Viet Han Investment and Production JSC (VHG: HOSE): Company Visit Note

Transcription

1 Viet Han Investment and Production JSC (VHG: HOSE): Company Visit Note Company background: Viet Han Investment and Production JSC (VHG: HOSE) was founded in 2003 as a private company and the company was listed on the Ho Chi Minh Stock Exchange in Jan VHG s current charter capital is VND 750bn. VHG started the business as a telecommunication cable producer, and expanded to electric cables, construction materials, plastic, natural rubber and other businesses. However, VHG has currently divested from those businesses and has placed emphasis on natural rubber, and infrastructure businesses. VHG has been restructuring the whole company through divesting from cablerelated business and focusing on natural rubber, and infrastructure businesses since During the period of , VHG s earnings mainly stemmed from cablerelated businesses which significantly fluctuated due to: (1) stable demand and increasing competition in optic cables and electric cables market which were the major earnings sources of VHG over the last 5 years, and (2) VHG faced difficulties in managing production of new optic cable products; and misdirected product line in electric cable products, VHG incurred losses in 2011 and 2012 of VND 31bn and VND 36bn respectively. Since 2013, the company has divested from those businesses. VHG divested from: (1) Kim Tin Plastic JSC, and (2) Viet Han Construction Materials JSC in In 1H14, VHG had divested from the remaining cable-related businesses comprising of: (1) optic cable, (2) electric wires and cables, and (3) fiberglass reinforced plastic (FRB). In 1H14 VHG s revenue welcomed two new earnings sources including natural rubber and fertilizer. Natural rubber and fertilize contributed approx. 33% and 41% to VHG s 1H14 revenue respectively. According to the company, natural rubber will become the main focus in the coming years. Currently, VHG does not possess a 1

2 natural rubber processing plant. Nevertheless, VHG plans to construct a natural rubber processing plant in 2Q15. Changes in management and board of directors VHG was founded as a private company in 2003, since Aug 2013 the majority of VHG s former members had left and VHG has replaced these members with new key members. Mr. Pham Tien Dung and Tran Xuan Hieu replaced Mr. Dinh Cong Trang, and Mr. Huynh Tan Chung for Chairman and CEO positions respectively. The former BOM and BOD sold all of their stakes at VHG to the new boards during The changes in managements played an important role in the restructuring of VHG s businesses and enhanced effectiveness and efficiency of VHG s businesses. Earnings performance: Strong recovery since 2Q13 In 2013, VHG made significant progresses in divesting from ineffective businesses. VHG s 2013 revenue and net profit reached approx. VND 187bn (+10% YoY), and VND 83bn compared with losses of VND 36bn in 2012 and VND 31bn in VHG s 2013 earnings mainly stemmed from divestments from ineffective businesses. VHG divested from: (1) Kim Tin Plastic JSC, and (2) Viet Han Construction Materials JSC, generating a return of approx. VDN 75bn (accounted for 92% of 2013 s financial income). Impressive earnings results in 1H14 were contributed by new business lines including natural rubber and fertilize. In 1H14, VHG s revenue and gross profit reached VND 143bn (+50% YoY), and VND 27bn (+ 249% YoY) respectively. Gross profit margin reached 19% compared with 8% in 1H13 which mainly derived from the natural rubber segment. The advantage of low labor cost (a result of disadvantaged area) compared with other companies, which normally accounts for 60% of total tapped latex cost, contributed to the improvement of VHG s earnings results. In regards to the natural rubber business, the former Board of Management involved in natural rubber business since 2008 through acquiring planted area of small holders in Dong Giang, Quang Nam province. By the end of 2013, approx. 3,000ha were acquired and tapped. In July 2011, VHG was approved by Dong Giang s district authorities to expand total planting area of rubber tree to 13,303ha in Quang Nam Province. According to the company, VHG might expand its rubber tree zone through M&A activities as the company believes that it is more efficient than planting new rubber trees. 2

