Thien Long Group (TLG) [O-PF +11.0%] Removal of illiquidity discount lets solid fundamentals shine

Transcription

1 Thien Long Group (TLG) [O-PF +11.0%] Update Report Report Date: December 16, F 2017F Current Price: VND100,000 Rev Growth 16.7% 17.2% 18.3% Current Target 18 Price: March 2011 VND108,000 EPS Growth 27.4% 24.5% 14.4% Previous Target Price: N/A GPM 38.6% 39.0% 38.5% NPM 10.0% 10.8% 10.5% Upside to TP: +8.0% EV/EBITDA 12.7x 10.7x 9.4x Dividend Yield: 3.0% P/Op CF 24.2x 19.4x 16.7x TSR: +11.0% P/E 22.7x 18.2x 15.9x TLG VNIndex 80% 60% 40% 20% 0% -20% Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Industry: Stationary TLG VNI Peers Company overview: Market Cap: $170.3 mn P/E (ttm) 18.1x 16.2x 14.8x Foreign Room: $47.7mn P/B (curr) 4.2x 1.8x 2.0x ADTV30D: $0.0 mn Net D/E -15.0% NA 18.6% State Ownership: 0.0% ROE 28.2% 11.8% 12.7% Outstanding Shares: 38.3 mn ROA 18.0% 2.0% 6.9% Fully Diluted Shares: 38.3 mn 3-yr PEG 0.8 Thien Long Group is a leading stationery manufacturer in Vietnam with a wide variety of products in its portfolio, including writing instruments and office, school and art supplies. Founded in 1981 and listed on the Ho Chi Minh Stock Exchange in 2010, TLG now holds a 60% share of the writing instruments category and is expanding its export footprint. Vy Nguyen Analyst vy.nguyen@vcsc.com.vn ext. 147 Removal of illiquidity discount lets solid fundamentals shine We resume our coverage on TLG with an OUTPERFORM rating and +11.0% Total Return. Solid FY16 and FY17 sales growth of 17% and 18%, driven by office supplies and exports. Weak input prices helped drive robust FY16 NPAT growth of 27% while conservative FY17 GPM assumption due to possible hike in oil prices still points to +14% NPAT growth in FY17. Demanding 15.9x FY17 PER reflects stable growth prospects and exceptionally solid fundamentals compared to peers. Ongoing market-leading position continues to buttress revenue growth. The competitive advantages of being the industry leader continued to earn TLG double-digit sales growth across most product categories in 9M In addition, export sales grew 32% vs 9M This result is in line with our expectation that office supplies and exports will be the long-term growth drivers while writing instruments continue to act as a strong foundation thanks to TLG s established brand, customer base and distribution network. Growing distribution network will help fend off domestic competition. TLG has the largest distribution network in Vietnam, with more than 57,600 retail outlets covering 63 provinces and cities, up from 53,000 outlets two years ago. We applaud TLG s ability to expand its already sizeable distribution network as this is a key competitive advantage. Export focus on ASEAN avoids threat of growing protectionism in the West. Brexit and the recent US presidential election are unlikely to have a significant impact on the company as TLG focuses much of its exports on ASEAN countries. In fact, the recent implementation of the AEC might allow TLG to continue to expand its penetration into ASEAN markets. Oil price recovery may moderately reduce GPM to a more normalized level. 9M 2016 GPM expanded 91 bps vs 9M 2015 to 39.8% largely because the average price of plastics, which accounts for approximately 20% of TLG s COGS, fell another 7% from an already low 2015 base. However, we expect this trend to reverse in FY17 due to a possible increase in oil prices leading to higher input plastic prices, and therefore forecast FY17 GPM to fall to 38.5%. Removal of illiquidity discount lifts target price. Previously, our valuation for TLG was penalized by a 20% discount on the derived target price due to the low trading volume of the stock. However, since TLG s share price have performed exceptionally well in conjunction with robust business performance despite the low trading liquidity in the past year, we decided to remove this discount as the market seems to be pricing the company on its fundamentals, despite low liquidity. See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 1

