Results Review

• Chin Well Holdings Bhd posted a 28.3% Y.o.Y jump in its 1QFY19 net profit to RM17.9 mln, from RM14.0 mln in 1QFY18 – helped by improved turnover, lower administrative expenses and selling and distribution expenses. Revenue gained 8.8% Y.o.Y to RM150.0 mln, from RM137.9 mln in the previous corresponding period.

• As Chin Well’s reported earnings and revenue were broadly within our estimates, making up about 29.1% of our full-year forecast net profit of RM62.0 mln, and 26.6% of our projected revenue of RM661.1 mln, we leave our forecast unchanged.

• Segmentally, net profit from the wire products segment more than doubled to RM1.7 mln vs. RM0.6 mln a year ago, boosted by higher unrealised forex gain, while fasteners’ net profit rose 17.0% Y.o.Y to RM15.9 mln, from RM13.6 mln in the same quarter last year.

• Moving forward, net profit and revenue is projected to grow at a five-year CAGR of 9.9% and 7.2% to RM65.3 mln and RM712.0 mln respectively, on the back of ongoing expansion of high margin products, increased distribution network in the European and U.S. markets and improved production efficiency.

• We also maintain our HOLD recommendation on Chin Well with an unchanged target price of RM1.90 by ascribing an unchanged target PER of 9.0x to its FY19 EPS of 21.1 sen.

Prospects

In-line with its plans to expand its product portfolio, primarily a new range for fasteners for the South-East Asian market, Chin Well has purchase new machineries amounting to approximately US$300,000, which is expected to be delivered early 2019.

Malaysia has previously imposed provisional anti-dumping duties on imports of galvanized iron (GI) from China and Vietnam. The group has agreed that the aforementioned trade duties will not result in higher raw material prices as GIs is not in the group’s purchase list and that its main raw material is steel wire rods.

Further, we also do not foresee a significant impact from the planned minimum wage increase from January next year as labour costs only accounts for 5.0% of Chin Well’s total cost, even after taking into account the wage increase next year.

While business costs is expected to remain on an upward trajectory, driven by higher minimum wages, rising wire rod prices and higher utilities, we remain confident on Chin Well’s ability to generate cash on stronger sales volume, improved contribution from US-based customers and higher production efficiency.

Downside risks include unexpected jump in wire rod prices, the appreciation of Malaysian Ringgit and any uncertainties which may arise from the ongoing U.S.-China trade war.

Valuation and Recommendation

While we are still positive on Chin Well’s earnings growth prospects and healthy balance sheet, we think that its share price has already priced-in its investment merits at the current juncture hence, the reason for our HOLD recommendation. Also, the target PER remains at a small premium to PER of its closest peer, Tong Herr Resources Bhd, premised on Chin Well’s higher margins and the positive growth outlook in the fasteners landscape in Europe.

Source: Mplus Research - 28 Nov 2018