HSC Daily Market Watch with a note on HPG (BUY)

Ngày đăng December 5, 2018

Market commentary – The VN index decreased with turnover still below recent averages. Market breadth widened while we also see that 30 stocks went to the ceiling and 16 stocks fell to the floor. Foreigners were less active net sellers to a small degree. The put through market was less active with large deals in TCB & HNG and then a smaller deal in VJC seen going through.


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


  • Bank shares were mixed with gains for BID and MBB while there were losses for EIB and HDB.



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



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



  • Tech stocks lost ground a bit.



  • Manufacturing names were broadly higher, led by DRC and HHS.


Corporate news – HPG hits full year targets in first 11 months. Forward outlook positive. Reiterate BUY. Hoa Phat Group (HPG – BUY) held an analyst meeting yesterday afternoon. Here are our key takeaways from the meeting


Quick conclusion. Reiterate BUY. Our revised FY2019 fair value price for HPG is VND 43,630 and values the company at a forward FY2019 P/E of 10 xs. For FY2018, HSC is trimming our full-year forecast now calling for a 10.5% y/y increase in NPAT. While for next year HSC forecasts net profit growth of 10.3% y/y. Additional capacity from the Dung Quat facility is helping drive the top line, however margins are being squeezed by falling prices in the region and the need to boost volumes sales in order to improve capacity utilisation. This means low double-digit growth in NPAT is likely for this and next year. Even so, the long-term growth store based on capacity expansion of existing products and a move into high quality long products and pre-tensioned steels as an import substitution policy is intact. HPG is the main beneficiary of Vietnam’s steady expansion of its industrial base given its position as the lowest cost steel producer with the largest market share. 


HPG has hit 101% of their full year bottom line target in the first 11 months FY2018 already – HPG announced that 11 months net sales are estimated at VND 50 trillion and NPAT at VND 8.1 trillion, respectively. HPG set targets of  VND 55 trillion (+ 19% y/y) for net sales, and VND 8.05 trillion for NPAT, flat y/y. We don’t have the 11-month numbers for last year for comparison yet. But these results suggests that sales have continued to grow steadily throughout the year given steady demand and new capacity.


11-month-sales volume grew steadily thanks to capacity added – In the first 11 months this year, HPG sold 2,164,146 tonnes of construction steel, (+10.7% y/y) and 601,600 tonnes of steel pipe, (+14.4% y/y). October and November sales volumes accelerated thanks to the addition of new rolling capacity in Dung Quat at the beginning of last quarter. The company targets the sale of about 200,000 tonnes, (-11.3% y/y) of construction steel and 60,000 tonnes, (+8.5% y/y) of steel pipe in December.  Which would lead to full year sales volume of; 


  • Construction steel of 2,364,146 tonnes, (+8.5% y/y)
  • Steel pipe of 661,600 tonnes, (+12% y/y).


This would easily beat their initial target submitted to the AGM in Q1 of 2.3 million tonnes of construction steel and 600,000 tonnes of steel pipe.


ASP broadly tracks input prices lower – HPG’s construction steel ASP has dropped to VND 12.8 million/ton recently, or down 5.9% from the peak of VND 13.5 million/ton seen in June FY2018, but still up 5.8% y/y. This is due to the recent sharp decline in input material price due given weakness in Chinese steel prices since August this year. HPG has also been proactive in cutting selling prices to gain more market share. In early November for example, they decreased their selling price for construction by VND 300,000/ton, or a 2.3% decline versus the average VND 200,000/ton cut by other competitors. This is driven by their determination to get the market to absorb the additional capacity of 2 million tonnes from Dung Quat which will be launched early next year.


Iron ore and coking coal prices drop sharply following the previous drop in steel prices – The 17% decrease in iron ore and coking coal seen in the past 2 weeks is a case of raw materials finally catching up the weakness in steel prices driven by China. Chinese steel rebar prices have dropped by about 21% since the peak in August this year and for a fairly long time, iron ore and coking coal prices continued to go up.




  • Iron ore price increased by 12.4% since August to their recent peak at US$ 77.8/ton in early November before correcting to US$ 65/ton currently.
  • Coking coal price increased by 10% since August hitting peak at US$ 210-215/ton or so in early November before falling to some US$ 190/ton, (-11.6% from the peak).


This was mainly due to the concerns over weak demand for steel products in China on a slowing economy and a bout of cold weather.


