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

Ngày đăng December 12, 2018

Market commentary – The VN index increased with turnover still below recent averages. Market breadth narrowed while we also see that 22 stocks went to the ceiling and 18 stocks fell to the floor. Foreigners were more active net buyers to a small degree. The put through market was more active with large deals in TCB & VJC and then a smaller deal in HDB seen going through.


Foreigners were active buyers of VNM; VRE and MBB. And net sellers of HPG and FPT.


  • Bank shares were broadly higher, led by BID, VCB and TCB.




  • Non-banks shares were all up, led by brokerage stocks.




  • Consumer and retail names were mixed to higher, led by QNS and MWG.




  • Tech stocks were mixed with a gain for FPT while YEG held its ground.




  • Manufacturing names were mixed to higher, led by RAL and TMT.




  • Resource names were all higher, except a minor loss for PXS.




  • Real estate and construction stocks were mixed to higher, led by HBC, KDH and KBC.




Corporate action – MOC looks to exit its VGC stake in 2019. Forward outlook moderate. Reiterate Outperform. The Ministry of Construction looks to reduce their ownership in Viglacera (VGC Outperform) from 54% to 0% in the 1H 2019. Meanwhile the Company hopes to complete the process of moving from the HNX to the HOSE soon, which is expected to be done by early next year.


Quick conclusion – Reiterate Outperform. We have a fair value price of VND 20,800 which values the company at a forward P/E of 15.8xs. For FY2018, HSC forecasts call for a 2.6% y/y drop in PBT, while a recovery of 7.2% y/y is expected in FY2019. The medium-term outlook calls for moderate growth only as rising competition is putting more pressure on results in the construction material segments, including glass, tiles and bricks. VGC is responding by moving up the value chain, however, this will take time. Sanitary ware production is a bright spot, with the My Xuan sanitary ware factory expected to come into official production from FY2019, adding 43% to capacity. We also expect a larger and steady income stream from IP leasing activity which should benefit from accelerating FDI.  We also believe the divestment from several underperforming investments in subsidiaries and affiliates will help in lifting the bottom line. Then the MOC plan to sell its stake and the move from HNX to HOSE will provide short term catalysts for the stock.


MOC plan to sell entire 54% stake in VGC in 2019 – After the unsuccessful attempt earlier this year to reduce their ownership stake from 54% to 36% via order matching from 27th June to 21st July, the MOC has rethought its strategy and according to management is now hoping to sell its entire 54% stake in the 1H 2019. The total number of shares to be sold is 241,985,262 and we expect the deal may be conducted in Q2 of 2019.


Several steps would precede this. Firstly, the company will likely move its listing to HoSE to increase the attractiveness of the shares. We then understand that the valuation report will have to be updated as the previous official valuation report has now expired. The valuation process will involve several methods including (1) NAV per share, (2) comparative valuations and (3) average share prices over a certain period before a cut offs time. The reference share price will thus be determined by the highest valuation produced by these methods.


We think that a controlling stake sale might be more attractive to a possibly strategic buyer in light of the perceived upside from greater improvements in efficiency. Thus, increasing the possibility of a successful transaction.


Looking to list on HOSE in Q1 2019 – The Company has also submitted the documents for a move from the HNX to HOSE, which is expected to be completed in early 2019. The would normally be expected to increase the liquidity of the stock.


Preliminary 11M 2018 results showed flat sales of VND 7,273 billion and a drop in PBT to VND 775 billion (-17.7% y/y), fulfilling 79.9% and 81.6% of the Company’s 2018 revenue and PBT targets respectively. However, as the PBT of the parent company only was almost flat at 574 billion (-0.7% y/y), we don’t expect the NPATMI 2018 to drop significantly.


  • Real Estate segment sees steady IP bookings – residential sales are behind schedule with only 108 unit sold (fulfilling around 29% of the FY2018 target), the IP segment recognized the bulk of a lease of about 37 ha in the last two months or so. So altogether in the first eleven months of 2018 the lease of more than 83.6 ha mainly from Dong Van IP, Yen Phong Expansion, Phu Ha and Tien Hai IPs have been booked.


