Hidden Gem in Malaysia Stock Exchange

Chin Well Holdings berhad - Superior Free Cash Flow, Minimal Capex, Net Cash, Good Dividend...

James Ng
Publish date: Thu, 10 Mar 2016, 06:44 PM
Chin Well Holdings berhad is established in 1988 and listed in 1999, with a long operational history of 28 years. It is engaged in the manufacture and trade of fastening and wire products. Its key strength:
  • Command worldwide market share of 3%
  • New high growth product lines: gate wires and gabion (possible beneficiary of new train routes in south east Asia)
  • Due to China competing businesses got whacked by Europe anti-dumping duty tax, sales to Europe increased by 23.5%. Starting from July 2011, Chinwel is one of the eight Malaysian companies to exempt from 76% anti-dumping tax.
  • DIY component market is projected to have huge growth in future. DIY sales grew 68% from 2014 to 2015. DIY components have a margin of up to 25%.
  • After implementation of GST (6% vs. previous sales tax 10%), order for screws increased from 100 tons to 600 tons (customers stop taking undeclared custom tax screws because wanted to claim GST input tax for screws).
  • Acquisiton of 40% share of Asia Angel (Vietnam) provides future growth.
  • Dividend policy of 40%, now RM0.0784, yield of 4.75%
  • Chinwel has a lot of loyal customers, some even up to nearly 30 years of business relationship.
  • Net cash position: cash RM101,121,000, minus borrowings RM29,698,000, still net RM71,423,000, net cash RM0.2384 per share.
  • Superior free cash flow: Because of minimal capex, last five quarters all positive free cash flow, hence they are planning for share buy back. Currently free cash flow of RM0.3329 per share.
  • Target price: Assume future EPS is RM0.21, 10x PE is RM2.10 (now trading at RM1.65, potential upside of 27%). I have bought this share recently.
Related Stocks
Market Buzz
Discussions
3 people like this. Showing 47 of 47 comments

CFTrader

Hi. Please be informed that the European had scrap the anti-dumping tax of China ... ...

2016-03-10 21:58

CFTrader

and Hi, please be informed that the order had being held back as the purchaser is waiting for the price from Chinwel's competitor , which is China ...

2016-03-10 21:59

stockmanmy

I like your style , fast.

You done a lot of work

You are not just a story teller like somebody.

2016-03-10 22:14

hng33

Yup, today alrdy accumulate a lot at 1.63- 1.64 which is still trade cum dividend of 4sen. Expect stock price to rebound above 1.70 soon.

2016-03-10 22:36

BoPoint

There is no reason to command a 10x PE esp in a business that has no moat and competitive advantage. 21 sen earnings assumption have no valid reason too. Investors please never forgot to look into business models. If one has no moat or progressive business growth and sustainability, strong discount should be considered rather than assumption based on macro factors. Even financial valuation alone (without taking the business model into account), I shall refute this article's TP. Thanks.

2016-03-10 22:57

CFTrader

Do anyone consider the 1st comment I bring it up ?
Today during the analyst briefing, MAYBANK had told us that due to scrap of anti-dumping policy, their fastener profit margin will shrunk to single digit.

This is the guidance given by their management.

2016-03-10 23:00

oi88

Selling pressure for today is strong with high volume, dont think is it due to small retailer, big boys selling heavily, maybe CFTrader is right.

2016-03-10 23:03

CFTrader

no, i'm not talking about share price.
I'm not big boys either, so I don't know the fluctuation of CHINWEL price.

I'm talking about fundamental changes...
Things change. Effective from 26 Febuary, they scrap the policy already, and you state it as advantage is a big wrong information.

2016-03-10 23:09

stockmanmy

when a share trades at NTA and low PE....everybody so scared..................


wait till a share trades at 2X NTA and PE 20....everybody not scared.


and as far as EU is concerned, they will not kill their own companies to benefit China...that is for sure.

2016-03-10 23:16

Icon8888

if EU doesn't comply, China will retaliate with duties on other products

messy

I think EU will comply

2016-03-10 23:18

Icon8888

if that happens, fair value about RM1.20

2016-03-10 23:20

Icon8888

in the face of so much uncertainties, better exit

2016-03-10 23:21

Icon8888

cut loss, even if your cost is 2.10

it is not fun for 2.10 to become 1.20

2016-03-10 23:22

Icon8888

that would be about 47% loss within two months

not an easy feat

only accountant can pull it off

2016-03-10 23:23

oi88

Big boys selling ahead of news, retailer always late.

