SOUTHERN PACKAGING: FY07 net profit soars 46% to S$6.7m

COO Pu Jinbo wants to grow shareholder value by increasing top line.

SOUTHERN PACKAGING, which produces PET bottles and printed plastic bags for FMCG MNCs, has a track record for steady growth.

Its well-diversified base of MNC customers which make fast moving consumer goods in the beverages, personal care and pharmaceuticals industry across 4 continents shield it from earnings volatility.

Two such clients are the world's largest chewing gum manufacturer, Wrigley, and cosmetics giant Mary Kay.

Sales growth was 29.3% a year since FY01.

”For FY08, we want to maintain our double digit top line growth,” says the company’s executive director and chief operating officer, Pu Jinbo in a telephone interview with NextInsight.

Slow and stable business model. Above: Southern Packaging's sales CAGR was 29.3% over the past 7 years.

FY07 sales at S$98.8 million (up 18% y-o-y), was a record high for the Foshan-based packaging company.

Gross margins for flexible packaging such as bags and satchets are 11%, compared with 24% for rigid packaging such as plastic bottles.

Sales volume increased for both flexible and rigid packaging, which respectively contribute 48% and 51% to revenues.

Southern Packaging has three segments:
 
(i)    Flexible packaging: plastic packaging bags with design supplied by customers

(ii)   Rigid packaging: polyethylene terephthalate (PET) bottles together with printing of design onto the bottle

(iii)  Value-added packaging: reprocesses and mixes beverage, such as herbal tea and instant drinks according to the formulation specified by the customers.

"Value-added packaging will not be an area of focus for the company," Mr Pu said.

He is upbeat about the company’s outlook, citing orders from two new customers this year – a pharmaceutical company from Huadong and a shampoo factory from Guangdong.

Capacity is almost full.  A new printing machine operational with effect from April 2008 will add S$12 million of flexible packaging output.

Southern Packaging’s Shanghai plant for rigid packaging (bottles) will commence operations in the same month.  The company decided to set up a factory in Shanghai in fill the gap for Wrigley, when the global chewing gum leader’s packaging resources in Guangdong reached full utilization.

Southern Packaging will also produce some bottles for Mary Kay in Shanghai.

"Capital investment is likely to slow down in FY08 compared to FY07 due to higher costs of debt financing in China," says Mr Pu.

Group gross margins were maintained at about 18% between FY06 and FY07 despite a rise in cost of key raw material petroleum.  The company was able to contain costs by purchasing raw materials in bulk as well as to pass on cost increases to customers.

Net profit rose 46% to S$6.7 million, boosted by other operating income of S$3.5 million.  Half of this was forex gain of S$1.7 milion.

The company had managed to contract in Chinese yuan last year to forestall forex losses after observing the slide of the US dollar against the yuan.

Most of the company's sales are to FMCG MNCs with factories in China.

Most of its customers have factories within China.

15% of sales were from exports to Europe while another 5% were from exports within Asia.  Sea freight expenses formerly under “selling and distribution” in FY06 were classified to “cost of sales” in FY07.  Group gross margins reported at 20.7% in FY06 were adjusted to 17.5% as a result.

Segment gross margins for rigid packaging, originally 30% in FY06 were restated to be 24%.   For flexible packaging, gross margins of 10% in FY06 remained unchanged after restatement.

Net margins were 6.8%, a 1.3 percentage point improvement over FY06 (post restatement).

A first and final scrip dividend of 0.73 cents per share was declared.

Other bottle makers on SGX

The PET bottle industry is a fragmented one, with each producer having less than 3% in market share.

Some other companies in the business include SGX-listed Full Apex and Sunmart, which raised S$104.4 million in a recent IPO (Aug 2007 IPO: 25 cents).

Full Apex makes PET bottles, shrink film, and corrugated paper packaging products. 80% of the company’s FY07 revenues arose from sales of PET bottles and shrink film.

Sunmart makes aluminum cans and plastic bottles that eject contents through spray pumps.  Its spray cans and bottles are sold to manufacturers of

(i)      Fast-moving consumer goods, such as hair products, cosmetics, perfume, deodorant and detergent;

(ii)    Pharmaceutical products, such as disinfectants and antiseptic; and

(iii)  Health-supplements.

Source: Bloomberg / NextInsight (5 Mar 2008)

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