Chin Well: Q4FY2015 Moderate Result

After glancing through the quarter report, I think the result was quite moderate and a bit below my expectation.

Revenue increased marginally if compared to corresponding quarter last year. Unfortunately, its gross profit margin dropped significantly from 24.8% to 16.5%.

Even coupled with lower administrative expenses and marketing expenses, the group posted much lower net profit in the end.

Since the acquisition was completed at previous quarter, the group does not need to share the result to the minority parties anymore.

Assumed the group taking full control since the beginning of the financial year, full year EPS would be RM49.4 million net profit divided by around 300 million shares, which equivalent to 16.46 cents. PE is around 8.5.

In terms of balance sheet, one thing to highlight is the group able to reduce its net debt position from RM25 million to net cash of RM2.1 million even taking into account of RM8.3 million to pay for the acquisition. That's a very healthy sign.

This was contributed by its strong cash flow and positive high free cash flow. Minor set back was the group made an inventories write-off of about RM4.5 million.

Fasteners segment posted poorer result this quarter. Management explained that it was due to demand slow down in European countries as well as product mix that generated lower profit margin products.

Surprisingly, the Wire segment posted a loss in this quarter. I expected it to post a good result due to new product of panel fence being launched. But things went to the other way as revenue dropped. 

Management also did not mention anything regarding the DIY products that the group emphasize all this while as DIY products fetch higher margin. 

In summary, it still depends on its growth prospect in the Fasteners segment and its stability in the Wire segment.

Situation in European countries also affected its performance as much of the group's sales was export to this region

At a PE region of 8-10 may not provides much growth in the share price as current sell down in the market caused many companies selling at cheaper price and higher dividend yield. 

Chin Well: Email enquiry to IR (25/5)

Just sent an email to Chin Well group's IR regarding some of the issues related to the group as below. 

1) There was an article from Bloomberg mentioned that EU had renew another five years tariffs on screws and bolts from China last month which will expire in Mar 2020. Are you able to confirm regarding this anti-dumping duty extension?

- Yes, the extension took effect on 28-March 2015 for a 5-year period.

2) If the anti dumping duty being extend, how well can Chin Well benefit from this? Does the management foresee better sales or normal as previously?

- Chin Well is one of the 9 Malaysian companies whose exports to EU are exempted from any duty. We do expect higher sales from EU as happened in 2009 when the earlier anti-dumping duty was imposed.

- However you must understand that currently, EU is seeing a mixed bag of fortunes in economy, where some countries are doing better than others. With this duty being extended, we hope that sales will pickup when the economies rebound.

3) With the recent quantitative easing being implement in Europe and the strengthening of RM against EUR, is that any drop in orders from Europe countries?

- EU demand is as above where some countries are faring better than others.

- We always give customers the option of whether to pay in USD or EUR. For EUR sales, we tell the customer that we add a certain percentage of currency hedge risk on top of sales. Our sales is 50-50 between USD and EUR.

4) With the recent drop in steel rod price, how long does Chin Well need to benefit from the lower raw material cost?

- Typically raw materials make up about 60-70% of our production cost. Our inventory turnover period is about 6 months.

5) Based on the sensitivity analysis for foreign currency risk described in AR2014, the group will face decreased PBT as a result of strengthening of RM against EUR and weakening of RM against USD. Is my interpretation correct? In this case, both currency movement is acting unfavourable to the group.

- As mentioned above, we impose a “forex risk fee” for EUR to safeguard our interest. Some of our imports are in USD so there is natural hedge.

6) There is an article mentioned that Chin Well group benefit from the GST implementation. Could you explain more on this?

- For one thing, the 6% GST is lower than the previous 10% sales service tax (SST), so prices of goods would be lower. Also, all players have to impose GST, whereas some players did not include SST. That’s why we welcome GST, because it levels the playing field in the whole industry!

Chin Well: A normal Q2 Quarter

Chin Well Holdings just announced its result for Q2FY2015. Some of the key highlights are below

- Revenue and net profit up y-o-y but dropped q-o-q

- The symptom was same for gross profit margin and net profit margin. 

- Profit attributed to minority interest increased for the past 3 quarters. It will be interesting when the profit from its Vietnam plant being fully consolidated into the group's bottom line starting from next quarter onwards.

- 1H2015 was far better than 1H2014.

