Vietnam Daily Market Watch

Market commentary – Both the VN Index and the HN Index started and finished the day negative territory. While afternoon trading saw a modest rally to avoid closing at an intraday low, failing to close above previous strong at 890pt in the South, and turnover, which is still below recent averages, suggest that investor sentiment is still fragile at the start of 2019. Market breadth was still on the wide side, albeit somewhat skewed, as 11 stocks went to the ceiling and 40 stocks fell to the floor. Foreigners were more active net buyers again today to a noticeable degree on the Southern bourse, while net sellers by a wide margin in Hanoi. The put through market was around normalized levels, with large deals in DIG; VNM and GMD seen going through.

 

Foreigners were active buyers and sellers of VNM; HPG and VRE, being net buyers in all cases. Foreigners were also active buyers of CTD and MSN, while actively selling CII and VJC.

 

  • Bank shares with the exception of VCB, which marked time, fell in unison, led by CTG; BID; MBB and STB.

     

 

  • Non-banks shares were more mixed, with insurers up marginally led by BVH, while brokers fell in lock step led by HCM.

     

 

  • Consumer and retail names were also weaker, despite MCH and QNS making it into positive territory. KDC; PNJ and MWG led the pack down, while KDF failed to trouble the scorers.

     

 

  • Tech stocks were lower as FPT lost ground, while YEG marked time.

      

 

  • Manufacturing names could not escape investor wrath today, as steelers, TCM, BMP and DQC led those in retreat. RAL and HHS posted gains, while PAC  sat on the fence.

 

Corporate action – HSG issued its agenda for the January 14 AGM. Reiterate Underperform – Hoa Sen Group (HSG – Underperform) has just released their AGM agenda today including the main points set out below.  HSG will hold their FY2019 AGM on January 14 2019.

 

HSG has set a mix targets for FY2019 looking for NPAT growth of 22.2% y/y, while the top line will fall 8.5% y/y – HSG’s targets for this year are quite cautious, calling for FY2019 net sales of VND 31,500 billion (-8.5% y/y), while being a little bit more ambitious for NPAT, calling for VND 500 billion (+22.2% y/y). HSG assumes that sales volumes will come to 1.9 million tonnes of finished steel products and plastic pipe, (+8.6% y/y). The base HRC price for this assumption is set at US$ 470/tonne.

 

The FY2018 dividend policy is set at a maximum of a very low ratio at 10% of par value, with all dividends paid in stock. Regarding the bonus, welfare fund and charity funds there remains a further total of 7% of NPAT, with the ratio for each fund to be 3%, 1% and 3% of NPAT respectively.

 

The Company proposes a special bonus scheme for BOD, BOM members and key management team members if the actual results exceeds the target – In addition to setting aside 1.5% of NPAT to cover BOD operating costs, the Company has also proposed a bonus scheme if the actual NPAT exceeds VND 500 billion this year. Under the plan, the Company will pay:

 

(1)  2% of NPAT (1% for BOD and 1% for BOM) if actual results meet the target of VND 500 billion this year;

(2)  with an NPAT in a range between VND 500 and VND 650 billion attracting an additional bonus of 2.6% for the excess amount over VND 500 billion (1.3% for BOD and 1.3% for BOM); and

(3)  with an NPAT above VND 650 billion attracting an incremental bonus of 3% for the excess amount over VND 650 billion (1.5% for BOD and 1.5% for BOM).

 

The Company will report on the timeline and results of projects in FY2016-FY2018 period, including projects such as the new plants in Hoa Sen Nghe An, Hoa Sen Nhon Hoi-Binh Dinh, Hoa Sen Ha Nam, Hoa Sen Phu My, Hoa Sen Yen Bai, the real estate projects and the mega project in Ninh Thuan. We understand that details are as follows.

