Highlights:

1.  Chinwel is one of the largest manufactures of fasteners in the world and South East Asia. It has completed its Vietnam plant expansion and may benefited from its US and Europe exports where they need a lot of fasteners from their automotive and heavy industries.
2.  Main future growth drivers come from its DIY fasteners where its margin is higher (mainly export to US) and upgrading of its galvanized wire production line (to be completed in FY19).
3.  Extensive global sales and distribution network with diversified clientele base and wide range of fasteners and wire products (over 3000 types) and it exports about 64% of its products to Europe, US and Middle East
4. High average dividend yield (about 5%) for FY2018 which is higher than bank’s FD rate. Historically, Chinwel has been generous in dividend payout over past 14 years based on its consistent earnings and cash flow.
5.  China wire rod price (raw material of fastener) has dropped 20% in recent two months. Normally wire rod price of china may lead to the price trend of Asia like from Vietnam where Chinwel may import. This downtrend of wire rod price may help Chinwel to expand its fasteners’ profit margin for FY2019.
6.  Demands of Chinwel’s fastener are projected to remain strong in FY2019 due to two main factors - less competition from China because of clamp down on non-environmental friendly fastener factories and stronger demand on the back of an economic recovery in Europe.
7. The fair forward 12-month PEx should be in the range of 9x-10x which translated to RM2.0 to 2.2 based on FY19 forecast EPS of 22 sen.

Company Background

CHINWEL is a manufacturer of carbon fastening products (screws, nuts and bolts) before diversifying into production of wire rods products (galvanized wire, annealing wire, hard drawn wire, PVC wire & grill mesh) following the acquisition of 100% of Chin Herr Industries in 2013. Today, manufacturing of carbon steel fasteners and wire rods products have remained CHINWEL's two core businesses. In 2015, the acquisition of the remaining 40% stake in Chin Well (Vietnam) which manufactures fasteners mainly for exports from Vietnam.

In FY18 ended June, fastening products contribute about 76% of total revenue. Chinel is now ranked as one of the largest suppliers of fasteners in the world and South-East Asia with exports accounting. Europe still remained the group's biggest export market, accounting for 42%) of the total group's revenue in FY18. CHINWEL’s wide range of fasteners are significantly used in highway guard rails, power transmission towers as well as furniture. To enhance the growth prospects going forward, CHINWEL has moved up the value added chain via its expansion into the higher margin DIY market for fasteners and high security fences and gabion for wire products.

Fundamental Data

Currently Chinwel is trading at trailing PE Ratio of 8.3 (based on current price of RM1.66) with EPS of 19.98 sen. Chinwel has performed relatively well as reflected by its performance in the latest five financial years results. Between FY14 and FY18, revenue increased YoY to new high while the EPS also improving upward. This superior showing has strengthened the balance sheet, as shown by the group’s strong cash position between end of FY13 (-RM61.1m) and end of FY18 (+RM44.6m). Chinwel has distributed decent dividend in past 5 years also contributed to accumulated dividend payout of 34.0 sen. CHINWEL has maintained its generous dividend policy of paying out at least 40% of its net profit to the shareholders over the past 5 years.

Source: http://www.malaysiastock.biz

We can observe that the net profit of 12MFY18 (55.8 mil) which is 10% higher than full year profit of FY17 even under challenging business condition. Chinwel has performed respectably in the cyclical steel industry as reflected by its performance in the latest five financial years. It has good dividend yield of 4.82% and NTA of RM1.87. More importantly, it has been distributing dividend over past 14 years (except FY2009) and the dividend has increased from 2.5 sen to 8 sen from 2004 to 2018 as shown in the figure below.

Source: http://www.malaysiastock.biz

Key Financial Data

Let us go through some key financial data (included latest result) of Chinwel as table below:

We can observe that Chinwel achieves small improvement but quite stable in ROE, ROIC, Ebit margin, ROA and dividend yield ratios for trailing 12 months vs past 5 year average result. Chinwel is a net cash company although they have undergone some acquisition and expansion in past 3 years.

