Safeguard duties on steel products to have short-term impact, says Chin Well

Posted on 15 June 2017

Source: The Edge

 THE government’s decision to go ahead with the safeguard duties on imported steel concrete reinforcing bar (rebar), steel wire rods (SWR) and deformed bar in coils (DBIC) appears to be unfavourable for Chin Well Holdings Bhd, but the impact is expected to be insignificant.

“In the long term, we don’t expect significant impact as the duty paid will be refunded when the finished goods are exported. However, in the short term, it will affect our cash flow and finance cost,” says Chin Well’s executive director Tsai Chia-Ling.

Chin Well makes nuts and bolts, of which the main raw material is SWR. More than 50% of its products are exported.

With an average inventory turnover of 186 days, the refund should take about six months after the goods are exported. However, Tsai notes that the group is waiting for further guidelines from the government on how to proceed with the process.

She tells The Edge that the group has also positioned itself to offset the negative impact of the duties through various strategies, including sourcing from countries that are not affected by the safeguard.

“By purchasing raw materials from such countries, we can supply to the domestic market without transferring the safeguard duties to customers,” Tsai says.

She adds that the group is working with other manufacturers to appeal to the authorities and ask for a judicial review on the imposition of the safeguard duty.

The latest measure would see some of the costs being transferred to customers.

Besides the challenges on the local front, Chin Well will also face a more competitive environment in Europe, which contributed 43.9% of the group’s total revenue in the first nine months to March 31, 2017 (9MFY2017), as anti-dumping duties on Chinese players ended in February last year.

The effect from the increased competition was reflected in the group’s latest financial results, which saw revenue contribution from Europe falling 19.1% year on year in 9MFY2017 to RM166.8 million.

Tsai says the Chinese players are returning to the market with a higher cost structure due to increased environmental regulation in China. This has led to a reduction in costs between them.

“The biggest cost difference we have with most Chinese players is actually due to environment cost. We forecast that in two to three years, when all the manufacturers in China follow certain industrial guidelines and maintain certain environmental ­requirements, they will have a similar cost [structure] as us. Then, Chin Well will be in a good position since we will be competing on efficiency and services as in the past, without the additional environment costs to our competitors,” she says.

Despite reports that the group would see lower revenue and bottom line for its financial year ending June 30, 2017 (FY2017), Chin Well’s latest financial results saw a strong recovery after a disappointing first half.  For the third quarter ended March 31, 2017 (3QFY2017), the group saw net profit surge 35.5% to RM14.7 million from RM10.8 million in the corresponding quarter a year ago. Revenue grew 26.4% to RM140.6 million during the same period.

Tsai says the group does not expect a significant change to its revenue for FY2017, but profit before tax for current financial year could be lower than FY2016.

“A reduction in fasteners demand worldwide will be cushioned by higher demand in wire products and the trading of steel bar where the margin is lower,” she adds.

On a more positive note, economic improvement seen in the European region could bode well for the group, given its high exposure there. Tsai agrees that there could be a slight improvement but says contribution from Europe should remain flattish in FY2017 and the first half of FY2018 as the bulk of the group’s customers in Europe are only expecting single-digit growth, with some near double-digit growth.

Other factors that will drive the group’s financial performance includes the ongoing infrastructure projects in Malaysia.

“We do receive orders from ongoing infrastructure projects and we are forecasting more projects to be announced in the near future,” she says.

As a manufacturer with more than 50% export exposure, Chin Well has also benefited from the weaker ringgit.

“The weaker ringgit has made us more competitive in the export market to a certain extent. In addition, we will also record some foreign exchange gain from translation of the export sales, export proceeds and debts denominated in foreign currencies,” she adds.

While the ringgit has shown some strength in the last two months, it remains at 4.29 against the US dollar, which is much weaker than a year ago when it was trading at about 4.10 to 4.20 against the greenback.

According to Tsai, a major issue manufacturers are facing in Malaysia now is the shortage of labour.

“Insufficient manpower for production lowers our production output and hence increases our unit cost, especially with regard to direct labour cost and manufacturing overheads,” she says.

Chin Well, however, foresaw the labour issue in 2003 and decided to set up another manufacturing facility in Vietnam to mitigate the operational risk.

While the group is facing a challenging environment following the recent decision on safeguard duties, increasing competition from China and operational issues such as shortage of labour, it has maintained its profitability since its debut on Bursa Malaysia in 1999. The group appears to be on track to maintain that despite a weaker financial year compared to a year ago.

Its share price performance also reflects Chin Well’s consistent track record, yielding a five-year total return of 59.8% or 9.6% annualised return. Despite seeing its share price grow 14.9% year to date, it is trading at a trailing price earnings ratio of only 9.2 times, and offers a decent dividend yield of 4.5%.

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