• Maintain SELL with lower MYR0.94 TP from MYR1.03, 23% downside. Chin Well’s 1HFY24 (Jun) results were below expectations due to prolonged demand weakness and loss of economies of scale. We foresee further downside risks to sales recovery considering the cautious outlook amidst macroeconomic headwinds in its key market. Current valuation (+2SD) appears lofty, and we believe the share price has yet to fully reflect the weaknesses and challenges ahead.

• Below expectations. 1HFY24 core earnings of MYR3.7m missed expectations, accounting for only 12% and 11% of our and Street’s full-year estimates. The negative deviation was due to weaker-than-expected sales and margin compression from the loss of economies of scale and higher input costs. Note that we stripped off the unrealised FX gain of MYR0.8m to arrive at the core profit. Geographically, 1HFY24 sales in Malaysia (-41%), Europe (-49%), and the US (-29%) all declined.

• Results review. YoY, 1HFY24 revenue fell 38.2% to MYR167.4m due to weaker sales volumes and ASPs for its products, on the back of soft market conditions. Both fastener and wire products segments were down 38.6% and 36.7% respectively. 1HFY24 EBITDA margin dipped 14.7ppts to 5% due to loss of economies of scale and higher production costs. QoQ, 2QFY24 revenue fell 25% YoY due to the aforementioned demand softness. Correspondingly, core earnings dipped 87.1% QoQ to MYR1.3m.

• Outlook. Management anticipates a slight improvement in sales in 3QFY24, contrary to the historical trend of softer sales during 3Q. This is attributed to CWH benefiting from the red sea crisis, as customers divert some orders from impacted suppliers to CWH. However, looking beyond the immediate term, management foresees a challenging outlook due to the prolonged weak market environment in its key markets. Specifically, customers in Europe are deferring orders due to ongoing inventory adjustments amid the economic downturn. With soft sales volumes expected, we believe CWH will experience continued margin compression due to diseconomies of scale and negative operating leverage.

• Forecast and ratings. We cut FY24F-26F earnings by 32%, 17%, and 15% after imputing softer sales and margin assumptions. We lowered our TP to MYR0.94 after rolling over the valuation base year to FY25F – pegged to an unchanged 8x P/E (in line with its mean). Our TP includes a higher 14% ESG discount, based on CWH’s new ESG score of 2.3 out of 4.0.

• Key upside risks: Higher-than-expected sales volumes, better-than- expected margins, and reduced competition intensity.

Source: RHB Research - 28 Feb 2024