Choo Chiang Holdings - SAC Capital 2021-05-04: Rides On Strong Home Sales And Copper Price


Choo Chiang Holdings - Rides On Strong Home Sales And Copper Price

  • Choo Chiang Holdings (SGX:42E) distributes low-voltage electrical products and accessories that are used for indoor installations in residential and commercial properties. It stocks > 40,000 line items under house brands CCM and CRM, and 30 third-party brands.
  • Choo Chiang's customers are mainly renovation contractors. The customer base is fragmented and about half are cash sales. Only about 15% of revenue is derived from project orders. Margins for project orders are lower due to competitive bidding and credit costs, made worse by construction delays due to manpower crunch.
  • Mobility restrictions in 2Q last year hit 1H revenue by 33% and net profit by 67%. Sales had bounced back in 2H20, with revenue just 2.5% lower y-o-y and net profit down 13% y-o-y.

Near term positive trends for Choo Chiang

  • In the near term, there are two positive trends working in its favour:
    1. surge in home sales; and
    2. higher copper prices.

An impetus to earnings growth is the strong home sales.

  • Total units sold for HDB resale flats and private homes were 54.3% y-o-y higher in 1Q21 to 15,681 units (FY20: +6.5%). Completion of a sale transaction typically takes 4 to 6 months, after which home renovation works would commence. Choo Chiang’s sales would lag home sales by 9 to 12 months. We estimate revenue could reach S$70m in FY21E and FY22E.
  • Choo Chiang outsource the production of some line items under house brands CCM and CRM. Margins for the house brands are 20-25% higher than 3rd party brands. Through raising the share of house-branded products over the years, gross margin has from 27.5% in FY16 to 29.3% in FY20.

Surge in Copper prices likely to lift sales

  • Copper-based products (such as cables) account for ~20% of sales, but the surge in copper prices (YTD: +22%) is likely to lift this to 25%. We believe this could add 3.0ppt to gross margin to about 32%. Copper price has risen to US$4.5/pound, the level last seen in Feb 2011. Choo Chiang does not take position in copper futures.

Net cash of S$13.5m

Lam Wang Kwan SAC Capital Research | Peggy Mak SAC Capital | https://www.saccapital.com.sg/ 2021-05-04
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998 SAME 99998