Summary

• Chin Well Holdings Bhd’s 3QFY20 net profit slipped 34.9% YoY to RM2.7m, mainly due to weaker EBITDA margins, in-tandem with the drop is sales volumes and ASPs while operations faced disruption from mid-March 2020. Revenue for the quarter fell 13.1% YoY to RM150.4.

• The weaker 3QFY20 earnings also dragged the cumulative 9MFY20 net profit to RM19.0m (-58.6% YoY), although revenue only contracted 11.8% YoY to RM453.6m. Both the reported net profit and revenue came in below expectations, accounting for 57.6% and 71.8% of our previous full-year target of RM35.8m and RM631.7m respectively. The variance was mainly due to lower-than-expected margins and lower factory efficiency rate.

• Following the lower sales volume to Europe in the previous quarter, Chin Well is now faced with the supply chain disruption stemmed from Covid-19. Already, contribution from Europe sank 55.4% YoY to RM79.3m as several countries in the region were badly affected by Covid-19. Nevertheless, operations have now returned to the norm since mid-April 2020 which could provide some alleviation from the recent downturn.

• In subsequent quarters, we reckon that demand would remain sluggish as market players opted for a more defensive stance, which eventually lead to slower demand. All in, the general demand is expected to remain weak as countries take on baby steps to re-open their economic activities.

• Additionally, we also see margins remain on the weaker note following the re opening of China economy as factories resume production. The import tariff imposed by the U.S. against China also does not bode well which could result in lower average selling prices as market players step up to protect their market share through stiffer price competition.

Valuation & Recommendation

• Moving forward, we slashed our FY20-FY21 forecast estimates by 23.8% and 23.1% to RM27.7m and RM39.9m respectively, to account for the weaker margins and lower sales volumes amid increasingly challenging business landscape.

• Following the sharp dive in share price performance in recent months, we think that the current price has much reflected the weakness of the fundamentals. Therefore, we upgrade Chin Well to HOLD (from Sell), but with a lower target price of RM1.07 (from RM1.10). We rolled-over our valuation metrics to FY21 by pegging a target PER of 8.0x to EPS of 13.3 sen (down from 17.3 sen) amid the challenging operations condition. The target PER is also similar to the PER of its closest peer, Tong Herr Resources Bhd.

• 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, sluggish demand as the industry struggles to recover to norm.

Source: Mplus Research - 26 Jun 2020