Founded in 1989, Chin Well Holdings Berhad (“Chinwel”) is one of the World’s largest suppliers of carbon steel fasteners today (claimed by the Management). With production facilities in Malaysia and Vietnam, Chinwel supplies its fasteners across the globe with North America being its largest export market in FY2021.

As a potential beneficiary of the economic rebound led by North America and Europe, we take this opportunity to introduce Chinwel and share our views on the Group as an investment target.

KEY SUMMARY

1. Chinwel is a well-established 30-year old corporation. The Group remains to be led by the founding family members to date with succession plans in place. Since listing, the Group records a consistent annual growth in revenue and had never a year made a loss. The Group also maintains a strong balance sheet and distributes dividends consistently.

2. With the economic recovery being led by North America and Europe, the management is witnessing a huge inflow of inquiries and orders since the end of 2020. Furthermore, with the imposition of anti-dumping tax in Europe on fasteners from China, since 1 January 2021, Chinwel is seeing a recovery of orders from the European market.

3. At today’s closing at RM1.34, Chinwel is trading at 9x PE to our 1-year forward base-case valuation. Based on our base-case FY2022 earnings per share (“EPS”) assumption of RM0.15, we estimate the potential for a 40% capital gain within the next 12 months, based on a 13x PE valuation. On top of that, we can conservatively expect a dividend yield of about 4% p.a.

BACKGROUND

Chinwel is involved in the manufacturing and trading of two key products i.e. fasteners and wire.

Fasteners

Being the Group’s core product, Chinwel manufactures and trades a wide range of fasteners like bolts, nuts, screws, etc. They have at least 100 SKUs with varying shapes, standards/grades, diameters, and lengths, etc. As an illustration, bolts themselves comprise of several types like Hexagon bolts, Structural bolts, T.C. bolts, etc and each type would have 5 – 10 or more SKUs with varying standards, diameters, and lengths.

These fasteners are widely used across most (if not all) industries including the power, infrastructure, industrial, automotive, building & construction, and furniture industries.

Over the years, the Group has established a strong distribution network in the domestic and international markets, with their products being sold in Malaysia, North America, Europe, other Asian countries, and the Middle East.

Chinwel also does small-scale trading of steel bars and other fasteners products complementary to the Group’s core manufacturing business.

Wire

The Group is also involved in the manufacturing and trading of precision galvanized wire, annealing wire, PVC wire, bright wire, and gabion fences, etc. The Group’s revenue is mainly contributed by the fasteners division (70% – 80%), with the balance from the wire division.

Chinwel operates with one production facility each in Penang, Malaysia and Dong Nai, Vietnam (established in 2004).

As a manufacturer, the Group sources raw materials such as wire rods and zinc ingots for use in their manufacturing. Based on available information, we understand that the Group sources materials within the respective domestic markets i.e. Malaysia and Vietnam directly.

There is a lack of information with regard to the Group’s existing production capacity/output and details about its Penang/Vietnam’s operation on the web.

MANAGEMENT TEAM

Tsai Yung Chuan (“TYC”), aged 64 is the co-founder and current Managing Director of the Group. He graduated with a Certificate in Electrical Engineering in Taiwan in 1975 before joining his family business in the manufacturing of fasteners in 1980. TYC expanded the business to Malaysia with the incorporation of Chinwel after his first visit to Malaysia in 1988.

Tsai Chang Hsiu-Hsiang (“TCH”), aged 64 joined her brother, TYC in the incorporation of Chinwel in 1989. She is the current Group’s executive director, mainly in charge of the Group’s financial affairs.

Tsai Chia Ling (“TCL”), aged 42 graduated from National Cheng Kung University in 2001 with a Bachelor of Business Administration Degree joined Chinwel as a Marketing Executive in 2003. In July 2013, she was appointed as the General Manager of the Group. She also holds the position of a non-independent non-executive director at Tambun Indah Land Berhad, where she was appointed to the Board in 2012 as an alternate director to TYC.

As of 11 August 2021, the trio, TYC, TCH, and TCL hold a total indirect stake of 8.42% in Tambun Indah Land Berhad via Amal Pintas Sdn Bhd.

Tsai Cheng Hsun, aged 40 graduated from National Taiwan University with Bachelor of Business Administration in 2003 and a Master in Business (Public Relations) from Queensland University of Technology before joining Chinwel Vietnam in 2004. He was pivotal to the setting up of Vietnam’s operation. In June 2013, he was appointed as the General Manager of Chinwel Vietnam and currently oversees the entire Vietnam operation.