3 Figure 1: VHG s net profit (VND mn) and net profit margin (%) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% Net profit Net profit margin Source: VHG Debt was significantly reduced during the last 3 years, from VND 115bn in 2011 to VND 52bn by the end of 2Q14. According to VHG, the debt was reduced to approx. VND 11bn by the end of 3Q14. Debt to equity ratio declined from 0.32 by 1Q13 to 0.11 by 2Q14. VHG s 1H14 interest expense totaled approx. VND 4.3bn compared with VND 7.6bn in 1H13. The difference of VND 3.3bn makes up 12% of 1H14 s net profit. Figure 2: VHG s debt, unit: VND mn Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 140, , ,000 80,000 60,000 40,000 20,000 - Debt Debt/Equity Source: VHG 3

4 Quite attractive cash dividend yield in 2014: VHG plans to pay 2014 s cash dividend of 10% on par, equivalent to a dividend yield of 7%. Ample cash position in Aug 2014, VHG issued 37.5mn shares to existing shareholders and had obtained approx. VND 375bn which will be used to develop natural rubber and infrastructure businesses. Earnings Outlook Planning to build a natural rubber processing plant in 2015: the plant will be designed with capacity of 10,000 tons per year in the first phase compared with 27,000 tons, 22,000 tons, and 16,000 tons of PHR, DPR, and TRC respectively and total estimated investment of VND 150bn. The processing plant will be located in Dong Giang Quang Nam Province where VHG s rubber field is located, and where VHG will be granted tax exemption and long-term preferential loans. The plant is an important investment step in VHG s business strategy as it will pave the way for developing an integrated production model. Infrastructure business is expected to strongly grow in 2015: VHG has closely followed the Sustainable Development Project of Da Nang City (total investment of USD 272mn) which is expected to commence in large scale starting in The project duration is planned at 7 years ( ). The project consists of 5 components: (1) improving storm water drainage and waste water systems- USD 92mn; (2) developing bus rapid transit system (BRT) USD 50.2mn; (3) urban strategy road USD 77.mn; (4) technical assistance and capacity development USD 15.3mn; and (5) other activities which are transferred from Da Nang s priority infrastructure project USD 36.8mn. VHG might participate in the first 3 components, particularly in providing equipment (water supply and drainage pipes, electric cables, composite materials, etc.) clearance, leveling, road base (providing the construction materials: stone, brick, sand leveling, etc.). The returns from these projects have yet to be quantified. Nevertheless, the size of these projects can have positive effects on VHG s financial statements during the projects life cycle. Divestment from property projects will reinforce VHG s cash position and strengthen VHG s financial capability in doing infrastructure business and natural rubber business. 4

5 Possibility of extraordinary earnings from property projects in 2015 Acccording to the company, VHG currently possesses two high valued land pieces located in Da Nang City (refer to table 1). D evelyn Office Building project is located in an attractive location, in close proximity to the State Audit office, Da Nang s post office, Agribank, and others. According to VHG, this project is planned to be developed through a joint venture in which VHG will contribute land asset. In such case, VHG will need to revalue the asset which will be contributed to the joint venture, and therefore it would be likely that VHG would record the difference between market value and book value of the asset as an extraordinary earnings (approx. VND 150bn). In regards to the D evelyn Beach project, the plan to develop this project has yet to be revealed. Nevertheless, it is clearly that the market value of this land peice is much higher than its book value. VHG can contribute this land piece in the case of a joint venture or completely sell this project. We believe that the company might gradually divest from these two projects to generate cash inflow and to focus on natural rubber and infrastructure businesses in the coming years. Table 1: VHG s property projects Projects Location Area (sqm) Book value Estimates of market value D evelyn Office Building 9 Le Duan Da Nang City 2,926 VND 105bn VND 250bn D evelyn Beach Hoang Sa - Truong Sa Da Nang City 53,829 VND 65bn VND 300bn Source: VHG Investment view We will provide details on earnings estimates for VHG during this month or Nov 2014 since the company will hold an extraordinary shareholder meeting during the period which will provide details plan relating to D evelyn Beach project, natural rubber processing plant, and other issues that might affect earnings in 2H14 and In short, according to our quick talk with the company, VHG s 9M14 bottom line has reached VND 76bn, slightly exceeding the 2014 s plan of 1.4%. In others word, VHG s 3Q14 net profit is estimated at VND 48bn (+71% YoY). 5