2 9M 2016: Office supplies, exports key sales drivers while GPM continued to expand on low oil prices Figure 1: TLG s 9M 2016 results summary VND billion 9M M 2016 % growth VCSC's comments Revenues (*) 1,423 1, % - Writing instruments % - Office supplies % - Maintained market leading position with more than 60% market share - Kept building on distribution channel to fend off competition - Aggressively pushing new products through existing distribution network - Gained new corporate clients (B2B sales) - School supplies % - Art supplies % Low base and effective marketing - Export % Increasing penetration into traditional ASEAN export markets Gross profit % Selling expenses % Increase in conjunction with sales. G&A % Operating profit % PBT % NPAT-MI % EPS (VND) 3,936 4, % Higher financial income from interest earned and decreasing net forex loss Effective tax rate decreased from 22.9% to 18.9% due to increasing deferred tax income Bonus & Welfare fund as % of profit after tax increased from 10% to 12% GPM 38.9% 39.8% Prolonged weak oil prices leading to weak input plastic prices Selling exp./sales 14.3% 14.0% G&A exp./sales 9.3% 10.1% Bonus for employees for good FY16 business results and celebration of 35-year company anniversary OPM 15.3% 15.6% Effective tax rate 22.9% 18.9% NPM 11.8% 13.0% Source: TLG & VCSC (*Revenue breakdown is based on VCSC s estimation) See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 2

3 FY16 outlook: Strong fundamental progress in line with our previous forecast Figure 2: VCSC s FY16 forecast summary VND billion FY16 old FY16F new FY16F new vs FY15A Revenues 2,212 2, % VCSC s explanations - Writing instruments % Higher than expected 3Q 2016 result - Office supplies % Higher than expected 3Q 2016 result - School supplies % - Art supplies % - Export % Gross profit % Selling expenses % G&A % Operating profit % PBT % NPAT-MI % EPS (VND) 4,413 5, % Effective tax rate decreased from 22.9% to 18.9%. Bonus & Welfare fund as % of profit after tax increased from 10% to 12% GPM 39.1% 39.0% Prolonged weak oil prices leading to weak input plastic prices. Selling exp./sales 15.4% 15.2% G&A exp./sales 10.0% 10.4% Bonus for employees for good FY16 business results and in celebration of 35 years of establishment ( ) OPM 13.8% 13.5% Effective tax rate 20.0% 20.0% NPM 10.9% 10.8% Source: VCSC See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 3

4 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Figure 3: TLG s margins continued to be supported by weak plastic prices USD/ton 2500 USD/bbl Brent - RHS High-density polyethylene (HDPE) General purpose polystyrene (GPPS) General plastic film polypropylene (GPPP) Source: Bloomberg See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 4

5 FY17 outlook: Double-digit EPS growth despite gross margin compression Figure 4: VCSC's FY17 forecast summary VND billion FY16F FY17F FY17F vs FY16A VCSC s explanations Revenues 2,208 2, % - Writing instruments % - Office supplies % - Maintain market leading position with more than 60% market share - Expand distribution channel to fend off competition - Continue to launch new products - Gain new corporate clients (B2B sales) - School supplies % - Art supplies % - Export % Increased penetration in both traditional and new markets. In particular, the recent implementation of the AEC might allow TLG to continue to boost its penetration into ASEAN Gross profit 862 1, % Selling expenses % G&A % Operating profit % PBT % NPAT-MI % EPS (VND) 5,496 6, % GPM 39.0% 38.5% Lagged impact of increase in oil prices and hence plastic prices Selling exp./sales 15.2% 15.4% G&A exp./sales 10.4% 10.2% Normalized from FY16 high base OPM 13.5% 12.9% Effective tax rate 20.0% 20.0% NPM 10.8% 10.5% Source: VCSC See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 5

