HSC Daily Market Watch with an earning’s note on AAA (Downgrade from Hold to Underperform)

Market commentary – The VN index edged higher with turnover still below recent averages. Market breadth narrowed while we also see that 17 stocks went to the ceiling and 20 stocks fell to the floor. Foreigners were less active net buyers to a small degree. The put through market was less active with large deals in MSN & SBT and then a smaller deal in KDH seen going through.


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


  • Bank shares had a good recovery today, led by VCB and ACB.


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


  • Consumer and retail names were mixed to higher, led by KDF and SAB.


  • Tech stocks were all higher, led by YEG.


  • Manufacturing names were mostly lower, except some gains for DQC and TMT. 

Earnings note – AAA first 9M disappoint as low margin trading business surges. Forward outlook moderate. Downgrade to Underperform. An Phat Plastic (AAA – Downgrade from HOLD to Underperform) recently released rather disappointing results for the first 9 months FY2018 showing an 18.5% y/y decrease in the bottom line. AAA posted net sales of VND 5,803 billion, (+119.5% y/y) while NPATMI fell to VND 128.8 billion, (-18.5% y/y). The top line jump was mainly supported by a 27.7% y/y increase in sales volume of in-house products, a 3.75% y/y increase in ASP and a bigger contribution from the trading segment. Meanwhile, margins were squeezed, SG&A expense jumped while lower profit from associates combined to pull the bottom line down by 18.5% y/y. This result enables the company to fulfill 96.7% of the top line but only 48.1% of the bottom line target.


Investment conclusion. Downgrade to Underperform. We have a fair value price of VND 15,226 which values the company at a forward FY2018 P/E of 14.1 times. For FY2018 as a whole, HSC now forecasts NPATMI will drop 20.6% y/y and then rises by 4.4% y/y next year. A surge in low margin trading activities from a subsidiary resulted in far lower margins even as sales surged. While in house sales are still growing but at a lower rate than before. Going forward they want to move into mobile phone parts and auto parts, however details of the exact ownership structure are scarce. Meanwhile the issuance of a corporate bond with attached warrants will lead to dilution over the next few years. There is a decent growth story here but there are currently a lot of unknowns and we would like to see more details from management about what their exact plans are.


Sales more than doubled y/y to VND 5,803 billion given the higher contribution from trading segment:


–     Trading segment sales jumped to VND 3,054 billion, a 5.1-fold increase from VND 605 billion in the first 9 months FY2017. This mainly came from a sales surge at a subsidiary called An Thanh which is focused on plastic resin trading activities. AAA holds 51% stake in HII which in turn holds a 100% stake in An Thanh which is why those sales are consolidated. The trading segment now accounts for 52.6% of net sales up from just 22.8% in 9 months last year.


–     In-house products expanded to VND 2,699 billion, (+32.5% y/y). Of which, sales volume increased by 27.7% y/y. This was mainly thanks to a higher contribution from the new factories No.6 and No.7. In addition, the sales of drawstring bags to the U.S. has increased in Q3 this year as imported tariffs for China exports to the U.S. increased to 10% from 3.5% since September 25th FY2018. Then ASP increased by 3.75% y/y, mainly thanks to an increase in the selling price of biodegradable bags. In-house products now account for 46.5% of net sales down from 76.9% in the same period last year.


–     Other service sales then posted at VND 56.2 billion, (+530.5% y/y) but accounted a very small portion to sales.


Gross profit rose 34.4% y/y although GPM fell on product mix changes – Gross profit rose to VND 475.5 billion, (+34.4% y/y) even as GPM fell sharply to 8.2% versus 13.4% in the first 9 months FY2017. This was driven by (1) the dramatic changes in the product mix which saw the contribution from the low margin trading segment surge and (2) a sharp drop in the GPM of both main segments also.


–     GPM of the trading segment collapsed to 2.9% from 6% in the first 9 months last year.


–     GPM of in-house products fell to 13.8% from 17.8% in the same period last year on the hike of about 10-15% in input material price while ASP increased by 3.75% y/y. In the in-house products segment, the company tried to maximize utilization rates of their existing facilities by setting lower selling prices to boost demand at the expense of margins.


