HSC Daily Market Watch with an earnings note on HBC (Outperform)

Ngày đăng September 11, 2018

Market commentary – The VN index increased with turnover still below recent averages. Market breadth widened while we also see that 29 stocks went to the ceiling and 13 stocks fell to the floor. Foreigners were more active net buyers to a small degree. The put through market was less active with a large deal GEX & CTD and then a smaller deal in VNM seen going through.                                                                                                                 

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

  • Bank shares performed very well today, except a minor loss for TCB.
  • Non-banks shares were all higher, led by BVH and VND.
  • Consumer and retail names were mixed to higher, led by VNM and MWG.
  • Tech stocks were mixed with a gain for FPT while YEG lost ground. 
  • Manufacturing names were mostly higher, led by TCM and TMT closing at the ceiling. 
  • Resource names were all higher, led by PVS and GAS.   
  • Real estate and construction stocks were mixed to higher, led by DIG and DXG. 

Earnings note – HBC 1H results disappoint. Forward outlook mixed. Reiterate Outperform. Hoa Binh Construction (HBC Outperform) 1-H numbers showed a 21.3% drop in NPAT to VND 298 billion though net sales increased by 19.6% to VND 8,080 billion. These results fulfilled only 39.1% and 28.0 % of the company’s sales and NPAT targets respectively. For Q2 only, the company recorded revenue of VND 4,734 billion (+27.0% y/y) and an NPAT of VND 159 billion (-19.2% y/y). 

Quick conclusion. Reiterate Outperform. We have a fair price of VND 28,200 per share giving us a FY2018 forward P/E of 6.2 xs. HBC 1H results showed relatively strong growth in revenue although decreasing gross margin resulted from higher competition and increasing operating expenses. Coupled with soaring financial expense which drove down NPAT by 21.3% y/y. We expect the full year bottom line will be boosted by the sale of stakes in several real estate projects. With that HSC forecasts FY2018 NPATMI will grow by 3.2% y/y while we expect FY2019 will grow 4.5% y/y. New contracts continue to roll in and the current backlog of VND 24.2 trillion including mostly high-rise buildings of residential; office and resort looks healthy. With the current financial structure relying heavily on debt, the interest burden is a concern. As are receivables. Hence the need to raise additional equity capital is still urgent to balance the capital structure. The stock looks fairly cheap given these issues although we prefer CTD on a long-term view.   

1H revenue grew 19.6% y/y as residential projects continue to contribute the largest proportion of revenue – In the first 6 months; 

  • Revenue from residential projects came to about VND 2,862 billion (-17.2% y/y) and contributed 38% of total revenue vs. 52 % in the same period last year.
  • Revenue from the commercial segment came to about VND 2,259 billion (+25.9% y/y) and by weight increased to 30% from 27%.
  • Revenue from the Hotel & resort segment came to about VND 1,205 billion (+20.9% y/y) and contributed 16% of total revenue vs. 15% in 1H 2017.
  • Revenue from the infrastructure segment came to VND 602 billion (+806.7% y/y) and contributed 8% of total revenues vs. 1% in 1H 2017. 

Strong 37.5% y/y growth in the value of new contracts signed – Total new signed contract value (excluding VAT) in 1H FY2018 amounted to VND 13,173 billion (+35.7% y/y), leading to a total backlog of VND 24,184 billion (+24.4% y/y) at the end of Q2. A sampling of the larger new contracts signed in 1H are as follows; 

  • The Empire City – VND2,761 billion
  • The Alma resort – VND1,213 billion
  • The Lancaster Lincoln – VND1,265 billion
  • Sunshine City – VND 654 billion
  • Celadon City – Plot A1 – Phase 2,3 – VND 1,234 billion
  • Anh Duong Soleil Complex – Phase 2 – VND 559 billion
  • No.15 and No. 16 Apartment Building – VND 523 billion
  • Prime – Prime Resort & Hotel – Cam Lam – VND 428 billion
  • CityLand Z751 – D&B Plot – VND 250 billion 

Future business from Vincity projects – In the next few years, Vingroup plans to develop 3 Vincity projects namely Vincity Gia Lam (364 ha), Vincity New Sai Gon (251 ha), Vincity Grand Park (280 ha). HBC has informed us that so far, they have won the following contracts; 

  • VinCity Grand Park – 8 buildings with a total contract value of VND1,600 billion
  • VinCity Gia Lam – 13 buildings with a total contract value of VND3,600 billion 

The Company hopes that they will receive more Vincity business in the future. More interestingly, HBC’s proposal for a specific type of wall will be applied in all blocks of Vincity. Thus, thanks to their “know-how” advantage, HBC expects a higher margin in this project compared to other competitors. 

