HSC Daily Market Watch with a corporate note on MWG (Outperform)

Market commentary – The VN index went up with turnover still below recent averages. Market breadth narrowed while we also see that 26 stocks went to the ceiling and 12 stocks fell to the floor. Foreigners were more active net buyers to a small degree. The put through market was less active with large deals in TCB & KDH and then a smaller deal in VNM seen going through.

 

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

 

  • Bank shares were mixed gains for EIB and TCB while there were losses for CTG and HDB.

     

 

  • Non-banks shares were mixed with gains for BVH and PVI while there were losses for SSI and VND.

      

 

  • Consumer and retail names were all higher, except some losses for KDC and SAB.

 

Corporate action – MWG foreign room will open to the tune of 6.32 million shares in December. Forward outlook very positive. Reiterate Outperform. Mobile World Group (MWG Outperform) has announced that it plans to issue 12,911,921 shares (3.0% of the OS) at par value for its staff which honours the commitments made in relation to the 2017 ESOP. The shares will be unlocked in a staggered fashion over 4 years with 25% to be unblocked by the end of each year. With this corporate action the foreign room will soon reopen to the tune of 6.32 million shares which is expected to happen sometimes in late December.

 

Quick conclusion – Reiterate Outperform. We have a fair value price of VND 138,500 giving us FY2019 forward P/E of 18.0 xs. HSC forecasts for FY2018 call for 28.4% y/y growth in NPAT. While our FY2019 forecasts call for 28.1% y/y growth in NPAT. The mobile segment is now mature, so growth mainly comes from the consumer electronic and grocery store chains. And both the CE and grocery store chains have made notable progress in the first 9M. The former is now the engine of growth while the later has seen margins improve further given economies of scale.

 

MWG has found a standardized format for the grocery chain and is now looking to accelerate their expansion to 500 stores by year-end. On the 3-5 year view we like MWG as it looks set to consolidate its position as the best retailer in Vietnam. Despite some near-term challenges.

 

First 10 month numbers maintained the strong pace seen YTD – For the first 10-months, MWG posted unaudited sales of VND 72,275 billion (+35.6% y/y) while NPAT came to VND 2,413 billion (+33.2% y/y), fulfilling 84% and 93% of its full year sales and NPAT targets respectively. By segment;

 

  • The MW chain reported sales of VND 29,386 billion (+1.5% y/y) with 1,038 stores operating as of October-end (-2.7% y/y).
  • The CE chain reported sales of VND 39,565 billion (+69.5% y/y) with 740 stores operating as of October-end (+30.7% y/y).
  • The grocery chain reported sales of VND 3,267 billion (+223.5% y/y) with 412 stores operating as of August-end (+95.3% y/y).        

 

Meanwhile, average grocery store sales have improved from VND 650 million per month in March to VND 1,050 million per month in October, in which the standardized stores, i.e. those having fresh meat and live fish, have seen average sales at VND 1,150 million per month.   

 

MWG has given details of its standardized format – A standardized grocery store format will have an area of 160 – 200 sqm and will have fresh meat and live fish as part of in its SKUs. Finalizing the standardized format is actually an important part of the process for MWG before it can scale up its grocery retail chain. Among 412 existing stores, MWG has approximately 250 stores of the standard format.

 

MWG’s standardized grocery stores starts making profit at store-level – In our earning model, we estimate that MWG’s standardized stores will reach break-even point at the store level at a sales level of VND 950 million per month. Given the total operating cost of an average grocery store comes to around VND 130 – 140 million per month while MWG’s grocery store have a GPM of 14%. Operating cost per store includes;

 

(1)  About VND 30 – 35 million in monthly rental for an average area of 160 – 200 sqm. 

(2)  Monthly salary of around VND 40 – 45 million for 6-7 staff. 

(3)  Utility expenses of around VND 30 – 35 million per month.

