Robust auto market offers bright prospects for battery segment

Transcription

1 Pinaco (PAC) [NON-RATED] ` Retail Research Report Date: May 12, Current Price: 41,500 Rev Growth 7.8% 3.4% 9.4% Dividend Yield: 18 March % EPS Growth 5% -9.7% 38.1% GPM 19% 17% 17% NPM 3.6% 4.2% 5.1% EV/EBITDA 10.2x 8.4x 7.6% 40% 20% PAC VNIndex 0% -20% May-16 Sep-16 Jan-17 May-17 Industry: Automobile batteries PAC Peers VNI Company Overview Market Cap: $84 mn P/E (ttm) 16.3x 17.4x 15.7x PAC operates in the automotive spare parts industry. Foreign Room: $23.5 mn P/B (curr) 3.4x 2.4x 2.2x Through 40 years of operation, PAC is the leading company ADTV30D: $0.36 mn Net D/E 2% 8% N/A in both dry cell and storage batteries with market shares of State Ownership: 51% ROE 23% 15% 13.2% 50% and 45%, respectively. The company has a nationwide Outstanding Shares: 46.4 mn ROA 8% 10% 2.2% distribution footprint of more than 140 agents. Thanh Tran Analyst thanh.tran@vcsc.com.vn ext. 139 Duc Vu Retail Research Manager duc.vu@vcsc.com.vn Robust auto market offers bright prospects for battery segment We recommend accumulating PAC for the following reasons: The company s brand is well-known with more than a 49% share of the battery market. The high growth potential of Vietnam s auto industry and more penetration into the motorbike battery market ensure revenue growth. Two new factories will increase capacity 26.7% and generate a VND25 billion (USD1.1 million) gain from the sale of the old factory this year PBT may be revised up by 49% to VND238.5 billion (USD10.5 million) because shareholders did not approve the audited financial report at the 2017 AGM. Vietnam National Chemical Group s (Vinachem) potential divestment of 51% of PAC would be a share price catalyst. Vietnam s auto industry recorded strong, 28% growth in # of new sale cars in The surge in the domestic automobile market, with projected 40% growth in the CMF battery market this year, benefits PAC s revenue in the coming years. PAC has established strong, well-known battery brands. With market shares of 45% and 50% for storage battery and dry cell battery, respectively, its core products focus on the replacement battery segment, which has shown sustainable growth momentum. PAC s further penetration into the motorbike battery market also support its revenue growth. For motorbike batteries, the shift from traditional batteries to sealed batteries continues, with projected growth in sealed battery sales of more than 25% in Relocation of two factories will provide non-recurring income in 2017 from selling land. The Gia Duc factory in Ho Chi Minh City has been relocated to Tan Tao industrial park. PAC will book a VND25 billion (USD1.1 million) gain from selling the land to Vietcomreal in Moreover, productivity capacity will rise 26.7% after PAC fully relocates its second factory by the end of PBT will increase 49% if PAC adjusts audited financials. PBT will be revised up to VND238.5 billion (USD10.5 million) from VND160.3 billion (USD6.9 million). This is a result of a decrease of VND44.3 billion (USD1.9 million) in labor payable and a reversal of VND33.9 billion (USD1.5 million) in provision for unemployment benefit allowance. Vinachem divestment should result in increased Furukawa ownership. Furukawa battery company of Japan bought 10.54% of PAC shares in September Management revealed that Furukawa and PAC have an agreement for Furakawa to buy shares from any Vinachem divestment. Furukawa also promises to help PAC to bring in modern production lines for new factories to take advantage of opportunities in the automobile battery segment. See important disclosure at the end of this document VCSC<GO> May 12,

