PHUOC HOA RUBBER JSC.,

Transcription

1 8/18/29 8/18/21 8/18/211 8/18/212 8/18/213 8/18/214 8/18/215 8/18/216 8/18/217 PHUOC HOA RUBBER JSC., Unlock Land s Value Equity Update September 29, 217 We issue our BUY rating for Phuoc Hoa Rubber JSC. (HSX-PHR) with a 12-month target price of VND 51,8 (+26% upside before dividend yield) based on the following key points: 1H217 strong performance. In 1H217, PHR posted a robust growth thanks to a strong recovery of natural rubber (NR) price. Particularly, revenue and net profit increased by 58.6% and 15.2% YoY, reaching at VND 657.7bn and VND 14.4bn, respectively. This strong performance is attributed to a strong NR price in early-217. Rubber segment s gross profit margin also remained high, at 22.6%, compared with 8.7% in 1H216. Our Investment thesis are the below followings: (1) Increased NR price and newly-planted trees at Cambodia boosts 217 earnings. We expect the NR price go up when seeing the fundamentals improve with: (i) higher demand from automaker markets, especially China, Japan and EU market; (ii) 1-15% output cut by ANRPC and (iii) shortterm supply deficit. In our model, we project NR price will increase by 3% in 217, equivalent to VND 41mn/ton, higher than PHR s guide of VND 35mn/ton and increase slightly in coming years. In addition, PHR has also expanded its business in Cambodia with total 9,184 ha, in which 1,5 ha falls in tapping period (planted in 28), yielding.6-.7 ton/ha. From , the newlyexploited land in Cambodia is projected to increase by 1,5-2, ha/year and will reach the highest yield in (2) Expected huge non-recurring income adds to bottom line. Rubber-tree liquidation. We expect PHR would receive a steady income, around VND 14-15bn/year from rubber tree liquidation. From early-217 to August 217, PHR liquidated total 1,4 ha with an average price of VND25-3mn/ha, translating into a revenue of VND 25-3bn in 217, of which VND 1bn recorded in 1H217. We expect the price of rubber tree liquidation stays at VND3 mn/ha till late-217, 76% higher than in late-216, thanks to NR rubber s price, natural forest closure and limited IP-used land. Industrial Park (IP) developer and transfer IP-used land. PHR currently invests in Tan Binh IP JSC., and Nam Tan Uyen IP JSC., and co-operates with VSIP (Vietnam Singapore Industrial Park). Particularly, PHR disclosed that the company will transfer 3 ha to VSIP in 217 and 391 ha in 218. The revenue from transfer land will be allocated in For the 3-ha transfer land profit, PHR will book 5% in 4Q217 and the remaining in 1Q218. With plan of transfer 2,37 IP-used land ha during period, we believe it will unlock the PHR s intrinsic value. NTC s divestment delivers the one-off profit for PHR. In 3Q217, PHR and VRG have agreed to divest PHR-owned NTC. PHR made known that his investment cost ranges around VND 56-59bn. Based on current NTC s market price of VND6-7,/share, we expect that PHR could gain around VND 25-31bn. This divestment is expected to occur in 218 after VRG s IPO, which will happen in late-217 and early-218. Valuation. We rate BUY for PHR with a 12-month target price of VND 51,8 a 26% potential upside, using a blended of DDM, FCFF and P/E methods. We expect 217F dividend to be VND 4,, higher than planned cash dividend payment of VND 1,5 as PHR will enjoy strong cash flow without significant capital expenditure. Key investment risks. (1) A downside risk in natural rubber price, (2) Delay in booking non-core businesses profit, and (3) Economy slowdown. BUY 26% Potential Upside My Tran, Associate myttd@tvs.vn Target price 12-month price target: VND 51,8 Expected 12-month dividend: VND 4, Trading Data and Key Metrics Ticker PHR Sector Natural Rubber Listed since August, 29 Price as of Sep 28 th, , 52-week range (VND ) 16.8/43, Shares outstanding (mn) 81.3 Free Float (mn) day average volume 475, P/BV (x) P/E (x) 11.4 Dividend yield 9.3 Debt to Equity (x) Source: Bloomberg, TVS Research Price Performance Chart Price (' VND) Volume (' shares) Source: Bloomberg, TVS Research Company Description Phuoc Hoa Rubber Jsc (PHR HSX) is the top nationally planting and exploiting natural rubber which belongs to Vietnam Rubber Group. The company was established in 1982, in which, its main business is involved in exploiting rubber products and developing industrial parks. The company currently owns 15,277 ha rubber land, in which, 8,6 planted land and three factories with a total capacity of 27, tons/year. The main export markets are Japan, China, Taiwan, European countries and the US. Besides, PHR s key competitiveness lies in its large land bank. The company also has advantageous location in Southeast provinces of Vietnam which helps plant rubber trees as well as develop IP in Binh Duong province. Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages.