- Balance sheet remained stable. Expect there will be cash outflow and increase in borrowings next quarter as the result of acquisition. But the cash flow generability had been quite good these 2 quarters. 

- Cash flow remained strong and good positive FCF.

In terms of segment, the revenue for the fasteners division was pretty stable for the past few quarters. It's just the products that being manufactured or sold that affected its margin.

It's noted for this quarter, a products mix with lower production yield in the Vietnam plant lower down its margin and subsequently lower profit was recorded.

A new product, namely panel fence helped to improve the overall performance for its Wire division although the contribution to the group is not that significant.

By looking at the contribution from its Vietnam plant, the profit after tax from this subsidiary increased tremendously for the past 3 quarters. However, there was a drop in this quarter. Not sure it was due to the lower production yield or higher wage incurred. Have to take note of this as Vietnam plant remained a good growth engine for the group.

Will continue to hold and looking forward for the consolidation from next quarter onward

Chin Well: After Acquisitions ..

Bursa just approved the acquisition by Chin Well group on Asia Angel's 40% equity stake in Chin Well Vietnam plant. 

Along with the announcement, it also published the past years result from the Vietnam plant. Its contribution to the Chin Well group is quite significant. 

However, its result for the past 3 years was quite bumpy. Gearing also in the region of 0.2-0.35 with low level of cash balance. 

For Q1FY15, it marked a great improved performance with PAT 5 times higher than same quarter preceding year. Cash balance also increased as well as the borrowings. 

No wonder the group made the decision to acquire the remaining shares it doesn't own. 

Well, it's still a cyclic business. Have to keep monitoring as the products from Vietnam plant mainly exported to Germany, UK and US. 

I made a stimulation on the result by assuming Chin Well group owned 100% on Chin Well Vietnam plant for trailing 12-month period. I directly just used the net profit of the group since its bottom line does not need to attribute to minority interest anymore. 

No. of outstanding shares increased 10% as part of the conditions of the acquisition

As a result, net profit chalked up to around RM50.9 mils which give it a EPS of 17cents. 

Net profit margin increased to around 10%. 

Nothing change on its revenue, gross profit and operating profit. 

In terms of balance sheet, I used the amount in the latest Q1FY2015 balance sheet as a base. 

The total consideration of RM92mils is funded by RM39.15mils (New shares issued), RM8.3mils internal fund and the rest from borrowings (advanced by Asia Angel). The balance shall be satisfied within 2.5 years after the acquisition. 

Thus, I adjusted the amount by reduce its cash as well as increase its borrowings. Net borrowings further reduced to RM67mils with net gearing ratio increase to around 15%. 

ROE increase to 11.3% due to increase in bottom line while ROIC reduced to around 10% as a result of higher borrowings. 

In terms of valuation, both market capitalization and enterprise value also increased due to larger number of shares and higher borrowings respectively. 

PE ratio dropped to around 9 as the increase in net profit enough to compensate the increase in the number of outstanding shares. 

Earning Yield dropped slightly to 12% due to increase in borrowing and no change to its operating profit. 

I always view this acquisition as a positive move although the acquisition took place in the PE region of 10. 

Hopefully the performance of the Vietnam plant will keep on improving and contributed more to the group.

Besides, the consolidation of the Vietnam plant into the group also helps the group in better management position to manage its cash flow and operation.

Chin Well & Tong Herr Comparison

I guess it's time to make a comparison between Chin Well & Tong Heer. I have been dragging for too long to write a post regarding this matter. 

I compiled the trailing 12-month data for both companies using methods as below

Chin Well = AR2014 + Q1FY15 - Q1FY14 

Tong Herr = cumulative Q3FY14 + Q4FY13 

As written in earlier posts, both groups also enjoying higher demand from their products as seen from their better performance result since last two three quarters ago especially Tong Herr group. 

For the trailing 12 months, Tong Herr managed to record higher revenue than Chin Well but lower operating profit and net profit compare to the latter. 

Chin Well managed to control its profit margin very well, better than Tong Herr did. I guess their raw material cost is roughly the same. Higher value products and lower operating cost contributed to Chin Well's higher gross profit margin and operating profit margin. 

Both group also in net borrowing position. Tong Herr has higher net gearing ratio compared to Chin Well. However, Chin Well's net gearing ratio probably will become higher after the recent acquisitions. 

