Chin Well (2)

Other People's Indifference Could Be Our Opportunity

Publish date: Tue, 13 Jan 2015, 01:09 PM

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Executive Summary

On 5 November 2014, the company announced the acquisition of the remaining 40% of its Vietnam subsidiary through issuance of 27 mil new shares (at RM1.45) and RM8 mil cash. The acquisition was completed on 31 December 2014.   

The acquisition will enhance Chin Well's EPS immediately. This is because Chin Well issued new shares at PER of 11.5 times to acquire the remaining 40% at PER of 5.5 times. The Vietnam subsidiary reported net profit of RM21 mil in latest financial year.

On top of that, Chin Well exports the bulk of its products. As such, it should benefit from the strong US Dollars.

(Chin Well share price)

1. Background Information

Chin Well is principally involved in the manufacturing and trading of the following :-

(a) fasterners (essentially screws, bolts and nuts); and

(b) security fence & gab ions

   

(Security fence)

(Gabions)

The company has market cap of RM450 mil (based on 300 mil shares and RM1.50 share price).

Based on past 12 months adjusted net profit of RM44 mil (after factoring in effect of acquisition, being RM35.6 mil + RM21 mil x 0.4 = RM35.6 mil + RM8.4 mil), historical PER is approximately 10 times.   

The group has strong balance sheets. With net assets of RM383 mil, loans of RM80 mil and cash of RM65 mil, net gearing is 4% only.

The company paid out dividend of 4.83 sen per share over past twelve months. Dividend yield works out to be approximately 3.2%.

2. Export Oriented

FY2014 revenue based on geographical location of customers is as follows :-

	(RM mil)	(%)
Malaysia	115	23.6
Vietnam	12	2.5
Other Asian countries	40	8.2
Europe	281	57.8
Others	38	7.9
Total	485	100.0

As can be seen from table above, approximately 24% of products are sold domestically while the remaining 76% are exported.

3. Major Shareholder Increased Shareholdings Recently

On 19 September 2014, the Tsai family acquired additional 22 mil shares via an off market transaction, thereby increased its shareholding from 51% to 58%.

4. Concluding Remarks

I first wrote about Chin Well in July 2014. Kindly refer to that article to better understand the group's operation and the various factors that affect its profitability.

The purpose of me writing Part 2 is to provide an update of the Group in view of its recent acquisition. In my opinion, it was a transaction that should have material positive impact on the group's earnings.

One thing that also attracted me to take a re-look is because the group exports the bulk of its products. The recent weakening of Ringgit should benefit the group either through margin expansion or increase in volume (due to pricing competitiveness).

A word of caution though - there is no information in quarterly / annual reports regarding what currency the group's sale is denominated in. The US Dollar has strengthened against the Ringgit recently, but Euro is in quite a mess. So please do your own homework before jumping in (of course, if you bump into any relevant information, please feel free to share it with all of us. Thanks in advance).

Have a nice day.