(4)  Other expenses of around VND 20 – 25 million to cover logistic at the distribution center and good delivery at store.

 

Given that average revenue for standardized stores came to some VND 1,150 million in October, HSC estimates that the grocery chain is probably starting to make profit at the store level for standard stores already. For the whole grocery chain, due to expenses for the distribution centers and complicated logistics, plus some closing expenses related to underperforming stores we estimate a loss of about VND (150) billion YTD.

 

MWG has also developed a large store format – Bach Hoa Xanh (BHX) developed a large store concept up to 300 sqm, located in the high population density areas and close to wet markets. These stores were upgraded from the standard store size given high population density and proximity to a wet market area. These large stores stock approximately 3,000 SKUs including more than 300 fresh SKUs. By October-end, MWG has 18 large stores. These stores has achieved monthly sales exceeding VND3 billion and more than 1,000 transactions per day.

 

MWG will accelerate grocery store opening in coming months to hit year-end target of 500 stores – In the coming months, BHX will accelerate new store openings to meet its target of 500 stores by 2018-end. The new stores will be located in residential areas, prioritizing secondary routes with ease of access for customers coming back home after work. While the focus area will be mainly at the HCMC East zone (District 2, District 9, ThuDuc), the HCMC South zone (District 4, District 7, District 8, BinhChanh, NhaBe) and neighboring provinces such as Binh Duong, Long An, Dong Nai, Tien Giang and Ben Tre. Meanwhile, the company also has a plan to open a new distribution center for cold storage for its fresh products.  The move to expand stores in central districts and also more crowded areas as well as the opening of a new distribution center for cold storage will increase operating expenses of the grocery chain in the rest of the year. However, this is essential for the chain to scale up. 

 

HSC FY2018 forecasts call for 28.4% y/y growth in NPAT – For FY2018 HSC forecast that MWG will make net sales of VND 88,240 billion (+33.0% y/y), and net profit VND 2,833 billion (+28.4% y/y). Based on the following key assumptions;

 

  1. For the Mobile World (MW) chain, we forecast that the chain will make sales of VND 36,505 billion (+5.2%). Our assumptions include: (1) store count comes at 1,030 stores (-3.9% y/y); (2) SSS growth of 5%; and (3) MWG’s market share in the mobile segment will remain at around 50%. Some big mobile stores switched into mini CE stores, and the market is mainly driven by phone replacement with almost unchanged volume as the switching from feature phone to smart phone completed. Then we believe MWG’s SSSG will turn to 5% from that of -2% in FY2017. 
  2. For the consumer electronics (CE) chain, we forecast that sales will come at VND 47,745 billion (+56.6% y/y). Our assumptions are: (1) store count will grow to 800 stores (+24.6% y/y) by year-end which includes 35 TAG stores; (2) SSS growth of 15%; and (3) MWG’s market share for consumer electronics will increase further from 32% at 2017-end to around 38% by 2018-end.
  3. For the grocery chain, we forecast sales of VND 3,990 billion (+250% y/y). Our assumptions include the opening of 267 stores during the year, bringing store count to 550 by year-end and average store sales coming at VND 795 million per store per month. 
  4. We then estimate GP will come to VND 14,787 billion (+32.7% y/y). Also assume overall GPM will slightly decline from 16.80% in FY2017 to 16.75% in FY2018 as sales mix shifts more towards the lower margin grocery store chain.
  5. We project net financial income will come at VND 15.0 billion (-9.4% y/y). Net financial income declines as MWG borrows to finance its CE and grocery expansion.
  6. We also assume SGA/sales ratio to slightly increase from 12.6% in FY2017 to 12.7% in FY2018 as MWG changes its bonus scheme towards more cash less ESOP.

 

Leading to an EPS of VND 7,280 and therefore valuing the company at a P/E of 12.1 xs.

