HSC Daily Market Watch with a final results note for VJC (Hold)

Ngày đăng September 15, 2018

Market commentary The VN index increased with turnover still below recent averages. Market breadth widened while we also see that 22 stocks went to the ceiling and 20 stocks fell to the floor. Foreigners were more active net buyers to a small degree. The put through market was more active with a large deal MSN & PDR and then a smaller deal in SCR seen going through. 

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

  • Bank shares were mixed to higher, led by VCB and CTG. 
  • Non-banks shares were mixed to higher, led by VCI and HCM. 
  • Consumer and retail names were broadly higher, led by BHN and VNM. 
  • Tech stocks all closed higher. 
  • Manufacturing names were broadly up, led by TCM and BMP. TMT closed at the ceiling today. 
  • Resource names were all higher, except a loss for PXS. 
  • Real estate and construction stocks were mixed with gains for CII and SJS while there were losses for KDH and CTI. 

 

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

 

  • Pharmaceutical stocks were mostly lower, led by DMC closing at the floor.

 

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

 

Earnings note – VJC final 1H numbers were positive. Forward outlook strong. Reiterate HOLDVietjet Aviation JSC (Hold) published their final audited results for 1H-FY2018 recently showing net sales of VND 21,221 billion (+29% y/y), an EBT of VND 2,159 billion (+13% y/y) and an NPAT of VND 1,999 billion (+11% y/y). This enabled VJC to fulfill 41% of its full year sales target and 37% of its EBT target. We recall that for FY2018, VJC called for a net sales target of VND 50,970 billion (+20% y/y) and EBT of VND 5,806 billion (+9% y/y).

 

Quick conclusion – Reiterate HOLD. We keep our fair value at VND 165,000, which values the company at a FY2018 forward P/E of 15.6 times which is close to the regional average multiple. For FY2018, HSC revises up and now calls for growth of 28% in net sales and 19% in NPAT. And for next year, we forecast growth of 13% y/y in net sales and 12% y/y in NPAT. Although the valuation is not really cheap, Vietjet is the fastest growing LLC in Asia with an ambitious expansion plan. The main catalyst over the medium terms of course is the growth potential of the regional aviation market especially into North Asian routes. Here cost management is VJC’s best competitive advantage. Focusing on international market should also improve VJC’s margins, given higher passenger yields and higher ancillary revenue per passengers. Our view on fuel prices suggests moderate growth over the next few years. 

Top sales were driven by growth of 34% y/y in passenger numbers – VJC’s sales are divided into 3 streams including (1) Passenger transportation; (2) Ancillary services and (3) Sale and leaseback of aircraft. The first 2 streams are the core businesses. 

  • Revenue from passenger transportations increased by 53% y/y to VND 12,579 billion. The drivers were as follows:
  • In 1H-FY2018, VJC carried 11.08 million passengers (+34% y/y). Of which, domestic passenger volume rose by 19% y/y while international passenger volume rose by 95% y/y. 
  • ASP rose by 14% y/y on a higher contribution from international passengers who pay higher fares. 
  • By the end of Q2/2018, VJC opened 38 domestic routes and 56 international routes while by the end of Q2/2017, VJC opened 38 domestic routes and 35 international routes.
  • Ancillary revenue rose by 51% y/y to VND 3,807 billion given by a growth of 34% y/y in passenger carried and a growth of 12% y/y in ancillary spending per passenger. We noted that ancillary spending per international passenger tends to higher than domestic passengers given longer flight time. 
  • The sales of aircrafts decreased by 16% y/y to VND 4,702 billion. During 1H-FY2018, VJC sold & leased back 4 aircrafts vs 5 aircrafts in 1H-FY2017. 

Higher fuel cost narrowed gross profit margins – For 1H-FY2018, VJC posted gross profit of VND 2,999 billion (+19% y/y) while GPM shrank from 15.3% to 14.1%. 

  • Gross profit from core business (excluding for sale & leaseback of aircraft) rose by 27% y/y to VND 2,153 billion while core GPM narrowed from 15.7% to 13.0%. The main reason was 37% y/y higher average fuel prices. Fuel cost typically accounts for around 42% of VJC’s operating cost.  
  • Gross profit from aircraft sale & leaseback rose by 3% y/y to VND 845 billion while GPM in this segment widened from 14.6% to 18.0%.  The main reason was the popularity of the A321 model of aircraft. 

