Summary

• Chin Well Holdings Bhd operations were back to full force since early May 2020 following the approval from MITI to resume their operations. Although the operations were back to normal, demand has yet return to pre-Covid-19 levels as global economy remain roiled by the rising new cases of Covid-19, particularly in Europe. We gather that the European markets (excluding FY20) traditionally make up to 30-55% of total revenue over the past years.
• Nevertheless, the aforementioned weakness may be cushioned by the rising orders from US given that the Vietnam operations were largely unaffected during these turbulent times. At the same time, Chin Well is capitalizing from the US move to impose the anti-dumping taxes on threaded rods on countries like Thailand, Taiwan, India and China. Hence, we expect shipments to US to play a major role in topline sustainability in FY21f.

• Elsewhere, we note that wire rod prices remain on the recovery trend, averaging US$4,065.82 per tonne in September 2020 vs. US$4,034.12 per tonne in August 2020 and US$3,944.16 per tonne in June 2020. This signals that demand of wire rod products are on a rising trend in line with global economy recovery.

• Already, housing starts in the US are on a recovery trend which suggests demand could be picking up in the recent months. On the local front, we reckon that the restart of mega infrastructure projects in 2021 may provide some relieve to Chin Well amid potentially improve demand in fasteners products.

• Moving forward, Chin Well plans to set up a new business segment by providing a one stop warehousing service. The construction of the automated warehouse in Shah Alam was recently completed pending approval from the relevant authorities for commencement of warehouse activities. This will ensure efficiencies in product storage and delivery over the longer term period.

Valuation & Recommendation

• We made no changes to our earnings forecast, pending the upcoming quarter results release by end of next month. Following the recent weakness in share price, we upgrade Chin Well to BUY (from Hold) with an unchanged target price of RM1.07. We derived our target price by pegging a target PER of 8.0x to FY21f EPS of 13.3 sen. The target PER is also similar to the PER of its closest peer, Tong Herr Resources Bhd.

• Downside risks to our call include volatility 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 Oct 2020