 

HSC FY2019 forecasts call for 28.1% y/y growth in NPAT – For FY2019 HSC forecasts that MWG will make net sales of VND 106,226 billion (+20.4% y/y), and net profit VND 3,630 billion (+28.1% y/y). Based on the following key assumptions;

 

  1. For the Mobile World (MW) chain, we forecast that the chain will make sales of VND 38,520 billion (+5.5%). Our assumptions include: (1) store count reduces to 1,000 stores (-2.9% y/y); (2) SSS growth of 10%; and (3) MWG’s market share in the mobile segment will remain at around 50%.
  2. For the consumer electronics (CE) chain, we forecast that sales will come at VND 59,239 billion (+24.1% y/y). Our assumptions are: (1) store count comes at 900 stores (+12.5% y/y) by year-end; (2) SSS growth of 15%; and (3) MWG’s market share for consumer electronics will increase further from 38% at 2018-end to around 40% by 2019-end.
  3. For the grocery chain, we forecast sales of VND 8,467 billion (+112% y/y). Our assumptions include the opening of 450 stores during the year, bringing store count to 1,000 by year-end and average store sales coming at VND 910 million (+15% y/y) per store per month. 
  4. We then estimate GP will come to VND 18,013 billion (+21.8% y/y). Also assume overall GPM will slightly improve from 16.75% in FY2018 to 16.90% in FY2019 as GPM of grocery chain improves from 14% in FY2018 to 18% in FY2019.
  5. We project net financial income will come at VND 30.1 billion (+88.3% y/y).
  6. We also assume SGA/sales ratio to come at 12.6%, slightly lower than 12.7% of FY2018.

 

Leading to an EPS of VND 7,693 and therefore valuing the company at a P/E of 11.4 xs.

 

MWG delivered bottom line growth of 40% over the last 5 years. This pace will slow but only slightly for the time being – MWG has been able to manage its growth such that the bottom line kept pace with top line growth until now. With the mobile segment now mature and the growth engine is shifting to the consumer segment while the grocery business is in its early phase. And while progress has been made to boost overall GPM; overall margins will tend to decline for now as grocery segmental GPM is lower than the average. HSC estimates grocery store GPM at 14% or still less than for other segments – they compare to a GPM of 17.1% for mobile and 16.7% for the consumer electronics segment.

 

Indeed, the grocery business is a trickier business to manage than the other two segments given the very short shelf life of fresh food & vegetables and meat & fish which we think accounts for about 30% – 40% of average store sales. Not only is wastage a major concern but the building of a backbone to ensure direct procurement will also be a time-consuming affair. Especially as the grocery stores chain moves out of its comfort zone in HCMC. Improving the grocery chain GPM here is the key to restoring MWG’s bottom line growth to the same level as top line growth. Which we are confident that they will manage to do over the next few years.

 

Investment thesis – Reiterate Outperform. We have a fair value price of VND 138,500 giving us FY2019 forward P/E of 18.0xs. MWG has met its target of concept proof for grocery store chain, and also work out a standardized format for scaling up. However, there are still a lot of things that need to be worked out via trial-n-error, like location and SKU choices across the network. That’s simply how retail is and there are no short cuts. Break-even for the grocery chain will happen by 2018-end but it might take until 2020 for them to make a reasonable profit from grocery. HSC has always taken the view that MWG will eventually be successful in its plan to build a nationwide and profitable grocery store chain. Although expanding out from the HCMC base will bring enormous logistical challenges.

 

  • Tech stocks mostly had a sideways movement.

      

 

  • Manufacturing names were broadly higher, led by EVE and TCM.

     

 

  • Resource names were mixed to lower, led by PVD and GAS.

     

 

  • Real estate and construction stocks were mixed with gains for VRE and VHM while there were losses for SJS and DIG.

      

 

  • Agriproducts and aquaculture stocks were mixed with gains for VHC and  HAG while there were losses for SBT and HNG.

      

 

  • Pharmaceutical stocks were broadly sideways.