1-H 2018 gross profit margin declined compared to last year on higher operating expense and greater competition – 1H 2018 gross profit came to VND 778 billion (+5.5% y/y), giving us a GPM of 9.6% vs. 10.9% in the 1H of FY2017. For construction only, GPM dropped to 8.9% vs. 10.7% last year. The decline in GPM was due to higher labor cost resulting from changes in the Social insurance policy, unfavorable movements in material prices and greater competition in pitching for new contracts. 

Net financial expense increased significantly – In 1H 2018, HBC recorded net financial expense of VND116 billion (+104.3% y/y). Financial income decreased 41.1% y/y while financial expense was up 29.3% y/y due to higher balance of short-term debt to finance growing WC needs. 

SG&A expense increased mainly due to higher staff cost and outsourcing service expense – SG&A expenses increased by 27.5% y/y to VND300 billion. SG&A expense/Revenue ratio increased from 3.5% in 1H 2017 to 3.7% for this period mainly due to a jump of 46.4% y/y in staff cost and 45.2% y/y in outsourcing service expenses respectively. In the 1H 2018, the Company did not book a lot of provision for bad receivables but we estimate around VND 100 billion will be booked in 2H 2018. For a total estimated provision for FY2018 of about VND 125 billion, nearly double that of FY2017. 

Total assets at the end of Q2 came to VND 14,030 billion (+8.7% y/y), in which current account receivables constitute 69.1%, up 21.1% y/y. By the end of Q2, total cash & cash equivalents and short-term investments amounted to VND 592 billion (-50.3% YTD), down significantly from the end of 2017. 

Large working capital needs resulting in negative operating cash flow – We note that the cash conversion cycle has increased from about 113 days to 121 days y/y mainly due to an increase in receivable days from 150 days to 158 days. Moreover, Customer advances/ Revenue decreased significantly from 14.8% to 6.8% also helped swell outflows to working capital resulting in negative CF. 

Debt burden remains high – By the end of Q2 2018, short-term debt balance was at VND4,591 billion, up 25.1% y/y as the Company continuously used more short-term debt to finance larger working capital needs resulting from fast-growing revenue. D/E was high at around 2.0 xs while a rapid surge in interest expense led to a deterioration in the interest coverage ratio from 4.3 xs in 1H 2017 to 3.2 xs in 1H 2018. 

Little progress has been recorded with the plan to raise equity capital via private placement for strategic investor – The Company is continuing with their plan to issue new shares to a strategic investor. The current business model is heavily reliant on short-term debt to finance working capital needs and we have seen no improvement in WC ratios. Credit lines has been gradually used up and we think that increasing the use of debt will be harder in the future. Selling some of their assets would ease the situation in the short-term but raising new equity capital remains an urgent requirement to improve leveraging ratios and reduce the interest burden. However, recent unfavorable movements of the share price (which has decreased 22% YTD and about 41.3% y/y) has made it harder to achieve the goal of issuing new shares at a 2.5 xs book value. 

The Company is proceeding with stake sales in 3 real estate projects, of which, one has come to the MOU phase (1C) and one is under SPA negotiations (Long Thoi) while the last one may be settled in 2019. The deals is hoped to generate some gains that help lift the bottom line in 2H-2018 and 1H-2019 as well as provide some short-term funding for the business. Details of the projects are as follows; 

  • 1C – This project is located in 1C Ton That Thuyet, Ward 4, HCM city – Total land area: 5,286 m2. The estimated profit from the sale is about VND155 billion.
  • Long Thoi – The Project is located in Long Thoi, Nha Be, HCM city with a total land area of 30,209 m2. HBC estimates that the total profit from selling their 48% stake in this project was about VND 87 billion.
  • Phuoc Loc Tho – The project is located in Phuoc Loc Tho, Nha Be, HCM city with total land area of 40,058 m2. HBC estimated that total profit from selling their 48% stake in this project would be about VND 100 billion in profit. 