 

–     Hoa Sen Nghe An plant – This plant is fully completed and focuses on steel sheet products, with total design capacity of 950,000 TPA of galvanized steel sheet, 240,000 TPA of pre-painted steel sheet and 700,000 TPA of CRC.

–     Hoa Sen Yen Bai plant – This plant focuses on steel pipe with a design capacity of 72,000 TPA.

–     Hoa Sen Binh Dinh plant – Phase 1 is complete offering 180,000 TPA of galvanized steel sheet and 45,000 TPA of pre-painted steel sheet. Phase 2 with a total design capacity of 200,000 TPA of galvanized steel sheet, 120,000 TPA of pre-painted steel sheet and 350,000 TPA of CRC will be commissioned in H1 FY2019.

–     Hoa Sen Phu My plant – Focuses on steel pipe with a total capacity of 150,000 TPA of black steel pipe and 85,000 TPA of galvanized steel pipe.

–     Ca Na – Ninh Thuan is the location where HSG plans to build a large plant to produce HRC. However, in April FY2017 the PM suspended approval on HSG’s US$ 10.6 billion proposed Ca Na Steel Complex in Ninh Thuan to await further information from environmental impact studies and overall viability. The suggestion is that the Ca Na project might be allowed to proceed if the additional studies prove it is safe and viable. At this stage, we understand that HSG has obtained the investment license for its Ca Na-Ninh Thuan port project. Accordingly, for the 1st Phase, the Company will build two docks which will be capable of berthing vessels from 70,000 – 100,000 DWT and then also have one dock for vessels of 20,000 DWT. Initially, this phase is estimated to cost around VND 1.3 trillion.

–     Real estate projects – Recently HSG announced that they increased their stake in affiliate companies, including raising its stake in Hoa Sen Yen Bai to 95% from 70%, Hoa Sen Quy Nhon to 99% from 45% and Hoa Sen Du Long to 95% from 45%. All these three companies focus on hotel, tourism, real estate and industrial park businesses.

 

However, after discussion with the Company, it appears that the increase in stakes in these three companies is also aimed at helping consolidate businesses at the Group level. This will help the Company to more easily control and manage these business. Meanwhile, the Company will slow efforts relating to non-core businesses and focus more on the core-business. Therefore, any investment in real estate and port business may be delayed for a while.

 

The Company is still in the process of restructuring their distribution network – We recall that, in last year’s AGM, the Company submitted a plan to shareholders to simplify their distribution network. The suggestion by their advisor was that, in each province, the Company will choose a single branch as the provincial HQ branch. Any other branches in the same province would then become pure distribution outlets under the HQ. However, until now, the Company hasn’t finished a detailed plan. As of the end of December 31st FY2018, the Company now owns 491 branches compared with the 371 branches a year earlier. Once this mission is completed, under the new system, true branches will be reduced to 65 or so, with the remaining 426 branches becoming outlets.

 

Along with this initiative, in late October FY2018, the Company also released a BOD resolution regarding their restructuring plan as follows. HSG will negotiate and work with Hoa Sen Investment Group Ltd. (HSIG) to receive the transfer of branches in its possession, management, exploitation of HSIG in some provinces and cities of the Northern and Central region. Accordingly, all branches will then be 100% owned by HSG. On the other hand, HSG will also transfer some branches in some provinces and cities of the Southern region to HSIG. Until now, the transferring and exchanging branches currently finalized consists of, HSG having received 100 branches from and having and passed 24 branches to HSIG. The Company declined to give detailed information relating restructuring costs and the size of each branch. We’d like to note that HSIG currently holds a 24.33% stake in HSG and has more than 200 branches nation-wide to distribute HSG products.