Cash conversion cycle for Tong Herr group is better than Chin Well. Chin Well mentioned they need to keep a considerable amount of inventory in order to deliver the products to their customers at the shortest lead time. 

Minority interest percentage of Tong Herr group is higher than Chin Well too. 

ROE and ROIC of Chin Well is better than Tong Herr although both companies also considered as mediocre based on the return performance. 

Both companies' free cash flow generability also quite good with FCF/Sales and FCF/Invested capital more than 5% with Chin Well recorded better.

In terms of currency risk, the strengthening of USD against RM had greater impact on Tong Herr compared to Chin Well. Both groups' borrowings also denominating in USD currency but Chin Well has higher portion of trade receivables and cash denominating in USD currency as hedge.

The impact is higher for Tong Herr in terms of percentage to the group's bottom line as Tong Herr's net profit is lower. 

Furthermore, Chin Well's exposure to EUR is serving as natural hedge to the exposure to USD currency since they're in opposite direction

It's noted that Chin Well also selling wire products apart from its core fastener segment. However, fastener segment contributed most to the group with around 85% and 96% respectively to the group's revenue and operating profit. Part of the revenue from its fastener segment came from its 60% owned Vietnam plant which soon to be fully consolidated after the acquisition end. 

Tong Herr has an aluminium extrusion plant in Penang apart from its core fastener business. In terms of contribution, fastener segment contributed around 70% to the group's revenue and operating profit. Although the aluminium extrusion segment contributed around 30%, but it's noted that Tong Herr only owned the extrusion plant for 51% only and part of the revenue from its fastener segment also came from its 50.01% owned Thailand plant. Besides, Tong Herr's associates, steel mill was still in red in FY2013 but managed to record profit in FY2014. 

Thus, if the demand of fasteners is improving, it will benefit Chin Well more as the contribution and PBT margin for its fastener segment are higher compare to Tong Herr. 

In terms of valuation, Chin Well PE ratio and DY are slightly higher based on trailing 12-month result compared to Tong Herr. Tong Herr may declared another dividend payment for the latest financial year due to better result. PBIT/Entreprise value ratio and FCF yield for both companies are roughly the same. 

I choose Chin Well because of its acquisition, higher margin for fastener products, improved production efficiency, higher value products contribution (DIY), new products from wire products, benefit from GST tax implementation, better growth prospect and lower exposure to currency risk. 

One thing to take note is the progress of the anti dumping duty imposed by EU. 

Chin Well: Email Exchange with IR (01/15)

I dropped another email to Chin Well IR to follow up on my earlier enquiries. Below are the details. 

Since the group intend to improve the DIY segment contribution for FY2015 from 11% in FY2014, what kind of target the group is looking to achieve in terms of revenue contribution?

A: Targeting 30% in 3 years

What is the rough PBT margin for DIY segment, normal fasteners and wire rods respectively? 

A: We do not disclose each segment’s margins due to competitive reasons; suffice to say gross margins are about 15-20% across all products.

It's noted that the group's inventory turnover is quite high and almost half of the inventory is finished goods. Is that any reason why the group need to keep such a high level of finished goods in hands? Does it affected the quality (corrosion) or it will become obsolete? 

A: This is mainly to cater to local market demand, where we are able to make next-day deliveries for orders made before 12 noon. Obsolescence and corrosion are no issues.

The group announced to acquire the remaining 40% stake in Chin Well Fasteners (Vietnam) not owned by the group for RM47mils. Is the acquisition going to be completed at Dec 2014?

A: We are awaiting Bursa’s approval for the share issuance portion.

Since one of the terms of the acquisition is to issue 27mils new shares at RM1.45 to shareholders of Asia Angel, is the price going to be adjusted due to the enlarge paid up capital and ordinary shares? 

A: Only EPS would be affected, i.e. adjusted upwards in tandem with higher profits attributable to shareholders.

Based on the sensitivity analysis for foreign currency risk as published in AR2014, a 10% weakening of the

RM against the USD currencies would have decreased PBT by around RM2.1mils. Is my interpretation correct?

A: Yes, but please take note that forex risk in USD will be set off against forex risk in Euro as both have opposite effects.

There are some local furniture players in Malaysia also shifted part of their operation to Vietnam due to lower labour cost. However, it's noted that the labour wages in Vietnam is increasing recently as was reported in their quarter reports and caused their profit margin dropped. Is the group's operation in Vietnam experiencing the same problem? What steps had been taken? 