6 Valuation: Removal of illiquidity discount lifts target price We adapt a combination of DCF (80% weighting) and PER (20% weighting to derive a target price for TLG at VND108,000 (+11.0% upside). We attribute a weighting of 80% to the DCF method as we believe it fairly reflects TLG s long-term growth prospects and the stable cash flows of its business model. In addition, we also incorporate the peer average TTM PER of 14.8x to be TLG s target PER. Previously, our valuation for TLG was penalized by its low liquidity, as 30-day and three-month average trading volume reached only 1,155 shares and 1,179 shares, respectively, equivalent to approximately VND120 million (USD5,300) per day. However, the fact that TLG s share price has performed exceptionally despite this low liquidity indicates that the market is pricing the company on its strong fundamentals. We therefore decide to remove this discount to our valuation for TLG. Figure 5: VCSC s valuation summary (VND per share) Method Fair value (VND/sh) Weight (%) Contribution (VND/sh) Five-year DCF 114,400 80% 91,500 P/E 14.8x targeted PER 81,300 20% 16,300 Target price 108,000 PER (ttm) at TP 19.7x PER (fwd) at TP 17.2x Source: VCSC Figure 6: Five-year DCF assumptions Assumptions FY16 FY17 FY18 FY19 FY20 EBIT (VND bn) Tax (62) (71) (81) (95) (115) + Depreciation Capex (132) (78) (62) (75) (92) - Working cap increase (61) (68) (84) (105) (130) Free Cash Flow Present value of FCF Total PV of FCF Cost of Capital FCFF (Five-year) VND bn Beta 0.5 PV of Free Cash Flow 850 Market Risk Premium % 8.1% PV of Terminal Val 3,217 Risk Free Rate % 5.4% PV of FCF and TV 4,067 Cost of Equity % 9.4% Plus: Cash 499 Cost of Debt % 6.0% Less: Debt 183 Corporate Tax Rate % 20.0% Value of Equity 4,382 WACC % 8.4% Current O/S + ESOP (mn) 38 Terminal Growth Rate % 2.0% Price per share (VND) 114,401 See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 6

7 Company name Country Figure 7: Global peers Market cap (USD million) TTM Net Sales (USD million) Y-o-Y % TTM NPAT Y-o-Y % Gross margin (%) Net margin (%) Net debt/ Equity (%) ROE (%) ROA (%) TTM Adjusted P/E Current P/B ACCO Brands United Corp States 1, (1.7) Societe BIC France SA 6, (4.2) (24.2) Mitsubishi Japan 1, (1.4) 61.4 Pencil Co Ltd (27.9) (47.7) Max Co Ltd Japan (27.4) Asia File Corp BHD Malaysia (4.5) 19.0 (11.4) (25.9) Adel Kalemcilik Ticaret ve Sanayi AS Turkey (60.6) MonAmi Co South Ltd Korea (1.1) SDI Corp Taiwan (5.6) 18.1 (5.8) (22.2) Linc Pen & Plastics Ltd India Average 1, (3.5) Median (1.1) 26.4 (4.2) TLG (22.3) See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 7

8 Recommendation History Figure 10: Historical VCSC target price vs share price (adjusted for splits and stock dividends) 120, ,000 O-PF 108, ,000 90,000 80,000 70,000 60,000 50,000 40,000 BUY 50,000 O-PF 50,000 M-PF 50,000 M-PF 66,000 U-PF 61,500 30,000 20,000 Actual Price Target price Source: Bloomberg & VCSC See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 8

9 Financial Statements INCOME STATEMENT (VND 2015A 2016F 2017F BALANCE SHEET (VND bn) 2015A 2016F 2017F bn) Revenue 1,884 2,208 2,613 Cash & cash equivalents COGS -1,158-1,346-1,607 Short term investment Gross Profit ,006 Accounts receivables Sales & Marketing exp, Inventories General & Admin exp, Other current assets Operating Profit Total Current assets 958 1,018 1,225 Financial income Fix assets, gross Financial expenses Depreciation In which, interest expense Fix assets, net Share profit/loss from associates LT investment Net other income/(loss) LT assets other Profit before Tax Total LT assets Income Tax Total Assets 1,293 1,432 1,656 NPAT before MI Minority Interest Accounts payable NPAT less MI, reported Short-term debt NPAT less MI, adjusted Other ST liabilities EBITDA Total current liabilities EPS basic reported, VND 4,413 5,496 6,289 Long term debt EPS basic adjusted (1), VND 4,413 5,496 6,289 Other LT liabilities EPS fully diluted, VND 4,413 5,496 6,289 Total Liabilities RATIOS 2015A 2016F 2017F Preferred Equity Growth Paid in capital/issued capital Revenue growth 16.7% 17.2% 18.3% Add l share capital/share premium Operating profit (EBIT) growth % 31.8% 18.0% 13.5% Retained earnings PBT growth % 30.2% 20.0% 14.4% Other equity EPS growth %, adjusted 27.4% 24.5% 14.4% Minority interest Total equity ,073 Profitability Liabilities & equity 1,293 1,432 1,656 Gross Profit Margin % 38.6% 39.0% 38.5% Operating Profit, (EBIT) Margin % 13.4% 13.5% 12.9% CASH FLOW (VND bn) 2015A 2016F 2017F EBITDA Margin % 15.5% 15.7% 15.1% Beginning Cash Balance NPAT less MI Margin, adj, % 10.0% 10.8% 10.5% Net Income ROE % 24.2% 27.6% 27.6% Dep, & amortization ROA % 15.6% 17.6% 17.7% Change in Working Capital Other adjustments Efficiency Cash from Operations Days Inventory On Hand Days Accts, Receivable Capital Expenditures, net Days Accts, Payable Investments, net Cash Conversion Days Cash from Investments Liquidity Dividends Paid Current Ratio x in Share Capital Quick Ratio x in ST debt Cash Ratio x in LT debt Debt / Assets x 18.8% 18.7% 17.5% Other financing cash flows Debt / Capital x 22.8% 22.7% 21.2% Cash from Financing Net Debt / Equity x -22.3% -14.7% -19.4% Interest Coverage Net Change in Cash Ending Cash Balance See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 9

