HSC Daily Market Watch includes a note on MSN (downgrade from BUY to Outperform)

Ngày đăng September 12, 2018

Market commentary – The VN index increased with turnover still below recent averages. Market breadth widened while we also see that 33 stocks went to the ceiling and 14 stocks fell to the floor. Foreigners were less active net buyers to a small degree. The put through market was less active with large deals in KDC & GEX and then a smaller deal in VHM seen going through.  

Foreigners were active buyers of VNM; HPG and VHM. And net sellers of VIC and VRE.  

  • Bank shares were mostly lower today, led by CTG, BID and MBB.     

 

  • Non-banks shares lost ground, except a gain for PVI.     

 

  • Consumer and retail names were mostly higher, led by PNJ and MCH.  

Corporate action. MSN announces plan to sell all its treasury shares. Medium term outlook positive. Downgrade from BUY to Outperform – Masan Group JSC (MSN – Downgrade to Outperform) has just issued a BOD resolution, according to which, the company will look to sell all of its 109,899,932 treasury shares at an expected price of some VND 100,000 per share.   

Quick conclusion – Downgrade to Outperform. We now see fair value for MSN at VND 102,182 equivalent to a FY2019 P/E of 26.7 xs and EV/EBITDA of 12.3 xs. Recent strong performance of the stock which is up 15.8% YTD leaves only a 10.3% gap between the current share price and the fair value price. Hence we are downgrading our rating purely on valuation grounds. In fact HSC is revising up our FY2018 net operating profit growth forecast and now calls for 59.5% y/y growth and then a further 23.6% expansion in FY2019. The treasury sale of just over 10% of the OS is expected to commence soon. Meanwhile MSR has successfully bought the 49% stake in Nui Phao – H.C. Starck Tungsten Chemicals Manufacturing LLC, the tungsten processing facility. Hence we revise up our earnings for MSR for this and next year. Which also obviously impacts MSN numbers too. Most of the key businesses; the consumer business & MSR along with its subsidiary Techcombank are doing very well. However Masan Nutri Science, the animal feed business is still struggling to recover from the collapse in the live pig herd last year after Chinese exports were halted. However, earnings here should rebound next year. The shares look attractive at current levels for long-term investors looking for a foothold in Vietnam’s consumer business.   

Most of the key businesses; the consumer business & MSR along with its subsidiary Techcombank are doing very well. However, Masan Nutri Science, the animal feed business is still struggling to recover from the collapse in the live pig herd last year after Chinese exports were halted. Although, earnings here should rebound next year. The shares look attractive at current levels for long term investors looking for a foothold in Vietnam’s consumer business.  

MSN plans to sell all of its treasury shares – Details as below;  

–     Number of shares to be sold – 109,899,932 shares.

–     Type of shares to be sold – ordinary shares.

–     Purpose of the sale – to restructure the equity holdings.

–     Timeline of the transaction – After the State Securities Commission posts its notice on receiving the Company’s registration for sale of treasury shares and trading begins according to the law. The transaction term not to exceed thirty (30) days from the date of commencement of the transaction, expected to commence within 2018.

–     Transaction will be executed by other matching or put through method

–     Transaction price is decided by – Sale Price ≥ Reference Price – (Reference Price * 50% of price fluctuation limit of the stock).

–     Selling price – VND100,000/share.  

Then after selling all of its treasury shares, the number of outstanding shares will increase by 10.43% to 1,163,149.488 shares. The selling price is at a small 8% premium to the current share price and just below HSC’s fair value price for the company.  

In August 2018 Masan Resources Corporation (MSR) announced that it has acquired a further 49% stake in Nui Phao – H.C. Starck Tungsten Chemicals Manufacturing LLC (“NHTCM”), hence increasing its holding in NHTCM to 100%. We expect MSR’s MPATMI will improve strongly as the company will eliminate minority interest in the last 4 months of 2018.  

HSC revises up its forecasts for MSR over the next two years as follows;  

–     For FY 2018 we revise up our net sales’ forecast by 5% from VND 7,489, up 38.6% y/y, to VND 7,875 billion (+ 45.7% y/y) and also revise up our NPATMI forecast by 35.7% from VND 759 billion (up 268.7% y/y) to VND 1,030 billion (+ 400% y/y). Assuming the JV is wholly consolidated into MSR’s financial report from September 1st 2018.  

–     For FY 2019 we also revise up our net sales’ forecast by 4.4% from VND 7,990 billion  to VND 8,344 billion (+5.9% y/y), and revise up NPATMI by 44.5% y/y from VND 833 billion to VND 1,204 billion (+16.8% y/y).  