SG&A expenses surged by 91.6% y/y to VND 190.8 billion – from VND 99.6 billion in 9 months FY2017 and accounting for 3.3% of net sales from 3.8% in the same period last year. Of which, selling expense came to VND 104.3 billion, (+138% y/y) and administration expense came to VND 86.5 billion, (+55.3% y/y). According to the company, they are expanding their domestic presence in modern trade channels. The company recently signed a contract with Vinmart to distribute their biodegradable bags.


Net financial losses expanded to VND (100.8) billion – in comparison with a loss of VND (42.2) billion in the first 9 months last year. This was mainly due to 110.6% surge in interest expense and a 152.7% jump in forex losses. Financial expenses came to VND 141.4 billion, (+118.5% y/y), of which forex loss came to VND 32.6 billion, (152.7% y/y) and interest expenses came to VND 108.8 billion, (+110.6% y/y). Bank loans rose significantly to VND 3,091 billion, (+50.3% y/y) as working capital demand increased. On the other hand, financial income rose by 80.5% y/y to VND 40.6 billion, of which, interest received jumped to VND 23.3 billion from VND 5 billion in 9 months FY2017.


Finally, pre-tax profit decreased to VND 189.8 billion, (-20% y/y) also impacted by the dropping out of VND 24.3 billion from associate profit which was booked last year. In addition, a sharp increase in SG&A coupled with the GPM squeeze fully offset top line growth. NPATMI came to VND 128.8 billion, (-18.5% y/y).


Regarding their balance sheet, we note some concerns relating to;


–     We saw the dramatic increase in short-term debt to cover rising working capital demand partly due to rising inventories and higher account receivable. Bank loans came to VND 3,091 billion, (+30% YTD), of which short-term bank loans jumped to VND 2,379.5 billion, (+67.8% YTD) and long-term bank loans decreased by 25.9% YTD to VND 711.6 billion.


–     Inventories tripled YTD to VND 1,632 billion, (+204.1% YTD) from only VND 536.7 billion at the beginning of this year. Of which, we note an amount of VND 824.8 billion from project in progress. According to the company, this is due to An Phat Complex High Tech IZ which is still under construction.


–     Meanwhile, account receivable also jumped to VND 713.9 billion, (+71% YTD) mainly came from trading activities of An Thanh Biscol.


3-year corporate bond with warrant issued – The company has issued a corporate bond totaling VND 400 billion on November 8th FY2018 to a trio of Korean investors including KEB Hana, Shinhan Investment and Shinhan Securities. This is a 3-year corporate bond with an attached warrant with a coupon of 6.7% per annum payable semi-annually. This comes attached with 4,000 warrants (1 warrant carries rights to 10,000 shares) at a convertible price of VND 14,000 – 14,500/share. The conversion price will be adjusted for other upcoming dilutory events (such as share splits and right issuance for existing shareholder at a price which is lower than the market price), if any. This warrant will be locked up for 1 year from the issuance date and after that the new shares which will be converted from warrants, equivalent to 40 million shares, will have no lock-up period. The exercise of a put-option in the bond will not terminate the right of warrants. The warrant holders will convert into shares over 4 periods and the conversion progress will be as below:


–     12 months after issuance date (November 2019)

–     18 months after issuance date (May 2020)

–     24 months after issuance date (November 2020)

–     30 months after issuance date (May 2021)


With the warrants likely to be converted in the next 30 months, we can expect a further dilution effect. Assuming all warrants will be converted into common shares, the outstanding shares of AAA will increase to 211.2 million shares, for a 23.4% increase from the current 171.2 million shares. With a bigger conversion coming in the next 2 years and bottom line growth normalizing, this should be viewed as a negative catalyst for the stock over the medium term.


For FY2018 as a whole, HSC now forecasts NPATMI will drop 20.6% y/y – We now forecast net sales of VND 7,755 billion, (+90.6% y/y) while NPATMI will come to VND 177.4 billion, (-20.6% y/y). We assume that:


–     In-house sales will come to VND 4 trillion, (+40.1% y/y) while trading segment sales are expected to come at VND 3.7 trillion, (+250% y/y).

–     GPM will come to 8.5% from 13.5% on the worsening product mix with the much higher contribution from trading activities. Gross profit then comes to VND 657.2 billion, (+19.4% y/y).