2016-03-10 23:25

soros228

No wonder chin well keep on diarrhoea.

2016-03-10 23:29

soros228

There must a reason why it's keep dropping.
Icon8888 u got a good point.

2016-03-10 23:36

Ven Felix

Desa has very high hope to Chinwell, once a must pick as an account clerk.

2016-03-10 23:39

Ven Felix

Next, is highly illiquid gem; highly recommend by Desa. ..Keinhin

2016-03-10 23:40

Ven Felix

Reason for Desa to eye on Keinhin, bcoz their bosses are real rich people...and highly tight hold that lead to high illiquid xD

2016-03-10 23:42

hng33

Ok, Let's see how market response tomorrow, chinwel price either continue slump down or rebound a bit, will set exit price based on average cost 1.637, either can reap profit or cut loss to free up capital.

2016-03-10 23:46

Hahahahaha

Hahahah CFTrader dun tell half dun tell half please~ i was at the briefing also..
The single digit only applies to certain products.. and only certain products are subject to benefits of anti dumping regulation.. hahhahaa ask ur Maybank brief more precise..
Their business are DIY driven.. See their MSIA sales~~ today they told what are the MSIA growth going forward no? What are the wire products margin going forward no?

Dont create fear to buy cheap please~ hahahhha

2016-03-10 23:47

soros228

Once down trend ; will be difficult to climb already.
It will take some time lol.
It's your call dude.
Either u jump into another counters lo.

2016-03-10 23:49

Hahahahaha

Icon8888 no nid think.. EU has already complied and posted on their website stating the regulation was removed... The main issue is not about whether EU remove or not.. Do you all know how small are their products that are subjected to benefit of Anti Dumping? hahaah their other orders have long been better than China products in terms of quality... Ask CFTrader tell you what was in the briefing instead of only talking negative
hahahha u all can continue create fear... i am collecting happily~~ hahahaaa

2016-03-10 23:50

Icon8888

yup, it has been removed on 28 February 2016

big wok liao

http://globalfastenernews.com/main.asp?SectionID=26&SubSectionID=39&ArticleID=14689

2016-03-11 00:00

CFTrader

Chin Well (MYR1.67): Anti-dumping repealing to affect ~10%
We attended Chin Well’s 2QFY6/16 result and corporate update briefing today. The repealing of anti-dumping law in EU for fasteners from China (effective 26-Feb) may not be as bad as it seems.

In terms of numbers, only its bulk sales of bolts may be affected, which makes up 20% of EU sales, i.e. MYR56m (~11% of FY15 revenue). In the likely scenario of margin compression due to the need to match China’s pricing, management has guided for single digit margins. This division is enjoying ~15% PBT currently. If this halves to 7.5%, the estimated PBT reduction is MYR4.2m, i.e. less than 10% of FY15 PBT.

We also find comfort in (1) China’s labour cost increase; (2) part of the repealing involved a promise of being more environmentally friendly, lowering CO2 emissions and proper waste water treatment (Chin Well pays MYR0.6-0.7m every month); (3) China’s promise to cut 15% output over five years; (4) Failure of China manufacturers to stock up on wire-rod which saw prices shoot up 30% since January; (5) perception of inferior quality of China products; (6) most customers would source from various countries (as per past practice) for risk and cost hedging.

It is hard for China to penetrate the DIY market as it is labour intensive and there is usually a 1-year customer audit period. Cost wise, environmental cost increase could mean a levelled playing field for others vs China by 2020. Lastly, there will also be a time-lag of at least a few months before China’s threat materialises, due to the above mentioned factors.

Having said so, the fact is everyone is holding back big/bulk orders awaiting China players' pricing. Chin Well has only received small urgent orders during this period.

Whilst it will be hard for Chin Well to repeat its 1HFY6/16 PATMI growth of 113% with the expected headwinds, management has shared two expansion plans.

It intends to invest ~USD400k for a gabion machine end-2016. Currently, its gabion and fences capacity are fully utilised. In 2Q, wire product revenue jumped 28.2% YoY as it secured more new projects in Malaysia and began regular supplies overseas.

