Vietnam Daily Market Watch with an AGM note on HSG (Underperform)

Ngày đăng January 16, 2019


Market commentary – Despite briefly starting in the red, the VN Index rebounded today to finish over near-term resistance of 905pt. The HN Index started and finished the day higher, and both bourses encouragingly finished at intraday highs. Turnover shows no sign of improvement, and market breadth narrowed further, with only 21 stocks going to the ceiling while 22 stocks fell to the floor. Foreigners were more active, and remained net buyers on both bourses. The put through market was slightly less active, although around twenty percent of all trades were still done by way of put through. Large deals in TPB; VND and TCBR dominating proceedings.


Foreigners were active buyers and sellers of TPB; VNM and GAS, being evenly matched, net buyers and net sellers respectively. Foreigners were also active buyers of VRE and POW, while actively selling HPG and VJC.


  • Bank shares rose in lock step today, led by MBB; TCB and BID.



  • Non-banks shares led by VCI also fared better with the exception of VND, which declined, and PVI and HCM, both of which failed to trouble the scorers.



  • Consumer and retail names were mixed, with gains by MSN; BHN and MWG largely offset by losses, albeit lower, at KDC; QNS; SAB and VNM. MCH; KDF and PNJ all marked time.



  • Tech stocks recovered today with gains by both FPT and YEG.



  • Manufacturing names, performed strongly today, with gainers led by stop high STK and TCM outnumbering stocks in retreat by more than five to one. HPG alone marked time.



HSG AGM uneventful – HSG announced a poor Q1 numbers. Outlook negative – Reiterate Underperform. Hoa Sen Group (HSG – Underperform) held their AGM on January 14, 2019. The meeting was fairly uneventful and passed all the key proposals.


Quick conclusion: Reiterate Underperform. We have a fair value price of VND 6,300/share, giving us a forward P/E of 5.8x. HSC forecasts FY2019 NPAT growth of 10.7% y/y mainly due to extraordinary profits from real estate sales. Q1 looks weak with a 3.6% decline in sales coupled with a collapse of 82.0% y/y in NPAT, mainly as a result of a sharp squeeze in GPMs. However, in our opinion, 2-H will shape up to be a better than 1-H this year, as high priced inventory drops out, and higher self-supply of CRC boosts the overall GPM. Some one-off income may also boost the bottom line further.


Here are our key takeaways.


Q1 results looks poor with a 3.6% y/y drop in the top line and a 82.0% y/y decline in the bottom line – At the meeting, the Company estimated net sales will come to VND 7.6 trillion (-3.6% y/y) and NPAT will collapse to around VND 60 billion from VND 333.3 billion in the same period last year. In this period, the Company sold 428,000 tonnes of steel and plastic products, generating a slight increase of 2.0% y/y. HSC estimates ASPs could drop by around 5.5% y/y following input material price trends. We will have detailed comments on margins once the full financial statements are released on January 31. Based on this, the Company has fulfilled just 24.1% of its 2019 top line target and only 12.0% of the bottom line plan.


Extraordinary profits saved the bottom line for HSG in this period – We understand that the Company is highly likely to book some extraordinary profits from recent real estate project sales – The Company successfully sold 2 projects in District 9 and District 2 as set out below.


  • 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 in PBT.


  • In addition, 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 around VND 150-180 billion, while their acquisition cost was just VND 70 billion. We estimate the Company will book about VND 100 billion in PBT from this sale going forward. Given that, we have included this profit in our earnings model at this stage.


These two projects will generate extraordinary profits totaling around VND 190-194 billion for HSG in PBT, which is equivalent to roughly VND 155 billion in NPAT. Assuming that the Company will book the profits from all these two projects in Q1 this year, the core-business loss then would come to VND 95-100 billion.


HSG has set mixed targets for FY2019, looking for NPAT growth of 22.2% y/y, while the top line will fall 8.5% y/y – At the AGM, the Company won approval for operational targets 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 has been set with a very low maximum ratio at 10% of par value, with all dividends paid in stock. Shareholders also approved this proposal. Regarding bonuses and the welfare and charity funds, there remains a further total of 7% of NPAT, with the ratio for each set at 3%, 1% and 3% respectively.