Note – This is partly determined by VJC and lessor and partly determined by the demand for a particular type of aircraft. A leasing term is around 7-13 years. And if the demand for this type of aircraft, the lessor will be willing to pay more for this aircraft. 

Net financial loss expanded – In 1H-FY2018, VJC recorded a net financial loss of VND (356) billion (+55% y/y). Several factors at here play; 

  • Deposit income of VND 92 billion in 1H-FY2018 vs. VND 28 billion in 1H-FY2017 as average deposit amount rose by 143% y/y. 
  • In Q2/2018, VJC recorded a provision of VND 119.5 billion for the decrease in PV Oil stock price (OIL; UPCoM). We noted that VJC bought 50 million OIL shares or a 4.59% stake at a price of VND 19,800 per share via IPO. By the end of Q2/2018, OIL price came to VND 16,500 per share. 
  • The unwinding of the discount for the provision against aircraft maintenance expenses rose by 89% y/y to VND 199 billion, given by an increase of 22% in the number of flights. 

Note – When VJC lease an aircraft, they have to record maintenance expenses for this aircraft for the leasing period (7-13 years). These expenses are future cash payments and VJC discounts these amounts to arrive at a present value. VJC also records a provision for the difference between the future value and the present value of these expenses every year during leasing lifetime.

Overall, EBT came to VND 2,159 billion (+13% y/y) and NPAT came to VND 1,999 billion (+11% y/y). 

For FY2018, HSC revise up and now calls for growth of 28% y/y in net sales and 19% y/y in NPAT – We have revised up our forecasts by 11% for net sales and 3% for NPAT as we have changed the following assumptions; 

  • Raise the number of sale & leaseback aircraft from 14 to 17. 
  • Raise passenger traffic from 21.16 million passengers to 22.2 million passengers.
  • Raise our assumption for the average Brent oil price from $ 63/bbl to $ 71/bbl. 

Now we forecast net sales of VND 54,278 billion (+28% y/y) and an NPAT of VND 6,044 billion (+25% y/y) vs a previous forecast for net sales of VND 48,979 billion (+16% y/y) and NPAT of VND 5,893 billion (+16% y/y). Our main assumption are as follows: 

  • Assume passenger transportation revenue will increase by 51% y/y to VND 25,430 billion, given by as follows: 
  • Growth of 71% in ASK to 33,137 million seat kilometers as the number of operation flights increase by 33% to 131,190 flights. 
  • Passenger traffic will grow by 29% to 22.1 million passengers including 15.4 domestic passengers (+12% y/y) and 6.7 million international passengers (+100% y/y). 
  • Average base fare will increase by 17% y/y to VND 1.150 million thanks to the higher contribution from international passengers who normally pay higher fares.
  • That ancillary revenue will come to VND 8,040 billion (+47% y/y), given growth of 29% in passengers handled and growth of 15% in the average ancillary sale per passenger. 
  • Other revenue will increase by 4% y/y to VND 20,810 billion, given by; 
  • The number of sales and leaseback aircraft will come to 17 aircraft. 
  • The average sale & leaseback aircraft price increases by 4% y/y as the price of new aircraft is higher.
  • Estimated gross profit will be VND 8,154 billion (+25% y/y) while GPM narrows from 15.5% to 15.0%; 
  • By then end of FY2018, we expect the total fleet will be expanded to 66 aircraft (+27% y/y) including 65 operating leased aircraft and 1 fully owned aircraft. 
  • HSC expects higher fuel costs as we assume average Brent oil price will increase by 32% y/y to US$ 71.74/bbl. 
  • Gross profit margin from sales and lease back will be 17.2%. 
  • SG&A expenses will rise by 13% y/y to VND 910 billion even as the ratio SG&A expenses to sales excluding aircraft sales will be reduced to 2.7%. 
  • Net financial loss will broaden by 97% y/y to VND (880) billion.  We assume the price of OIL come to VND 14,000 per share by the end of FY2018. Hence, VJC will record a provision of VND 290 billion against their investment in OIL. HSC’s fair price for OIL comes to VND 14,400, which values the company at a FY2018 forward P/E of 25.7 times. (PLX is trading at a FY2018 forward P/E of 23.8). 

Overall, we forecast that EBITDAR will come to VND 13,685 billion (+28% y/y) and that EBITDA will come to VND 7,323 billion (+26% y/y). At a current price of VND 149,000/share, EV/EBITDAR is 5.86 times and EV/EBITDA will be 10.95 times. 

