Review

• Excluding one-off expenses of RM7.9mn, CHINWEL’s core earnings for 1QFY25 amounted to RM3.3mn, representing 18.9% and 12.3% of ours and the consensus' full-year estimates, respectively. We consider this result to be within our expectations, as we anticipate a stronger earnings performance in 2HFY25, driven by the potential growing demand towards the fastener products resulting from escalating adoption of the China+1 strategy by western country clients.

• YoY, 1QFY25 revenue rose by 26.4%, thanks to higher sales volume despite sluggish recovery in average selling price (ASP). However, its core earnings declined by 15.5% due to lower profitability margins.

• Similarly, the 1QFY25 bottom line plunged by 32.3% QoQ, despite a moderate topline expansion of 11.1% QoQ. This was mainly underpinned by subdued profitability margins and the minimal tax expenses recorded in the preceding quarter.

Impact

• No change to our earnings estimates.

Outlook

• We remain cautiously optimistic about CHINWEL’s outlook, driven by the structural growth opportunities arising from the ongoing shift in western clients' sourcing strategies, particularly the increasing adoption of the China+1 approach. This strategy, aimed at reducing reliance on China, is expected to result in growing demand for steel-related products from Southeast Asia, a key region for CHINWEL’s operations.

• While the near-term environment remains challenging, with subdued steel prices and ongoing global economic uncertainties, we believe CHINWEL’s strong market positioning and diverse product portfolio will enable it to weather these headwinds. The company is well-positioned to capitalise on the emerging demand from its key markets, and we anticipate a stronger earnings performance in 2HFY25, as demand picks up and cost pressures ease.

• Although the road to a full recovery may take time, we see a clear path forward as CHINWEL’s long-term fundamentals remain intact. Once the external environment stabilises, we expect profitability margins to gradually improve, supported by higher sales volume and more favourable pricing trends.

Valuation

• We maintain our target price of RM0.69, based on an unchanged target PER of 9x CY25 earnings. Given the negative risk reward profile, we reiterate our Sell recommendation on the stock.

Source: TA Research - 28 Nov 2024