Chin Well Holdings (CWH) is a one-stop manufacturer of fasteners and wire  rods.  We  see  CWH’s share  price  potentially  being  re-rated  in  the near  term  as:  i)  Europe  is  likely  to  extend  its  anti-dumping  duty  on fasteners  from  China,  and  ii)  the  implementation  of  GST  will  make CWH’s products more price-competitive vis-à-vis its peers in China. Our MYR1.57 FV is based on 10.3x CY14 P/E. The stock is Not Rated.

Background. CWH is an integrated manufacturer of fasteners and wire rods.  It  has  manufacturing  facilities in  Penang,  Malaysia and  Dong  Nai, Vietnam.  The  combined  facilities  have  a  total  monthly  production capacity  of  14.8k  tonnes  of  fasteners  and  4k  tonnes  of  wire  rods.  The founding Taiwan-based Tsai family collectively owns 48.4% in CWH.

Anti-dumping duty on fasteners may be extended. On 26 Jan 2009, the European Union imposed a definitive anti-dumping duty of up to 87% on  imports  of  certain  iron  or  steel  fasteners  from  China  for  an  initial period of five years. This has proven to be a boon to the company as its Europe-based  customers  had  to  switch  to  CWH  from  China-based suppliers. Sales to Europe now make up 56% of the group’s total topline from  26%  in  2009.  The  anti-dumping  policy  is  subject  to  renewal  come Jan  2014.  Management  believes  that  the  existing  policy  will  likely  be extended for another 5-year term.  

GST a blessing in disguise.  Management guided that CWH  may be a potential  beneficiary  of  the  proposed  implementation  of  the  goods  and services  tax  (GST)  from  Apr  2015,  given  that  the  6%  tax  rate  is  lower than the current 10% sales tax imposed on its customers. This will make CWH’s products more price-competitive,  particularly  against  competing products  from  China. From our checks with sources, CWH’s fasteners and  wire  rods  are  generally  priced  at  a  7-15%  premium  to  similar products made in China at present.

FV of MYR1.57. Our FV of MYR1.57 is pegged to CY14 P/E of 10.3x, at a 35% premium to its peer given CWH’s relatively larger earnings base. The stock is Not Rated. Management has a policy of paying a minimum 40% of its earnings as dividend effective FY14. This will translate into a decent yield of 4-5% p.a.

Expecting a Bumper Year

Background.  CWH  is  an  integrated,  one-stop  manufacturer  of  fasteners  and  wire rods.  With  a  total  headcount  of  over  1,100  staff,  it  has  manufacturing  facilities  in Penang, Malaysia and Dong Nai, Vietnam. The combined facilities have total monthly production  capacity  of  14.8k  tonnes  of  fasteners  and  4k  tonnes  of  wire  rods.  CWH now  exports  over  72%  of  its  products  to  Europe,  the  US  and  other  Asian  countries with  the  remaining  28%  sold  in  Malaysia  and  Vietnam.  The  founding  Taiwan-based Tsai family collectively owns 48.4% in CWH.  

Core business segments. CWH has two core operating segments, namely:

i.  Fastener  products:  CWH  manufactures  and  trades  carbon  steel  screws, 
nuts,  bolts  and  other  fasteners.  It  markets  to  both  bulk  industrial  and  do-it-yourself  (DIY)  markets.  Its  factory  in  Malaysia  focuses  mainly  on  the  bulk market  while  the  Vietnam  factory  produces  for  both  the  bulk  and  DIY markets. This segment made up 82% of the group’s 1QFY14 sales. 

ii.  Wire  products:  On  top  of  that,  CWH  also  manufactures  precision galvanised wire, annealing wire, hard drawn wire, PVC wire, bent round bar and  wire  mesh  in  its  plant  in  Penang.  This  division  contributed  18%  of  its consolidated sales in 1QFY14.

Potential extension of anti-dumping on fasteners. On 26 Jan 2009, the European Union imposed a definitive anti-dumping duty of up to 87% on imports of certain iron or  steel  fasteners  from  China  for  an  initial  period  of  five  years.  Fasteners  shipped from  Malaysia  too  are  imposed  an  85%  anti-dumping  duty,  as  it  is  suspected  that Chinese  fastener  exporters  are  circumventing  the  duty  imposed  on  them  by transshipping  via  Malaysia.  CWH,  however,  was  granted  exemption  from  this  duty due to its delivery track record. This proved to be a boon to the group as its Europe-based customers had to switch to CWH from China-based suppliers. Sales to Europe now make up 56% of the group’s total topline vis-à-vis 26% in 2009. Moving forward, this anti-dumping policy is subject to renewal in Jan 2014. Management believes that the  existing  policy  will  likely  be  renewed  for  another  five-year  term.  This  will  allow CWH to further expand its presence in the European fastener market over the near to medium term.