6 In summary, VHG has made signifcant changes in its operation and management, and achieved improvements in earnings performance thanks to the restructuring. In the short term, VHG s stock will witness several upside catalysts including 10% on par cash dividend (equivalent to a dividend yield of 7%), and impressive earnings results in 3Q14, divestment from property projects in 2015; Company s focus on the integerated production model relating natrual rubber business, and infrastructure business is still on watch. While natural rubber sector still faces difficulties due to price downtrend, infrastructure development is a difficult business and requite prudent cash management. 6

7 APPENDIX VND Billion VND Billion Balance Sheet Income Statement + Cash 7 30 Net Sales Short-term investments 3 3 COGS Account receivables Gross Profit Inventories 69 1 Financial Income Other current assets 5 9 Financial Expense Total Current Assets Selling Expense LT Receivables 0 17 Admin Expense Net Fixed Assets Income from business operation Investment properties Net Other Income LT Investments 0 85 Income from associates Goodwill 0 0 Profit Before Tax Other LT Assets 7 65 Net Income Total Long-Term Assets Minority interest 0 0 Total Assets NI attributable to shareholders Current Liabilities In which: ST debt Basic EPS (VND) -1,446 2,213 + Non-current Liabilities 7 0 BVPS (VND) 14,354 11,570 In which: LT debt 7 0 Dividend (VND/share) 0 0 Total Liabilities EBIT Contributed capital EBITDA Share premium Retained earnings Growth + Other capital/fund 0 0 Sales -32.1% 10.9% Owners' Equity EBITDA -80.1% % NCI 0 30 EBIT 22.5% % Total Liabilities & Equity NI 18.2% % Equity -9.2% 20.9% Cash Flow Chartered Capital 0.0% 50.0% CFO Total assets -6.5% 12.8% CFI CFF 1-34 Valuation Net increase in cash PER Beginning cash 5 7 PBR Ending cash P/Sales Dividend yield 0.0% 0.0% Liquidity Ratios EV/EBITDA Current ratio EV/Sales Acid-test ratio Cash ratio Profitability Ratios Net debt / EBITDA Gross Margin 4.8% 4.3% Interest coverage Operating Margin -10.4% 33.3% Days of receivables Net Margin -21.5% 44.4% Days of payables Selling exp./net sales 6.5% 3.6% Days of inventory Admin exp./net sales 10.0% 11.1% ROE -9.6% 20.9% Capital Structure ROA -7.0% 15.6% Equity/Total asset ROIC -4.0% 19.2% Liabilities/Total Assets Liabilities/Equity Debt/Equity ST Debt/Equity Source: VHG, SSI Research 7

8 RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 16% (*). A BUY rating is given when the security is expected to deliver absolute returns of 16% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to negative - 8%, while a HOLD rating implies returns between negative - 8% and 16%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 1-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy, completeness or correctness is not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time; Expressions of opinion contained herein are subject to change without notice; This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities; SSI and its affiliates and/or its officers, directors and employees may have positions and may effect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere; SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content; The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. CONTACT INFORMATION Phuong Hoang Senior Director, Institutional Research & Investment Advisory phuonghv@ssi.com.vn Kien Tran Nguyen Analyst, Agriculture kiennt1@ssi.com.vn SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) Fax: (848) info@ssi.com.vn HA NOI 1C Ngo Quyen Street Ha Noi City Tel: (844) Fax: (844)