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This article first appeared in The Edge Financial Daily, on March 16, 2016.

 

Chin Hin Group Bhd
March 15 (81 sen)
Not rated with a target price of 95 sen:
While the roll-outs of several mega infrastructure projects, such as mass rapid transit Line 2 (MRT 2), light rail transit Line 3 (LRT 3), the southern double track and various highways, are expected to benefit Chin Hin Group Bhd, the icing on the cake comes from earnings growth prospects for its manufacturing divisions. This is supported by an expected improved operational efficiency and expansion of manufacturing capacities.

Chin-Hin_chart_FD_160316

We see the manufacturing of autoclaved aerated concrete (AAC) as its rising star. The product has started to gain market acceptance, especially the AAC blocks, a strong substitute of clay or sand bricks.

We projected earnings growth of 17.1%/23.4%/29.3% for financial year 2016 (FY16)/FY17/FY18, mainly driven by the manufacturing divisions. Based on 11 times calendar year 2017 (CY17) earnings per share (EPS), we arrive at a fair value of 95 sen. While Chin Hin is believed to be the largest distributor of building materials in Malaysia, generating over RM800 million of revenue from this segment, we see its earnings growth to be driven by the manufacturing divisions.

We are positive on the prospects for its AAC manufacturing business after our recent visit to the plant in Serendah, Selangor. The state-of-the-art machinery supplied by Wehrhahn GmbH, a German manufacturer, is highly automated. Management said the plant is operating 24 hours a day to cope with strong customer demand.

To meet the increasing demand, the group has allocated RM10 million out of the RM41 million initial public offering (IPO) proceeds to expand the existing AAC manufacturing facilities, and to purchase new equipment and machinery.

Upon completion of the expansion targeted by the end of 2016, production capacity will increase from 375,000 cu m to 600,000 cu m. The AAC manufacturing division produces blocks, lintels, floor and wall panels marketed under the brand of “Starken”.

We understood that Starken is currently the largest AAC manufacturer in Malaysia. The group is supplying AAC products to various renowned developers. It has penetrated into foreign markets, and exports AAC products to Indonesia, Australia, New Zealand, Hong Kong, Taiwan and Singapore. Its AAC products are certified as green products, eco-friendly building materials by the Singapore Environment Council.

We arrive at a fair value of 95 sen, based on 11 times CY17 EPS. The fair value is higher than 77 sen in our IPO note dated Feb 23, 2016, in which our valuation was based on 11 times CY16 EPS. We think the target price-earnings ratio of 11 times is justifiable. This is given that several mega projects, such as MRT 2, LRT 3, the southern double track and various highway projects, are expected to benefit Chin Hin, being the market leader in the distribution of building materials. This is besides the growth potential of its manufacturing divisions, especially the AAC and precast concrete divisions.

We project earnings growth of 17.1%/23.4%/29.3% in FY16/FY17/FY18, to be driven by capacity expansion in its manufacturing divisions. — TA Securities, March 15

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