  • Building glass sees margin squeeze – The segment still has to face significant competition from imported products from Malaysia as we have discussed in our previous note. Thus, we expect it to end the year of 2018 with a significant drop in margins. We await further moves by producers in Malaysia as we think exporting glass is not a sustainable strategy due to very high transportation cost.


  • Sanitary ware capacity increase is almost complete – The new My Xuan factory is almost ready. Trial production is underway and the product quality, according to management, has met targets. Official operation will commence in 2019 and this will add 43% to total capacity.


  • Tile segment eyes a possible improvement – According to our recent discussion with the Company, the last two quarters of 2018 has seen a slight reduction in competitive pressures. A potential contract with Vincity is under negotiation and would boost sales over the in mid-term. However low barriers to entry coupled with oversupply in the local market, means the segment will remain tough.


For FY2018, we keep our forecast calling for a 4.3% y/y decrease in sales and a 2.6% y/y drop in PBT – HSC now forecasts FY2018 sales of VND 8,805 billion (-4.3% y/y) and PBT of VND 890 billion (-2.6% y/y).


  • Residential real estate bookings are expected to come to VND 523 billion (-39.4% y/y) with a significant contribution from Hoang Hoa Tham Phase 3, Dang Xa low-rise, Xuan Phuong.
  • IP land leasing – We assume the leasing of a total of 87 ha at an average price of USD 53 /per square meter. These IPs are attracting interest mostly from FDI electronic manufacturers, such as Samsung, LG, Rinnai and several their parts makers.
  • Building glass segment are forecast to show an 11.6% y/y drop in revenue to VND 1,159 billion. Fiercer competition from both local producers and imported products from Malaysia has driven down selling prices by more than 30% in the market, coupled with a previously higher fuel price. Thus, we expect a drop in both revenues and margins in this segment. With GPM is forecast to decrease to 14.5% versus 31.5% of last year.
  • Sanitary ware revenues will rise to VND 1,184 billion (+17.4% y/y). The My Xuan factory will be completed and ready to operate from Q3 FY2018 though we expect any significant contribution to total revenue will only be recognized from FY2019 onwards. We think the GPM will remain high at over 30% for the time being.
  • Granite & ceramic tile revenues to grow only 2.1% y/y to reach VND 2,090 billion this year. This is another segment facing tough competition both from local producers and low-priced, imported products from China. The local market is currently oversupplied and the whole industry is expected to grow at a CAGR of just 2.3% between FY2017-2020F. We think future growth depends largely on the pace of product innovation. Thus gross profit margins are expected to decrease to 22% in 2018 versus 23.6% a year earlier.
  • Brick revenues to drop by 9.5% y/y to VND 2,046 billion as the Company is reducing the production of traditional fire bricks and concentrating on producing cotton bricks and other more sophisticated products carrying higher margins. We expect that GPM in this segment will be 16.2% for FY2018.
  • We project overall GPM will be at 23.1% for FY2018 versus 23.3% in FY2017 giving us a gross profit of VND 2,034 billion (-5.0% y/y).
  • Interest expenses are expected to increase by 22.5% y/y.
  • The SG&A/sales ratio will come to 12.2%.


With this we forecast a PBT of VND 890 billion (-2.6% y/y) and a NPATMI of VND 589 billion (-1.8% y/y), delivering a FY2018 forward EPS of VND 1,314/share (-1.8% y/y) for a current forward P/E of 13.1xs.


For FY2019, our forecast calls for 7.2% y/y growth in PBT – We forecast FY2019 sales of VND 9,234 billion (+4.9% y/y) and a PBT of VND 953 billion (+7.2% y/y) given the following main assumptions.


