CHINWEL

I think it's entering Accumulation Zone.  Position sizing is critical now.

Long Term Charts

The 61.8% Fibonacci level near 1.18 is a logical first entry.

There's a couple of downtrend line support below around 1.10 down to 1.00.

There's the 78.6% Fibonacci level near 0.96.

The patient long term investor will stalk his prey over the coming months.

Business Profile

Simply put, its 2 main divisions are fasteners and wires.  Historically, it's cash cow has been the fasteners products (wires lesser extent) but in recent times faces huge headwinds in both segments, which is why the stock price has taken a hit.  It also has a massive net cash, built up from windfall gains in recent years.  This is simply due to the cyclical nature of its business - some years faces tough times, other years huge windfall gains.  The most recent gain was spectacular, causing the company to turn from a company with sizeable debts for a decade, into a huge net cash in just 1 year.  The company was prudent - it paid off its borrowings, and also bought a subsidiary withfreehold land worth over RM62 million.  The land doesn't pay interest though, and probably won't be disposed, but it's worth something and not nil.

See image below - during 2022, it acquired a subsidiary with 62m worth of freehold land. Land by nature doesn't earn anything. 

Turning Point to huge Net Cash - 2022

Compare FYE2022 vs FYE2021.

The turning point is huge PBT 122m (2022) vs 32 (2021) or 90 million difference.

Also good receivable and good inventory management vs prior year further increases its cash.  Responsibly does the opposite with payables.  Good management during very good times (it's easy to be good management when one is flooded with cash).

Sometimes, I wonder if it's too good to be true ... (here, we have to trust the external auditors).

Huge Net Cash Today, but wasn't like this all the time

Today, Net Cash + Land = RM288 million, or RM0.96.

Two years prior, Net Cash = RM0.3 million.  (Was 2022 too good to be true? No reason to doubt yet from price charts)

There's no magic to this huge growth - they had a windfall year back in 2022 and in the last year faced huge headwinds.

Near Term Future Prospects Bleak causing short term analysts to miss the picture

That's one view.

I do hear other views questioning if the analysts actions - originally started with HOLD - and then briefly turned to BUY - followed by recent SELL - the question is isn't this type of action intended to shake off the weak holders?   

Regardless, we use these to our advantage.

Analysts Short Term Business Analysis is not wrong

I agree that short term, the key fastener segment sales volume looks subdued short term.  Earnings for Wires look bleak too and they are waiting for government contracts.  Overseas particularly from Europe is challenging, due to the conflicts there.  North America is holding.

Just look at last 3 months vs prior year and just see how volatile its business is.  2022 was bumper harvest year, 2023 is lean and will probably get leaner before it gets better again.

Here's another comparison past 6 months 2023 vs 2022.  The recent revenue fall is very real.  But this is what cyclical stocks mean.

Where is the source of optimism for the long term?

The business financials have clearly fallen hugely - big huge drops in revenues, segment profitability has turned from large positives to almost nil.  Why can't earnings turn negative in the coming months?  Why can't there be more pain?

The truth is nobody knows.  Odds are, it's probably not bottom yet.

Founder and Substantial Shareholder Actions

If you own this stock for the long term, you must know this guy - Mr Tsai Yung Chuan.  He's the founder since 1989.  His wife and his 3 children are directors and senior management.

He's not a very good market timer - some of his past acquisitions are at high prices.  However, his most recent buy at end Feb 2024 at 1.19-1.20 is close to price chart - the 61.8% Fibonacci level at 1.18.  The size is decent around 300k+ shares - a tiny amount for him, but still, not that small.  But he did buy bigger back in Feb 2022 at 1.56 before it shoots up to 2.00 but what he couldn't predict is that hardship that followed after a very good 2022 year.  Nobody has a crystal ball on what's going to happen in Europe, not even him.

Past 10 Years Fundamentals

The 10 year CAGR is not inspiring, but that's expected for a cylical business.

The NAPS grows 6% p.a. compounding and comparable to EPF, so, that's decent say B-

EPS and DPS depends on start year but the key is to note the huge 2022 EPS which was that bumper year that's unlikely to be repeated soon.  But if you have a 10 year time frame in this stock, then, it's very good odds to see a repeat over next 10 years.  Still, Buffet would prefer something better quality than this type of company, but if you time your purchase and sales, it could turn out to be similarly rewarding / better.