For FY2018, HSC’s forecast calls for 3.2% y/y increase in NPATMI – For FY2018, we forecast net sales at VND 19,348 billion (+20.6% y/y) and NPATMI at VND 887 billion (+3.2% y/y). We have made the following assumptions; 

  • The value of backlog transferred to FY2018 was VND 19,091 billion, of which we expect that 45% will be executed and booked in FY2018. We now estimate the value of new contracts signed in FY2018 to be around VND 22,364 billion (+20% y/y). And of course, we assume that part of this will also be executed in FY2018 resulting in net sales of VND 18,655 billion (+24% y/y).
  • We also assume that VND 565 billion (-38.4% y/y) will be booked in sales of real estate products.
  • We forecast that gross margin for construction will decrease to 8.9% vs. 10.1% in 2017 given higher material input and labor cost on greater competition. Gross margin of real estate segment is assumed to be 22%. Thus, total gross profit come to VND 1,797 billion (+6.5% y/y) and total gross margin is 9.3%.
  • Net financial expense is projected to grow by 68.2% y/y to VND 248 billion as the Company need a lot more short-term debt to finance their high growth rate.
  • We look for SG&A to equal VND 638 billion (+20.1% y/y) and SG&A/sales equals 3.3%.

 With this, we forecast FY 2018 NPAMIT at VND 887 billion (+3.2 % y/y). Diluted EPS equals VND 4,554 and at the current price, this stock is trading at current forward P/E of 4.9 xs.

 For FY2019, HSC’s forecast calls for 4.5% y/y increase in NPATMI – For FY2019, we forecast net sales at VND 21,461 billion (+10.9% y/y) and NPATMI at VND 927billion (+4.5% y/y). We have the following assumptions; 

  • The value of backlog transferred to FY2019 was VND 22,800 billion, of which we expect that 45% will be executed and booked in FY2019. We now estimate the value of new contracts signed in FY2019 to be around VND 23,482 billion (+5% y/y). And of course, we assume that part of this will also be executed in FY2019 resulting in net sales of VND 20,827 billion (+11.6% y/y).
  • We also assume that VND 500 billion (-10% y/y) will be booked in sales of real estate products.
  • We forecast that gross margin for construction will stay at 8.9%. Thus, total gross profit comes to VND 1,976 billion (+10% y/y) and total gross margin is 9.2%.
  • Net financial expense is projected to increase 15.4% y/y.
  • We look for SG&A to equal VND 689 billion (+8.0% y/y) and SG&A/sales equals 3.2%.

 With this, we forecast FY 2019 NPAMI at VND 927 billion (+4.5% y/y). Diluted EPS equals VND 4,759 and at the current price, this stock is trading at current forward P/E of 4.7 xs.

 Potential improvement in cost controls and risk management using in house Project Management System (PMS) – The PMS was developed by HBC and went live in early 2017. The system provides tools for project planning, risk identifying, progress tracking, documents recording and saving and thus helps management to spot problems as they emerge and make necessary adjustments to keep a project on time and under budget. The larger a construction enterprise is, the more challenging it is for cost control and risk managing at the group level. PMS makes it easier. Thus, this system can be an important tool in enhancing HBC’s operational efficiency over time. 

Expanding into foreign markets – starting with Myanmar and Kuwait. The current residential cycle for mid-to-high-end apartments is clearly in a bit of a slowdown and coupled with slowing launches of new commercial projects this is resulting in a more difficult domestic landscape.  Increasing competition has also driven down margins. Therefore, the Company plans to expand their activities into foreign markets targeting the Middle East and some less developed countries in the ASEAN region like Cambodia, Laos and Myanmar. Target contract value signed in foreign markets has been set at a very ambitious VND 3,000 billion with a gross profit margin of 7%-10% in the period 2018 – 2020. Some live projects include; 

  • Myanmar market – HBC will be a sub-contractor for Kajima on the construction of Yankin Storage Site PPP Redevelopment. The Project is being developed on a land area of 2.7 ha with a total investment up to US$ 450 million. The commencement ceremony is expected to be held on 18th November 2018 and the construction timeline is expected to be 5 years. The Company has not revealed the value of their package here. 
  • Kuwait market – HBC has made a partnership with HOT Engineering and UGCC. The Company signed a sub-contract with UGCC with value of VND 28 billion mainly related to the supply of labor and management services. 

Romania and Saudi Arabia may be their next destination for construction services. We think that timeline should be measured in years before the contribution to revenue and earnings (if any) might become significant. Although we note the higher level of risk including, legal risk, political and currency risk normally associated with foreign investments. 