10 VCSC Rating and Valuation Methodology Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price current price)/current price + dividend yield, and is not related to market performance, RATING DEFINITION BUY Total stock return including dividends over next 12 months expected to exceed 20% OUTPERFORM (O-PF) MARKET PERFORM (M-PF) UNDERPERFORM (U-PF) SELL NOT RATED RATING SUSPENDED Total stock return including dividends over next 12 months expected to be positive 10%-20% Total stock return including dividends over next 12 months expected to be between negative 10% and positive 10% Total stock return including dividends over next 12 months expected to be negative 10%-20% Total stock return including dividends over next 12 months expected to be below negative 20% The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company, A rating that happens when fundamental information is insufficient to determine an investment rating or target, The previous investment rating and target price, if any, are no longer in effect for this stock, Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon, Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly, Risks: Past performance is not necessarily indicative of future results, Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report, For investment advice, trade execution or other enquiries, clients should contact their local sales representative. See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 10

11 Disclaimer Analyst Certification of Independence I, Vy Nguyen, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers, I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking, VCSC and its officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment),vcsc may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment, Copyright 2013 Viet Capital Securities Company VCSC, All rights reserved, This report has been prepared on the basis of information believed to be reliable at the time of publication, VCSC makes no representation or warranty regarding the completeness and accuracy of such information, Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only, They do not necessarily reflect the opinions of VCSC and are subject to change without notice, This report is provided, for information purposes only, to institutional investors and retail clients of VCSC in Vietnam and overseas in accordance to 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12 Contacts Corporate Head Office Bitexco Financial Tower, 2 Hai Trieu Street District 1, HCMC Hanoi Branch 109 Tran Hung Dao Hoan Kiem District, Hanoi Transaction Office Transaction Office 10 Nguyen Hue Street Nguyen Cong Tru Street District 1, HCMC District 1, HCMC Research Research Team Barry Weisblatt, Head of Research ext barry.weisblatt@vcsc.com.vn research@vcsc.com.vn Long Ngo, Senior Manager ext 145 Anirban Lahiri, Senior Manager ext 130 Banks, Securities, Insurance Logistics and Agriculture - Hoa Trinh, Senior Analyst ext Hai Hoang, Analyst ext Thuy Le, Analyst ext Nga Nguyen, Analyst ext 199 Construction Materials Duong Dinh, Manager ext Dung Ly, Analyst ext 149 Oil & Gas, Power and Fertilizer - Vy Nguyen, Analyst ext Tram Ngo, Analyst ext 135 Macro - Hien Nguyen, Analyst ext Luong Hoang, Analyst Hong Luu, Manager ext 120 Phap Dang, Manager ext 143 Real Estate and Construction Consumer Goods, Autos and Tires - Anh Nguyen, Analyst ext Dao Nguyen, Senior Analyst ext Nghia Le, Analyst ext 181 Duc Vu, Manager ext 363 Retail Client Research - Thanh Nguyen, Analyst ext Ninh Chu, Analyst ext 196 Institutional Sales and Brokerage & Foreign Individuals Head of Institutional Sales Vietnamese Sales Michel Tosto, M. Sc. Dung Nguyen ext ext 136 michel.tosto@vcsc.com.vn dung.nguyen@vcsc.com.vn Retail & Corporate Brokerage Ho Chi Minh City Hanoi Quynh Chau Quang Nguyen ext ext 312 quynh.chau@vcsc.com.vn quang.nguyen@vcsc.com.vn See important disclosure at the end of this document VCSC<GO> Viet Capital Securities 12