Europe accounted for 42.9% of the Group’s total revenue in FY22, and is expected to remain a key market and growth driver, particularly its DIY products. After contracting for the last two consecutive quarters, the Eurozone economy is expected to return to growth in the coming quarters underpinned by declining energy prices, abating supply constraints, improved business confidence and strong labour market. Management also anticipates inventory overstocking in European markets to ease, with re-stocking activities likely to pick up by end-2023. Margins are expected to remain under pressure however, on lower average selling price (ASP) due to price competition from China and higher manufacturing cost. We keep our forecasts unchanged and maintain our Neutral call on Chin Well with an unchanged PE-based target price of RM1.17.

• 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. 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.

• Improved outlook amid persistent challenges. The Eurozone’s current economic environment is being shaped by confluence of factors. On the positive side, energy prices are moderating, labour market is strong, while foreign demand is strengthening as supply bottlenecks ease. On the negative side, inflation remains stubbornly high, the interest rate hike cycle is still ongoing and geopolitical uncertainty remains high. All said however, recent data is lifting the growth outlook for the Eurozone, which is expected to return to growth in the coming quarters. The Eurozone economy is now expected to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.
  
  Management also anticipates the current inventory over-stocking in the European market to ease, with re-stocking activities to pick up by the end of 2023. In the domestic market, there are also signs of demand picking up, boosted by construction projects in Malaysia, i.e. ECRL. Nevertheless, the near-term outlook for the Group remains challenging on weakened demand and continued margin compression, driven by higher cost and lower ASP. The Group will continue to focus on its DIY segment, and expansion of new products in the downstream market to cushion the weakening demand and margin squeeze.

Source: PublicInvest Research - 30 Jun 2023