Greatview Aseptic Packaging Company Ltd. 468:HK
January 17, 2021 - 10:41pm EST by
mimval
| 2021 | 2022 | ||||||
| Price: | 4.25 | EPS | 0.36 | 0.39 | |||
| Shares Out. (in M): | 1,337 | P/E | 12 | 10.9 | |||
| Market Cap (in $M): | 733 | P/FCF | 10.6 | 9.8 | |||
| Net Debt (in $M): | 0 | EBIT | 634 | 700 | |||
| TEV (in $M): | 688 | TEV/EBIT | 8.3 | 7.5 | |||
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Description
Greatview Aseptic Packaging (468:HK), known as “GA Pack” by its trade name (formerly “Tralin Pak”),
is one of only 2 publicly traded pure-plays in a faster growing segment of the packaging industry, and
at current price of HKD 4.25 (USD 0.55) it trades at an EV/EBITDA of 7x (2020 consensus est. CNY
628M/USD 96M) and 12x FCF (CNY 390M/USD 58M), with a 6.4% dividend yield. The company’s IPO
priced at HKD 4.30 on Dec. 9, 2010, led by Goldman Sachs and Morgan Stanley, see the IPO prospectus
here for 433 pages of helpful background:
For a less time-consuming and more up to date synopsis of GA Pack’s history see here:
The co-founders still own a lot of stock, with 56
year-old CEO Jeff Bi at 129M shares (9.65%) and his co-founder, COB Hong Gang, at 81M shares
(6.04%), both having sold none of their shares since the IPO over 10 years ago. A reverence for the
shares? Check. Shares outstanding also unchanged since IPO, from 1.334B then, to 1.337B now, with
sales up 2.8x (from USD 172M in 2010 to est. USD 479M in 2020), and EBITDA up 2.3x (from USD 42M
in 2010 to est. USD 96M in 2020), with growth financed internally from cash flow and the IPO
proceeds. Such reinvestment in growth has not precluded outstanding cash dividends, with USD
323M paid out over the past 9 years through 2020; that’s 44% of the current market cap.
Jardine Strategic (JS SP) bought 28% of GA Pack for HKD 5.00 in June 2017 (via block trades in open
market) and stated that they would seek to help them expand, presumably through Jardine’s
connections throughout Southeast Asia, particularly in Indonesia.
I see minimum fair value at no less than 10x EBITDA and 17x FCF, which would be a price of HKD 5.82
(USD 0.75) implying 37% upside plus 6.4% dividend = 43% total return from current price.
The Beijing Winter Olympics beginning Feb. 4, 2022 should boost demand and attention as GA Pack’s
major customers are Yili (#1 market share in dairy products in China, official sponsor of 2022 Olympics)
and Mengniu (#2 market share in dairy in China, partnered with Coca-Coca in a broader beverage
sponsorship for 2022 Olympics and beyond). Both of GA Pack’s major customers, Yili and Mengniu,
trade at north of 20x EBITDA.66% of GA Pack’s sales are from China, and 84% of total company sales
are to dairy producers. Dairy consumption per capita in China is still very low, at about one-third of
what it is in the U.S. and Europe, despite huge growth over 20 years.
The only public comparable is SIG Combibloc (SIGN SW, CHF 20.48) which IPO’d in Sept. 2018 at CHF
11.25 and now trades at EV/EBITDA of 15x, 33x FCF, and a dividend yield of 2%. SIG is more than 4.5x
the size of GA Pack (SIG sales est. US$2.2B for 2020 vs. GA Pack US$479M, and SIG has higher EBITDA
margin of 27% vs. 20%, but GA Pack has grown faster than SIG over the past 5 years and is expected
to do so again over the next 5 years as well. SIG also has a modestly leveraged balance sheet, vs. GA
Pack’s net cash balance sheet.
SIG’s private equity sponsor and until recently their largest shareholder, Onex Corp. (ONEX CN), sold
the last 32.3M of their shares at CHF 20.35 on Dec. 1, 2020, an EV of $9B (15x EBITDA) for a huge gain
vs. the EV at their Nov. 2014 announced buyout of $4.66B, at 8.5x EBITDA).
Bain Capital paid USD 40M for 43.2% of GA Pack in 2006 (when the company was private and 3 years
old) for a cost per share of HKD 0.92, and after selling some on the IPO at HKD 4.30 in Dec. 2010, they
sold the rest in 2012 and 2013 at prices from $4.12 to $4.85, exiting completely by Q4 2013, making
about 5x on their original investment over 7 years (including dividends).