2 2 SUMMARY FINANCIALS Earning Model (VNDbn) 215A 216A 217F 218F Balance Sheet (VNDbn) 215A 216A 217F 218F Net sales 1,227 1,178 1,541 1,698 Cash and equivalents Cost of sales 1,58 1,18 1,277 1,39 Financial investment Gross profit Accounts receivable Selling expenses Inventory General administration expenses Prepaid expenses, other CA Other operating income/(expenses) Total current assets 89 1,194 1,335 1,51 EBITDA Depreciation & Amortization Net Property and equipment 2,47 2,24 2,197 2,168 EBIT Net intangibles Net interest income/(expenses) Total investment Net investment income Other long - term assets Others (recurring) Total Assets 3,226 3,88 3,978 4,161 Pretax Profit Income tax Account Payables Tax rate (%) 19% 23% 2% 2% Short-term debt Minorities Net Income Total Current Liabilities 779 1,16 1, EPS (basic, reported) 2,83 2,219 5,16 7,584 Weighted shares outstanding (mn) Long-term debt Other long-term liabilities Common dividends declared 2% 18% 4% 4% Total long-term liabilities DPS (VND) 2, 1,8 4, 4, Dividend Payout ratio (%) 96% 81% 8% 53% Stockholders' equity 2,135 2,236 2,319 2,61 Common Equity Treasury shares (97) (97) (97) (97) Growth and Margin (%) Capital surplus Sales Growth (%) -23.5% -4.% 3.8% 1.2% Retained earnings EBITDA Growth (%) N/A 2.8% 39.6% 19.4% Budget sources and other funds 982 1,29 1,54 1,93 EBIT Growth (%) -48.8% -.6% 199% 1198% Minority interest Net Income Growth (%) -19.4% 3.8% 124.% 5.9% Total liabilities and equity 3,226 3,88 3,978 4,161 EPS Growth (%) -19.8% 3.9% 1261% 51.2% Gross Margin (%) 13.8% 13.4% 17.1% 18.1% EBITDA Margin (%) 1.1% 1.8% 11.5% 12.5% EBIT Margin (%) 6.4% 6.6% 1.4% 11.3% Ratios Net Income Margin (%) 17.5% 18.9% 33.1% 45.4% ROE (%) 9.8% 9.7% 22.% 29.5% ROA (%) 6.4% 6.2% 13.1% 18.9% Cash flow Statements (VNDbn) 215A 216A 217F 218F ROIC (%) 6.4% 16.1% 5.4% 6.5% Pretax profit Inventory days Adjustments for: 61 (114) - - Receivable days Depreciation and amortization (9) (9) Payable days Change in inventories (67) Asset Turnover (x) Change in trade receivables (29) Debt/equity (x) 35.5% 44.2% 69% 57% Change in trade payables 84 (17) Other operating cash flow Cash flow from operations Net Capital expenditure 44 (139) (94) (211) Valuation (Multiples) Change in Financial investment 253 (368) 27 3 EV / EBITDA (x) N/a N/a Divestures 4 5 P/E (x) Other investments, net (313) Dividend Yield (%) 13% 7% 9.3% 9.3% Cash flow from investing (11) (467) (67) (181) P/B (x) Equity issued Net borrowings (134) (78) Dividends to shareholders (164) (141) (423) (393) Cash flow from financing (298) 8 (47) (471) Net cash flow (64) (122) Opening cash Notes: CA = current assets; CL = current liabilities Closing cash Source: TVS model and forecast