We also revise down our forecast for Masan Nutri Science as we expect the earnings recovery will be pushed into 2019. Though pig price has recovered recently, normally the feed market takes 12-24 months to fully recover from such a price and demand collapse as we saw last year  

–     For FY2018 we keep net sales forecast of VND 16,995 billion (-9.1% y/y) but revise down net profit by 42 % from VND 487 billion (-21.2% y/y) to VND 283 billion (-54% y/y).  

–     For FY 2019 we keep our forecast for net sales at VND 18,524 billion, up 9% y/y and forecast NPATMI at VND 504 billion, up 54% y/y.   

We then revise MSN’s overall forecasts as below;  

HSC revises up our FY2018 net operating profit growth forecast to 59.5% y/y from 47.8% y/y previously – We now forecast net sales will rise by 10.9% to VND 41,703 billion (+10.9% y/y and  higher by 0.93% compared with our previous forecast) and NPATMI from operations adjusted for one-off gains last year and this year, is now forecasted at VND 3,596 billion (+52.5% y/y and also up 3.1% compared with our previous forecast). The main reason is the upward revision of MSR numbers although we have at the same time trimmed our numbers for Masan Nutri Science.  

Our key assumptions for each business segment are shown below;   

  1. Masan Consumer Holding has net sales of VND 17,290 billion, up 24.1% y/y and NPATMI of VND 2,662 billion, up 130.2% y/y. Masan Consumer Holdings has completed the restructuring of its business model with wholesaler inventory days having dropped back to normalized industry levels. They also have an impressive new product launch pipeline for 2018 and the launched products so far have shown good results in 1H.   
  1. Masan Nutri Science net sales is now forecasted at VND 16,995 billion, down 9.1% y/y and NPATMI is forecasted at VND 283 billion, down 54% y/y.   
  1. Masan Resources is expected to make net sales of VND 7,875, up 45.7% y/y and NPATMI of VND 1,030 billion, up 400% y/y, thanks to the full consolidation of NHTCM profit in MSR from Q4 as mentioned above.  

Then we forecast that EPS (based on net operating profit) will come to VND 3,433, meaning MSN is trading at a PE 2018 of 26.9 xs.  

For FY2019, we now forecast net operating profit growth of 23.6% y/y – For next year we forecast net sales at VND 45,261 billion, up 8.5% y/y and NPATMI at VND 4,445 billion, down 12.2% y/y. Excluding one-off profit in FY2018, net operating profit in FY2019 grows by 20% y/y. Below are our key assumptions;    

  1. Masan Consumer Holding’s net sales is VND 18,392 billion, up 9.3% y/y and NPATMI is VND 3,094 billion, up 16.2% y/y.   
  1. Masan Nutri Science net sales is forecasted at VND 18,524 billion, up 9% y/y and NPATMI is forecasted at VND 504 billion, up 54% y/y.   
  1. Masan Resources’ net sales of VND 8,344 billion, up 5.9% y/y and NPATMI of VND 1,204 billion, up 16.8% y/y.   

Then we forecast EPS comes to VND 3,822. We assume MSN sells all 109,899,932 treasury shares in 2018, hence the outstanding share count will increase by 10.43% to 1,163,149.488 shares. At current price stock is trading at forward P/E of 24.2 xs.  

Masan has begun to focus once again on the core consumer business – We see growth led by selective revenue lines in the consumer business and the creation of an entire animal protein vertical;  

  • We forecast beer sales will grow at a CAGR of 23.9% over the next 3 years. Masan is expanding their presence using a bottom up approach using promotional beer festivals to improve product recognition. Market share in HCMC has improved leading to better product standing. New launches in the premium segment should also help to expand the breath of the product.  
  • We forecast energy drinks will grow at a CAGR of 23.2% over the next 3 years. Wider distribution of the highly successful product (which is a coffee-based energy drink) should ensure that growth remains at very high levels over the next few years as they increase penetration.  
  • We forecast animal feed sales will grow at a CAGR of 9.5% over the next 3 years. Despite the collapse in pig prices which lead to a sharp drop in animal feed demand as many smallholders regressed into developing their own feed, Masan took advantage to increase their market share in the segment. By launching affordable products, they were able to make major inroads and they should continue to gain market share over the next few years.  
  • We see enormous potential with the launch of a branded fresh meat product range towards the end of this year. This is a US$ 9 billion market segment in Vietnam and is completely dominated by unbranded products where provenance is unknown. By marketing through the dominant general trade channels where wet markets hold the key, Masan expects to pick up significant market share. They will use a network of shops to build a brand name and act as local storage facilities for distribution to meat stalls.  

