Friday, 7 November 2014

Chin Well: Acquiring A Bottom-Line Booster

Just exactly like what Latitude Tree has done earlier this year, Chin Well is going to acquire the remaining shares of its Vietnam operation.

Chin Well is one of the world largest manufacturer and supplier of high quality carbon steel fasteners (screws, nuts bolts). It has manufacturing plants in Malaysia (Penang) and Vietnam.

Similar to Latitude, the company is controlled and managed by Taiwanese.

Chin Well currently has 60% stake in its Vietnam operation Chin Well Fasteners (Vietnam) which was established in 2004.

It will acquire the remaining 40% shares from Asia Angel Holdings Ltd for RM47.6mil, which will be satisfied by issuing 27,000 new Chin Well shares at RM1.45 each and RM8.3mil cash.

Its share price is at RM1.62 currently.

From FY14 (ends in June 2014) audited financial report, Chin Well's total net profit is RM44.6mil while its profit after non-controlling interest (PATAMI) is RM35.85mil.

If the Vietnam operation is included, Chin Well's PATAMI for FY14 will increase 23.8% to RM44.4mil.

After the acquisition, Chin Well's total paid-up shares will increase 10% from 272.5mil to 299.5mil.

Hence, EPS will also increase 12.8% from 13.15sen before acquisition to 14.83sen after acquisition.

This seems like a very good deal!

Due to lower labour cost and readily available manpower, Chin Well will certainly shift its focus into expanding its Vietnam operation in the future.

At the moment, Vietnam operation has a capacity of 6,000MT/month and it is currently running at 90%. Its Penang operation is only running at below 50% capacity (4,000MT/month out of 8,800Mt/month) due to shortage of foreign workers.

Base on current share price of RM1.62 and latest FY14 EPS of 13.15sen, Chin Well's actual FY14 PE ratio stands at 12.3x. 

If we include contribution from Vietnam, EPS in FY14 will be 14.83sen and PE ratio will drop to 10.9x.

It is notable that Chin Well posted a magnificent latest quarterly result in which net profit rose tremendously mainly due to better sales and gross profit margin.

        Chin Well Quarterly Results

Not only Chin Well, its peer and also competitor Tong Herr also registered extremely good quarterly results recently.

       Tong Herr Quarterly Results

Tong Herr is currently trading at actual FY13 PE ratio of 16x at share price of RM2.26. However, looking at its 1HFY14 results so far, its EPS might reach 28sen base on annualized figures, and thus projected FY14 PE might be just 8x.

Both companies' much better results recently might be due to economy recovery in western countries, plus the effect of anti-dumping duty imposed on China-made fasteners by Europe since 2009.

This duty is expected to be extended in Oct14 for another 5 years until 2019. However,I can't find any update on this matter. The extension will be important for Chin Well.

Chin Well's sales in Europe has since more than doubled from 26% of total sales in 2009 to 57% currently.

If we annualize Chin Well's FY14Q4 result for FY15, it may get RM68mil (RM17mil x 4) net profit. This will give an EPS of 22.7sen!

Anyway, history suggests that Chin Well & Tong Herr's quarterly earnings were up and down with few extraordinary good quarters in between. So annualized result might be very misleading.

Chin Well's acquisition of remaining shares in Vietnam operation is similar to what Latitude Tree has done. Both businesses seem to be cyclical as well. It's just that Latitude's Vietnam operation is relatively larger and it was also trading at a very low PE.

The Star has a great report about Chin Well in July14. If you are optimistic about Chin Well, you can study it in more detail to determine whether it is worth investing in.


INTEGRATED fasteners and wire rods manufacturer Chin Well Holdings Bhd has seen its European sales more than double following the anti-dumping duty imposed on China-made fasteners since 2009.

Executive director Tsai Chia Ling says that with another five-year extension on the cards, the company hopes to grow its current European sales market to a maximum of 60%, with the remainder from its Asian customers.

She says Europe had accounted for around 26% of its sales in 2009 before shooting steadily up to around 57% currently after China was out of the competition.

The anti-dumping duty was slated to end on Feb 8 but an extension is now under review following a request by the European Industrial Fasteners Institute on Oct 1, 2013.

“Currently it is under investigation and is very likely to be approved by the European Commission. The final result will be announced by October. I believe that with this extension, our results will keep improving,” she tells StarBizWeek.

