KUALA LUMPUR: Thong Guan Industries Bhd may see a margin contraction in light of the weakening US dollar.

CGS-CIMB Research said Thong Guan's margins had historically been correlated with the US dollar against the ringgit exchange rate.

"We believe the company's large exposure to US dollar-denominated transactions (80 per cent of revenue from exports as of financial year 2022) has benefited its operating margins due to the strong US dollar versus the ringgit exchange rate over the past three years.

"As per our economics note dated Dec 6, 2023, we believe that the ringgit depreciation may be nearing its end as United States interest rates may have peaked," it said in a note.

The firm lowered its revenue estimates for Thong Guan by 17.1-23.0 per cent for FY23-FY25 to account for the normalisation of demand for plastic packaging products to pre-Covid-19 levels.

"Our revised estimates show a revenue decline of 11.4 per cent year-on-year (YoY) in FY23 and growth of 7.6-12.5 per cent per annum in FY24-26, implying a FY23-26 compound annual growth rate of 9.7 per cent per annum, which is consistent with historical growth trends.

"We believe FY21-22 were bumper years for Thong Guan due to elevated demand during the pandemic, which has since normalised as evidenced by the 13.8 per cent YoY decline in the nine-month period of 2023 revenue to RM921.7 million," it added.

It maintained its "Add' call on the company with a lower target price of RM2.74 from RM3.05 previously.