Q4’s prospects look mixed as margins likely to be squeezed – as ASP has been declining at a faster clip in Q4 than before. Accordingly, HSC estimates Q4 ASP has decreased by 2.5% QTD although still up 9.6% y/y to VND 12.96 million/ton. Then, we estimate FY2018 average prices for iron ore and coking coal of some US$ 69/ton, (+25.5% y/y) and US$ 190/ton, (+5% y/y) or so, respectively. And given the obvious lag between the purchase of raw materials and sale of finished product this means that Q4 output will carry a relatively high input cost and lower output prices. HSC thus forecasts Q4’s net sales and NPAT will come to VND 15,332 billion, (+20.3% y/y) and VND 2,019 billion, (-15.9% y/y) respectively.


For FY2018, HSC is trimming our full-year forecast now calling for a 10.5% y/y increase in NPAT given the sharper decline in ASP – HSC now forecasts the company will report net sales of VND 56,781 billion, (+23% y/y) and an NPAT of VND 8,852 billion, (+10.5% y/y). This is 3.7% lower than our initial forecasts of VND 9,191 billion, (+14.7% y/y) in NPAT. As mentioned HPG now focusses on market share gains to help absorb new capacity at a time when ASP is anyway falling in the region. As a result, near term margins will be squeezed. Our key assumption are as set out below:


  • Sales from the steel segment will come to VND 47,405 billion (+19.3% y/y) thanks to 8.5% y/y growth in sales volumes for construction steel and 12% y/y growth in sales volumes of steel pipe.
  • We estimate ASP for construction steel will increase to VND13.2 million/ton (+16.5% y/y).
  • We expect animal feed sales to expand to VND 4,198 billion (+45% y/y).
  • We further forecast that real estate sales will come to about VND 1,856 billion (+144.1% y/y).
  • For other minor segments, we assume sales growth rates of 10-12%.
  • Gross profit will come to VND11.9 trillion (+12% y/y) implying a lower GPM of 21% versus 23% in FY2017, given their strategy to gain more market share in both domestic and export markets.
  • We expect the net financial loss to expand to VND (438.5) billion from VND(370) billion given higher interest expenses, while SG&A expenses will be VND 1,085 billion (+8% y/y) as we project SG&A as a percentage of net sales will be 1.9%.


Finally, we forecast a pre-tax profit and NPAT for FY2018 of VND 10,354 billion (+11.5% y/y) and VND 8,852 billion (+10.5% y/y). FY2018 EPS will thus come to VND 3,956 translating into a forward P/E of 8.7 xs.


For FY2019, HSC forecasts net profit growth of 10.3% y/y thanks in part to some contribution from the Dung Quat factory – HSC forecasts the company will deliver net sales of VND 70,067 billion (+23.4% y/y) and NPAT of VND 9,765 billion (+10.3% y/y). The key assumptions are as set out below:


  • Sales from the steel segment will come to VND 59,806 billion (+26.2% y/y) thanks to: (1) 42.1% y/y growth in the sales volume of construction steel to 3.36 million tonnes, (2) 10% y/y growth in the sales volume of steel pipe to 788,000 tonnes and (3) a 100,000 tonnes of steel sheet product.
  • We estimate the ASP for construction steel will decrease by 9% to VND11.98 million/ton.
  • We expect animal feed sales to expand to VND 5,038 billion (+25% y/y).
  • We further forecast that real estate sales will decrease by 10% to about VND 1,668 billion as the bulk of any contribution from the Mandarin Garden 2 project will have already been booked in FY2018. The company will also partially book sales from a new real estate project called the 70 Nguyen Duc Canh project.
  • While for other minor segments, we assume sales growth rates of around 7%.
  • Gross profit will come to VND13.5 trillion (+13.3% y/y) implying a lower GPM of 19.3% versus 21% in FY2018. The company will start to book the additional depreciation expense of Dung Quat since 2-H FY2019 while steel sheet will be fully booked its depreciation cost for the first year.
  • We expect the net financial loss to expand to VND (988.3) billion from VND (438.5) billion given 80.6% y/y higher in interest expenses. We further assume that HPG will book their non-capitalized interest expense in 2-H FY2019.
  • We further forecast SG&A expenses will be VND 1,436 billion (+32.4% y/y) as we project SG&A as a percentage of net sales will be 2.1%.