HBC is the second largest listed private sector contractor after CTD – HBC is one of the leading private construction companies specializing in construction, construction material and real estate. Construction is still its core business with a revenue contribution above 90% over the past 5 years. Although it does have its own residential real estate developments. HBC’s project pipeline mostly consists of high-rise buildings (including residential and office buildings) which accounted for 75% of the company’s FY2017 revenue 

Investment thesis – Reiterate Outperform. We have a fair value price of VND 28,200 using DCF valuation, valuing the company at a forward PE of 6.2xs. The stock has fallen by 22% YTD and is now trading at a much more reasonable range. The Company is currently having a large backlog and new contracts are expected to keep rolling in. Though the fast growth has raised further our concern regarding increasing bad receivables, deterioration in working capital ratios, and unhealthy balance sheet with a high leverage ratio. Meanwhile, plan to issue for strategic investors does not show any positive results and whether their strategy to expand to foreign markets bears fruit is still a question mark that takes years to answer. 

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


  • Pharmaceutical stocks were mostly higher, except a minor loss for DMC.     


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

Vietnamese stocks rebound – The market rebounded today continuing the rally begun last Friday with nice gains across all indices. Dairy market leader VNM was the biggest gainer in terms of index points today attracting buyers on hopes that Q3 numbers may show some improvement and after persistent weakness. Real estate conglomerate VIC continued to move higher as did related play VRE. Then banks such as VCB; BID and CTG all did well a key bank M&A was approved by the SBV. Insurance giant BVH also rose as did brokerage stocks. Other blue chips such as MSN & HPG advanced also. Speculative issue HAG hit the ceiling. 

 On the other hand, some banks such as TCB and TPB fell back. VHM also lost more ground. In general, today’s rally was broad based. Foreigners were very active and net buyers to a significant degree in the equity market today. 

Markets were relieved by the absence of any developments on the trade dispute front overnight and further encouraged by a modest rally on Wall Street. With support at the 50-day MA for the VN index having been shown again on Friday to be firm, equities have been climbing to test the upper end of the current trading band. However, sentiment remains very short term oriented with many investors ready to take profits quickly if the mood changes.

 The four futures contracts recovered significant ground today and rose with the cash index on the whole. Which means they still trade at a large discount to the cash index at the close. While the long-dated contract was trading at a slight discount to the short-dated contract. Mixed message here. Unusually, the futures market overnight got things wrong and failed to predict today’s rally. However, given the continued larger than usual discount there is clearly some lingering skepticism in the futures market about where the cash market is going near term.  

Investors were no doubt buoyed by comment by the Minister-Head of Vietnam’s Government Office, Mai Tien Dung speaking at a conference yesterday who suggested that FY2018 GDP will come in around 7% vs. 6.81 in FY2017. While August trade numbers look very healthy with a very large trade surplus and double-digit growth in both exports and imports y/y (although the pace of growth has slowed somewhat). Thus, providing a major boost to the balance of payments. 

The economy has been growing faster than expected YTD and HSC current guidance suggests GDP growth of 6.7-6.8% for this year. Then the SBV has given approval in principle for the proposed merger between HDBank and PGBank which encouraged investors to take a look at the banking sector again following recent weakness. HDBank is likely to be given a new and higher credit growth target as a result.  

Today’s equity market movement changes the tone somewhat and suggests that the near-term risk is now slightly to the upside. We remain skeptical as to whether the market has the legs to take us up to the 200-day MA line let alone above it at this point in time. Even so, we did manage to close above the 100-day MA today which is mildly encouraging. 

At the same time there is a clear differentiation between Vietnam with its strong GDP growth; moderate inflation; growing foreign currency reserves and healthy balance of payments compared to some other regional emerging markets which have seen various macroeconomic problems surface. The strong macroeconomics has kept the currency fairly stable in recent weeks and given the equity market something of a safe haven hue in relative terms compared to some other Asian markets. Even so, the risk-off mentality towards global emerging markets in general also extends to the Vietnamese equity market for the time being.

 Asian shares & major currencies – Asian shares were mixed today even as Wall Street made some gains overall on Monday. As for currencies, the US$ (94.958) slipped below 95 today when measured against its trade weighted ICE index. Then the Euro (1.1626) traded a little higher; Pound Sterling (1.3056) gained more ground; the Japanese Yen (111.48) lost out while the Chinese Yuan slid today (6.8637). 