2 Main business lines: Dry cell battery and storage battery PAC is the leading company in both domestic dry cell and storage batteries with strong brand name awareness. For the last few years, PAC has implemented advanced technology of HOLD top companies in the world from Germany, USA, and Korea to improve product quality. Pac s battery products always ensure world class performance with high capacity and long life at international standards (IEC and JIS). PAC also increased commissions for retailers and cut administrative expenses, leading the business to improve throughout 2015 and In the dry cell battery market, PAC maintains 50% share in Vietnam and 80% in the South, reflecting its strong brand name for this type of battery. Dry cell sales were VND271 billion (USD11.8 million) in 2016, accounting for 11.5% of total revenue and 3% growth compared to In general, the demand for dry cell batteries in Vietnam is saturated and production only meets domestic demand. PAC is focusing on storage battery products as demand of this segment is increasing rapidly in Vietnam. The storage battery segment, which accounts for 88.2% of PAC s total revenue, reached VND2.02 trillion (USD87.8 million), 11% higher compared to The market share of PAC in this segment is 45%, equivalent to its main competitor, GS Battery Vietnam, a joint venture between GS Yuasa and Mitsubishi. PAC s core products are in the replacement battery market. Moreover, OEM batteries, which are a type of storage battery, also maintained sustainable growth momentum (10% growth rate in 2016) and Q recap PAC booked impressive FY2016 NPAT-MI owing to revenue growth and a fall in F/X losses NPAT-MI grew 34%, thanks to higher sales and positive net financial income and expense resulting from a smaller F/X loss, which fell sharply to VND6.3 billion (USD0.3 million) from VND28.4 billion (USD1.2 million) in PAC borrowed USD12 million from banks to import materials and the F/X loss fell thanks to a stable VND/USD F/X rate in 2016, when the VND only depreciated 1.2% compared to a 5.1% depreciation in Total revenue reached VND2.29 trillion (USD90 million), 9.4% higher than 2015 and revenue CAGR was 5.2% from 2012 to Gross profit margin remained the same in 2016 thanks to the company increasing its average selling price 8%-10% despite the cost of input materials, such as zinc and lead, rising significantly. Together with revenue growth, PAC s EPS experienced strong growth in 2016 to VND2,394, up 38% compared to For the period , EPS CAGR was 12% and we expect the growth rate in 2017 will outperform the CAGR for revenue, in addition to the one-off profit from selling the factory. See important disclosure at the end of this document VCSC<GO> May 12,

3 Figure: PAC revenue and gross profit structure* 2500 Revenue 400 Gross profit HOLD 19% % % % Dry cell battery Storage battery Gross profit GPM Unit: VND billion Source: PAC, VCSC Healthy financial position thanks to strong growth in operating cash flow For FY2016, operating cash flow reached VND234 billion (USD10.1 million), 59% higher than 2015, driven mainly by higher income and an 8% decrease in accounts payable. At the end of 2016, PAC had VND108 billion (USD4.7 million) in cash and cash equivalents. PAC still had high short-term debt of VND589 billion (USD25.6 million), up 40% vs 2015, and a debt to equity ratio of 1.04 (0.84 for 2015). However, the financial statement showed that cash and cash equivalents accounting for short term investment reached VND467 billion (USD20.3 million), up 133.4% vs 2015, so total cash balance and bank deposits less than one year were VND635 billion (USD27.6 million). Therefore, we believe high short term debt will not affect PAC s operating activities. Figure : PAC s financial parameters Cash & cash equivalent Short term investment Debt Unit: VND billion Source: PAC s FS & VCSC See important disclosure at the end of this document VCSC<GO> May 12,

4 Q revenue reached VND691 billion (USD30 million), +27.5% vs Q while HOLD PBT was VND36.8 billion (USD1.6 million), +21.8% vs Q PAC s guidance for 2017 PBT is VND165 billion (USD7.2 million). However, excluding non-recurring income of VND25 billion (USD1.08 million) from selling land to Vietcomreal, it would be VND140 billion (USD6.1 million). The firm reached 26.3% of its adjusted guidance in Q Therefore, we believe that PAC will surpass its 2017 PBT target because in the battery industry, Q1 usually has the lowest sales of any quarter of the year due to the long Tet holiday. PAC s 2017 AGM did not approve the audited 2016 financial report. AGM did not approve the audited finance report for 2016 because Vietnam National Chemical Group (Vinachem), a major shareholder with a 51% stake from the establishment of PAC in 1976, disagreed on some items on the balance sheet, such as labor costs and retrenchment allowance. With good results in FY2016, PAC s management decided to raise the salary fund, but Vinachem did not agree. Accordingly, salaries will decrease VND44.3 billion and the payables on the balance sheet will reduce VND44.3 billion (USD1.9 million), equal to 16.8% of total salary before adjustment. Therefore, PBT will increase by VND44.3 billion to VND204.7 billion (USD8.9 million), up 69.2% vs Regarding debt obligations, PAC has set aside a prudent total provision of VND33.9 billion (USD1.5 million) for unemployment benefit allowance in However, Vinachem wants to redeem the allowance because it believes that provision should be made only when a resignation occurs in practice. The company is currently waiting for the Ministry of Finance to decide this issue. If the Ministry of Finance requests that the provision be reversed, PBT will increase by VND33.9 billion to VND238.6 billion (USD10.4 million), up 97.3% vs On the balance sheet, items will be reduced by VND33.9 billion. Shareholders approved the plan to pay a cash dividend in 2016 totaling 22% of par value equivalent to VND2,200 per share or a 5.3% dividend yield. The company has paid a combined VND1,200 for dividends in August 2016 and March The remaining VND1,000 will be paid after the 2017 AGM, which was on April 27, Shareholders have also approved the cash dividend for 2017 at a minimum of VND1,500 per share. See important disclosure at the end of this document VCSC<GO> May 12,