For a more comprehensive evaluation, I have used 10 metrics to evaluate FLB. pls refer to the table below for the details of the points scored by Chinwel (this section is not for public at this moment).

Prospect and Fair value for FY2019

The profit growth of Chinwel lies on two core businesses in FY18. The dominant fastening products show sharp profit rebound (+RM10.3m YoY) which more than offset the decline in the wire rod segment which is partly caused by forex loss. The EPS has risen YoY in three out of the four quarters of FY18, particularly sharply in the 4QFY18. CHINWEL outperformed heading into FY19 with the 1Q19 result’s EPS up YoY as well as QoQ to 5.90 sen. Revenue also expanded at its quickest pace YoY (+28%) for the eighth straight quarter.  Profit expanded further in the dominating fastening products arm (+RM0.4m YoY) from an elevated base in 1QFY19 while for wire products, profit rebounded (+RM1.6m) from the sharp fall in FY18.

The raw material of fastener is wire rod. The future prospect of the Chinwel is depending on demand and cost of their raw material supply. Let see China raw materials (wire rod) chart as below:

Source: http://www.sunsirs.com (Wire Rod is raw material of fastener)

From the chart above, we can observe that the price of China wire rod has dropped significantly (20%) in recent two months.  Normally wire rod price of china may lead to the price trend of Asia like wire rod price from Vietnam where Chinwel may import. This downtrend of wire rod (raw material) should help Chinwel to expand its fastener profit margin for FY2019.

Chinwel benefited from the clamp down on polluting factories in China

Let us go through a news related to Chinwel from Theedge:

Source: http://www.theedgemarkets.com/article/chinas-crackdown-polluting-factories-helps-boost-demand-chin-wells-fasteners

Demand of Chinwel’s fastener is projected to remain strong in 2019 due to two main factors - less competition from China because of a clamp down on non-environmental friendly factory operations and stronger demand on the back of an economic recovery in Europe.  This can be witnessed by the increase of record revenue and higher profit in 1Q19 result.

Besides, Chinwel's expansion would be in Vietnam where labour supply is comparatively more consistent.  Chinwel will add more production lines in Vietnam to cater to rising demand of its new fasteners which could speed up construction work. In Europe, negotiations are on-going with 3 important customers for DIY fasteners.

Besides, the upgrading of Chinwel’s galvanized wire line is in the progress and is expected to be completed in FY19. The upgrading will enhance the production efficiency and reduced the product cost. Chinwel had commenced the building of an automated warehouse in its Shah Alam land and the construction is expected to be completed in the FY19.

 According to Zion Market Research, the global industrial fasteners market is projected to grow at about 5%+ CAGR until 2022 (market size of USD116.5bn).  Chinwel is raising the output of DIY fasteners, rebar connectors and wire mesh products so that they will contribute 30%-40% of group's revenue in coming 3 to 4 years from 11% currently. The group has completed an expansion on its plant for these products which are produced in Vietnam and Penang. At present, the bulk of Chinwel's construction grade fasteners (lower margin compared to DIY) is sold to Europe which contributes 40%-50% of the group's revenue.  

FY2019 Results Sales of wire mesh products may increase due to potential large orders from the Middle East and South Asia region. The US market is also likely to make a comeback for the DIY fasteners (made in Vietnam) in 2019. 

Based on Chinwel’s future stable earning (moderate growth is expected), sustainable high dividend payout from strong balance sheet, the fair forward 12-month PE for should be in the range of 9x-10x based on EPS of 22 sen (translated to RM2.0 to 2.2) which is consider reasonable valuation for a leading fastener company with strong present in Europe market where they need a lot fastener from its automotive and aviation industries.

Risk

1. Rising labour cost (foreign workers levy and min wages increment in 2019)
2. Weaker EUR and USD currencies as Chinwel is an export-oriented company.

If you interested on my analysis report, please contact me at davidlimtsi3@gmail.com

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Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company.