Chin Hin’s 1HFY17 net profit of RM15.1m (+9.9% YoY) is below expectations, making up only 28% and 33% of our and consensus full-year estimates respectively. While we expect subsequent quarters to be stronger, we are lowering FY17 estimates by a more significant 16.4% to account for unexpected losses in the wire mesh business and lower contributions from its distribution and ready-mixed concrete businesses. FY18 and FY19 estimates are lowered by c. 4.0% on weaker distribution-related contributions. While a near-term dampener, we continue to look forward to stronger earnings growth ahead, underpinned by 1) contributions from its capacity expansions in the autoclaved concrete and precast concrete businesses, and 2) recent earnings-accretive acquisitions (with profit guarantees), amongst others. We like Chin Hin’s growth prospects and retain our Outperform call. The target price is unchanged at RM1.55, implying a 13.5x PE multiple to FY18 EPS of 11.4sen (lower, as it incorporates recent 10% placement exercise). The company declared a single-tier divided of 2sen for the current financial year.

• Distribution of building materials and ready-mixed concrete. Combined revenue from both divisions for 1HFY17 fell a sharp 20.9% YoY to RM356.3m owing to a significant decline in sales volume of cement as a further softening of housing construction activities took a greater bite. Additionally, some cement manufacturers are also selling directly to consumers, resulting in lost business opportunities. While the Group has been shifting its distribution mix in recent quarters to lower-volume higher-margin products, the slowdown has been higher-than-expected, hence the need to lower our forecasts.

• Wire mesh and metal roofing. Combined revenue grew 11.7% YoY to RM81.1m in 1HFY17, partly due to extra capacities in its steel mesh manufacturing facility. That said, intense domestic competition and increasingly weaker demand are keeping selling prices low while the imposition of provisional safeguard duties (of 13.9%) by the government on imported steel wire rods has impacted on raw material costs. Operational losses previously not factored in are now accounted for in our estimates for FY17. Management assures the bleed has stopped however.

• Autoclaved aerated concrete (AAC), G-Cast Concrete and MI Polymer Concrete. Slowing property-related activities has actually been a boon to the former, with greater adoption of its cost-saving AAC blocks seen. On-going spending on water and sewerage-related infrastructure continue to drive the precast concrete business meanwhile. Cumulative revenue growth of 46.6% YoY in 1HFY17 is reflective of such, with pretax profits jumping a sharper 111.7% YoY to RM12.7m in the corresponding period.

Source: PublicInvest Research - 25 Aug 2017