All in all, we finally forecast a pre-tax profit and NPAT for FY2019 of VND 11,097 billion (+7.2% y/y) and VND 9,765 billion (+10.3% y/y). FY2019 EPS will come to VND 4,363, giving us a forward P/E of 7.9 xs.


Dung Quat project still on track – The Phase 1 rolling mill at the Dung Quat project has been in testing since mid-August and started to generate sales in mid-October this year.


–     This new rolling mill adds 600,000 tonnes of construction steel, (+25%) to maintain growth in Q4 this year and into next year.

–     In late November, HPG announced an increase in the chartered capital of the Dung Quat Steel Complex to VND 15 trillion from VND 10 trillion. Accordingly, HPG will then hold a 98.67% stake in this Steel Complex compared to 95% before. The increase in chartered capital will be used to; (1) invest into a factory to produce semi-input raw materials, (2) expanding port capacity to accept larger ships, (3) upgrade machinery and (4) higher investment to address in environment issue. This additional capital to be financed by a US$ bank loan at an interest rate of 4.8% per annum.

–     Total capital disbursement as of September-end, FY2018 was about VND 24 trillion out of a total plan of VND 45 trillion. Of this, internal resources provided about VND 13 trillion, with the balance of VND 11 trillion coming from loans. The company will continue to disburse an additional VND 3 trillion in Q4 this year.

–     Initially the company will focus on making finished construction steel via importing billet from outside for the new additional capacity in Dung Quat prior to launching full capacity of P1 in early Q2 FY2019.

–     All other planned facilities will come on stream in the 2-H next year.

–     This new Dung Quat Steel Complex will enjoy a favorable tax treatment, with 0% in the first 4 years starting from FY2019, a 50% discount to the full rate of 10% for the next 9 years, equivalent to an effective CIT of only 5% and the last 2 years of this favorable tax treatment attracting a rate of 10%.


Hai Duong plant capacity also increased – After upgrading the BF No.2 plant, capacity of the 3 BFs at the Hai Duong factory have now increased by 210,000 TPA to 1,910,000 TPA (+12.4% y/y).


Steel sheet factory project to be fully launched in December this year after a 5-month delay – The full value chain for steel sheet was supposed to be ready in July this year. However, given the tougher environment in the steel sheet market and unfavorable weather, the company delayed the launch by 5 months. This factory has a designed capacity of 400,000 TPA at a cost of VND 2,700 billion.


–     The company completed their color coated assembly line late last year. HPG bought galvanized steel sheet from outside and used their own color coated line to make the final products.

–     Currently, the company is finishing its galvanized facility and has started testing recently. They now expect to launch the first in-house products to commercial channels in December this year.

–     HSC expects that steel sheet sales volume could come to 100,000 tonnes or equivalent to 25% of designed capacity in FY2019. At this stage, HPG is looking to introduce their products in the Northern and Central markets and then expand their presence to the South by the end of this year.


Post-tensioned steel factory came on stream in September – This plant is located right next to HPG’s Dung Quat Steel Complex. HPG is a pioneer in producing high quality post-tensioned steel products, which is a substitute for imported products. The design capacity of the first phase is about 160,000 TPA, at a a cost of VND1 trillion, including 3 high-end products such as PC bar, PC Strand and PC wire. HPG will use high-quality billets from P1 of the Dung Quat factory as input materials.


In May this year, HPG and the Vietnam Pipe Industry Association signed a long-term strategic cooperation contract. Accordingly, HPG will provide up to 100,000 tonnes of post-tensioned steel worth VND 2 trillion a year to members of this association.


FY2019 targets look impressive calling for 48-69.1% increase in sales volumes of construction steel – At the meeting, the company announced that they target the FY2019 volume sale of;


  • 3.5 – 4 million tonnes of construction steel, (+48% – 69.1% y/y).
  • 700,000 tonnes (+5.8% y/y) of steel pipe.


Of this, Dung Quat’s contribution will come to 1.2 – 1.7 million tonnes in FY2019. Of which, at least 400,000 tonnes of construction steel, (+61.9% y/y) will be exported and the key export markets include Cambodia, Laos, Philippines, Indonesia and even North American countries.


FY2018 dividend policy set at a minimum of 30% of par value in stock – At the meeting, the company announced that they will issue a stock dividend at a ratio of 30%. They have no plan for cash dividend given the large capex this year. This will need to be submitted to the upcoming AGM for approval.


Investment conclusion – Reiterate long-term BUY. Our FY2019 fair value price for HPG is VND 43,630 and values the company at a forward FY2019 P/E of 10xs. This is revised down from the previous fair value price of VND 54,165 given our new lower assumption of a 10.5% y/y increase in FY2018 NPAT plus a reduction in fair value PE from 11 to 10. Regardless of the rather flat outlook for bottom line growth next year we continue to see HPG as the main beneficiary of the (1) expansion in Vietnam’s industrial space which is leading to demand for new types of steel; (2) HPG’s strategy of import substitution especially in flat steel products and (3) ongoing consolidation of the industry where they remain the lowest cost producer.


HPG has been able to maintain their advantage by a continuous capacity expansion, enabling them to continue to modernize their facilities and maintain economies of scale. strategy of continuous expansion. Which has yielded savings through economies of scale and highly integrated system value chain. Then import substitutes such as high quality long steel and post-tensioned steel will be the key drivers for HPG sales going forward. Similarly, their HRC facility will reduce the need for imported HRC. Then the tax incentives offered for production from the Dung Quat Economic Zone will support bottom line growth and offset some of the margin squeeze.


  • Resource names were mostly lower, led by PVD and PXS.



  • Real estate and construction stocks were mixed with gains for SJS and KBC while there were losses for CTI and KDH.



  • Agriproducts and aquaculture stocks were mixed to lower, led by SBT and DPM.



  • Pharmaceutical stocks were mixed with a gain for DHG while IMP lost ground.



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



Vietnamese stocks fall back today – The markets today corrected mildly following the regional trend. VNM was the biggest loser in terms of index points as they announced a rather small interim cash dividend of VND 1,000 per share. Fellow consumer name SAB also fell. VHM also lost out after nice gains yesterday as did fellow developers NVL & KDH. Resource names GAS and PVD dropped with oil prices. While banks such as EIB; HDB and STB lost out. Agriproducts giant SBT tumbled too.


On the other hand, insurance giant BVH gained the most in index points. Banks such as BID; CTG; VCB; TCB; MBB; TPB and VPB all gained some ground. Industrial park play KBC also jumped perhaps on speculation that Foxconn may come to Vietnam.


The four futures contracts made small gains ranging from 1 to 2.7 index points while the VN30 cash index slipped. This leaves the four contracts still trading at a 9.7 to 11.8 discount to the cash index. No clear signal from the futures market again today with the discount still quite large suggesting some mild caution about the near-term outlook.


The VN index clawed back its early losses as regional shares were uplifted by an encouraging statement from the Chinese on trade. However clearly the 100-day MA is going to be a bit more of a struggle than we had expected yesterday. We are sitting just below it at the moment, however we would need to gain at least another 5-6 points to confirm any breakout.


The market mood has clearly lifted this week as seen in the 43% increase in average daily volumes this week compared to the average for November. GDP looks like it will exceed 7% this year; PMI is roaring away and the trail of companies such as Foxconn looking to possibly relocate factories to Vietnam is getting longer. The FDI story is important not only for GDP’ exports and jobs but can also help to keep the currency stable and boost reserves.


However the external mood is still volatile with investors worrying about the yield curve inversion in the U.S. and still unable to make up their minds about the likely success of the U.S. – China trade talks. The dollar gained while oil fell today which is never good for Vietnamese shares. In the end, however, the correction here today was very mild indeed compared to some markets. And so, we say that the bias is still firmly to the upside.


Asian shares & major currencies – Asian shares declined today after Wall Street’s declines on Tuesday. As for currencies, the US$ (97.009) gained ground today when measured against its trade weighted ICE index. Then the Euro (1.1339) slipped; Pound Sterling (1.2737) edged higher after recent volatility; the Japanese Yen (112.97) slipped also while the Chinese Yuan fell back to (6.8638).


Oil prices fall back – Crude oil traded lower today with the active month WTI futures crude oil contract trading at US$ 52.71 in late Asian trade. Some profit taking after recent gains with signs U.S. stocks continue to rise.


The American Petroleum Institute (API) overnight estimated that U.S. crude inventories rose by 5.4 million barrels in the week to November 30th, to 448 million barrels. If confirmed by the EIA number this will offer further evidence of chronic oversupply situation caused by the explosion in shale oil production this year despite some pipeline bottleneck issues.


Of course, at the moment this can be read in two ways. On the one hand if shows that the demand/supply imbalance is deeply embedded which is of course negative for prices. On the other hand, it ratchets up the pressure on OPEC plus to cut output significantly in order to stabilise prices. 


In global macro and general news – Equity markets reacted nervously overnight and today to the (1) continuing confusion over what was agreed at the G20 dinner and (2) inversion of part of the U.S. Treasury yield curve which can sometimes predict a recession. President Trump didn’t help much with a tweet calling himself “Tariff Man” and threatening that tariffs against China would be ramped up if negotiations failed to yield a “real deal”. Although he did hint at an extension to the tight 90-day deadline. The real issue for markets has been the lack of official commentary from the Chinese side.  Which appears to be due to the fact that President Xi is on a state visit to Portugal. Hence, until this morning we had only heard from the American side and their communication and more importantly coordination skills have clearly let them down. 


However, today, the Chinese Ministry of Commerce did issue a statement confirming the 90-day period for negotiations and pledging to move ahead to implement what was agreed at what they called a “very successful” meeting. This is the kind of reassuring comment that the market has probably been looking for since Saturday.


The Philippine Statistics Authority reported today that its consumer price index rose 6.0% y/y in November slowing from a pace of 6.7% seen in October. This is the lowest annualised growth seen since June and was also below consensus estimates calling for 6.2% y/y growth. Slowing prices rises for food; fuel and utilities were the reasons why. Seasonally adjusted inflation dropped by 0.3% m/m in November for the first decline since February 2016. Many observers now expect the central bank to keep rates unchanged at its next meeting on December 13th.


Inflationary pressures have come off the boil in several economies recently partly given higher interest rates and partly on falling oil prices. And partly as the global economy appears to be slowing down. Indeed, it’s fair to say that global inflationary expectations have been declining for several months which is of course always good news for equity markets.


Meanwhile the gap between the U.S. Treasury 2 year and 10-year notes narrowed to 11 bps overnight as the gap between the 3 and 5-year notes remained around zero. The partial inversion of the U.S. was a major topic of conversation and perhaps the main reason why U.S. equity markets tanked yesterday. With bond markets rallying in a clear sign of risk aversion. Indeed, the benchmark yield has fallen by 30 bps over the last few weeks. The message here is a sea change in the outlook of U.S. investors; from worrying about higher interest rates to worrying about a slowing economy. And of course, we should not forget the steady tightening effects from the shrinking of the Fed’s balance sheet.



HCMC – The VN index fell today as turnover narrowed to VND 4,683.6 billion or US$ 201.27 million. The index lost 0.18% and closed at 957.14. 142 stocks up while 144 stocks down. And 9 stocks went to the ceiling while 4 stocks dropped to the floor. Foreigners accounted for 11.86% of the buying value and 12.24% of the selling value.


Foreign buying fell in actual terms and also in percentage terms. While foreign selling also fell further in actual terms but rose in percentage terms. Foreigners turned net sellers to the tune of VND 17.49 billion worth of shares in HCMC. And we saw twenty nine transactions in the put through market today.


Foreigners were active buyers of HPG; VNM; VIC; VHM and MSN. They also actively sold HPG; VIC; VHM; VNM and MSN. The put through market was more active today with four enormous; one super jumbo; five jumbo; two large and some medium sized & smaller deals accounting for 28.10% of total turnover.


We saw 22,330,000 shares of TCB; 10,200,000 shares of HNG; 1,000,000 shares of VJC; 6,367,959 shares of SBT and 500,000 shares of VIC going through. Foreigners were more active in the put through session in the VIC & VHM deals and then five other smaller deals today in the market.


E1VFVN30 was down 1.48% today closing at VND 15,270.


Hanoi –  The Hanoi market went up today while turnover came to VND 697.85 billion or US$ 29.99 million. The HN index was up 0.33% to close at 107.74. 93 stocks up while 66 stocks down. And 21 stocks went to the ceiling while 12 stocks dropped to the floor. Foreigners accounted for 1.31% of the buying value and 6.59% of the selling value.


Foreigners were net sellers to the tune of VND 36.83 billion worth of shares. And we saw fifteen medium and small sized deals today during more active put through session in Hanoi accounting for 8.39% of total turnover.


We saw 1,933,230 shares of SHN; 550,000 shares of TNG and 1,020,050 shares of SHB along with some smaller transactions in the put through market today.



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