 

The Company is scaling down their workforce and reducing bank loans during the restructuring – At the end of HSG’s FY2018 fiscal year, the Company had a workforce of 7,062 from 8,200 in September FY2017. Also, most of the reduction came from back office staff and factory workers. The Company has also aggressively reduced bank loans via reducing short-term receivable and inventories. Accordingly, at the end of September FY2018, bank loans (both short- and long-term) totaled VND 14.3 trillion (+21% y/y), a reduction of 15.9% from the peak in December FY2017. At the same time, inventories stood at VND 6.6 trillion (-25.3% y/y), a reduction of 33.3% from the peak of VND 9.9 trillion in March FY2018.

 

Prospects for the flat steel segment look tough in both the export and domestic markets given oversupply – While the export market is suffering from increased anti-dumping taxes, the domestic market is also gloomy due to new entrants and massive capacity expansion by existing players. To deal with anti-dumping policy, HSG has switched its focus towards the domestic market in recent years. Other companies are following a similar pattern, such as Nam Kim and Dong A. Specifically, HSG has aggressively opened new branches year by year to increase their domestic market share, as reflected in the surge in domestic steel sheet sales volumes in 2H FY2018. Indeed, to realize this strategy, HSG has offered very low selling prices to end users in the same way it did for plastic pipe in the past. As a result, the Company made a huge loss in its core business. Further, the GPM has been squeezed quarter by quarter, as illustrated by the Q4 GPM, which was reported at only 8.5%, compared to the Q3 GPM, which came to 10.0%, down from 13.5% in Q2 and 15.0% in Q1 this year.

 

For FY2019 as a whole, HSC forecasts net sales of 31,693 billion (-8.0% y/y) and NPAT of VND 453.1 billion (+10.7% y/y) on an expected recovery in margins and the booking of extraordinary profit from real estate – HSC assumptions are as set out below.

 

–     Sales volumes will increase by 8.5% y/y to 1,898,479 tonnes of finished product, including 1,389,820 tonnes of steel sheet (+8.6% y/y) and 466,133 tonnes of steel pipe (+10.2% y/y).

–     Plastic pipe sales volumes are estimated to decline by about 10% y/y to 42,527 tonnes.

–     HSG’s GPM will expand to 12.6% thanks to the higher internal self-supply from CRC factories in FY2019, plus improvements in cost management.

–     SG&A expenses will come to VND 2,757 billion (+1.7% y/y) as the Company restructures operations via scaling down its workforce and other measures.

–     Net financial losses will narrow slightly to VND 736.4 billion from VND 791.2 billion thanks to the booking of extraordinary profit. Financial expenses are expected to increase by 6.8% on higher interest expenses, while the dropping out of the VND 102 billion gain from the selling of a stage in a port last year will be offset by the booking of VND 94 billion from the transfer of a real estate project in District 9 in Q1 this year and the booking of another two projects in upcoming quarters.

–     All in all, pre-tax profit and NPAT will thus come to VND 585.2 billion (+10.6% y/y) and VND 453.1 billion (+10.7% y/y) respectively.

 

Assuming no change in AOS, FY2019 EPS will be VND 1,095, giving us a forward P/E of 5.9x. If we exclude non-core profit, core FY2019 EPS will come to just VND 700, translating into a core P/E of 9.2x.

 

Possible sale of a real estate project offers upside potential to earnings this year – In mid-November, the Company released a BOD resolution regarding the sale of a real estate project in Do Xuan Hop Street, Phuoc Long B, District 9 which covers 7,156 sqm on November 6 2018. Specifically, HSG sold this project for VND 139 billion, while the invested cost was about VND 45 billion. HSC estimates the extraordinary profit from this project could come to VND 94 billion.

 

The Company recently also successfully sold another land lot in District 2. This land lot covers 969 sqm in Tran Nao Street, District 2 and has been valued at over VND 150-180 billion, while their acquisition cost was just VND 70 billion. We estimate the Company will book about VND 100 billion from this sale going forward. Given that, we have included this profit in our earnings model at this stage.