3 3 216 & 1H217 BUSINESS PERFORMANCE Weak core earnings partially compensated by non-core one. Gross profit remained low in 216 as NR price hit a 2-year low. Non-core profit, however, makes PHR outperform peers. In 216, PHR recorded a VND 1,178bn (-4.% YoY) in revenue and VND 22bn (+14.7% YoY) in net profit, exceeding 11.78% and 6.93% of yearly target plan, respectively. This translates into an EPS of VND 2,219. Gross profit remained low at 13.4% as NR price hit a 2-year low in 216. Revenue and gross profit from core activity contributed 82% and 63%, respectively, to its total business. However, non-core profits (accounting for c.8% of parent s profit before tax) from rubber tree liquidation (VND 143.8bn) and transfer land (VND 16.4bn) for Nam Tan Uyen Industrial Park JSC., (NTC UPCoM) and Tan Binh Industrial Park Jsc., made PHR outperform peers. 1H217 strong performance attributed to NR price recovery A surge in NR price in early-217 secured PHR s 1H217 strong performance. In 1H217, PHR posted a robust growth thanks to a strong recovery of NR price. Particularly, revenue and net profit increased by 58.6% and 15.2% YoY, reaching at VND 657.7bn and VND 14.4bn, respectively. This strong performance is due to a surge in NR price in early-217. Regarding rubber segment, average selling price and COGS reached at VND 45mn/ton and VND 35mn/ton, respectively. Rubber revenue accounted for 74% in revenue (VND 489bn, +55% YoY) and 88% in gross profit (VND 27.5bn, +33% YoY). The core segment s gross profit margin also remained high, at 22.6%, compared with 8.7% in 1H216. Figure 1: Sales breakdown by segments (1H217) (VND bn) 7 6 1H217 1H Rubber Wood Others Total Source: PHR, TVS Figure 2: Gross profit breakdown by segments (1H217) (VND bn) Source: PHR, TVS 1H217 1H216 Rubber Wood Others Total We expect large profit from tree liquidation booked in 2H217. In 7M217, the company continued to post a record-high profit, reaching at VND 67.34bn (+53% YoY) in revenue and VND 221.2bn (+21.7% YoY) in before-tax profit (PBT). Sales volume increased by 5.8% with an average price of VND 42.96mn/ton, up 45.2% YoY. Outsourcing volume has increased significantly as the company wants to keep inventory for late-217 demand. In 7M217, the company also completed liquidating 1, ha of rubber tree with an average price of VND 25-3mn/ha, translating into a liquidation revenue of VND 25-3bn in 217. The company, however, only recorded VND 1bn in 1H217, implying that the remaining will be booked in 2H217.

4 4 Figure 3: Global NR price (USD/kg) and PHR s selling price (VNDmn/ton) 1 PHR's selling price NR price Source: PHR, TVS Research