Anti-dumping duties: The good and the bad

Tsai says Chin Well has benefited significantly from this anti-dumping duty because of a regulation published by the European Union on July 26, 2011, which slapped the 85% tariff on imports of certain steel fasteners from Malaysia.

Only eight Malaysian companies, including Chin Well, have been granted exemptions from this regulation.

“This regulation was imposed after many unscrupulous businesses used Malaysia as a transhipment stop for goods from China to Europe,” she says.

Tsai: ‘We are looking to get a bigger slice of the D- I-Y market’.

Tsai says its fastener business has also received a boost from another anti-dumping duty by the United States on imports of steel threaded rods from China, India and Thailand, with a tax rate of up to 200%.

She says its wholly-owned subsidiary Chin Well Fasteners Co Sdn Bhd (CWF) expects to benefit from the customer demand shift over the next few years.

However, CWF has yet to enjoy the impact of the anti-dumping duty as product shipments have been temporarily put on hold due to quality control issues from its subcontractor.

“We explained to our customers that we will resume taking orders when the threaded rods reach a level of quality we are comfortable with. We expect to begin taking orders again after two to three more months,” she says.

Although the US International Trade Commission decided in April that it would not impose anti-dumping duties on steel threaded rod imports from Thailand, she observes that US customers were still unwilling to purchase there due to the current political unrest.

Despite the gains Chin Well enjoys from the spillover from the two anti-dumping duties above, Tsai notes there is another one which has adversely affected the business of another of its wholly-owned subsidiaries, Chin Herr Industries Sdn Bhd (CHI).

This is the anti-dumping duty Malaysia has imposed on imports of wire rods from selected companies in China, Taiwan, South Korea and Indonesia, with a tax rate of up to 25%.

Given that CWF owns a licensed manufacturing warehouse (LMW) factory while CHI is a local manufacturer, only the latter is affected by the extra tax levied if it continues to purchase wire rods from China.

Expressing strong disappointment with the decision, Tsai says the extra tax had greatly affected its sales in financial year 2013, resulting in a total cut in its product exports for almost nine months and declining local sales.

“Overseas customers may accept a price difference of 3% to 8% with China because of quality, delivery and services. But with a difference of up to 25%, it closed the door of exports for local manufacturers,” she says.

The impact was seen in a drop in revenue for FY13 (ending June 30, 2013) to RM461.89mil from RM501.58mil in the previous corresponding period.

Its profit also took a dive to RM22.28mil from RM47.63mil. However, revenue during its current FY14 has improved to RM356.95mil from RM340.85mil in the previous corresponding period.

Tsai attributes this improved performance to a resumption in local sales and exports over the last five to six months, although at a weaker rate, allowing it to turn a minimal profit instead of making losses.

Unwilling to rely on its existing products given the situation, Tsai says Chin Well decided to look for a way out by venturing into the more profitable downstream end.

She says it purchased three new machines at its Bukit Mertajam plant for RM800,000 to RM900,000, which it took delivery of in end-February, so it could produce fencing and mesh wire.

Besides continuing its local sales of galvanising wire and PVC wire, she says it will be sending out its first downstream shipment to Australia, India and some parts of the Middle East by early next month.

“This will hopefully allow our sales figures to get back to normal. The aim is for the factory to produce a majority of downstream end-products which are of higher value,” she says, noting that its previous sales ratio was 70% exports and 30% local sales.

The US takes up 8% of Chin Well’s total sales market, while the remaining sales are from Europe (57%), Malaysia (24%) and other Asian countries (11%).

Expansion of the D-I-Y market in Europe

Going forward, Tsai says Chin Well wants to expand its D-I-Y (do-it-yourself) product exports to the US and Europe as this segment commands better profitability.

She says that its factory in Dong Nai, Vietnam, under CWF Vietnam, is currently running at 90% capacity out of 6,000 metric tonnes per month and produces a 70:30 mixture of industrial and D-I-Y products.

She notes that labour costs are low there, which suits the D-I-Y segment’s labour-intensive requirements and that allows the company to achieve higher margins for its products.

“CWF Vietnam currently has around eight to 12 customers globally. It exports only D-I-Y products to the US, and both industrial and D-I-Y products to Europe,” she says, adding that a major client is Germany-based wholesaler The Würth Group.