  • Residential real estate bookings will come to VND 499 billion (-4.8% y/y). GPM is assumed to be around 34%.
  • IP land leasing – We assume that the Company will lease 102 ha, at average price USD 51 per square meter giving us a revenue of VND 1,194 billion (+13.5% y/y). The GPM is expected to be around 32.0%.
  • Building glass revenues are expected to increase 3.7% y/y to VND 1,202 billion, and we expect the GPM will be around 15.5%.
  • Sanitary ware revenue will rise to VND 1,553 billion (+31.2% y/y) as the contribution from the new My Xuan factory will be more significant. We think the GPM will remain high at over 30% for the next period.
  • Granite & ceramic tile revenues will grow by only 3.0% y/y to reach VND 2,153 billion, with competition continuing to drive down margins gradually. We think that the FY2019 GPM will be around 21.0%.
  • Brick revenues expected to drop a further 10.2% y/y to VND 1,839 billion with margins dropping to 15.6% for the same reasons as above.
  • We project the overall GPM will be flat at 23.1% for FY2019 on a gross profit of VND 2,136 billion (+5.0% y/y).
  • Interest expense is expected to increase 12.4% y/y and SG&A expenses will reach 11.9% of total revenue.


With this we forecast PBT of VND 953 billion (+7.2% y/y) and NPATMI of VND 634 billion (+7.6% y/y), delivering a FY2019 forward EPS of VND 1,414/share (+7.6% y/y) for a forward P/E of 12.2 xs.


VGC is well placed in the Vietnamese market as a mid-price quality construction materials producer – whose products include Building glass and façade, sanitary wares, bricks and tiles with a market share in terms of production capacity in key segments as follows;


  • Building glass – 41%
  • Sanitary ware – 9%
  • Granite and Ceramics tiles – 11.2% and 3% respectively
  • Bricks – 45%


However, margins have been under pressure given increasing competition mostly from imports. Hence in response, VGC’s business is transitioning up the value chain due to increasing competition for traditional products. This will take some years and in the meantime top and bottom line growth is expected to be moderate as competitive pressures remain strong. In addition, VGC has already expanded into some parallel higher margin businesses such as residential real estate and IP leasing. However, these businesses are lumpy in nature with uneven bookings depending on the product cycle. In the core businesses VGC will; 


  • VGC will focus more on high-quality building glass and sanitary wares which carry higher margins.
  • Opportunities in new materials such as gypsum board, autoclaved aerated concrete (AAC) are also being studied, given that traditional materials such as ceramic tiles and clay bricks all face fiercer competition and decreasing demand. This also results from a shift in construction technology towards superior materials such as granite and porcelain tiles instead of traditional ceramics tiles, or AAC instead of clay bricks.
  • The Company is planning to build a gypsum board production facility in the North with a total capacity of 25 million sqm meter per year and considering an expansion into AAC production via M&A.


VGC has a large land bank set aside for IP expansion and affordable housing products development. As of the end of 9M FY2018, the Company owned a landbank totaling 3,300 ha for IP development, of which 32% is occupied by tenants and then about 20 ha of unsold area for affordable residential property development. Given this, between FY2018-2020 we forecast:


  • total revenue will grow at CAGR of 3.8 %, and
  • consolidated NPAT will grow at a CAGR of 5.3%.


Reiterate Outperform. We have a fair value price of VND 20,800 which values the company at a forward P/E of 15.8xs. The share price has decreased sharply following the news that the first attempt to conduct a divestment of share by the Ministry of Construction via order matching failed. At the current share price, it is trading at an 20.9% discount to our fair value. The divestment of state ownership to 0% will likely be complete in FY2019, preceded by a move from HNX to HSX in Q1. VGC is a domestic leader in building materials, with core businesses consisting of several building materials segments.


As demand for some traditional materials has slowed and competition has increased significantly in the market, the Company is adding new products and materials carrying higher margin, as well as putting efforts into restructuring less profitable subsidiaries and affiliates across different segments. Sanitary ware production is expected to boost revenues from FY2019 onwards after the My Xuan production facility comes into full operation. The Company also has a large land bank it can use to develop industrial parks and residential real estate products.


