Results Review

• Excluding a net exceptional gain of RM0.1mn, CHINWEL’s 1QFY20 core profit of RM6.6mn came in below our expectation, accounting for 11.1% of our full-year estimate. The variance was mainly due to lower-thanexpected demand from European market and lower-than-expected average selling prices in Asia market.

• YoY, 1QFY20 core profit plunged 65.2% to RM6.6mn while revenue dropped by 11.8% to RM155.5mn. The weaker performance was mainly due to: i) a slowdown in European market and, ii) lower average selling prices in Asia market as China rerouted the fasteners products to Asia region. Meanwhile, the wire products division was largely dragged by weaker demand from Middle East.

• QoQ, 1QFY20 core profit was 2.2% higher at RM6.6mn despite revenue dropped by 6.5% to RM155.5mn. The better performance was mainly due to an adjustment of lumpy realized forex gain recognized a quarter ago.

Impact

• Following the weaker-than-expected results, we lower the FY20 to FY22 utilisation rate assumptions for the fasteners plant in both Malaysia and Vietnam operations to 38.0%/40.0%/41.5% (from 42.0%/43.5%/45.5%) and 60.0%/61.0%/62.5% (from 70.0%/72.0%/73.0%) respectively. In addition, we also lower the average selling price assumptions for fasteners products. All in, earnings forecasts for FY20/FY21/FY22 were cut by 21.5%/17.5%/15.0% respectively.

Outlook

• Given the outlook in European market remains challenging, we expect the group to continue focusing on securing additional orders from US market in order to offset against the setbacks from European market.

• The group is currently working on expanding its plating capacity for threaded rods in Malaysia and the work is expected to be completed by December 2019. The expansion plan will allow the group to produce about 600 tonnes of threaded rods per month as compared to 200 tonnes per month currently.

Valuation

• Subsequent to the earnings downgrade, we lower the target price from RM2.06 to RM1.70, based on unchanged 10x CY20 EPS. Maintain Buy call on the stock.

Source: TA Research - 28 Nov 2019