• Maintain SELL, with new MYR0.65 TP from MYR0.76, 34% downside. Chin Well’s 1QFY25 (Jun) results missed expectations due to weaker-thanexpected sales and margin. We revise our forecasts on expectations of continued soft earnings in the upcoming quarters due to prolonged demand weakness and loss of economies of scale. Given the prevailing weak sentiment, we believe the current valuation (+2SD) is demanding and has yet to fully reflect the weaknesses and challenges.

• Below expectations. CWH recorded 1QFY25 core loss of MYR0.4m (1QFY24: MYR2.3m profit), below both our and Street’s estimates. The negative deviation is attributed to a weaker-than-expected topline and margin compression resulting from the loss of economies of scale and higher input costs. Note that we excluded an unrealised FX loss of MYR4.2m to arrive at the core profit.

• Results review. YoY, 1QFY25 sales rose 26.4% to MYR105.9m driven by higher volumes as ASPs were reduced amid stiff price competition. However, the lower ASPs resulted in 1.4ppt contraction in GPM to 7%, which in turn compressed the EBITDA margin by 4.2ppts to 2.4%. Geographically, strong sales growth in Malaysia (+3%), Europe (+83%), and Vietnam (+195%) more than offset a 20% decline in the US. QoQ, 1QFY25 revenue rose 11.1% due to aforementioned factors. However, the pressure from lower ASPs weighed on margins, resulting in a core loss of MYR0.4m for 1QFY25 (vs profit of MYR3.5m in 4QFY24).

• Outlook. Management foresees a challenging outlook due to ongoing international conflicts, escalating US-China tensions, and the threat of a recession in its key markets, all of which have weighed heavily on global economic sentiment. This has led to reduced infrastructure spending and softened demand for fastener products. Additionally, the strengthening MYR has further pressured export earnings. That said, FY25F could see a gradual recovery in volume as customer inventory adjustments normalise. CWH is also poised to benefit from higher tariffs on China-made fastener products imposed by the US, which could drive export diversion to the group.

• Forecast and ratings. We cut FY25-27F earnings by 14%, 11%, and 10% – accounting for the prolonged demand weakness and loss of economies of scale. Our TP is lowered to MYR0.65 – based on an unchanged 8x FY25F P/E (in line with its mean) – and includes a 14% ESG discount from its 2.3 ESG score which is below the country median.

• Key upside risks include higher-than-expected sales volumes and betterthan-expected margins.

Source: RHB Securities Research - 28 Nov 2024