This article first appeared in Corporate, The Edge Malaysia Weekly, on June 13 - 19, 2016.

FASTENER manufacturer Chin Well Holdings Bhd found itself in a pickle recently. The European Commission’s unprecedented move to lift anti-dumping duties on China-made fasteners starting from March means that Chin Well will now have to compete with the cheaper prices of its Chinese competitors. Chin Well derives more than half of its revenue from the Europe market.

The removal of the anti-dumping duties could not have been more ill-timed as the lacklustre global economic growth could result in tapering demand for fasteners as infrastructure or construction-related projects slow down or are put on hold.

“When the rumour (about the removal of the anti-dumping duties on China fasteners) surfaced in February, everyone thought that it was a joke. But by end-February, the anti-dumping duties had been removed,” Chin Well executive director Tsai Chi Yun tells The Edge. “Everyone was shocked and in a state of panic. The wholesalers in Europe were worried because their customers were expecting them to buy from China at a cheaper price and offer them price cuts and offers.”

Some of Chin Well’s European customers have moved to its Chinese competitors since the anti-dumping duties were lifted, says Tsai, adding that sales decreased 15% in the third quarter ended March 31 from a year ago.

For the quarter, revenue dipped 7% to RM111.24 million from RM119.64 million a year ago. Net profit declined marginally by 1.1% to 10.83 million from RM10.95 million previously.

Nevertheless, Tsai stresses that only its bulk purchases for bolts — and not other products such as screws and those in the do-it-yourself (DIY) fastener segment — have been affected by the entrance of the Chinese manufacturers.

“The China-made screws are known to have issues with quality, which is why we did not see an impact on our screws from the removal of the anti-dumping duties. And we find that usually, the industrial buyers — those involved in construction and who buy in big quantities — still prefer to buy from us because of the better quality [we offer]. But those who are selling fasteners to end users will buy from the Chinese,” explains Tsai.

Chin Well’s DIY fasteners, which are manufactured in Vietnam, have not been affected because the largest cost component for this segment is packaging and labour. According to Tsai, most of China’s fastener manufacturers in the coastal cities are facing a labour shortage. “China cannot compete with Vietnam because the labour cost in China is much higher. They can’t do it inland because it takes up a lot of space and it will not be worth the transport cost,” he explains.

The fastener segment contributed 65.7% to total revenue in the nine months ended March 31 while the DIY fastener segment contributed 17.4%. The remaining revenue was derived from wire products.

At the same time, the Chinese manufacturers also have their fair share of problems. The policy to curb the steel oversupply in the country has resulted in production cuts that forced many small and inefficient steel mills to close down.

When the anti-dumping duties were lifted, the Chinese fastener manufacturers found themselves facing a shortage of wire rods, which pushed up the price of Chinese-made fasteners sharply. Chin Well, which initially had to drop prices by about 10% for its European customers to compete with the Chinese, found itself able to raise prices again, along with those of its competitors.

As it faces competition from the Chinese manufacturers in Europe, Tsai says Chin Well will change its focus — to the Southeast Asian and local markets.

“We hope to grow these markets because the growth in this region, in terms of turnover and projects, is much higher than in Europe. And we also believe that there will be more construction projects in Malaysia, leading up to the general election in 2018.”

“We’re still competing with China in this region but since they are focusing on selling to Europe, they are less focused on Southeast Asia. For us, supplying to Southeast Asia makes sense because we are nearer geographically, which means that delivery time will be shorter. And, our quality is also more superior,” explains Tsai.

Nevertheless, it looks like Chin Well faces a steep climb ahead in the region. For the cumulative nine months ended March 31, it derived 27% of its revenue from the local market, 7% from Southeast Asia and 56% from Europe.

Chin Well admits that the road ahead will be challenging, with the removal of the anti-dumping duties and slower global economic growth likely to impact its revenue and profit.

“I think the biggest problem now are the volatile steel prices. Most of the buyers in Europe hesitate to make big order placements. We don’t receive stock orders anymore. Instead, we receive small orders with urgent delivery.

“We are still profitable. That’s the most important thing. There will be a decline in revenue and profit but generally speaking, we are still profitable. We believe with the cash we have in hand, we can go through this period,” says Tsai.

As at March 31, Chin Well’s balance sheet showed a cash balance of RM100.89 million while short-term borrowings totalled RM21.17 million.

Chin Well’s share price has come off its peak of RM2.26 on Jan 6, slipping 30% to RM1.58 last Thursday, which translated into a market capitalisation of RM473.21 million.

Tsai believes that the decline can be attributed to the lifting of the anti-dumping duties as investors fear that Chin Well will lose all its advantages.

“I feel it’s an overreaction. When our financial report shows that we are still profitable, people will realise that,” says Tsai.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.