Market is revaluating MSN as numbers improve and the company reaches out to investors – After the perfect storm of the 1H of last year, we have seen a root and branch restructuring of the consumer business. Coupled with a proactive reaching out to financial investors. The company feels that they have a story to tell and seem to want to tell it. And more importantly perhaps, listen to investor concerns. The numbers are now starting to come through. While the renewed focus on the consumer core is also pleasing. The launch of branded fresh meat products later this year will be a very important event. As entry into this huge consumer segment where competition is heavily fragmented will be a seminal moment for the company. Execution is tough and margins lower than in other segments, but the rewards of taking a major share of this market could potentially be huge over the next few years. 

Investment conclusion – Downgrade from BUY to Outperform. We value the company at a fair value price of VND 102,182 per share or a FY2019 P/E of 26.7xs and EV/EBITDA of 12.3xs. We downgrade on valuation grounds and at the same time have revised up our earnings forecast for this year. The consolidation of JV into MSR will help both MSR and MSN improve their bottom lines from now on. The structural reforms within the consumer business have showed good results since Q4 last year meanwhile the resources business has benefited from higher selling prices and improved operations. The pig price crisis seems to be over and the animal feed business has a chance to recover from the 2H this year and into next year. Therefore, we argue that overall earnings growth will return to normalized levels of at least 10%-20% from next year. Then the long-term outlook for the 3F model at MNS is quite promising.

  • Tech stocks were mixed with a gain for YEG while FPT lost ground. 
  • Manufacturing names were mixed with gains for PAC and EVE while there were losses for DQC and DRC. TMT closed at the ceiling today.
  • Resource names had strong gains today, led by GAS and PXS.   
  • Real estate and construction stocks were mixed to higher, led by NVL and DIG.
  • Agriproducts and aquaculture stocks were mixed with gains for VFG and HAG while there were losses for VHC and PAN.  
  • Pharmaceutical stocks had sideways movement. 
  • Utilities, transport and logistics stocks were mixed to lower, led by airline stocks.       

Vietnamese stocks close mixed – The markets ended the day rather mixed after early strong gains were dialed back. GAS was the biggest gainer in terms of index points along with other resource names such as PLX and PVD although they ended below the day’s highs. VIC & VHM rose further while fellow real estate play NVL also made some gains. Fish farm leader VHC made strong gains as we await details of the next round of tariffs from the U.S.  

On the other hand, banks were mostly weaker led by BID; CTG; VCB; TCB; MBB and VPB. HPG also declined as did VJC and BVH. Foreigners were fairly active and net buyers of shares for a second day. Even so blue chip stocks were rather mixed.   

Higher interest levels from foreign investors coupled with some positive macro news have helped to boost market sentiment in recent days. However, the market ran into some selling pressure just above the 990 level on the VN index in afternoon trading. Morning gains were mostly scaled back and the VN30 even closed in the red. Part of the problem was the lack of support from regional markets where sentiment remains rather fragile. It’s clear also that the VN index doesn’t feel that comfortable above the 100-day MA.  

The four futures contracts closed in the red thus widening the discount between the futures and VN30 cash indices to 8.7-11.9 points. The long-dated futures contract also closed at a discount to the short-dated contract. This is a rather negative short-term outlook from the futures market which has been skeptical of cash market gains over the last few days frankly.  

Yesterday’s bright mood has dissipated to some degree reinforcing that rather short-term trading mindset that is prevalent at the moment. Which is another way of saying that forward visibility is rather limited at the moment.  

Asian shares & major currencies – Asian shares were lower today even as Wall Street made some gains on Tuesday. As for currencies, the US$ (95.077) slipped today after previous gains when measured against its trade weighted ICE index. Then the Euro (1.1582) traded a little lower; Pound Sterling (1.3030) was little changed; the Japanese Yen (111.50) edged higher while the Chinese Yuan gained a little ground today (6.8702).  

Oil prices jump – Crude oil surged overnight and made more gains today with the active month WTI futures crude oil contract trading at US$ 69.78 in late Asian trade. Support emerges as U.S. inventories drop further with a major hurricane also closing in.  

The gathering hurricane Florence which is about to hit the east coast of the U.S. has caused oil prices to spike as mass evacuations raise concerns over supply disruptions. The Category 4 storm is expected to make landfall on Friday. The storm is large; very strong and slow moving and generally it is these types of storms that cause the worst flooding. And this could cause weeks of dislocation over a fairly wide area especially if they get more than 25 inches (64 centimeters) of rain.  