A: Favourable product mix of DIY products mitigates the labour cost.

I'm believe Tong Herr Resources group is one of your competitors, but their main products are more to stainless steel fasteners. Is Chin Well exhibit any competitive edge over Tong Herr Resources? 

A: We manufacture different types of fasteners that have different applications. Tong Herr produces stainless steel fasteners that are mainly for indoor applications; Chin Well makes carbon steel fasteners for outdoor applications. Therefore our customers don’t mix, and we do not compete against each other.

Chin Well: Email exchange with IR

I dropped an email to Chin Well Berhad's IR. Below questions are some of my enquiries to them and their answer. 

1) Based on the FY2014 annual report, Mr Lim mentioned in his chairman statement that the group secured new contract from the largest DIY fastener supplier in German and France. Are the contracts long term base or by order base? Approximately how much they will contribute to the group's result in FY2015 compared to FY2014?

A: Such contracts are typically received quarterly. DIY segment made up 11% of group revenue in FY2014 and we hope to increase the contribution in FY2015.
(p/s: I hope also )

2) Mr Lim also mentioned that the group invested a substantial amount in new machine and is expected to be commissioned at the end of 2014. May I know what is the progress now? The new machines are expected to improve production output or improve efficiency?

A: The machinery has been installed, and are expected to enhance efficiency.

3) EU had imposed a five year anti-dumping duty on imports of iron and steel fasteners originating in PRC in 2009 and is set to expire in Oct 2014. Is that any update on the extension of the duty?

 A: The industry is awaiting EU’s decision. Meantime, the existing anti-dumping duty applies.

4) Is the raw material of Chin Well Holding’s products mainly from carbon steel? What forms are they?

A: Fasteners are made of higher grade carbon steel wire rod, which are made to reach the mechanical properties required by different standards; while Chin Herr’s raw material is from construction grade wire rod for basic foundation use.

5) The group’s trade receivables turnover is quite high and there is high percentage of trade receivables past due more than 60 days. How does the group tackle this issue and manage its credit risk?

A: It is normal for local market or the South East Asia market to have payment term of 90 days or more. Our marketing department has weekly meetings to keep track of customer's payment and control the shipment to make sure every customer is within the credit limit. 
(p/s: To me, the credit term is little bit long, perhaps it's industry norm? )

6) It’s noted that the group’s borrowings are all denominated in USD currency and the current trend is that the USD will strengthen against MYR. Does the group contemplating to convert the loan into MYR currency or others?

A: The export sales which takes up more than 70% of the group revenue are either in USD or EUR, therefore the purchase of raw material in USD is a natural hedge. Furthermore the interest rate for borrowing USD is less than 1% while the interest rate for borrowing MYR is more than 4%.  

We don't see it will do us any good by converting the loan from USD to MYR with a loss in currency change, then pay a higher interest rate with MYR borrowing, then take up another currency change loss by turn MYR in to USD to pay back to the suppliers.
(p/s: I should find this in the annual report. It's stated there :) )

Chin Well: Better times ahead

Chin Well Holding Berhad is one of the world’s largest manufacturers and suppliers of high-quality carbon steel fasteners which consists of screw, nuts and bolts. Through production facilities in Malaysia and Vietnam, Chin Well manufactures and supplies fasteners that are primarily utilized in highway guard rails, power transmission towers, furniture and other applications.

The group has another segment, namely Wire division, which primarily manufacture variety of precision wire products. 

The performance of the group had been like in roller coast ride throughout the past few years. The net profit margin is thin and up down following the trend of gross margin. Low net profit in year 2009 was due to high inventory was written off that year.

In 2009, the EU had imposed a five-year anti dumping duty up to 85% on imports of iron or steel fasteners originating in PRC, in an attempt to prevent further price distortions and restore fair competition. 

Unfortunately in late 2010, EU investigated allegations that PRC-made fasteners were being transhipped to Eu countries via Malaysia.  

In late July 2011, EU had announced that the group was one of the companies exempted from 85% anti-dumping duty that able to export carbon steel fasteners from Malaysia to EU. And the duty is still applies currently, waiting for extension. This duty helps the group to improve its sales a lot. 