5 5 INVESTMENT THESIS Increased NR price and newly-planted trees at Cambodia boosts earnings. Core business Tracking with global rubber prices The upward trend of NR price could lift PHR s profit. Rubber segment takes lion share of PHR s total earnings, equivalent to 58% profit before tax in 1H217. We believe that with current expansion plan in Cambodia, PHR could capture ample profit from the upward trend of NR price. The downside risk of rubber price, however, could hurt its total earnings due to strong correlated with global NR price. We see high correlation between PHR s core profit and NR price (See more in Figure 4). Figure 4: NR price and PHR s rubber gross profit 45% 4% 35% 3% 25% 2% 15% 1% 5% % GPM Natural Rubber price Source: PHR, TVS Research Supply-demand, alliance power and weather condition play important role in NR price s movement. And we expect the price will go up. Although NR price has slowed down recent times, we expect that NR price will go up due to: Higher demand thanks to the recovery of Chinese auto market. After a recovery in June, Chinese passenger-car sales have continued to accelerate in July-August, 217, 5.3% higher than in August, 216. China is the world s largest rubber consumer, mostly for car tires production, constituting c.4% of total world rubber consumption. Thus, bright outlook in Chinese auto market has been raising hopes for the growth momentum of NR price after a dip recently. Other auto markets, like EU and Japan, also delivered a high growth in 8M217 s sales volume, accelerating 5% and 8.1%, respectively. Short-term supply deficit supports NR price bounce back in 3Q217. The world rubber consumption of NR reached at 8.54 mn tons, where supply deficits over 5, tons in 8M217. As the result, NR price has recently bounced back after a dip in June, reaching around JPY22-23/kg in September, 217. Alliance power play important role in NR price movement. In August, 217, Thailand, Indonesia and Malaysia, which are the key member of ANRPC*, considered to increase rubber price to support rubber farmers by cutting rubber output from 1% to 15%.

6 6 Weather condition could positively affect short-term NR price s movement. September-January is the peak season in rubber harvest times. However, rainfall could lower rubber yield as well as rubber exploitation volume. This could support for NR price trend in late-217. *ANRPC (Association of Natural Rubber Producing Countries) has 11 members, including Cambodia, China, India, Indonesia, Malaysia, Papua New Guinea, Philippines, Singapore, Sri Lanka, Thailand and Vietnam. This group accounted for 9% of global rubber production. The increase in Cambodia s newly-exploited land offsets the decreasing land in Binh Duong province. In Vietnam Rubber Group, PHR ranked the top 5 in the planted rubber land with a total 15,277 ha in Vietnam and 8,632 ha in tapping period. Each year, the company taps around 16,- 18, tons of rubber and outsource 11,-14, tons of rubber from Rubber Farmers in Southeast region. Thanks to its advantageous location in Southeast region, the company could flexibly collect from the farmer to utilize its operating capacity of 27, tons/year. Moreover, the company has also expanded its business in Cambodia with total 9,184 ha, in which 1,5 ha falls in tapping period (planted in 28), with an average yield of.6-.7 ton/ha. From , the newly-exploited land in Cambodia is projected to increase by 1,5-2, ha/year and will reach the highest yield in , thus offset the decreasing land in Binh Duong province due to industrial park expansion (See more in figure 6). Figure 5: Vietnam Rubber Group s subsidiaries (216) PHR DPR TRC Dau Tieng Dong Nai Phu Rieng Loc Ninh VRG Key Indicators Binh Duong Binh Phuoc Tay Ninh Binh Duong Dong Nai Binh Phuoc Binh Phuoc Revenue (VNDbn) 1, ,297 1, ,72 PBT (VNDbn) ,227 Total area (ha) 24,461 16,583 13,6-34,234 18,85 15,859 3, Parent 15,277 1,83 6, - 34,234 18,85 1,8 - Cambodia* 9,184 6,5 7, ,59 - Tapping area (ha) 16,294 13,228 4,718 16,35 18,351 11,54 1,25 253,3 Parent 8,632 7,135 4,718 16,35 18,351 11,54 7, - Cambodia* 7,662 6, ,25 - In-house volume (tons) 16,4 14,476 9,5 26,212 24,316 26, - - Outsourcing volume (tons) 14, 2, ,93 5,936 9, - - Consumption volume (tons) 3,874 17,232 1,639 39,143 3,252 35,541 12,238 - Source: PHR, TVS Research Figure 6: Cambodia s exploiting plan Planting year Area (ha) Expected exploited volume (tons) 21 2, , 1, , , 1, ,278. 1, 1, Sum 7, ,. 2, , , Source: PHR, TVS Research

