GMG Global

Kim Eng on 11 Jul 2012

Backed by a powerful parent. GMG is 51% owned by Sinochem Group, a multinational conglomerate based in China. Sinochem primarily operates in energy, agriculture, chemicals, real estate and financial services. With annual sales volume of over 800,000 tonnes, it is the biggest rubber supplier in China and second-largest in the world. A powerful parent, Sinochem provides GMG with access to the China market, certainty in purchase orders and an additional source of capital. GMG is now the single largest natural rubber supplier to China.

The only pure rubber players on SGX. There are several companies listed on the SGX in the rubber business. However, GMG is unique in the sense that its peers are either more diversified plantation players or midstream processors in the rubber value chain. GMG on the other hand is a pure natural rubber play, with 70% of total gross profit coming from upstream rubber plantation operations.

Excellent proxy for natural rubber prices. GMG’s share price is highly correlated with natural rubber prices (see Figure 3) thanks to its upstream plantation operations. Over the last four years, the correlation between its share price and rubber price movements has been 89%. The correlation is expected to strengthen further as the company expands its upstream operations. Thus GMG is a convenient substitute for rubber futures if investors want to bet on rubber prices.

Teck Bee Hang turnaround. TBH was one of the leading natural rubber processors in the world. It now has five factories with a combined processing capacity of 200,000 tonnes. It was facing insolvency post the global financial crisis due to a high interest burden and jump in rubber prices. GMG acquired 51.4% of TBH in 2010 to make it a subsidiary. We believe that TBH’s high-quality assets are still intact despite the financial difficulties of the past few years, and that the collaboration with GMG will create great synergy.
Key concerns on the stock. We identified two salient concerns for the stock price, namely 1) falling rubber prices and 2) lower yields and higher re-planting cost in the future due to its relatively old rubber trees age profile.

Pure rubber player. GMG Global is an integrated rubber producer engaged in the planting, growing, tapping, processing, marketing and export of natural rubber (NR). Its main products are centrifuged latex and tyre-grade rubber. It owns c.21,000ha of rubber plantations in Cameroon and Ivory Coast, and its processing plants are located in Cameroon, Ivory Coast, Indonesia and Thailand. Its products are mainly sold in Europe, the US, China and some other Asian countries. It was listed on the SGX in 1999. GMG is unique in the sense that its peers are either more diversified plantation players such as Olam and some other plam oil plantation companies or midstream processors in the rubber value chain.

Powerful parent. In 2008, Sinochem, China’s largest and the world’s second-largest rubber trader, took a 51% stake in GMG. A powerful parent, Sinochem provides GMG with access to the China market, certainty in purchase orders and an additional source of capital. More than 30% of GMG’s products are sold to Sinochem.

Foray into Africa. GMG has been in Africa since 1995. Its African operations include rubber tree cultivation as well as rubber processing in Cameroon and Ivory Coast. GMG holds a 90% stake in Hevecam in partnership with the Cameroon government. Hevecam produces c.20,000 tonnes p.a. of NR from its landbank of 40,000ha. It also has a processing capacity of 55,000 tonnes. GMG’s Ivory Coast operations are much smaller compared to its Cameroon operations, with landbank of only 1,560ha and a processing capacity of 36,000 tonnes p.a.. In Ivory Coast, GMG’s output accounted for c.12% of the country’s rubber production of approximately 220,000 tonnes in 2010, while in Cameroon, it accounted for c.60% of NR exports. GMG’s main competitor in the region is SIFCA, one of Africa’s largest agro-industrial business groups.

Excellent proxy for natural rubber prices. GMG’s share price is highly correlated with natural rubber prices (see Figure 3) thanks to its upstream plantation operations. Over the last four years, the correlation between its share price and rubber price movements was 89%. The correlation is expected to strengthen further as the company expands its upstream operations. Thus GMG is a convenient substitute for rubber futures if investors want to bet on rubber prices.

Key concerns on the stock. We identified two salient concerns for the stock price, namely 1) falling rubber prices and 2) lower yields and higher re-planting cost in the future due to its relatively old rubber trees age profile.
1) Falling rubber price: GMG’s profit is highly determined by rubber price. As 70% of gross profit coming from its upstream plantation, GMG’s profit is very vulnerable to falling rubber price.
2) We learn from the management that 80% of GMG’s rubber trees are between 23-29 years old, which is at the later stage of a rubber tree’s peak-yield age. The normal life span of rubber tree is around 40 years and the peak yield age is around 25 years. So it is not only suggesting that the yield will likely be at a downward trend going forward but also meaning possible higher re-planting cost in the next few years.

Undemanding valuation. GMG’s share price has been dropping, from SGD0.24 in Nov 2010 to SGD0.13 currently, along with declining rubber prices. Worry over a lower ROE due to the acquisition of Teck Bee Hang also drove its P/B ratio down. We think GLG’s current valuation is inexpensive at 1.2x PB compared with historical average of 1.5x.

Rubber price to stabilize? Recent moves by global central banks, including China’s rates cut on 6 July, will have positive impact on global commodity demands outlook and support commodity prices. As rubber price starts to stabilize, we expect GMG’s share price to follow suit. So we view GMG as a good vehicle for investors to capture a possible rebound in rubber price but in the long term we should pay some attention to relatively old age profile of its rubber trees.