Tsai Chia Wen, aged 31 graduated with a Bachelor’s degree in Business Administration from Arizona State University in 2011 and joined Chinwel Vietnam as a purchaser after graduating. In 2013, she was promoted as the Head of Marketing department.

The Tsai mentioned above are all family members.

Other key management staff includes:

• Chiu Chih Tsung, aged 54, being the Senior Manager responsible for production management of the Vietnam operation. He has more than 28 years of experience in fasteners related business before joining the Group in 2014.
• Chu Kim Teik, aged 55 joined the Group 29 years ago currently holds the position as General Manager for the Wire division. He leads the management planning and oversee entire operations of the Wire division.

FINANCIAL PERFORMANCE

Before the pandemic i.e. FY2016 – FY2019, Chinwel was growing consistently in terms of revenue at a 3-year compounded annual growth rate (“CAGR”) of 10.2%. However, the several rounds of operations lockdown during FY2020 & FY2021 had caused a significant decline in Chinwel’s revenue. FY2021 revenue closed at RM491m, an RM190m / 28% drop from FY2019.

The decline was mainly attributable to limitations on its production output and logistical hiccups during the lockdowns.

In terms of contribution by geographical region, Malaysia remains as Chinwel’s largest market, contributing RM156m (31.8%), followed by North America (28.6%), Europe (28.0%), and Asia (11.6%) in FY2021. In fact, over the years, Chinwel’s key export market has shifted from Europe to North America, as illustrated below.

The notable decline in contribution from the European market was primarily due to the oversupply of cheap fasteners from China, following the US-China trade war in 2018.

On a positive note, the hefty tariff imposed by US on China’s products provided opportunities for Chinwel to penetrate and grow its share in North America. In FY2021, North America has replaced Europe as the Group’s largest export market. During the pandemic, revenue from North America continued to show growth, increasing from RM73m in FY2019 to RM141m in FY2021.

Profitability-wise, the Group’s gross and net margins were on a decline since FY2016 due to the intense price competition in Europe. This was a result of the dumping of cheap stocks by China manufacturers/traders.

The table below summarises the Group’s revenue and profit results by divisions over the years.

Based on the above, several observations are:

1. Throughout FY2016 – FY2019, both divisions’ growth were healthy and consistent;
2. The fasteners division is Chinwel’s main revenue and profit contributor. Over the years, contribution to the Group’s total revenue was between 72% – 82%;
3. The profitability of the fasteners division was on a downtrend since FY2016. PBT margin fell from 16.2% to a low of 1.5% in FY2020, before rebounding to 5.7% in FY 2021;
4. The profitability of the wire division was inconsistent over the years, with a wide fluctuation ranging from as low as 1.1% to a high of 14.9%;
5. FY2021 profitability has rebounded from the FY2020 low. In comparison to the earlier years, margins for the fasteners division have further room to grow. The worst is most likely over for the Group, post FY2020.

FINANCIAL POSITION

Year over year, Chinwel consistently generates positive CFO and FCF.

The above is notwithstanding the annual capital expenditures (“CAPEX”) spent by the Group for upgrade, expansion, and replacement of wear & tear. The table below illustrates that the Group spends roughly 50% of the CFO generated on CAPEX annually.

Over the past 5 years, RM60m CAPEX was spent on the following:

• Upgrade and expansion of thread bar production line (fasteners division);
• Expansion of grill mesh production capacities (wire division);
• Construction of new automated warehouse in Shah Alam;
• Construction of waste water treatment plant in Vietnam; and
• Replacement of equipment wear and tear.

The Group maintains a strong balance sheet with no concern on its liquidity & solvency position.

The higher inventory in FY2021 was strategic as the management stocked up on raw materials in view of the global supply shortage.

The negative payable term is consistent with the industry as purchases for materials like steel are usually on upfront terms.

CORPORATE UPDATES

1. Based on reports, the global industrial fasteners market is projected to grow at a 4.2% CAGR for the 2021-2028 period. The global industrial fasteners demand is gradually returning to pre-pandemic levels with Government spending on infrastructure projects resuming in Europe, and the Asia Pacific driving demand within the construction sector.

2. Chinwel Vietnam operations have been fully allocated up to March 2022 following the recovery of orders from Europe, specifically Do-It-Yourself (“DIY”) screws.