7 7 Ample income from non-core businesses More Steady Revenue Coming From rubber tree liquidation Liquidating rubber tree adds more steady revenue around VND 14-15bn per year. Along with a strong performance in rubber segment, rubber tree liquidation has proven as an attractive segments. PHR owns an old-tree profile, with average age of year old compared with younger tree structure like DPR and TRC. Thus, the company would receive a steady income, around VND 14-15bn/year from rubber tree liquidation. According to VRG, rubber wood contributed c.32% of total export value of USD 4.85bn (+16.4% H-o-H). Figure 7: Revenue from liquidating rubber tree VND14-15 bn/year H217 Source: PHR, TVS Research From early-217 to August 217, PHR liquidated total 1,4 ha and expects to liquidate more 5 ha in 4Q217. Thanks to a rising rubber price, natural forest closure and FDI attractions, rubber wood tree s price has experienced a rapid growth this year. In September, rubber wood liquidation is traded at VND 3mn/ha, 76% higher than in late-216. We expect that rubber wood liquidation price could continue their upward trend in the rest 217 Extraordinary profit thanks to transferring land to IP developers The company planned to transfer 2,37 ha for IP developers during period. We expect PHR can recognize extra-profit from transferring land to VSIP during Owning the favorable geographic location, PHR has more advantages as an IP developer apart from NR exploiter. PHR currently invests in Tan Binh IP JSC., and Nam Tan Uyen IP JSC., and cooperates with VSIP (Vietnam Singapore Industrial Park), which are three well-known IP developers. Tan Binh IP JSC.,: total area of 352 ha and commercial land is 244 ha with current occupancy rate of 6% and current land rental of USD 54-55/sqm. The company plans to expand further 1, ha in 218.

8 8 Nam Tan Uyen IP JSC.,: total area of 62 ha and commercial land is 429 ha with current occupancy rate of 9-1% and current land rental of USD5-6/sqm. NTC plans to expand further 346 ha (commercial land of 256ha) in Q4217. VSIP: PHR disclosed that the company will transfer 3 ha to VSIP in 217 and 391 ha in 218. The revenue from transfer land will be allocated in For the 3- ha transfer land profit, PHR will book 5% in 4Q217 and the remaining in 1Q218. Figure 8: PHR s planned transfer land Company Type of Investment %Ownership Acreage (ha) Land transfer price (VND Time mn/ha) Tan Binh IP JSC., Subsidiary 8% 1, N/a Nam Tan Uyen IP JSC., Investment associates 32.85% * VSIP Co-operation 691 1, Source: PHR, TVS Research, *current price NTC s divestment delivers the one-off profit for PHR In 3Q217, PHR and VRG have agreed to divest the PHR s stake in NTC. The company made known that their investment cost ranges around VND bn. Based on current NTC s market price of VND6-7,/share, we expect that PHR could gain around VND 25-31bn. This divestment is expected to occur in 218 after VRG s IPO, which will happen in late-217 and early-218. Favorable geographic location Favorable geographic location gives PHR advantages to position itself as an industrial park developer and rubber exploiter. PHR is one of the largest NR exploiter in Vietnam Rubber Group. The company has the advantageous location in Southeast provinces of Vietnam where the weather condition is favorable for planting and tapping NR trees. The company locates in the central of Binh Duong Province where is well-known for FDI investors. The province remains attractive to foreign investors, following by Ho Chi Minh City, ranked the 2 nd place with total FDI investment of USD 29bn in 8M217. Therefore, the favorable natural location gives PHR advantages to position itself as an Industrial park developer, besides its traditional business.

