Vietnam Daily Market Watch with a corporate note on HPG (BUY) -HSC- 21/12/2018

Ngày đăng December 22, 2018

Market commentary – The VN index decreased with turnover still below recent averages. Market breadth widened while we also see that 23 stocks went to the ceiling and 26 stocks fell to the floor. Foreigners were more active net sellers to a noticeable degree. The put through market was more active with large deals in NVL & HNG and then a smaller deal in GEX seen going through.


Foreigners were active buyers of VJC; HPG and VPB. And net sellers of VNM and VPB.


  • Bank shares were mixed to lower, led by STB and VPB.



  • Non-banks shares mostly recovered, led by insurance stocks.



  • Consumer and retail names were mixed to lower, led by BHN and KDC.



  • Tech stocks all lost ground.



  • Manufacturing names were mixed with gains for DRC and AAA while there were losses for NKG and STK.


Corporate news – HPG’s share price has fallen sharply recently on lower steel prices and weakening demand. Forward outlook still fairly positive. Reiterate BUY. Hoa Phat Group’s (HPG – BUY) stock price has been falling faster than the market recently (-14.7% MTD and also down 12.8% YTD). The most recent leg of the correction in HPG’s stock price appears to have been triggered by several factors;


Quick conclusion. Reiterate BUY. Our 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 maintains our full-year forecast calling for a 10.5% y/y increase in NPAT. For FY2019, HSC forecasts net profit growth of 10.3% y/y thanks in part to some contribution from the Dung Quat factory. The share price has fallen recently as a combination of lower than normal volumes sales and falling output prices have hurt sentiment. 


HPG’s policy of offering the lowest pricing to customers is not that new an idea really. Their unit cost per ton has always been the lowest in Vietnam and their steady market share gain in the last few years has been a function of passing on incremental savings to customers as they gained scale economies. Enabling them to continuously boost capacity in the knowledge that the market would quickly absorb it. However we are now seeing some signs of possible demand weakness in the market. Indeed the weak end demand for December is our biggest near term concern as this comes despite falling prices for construction steel. Exacerbated by wholesaler reluctance to stock inventories when prices are falling so quickly. There is clear linkage here and if prices stabilise demand will rise again as wholesalers boost inventories.  Rising interest rates and more limited access to credit might be a factor for some developers, however our view of the real estate market is still fairly upbeat. However gives as we are in the low season this is not critical at all for FY2018 numbers. The real test will be to see by how much demand recovers in Q1. For the time being, we assume that prices and demand will recover somewhat since April next year. 


Longer term the story remains intact with no domestic or foreign player able to impact HPG’s formidable competitive advantages. And even as demand for some segments may perhaps slow, their entry into new categories where they play the role of import substitution as Vietnam’s industrial base expands will keep the top line growth story intact. Even so we should brace ourselves for several quarters of lower than normal margins.  HPG is very cheap following the recent correction. Our model of regional comparatives shows that the aggregate PE for the steel sector in the region is currently about 7.2 times forward PE on FY2019 forecasts. Therefore, we see current weakness as a good buying opportunity. Although we see this price weakness continuing for the time being. Hence investors should choose their entry point carefully.


Weak seasonal demand; falling prices and some institutional selling pressure have all combined to hurt the share price – HPG’s current sharp share price decline has come about due to a series of factors. Some of these are short term while some may continue to impact the stock for a while. We list them out as follows; 


  • Weak demand for construction steel MTD which means that the company is scrambling to hit a target of 200,000 tons for the month (-11.3% y/y). Few new projects appear to have started this month and this looks like more than just a seasonal issue. 


  • The 16% decline in Chinese rebar steel prices from CNY 4,850 per ton which was the high seen in end of October FY2018. This price decline accelerated in late November and it dropped 17% from the peak to hit a low of CNY 4,026 per ton before rebounding slightly to CNY 4,071 per ton.


  • HPG’s own steel for construction price has seen an 11.8% decline from VND 13.6 million per ton which was the peak in June FY2018. The price decline accelerated in the first 15 days of December with a 7.7% decrease MTD to VND 12 million/ton currently.


  • HPG’s strategy of focusing on winning market share to more quickly absorb oncoming capacity is partly driving the price decline. The company appears committed to offering the most competitive price in the market in order to win more market share and boost capacity utilisation.


  • The fact that a large institutional holder namely, PENM registered to sell a large block in HPG in October and then also in November; 


(1)  Registering to sell 20 million shares of HPG (0.94% of the OS) in the beginning of October and then going on to actually sell 10.9 million shares.


(2)  Registering to sell an additional 20 million shares of HPG in mid-November. We understand that to date they have not sold any further shares.


The average daily trading volume in the stocks over the last 30 trading days has come to is 4.8 million shares per day. Which compares to average daily trading volume of some 5.4 million shares per day in January when the market was hot. Hence any selling pressure from this one seller is not at all onerous in our opinion and should have been fairly easily absorbed. Indeed, since the beginning of October we note that overall net foreign selling came to 99,140 shares in October; 1,406,240 shares in November and then some 12,658,410 shares in December MTD. Which means that the selling pressure is now much broader and involves other foreign sellers.


