Following our recent meeting with management, we are more upbeat about CHINWEL’s outlook, underpinned by the gradual demand recovery in the European market. On top of that, the sales orders from the US market remain healthy due to local infrastructure spending as well as trade diversion. On the other hand, the transitional period for Carbon Border Adjustment Mechanism (CBAM) has finally kicked-off on 1 Oct 2023. Management believes that it could be a game changer for the industry given that smaller steel players might get phased out due to stringent requirements and high compliance costs. Overall, we upgrade CHINWEL from Hold to Buy with an unchanged target price of RM1.41.

Start Seeing More Orders From the European Market

Based on management's guidance, the group has started to receive more new orders from the European market, mainly thanks to gradual demand recovery. Despite the order size is still relatively small, we believe it is a good sign given that the worst could be over. Recap, the group was negatively impacted by the slowdown in the European market as the local economic activities were badly affected by elevated energy costs. Management guided that the average selling prices of steel fastener products still remain soft, due to persisting weak steel prices as a result on-going real estate crisis in China. The group is currently taking this opportunity to buy more raw materials and build up the inventories in order to prepare for the next market upturn.

Despite the slowdown in the European market, the sales orders from the US market remain healthy due to local infrastructure spending as well as trade diversion. The sales contribution from US market has been trending up since US imposed a 25.0% tariff against fastener products from China back in 2019. Management revealed that the group is in discussion with a few big DIY customers from the US and Europe that are looking to switch suppliers due to the geopolitical tension.

CBAM Could be a Game Changer Over a Long-run

The transitional period for CBAM has finally kicked-off on 1 Oct 2023. Under CBAM, a carbon tariff or carbon tax will be imposed on carbon intensive products that are exported to European Union. The full enforcement will start on 1 January 2026. Management believes that it could be a game changer for the industry given that smaller steel players might get phased out due to stringent requirements and high compliance costs. As a result, the fasteners industry may see lesser competition over a long-run. Meanwhile, the group intends to allocate a maximum of RM10.0mn for capital expenditures over the next 3 years, mainly for plant upgrading and carbon reduction exercises.

Impact

Maintain Our FY24 to FY26 Earnings Forecasts.

Valuation

No change to our target price of RM1.41, based on unchanged 9x CY24 EPS. Upgrade the stock from Hold to Buy following the recent weakness in share price. We are more upbeat about the CHINWEL’s outlook, underpinned by the gradual demand recovery in the European market as well as increasing sales from the US market thanks to the trade diversion.

Source: TA Research - 20 Dec 2023