9 9 Figure 9: PHR s location Source: Google Map, TVS Research

10 1 OUTLOOK and VALUATION 217 and 218 Outlook Our blended model arrives fair value of VND 51,8 per share, 26% potential upside before dividend yield. In 217, we expect that PHR sell around 29,45 tons, of which 15,45 tons is outsourced, with an average yield of 1.9 tons/ha. Cambodia s exploitation volume will be at 9 tons with a lower yield of.6 tons/ha. The average rubber price is expected to be VND 41mn/ton, up 3% YoY. In 217, we project that PHR s revenue and profit after tax will reach VND 1,541bn (+3.8% YoY) and VND 51bn (+126.1% YoY), respectively. This translates into an EPS of VND 5,16. With strong performance, we expect the company could rise its cash dividend payment to 35-4% in 217 instead of 15% as per management s guide. For 218 forecast, we expect that rubber price could increase slightly due to its fundamental support. However, rubber volume from in-house exploitation and consumption could be lower due to liquidation and transfer land activities, reaching at 14,5 tons and 27,5 tons, respectively. PHR s net revenue and NPAT is projected to increase by 1.2% and 51.2% YoY, equivalent to EPS of VND 7, P/E forward will be 5.41x, lower than the average P/E of 8.6x in domestic natural rubber sector. We value PHR using a blended of FCFF, PE and DDM methods. Our 12-month target price is VND 51,8/share. Figure 1: Valuation summary Method Price (VND) Weight (%) DDM 45,298 3% FCFF 4,242 3% PE 65,225 4% Target price (VND) 51,766 1% Source: TVS Research For DDM model, we expect PHR can pay dividend of VND 4, per share until 221 as we are bullish on the business cash flow without significant capital expenditure. Figure 11: DDM-based method VND unless otherwise stated Cash Dividend 4, 4, 4, 4, 4, Cost of Equity (%) 1.33% Present Value of Cash Dividend 3,897 3,532 3,21 2,92 2,63 Cumulative Present Value of DDM 16,162 Growth rate (%) 1.2% Terminal Value (VND) 44,312 Discount Factor.66 PV of Terminal Value 29,136 Implied Price per Share 45,298 Source: TVS Research

11 11 Figure 12: FCFF-based method VNDbn unless otherwise stated FCFF WACC (%) 7.92% Present Value of FCFF Cumulative Present Value of FCFF 1,729 Terminal Value 3,289 Discount Factor.72 Present Value of Terminal Value 2,378 Total FCFF 4,17 Less: Total Debt 835 Implied Equity Value 3,272 Number of shares (mn) 81 Price per Share (VND) 4,242 Source: TVS Research Figure 13: Peer comparison No. Ticker Company ROE P/E 1 DPR Dong Phu Rubber JSC., 11.63% TRC Tay Ninh Rubber JSC., 5.8% 7 Average P/E 8.6 Source: TVS Research Downside risks to our model are: (1) Commodity price risk. Decline in natural rubber price could undermine PHR s future earnings. (2) Delay in transferred-land s profit recognition. Currently PHR do not disclose the non-core business recognition practices that raises our concerns about quarterly earnings volatility. (3) Economy slowdown. Domestic GDP growth slows could lead to a decline in FDI flows, which negatively affected industrial park and wood segments.

12 12 ANALYST CERTIFICATION I, My Tran, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies or its or their securities. 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. RATING and VIEWS Buy (B), Neutral (N), Sell (S) Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions 12-month rating Definition Buy Total Stock s Return Potential > 15% Neutral Total Stock s Return Potential between (-15%) and 15% Sell Total Stock s Return Potential < (-15%) Short-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to fall within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target. DISCLAIMER Copyright 217 Thien Viet Securities JSC (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of TVS. The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. HO CHI MINH 63A Vo Van Tan St, District 3 Floor 9, Bitexco Nam Long Building Tel: +84 (8) Fax: +84 (8) RESEARCH DEPARTMENT Duy Nguyen (Mr.), Manager Equity Capital Market duynh@tvs.vn My Tran (Ms.), Associate Agribusiness myttd@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn THIEN VIET SECURITIES JOINT-STOCK COMPANY HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) Fax: +84 (4) Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn