• NEUTRAL, new MYR1.45 TP from MYR1.56, 1% upside. Chin Well dipped into a MYR0.1m loss in 3QFY23, coming in below expectations due to significantly lower topline and margin compression from the loss of economies of scale and higher input costs. We cut our forecasts accordingly to reflect the softer numbers and persistently weak demand outlook. The current at-mean valuation is fair – supported by a proposed share buyback and decent c.5% yield.

• Below expectations. 9MFY23 revenue of MYR360.8m (-21.7% YoY) and core earnings of MYR34.5m (-49.5% YoY) accounted for only 61.1% and 53.8% of our and consensus’ full-year forecasts. Slower-than-expected revenue and EBITDA margin led to the underperformance. Geographically, revenue weaknesses in Malaysia (-13.3% YoY), Vietnam (-46.1% YoY), and Europe (-35.4% YoY) were partially cushioned by improved sales in North America (+4.2% YoY).

• Results review. 3QFY23 revenue of MYR90.2m (+46.2% YoY, -19.1% QoQ) was dragged down by fasteners (-50.4% YoY, -16.5% QoQ) and wire products (-32.1% YoY, -24.8% QoQ) segments. The YoY and QoQ weaknesses were attributed to softening of sales volumes and ASPs for its products, amid global macroeconomic headwinds. Meanwhile, 3QFY23 EBITDA margin contracted 12pts YoY to 2.2% on losses of economies of scale and higher input costs, leading to quarterly loss of MYR0.1m.

• Outlook. We expect CWH’s product ASPs to remain soft following weak demand and slower orders from global market customers. We gathered that the reopening of China borders has intensified competition for its products – resulting in further decline in ASPs and subsequent margin shrinkage. On a brighter note, management expects sales to be cushioned by the resumption of local construction projects under the new Malaysia Government. Moving forward, the DIY fasteners segment – which fetches a higher margin – remains the group’s key focus. The segment made up 25% of the company’s FY22 revenue.

• Forecast and ratings. We cut FY23-25F earnings by 26.7% to 12.2% – accounting for the prolonged demand weakness and loss of economies of scale. Our TP is lowered to MYR1.45 – based on an unchanged 8x P/E (in line with its mean) – while we roll forward the valuation base year to FY24. Our TP includes a 4% ESG discount, as its 2.75 ESG score is below the country median. We maintain our NEUTRAL call, as we believe the near- term growth weakness has been factored into the share price. Key risks: Raw material price fluctuations, labour shortages, and FX rate volatilities.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 29 May 2023