Trade Strategy and Position Sizing

We don't own cyclicals for its Long term Dividend Yield - that's self defeating, because cyclicals will have lean years leading to nil dividends and is not a suitable source of reliable yearly dividend income like EPF.  If you want stability of yearly income, invest in EPF.

The strategy with Cyclicals is Price Gains.  Simply put, buy when it is low, and sell when it is high.  Never lose sight of this fundamental goal.  Everything that Analysts say or what everyone else say in investment forums should be ignored.

The risk with this strategy is what goes low, can go lower.  I showed some price levels.  There are no guarantees with these price levels.  They can break, they can fall.

Your safety is intrinsic.  You know the business is worth 96 sen.  Excluding the land, it is worth 74 sen.  If price falls to these levels, or lower, you want to keep buying more, because this company has a long proven history to share profits with you.  However, to make sure your portfolio will keep making new all time highs, you don't want to have too huge a position size.

If neutral position size is 3%, at the bottom, it should not be more than say 5% portfolio.  I highly doubt it will sell at 74 sen, but if it does get there, we know getting to RM1.50 (or doubling) is many times more likely to happen over next 5-10 years.

Hence, I would aim to get to 3% portfolio near the 61.8% Fibonacci level.  

As price falls, my value will fall and I will slowly add to keep it around 3% and higher slightly.

• Around 1.10, I may aim for 3.5% or more.
• Around 1.00, I may aim for 4% or more.
• Around 0.95, I may aim for 4.5% or more.
• And below that, I may aim for additional 0.5% capital or more.
• These are just high level thoughts.

They are not cast in stone - every quarterly report provides an opportunity to review the fundamentals of the company to re-evaluate if the business fundamentals have change.

In terms of target price, over next 5 years, getting to RM1.8 is very good odds.  Ignoring dividends, it should meet your 9% per annum return criteria.  It could take longer if global market enters a crash and recover.  It could be sooner too if the situation overseas resolve itself sooner. 

Risks with this strategy

The founder and his wife are both late 60s.  Typically, where the business is today is because of them.  The bumper year in 2022 is a typical result after many decades of getting ready for this.   It is safe to say that if the founder is no longer around, there will be disruptions that may have repercussions not only short term but potentially longer term.   Whilst their children have been in the business for a decade, this reduces the risk but doesn't eliminate the risk completely.  Hence, at the bottom, never own more than 5% portfolio.

The reliance on exports to Europe and North America, and reliance on Vietnam as inputs adds forex volatility risks but is also opportunity to diversify.   As I have a highly diversified portfolio, I'm fine with this and doesn't bat an eyelid.  Nobody can predict forex movements over the long term.

The stock price can stay low for a very long time, and for a strategy in cyclicals where dividend yields are less reliable, this could depress the portfolio returns longer than expected.   Fortunately, I don't need to the dividend income to spend yet, I expect to still have other sources of income over the next 5 years, it's a non-issue for me.

Whilst the company has a proven history to share profits with shareholders, the most recent nil dividend declared is slightly perplexing, as they always share 40% profits.  Once, during tough times, they shared more.  However, not a major issue because to me, I suspect management is trying to be responsible to send the message that the upcoming 6 months can be expected to be tougher i.e. don't expect earnings to be positive (i.e. nil dividends).   So, the base case is there may be better buying opportunities coming given this announcement of nil dividend.  In theory, as the next 2 quarter results are announced, watch out for price  divergence signs, especially if price doesn't go lower on negative earnings.

Stock market crashing always open up opportunities elsewhere.  Besides utilizing market crash cash reserves (these are held as cash solely to capitalize), it is a viable strategy to sell CHINWEL too, to raise cash and buy other stocks that will recover faster.   Likely CHINWEL will hold its value better than other stocks when market crashes, due to its high Net Cash position.  Hence, market crash and temporary loss in CHINWEL is very welcome opportunity!

Summary and Conclusion

1. Target 3% capital near 1.18.
2. Own a bit more at lower prices due to the high Net Cash position.
3. Never own more than 5% capital for this stock.
4. Have at least 5-10 year horizon for this stock.
5. Welcome broad market crash, which is opportunity to swap into better stocks that will recover faster after market crashes.