Chin Well is also looking to set up a recurring source of income. It has commenced construction of a new automatic warehouse in Port Klang for MYR12.8m, which will complete within 6-9 months. It plans to utilise 30-40% of the space, whilst renting the remaining out for storage of hardware related items. At 80% utilisation, management hopes for ~MYR2m p.a. contribution.

Separately, on the US side, it seems that the worst is over. Orders are coming in, though not consistently and not at previous levels. PrimeSource is Chin Well’s only customer in the US and the supplier of Home Depot. The PrimeSource takeover resulted in inventory rationalisation and order halts (due to over stocking previously) which affected Chin Well significantly.

The group’s balance sheet remains solid. It currently has a net-cash position of MYR71.4m.

As its stellar performance is not expected to continue into the 2H, we look at its 12M trailing EPS of 20.7sen (vs. annualised 1H EPS of 24.6sen). The stock is trading at 8.1x trailing EPS, which is below its 3-year historical average PER of 11.4x.

2016-03-11 00:25

stockmanmy

From the businessman perspective.

If you can find me a business with good management , trading at NTA and low PEs, you invest.

You do that consistently, you will be hugely rewarded by the stock market. .....that is called investments.

every thing else is talk three and talk four and fear.

2016-03-11 00:49

JT Yeo

Please be mindful that capex has been lagging behind depreciation since 2011 or probably even longer. It could be a sign the company is underinvest, thus inflating FCF. And when you look at the total assets has been failing for 4-5 years already, you need to ask can they continue to grow revenue with less and less assets? Something got to give.

2016-03-11 08:01

fast

CFTrader: Thanks informing. JT: I'm happy if Chinwel able to do well with less and less assets, meaning their efficiency is increasing.

2016-03-11 08:29

fast

JT: Just checked, Chinwel assets still growing...

2016-03-11 08:32

JT Yeo

Refer to the link above, sorry not total assets but property plants and equipments assets - those are the one that drive revenue. It is going down from 183 mil to 155 mil. You may be right they are becoming efficient, but it is assumption.

2016-03-11 08:57

Icon8888

a company as competent as Chin Well is unlikely to save money at the expense of future prosperity (kill the goose to extract eggs)

one possibility is that actual wear and tear is lower than depreciation charges

depreciation charges is an accounting figure (straight line reduction irregradless of what happens to the machines and equipment)

capex on the other hand, is dictated by actual wear and tear

if the equipment is maintained well, they will need to spend less on capex (despite higher depreciation charges) and yet maintain the same amount and quality of equipment for production

Posted by JT Yeo > Mar 11, 2016 08:01 AM | Report Abuse

Please be mindful that capex has been lagging behind depreciation since 2011 or probably even longer. It could be a sign the company is underinvest, thus inflating FCF. And when you look at the total assets has been failing for 4-5 years already, you need to ask can they continue to grow revenue with less and less assets? Something got to give.

2016-03-11 09:04

JT Yeo

again everything is up for interpretation. We are dealing with uncertainty. Their long term ROE is sitting at 10%, which is mediocre.

2016-03-11 09:44

hng33

thanks icon, alrdy sold at 1.65, avoid loss, free up capital

2016-03-11 09:57

enning22

a lert! Europe anti-dumping duty tax has just benn cancelled, a few days ago

2016-03-11 10:44

stockmanmy

alert yes......but did you notice there are a lot of buyers there? there are people who like to buy when things are cheap.....hahahaha

=======================
ed by enning22 > Mar 11, 2016 10:44 AM | Report Abuse

a lert! Europe

2016-03-11 10:57

moneySIFU

Very very good discussion here, nothing to do but do reading here.

2016-03-11 11:16

Probability

totally agree with Icon's point on Depreciation there...

2016-03-11 11:33

tftey

China won at WTO case and the antidumping factor would be big negative factor for ChinWell.

2016-03-11 14:51

Beza

Correct.

2016-03-11 15:21

Jones Ong

kana miko point good let time tell the truth

2016-03-11 22:37

soros228

1. Share price dictate the future direction of the company.
If the share price keep on diarrhoea; the prospect is guarded.

2016-03-11 22:50

stockmanmy

kana....that is what a well managed company do....they turn adversity into advantage.

2016-03-11 23:46

VenFx

Europe $ QE,lead to $ depreciation..that's the core issue.

2016-03-11 23:51

Post a Comment