Investment Merits

• Starken AAC is an up and coming “star” given Chin Hin?s aggressive expansion plans

• In the midst of bumping up its precast and wire mesh capacity, which would support higher production and earnings

• We foresee continued efforts to look for value accretive M&As after two successful acquisitions in late 2016

Company Profile

Chin Hin Group (Chin Hin) is an integrated builders conglomerate that provides building materials and services to the construction and building industries. The group„s history can be traced back to 1974 when its founder, Datuk Chiau Beng Teik took over his family?s hardware shop in Alor Setar, Kedah, under the name of “Chop Chin Hin”. Through hard work and perseverance, the group has evolved from a small hardware outfit into one of the largest building materials distributors in Malaysia. Chin Hin has expanded into the supply of ready-mixed concrete through multiple points of sales throughout the country. Towards the end of 2009, its present group MD, Chiau Haw Choon joined his father, which lead to further expansion and diversification of the group into various manufacturing operations which complement its existing business – these include venturing into wire mesh products, metal roofing systems, Autoclaved Aerated Concrete (AAC), and pre-cast concrete products. Today, Chin Hin has grown into a “one-stop centre” for the building and construction industries in Malaysia.

Highlights

Starken AAC – an up and coming “star”. After a few years of market education, many contractors have started to adopt Starken AAC as a substitute for traditional bricks and mortar. The group has just finalised its acquisition of 50.6 acres of land in Kota Tinggi, Johor for MYR22m, to set up a 600,000 m3 AAC block plant on the site, on top of its existing capacity of 375,000 m3. This new plant is targeted to commence operations by mid-2018 to ease the current delivery lead time of up to six months. The Johor production line would be interchangeable between manufacturing AAC blocks and wall panels. The Housing and Development Board of Singapore (HDB) has accepted Starken?s wall panels for their government affordable housing project. This plant would be geared up to increase the production quantity of wall panels to cater to rising demand from the local market as well as neighbouring countries.

“Casting up” precast and wire mesh capacity. Precast concrete is another lucrative business for Chin Hin. Its 2016 precast capacity of 45,000 tonnes pa (tpa) would increase to 300,000 tpa in 2017, with four new plants at Serendah, Bidor and Rawang. The new plants at Bidor and Rawang have been operational since January, with contributions expected as soon as 1Q17. Separately, it also plans to set up a new 100,000-tonne precast plant adjacent to its new AAC plant in Johor, operational by early 2018. With the Government?s continued initiatives in the water and sewerage sector, prospects for the precast concrete business are looking bright. Elsewhere, it installed the world?s latest wide-body fast-speed CTS welder in Dec 2016, which increased production capacity by 24,000 tpa to 96,000 tpa – positive earnings contributions are expected from FY17.

Vertical integration via M&A. Leveraging on its network of 4,000 customers, the group is aggressively adopting its vertical integration strategy in expanding its product range that offers better margins. Last year, it acquired Midah Industries and Epic Diversity. These acquisitions would further expand Chin Hin?s product portfolio to include hollow metal doors, fire rated roller shutters, and other products that fetch higher margins. Furthermore, the acquisitions were supported by PBT guarantees of MYR3m in aggregate each for the next two years. Led by a young and driven management team, we expect the group to continue to be on the lookout for value accretive M&As. Meanwhile, its distribution of building materials, ready-mixed concrete and other segments should continue to benefit from the booming infrastructure construction sector in Malaysia although softer new property development may cap its upside.

Company Report Card

Latest results. Excluding revaluation surplus of MYR13.8m and one-off listing expenses of MYR2.9m, Chin Hin reported a core net profit of MYR34m in FY16 or up 12.3% YoY.

Balance sheet/cash flow. Chin Hin?s net gearing of 0.74x as at endFY16 is deemed reasonable being in the trading business.

ROE. The decent earnings helped Chin Hin to keep its ROE at the commendable double-digit levels.

Dividend. While it does not have a formal dividend policy, management has verbally committed to a generous payout ratio of 50%.

Management. Founded by Datuk Chiau Beng Teik, presently his son Mr Chiau Haw Choon is in charge of the day-to-day operations together with a team of professional managers.

Recommendation

We believe Chin Hin is the best proxy to ride the infrastructure boom in Malaysia. The young and dynamic management team has put in continuous effort to expand existing capacity and improve operational efficiency, while the board is aggressively looking for value accretive M&As to vertically integrate its existing business. With projected bottomline growth of 25.3%/26.4% in FY17F-18F, we believe it deserves to trade at a higher target FY18F P/E of 13x vs the industry valuation range of 10-13x. We have a fair value of MYR1.40.

Source: RHB Securities Research - 5 May 2017