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




  • Pharmaceutical stocks were mixed to higher, led by TRA and IMP.




  • Utilities, transport and logistics stocks were mixed with gains for VSC and PPC while there were losses for NCT and VNS.




Vietnamese stocks advance today – The markets moved higher today, VCB made the biggest gain in terms of index points while other banks such as BID; TCB; CTG; MBB; STB and HDB all advanced. Resource names such as GAS; PLX and PVD all moved higher with oil prices. Leading insurer BVH made a nice move. Consumer name MSN rose as did leading retailers MWG & PNJ.


On the other hand, VNM slipped as did fellow consumer name KDC. Banks VPB and EIB also lost ground. Real estate names NVL and NLG also fell back. In general, a good day for blue chips led by banks and resource names. Foreigners were more active and also net buyers.


The four futures contracts rose between 6.7 and 10.1 index points today which exceeded the gains in the VN30 cash index. The discount between the four futures contracts and the cash index now rests between 6.8 and 8.2 index points which represent a considerable narrowing in recent days. This discount might be considered to be fairly neutral by historical standards and suggests that the futures market can see further upside potential near term in cash equities.


The VN index made some gains today and finally appeared to break above the 100 MA line. This resistance line was never really supposed to cause much trouble; however, it has turned into something of a barrier for the market in the last 10 days or so. In any event, the 200-day MA is the next target and it currently lies at around 1003.57. So, despite last week’s volatility our early December investment thesis calling for a year-end rally may well be back on track again.


With President Trump making some moves to defuse the Huawei issue and trade talks underway a potential headwind has been removed for now. The upcoming Fed FOMC meeting is seen as a potential positive if the language of the communique becomes more dovish as expected. Oil is recovering from recent lows while the dollar seems to be trading in a stable range. Brexit related concerns and the Italian budget issue remain of course but these are secondary in nature to Asian markets. The picture then has brightened somewhat today although we note that events are very fast changing these days.


In any event from a technical point of view we have a potentially clear run up to the 200-day MA in coming weeks. While daily volumes improved today with some fairly large trades seen going through as risk appetite appears to have returned amongst foreign investors to some extent.


Asian shares & major currencies – Asian shares moved higher today thus ignoring Wall Street’s mixed performance on Tuesday. As for currencies, the US$ (97.415) gained some ground today when measured against its trade weighted ICE index. Then the Euro (1.1327) traded a little higher; Pound Sterling (1.2501) edged higher after recent weakness; the Japanese Yen (113.41) traded narrowly while the Chinese Yuan rose to (6.8892).


Oil prices rise – Crude oil traded a higher today with the active month WTI futures crude oil contract trading at US$ 52.05 in late Asian trade. API estimates a big draw in inventories while traders note tightening supply after OPEC plus deal.


American Petroleum Institute (API) estimated that U.S. crude inventories fell by very significant 10.18 million barrels for the week ending December 7th. Last week the EIA number fell breaking a run of some seven weeks when the number moved higher. Now this, if confirmed by the EIA number later today would suggest that the trend is starting to move in the opposite direction as U.S refineries return to normal levels of activity after seasonal maintenance.


Oil prices have been propelled higher in recent days by ongoing disruption to El Sharara, Libya’s largest oilfield after it was overrun by local tribesmen on Sunday. This field pumps out 315,000 barrel-per-day and an adjoining feel El-Feel produces 75,000 barrels per day has also been apparently affected. Both fields have a remote location in the southwestern desert and are thus vulnerable to such attacks which are often a way of expressing local grievances. This adds to recent problems. As Libya’s crude oil production had anyway fallen by about 300,000 bpd since the start of this month on the back of oil export terminal shutdowns amid harsh weather and full storage tanks.