And then, EBT will rise by 20% y/y to VND 6,364 billion. If we exclude the profit from sale and leaseback, core EBT will come to VND 2,820 billion (+45% y/y). 

As the effective tax rate expands from 4.3% to 5.5% in FY2018, we expect NPAT will come to VND 6,012 billion (+19% y/y), generating an EPS of VND 10.545/ share. At a current price of VND 149,000/ share, forward P/E comes to 14.13 times. 

For FY2019, HSC calls for a growth of 13% y/y in net sales and 12% y/y in NPAT – We forecast net sales of VND 61,515 billion (+13% y/y) and NPAT of VND 6,754 billion (+12% y/y). Our assumption are as follows; 

  • Assume passenger transportation revenue will increase by 32% y/y to VND 33,660 billion, given by as follows: 
  • A growth of 35% in ASK to 44,814 million seat kilometers as the number of operation flights increase by 20% to 157,277 flights. 
  • Passenger traffic will grow by 19% to 26.2 million passengers including 16.2 domestic passengers (+5% y/y) and 10.0 million international passengers (+50% y/y). 
  • Average base fare will increase by 12% y/y to VND 1.284 million thanks the higher contribution from international passengers who normally pay higher fares.
  • That ancillary revenue will come to VND 10,000 billion (+24% y/y), given growth of 19% in passengers handled and growth of 5% in the average ancillary sale per passenger. 
  • Other revenue will decrease by 14% y/y to VND 17,854 billion, given by; 
  • The number of sales and leaseback aircraft will be decreased from 17 to 14 aircraft; 
  • The average selling aircraft price will be stable. 
  • Estimated gross profit will be VND 9,560 billion (+17% y/y) while GPM broadens from 15.0% to 15.5%; 
  • By then end of FY2019, we expect the total fleet will be expanded to 78 aircraft (+18% y/y) including 74 operating leased aircraft and 4 fully owned aircraft. 
  • HSC expects higher fuel costs as we assume average Brent oil price will increase by 10% y/y to US$ 79 /bbl. 
  • Gross profit margin from sales and lease back will be 17.2%.
  • SG&A expenses will rise by 30% y/y to VND 1,185 billion even as the ratio SG&A expenses to sales excluding aircraft sales will be reduced to 2.7%. 
  • Net financial loss will reduce by 34% y/y to VND (584) billion.  

Overall, we forecast that EBITDAR will come to VND 17,165 billion (+25% y/y) and that EBITDA will come to VND 8,557 billion (+17% y/y). At the current price of VND 149,000/ share, EV/EBITDAR is 4.80 times and EV/EBITDA will be 9.64 times. 

And then, EBT will rise by 22% y/y to VND 7,791 billion. If we exclude for profit from sales and leaseback, core EBT will come to VND 4,756 billion (+69% y/y). 

As the corporate tax rate for core business increases from 10% to 20%, we expect NPAT will come to VND 6,754 billion (+12% y/y), generating an EPS of VND 11,845/ share. At the current price of VND 149,000/ share, forward P/E comes to 12.58 times. 

Plan to issue convertible bond (CB) – On August 30th 2018, VJC announce the record date to collect written opinions from shareholders about the issuance of a convertible bond to fund  new aircraft purchases. The company has not disclosed any details about this CB issuance. 

Ambitious expansion plan, focusing on international markets – The company expects passengers carried will double from 17 million passengers for FY2017 to 34 million passengers for FY2020, generating a CAGR of 26% in the period FY2017-2020.  For FY2018 alone, they target the carriage of 24 million passengers, up 41% y/y. 

We view this target is being quite aggressive as the domestic market is witnessing a slow-down in growth. The main reason is a slight decrease in the number of Vietnamese first-time air travelers. Currently, the domestic market contributes around 80% total VJC’s passenger carried while first-time air travel accounted for around 30% Vietjet’s total domestic passengers. However, in contrast, we see strong growth in international market, especially in the North Asian market. 

