Results Review

• Chin Well Holdings Bhd posted a 62.6% Y.o.Y drop in its 1QFY20 net profit to RM6.7 mln vs. RM17.9 mln in the previous corresponding period, following the decline in both fasteners and wire products orders amid the uncertain U.S. - China trade relations and slowing global economy. Revenue for the quarter, meanwhile, fell 11.8% Y.o.Y to RM155.5 mln, from RM176.3 mln last year.

• The reported net profit was below our expectations as it only accounted for 10.0% of our previous full year earnings forecast of RM67.3 mln. Revenue was in-line, accounting for 21.9% of our estimated revenue of RM709.6 mln. The difference was caused by lower-than-anticipated revenue from the wire rod segment as well as weaker margins arising from increased competition and pricing imbalances.

• Moving forward, we trimmed our FY20-FY21 forecast earnings by 6.9%-14.9% to RM57.9 mln and RM63.5 mln respectively, although revenue was adjusted slightly higher to RM728.0 mln (+2.0%) and RM738.7 mln (+3.5%), after fine-tuning our margins and sales volume assumptions.

• Even so, we maintain our BUY recommendation on Chin Well, but with a lower target price of RM1.75 (from RM2.05) by ascribing an unchanged target PER of 9.0x to Chin Well FY20 EPS of 19.7 sen (from 22.9 sen) as we maintain a positive outlook on Chin Well’s long-term earnings accretion from higher sales, while its balance sheet remains strong enough to withstand external uncertainties. Also, the group pays a consistent dividend yield of about 5.0% per year, which is reasonable, in our view

Prospects

Performance across all key markets, except for Malaysia and North America, was weaker in 1QFY20 compared to the same quarter last year, while sales to the European markets saw the biggest drop by more than 50%.

Unabated U.S.-China trade tension has resulted in the diversion of Chinese-made fasteners into the European market, which significantly pressured selling prices and margins. We believe the price competition will spill over into 2020 in the absence of an extensive trade deal between Beijing and Washington and a subsequent tariff rollback.

Moving forward, Chin Well is expected to focus its marketing efforts on the domestics and American markets. The group is planning to increase its threaded rods exports to the U.S. next year; taking advantage of potentially higher anti-dumping taxes on alloy steel threaded rods from Thailand, Taiwan, India and China. Currently, Chin Well in is the midst of expanding its production capacity to meet increased demand from U.S. customers. In the long run, revenue contribution from the U.S. should make up about 15%-20% of Chin Well’s group revenue.

Wire rod sales are also foreseen to improve gradually following potentially higher sales volumes from the newly added production line in 4QFY19. However, at the group level, we expect to see some margins compression due to increased trading sales and aggressive price competition, as well as increasing supply from Chinese fastener manufacturers. In the near-term, we will continue to monitor if the increased U.S. orders is able to cover the sales gap left by lower revenue contribution from the EU markets.

Valuation and Recommendation

We keep our BUY recommendation on Chin Well with a lower target price of RM1.75 (from RM2.05) by ascribing an unchanged target PER of 9.0x to Chin Well FY20 EPS of 19.7 sen (from 22.9 sen). We continue to maintain a positive outlook on Chin Well’s long-term earnings accretion from higher sales, while its balance sheet remains strong enough to withstand external uncertainties, we opine.

The group is currently trading at a forward PER of 7.8x, which is below its five-year average PER of 8.9x – indicating room for more upsides, in our opinion. Reasonable dividend yields of above 5.0% historically, is an added attraction.

The target PER is at a small premium to the PER of its closest peer, Tong Herr Resources Bhd, premised on Chin Well’s higher margins and positive growth trajectory.

Downside risks to our call include sudden spike in raw material prices, tighter competition, volatile forex movements and unforeseen change in the global trade landscape (i.e.: trade war).

Source: Mplus Research - 28 Nov 2019