 

Besides that, HSG is also seeking buyers for another two real estate projects in District 9, as well as the last land lots at the Hoa Sen Riverview project which cover 15,000 sqm in District 9. The Company has so far invested about VND 45 billion in this project. Given a lack of information, we haven’t incorporated any potential profit from this last project into our earnings model. This will leave more potential upside for earnings of HSG this year.

 

Investment conclusion – Reiterate Underperform. Our fair value for HSG is VND 6,300 per share giving us a forward FY2019 P/E of 5.8x, and core forward P/E of 9x. HSG’s market price has already declined by 70.1% in FY2018 given its run of poor results for four consecutive quarters this year, which has led to foreign net selling recently. We also have some concerns about the Company’s corporate governance. In particular, we are concerned about the dramatic profit collapse in this period as a result of active inventory management, plus some issues relating to distribution channels, receivables and transactions with related companies as we mentioned in our previous notes. These issues have been repeated many times leading to a lack of trust from investors towards the management team. Margins are still under pressure as internal CRC production is getting up to speed rather gradually, leading to higher costs until utilization rates improve, although we recognize that this is just a question of time. The other short-term catalyst would be the booking of a potential extraordinary pre-tax gain of over VND 100 billion from the divestment of real estate projects in District 2 and District 9.

 

  • Resource names were all in the naughty corner today, led by PXS and PVS.

     

 

  • Real estate and construction stocks slumped heavily led by stop low HBC, and ably assisted by SJS; VRE and CII. KBC was the lone gainer, while KDH failed to trouble the scorers.

     

 

  • Agriproducts and aquaculture stocks also had a tough day at the office, as losers led by DPM; HAG and HNG outnumbered gainers GTN and VFG by more than three to one.

     

 

  • Pharmaceutical stocks were mixed to down and DHG fell sharply, while DMC and TRA marked time.

     

 

  • Utilities, transport and logistics stocks were also lower as VSH shed more than five percent, while HVN; GMD and VSC also fell heavily. NT2 was the lone issue to post strong gains, while VNS sat still.

    

 

Vietnamese stocks plunge – Both bourses fell by one and a half percent today, as the VN Index broke previous strong support at 890pt, with the next stop, according to our technical analyst at 850pt. Failing that it could go as low as 800pt. The mid- to long-term trend will from time to time bring periods where the market is oversold. However, we feel that any technical rallies should be approached with caution, and that the general trend is still down.

 

In Ho Chi Minh, GAS, BID and CTG were pushing the market into negative territory, while there were no contributors of any note. In Hanoi, VCS attempted some heavy lifting, but was more than matched on the other side of the ledger by ACB. In terms of sectors, there were no winners today with heavy weight bank, resource, consumer and real estate names perhaps the biggest losers. The four futures contracts today offered little expectation of improvement, falling by more than the VN30 cash equities market to now attract double-digit discounts to that index.

 

With crude oil prices kicking the year off poorly, despite a lower US dollar offering some good news for emerging market currencies, there would appear little respite for emerging markets, as the FED and ECB continue to shrink their balance sheets. Domestically, there is little in the way of bad news, however, the narrative of low trading volumes appears to have followed us into the new year, supporting the view of our technical analyst. We do note that foreigners have started 2019 as net buyers in Ho Chi Minh, however, we will need to see this trend continued before drawing a firm conclusion.

 

Asian shares & major currencies – Asian shares, with the exception of the Nikkei 225, which was closed for a market holiday, were mainly down, despite Wall Street and the S&P 500 trading sideways and NASDAQ showing sound gains overnight. As for currencies, the US$ (96.52) was little changed from this time a day ago, despite the recent traded being somewhat on the negative side. Against its trade weighted ICE index the US dollar as noted above was a little over a dollar below its December 14 52-week high of US$ 97.71. The Euro was trading slightly higher (1.1372), while the Pound Sterling (1.2553) edged lower. The Japanese Yen (106.85) firmed noticeably against the greenback, while the Chinese Yuan (6.8775) lost some ground.