–     Net financial losses will expand to VND (130.4) billion from VND (39.3) billion last year given a 93.5% jump in financial expense coupled with a 4% decline in financial income.

–     SG&A expense comes to VND 267.8 billion, (+44.7% y/y) and accounting for 3.5% of net sales from 4.5% last year.

–     Pre-tax profit and NPAT then comes to VND 267.3 billion, (-18.5% y/y) and VND 221.8 billion, (-15.8% y/y) respectively. HSC further forecasts NPATMI will then come to VND 177.5 billion, (-20.5% y/y).


FY2018 diluted EPS then will come to VND 1,078 and translating into a FY2018 forward P/E of 14.4 times.


For FY2019, HSC forecasts sales will increase by 21.2% y/y and NPATMI by 4.4% y/y – Accordingly, HSC forecasts the company will deliver net sales of VND 9,400 billion, (+21.2% y/y) while pre-tax profit are projected to come to VND 293.8 billion, (+9.9% y/y). The key assumptions are as below;


–     In-house sales will come to VND 4.6 trillion, (+13.2% y/y) while trading segment sales are expected to come at VND 4.8 trillion, (+30% y/y).

–     GPM will improve slightly to 8.63% from 8.48% in FY2018 as HSC expects the higher utilization rate of factory No.6 will increase to 75% or so from 65% in FY2018. Gross profit then could come to VND 810.9 billion, (+23.4% y/y).

–     Net financial losses will expand to VND (139.3) billion from VND (130.4) billion in FY2018. Of which, HSC forecasts financial income will increase by 5% y/y to VND 56.2 billion while financial expense then will increase by 6.3% y/y to VND 195.5 billion.

–     SG&A expense could come to VND 385.7 billion, (+44.1% y/y) and accounting for 4.1% in comparison with 3.5% in FY2018 as the company now is expanding their domestic sales which normally generates higher selling expense.

–     Pre-tax profit and NPAT then comes to VND 293.4 billion, (+9.8% y/y) and VND 243.5 billion, (+9.8% y/y) respectively. HSC further forecasts NPATMI will then come to VND 185.3 billion, (+4.4% y/y).


FY2019 fully diluted EPS then will come to VND 806 translating into a FY2019 forward P/E of 19.2 times.


Capacity expansion via factory No.8 and No.9 has been delayed for a while – as below;


AAA paid VND 756.5 billion to buy the Viet Hoa – Kenmark IZ in a BIDV disposal auction this year and then renamed it An Phat Complex Hi-Tech IZ. At this stage, AAA holds 96.5% stake in An Phat Complex Hi-Tech IZ. After taking over this IZ, An Phat Complex Hi-Tech IZ will expand their business into the IP segment as this IZ covers a total of 46 ha. Capex for the IZ is VND 2,000 billion including the land and infrastructure costs. Besides that, An Phat Complex will focus on investing in the production of high-tech, eco-friendly plastic products such as biodegradable bags and high-tech PVC construction materials via their associates and subsidiaries as flow:


–     An Cuong – will focus on producing high-tech building materials (plastic wall panels used in construction) with a total capacity up to 70,000 m2/month.


–     An Vinh Packaging – will focus on producing premium industrial packaging such as PP bags, Jumbo bags, Sling bags. The capacity will come to about 2,000 TPM.


–     Dai An Plastic – will make mobile phone spare parts, home appliances and automotive components via injection molding plastic technologies. In the first phase, Dai An aims to become a primary vendor for Samsung Vietnam


Regarding Factory No.8, an EGM which was held in October this year which approved moving Factory No.8’s location to the An Phat Complex Hi-Tech IZ from the current location in the An Dong IP. Factory No.8 will specialize in producing laminated films with a proposed capex of VND 360 billion. However, the company has just finished their feasibility study and detailed information including factory capacity hasn’t disclosed yet.


These projects will likely receive tax breaks including: 0% in the first 4 years, 50% of the normal CIT of 10% in the subsequent 9 years and the last 2 years at a CIT of 10%.


Given the lack of information regarding the structure and detailed production plan, we haven’t incorporated any earnings from factory No.8 and No.9 into our earnings model at this stage.


An Phat Holdings increased their stake in AAA to 43.99% equivalent to 75,317,140 shares from 65,317,140 shares – In late October this year, An Phat Holdings bought 10 million shares of AAA to lift their stake in AAA to 43.99% from 38.15% previously.


Investment conclusion – Downgrade from Hold to Underperform. We now have a fair value price of VND 15,226 which values the company at a forward FY2018 P/E of 14.1 times. Currently, at the market value, forward valuation of 19.2 times in FY2019 P/E looks rather expensive. The potential conversion related dilution will be the biggest medium-term concern. Top line growth prospects still look decent however we note that in-house products have been grew at a decelerated rate recently. While there has been some delay in the expansion of factory No.8 and No.9. Meanwhile, the decision to greatly expand trading activity which carry negligible margins is hard to understand.


Looking forward the steady capacity increase and move into new products could form a form decent longer-term story here. However, the details about how they plan to execute this are very scarce. AAA has an aggressive IR and has actively promoted their stock in recent years. We like the story and their technology driven approach to the plastic packaging industry. However, our biggest concern is the lack of detail about the rather complicated structure of An Phat Holdings and their subsidiaries relating to An Phat Complex Hi-Tech IZ, which we consider as the key driver for the company in the future.


  • Resource names were all up, led by PVD and PVS.



  • Real estate and construction stocks were broadly higher, led by KDH and NLG.      


  • Agriproducts and aquaculture stocks were mixed to higher, led by HNG and GTN.     


  • Pharmaceutical stocks mostly had a sideways movement.     


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


Vietnamese stocks bounce today – The markets recovered today as regional markets had a better day. VCB led the gainers in terms of index points while other banks such as CTG; TCB; MBB; BID and STB also moved higher. Consumer names SAB & VNM gained ground. While resource names GAS; PLX and PVD bounced with oil prices. Real estate play KDH surged while VIC; NVL & VRE advanced also as did contractor CTD.


On the other hand, HPG & POM slipped as prospects for regional steel companies darkened on margin concerns. Consumer names MSN and BHN both slipped. Blue chips had a better day while foreigners were net buyers by a small margin.


The four futures contracts rose today by between 3 and 6 index points although they still lagged the VN30 cash index. Even so they still closed at a 11.1-12.4 index point discount to the cash index suggesting that the futures market is still unconvinced by the current trading rally. And this if we see a breakout tomorrow in the cash market you can expect a bigger catch up rally in futures also. 


The afternoon rally erased yesterday’s losses and brought us back up to recent technical rally highs. Volumes improved also as we await the G20 outcome this weekend. The VN index hit clear resistance at 930 yesterday which changed the tone of the market and moved the bias slightly to the downside. This after a technical rally led by stocks such as VNM and VHM. However, we found support in the afternoon at lower levels enabling the index to head back towards that resistance level. And clearly, we will now see another retest of the 930-level tomorrow with a better than even chance of a breakout.


We keep our view that the current technical rally still has some upside potential as major resistance is still comfortably above where we are at the moment. However, until volumes improve the market will remain fragile. And that in turn obviously depends on external developments.


Asian shares & major currencies – Asian shares were mostly higher today following Wall Street’s gains on Tuesday. As for currencies, the US$ (97.399) rose again today when measured against its trade weighted ICE index. Then the Euro (1.1277) slipped; Pound Sterling (1.2756) edged higher; the Japanese Yen (113.77) was little changed while the Chinese Yuan still traded narrowly at (6.9535).


Oil prices move a little higher – Crude oil traded a little higher today with the active month WTI futures crude oil contract trading at US$ 51.84 in late Asian trade. Traders hoping for better news in the next few days as bad news exhaustion sets in.


The American Petroleum Institute (API) estimated that U.S crude oil inventories rose 3.453 million barrels for the week ending November 23rd. Which would be higher than consensus and would mark the tenth straight week of builds in inventories if confirmed. The actual EIA number will be released later today. If we another build it will add to concerns about oversupply. With U.S refineries coming back on line after seasonal maintenance the expectation is that inventories should stabilise and perhaps even drop a little.