The Company also won the approval for a special bonus scheme for BOD, BOM members and key management team members if the actual results exceed the targets – In addition to setting aside 1.5% of NPAT to cover BOD operating costs, the Company obtained approval for a bonus scheme if the actual NPAT exceeds VND 500 billion this year. Under the plan, the Company will additional payments as follows:


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


  • 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 3.0% for the excess amount over VND 650 billion (1.5% for BOD and 1.5% for BOM).


The Company reported on the timeline and results of projects in the 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 has been completed and is focused 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 1H 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, with another 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 some stakes 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. Regarding the project in Quy Nhon, namely Hoa Sen Tower Quy Nhon, there are some issues relating to the investment license and the Company will stop development on this project. The Company has disbursed about VND 10 billion.


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 businesses. Meanwhile, the Company will slow efforts relating to non-core businesses and focus more on its 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, to date the Company hasn’t finished a detailed plan. As of the end of December 31 FY2018, the Company 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 certain branches in some provinces and cities of the Southern region to HSIG. To date the transferring and exchanging of branches currently finalized consists of HSG having received 100 branches from and having 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.


At the AGM, the Chairman also released their 2-3 year targets for expanding their distribution network to 1,000 branches from current level of 491 branches.


The Company is scaling down their workforce and reducing bank loans during its restructuring – At the end of 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 receivables 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, such as Nam Kim and Dong A, have followed suit. 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 for two consecutive quarters. 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 last year.


For FY2019 as a whole, HSC maintains our forecast calling for net sales of VND 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 10.0% y/y to 42,527 tonnes.


–     HSG’s GPM will expand to 12.6% thanks to 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 6.2x. If we exclude non-core profit, core FY2019 EPS will come to just VND 700, translating into a core P/E of 9.7x.


Another possible sale of a real estate project offers upside potential to earnings this year


We have learnt that HSG is also seeking buyers for another real estate projects in District 9. This represents the last land lots held by HGS that they currently have plans to sell, namely 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 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 9.7x. HSG’s market price has already declined by 70.1% in FY2018, given its run of poor results over four consecutive quarters, which has also 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 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 only other short-term catalyst would be the booking of a potential extraordinary pre-tax gain from the divestment of a real estate project in District 9.


  • Resource names also rebounded, led by PVD and PVS. Yesterday’s hero PXS trod water.



  • Real estate and construction stocks led by VHM; DIG and VRE outnumbered stocks in retreat, such as CTD and NLG, by more than two to one, while NVL failed to trouble the scorers.



  • Agriproducts and aquaculture stocks had a better day at the office, with DPM and HNG leading the charge. PAN fell sharply, joined by VFG, while GTN and HAG both moved sideways.



  • Pharmaceutical stocks, however, fell IMP and DMC suffered heavy losses. TRA managed modest gains, while DHG marked time.



  • Utilities, transport and logistics stocks were again honors even, as gains at VSC; NT2; GMD and others were matched by losers led by VNS; VSH and PPC.



Vietnamese stocks rebound today – A rebound on both the Ho Chi Minh and Hanoi stock exchanges today reflected an improved mood across regional bourses, despite losses in the US overnight. The VN Index finally managed to break near-term resistance at 905pt, closing close to 910pt. We would still like to see confirmation over the next to trading days, with turnover at current low levels, and a less than aggressive stance by foreign investors. If, however, the breakout is confirmed, the next near-term resistance level is close at 920pt. There is no immediate change in our outlook for the HN Index.


In terms of sectors, banks, resource stocks, manufacturing names and real estate and construction issues led today’s recovery. In Ho Chi Minh, VHM contributed almost two percent to the bourse today, with other contributors less than half a percent and no detractors of any note. In Hanoi, yesterday’s villain ACB was doing the heavy lifting, ably assisted by VCS and VGC. In a somewhat different trading pattern, today saw a return to a small number of heavyweight stocks driving the markets.


The four futures contracts again today closed the gap with the VN30 cash index, with discounts still down to around 5-10 index points as we close in on maturity dates. The trend of foreigners net buying continues, however, with turnover remaining just over a combined US$130 million, and stocks unchanged for the day representing more than forty percent of all issues, it is hard to draw definitive conclusions. Further, we note that stocks in retreat today outnumbered advancers by around a quarter, making for a less than broad based recovery.  


Asian shares & major currencies – Asian shares traded higher today, despite losses on Wall Street and across US bourses accelerating overnight. As for currencies, the US$ (95.57) gave up a small amount of ground when measured against its trade weighted ICE index. The Euro (1.1473) was essentially unchanged against the US currency, while the Pound Sterling (1.2902) was buying more greenbacks than this time a day ago. The dollar firmed against the Japanese Yen (108.65), but was buying fewer Chinese Yuan (6.7547) than at the time of last writing.