Anti-dumping  policy  on  threaded  rods  could  boost  2HFY14  earnings.  On  the other hand, the US imposed an estimated maximum of 112.0% and 74.9% duties on threaded rods from India and Thailand in August 2013. This would likely translate into higher orders for CWH from its existing as well as potential new US-based customers come 2HFY14, according to management.

GST a blessing in disguise. Management guided that CWH could potentially benefit from  the  proposed  implementation  of  GST  from  Apr  2015, given  that  the  6%  rate  is lower than the current 10% sales tax that the group is charging its customers. This in our view could make CWH’s products more  price-competitive,  particularly  against China’s products. From  our  channel  checks, CWH’s fasteners and wire rods are generally priced at a 7-15% premium to similar products from China at present.

To expand DIY segment. In the near term, management intends  to expand its DIY segment, which accounts for 10% of total group sales currently. We understand DIY fastener  products  command  2-3x  higher  profit  margins  compared  to  conventional bulk  fasteners.  As  the  Europe  and  US  economy  are  recovering  from  their  recent downturn, CWH looks to capitalise on the enormous potential within this segment as the group foresees rising demand for niche DIY fasteners from markets such as the US,  Canada  and  the  UK.  We  believe  this  could  help  boost  CWH’s  blended profitability margins in the long run.

Earnings  forecasts.  CWH’s 1QFY14 revenue slipped  7.5%  y-o-y  to  MYR106.3m due to overall slower demand for wire rod products. However, its bottomline improved by 4.8% y-o-y to  MYR6.2m due to improved ASPs and hence higher profitability for its  fasteners.  Moving  forward,  we  expect  CWH  to  register  core  earnings  of MYR39.9m in FY14F and MYR43.5m in FY15F. Although 1QFY14 earnings made up only  15.5%  of  our  FY14F  full-year  estimate,  we  foresee  earnings  growth  to  pick  up 
momentum  going  forward  in  view  of  likely  higher  orders  for  its  fasteners  and  wire rods.

Solid  balance  sheet.  CWH’s net gearing stood at 9.5% as of 1QFY14,  with  cash balance  of  MYR43.9m.  Coupled  with  annual  operating  cash  flows  of  MYR20m-40m p.a.,  funding  for its annual capex  of  MYR5m-10m  should  not  put  a significant  strain on its books in the foreseeable future.

Investment  risks.  Being  CWH’s  biggest  revenue  contributor,  Europe  presents  a significant  risk  given  that  CWH  is  leveraging  on  the  region’s  imposition  of  anti-dumping  duty  on  fasteners  from  China.  Our  forecasts  are  premised  on  our assumption  that  this  policy  will  be  renewed  in  Jan  2014.  If  the  policy  were  to  be aborted, we believe this could have a negative impact on CWH’s growth prospects.

Dividend policy.  Management has set a dividend policy of  a minimum 40% payout effective FY14. With that, we expect CWH to distribute a 5.9 sen DPS in FY14F and 6.4 sen for FY15F, which will translate into a decent dividend yield of 4-5% p.a.

Valuation.  We  believe  CWH’s  closest  competitor  listed  in  Bursa  Malaysia  is  Tong Herr Resources (THR MK, NR), which is currently trading at 7.6x CY14 P/E. We are ascribing a FY14 P/E of 10.3x for CWH, pegging a 35% premium to THR given that CWH’s earnings  base  is  1.5x  larger  than  THR’s. Consequently,  we  derive  a  FV  of MYR1.57 for CWH. The stock is Not Rated.

Financial Exhibits

SWOT Analysis

 Integrated and one-stop manufacturer of fasteners and wire rods

Company Profile

CWH  is  primarily  involved  in  the  manufacturing  of  carbon  steel  nuts,  bolts,  screws  and  other  fastener  products.  The  company  also manufactures carbon steel wire rods in factories in Penang, Malaysia and Dong Nai, Vietnam.

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Source: RHB