An update on Chinwel’s 3Q2022 results.

KEY SUMMARY

1. The growth was driven primarily by its Fasteners division where demand from Europe rebounded from the uplift of economy lockdown coupled with the increase in wire rod price.

2. The improved selling price directly translates to a better gross margin for the Group. Chinwel is taking advantage of operating leverage as overheads remain fixed.

3. Given the current market environment where inflation is high and growth is expected to slow (with the increasing interest rate), we would favor value over growth stocks. In this regard, we remain our liking over Chinwel.

UPDATE ON LATEST QUARTER (JAN – MAR) RESULTS

On a QoQ comparison, Chinwel’s performance shows improvements in the top and bottom line. 3Q Revenue and PAT grew by RM20.7m / 14% and RM6.5m / 31%, respectively. PAT margin is at a multi-year high of 16.5%.

The growth was driven primarily by its Fasteners division where demand from Europe rebounded from the uplift of economy lockdown coupled with the increase in wire rod price.

As mentioned in our previous article, the improved selling price directly translates to a better gross margin for the Group. Chinwel is taking advantage of operating leverage as overheads remain fixed.

UPDATE ON 9MFY22 (JUL – MAR) PERFORMANCE

Chinwel’s 9MFY22 Revenue and PAT grew by RM99.6m / 27% and RM50.1m / 3.7x, respectively as compared to 9MFY21. The higher selling price of Fasteners is the main contributor to the better performance.

Based on the current run rate, Chinwel is forecast to close FY22 at record-high Revenue (c.RM630m) and PAT (c.RM95m). Key risks to the business in the following year/(s) include:

• Lower selling price of wire steel rod (higher price means better margin for the Group);
• Slowdown in construction activities (Europe, USA, Malaysia);
• Constraint with labour supply; and
• Oversupply from China (which may lead to another round of price dumping).

VALUATION UPDATES

Given the current market environment where inflation is high and growth is expected to slow (with the increasing interest rate), we would favor value over growth stocks. In this regard, we remain our liking over Chinwel for the following reasons:

• Commodity-based, recession-proof product;
• Strong balance sheet with net cash position;
• Cash generative business with minimal CAPEX or R&D required;
• High dividend yield of 4% – 8%;
• Low valuation at below 8x PE; and
• Beneficiary of high steel price (operating leverage).

Having said the above, there are several risks associated to the industry / business which all should be aware as mentioned above and in my previous article. Goodluck investing!