  • Furthermore, in recent days it appears that domestic investors have joined in the act which caused the share price to accelerate to the downside in recent days. And this may have triggered some margin related selling although we cannot confirm that.


HPG’s construction steel prices drop to a one-year low – In the first 15 days of December, HPG have decreased their selling price for construction steel 4 consecutive times by 7.7% MTD to just VND 12 million/ton, (this is flat y/y and down 4% YTD). The speed of the drop has obviously unsettled some investors, but this is clearly in line with;


  • Raw material price declines,
  • And with its price cutting strategy which was announced at the analyst meeting recently.


We understand that HPG’s selling price now is 2.84% lower than TISCO, their main competitor in the Northern market. This is significant as TISCO uses similar BOF production technology to HPG. While the other steelmakers in the South like POM or Vinakyoei, use more expensive EAF technology, which costs around 10% more in production cost per unit.


Weak end demand is partly to blame for lower prices although this may be seasonal to some extent – HPG’s sales volume of construction steel in the first 20 days of December look unusually weak at only 100,000 tonnes or so. The company is trying to boost their sales volume for the rest of the month to meet their initial plan of 200,000 tonnes, (-11.3% y/y) for December. If they can reach the 200,000-ton target for this month this would mean that volume sales for FY2018 would have reach 2,364,146 tons (+8.4% y/y). In addition, agents are keeping inventories at very low-level fearing further price declines and this is further hurting demand.


Seasonally speaking we are in the low season as demand for steel products is normally low with few new construction/infrastructure projects starting at the end of the year while the residential developers focus in handing over completed projects. Looking at the picture for Q4 only, sales volume of construction steel should reach 670,606 tonnes, (+13.5% y/y and 11.7% q/q). Even so, the y/y decline even in the targeted volume number suggests that demand is weaker than normal. And the fact that steel prices have dropped YTD suggest that this is not related to higher costs but may have something to do with (1) higher interest rates and (2) the availability for credit for developers.


Input material price movements – The price of iron ore has recovered a little after correcting in November and reached a year-high level of US$ 69-70/ton, or up 9.4% from the low in November). Coking coal has followed a similar trend and currently trades at US$ 230/ton, up 20% from the low in November. Iron ore and coking coal are the key components HPG steel production accounting for some 62-65% of COGS in total.


In contrast, global scrap prices are still falling given huge supply from China and are now trading at about US$ 320/ton or so, down by 16% from the peak of US$ 380/ton in February this year. While important as an indicator for global steel prices it is insignificant as an input for HPG. Although, 65% of Vietnamese steel industry capacity, which employs EAF technology, is clearly impacted by scrap prices.


Q4 gross profit margins likely to be squeezed – HSC estimates Q4 ASP has decreased by 2.5% QTD although it’s still up 9.6% y/y to VND 12.96 million/ton. Then, as 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 relatively high input cost coupled with lower output prices.  This means only one thing. And 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. HSC estimates Q4 gross profit margin will come to VND 2,795 billion, (-12.4% y/y) and generating a GPM of 18.22% in comparison with 25.03% in Q4 last year.


For FY2018, HSC maintains our full-year forecast calling for a 10.5% y/y increase in NPAT – HSC still 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). 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 assumptions 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 7.5 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 6.8 xs.


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 10 xs. 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 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 all higher, led by PXS and GAS.



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



  • Agriproducts and aquaculture stocks were mixed to higher, led by VHC and DPM.



  • Pharmaceutical stocks mostly had sideways movement.



  • Utilities, transport and logistics stocks were mixed to higher, led by NT2 and GMD.



Vietnamese stocks fall back today – The markets declined further today after holding the line in the morning session. VNM was the biggest decliner in terms of index points while other consumer names such as SAB; BHN; MSN and KDC all lost ground today. Then banks such as VPB, TCB; CTG; MBB and STB declined. VRE fell rather heavily while VHM & VIC saw modest declines. YEG continued to lose ground.


On the other hand, GAS was the biggest gainer in terms of index points on higher result expectations. Banks such as BID; VCB and TPB all rallied. While real estate developers such as NVL; KDH and DXG all performed well. HPG recovered a little after recent heavy losses as did HCM. 


The four futures contracts saw a wide variance today ranging from a gain of 3.3 index points to a loss of 6 points compared to a 5.76-point loss in the VN30 cash index. The contracts now trade at a premium ranging from 0.7 to 6.4 index points to the cash index. Which suggests that perhaps the cash market is a little oversold technically at the moment. Foreigners were active and heavy net sellers in the cash market.


During the morning session, and after recent declines the VN index seems to have found some support just below the 920 level. However, we tested lower in the afternoon although closing several points above the lows. Volumes remain below average as many investors prefer to stay away. Even so the advance/decline ratio was tight suggesting a certain amount of seller exhaustion at current levels.


