Chin Well Holdings Bhd’s (Chin Well) 1QFY23 net profit increased by 50% YoY to RM25.9m on higher average selling price (ASP) and orders diverted from China due to supply chain disruptions resulting from the country’s intermittent lockdowns. While the results beat both our and consensus expectations, accounting for 32% and 40% of full year estimates respectively, we believe this to be unsustainable and trim our FY23-25F earnings forecast by 3-8% to account for a more challenging outlook ahead. The on-going Ukraine-Russia war, escalating tensions between US-China relations and interest rate hikes in major markets have adversely affected global economic sentiment which is expected to further dampen global demand for fastener products. Our Outperform call is maintained, though with a lower PE-based target price of RM1.80 (from RM2.00) following our earnings adjustment.

• 1QFY23 revenue improved by 8.7% YoY to RM156.2m, driven by higher revenue from the Fasteners division attributed to higher ASP and some customers diverting orders from China due to supply chain disruptions. Wire division posted lower revenue of RM31.5m (-23.6% YoY, -9.4% QoQ) due to slowdowns in the rollout of infrastructure projects in Malaysia.

• 1QFY23 net profit increased 50% YoY to RM25.9m, in line with higher revenue and better margin on higher ASP and stronger US Dollar. This was however partly offset by lower contribution from Wire division on weaker demand and higher material cost.

• Outlook. While we remain positive on Chin Well’s long-term prospects given the resilient demand for its products, we expect Chin Well to face macro headwinds moving forward however, particularly in Europe which could dampen demand for its products. We expect the Group to face margin compression as the ASP of its products have started to soften on slower orders while material and operating cost remain elevated. Nevertheless, we expect the Group’s focus on DIY segment and expansion of new products in the downstream market to cushion the weakening demand and margin squeeze, in addition to its continued investments into and transformation of its production processes towards more automation.

Source: PublicInvest Research - 30 Nov 2022