      

 

  • Utilities, transport and logistics stocks were mixed to higher, led by airline stocks.

      

 

Vietnamese stocks make more gains today – The markets today were mostly higher although the HN index slipped at the close. VHM played catch-up today and was the biggest gainer in index terms with gains for related stocks such as VRE also. Consumer names VNM; MSN & BHN all advanced. While aquaculture leader VHC bounced after recent extended losses. Banks such as VPB; TCB and EIB all rose.

 

On the other hand, SAB was the biggest loser in terms of index points. Resource names weakened led down by GAS & PLX. Banks also suffered from mild profit taking such as VCB; CTG; BID; MBB; TPB and HDB.

 

Thus, the futures market remains a few steps behind cash equities suggesting some caution. However, this is not a bad thing as the futures habitually trade at a discount to cash and a move to trading at a premium often suggests a maturing rally. So, we interpret the healthy discount as signaling that the rally is still fairly young. Volumes improved noticeably on yesterday while foreigners were net buyers but only by a slim margin

 

The VN index just breached the 100-day MA line today set at 957.68, one day after breaking above the 50-day MA line. However, this only occurred after a burst of buying in the late afternoon. In the morning session the market had traded narrowly. 

 

However, buyers emerged in the last hour of trading and pushed the market higher. This late buying interest appeared to follow comments by the Prime Minister at a conference today where he suggested that FY2018 GDP would reach 7%, thus exceeding the government’s 6.7% target. This stands in sharp contrast to the growth outlook for much of Asia where there is growing evidence of a slowdown. However aggressive FDI flows and robust exports have ensured that the Vietnamese economy continues to accelerate. 

 

Meanwhile regional markets moved a lot more cautiously today as they await to see more information about exactly what was agreed during the G20 meeting. Here they look for something from the Chinese side who have remained silent so far. This suggests that the shape of the equity rally could be a case of two steps forward and one step backwards in coming weeks.

 

Asian shares & major currencies – Asian shares mostly declined today even as Wall Street made gains on Monday. As for currencies, the US$ (96.739) fell back further today when measured against its trade weighted ICE index. Then the Euro (1.1382) traded a little higher; Pound Sterling (1.2736) edged higher; the Japanese Yen (113.09) fell back today while the Chinese Yuan enjoyed a second day of strong gains at (6.8429).

 

Oil prices move higher – Crude oil traded higher again today with the active month WTI futures crude oil contract trading at US$ 71.77 in late Asian trade. Recent more positive news flow drives prices higher.

 

Oil markets are still digesting the recent news and also looking forward to the two-day OPEC plus gathering in Vienna starting on December 6th. Where consensus is now looking for an agreement to cut supply by around 1.3 million barrels per day. The amount of any agreed cut won’t of course be officially announced but rather leaked to the media afterwards. While the official communique will likely simply talk of extending any production cut agreement to stabilise prices into 2019. Qatar’s proposed exit from OPEC won’t have any impact on this narrative.

 

The upward trajectory for oil prices looks fairly undemanding near term provided of course that the OPEC plus meeting delivers. However even with a 1.3 million barrel a day supply this will likely only gradually bring demand/supply back into equilibrium over a period of months. Indeed, Alberta’s move to cut production in Canada is a clear sign that the current glut is affecting everybody.

 

Hence, while observers can see 10-15% upside in oil prices from here, they seem definitely capped in the US$ 60-70 range for Brent and the US$ 55-65 range for WTI for the foreseeable future.  Now if the China-U.S. trade dispute is indeed solved in coming months, that range may increase as OPEC and others raise their demand projections for next year. However, it would be rather premature to think that far ahead at this stage. 