Oil prices decrease – Crude oil appeared to stabilize somewhat over the last twenty four hours, with active month WTI futures crude oil contracts edging up to US$ 51.22 at the time of writing, while Brent crude was largely unchanged at US$ 59.81 per barrel. Despite recent volatility, Saudi Arabia’s Energy Minister, Khalid al-Falih advised media that there was need to schedule an extraordinary OPEC meeting, prior to that which has been scheduled for April.


Stability in crude oil prices may also be aided by reports that OPEC will publish proposed production cuts by country to give more clarity to the OPEC+ deal struck last year. While it is known that OPEC plans to cut 812,000 bpd, of which Saudi Arabia will cut 322,000 bpd, and that Russia will cut production by 230,000 bpd to 11.191 million bpd, taking most of the 383,000 bpd non-OPEC cuts, the new breakdown, scheduled to be published later this week, may remove some lingering skepticism. Of course, even if enforced, whether this will be enough to restore balance as China’s economy continues to slow is still crucial.


In global macro and general news – Data released in the US overnight showed that consumer inflation expectations edged up from 2.97% in November to 3.00% in December. This is ahead of market expectations calling for a 2.90% hike. Japanese machine tool orders, on the other hand, declined 18.3% y/y in December, following a 17.0% y/y decline a month earlier in yet further confirmation of the slowdown in the global economy.


In China, outstanding yuan loan growth in December rose 13.5% y/y accelerating from a 13.1% y/y gain a month earlier. At the same time total social financing, including some off balance sheet items outside of the regular banking system, in December rose to CNY1590 billion, which was also ahead of the CNY1520 billion recorded in November, but perhaps most interestingly almost 25% above market consensus, which expected a figure of CNY1200 billion. Meanwhile, M2 Money Supply in December rose 8.1% y/y in December following a rise of 8.0% in November but missing market expectations for an 8.2% y/y rise.


In the Eurozone, German full-year 2018 GDP showed growth of 1.5% y/y, which marked a noticeable deceleration from the 2.2% growth achieved a year earlier, and was on the lower end of market estimates calling for growth of between 1.5-1.7% y/y. The German budget surplus was, however, 1.7% of GDP, a marked rise from the 1.0% recorded a year earlier. Also in Europe, the EU balance of trade for November showed the trade surplus narrowing to EUR19.0 billion, compared with EUR23.4 billion a year earlier, but still well above market expectations for a surplus of EUR13.7 billion.





HCMC – The VN index rose today as turnover narrowed to VND 2,523.25 billion or US$ 108.97 million. The index gained 0.87% and closed at 909.68. 189 stocks up while 98 stocks down. And 11 stocks went to the ceiling while 9 stocks dropped to the floor. Foreigners accounted for 18.97% of the buying value and 16.43% 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 64.10 billion worth of shares in HCMC. And we saw thirty three transactions in the put through market today.


Foreigners were active buyers of TPB; VNM; VRE; POW and GAS. They also actively sold TPB; HPG; GAS; VNM and VJC. The put through market was less active today with one enormous; two super jumbo; two jumbo; five large and some medium sized & smaller deals accounting for 16.68% of total turnover.


We saw 4,343,450 shares of TPB; 4,500,000 shares of VND; 1,941,330 shares of TCB; 2,039,990 shares of HNG and 240,000 shares of GAS going through. Foreigners were more active in the put through session in the TPB & GAS deals and then eight other smaller deals today in the market.


E1VFVN30 was up 0.71% today closing at VND 14,250.


Hanoi –  The Hanoi market went up today while turnover came to VND 385.8 billion or US$ 16.66 million. The HN index was up 0.99% to close at 102.58. 81 stocks up while 57 stocks down. And 10 stocks went to the ceiling while 13 stocks dropped to the floor. Foreigners accounted for 3.61% of the buying value and 2.11% of the selling value.


Foreigners were net buyers to the tune of VND 5.77 billion worth of shares. And we saw thirteen medium and small sized deals today during less active put through session in Hanoi accounting for 21.61% of total turnover.


We saw 382,100 shares of HHC; 1,328,800 shares of DNP and 425,000 shares of VC3 along with some smaller transactions in the put through market today.




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