Oil prices little changed – crude oil edged higher after overnight losses with the active month WTI futures crude oil contract trading at US$ 67.76 in late Asian trade. Oil trades narrowly as we await U.S. inventory data. 

Not much news out today as the weekly API and EIA data set on U.S inventories is awaited. After several weeks of decline in U.S. crude oil inventories, traders are a little cautious with some reports that stocks might rise again. Meanwhile there are some other media reports of upcoming meetings between senior U.S Energy department officials and their Saudi and Russian counterparts in an attempt to boost supply ahead of the application of Iranian sanctions in a few months. 

As we mentioned yesterday, spare capacity in both the OPEC and non-OPEC spaces is limited and likely won’t be sufficient to offset a more than a 500,000-1,000,000 barrel a day supply shortfall caused by the sanctions. And with consensus expecting Iranian exports to drop by more than 1,000,000 barrels a day, as a result of these sanctions, demand-supply is expected to tighten further in coming months. 

Meanwhile an armed takeover of the Libyan National Oil Corporation HQ in Tripoli yesterday reminded us all of how tenuous the supply situation is in that country. With concerns that a recent ceasefire might not hold. Libyan oil production has recovered well in recent weeks after various disruptions over the summer. However, if recent history is any guide this situation won’t last forever.     

In global macro and general news – There are signs that ongoing trade talks between the U.S. and the EU are making steady progress. Overnight the U.S. Trade Representative’s office said it will begin talks with Congress to get fast track authority for a trade deal with Europe. This so called Trade Promotion Authority allows for a straight yes – no vote in Congress should agreement be reached. The timeline for the talks suggest an agreement might be reached by November sometime. The main concern of the Europeans is to avoid tariffs being placed on their auto exports and they appear ready to make some concessions in other areas to avoid this. 

Meanwhile markets remain alert for developments in the ongoing China – U.S. trade dispute. The Chinese have promised to react firmly to any further escalation from the US. And the ball appears to be in the US court at the moment. With the comment period on the US$ 200 billion worth of tariffs having elapsed last week already.  

The EU’s chief negotiator Michel Barnier speaking in Slovenia has said that a Brexit deal with the UK is possible within 6-8 weeks if both sides are realistic. The tone of the negotiations has shifted in recent days with the EU apparently willing to help out the British government as much as possible without compromising their core principles. This might result is some clever or vague wording on certain issues. The main sticking points are trade relations and the Northern Ireland – Republic of Ireland border issue where the differences remain very wide.

 This news buoyed the Euro and Sterling in the currency markets and added weight to speculation that a one-off summit of EU leaders in November might be called to sign-off on any agreement. The tough part of course would be to get any agreement passed by the UK parliament where there appears to be no settled majority for any proposal that has been made so far. Even by the British government itself.

HCMC – The VN index rose today as turnover expanded to VND 4,359.87 billion or US$ 187.56 million. The index gained 1.52% and closed at 985.06. 192 stocks up while 91 stocks down. And 12 stocks went to the ceiling while 4 stocks dropped to the floor. Foreigners accounted for 28.27% of the buying value and 17.18% 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 483.41 billion worth of shares in HCMC. And we saw thirty four transactions in the put through market today.

Foreigners were active buyers of VNM; GEX; CTD; HPG and VIC. They also actively sold CTD; GEX; VNM; NLG and VHM. The put through market was more active today with two enormous; two super jumbo; eight jumbo; six large and some medium sized & smaller deals accounting for 18.23% of total turnover.

We saw 5,290,000 shares of GEX; 770,000 shares of CTD; 630,020 shares of VNM; 2,015,392 shares of NLG and 300,000 shares of VJC going through. Foreigners were more active in the put through session in the CTD & GEX deals and then fourteen other smaller deals today in the market.

E1VFVN30 was up 1.81% today closing at VND 15,780.


Hanoi – The Hanoi market went up today while turnover came to VND 544.3 billion or US$ 23.42 million. The HN index was up 0.66% to close at 111.43. 94 stocks up while 67 stocks down. And 17 stocks went to the ceiling while 9 stocks dropped to the floor. Foreigners accounted for 2.47% of the buying value and 5.09% of the selling value.

Foreigners were net sellers to the tune of VND 14.24 billion worth of shares. And we saw twelve medium and small sized deals today during more active put through session in Hanoi accounting for 4.57% of total turnover.

We saw 1,164,047 shares of SHB; 200,000 shares of DL1 and 423,921 shares of MSC along with some smaller transactions ind the put through market today.


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