Hence any trend to the contrary would only confirm that the market is still unable to absorb all the extra supply globally. And put pressure on prices short term whilst also adding to the urgency of the OPEC plus countries finding a fix as soon as possible. If oil prices fall below US$50 a barrel, then we might see growing stress for some smaller to mid-sized oil companies. However, some traders are starting to bet that we may see some progress in the China – US trade dispute and/or that OPEC plus will opt for supply cuts soon.


In global macro and general news – The pre G20 meeting maneuvering continued overnight with Larry Kudlow, President Trump’s chief economic advisor telling the press that the President was hopeful of a breakthrough whilst ready to impose more tariffs if things don’t work out. Both Presidents are scheduled to have dinner on Saturday. Very hard to read the tea leaves although we have to suppose that given that (1) President Trump called President xi several weeks to restart talks and (2) since then there has been a lot of communication between the two sides that the chances of some form of breakthrough is a lot higher than it has been for months. At best then we might expect; a temporary freeze on new tariffs and the beginning of intense talks. And at worst, an escalation of the trade dispute into a full-scale trade war. 


Federal Reserve Vice Chairman Richard Clarida spoke at a conference in New York overnight where he appeared to use more dovish language than he has recently in reference to interest rate policy. The hint here is that he is suggesting that U.S. interest rates are a lot closer to being normalised given almost two years of rate hikes. The expression used was “gradual policy normalization” which is viewed as more neutral than his previous words calling for “some further gradual adjustment” on October 25th.


The Chairman of the Fed Board of Governors, Jerome Powell, will give a speech later today and naturally all ears will be tuned to see if he also echoes what appears to be a slight softening in the Fed’s stance. This is an old argument really about (1) what is a neutral rate of interest (consensus suggests around 3%) and (2) whether or not the Fed should continue to increase interest rates beyond that neutral rate in order to dampen down growth. Until about a month ago, most economists suggested that there were at least another four interest rates hikes to go in the current Fed cycle. However, the mood has changed since then.


Now with clear evidence that major global economies are slowing; oil prices collapsing and no signs that inflation is accelerating, those voices in favour of a so-called pause in U.S. rate hikes sometime next year have grown louder. Implying that rates should not move significantly above the so called neutral rate unless the U.S economy continues to grow above the long term average rate. Which is why every word uttered by the Fed is being carefully parsed at the moment for clues as to how many more rate hikes are left before they are satisfied with their work.




HCMC – The VN index rose today as turnover narrowed to VND 3,109.16 billion or US$ 133.61 million. The index gained 0.77% and closed at 930.20. 132 stocks up while 147 stocks down. And 4 stocks went to the ceiling while 9 stocks dropped to the floor. Foreigners accounted for 17.16% of the buying value and 15.27% of the selling value.


Foreign buying fell in actual terms and also in percentage terms. While foreign selling also fell in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 58.65 billion worth of shares in HCMC. And we saw twenty eight transactions in the put through market today.


Foreigners were active buyers of VNM; KDH; VIC; VHM and HPG. They also actively sold KDH; HPG; GAS; VNM and VHM. The put through market was more active today with three enormous; one super jumbo; four jumbo; four large and some medium sized & smaller deals accounting for 32.65% of total turnover.


We saw 5,177,730 shares of MSN; 6,900,000 shares of SBT; 5,000,000 shares of KDH; 4,300,000 shares of EIB and 1,214,000 shares of GEX going through. Foreigners were more active in the put through session in the KDH & VNM deals and then seven other smaller deals today in the market.


E1VFVN30 was up 0.20% today closing at VND 14,780.


Hanoi – The Hanoi market went up today while turnover came to VND 694.41 billion or US$ 29.84 million. The HN index was up 0.88% to close at 104.10. 82 stocks up while 70 stocks down. And 13 stocks went to the ceiling while 11 stocks dropped to the floor. Foreigners accounted for 0.34% of the buying value and 7.98% of the selling value.


Foreigners were net sellers to the tune of VND 53.08 billion worth of shares. And we saw seventeen medium and small sized deals today during more active put through session in Hanoi accounting for 44.43% of total turnover.


We saw 18,309,394 shares of MSC; 1,565,015 shares of SHB and 598,000 shares of HUT along with some smaller transactions in the put through market today.




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