The VN index seems likely to retest support below 900 in coming weeks as global markets seem to be sliding relentlessly lower for the time being. With investors very sensitive to any bad news in individual stocks whilst skeptical of equities as an investment class. Behind this of course is the steadily declining liquidity in the U.S dollar as the quantitative tightening policy continues to shrink the Fed’s Balance sheet. 


Asian shares & major currencies – Asian shares declined today after Wall Street’s further losses on Wednesday. As for currencies, the US$ (96.566) fell back today when measured against its trade weighted ICE index. Then the Euro (1.1457) traded higher; Pound Sterling (1.2679) edged higher; the Japanese Yen (111.84) continued to gain ground while the Chinese Yuan traded narrowly at (6.8895).


Oil prices continue to lose ground – Crude oil fell further today with the active month WTI futures crude oil contract trading at US$ 71.77 in late Asian trade. API estimate suggests inventories rose last week in the U.S. 


The weekly American Petroleum Institute (API) estimates for U.S crude oil reported an inventory build of 3.45 million barrels for the week ending December 14th. This once again raises the scepter of rising shale oil production which has pushed the WTI price below the US$ 50-barrel level in recent days. The impact of the proposed OPEC plus production cuts has been very short-lived as traders instead focus on weakening demand and the prospects of a continued surge in shale oil in the 1H of next year. For the time, being, few are brave enough to stand in front of what looks like a runaway train and therefore prices continue to fall.


In global macro and general news – The Fed’s outlook for interest rate increases in FY2019 suggest another two increases in the offing. While the Chairman of the Board of Governors Jeffrey Powell emphasized the continued strength of the U.S economy in the post FOMC meeting press conference. This was all a little more hawkish than people were hoping for hence equity markets dropped back further. He did acknowledge concerns about weakening global growth and weaker stock markets, however the main thrust of his comments was the fact that U.S growth remains robust.


The conclusions being drawn here look unavoidable to us, the Fed can only look at current macroeconomic and other data to decide policy while the markets are by definition much more forward looking. Hence, when economic cycles look to be turning, the markets generally reach conclusions about the future a lot quicker than the Fed can.


So, for now, the Fed continues to see the U.S. economy expanding at a fast clip and sees no reason for accommodative interest rates. Meanwhile markets are on possible future recession watch and sense that the Fed’s ongoing balance sheet adjustment means that actual monetary policy is a lot tighter than the gradual rise in interest rates would suggest. Indeed, as Bloomberg noted, Jeffrey Powell said that the “We came to the decision that we would have the balance sheet run-off on automatic pilot and use rate policy as the active tool of monetary policy. I don’t see us changing that”. And this very clearly stated view about the ongoing balance sheet adjustment may turn out to be a lot more significant for future equity market sentiment than the interest rate outlook.


Meanwhile the Fed’s own outlook for interest rates next year show that the Fed fund’s rate could be raised another 50 bps to 2.75-3.00% which means two more interest rate hikes compared to three previously. As often mentioned 3% is still the notional so called neutral rate for interest rates. So, the adjusted outlook calls for a new target at the lower end of the neutral rate zone. Followed most likely by a pause. This also suggests that the dollar may strengthen somewhat in the 1H of next year. And that equity markets will continue to have some downside risk.


HCMC – The VN index fell today as turnover narrowed to VND 3,229.16 billion or US$ 138.77 million. The index lost 0.11% and closed at 918.24. 144 stocks up while 140 stocks down. And 7 stocks went to the ceiling while 13 stocks dropped to the floor. Foreigners accounted for 13.89% of the buying value and 16.33% of the selling value.


Foreign buying rose 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 78.99 billion worth of shares in HCMC. And we saw fifty transactions in the put through market today.


Foreigners were active buyers of VJC; HPG; VPB; VNM and DXG. They also actively sold CTG; HPG; VJC; VNM and VPB. The put through market was less active today with one enormous; two super jumbo; eight jumbo; seven large and some medium sized & smaller deals accounting for 30.49% of total turnover.


We saw 5,512,870 shares of NVL; 5,500,000 shares of HNG; 2,511,330 shares of GEX; 939,590 shares of CAV and 350,000 shares of VJC going through. Foreigners were more active in the put through session in the VJC & VPB deals and then nine other smaller deals today in the market.


E1VFVN30 was down 0.14% today closing at VND 14,530.


Hanoi – The Hanoi market went up today while turnover came to VND 615.63 billion or US$ 26.46 million. The HN index was up 0.35% to close at 104.53. 76 stocks up while 53 stocks down. And 16 stocks went to the ceiling while 13 stocks dropped to the floor. Foreigners accounted for 2.69% of the buying value and 2.35% of the selling value.


Foreigners were net buyers to the tune of VND 2.11 billion worth of shares. And we saw thirteen medium and small sized deals today during more active put through session in Hanoi accounting for 39.64% of total turnover.


We saw 4,840,373 shares of ACB; 8,154,968 shares of SHB and 1,000,000 shares of DNP along with some smaller transactions in the put through market today.


This year HSC will have the publication holiday from 21st December until 2nd January inclusive and we begin again on 3rd January. We wish all our readers a pleasant and safe holiday season.



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