Meanwhile the American Petroleum Institute (API) estimated that U.S. crude stocks fell by 8.6 million barrels in the week to September 7th to 395.9 million barrels. This was bigger fall than was expected and marks the third consecutive week of drops partly due to very robust U.S. exports. This as Japanese; South Korean and Indian buyers look to replace Iranian oil with cheaper U.S oil ahead of the imposition of sanctions in November.  

The Russian Energy Minister Alexander Novak speaking to media at an economic conference overnight that current oil prices were beneficial to producers and consumers and that an overheated price suited nobody. However, he also warned about the fragile state of the market given concerns over declining supply from certain producers such as Venezuela.  Frankly given limited spare capacity there is a clear limit to what key producers such as Saudi Arabia and Russia can do to boost supply in the event that Iranian exports are severely curtailed given the arithmetic involved. As has been frequently discussed here.  

In global macro and general news – The Chinese government will formally ask the WTO on September 21st for permission to impose annual retaliatory trade measures on US$ 7 billion worth of U.S products. This relates to a historical case where the WTO has already ruled in China’s favour and required compliance by the U.S as of August 22nd. To which the U.S has not complied. While not directly related to the ongoing trade dispute between the two countries this would no doubt raise the temperature further.  

Currently there is something of a standoff as the world awaits President Trump’s decision regarding the US$ 200 billion worth of Chinese products for which the comment period has already expired. Meanwhile investment bank JP Morgan has estimated that a fully-fledged trade war would cost the Chinese economy up to 5 million jobs and shave up to 130 bps off GDP growth in a worst-case scenario.   

The U.S. Congressional Budget Office has estimated that the U.S. budget deficit in August nearly doubled to US$ 211 billion. Adjusted for seasonal factors it grew by 19% y/y. Tax receipts fell by 3% y/y as corporates tax receipts fell significantly even as spending rose by 8% y/y. In the first 11 months of the fiscal year, the deficit was US$ 895 billion, which is US$ 222 billion more than the previous year. Spending rose 7% y/y over that period while revenue rose 1% y/y. With corporate tax revenues down some 30% y/y due to the huge tax cut imposed at the beginning of the calendar year. This has been expected by most economists and will lead to greater U.S treasury bond issuance; higher interest rates and a rising budget deficit over the medium to longer term.  

The People’s Bank of China offered funding of 60 billion-yuan (US$ 8.7 billion) worth of seven-day reverse-repurchase agreements today after a 15-day hiatus. And kept the interest rate unchanged at 2.55%. Short term money market interest rates had been moving higher in recent days with the one-week Shanghai Interbank Offered Rate moving up to 2.69% recently, a level not seen since July. And the central bank no doubt felt the need to nip this trend in the bud so to speak.  

 

HCMC – The VN index rose today as turnover narrowed to VND 3,906.92 billion or US$ 168.08 million. The index gained 0.20% and closed at 987.01. 154 stocks up while 129 stocks down. And 8 stocks went to the ceiling while 5 stocks dropped to the floor. Foreigners accounted for 15.36% of the buying value and 10.88% of the selling value.

Foreign buying fell in actual terms and also in percentage terms. While foreign selling also fell further in actual terms and also in percentage terms. Foreigners turned net sellers to the tune of VND 174.99 billion worth of shares in HCMC. And we saw twenty nine transactions in the put through market today.

Foreigners were active buyers of VNM; HPG; VHM; GEX and VIC. They also actively sold VNM; VHM; HPG; VIC and VRE. The put through market was less active today with three jumbo; three large and some medium sized & smaller deals accounting for 5.23% of total turnover.

We saw 1,050,000 shares of KDC; 1,000,000 shares of GEX; 194,000 shares of VHM; 1,100,000 shares of SJS and 122,040 shares of VNM going through. Foreigners were less active in the put through session in the GEX & VHM deals and then seven other smaller deals today in the market.

 

E1VFVN30 was up 0.44% today closing at VND 15,850.

 

Hanoi – The Hanoi market went up today while turnover came to VND 724.01 billion or US$ 31.15 million. The HN index was up 0.20% to close at 111.65. 105 stocks up while 72 stocks down. And 25 stocks went to the ceiling while 9 stocks dropped to the floor. Foreigners accounted for 3.41% of the buying value and 1.45% of the selling value.

Foreigners were net buyers to the tune of VND 14.19 billion worth of shares. And we saw sixteen medium and small sized deals today during more active put through session in Hanoi accounting for 4.71% of total turnover.

We saw 1,126,012 shares of SHB; 200,000 shares of DL1 and 340,000 shares of VGC along with some smaller transactions in the put through market today.

 

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