In terms of balance sheet, it may not so look good at first glance as the total borrowings far exceed its cash balance on hands during the early years. But the trend is improving recently to achieve net cash position. Net gearing ratio is at 0.06 at the latest financial year. It’s noted that all loans are denominated in USD dollar. So, the strengthening of USD may not doing them a favour, but the loan interest rate is quite low, less than 2% based on AR2014.

Net cash flow from operating activities may not be that smooth throughout the years due to fluctuating working capitals needed. However, the group managed to chalk up a good positive free cash flow in the last 4 years which explained why the group managed to pare down its borrowings while at the same time improving its cash position.

 If you are an investor who focus highly on fundamental, you’re probably kick this company out without any hesitation.  ROE and ROIC are all below par, low and inconsistent some more. High inventory and trade receivables turnover contributed to its high cash conversion cycle. Cash conversion cycle for the past 6 years were more than 180 days. That’s 6 months, man. Its operating cash flow can be improved further if the group manage to bring down the numbers.

Let’s take a look on its divisions. The performance of its Wire Products division is getting bad. Low margin and deteriorate performance. It just shows that how competitive it’s in the steel wire industry. Low entry barrier and involved in price war with its competitors. The group is still highly depends on its Fasteners division. Whether the group eat porridge, eat rice or eat wind also depends on it.  The good point is the net profit growth rate is higher than revenue growth rate albeit the margin is fluctuating.

In terms of market segment, ever since the anti-dumping duty being implemented by EU, export sales to European countries kept increasing. At the last financial year, European sales contributed around 58% of overall revenue.

Some of the additional key points are below;

• Majority of the Other Income comes from realized gain/loss on foreign exchange.
• At least 40% dividend payout policy.
• DIY customers considered as a niche market and able to fetch higher profit margin.
• Administrative expenses kept reducing each financial year.
• Fasteners are made of higher grade carbon steel wire rod, while Chin Herr’s raw material is from construction grade wire rod for basic foundation use.
• Based on AR2014, the group managed to secured contracts from the largest DIY fastener suppliers in Germany and France on top of US and UK in FY2014.
• The group invest in new high technology production lines to improve production efficiency, target to be commissioned in Malaysia and Vietnam plant by end 2014.
• In FY2013, the group form a JV with DKSH Holdings to form Swisstec Sourcing to source for DIY customers in both Asia and Europe. However on July 2014, the group disposed its 50% stake in Swisstec as Swisstec is loss making and to eliminate further future sharing of losses of Swisstec. Impaired around 2.2mils in FY2014.

So in conclusion, Chin Well is just a mediocre company, at least didn’t not incur any losses. When checking its quarter-to-quarter trend, it’s nice to see that the performance of the group is in upward trend. So, can I say it’s having a turnaround? Special thanks to its Vietnam operation and better profit margin from its DIY product group as well as better sales to Europe.

What prompt me to look into Chin Well is because of their recent corporate announcement. In Nov 2014, the group announced to acquire the remaining 40% stake in Chin Well Fasteners (Vietnam) not owned by the group for RM47mils. The acquisition will be fund via combination of issuance of 27mils new shares at RM1.45 to shareholders of Asia Angel and the balance via cash amounting to RM8.3mils.

Chin Well Vietnam recorded net profit of RM21.4mils in FY2014. If Chin Well group own the remaining 40%, its net profit will be increased by RM8.56mils. That will give it additional EPS of 2.85 cents based on enlarge no. of shares of around 300mils. Full year EPS for FY14 will become around 14.78cents ((35.8mils + 8.56mils)/300mils). Of course, the current share price will be adjusted as well, depends on the timing of completion date.

I view the acquisition positive as the labour cost in Vietnam is cheaper and the operation plant there focus more on DIY products which fetch high profit margin. The acquisition PE is around 5.5 (RM47mils / RM8.56mils) which is cheap and reasonable for me. 

When look into the payment terms, it’s even more favourable as around 45% of the acquisition cost will only be paid after 2 years the signing of SPA. It’s like borrow RM20mils without any interest for 2 years :)

So, the better performance recently, higher contribution from the DIY segment and the full equity stake of its Vietnam plant soon, perhaps it’s worth for you to take a look?

Oh ya nearly forgot, below lady, Ms Tsai Chia Ling is one of the executive director of the group. She is the daughter of the founder + managing director, Mr Tsai Yung Chuan. She is also a non-independent non-executive director of Tambun Indah Land Berhad. Her age is 35. Marital status: No idea. 

Nothing, really nothing. Just want to mention only.