Following a recent meeting with management, we remain cautious on the Group’s near-term prospects. Management expects earnings to remain depressed on slowing global economic growth, particularly the European market, and lower average selling price (ASP) due to price competition from China after the re-opening of the country’s borders. We reduce our FY23-25F earnings forecasts by an average of 10% to account for lower demand, weaker ASP and lower margins. Nevertheless, management anticipates inventory overstocked in European markets to ease, with re-stocking activities to pick up by end of 2023. We maintain our Neutral call on Chin Well with a lower PE-based target price of RM1.17 (from RM1.24) following our earnings adjustment.

• 3QFY23 results round-up. During the quarter, the Group barely achieved profitability with profit before tax falling by 99.6% YoY to RM0.2m mainly due to lower revenue and decline in ASP following the drop in global wire rod prices, amid intense competition from China after re-opening of the country’s borders.

• Preparing for next market upturn. The Group’s current capacity utilisation rate is below its long term average of around 30%. Management is taking the opportunity to do major maintenance and upgrading of its facilities in the interim, and building up stock for the next market upturn.

• Steel prices. The World Steel Association forecasts demand for this year to rebound 2.3% and grow 1.7% in 2024. Manufacturing activities are expected to lead the recovery, though high interest rates will continue to weigh on steel demand.

• Outlook. The near-term outlook for the Group remains challenging, with demand weakened due to slowing global economic growth, particularly Europe which has been affected by on-going geopolitical conflicts, inventory overhang and interest rate hikes. We expect the Group to continue facing margin compression with lower ASP and higher operating cost. On a positive note, management anticipates inventories currently overstocked in the European market to ease, with restocking activities to pick-up by the end of 2023. There are also signs of demand picking up in the domestic market, boosted by construction projects in Malaysia, i.e. ECRL. Moving forward, the Group will continue to focus on the DIY segment, and expansion of new products in the downstream market to cushion the weakening demand and margin squeeze.

Source: PublicInvest Research - 13 Jun 2023