  • The fleet will be expanded by 62% from now until FY2020 – The company plans to expand their fleet from the current 55 aircraft to 89 aircraft by the end of FY2020. Of which, they will own 3-4 aircraft. Moreover, VJC’s fleet with current engine option (ceo) aircraft will be replaced gradually by new engine option (neo) aircraft. The new aircraft will not only add more seats on each aircraft (186 seats on A320 neo vs. 180 seats on A320 ceo and then 240 seats on A321 neo vs. 230 seats on A321 ceo) but also save around 15-20% in the fuel burn. 
  • In FY2018, VJC aim to increase their route by 31% y/y to 102 routes (42 domestic routes and 60 international routes). They will open 24 new routes of which 4 will be new domestic routes and 20 will be new international routes. North Asia is still the focal international market for VJC. Beside expanding current markets (China, Taiwan, South Korea), VJC will also increase their presence in new markets including Japan, Indonesia and India. 
  • Establishing joint ventures to operate LCCs in other Asian markets – After Thailand, VJC plan to establish JVs to operate LCCs in other Asian markets such as China, Taiwan and Japan. We see these JVs would not only allow Vietjet to enter the domestic market of these countries, but also account for some of VJC’s aircraft orders. However, due to higher competition between current LCCs and less support from the governments of the host country, it may be challenging to apply VJC’s current model to their JVs. 
  • Cooperation with full-services airlines to exploit long-haul routes – VJC has signed cooperation agreements with some full-services airlines including Japan Airlines and Qatar Airways in order to extend its network beyond East Asia. They will operate code-share flights. That means the passenger could book flights operated by these full-service airlines via VJC’s booking systems and vice versa. Long haul routes (over 6 hours flight time) are not suitable for the LLC model as they require wide-body aircraft while the load factor is generally lower than for short-routes. Hence, cooperation with full-services airlines seems to be best way for VJC to approach long-routes customers. VJC can sell long-haul flights operated by other airlines. 

Investment thesis – Reiterate HOLD. We see fair value per share at VND 165,000 which values the company at a FY2018 forward P/E of 15.6 times- the regional average multiple. The main catalyst over the medium term of course is the growth potential of the overall aviation market and especially the low-cost segment where VJC is the leading carrier in Vietnam. With prospects for new international routes into North Asia especially interesting. We forecast a CAGR of 14% for total passenger volume for the market as a whole.

Vietnamese stocks make moderate gains The markets made a little more headway today although the level of gain was trimmed somewhat in afternoon trading. VCB was the biggest gainer in terms of index points while other banks such as CTG also rose. VHM continued to move higher while VRE & VIC rebounded. Consumer names VNM (better Q3 prospects); SAB and BHN (some movement on strategic stake sale perhaps) also advanced. 

On the other hand, MSN fell after the recent announcement of a proposed treasury share sale. BVH also slipped after recent gains while banks such as BID & MBB also lost out. HPG also fell after a nice run as did HSG. Mixed performance by blue chips once again with no clear sector trend emerging. However, foreigners remained net buyers which is very encouraging.

 

The four futures contracts rose today and exceeded the gains in the VN30 cash index thus narrowing the gap between futures and cash to between 1.8-5.1 However the long dated futures contract still trades at a discount to the short-dated contract. Mixed outlook then, the narrow gap is a positive, however, faith in the long term future of the current rally is still a bit thin. 

The VN index is still trying to find traction above the 990 level that has detained us for some time. It’s helpful of course that regional and global markets have been lifted in the last few days by hopes of progress on trade issues. While emerging market currencies have entered calmer waters for now. Nonetheless, the equity market here is still grinding through the gears and trying to weather heavy resistance as it lines up an eventual attempt at the 200-day MA line. 

Importantly though, we can argue that the 100-day MA and not the 50-day MA is now the main support line which is of course a positive development. And if the current external environment holds in place then we can expect further gains over the near term. Of the two steps forward one step backwards variety. However, that is surely good enough.  

Asian shares & major currencies – Asian shares moved up today even as Wall Street made some gains on Thursday. As for currencies, the US$ (94.407) slipped today when measured against its trade weighted ICE index. Then the Euro (1.1712) traded higher; Pound Sterling (1.3126) also gained some ground; the Japanese Yen (111.84) traded narrowly while the Chinese Yuan lost a little ground today (6.8506). 

Oil prices rebound a little – Crude oil regained some lost ground after falling back overnight with the active month WTI futures crude oil contract trading at US$ 68.96 in late Asian trade. Profit taking emerged yesterday as hurricane Florence was being downgraded before it hits land. 

Hurricane Florence has been downgraded to a Category 1 storm which eases concerns over its likely impact when it hits the U.S eastern seaboard later today. And this caused some short term selling in oil overnight as traders unwound what had been priced in. Meanwhile oil traders were taking a more nuanced view on the possibility of progress in upcoming trade talks between China and the U.S. Mindful perhaps of the IEA’s most recent report which warned of possible demand weakness if the current trade dispute worsens. 

