Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on July 4, 2022 - July 10, 2022

Chin Well Holdings Bhd

Target price: RM2 OUTPERFORM

PUBLICINVEST RESEARCH (JUNE 28): We like Chin Well for its wide range of fasteners (over 3,000 products) and wire products, which enable the group to offer “one-stop solutions” to its customers. The group’s extensive global sales and distribution network with diversified clientele base, and attractive dividend yield sustained by a healthy balance sheet, makes it stand out.

Chin Well’s prospective dividend yield is an attractive 6.4%. The group’s DIY fasteners cater mainly for the European and US markets and carry higher profit margins. Demand is boosted by anti-dumping duties imposed by Europe and the US on fastener products originating from China. This has allowed the group to secure more orders from both these markets. Intermittent lockdowns in China since April 2020 have also pushed customers to countries here in Asean.

The global industrial fasteners market size is projected to reach US$147 billion by 2028, growing at a CAGR of 5.9% from US$98.2 billion in 2020, according to Zion Market Research. Long-term growth for the sector is expected to be driven by increased use of industrial fasteners in various industries such as automotive, construction, infrastructure, furniture and machinery.

Despite the ongoing global uncertainties, demand for industrial fasteners is anticipated to return to pre-pandemic levels and resume its growth trajectory from FY22 onwards. The group has a strong and extensive global distribution network with a presence in some 30 countries. About 70% of the group’s total revenue in 9MFY22 is derived from the export market, with the balance from the domestic market.

For the export market, Europe represents the largest at 41%, followed by North America at 20% and others at 10%. From time to time, the group would explore new business ventures and/or products in the downstream market for better growth and higher margins. Chin Well expanded its product offering from galvanised wire, PVC wire and black annealed wire to downstream products such as poultry mesh, gabion and security fences in 2014. Due to high demand, the group subsequently expanded its production capacity, which is expected to enhance its performance in the long term with higher value-added margins.

Tenaga Nasional Bhd

Target price: RM8.70 HOLD

MAYBANK INVESTMENT BANK (JUNE 28): The government has upheld Tenaga’s imbalance cost pass-through (ICPT) mechanism for 2H22 largely through direct compensation, thus alleviating a near-term overhang.

Domestic (household) users will continue to enjoy a 2 sen per kWh rebate, while industrial and commercial users will continue to bear a 3.7 sen per kWh surcharge. The government, in turn, will cover subsidies worth RM5.8 billion.

Tenaga has separately disclosed that the ICPT mechanism is intact for 2H22. We have previously highlighted the possibility of the government directly compensating Tenaga, given Malaysia’s status as a net energy beneficiary. At the time of writing, the government’s payment details have yet to be disclosed. We estimate RM1.2 billion would be recovered from the 3.7 sen per kWh surcharge on industrial and commercial users. Coupled with the RM5.8 billion of direct subsidies by the government, we estimate Tenaga should recover RM7 billion for 2H22. Nevertheless, elevated coal prices means ICPT concerns would likely resurface again in six months’ time. In our view, it would take a couple more rounds of successful pass-through to permanently convince the market of the integrity of the mechanism.

VS Industry Bhd

Target price: RM1.49 BUY

RHB INVESTMENT BANK (JUNE 28): VS Industry’s 9MFY22 results missed expectations, as its recovery continued to be capped by the crunch in labour and component parts. Its current valuation is attractive — trading below the mean PER — taking into account a 61% earnings growth in FY23F and the resolution of labour standard issues, with the audit findings expected to be announced soon. We also like the electronic manufacturing services sector for its cost-plus model — hence the insulation from the inflationary environment.

Net profit of RM135 million for 9MFY22 (-34% year on year) met 66%-67% of our and consensus full-year forecasts. Despite the anticipation of a stronger 4QFY22, the recovery in 9MFY22 was still milder than expected. Post-results, we cut FY22F-FY24F earnings by 4%, 11% and 10% after refreshing our sales assumptions in accordance with management’s guidance. We expect earnings to continue recovering, post the arrival of new foreign labour (intake of 1,400 workers) starting at end-May. This should effectively lift the company’s production capacity and output from 4QFY22. Beyond the near term, 61% earnings growth in FY23 should be underpinned by the normalisation in production and contribution of new production lines.

Inari Amertron Bhd

Target price: RM3.65 BUY

MIDF RESEARCH (JUNE 29): Inari’s indirect wholly-owned subsidiary, Amertron International Ltd, has entered into a joint venture (JV) with CFTC (Yiwu) Equity Investment Fund Partnership (Ltd Ptd) and CFTC Equity Investment Management (Beijing) Co Ltd to provide outsourced semiconductor assembly and test (Osat) manufacturing and related businesses for the China market under a JV company named Yiwu Semiconductor International Corp. The share subscription in Yiwu is expected to take place progressively starting from 3QCY22 and to be fully completed in 1QCY23. Upon completion of the exercise, Inari will own a 55% stake in Yiwu, with the rest held by CFTC. Inari’s injection into Yiwu, amounting to RM283 million, will be funded from a private placement’s proceeds, completed in July 2021 (27% of the proceeds).

We are positive on the development as the JV will help Inari to improve its existing captive business strategy and grow the existing Amertron Technology (Kunshan) Co Ltd operations in the burgeoning China market. Inari could also diversify its product and customer base with additional revenue and earning streams. Upon successful execution, we expect the JV to be earnings accretive to Inari as it allows Inari to partner with a strong local technology fund that could help open up China’s Osat market for the group.

 

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