 

In global macro and general news – The post G20 meeting environment has seen various additional comments by senior White House officials overnight trying to add flesh to the bones of what was actually worked out with the Chinese at their recent dinner. And it seems that they had some trouble explaining themselves in the process. Treasury secretary Steve Mnuchin and top economic adviser, Larry Kudlow said that the Chinese have made a commitment to reduce their 40% auto tariffs. This repeated a statement that President Trump himself made but with a much less certain tone. They further said that the Chinese have made some US$ 1.2 trillion in commitments on trade overall including action on both tariff and non-tariff barriers. 

 

There are two issues here. Firstly, they seemed a bit unclear as to what level of commitment had been made. Secondly, none of this has been confirmed by the Chinese themselves. Leading to uncertainty in equity markets today. This problem apparently seems to stem from the lack of detailed ground work ahead of the meeting which is typical of President Trump’s ad hoc style. And means that there is now some confusion about exactly what was offered. And given that the U.S. is now looking for an immediate follow-up to whatever they believe was agreed this means that the 90-day window for talks will be a very busy and possibly contentious period for both sides.

 

The other big story today is that one section of U.S. Treasury bond yield curve has now inverted for the first time in more than a decade as the yield on the 3-year bond exceeded that of the 5-year bond on Monday. This is significant to the extent that (1) it can be a long-range predictor of a future recession; (2) the inversion has been expected for some time and now it’s actually happened. The more important spread, which is that between the 2-year and 10-year Treasury bonds is now less than 15 bps.

 

Analyzing what this means is hard than usual however. Given a very unusual factor, namely the ongoing Fed’s balance-sheet reduction which has put more pressure on 10-year yields than the shorter-dated maturities. While a higher budget deficit is simultaneously forcing the Treasury department to issue a lot more debt. All of this complicates the analysis given that these events are unprecedented.

 

Therefore, all that can be said is based on the past, a yield inversion could signal an economic slowdown in the U.S. over the next 12-24 months, but this is not a certainty. In other words, while all recessions in recent memory have been preceded by a yield curve inversion, not all inversions automatically lead to a recession. What it will do for sure is give the Fed some more food for thought. And gives a further argument to those who believe that the Fed should pause raising interest rates after the upcoming expected rate hike this month. And then strictly follow the data. 

 

 

 

HCMC – The VN index rose today as turnover expanded to VND 4,888.18 billion or US$ 210.06 million. The index gained 0.76% and closed at 958.84. 137 stocks up while 153 stocks down. And 7 stocks went to the ceiling while 7 stocks dropped to the floor. Foreigners accounted for 12.83% of the buying value and 12.14% of the selling value.

 

Foreign buying rose in actual terms and also in percentage terms. While foreign selling also rose in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 33.72 billion worth of shares in HCMC. And we saw thirty four transactions in the put through market today.

 

Foreigners were active buyers of VNM; VIC; VRE; VHM and MSN. They also actively sold VNM; VIC; MSN; HPG and VHM. The put through market was more active today with three enormous; twelve jumbo; two large and some medium sized & smaller deals accounting for 25.10% of total turnover.

 

We saw 20,545,000 shares of TCB; 4,877,287 shares of KDH; 785,960 shares of VNM; 446,770 shares of VIC and 2,510,000 shares of SJS going through. Foreigners were more active in the put through session in the VNM & VIC deals and then nine other smaller deals today in the market.

 

E1VFVN30 was up 2.11% today closing at VND 15,500.

 

Hanoi –  The Hanoi market went down today while turnover came to VND 525.35 billion or US$ 22.58 million. The HN index was down 0.23% to close at 107.39. 77 stocks up while 59 stocks down. And 19 stocks went to the ceiling while 5 stocks dropped to the floor. Foreigners accounted for 1.34% of the buying value and 1.57% of the selling value.

 

Foreigners were net sellers to the tune of VND 1.21 billion worth of shares. And we saw thirteen medium and small sized deals today during less active put through session in Hanoi accounting for 2.08% of total turnover.

 

We saw 722,000 shares of SHB; 1,122,000 shares of HKT and 30,000 shares of AMV along with some smaller transactions in the put through market today.

 

 

 

 

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