At any rate, we were due for something to happen as Libyan production has been eerily disruption free since the summer. Indeed, Libyan production has been running at 1.3 million barrels per day in recent months, the highest level since 2013. Naturally a lot depends on how long this disruption lasts. And if the past is any guide it can range from a few days to a few weeks. 


Then of course we have the OPEC plus decision to cut production by 1.2 million barrels per day plus the decision by Alberta, a Canadian province to cut production by some 325,000 per day and suddenly the numbers start to stack up to quite a big number. Especially as the baseline for the OPEC plus cut is October which means that we estimate it is really a cut of around 1.4-1.5 million barrels per day on the November number.


In global macro and general news – President Trump has let it be known that he is prepared to intervene in the Huawei case if a trade deal is likely. This explicitly links two tracks that the U.S. administration has hitherto kept apart by arguing that the Huawei case was a purely legal matter based on a long running case (the sanctions in question were put in place under the Obama Presidency). However, this appears to be an attempt to keep the trade talks on track after the Chinese had reacted strongly to the CFO’s arrest in Canada. It looks like markets have welcomed this news today as it holds out the possibility that the trade talks can continue normally as both countries try to limit the damage from the Huawei factor. And the Chinese Yuan also rose on the news.


The IMF continues to our cold water on the forward macroeconomic outlook for the world. David Lipton, the first deputy managing director of the IMF talked of storm clouds building and said the world was as yet unprepared. Focusing on the fact that due to low interest rates monetary policy lacks potency while fiscal policy is also constrained due to generally high debt levels for many countries. This follows recent comments from the outgoing chief economist who warned of headwinds to U.S. growth.


Japan’s core machinery order recovered by just 7.6% m/m in October after a 18.3% m/m drop in September after an earthquake. Which was well below consensus calling for a 10.3% m/m increase. Then orders from manufacturers bounced rose 12.3 percent on-month in October after a 17.3% m/m decline in September. The Japanese economy had a difficult Q3 as capex cratered and this tepid recovery suggests that things haven’t improved much since then. Naturally it’s unlikely that the Q3 GDP decline will continue in Q4 given the factors behind it, but a feeble recovery won’t do much for confidence either.




HCMC – The VN index rose today as turnover expanded to VND 4,882.06 billion or US$ 209.8 million. The index gained 0.70% and closed at 961.28. 182 stocks up while 91 stocks down. And 6 stocks went to the ceiling while 6 stocks dropped to the floor. Foreigners accounted for 18.05% of the buying value and 16.24% of the selling value.


Foreign buying rose in actual terms and also in percentage terms. While foreign selling also rose further in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 88.75 billion worth of shares in HCMC. And we saw thirty seven transactions in the put through market today.


Foreigners were active buyers of VNM; VRE; MBB; E1VFVN30 and FPT. They also actively sold VNM; VRE; MBB; HPG and FPT. The put through market was more active today with eight enormous; one super jumbo; five jumbo; four large and some medium sized & smaller deals accounting for 42.46% of total turnover.


We saw 24,492,200 shares of TCB; 2,000,000 shares of VJC; 5,000,000 shares of HDB; 4,295,000 shares of VRE and 5,790,815 shares of MBB going through. Foreigners were more active in the put through session in the VRE & MBB deals and then ten other smaller deals today in the market.


E1VFVN30 was up 1.32% today closing at VND 15,350.


Hanoi – The Hanoi market went up today while turnover came to VND 420.32 billion or US$ 18.06 million. The HN index was up 1.02% to close at 107.68. 89 stocks up while 54 stocks down. And 16 stocks went to the ceiling while 12 stocks dropped to the floor. Foreigners accounted for 2.54% of the buying value and 3.23% of the selling value.


Foreigners were net sellers to the tune of VND 2.91 billion worth of shares. And we saw eighteen medium and small sized deals today during more active put through session in Hanoi accounting for 33.15% of total turnover.


We saw 4,000,000 shares of SHS; 2,230,000 shares of VGC and 700,000 shares of VCG along with some smaller transactions in the put through market today.





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