5 Outlook for coming years The storage battery for the automobile segment is the main driving force in the long term. Vietnam s automobile sales have boomed since 2014, thanks to a series of preferential HOLD policies, and this trend has not slowed down yet. According to VAMA, total sales of the automobile market in 2016 reached 370,781 vehicles, 28% higher compared to We expect strong growth in automobiles of 20% per annum, mainly driven by higher incomes and a lower import tax rate for the next five years. Moreover, the battery industry has grown by at a 20% CAGR over the period (PAC s estimated CAGR), and the company also expects this industry to continue to grow double digits in 2017, thanks to higher demand. Therefore, these factors should fuel PAC s strong prospects in the storage battery segment as the company focuses on replacement batteries for automobiles. PAC eyes more penetration into motorbike accumulator market, thanks to new technology production lines with high quality products. PAC s market share of the motorbike accumulator market was 21% in 2016, much lower than its main competitor GS Battery (50%). However, from 2017, with new technology transferred from Furakawa company in Japan, PAC expects to gain more market share by introducing higher quality products to meet the quality demands of the customer. Figure: Growth rate of battery products, number of vehicles sold Growth rate of battery products (2016) Number of vehicles sold in Vietnam 40% 36% 400,000 30% 25% 350, ,000 20% 10% 14% 3% 250, , ,000 0% -10% -20% Conventional motorbike battery -20% Sealed motorbike battery Conventional automobile battery Automobile CMF battery Household battery 100,000 50, Passenger car Commercial vehicle Truck -30% Bus Special purpose Unit: Number of vehicles Source: PAC,VAMA, VCSC Shareholders have been awaiting the divestment of Vinachem for a long time. The recent share price increase reflects investor expectation of a Vinachem divestment. However, according to the management team, there is no information about Vinachem s divestment. We believe this is not a short-term story, but if it comes to pass together with Furukawa s commitment to buy shares from Vinachem, a change in ownership structure could positively impact PAC s business. See important disclosure at the end of this document VCSC<GO> May 12,

6 BB Ticker Mkt cap (USD mn) New Factory By the end of this year, the company plans to increase capacity to sustain growth. PAC's factories are now operating at 100% capacity, both dry cell battery and storage battery. HOLD This year, the company will relocate the whole battery factory from Hau Giang factory to Tan Tao factory. Storage battery capacity will go up 26.7% this year. Currently, the total capacity of storage battery production is 1.5 million Kwh at three factories, as each factory has a capacity of 500,000 Kwh. The company will transfer all the storage battery production machinery at Tan Tao factory to Nhon Trach industrial park, Dong Nai. This will increase capacity to 1.9 million Kwh by the end of this year. Total cap-ex is VND141 billion (USD6.3 million). Moreover, PAC is working with its strategic partner Furukawa Battery Co. Ltd. on technology transfer to help the company enter new areas, such as industrial batteries used for metro and solar systems. PAC s production will not be affected much during the relocation of the factories. PAC plans to relocate two factories in District 6 of Ho Chi Minh City. The relocation will take place in a rolling form rather than moving all at once to avoid affecting production. At this point, the factory in Gia Phu has been relocated but Vietcomreal, which is a partner, has not been granted the license to build a commercial center. Therefore, a VND25 billion (USD1.1 million) compensation has not been recorded yet in PAC s 2016 financial report. We believe that this year the company will book this non-recurring income, which would support 2017 EPS. Valuation Table: Regional peer comparison TTM Rev Growth TTM EPS Growth GPM NPM ROE ROA Net debt /Equity Adjusted TTM P/E* Current P/B 1537 TT % 14% 25% 13% 27% 19% -19% 14.4x 3.6x CH % -16% 19% 9% 11% 7% 16% 21.8x 2.3x 6674 JT % 35% 25% 3% 8% 3% 27% 15.9x 1.3x Average 5% 11% 23% 8% 15% 10% 8% 17.4x 2.4x PAC VN 84 14% 35% 17% 5% 23% 8% 2% 16.3x 3.4x Source: Bloomberg *Foreign peers are used P/E valuation is lower than peers. PAC is currently trading at 16.3x ttm P/E, lower than its peer median of 17.4x, signaling a good opportunity to take advantage of a discount valuation given PAC s high growth prospects. PAC enjoyed high a EPS growth rate. This is thanks to the increasing demand for accumulator products and better operation management. See important disclosure at the end of this document VCSC<GO> May 12,

7 Financial Statements HOLD INCOME STATEMENT BALANCE SHEET (VND bn) (VND bn) Revenue 2,026 2,095 2,291 Cash & cash equivalents COGS -1,649-1,744-1,896 Short term investment Gross Profit Accounts receivables Sales & Marketing exp Inventories General & Admin exp Other current assets Operating Profit Total Current assets ,251 Share profit/loss from associates Fix assets, gross Net other income/(loss) Depreciation EBIT Fix assets, net Financial income LT investment Financial expenses LT assets other In which, interest expense Total LT assets Profit before Tax Total Assets 1,252 1,264 1,684 Income Tax NPAT before MI Accounts payable Minority Interest Short-term debt NPAT less MI, reported Other ST liabilities NPAT less MI, adjusted (1) Total current liabilities ,080 EBITDA Long term debt EPS basic reported, VND 1,920 1,733 2,394 Other LT liabilities EPS basic adjusted (1), VND 1,920 1,733 2,394 Total long term liabilities Preferred Equity RATIOS Paid in capital/issued capital Growth Add l share capital/share premium Revenue growth % Retained earnings Operating profit (EBIT) growth % Minority interest EPS growth %, adjusted Total equity Liabilities & equity 1,252 1,264 1,684 Profitability CASH FLOW (VND bn) Operating Profit, (EBIT) Beginning Cash Margin % Balance EBITDA Margin % Net Income NPAT less MI Margin, adj. % Dep. & amortization ROE % Change in Working Capital ROA % Other adjustments Cash from Operations Efficiency Days Inventory On Hand Capital Expenditures, net Days Accts. Receivable Other Days Accts. Payable Cash from Investments Cash Conversion Days Dividends Paid Liquidity in Share Capital Current Ratio x in LT debt 1,414 1,788 2,118 Quick Ratio x in ST debt -1,407-1,855-1,987 Cash Ratio x Other financing cash flows Debt / Assets % Cash from Financing Debt / Capital % Net Change in Cash Interest Coverage Ending Cash Balance Source: Company financial statements, VCSC forecasts. (1) Ratios are calculated using based on reported earnings. Adjusted EPS are based on earnings normalized to exclude extraordinary profits and adjusted for provisions for contributions to employee bonus funds (5% of NPAT) according to Circular 200. See important disclosure at the end of this document VCSC<GO> May 12,

8 Rating and Valuation Methodology 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 HOLD and the formal recommendation, thus these performance parameters should be interpreted flexibly. Target price: In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock, provided the necessary catalysts were in place to effect this change in perception within the performance horizon. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. 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> May 12,

9 Disclaimer Analyst Certification of Independence I, Thanh Tran, 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 HOLD 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. 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10 Contacts Corporate Head Office Hanoi Branch Bitexco Financial Tower, 2 Hai Trieu Street 109 Tran Hung Dao District 1, HCMC Hoan Kiem District, Hanoi HOLD 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 Digvijay Singh, Senior Manager, ext 145 Logistics and Transportation Banks, Securities, Insurance Anirban Lahiri, Senior Manager, ext Nghia Dien, Analyst, ext Nga Nguyen, Analyst, ext Son Tong, Analyst, ext Phu Pham, Analyst, ext 124 Macro Oil & Gas, Power and Fertilizer - Hien Nguyen, Analyst, ext 132 Duong Dinh, Manager, ext Luong Hoang, Analyst, ext Tram Ngo, Analyst, ext Thanh Nguyen, Analyst, ext 173 Consumer and Pharma Retail Client Research Phap Dang, Senior Manager, ext 143 Duc Vu, Manager, ext Dao Nguyen, Senior Analyst, ext Ninh Chu, Analyst, ext Nghia Le, Analyst, ext Thanh Tran, Analyst, ext 139 Real Estate, Construction and Materials Hong Luu, Manager, ext Anh Nguyen, Analyst, ext Vy Nguyen, Analyst, ext 147 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> May 12,