Aseptic packaging is growing at a much faster rate than packaging in general due its main benefit of
providing long lasting shelf life (6 to 9 months) for liquid milk and juices and other items without the
need for costly cold transport or cold storage which is particularly lacking in the faster growing
emerging markets. Aseptic packaging is environmentally friendly, despite the difficulty in recycling it,
due to its overall lower carbon footprint. It packages a growing number of products beyond the most
common items such as milk, fruit juice, and coconut water; items such as soups, sauces, baby food,
and even wine now: https://www.banditwines.com/
Tetra Pak (privately held) is by far the largest player with 65% of the global market for aseptic
packaging, while SIG Combibloc (SIGN SW, CHF 20.48) the #2 player with a 21% share, and GA Pack
(as it’s known in the industry) is #3 with a 5% global share. There are a few other major providers like
Elopak of Norway, but all are private or subs of bigger companies. Greatview Aseptic is #2 in China
with a 13% share, but SIG is closing in fast, opening a large new plant there this year. That said, SIG
has been in China since 1985, and Tetra Pak since 1972, whereas GA Pack began in 2003, so they have
done very well in a relatively short period. Milk is the biggest end use in China, where 70% of milk
bought by consumers is processed via Ultra Heat Treatment (UHT), which Tetra Pak introduced in the
late 1990s and triggered the boom in milk production and aseptic packaging, relegating pasteurized
milk with its short shelf life to 30% market share vs. the long shelf life of UHT milk.
Greatview is an “NSS” which stands for “Non-System Supplier” which means they are mainly about
selling the razor blades (the packaging paper), not the razors (the filling machines/system). They had
primarily been making money by undercutting Tetrapak in that way, and now in response to SIG’s
more aggressive expansion in China GA Pack will now begin providing the packaging sleeves that work
with SIG’s machines:
Demand for this type of packaging appears primed for growth for years to come, especially in China,
as they shift towards a consumer-led economy, and GA Pack should be able to continue to capture
some portion of that growth. They are operating at about only 55% of capacity vs. industry normal
65% to 75%, so they have plenty of room to grow production without adding new capacity / cap-ex.
Above is a slide from SIG’s Nov. 2020 presentation. It shows how the filler machines take some time
to get a pack-back on their initial cash out-flows. And while GA Pack did start selling some filler
machines in 2019, they mostly avoid that cost by selling mainly just the razor blades, at a price which
is 5% to 10% less than Tetra Pak and SIG charge.
Organic Valley explains their use of aseptic packaging at this link:
https://www.organicvalley.coop/blog/what-is-shelf-stable-milk/
(relevant excerpt below):
“What is Shelf-Stable Packaging?
Packaging plays a critical role in making aseptic milk different from the milk you typically find in the
refrigerator. For Organic Valley shelf-stable milks, we use Tetra Pak cartons, which contain six layers
in a laminate of three materials: 70% high-quality paperboard, 24% polyethylene plastic, and 6%
aluminum.
Paper provides stiffness, strength, and a space-efficient brick shape. Polyethylene makes up the
innermost and outermost layers to make the package liquid-tight and provide a protective exterior
coating to keep the package dry. An ultra-thin aluminum layer forms a barrier against light and
oxygen. In addition, shelf stable milk is packaged in special plants that use fully enclosed equipment
to ensure everything stays extra clean.
The combination of UHT ultra-pasteurization and shelf-stable packaging eliminates the need for
refrigeration and prevents spoilage without the use of preservatives. This gives the milk an amazing
shelf-life of 6 to 9 months! Far beyond anything you’d find in the refrigerator.”
GA Pack’s stock is underfollowed now: The stock was covered by at least 8 analysts as recently as Jan.
2015 (Macquarie, HSBC, Goldman Sachs, RHB Research, Mizuho, JP Morgan, and Kim Eng (see HSBC
example below). But, now after 5 years of lower than expected growth (increased competition from
larger and smaller players, and tariff / trade war issues), only Macquarie and Daiwa Securities appear
to have coverage (according to Bloomberg), rating it outperform and buy with HKD 5.00 price target.
HBSC report on GA Pack, July 30, 2014:
Sept. 19, 2019 interview with GA Pack CEO, Jeff Bi, in CEO Magazine:
Risks:
Raw material costs rise with price of oil. Polyethylene, liquid paper board, and aluminum are the
main inputs, and raw materials are 90% of the cost of goods sold. They usually can’t pass through
entire cost increase quickly enough to prevent margin compression during periods of rising costs.
Legal risks: Tetra Pak has sued them and lost on patent infringement. While further legal actions
cannot be ruled out, it seems more likely that they have cleared that hurdle, especially since in China
Tetra Pak subsequently had to pay a fine for abuse of market power in China.
Customer concentration, their top 3 customers are more than 60% of sales
Currency risk: listed in HKD, earnings mostly in RMB, commodity costs mostly in USD
Governance: the company paid USD 5.5M to buy out an unprofitable technology vendor to the
company in 2019 that happened to be owned by the CEO’s brother (also a founding shareholder in
GA Pack). Despite the poor optics, GA Pack appears to have been using this technology for some
time, so it appears at least strategically to make sense. From recent annual report: “In 2016,
Greatview introduced a world-first innovation for aseptic cartons in the form of high speed digital
printing to deliver a unique-per-carton variable image, text or QR code, opening the way for 2-way
communication between brand owners and consumers. Applications include instant wins, marketing
campaigns and enhanced traceability.”
We are long Greatview Aseptic (468 HK) and may buy or sell additional shares at any time. This is
not a recommendation to buy or sell securities. Please conduct your own research and reach your
own conclusion.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or
others I advise hold a material investment in the issuer’s securities.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
* Next earnings report due Mar. 30, 2021
* Feb. 4, 2022 Beijing Winter Olympics
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