 

Oil prices continue to lose ground – Crude oil prices continue to remain weak, with active month WTI futures crude oil contracts trading at US$ 54.63 and Brent crude at US$54.33 per barrel at the time of writing. Comments by Saudi Arabia that it was serious about oil productions cuts, backed up by a 500,000 bpd fall in production in December gave some comfort to investors, however, the financial markets and general direction of the global economy appear to be the factors most influencing oil price movements currently.

 

Further, EIA figures reported US oil production of 11.7 million bpd in the third week of December, Iraq production in December jumped 250,000 bpd from a month earlier, and the start of production by French Oil major Total at its ultra-deepwater Egina oil field, which is expected to add up to another 200,000 bpd at peak production still speak of a less than settled picture. All in all crude oil prices look set to remain under pressure but see volatility at least equal to that in 2018.

 

In global macro and general news – A marked drop in the Markit Manufacturing decline in France in December, accompanied by a more modest decline in Germany led to a decline in the Markit Manufacturing EU index to 51.4pt in the last month of 2018 from 51.8pt in November. The result was in line with market expectations and preliminary estimates. It did, however, mark the slowest expansion in factory activity since February 2016.

 

In the US, the IHS Markit US Manufacturing PMI for December also declined from 55.3pt in November to 53.8pt in December. It was broadly in line with preliminary estimates calling for 53.9pt.On the other hand, despite Brexit concerns, the IHS Markit/CIPS UK Manufacturing PMI increased to 54.2pt in December, from an upwardly revised 53.6pt a month earlier, and recorded the strongest expansion in the factory activity since June.

 

Perhaps, however, most telling was the Caixin China General Manufacturing PMI falling below 50pt to 49.7pt in December. Market estimates had called for the index to decline marginally from 50.2pt in November to 50.1pt. This reading caught some on the hop, signaling the first contraction in the manufacturing sector since May 2017. New order fell for the first time since June 2016 and new export business declined for a ninth consecutive month in more evidence that the US/China trade war is biting.

 

 

 

HCMC – The VN index fell today as turnover expanded to VND 4,295.32 billion or US$ 184.59 million. The index lost 0.86% and closed at 919.24. 108 stocks up while 179 stocks down. And 5 stocks went to the ceiling while 7 stocks dropped to the floor. Foreigners accounted for 9.45% of the buying value and 13.09% of the selling value.

 

Foreign buying fell 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 sellers to the tune of VND 156.33 billion worth of shares in HCMC. And we saw thirty six transactions in the put through market today.

 

Foreigners were active buyers of HPG; VNM; VRE; VJC and VPB. They also actively sold HPG; CTG; VNM; VJC and VCB. The put through market was more active today with five enormous; two super jumbo; five jumbo; five large and some medium sized & smaller deals accounting for 38.09% of total turnover.

 

We saw 22,054,280 shares of TCB; 4,766,320 shares of NVL; 8,504,001 shares of FTS; 892,000 shares of VJC and 3,500,000 shares of HDB going through. Foreigners were less active in the put through session in the VPB & VRE deals and then eight other smaller deals today in the market.

 

E1VFVN30 was down 0.14% today closing at VND 14,550.

 

Hanoi – The Hanoi market went down today while turnover came to VND 619.25 billion or US$ 26.61 million. The HN index was down 0.25% to close at 104.16. 62 stocks up while 86 stocks down. And 9 stocks went to the ceiling while 18 stocks dropped to the floor. Foreigners accounted for 1.86% of the buying value and 0.94% of the selling value.

 

Foreigners were net buyers to the tune of VND 5.72 billion worth of shares. And we saw eighteen medium and small sized deals today during more active put through session in Hanoi accounting for 26.12% of total turnover.

 

We saw 3,838,100 shares of SHS; 2,098,600 shares of VGC and 2,300,000 shares of VIX along with some smaller transactions in the put through market today.

 

 

HSC

 

 

 

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