Tsai says its focus for the D-I-Y segment remains concentrated on the Europe and US, as customers there are willing to pay more for on-time delivery and higher quality in both packaging and fasteners.

“As we are going to enter our new financial year, we are looking to get a bigger slice of the D-I-Y market by securing at least one to two customers in every European country,” she says.

Upcoming GST a boon

Tsai says that Chin Well will be able to be more competitive in the local market once the 6% Goods and Services Tax (GST) comes into effect on April 1 next year.

She says it will achieve better pricing by 4% as the current Sales Tax is 10%.

“The GST will also boost fair competition. There are some players in the market that are not issuing invoices in order to avoid the 10% sales tax. With the GST, they have to issue invoices, which will push their prices up by 6%,” she says.

At the moment, Tsai is not worried about competition from alternative joining technologies, such as adhesives, as she observes the industry typically lags in the adoption of new or emerging methods.

She said that the outlook remained positive over the new few years, especially if the EC decides to approve a further five-year anti-dumping duty period against China.

Assuming China comes back into the game in 2019, she opines that its prices should be on a more level-playing field given the Government’s current focus on environmental issues, which have pushed manufacturing costs up.

“We also enjoy a competitive edge in that our operations in CWF and CWF Vietnam are completely in-house throughout the whole process flow, saving costs,” she says.

Despite its growth prospects, Tsai says production at CWF’s factory is hindered by a big manpower shortage issue and is currently operating at just 46% capacity.

She notes that the factory is capable of producing 8,800 MT per month with 24/7 operations, but was currently producing just over 4,000 MT per month.

“The authorities have yet to approve our request to increase our manpower with more foreign hires and it is difficult to find locals who want employment in factory conditions,” she says.

With Europe being its biggest market, Tsai says Chin Well has submitted applications for CE (European Conformity) certifications for around 30% of its product range of fasteners.

She says around 40% of its product range has already received approval, while it has no current plans to obtain CE for the remaining 30%.

Tsai says domestic and regional sales were currently on a downtrend, observing that sales typically decreased when businesses were doing well and could afford to import fasteners in container-quantities from China instead.

However, she says when domestic and regional sales pick up, Europe and US demand then decreases.

“This allows us to weather the situation well. In addition, Chin Well can obtain higher margins by selling our products in Europe and US,” she says, adding that prices of cold heading quality wire rods, which is the raw material for fasteners, have been stable on the low-end at US$600 to US$750 per tonne.

Noting that changes can come swiftly and unpredictably, she says Chin Well will continue to upgrade its internal processes and enhance its cost-efficiency measures without compromising quality.

“We have been in business for 25 years now and believe Chin Well is fit to face global competition,” she says.



  1. I view the acquisition quite well also.

    Based on the RM47mils acquisition price, PE is only 5.5 based on the 8.8mils net profit (40% stake).

    NA for Chin Well Vietnam is RM1.50. So P/B is around 1 also.

    Got 40% dividend policy too

    1. CT Yap, may I know how do you calculate the PE? Thanks.

  2. Chin Well Vietnam earned RM21mils in FY2014.
    Asia Angel shared 40%, thus its net profit is RM8.4.
    Chin Well proposed to acquire Asia Angel 40% stake by Rm47.46mils. So, PE is 47,46/8.4 = 5.65.
    Actually it's explained in the announcement. Page 3. Note 2.2 :)

    The 2 shareholders of Asia Angel will not lose much since they will own close to total 10% each in Chin Well after the deal for long term investment.

    1. Thanks :) Chin Well looks like a steady company.

  3. TIme to revisit Chin Well?
    Since the share price dropped to around RM1.45 which is the price Asia Angel paid.

    1. Any news on extension of the anti-dumping duty on China?
      Will watch closely.

  4. I dropped an email to them. Below is the reply from their IR.

    I'm one of the retail investors who are investing in Chin Well Holding Berhad. First of all, thanks for the great effort for making yet another impressive performance for the latest financial year and enhanced shareholders' value. Followings are some of the questions I have on the group performance;

    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.

    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.

    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.

    Thanks for the time for reviewing my email and looking forward for your reply. Thanks

    1. CT, Thanks for your sharing. You should put it up in your blog.