3. The management expects orders from Europe to recover further following the imposition of anti-dumping tax on fasteners from China since 1 January 2021. Further details are elaborated below.

4. The Group benefited from stocking up of wire rods when the price was low. Since November 2020, the free on board (FOB) fastener price (depending on the grade, plating, and packaging requirements) has increased by ~50% from US$1,350 (RM5,724) per tonne to US$2,800 (RM11,872) per tonne.

KEY STRENGTHS & OPPORTUNITIES

1. Consistent revenue and >20 years of consecutive profits with net margin averaging about 7% – 8%. Chinwel also maintains a strong balance sheet and distributes consistent dividends annually.

2. Chinwel is a well-established business with >30 years of incorporation. The Group remains to be led by the founding members to date. Succession plans are in place with the second-generation on board in the management since the early 2000s. (Pros & Cons)

3. Fasteners are standard commodity products with no change in design or technology. Chinwel does not incur (or, if yes, very minimal) research and development expenses for product development. Product design or composition remains the same for decades. There is a low risk of the product obsolete. (Pros & Cons – Low margin product).

4. The economic recovery in North America and Europe is expected to keep Chinwel fully occupied at least for the next few quarters. Following the reimposition of anti-dumping tax in Europe, the European Fastener Distributors Association (“EFDA”) raised concerns stating that the anti-dumping measure imposed would severely disrupt the European supply chain that is already reeling from the impact of the pandemic.

It was mentioned that the industrial fasteners supply market is incredibly tight as standard parts are not produced in Europe. European fasteners manufacturing has for a long time been largely specialised in high added value, customised fasteners. Trade defense measures cannot simply ‘turn back the clock’ and demand will only be moved to other primarily Asian sources.

In this regard, Chinwel management is expecting a strong rebound in orders from Europe in the next few quarters. This is in addition to its increasing order books from North America.

5. The tight supply for raw materials should continue (contributing to higher prices) following the lower production in China. Many steelmakers in China are only allowed to run during off-peak hours from 15 November to 15 March 2022.

6. Environmental, Social and Governance (“ESG”) factor in play is creating a new wave of demand for the incumbents to upgrade and transition to newer, automated production. This would, directly and indirectly, drive up demand for fasteners products.

KEY RISKS & THREATS

1. Decline in margins to persist/worsen. A scenario that is unlikely for the reasons above.

2. Low-margin, commodity products that are subjected to price war as witnessed throughout 2018 – 2020 in the European market. Nevertheless, the worst seems to be over with the imposition of anti-dumping tax on China-made fasteners and North America and Europe-led economic rebound, etc.

MAJOR SHAREHOLDERS AS AT 31 MARCH 2021

The Tsai founding family owns a total stake of 56.1% in the Group via its private vehicle, Benua Handal Sdn Bhd.

The Chairman of the Group, Mr. Lim Chien Chéng owns a 2.7% stake in the Group. Mr. Lim is a lawyer by profession handling corporate matters including international joint venture agreements, company reconstruction, mergers and acquisitions, and public flotation. Mr. Lim is currently also a partner of Ghazi & Lim.

Institutional investors with stakes in the Group include Samarang Asian Prosperity (“Samarang”) (9.8%), Eastspring (2.9%), and EPF (2.2%), etc. Samarang is a Luxembourg-based asset management company with exposure in Asia through its Asian Prosperity fund, launched in October 2017.

Mr. Fong Siling’s portfolio also includes 1m shares of Chinwel. Mr. Fong is a prominent value investor based in Malaysia.

PEER COMPARISON

The only direct peer of Chinwel would be Tong Herr Resources Berhad (“Tong Herr”), a manufacturer and trader of stainless-steel fasteners and aluminium products.

VALUATION ESTIMATE

At today’s closing at RM1.34, Chinwel is trading at 9x PE to our 1-year forward base-case valuation.

Based on our base-case FY2022 earnings per share (“EPS”) assumption of RM0.15, we estimate the potential for a 40% capital gain within the next 12 months, based on a 13x PE valuation. On top of that, we can conservatively expect a dividend yield of about 4% p.a.

As mentioned, we opine that the worst may be over for the Group. The expected rebound in orders from Europe and its growing market share in North America would be the Group’s key growth driver over the next 12 months.

A decent investment opportunity with a justifiable risk to reward balance for your consideration!