In recent months resistance has tended to emerge as the WTI oil price exceeds US$ 70 and this time has proven to be no exception. Even so, we keep our view that the risk to oil prices is to the upside between now and year-end given that the near-term risks to supply greatly exceeds any medium risks to demand. 

In global macro and general news – The mood in Asian equities has lifted somewhat with news that the Chinese and U.S. will soon hold another round of senior level trade negotiations. Of course, we have no idea at this stage if progress will be made. And recent comments by President Trump that he feels no pressure to make a deal must be viewed as pre-talk posturing. Meanwhile the Chinese side has hinted at reform to the WTO structures. Indeed, given progress on both the NAFTA and EU talks it seems that the U.S. might be open to some form of compromise eventually. However, that may be still some time away. 

The U.S August Consumer Price Index (CPI) was released showing an increase of 0.2% m/m which was unchanged on the July increase. The CPI also rose 2.7% y/y, slowing from July’s 2.9% y/y increase. Then core CPI was up 0.1% m/m and 2.2% y/y compared to a 2.4% y/y increase in July. This slight slowing in consumer price inflation was heralded by the unexpected drop in the producer price index on a m/m basis which was announced the previous day. It feeds into a narrative that suggests that for the time being, CPI is holding steady and neither accelerating nor decelerating to any great degree. And of course, the correct monetary policy response to this would be a gradual increase in interest rates. Which is exactly what is being prescribed by the Fed. 

The Federal Reserve Bank is widely expected to increase interest rates by another 25 bps at its next September 25-26 policy meeting. Indeed, given that the core Personal Consumption Expenditure Index is hovering at the 2% target this is almost inevitable. The debate has already switched to what happens next year with some Fed governors calling for a halt to rate increases once it hits the so called neutral or long-term equilibrium level of around 2.9% (consistent with a Fed fund’s rate pf 2.75-3%). While others, as we mentioned the other day suggest that short term rates could exceed the long term neutral rate for a period.  

The Turkish central bank decision to raise benchmark one-week repo rate by 625 basis points to 24% yesterday caused the Turkish lira to jump overnight and added to a sense of relative calm surrounding vulnerable emerging market currencies such as the Argentinian peso and South African rand in recent days. Of course, this may be simply temporary as pressure tends to come in waves with periods of calm in between. However at least now we are seeing some alignment between central banks in terms of the response to currency pressure.

 

 

HCMC – The VN index rose today as turnover expanded to VND 4,075.58 billion or US$ 175.6 million. The index gained 0.34% and closed at 991.34. 158 stocks up while 131 stocks down. And 6 stocks went to the ceiling while 3 stocks dropped to the floor. Foreigners accounted for 17.01% of the buying value and 13.71% of the selling value.

Foreign buying rose in actual terms and also in percentage terms. While foreign selling fell further in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 134.66 billion worth of shares in HCMC. And we saw twenty nine transactions in the put through market today.

Foreigners were active buyers of VNM; VHM; NLG; DXG and HPG. They also actively sold VHM; MSN; NLG; VNM and HPG. The put through market was less active today with one enormous; three super jumbo; two jumbo; five large and some medium sized & smaller deals accounting for 13.35% of total turnover.

We saw 1,410,000 shares of MSN; 2,773,840 shares of PDR; 6,854,016 shares of SCR; 1,995,000 shares of NLG and 1,430,000 shares of GMD going through. Foreigners were less active in the put through session in the NLG & MSN deals and then nine other smaller deals today in the market.

E1VFVN30 was up 2.48% today closing at VND 16,100.

 

Hanoi – The Hanoi market went up today while turnover came to VND 639.07 billion or US$ 27.53 million. The HN index was up 0.63% to close at 113.37. 101 stocks up while 62 stocks down. And 16 stocks went to the ceiling while 17 stocks dropped to the floor.

Foreigners accounted for 5.08% of the buying value and 0.93% of the selling value. Foreigners were net buyers to the tune of VND 26.48 billion worth of shares. And we saw sixteen medium and small sized deals today during more active put through session in Hanoi accounting for 8.13% of total turnover.

We saw 2,642,000 shares of SHB; 877,500 shares of VC3 and 1,000,000 shares of CVN along with some smaller transactions in the put through market today.

 

We thank you for being our client,

 

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