Superdong Kien Giang Speedboat Corporation (HOSE: SKG) - Phu Quoc beckons

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1 c Coverage 06 Oct 2016 Rating OVERWEIGHT SKG Transportation Market price (VND) 86,100 Target price (VND) 101,200 Price return (%) 17.5% Expected dividend yield (%) 1.2% Expected total return (%) 18.7% VND,000 Stock performance (%) YTD 1m 3m 12m Absolute 38% 7% 13% 54% Relative 18% 11% 19% 36% Source: Stoxplus, relative to VNI Stock Statistics 06Oct16 52week range (VND) 50.3k101k Shares o/s (bn) 34.3 Mkt cap (VNDbn) 2,950 Mkt cap ($m) Foreign % owned 48% Est. free float (mn) m avg daily vol (mn) 0.08 VND/USD 22,250 Index: VNIndex/HNX /85.97 Source: Stoxplus Ownership Price Volume '000 shares 06Oct16 Puan Kwong Siing 22.12% Nguyen Thi Thien Huong 11.21% Quach Hong 6.85% The Ton Poh Thailand Fund 6.15% Others 53.67% Source: Stoxplus Superdong Kien Giang Speedboat Corporation (HOSE: SKG) Phu Quoc beckons Investment ideas: Benefit from booming tourism in Phu Quoc and Nam Du thanks to new governmental development plan for the region. A large fleet helps Superdong take advantages of economics of scale and dominate its market. New projects may continue boosting sales and profit Strong financial condition thanks to high profit margin and a lot of cash. Investment risks: Increasing oil price will likely adversely affect profit margin. Increasing competition due to the investment incentives of Phu Quoc Capital structure is not optimal. Valuation: We value each SKG share at VND101.2k at the end of 2017 based on multiple approach. So OVERWEIGHT VNDbn Net revenue Growth (%) Operating profit Margin (%) Other profit Net profit Margin (%) Outstanding shares (million) EPS (bonusadjusted, VND) Growth (%) ROE (%) (excl minority) Net debt/equity (%) PER (x) PBR (x) EV/EBITDA (x) DPS (VND, as reported) Dividend yield (%) , , , , E 2017E 2018E ,656 7,554 8, ,000 1,000 1, Ms. Nu Le (+84 8) Ext: 1460 Nu.lt@kisvn.vn Page 1

2 Growth potential from Phu Quoc. Aiming at developing Phu Quoc to an international tourism centre, Vietnam former Prime Minister Nguyen Tan Dung promulgated special policies, providing the most favorable treatment (that a region of Vietnam can have) for investors to this island (the least underdeveloped region of Vietnam). For example, tax rate for investments in Phu Quoc is 10% in their lifetimes in addition to tax exemption in the first 4 years and 50% tax reduction in the next 9 years; imported capital goods is tax free; personal income tax is also reduced by 50%; foreigners staying in Phu Quoc less than 30 days will be offered visa exemption; etc. As a result, Phu Quoc has attracted huge investment in the recent years, especially into tourism such as: Vinpearl Phu Quoc, Safari Wildlife Zoo, Premier Village Phu Quoc Resort, etc. Being the heart of 2016 national tourism year of Discovering the South, Phu Quoc is welcoming more and more visitors thanks to myriad tourism activities such as 2016 Phu Quoc Green Tourism Campaign, Cuu Long River Delta Food Festival. Phu Quoc welcomed 1.92 million turns in 8M2016, more than 1.64 million turns in Tourist number 4.00 million turns Kien Giang Phu Quoc Foreigner ( to Phu Quoc) M2016 Source: Kien Giang Department of Culture, Sports and Tourism According to the development plan of Phu Quoc, visitors to the island is estimated to double to 23 million turns in 2020 from 11.2 million turns in With the recorded figure of tourists already reached 1.64 million turns in 2015, we expect that there will be approximately 4 million turns of visitors to Phu Quoc in 2020, equivalent to CAGR of 20% over the period In addition, according to Kien Giang Department of Culture, Sports and Tourism, about two third of Phu Quoc destined travelers use waterway and the rest use airplane. As a result, it provides more opportunities for waterway transportation services companies like Superdong to expand its business operation.. and Nam Du Nam Du is another destination when travelling to Kien Giang with fresh air, wild and breath taking scenes. Nam Du saw 47k turns of visitors in 2015 and 20k turns in 3M2016. Foreseeing this potential, Superdong has launched Rach Gia Nam Du route 6 months earlier than its initial schedule. Despite of coming into operation from Page 2

3 2H2015, the contribution of the route to Superdong s net sales reached 15% in 1H2016. Superdong s capacity Capacity Boat ( passengers) Superdong I 171 Superdong II 258 Superdong III 306 Superdong IV 306 Superdong V 275 Superdong VIII 275 Superdong X 275 Superdong VI 275 Superdong VII 275 Superdong IX 275 Superdong XI 275 Superdong XII 275 Routes (Normal + Rush occasion) Rach Gia Nam Du Rach Gia Phu Quoc Ha Tien Phu Quoc Status Active Coming Source: Superdong Superdong s business areas 56km 115km 90km Rivals Maritime transporter Source: Superdong, KIS estimates Having huge capacity and highquality services, Superdong is monopoly exploiting Rach Gia Phu Quoc route while holding 8385% market share of Ha Tien Phu Quoc route and 65% of Rach Gia Nam Du route. Page 3

4 Rach Gia Phu Quoc route Price (VND,000) Travel time Adult The old The disabled Children 2h Ha Tien Phu Quoc route Source: Superdong Price (VND,000) Company Travel time Adult The old The disabled Children Motorcycle CarBus Superdong 1h20' Ngoc Thanh 1h15' Thanh Thoi Ferry* 2h30' ,000 *Fares for vehicles exclude fares for passengers Company Nam Du Phu Quoc route Travel time Source: Superdong, Ngoc Thanh, Thanh Thoi Price (VND,000) Adult The old The disabled Children Superdong 2h Ngoc Thanh 2h25' Source: Superdong, Ngoc Thanh Compared to Ngoc Thanh, Superdong sets a little higher price for the premium service quality thanks to newer boats with better facilities and higher capacity. For Thanh Thoi high speed ferry, while the travel time of Superdong is shorter, its Bai Vong port is also nearer from Duong Dong downtown (Thanh Thoi ferry arrives Da Chong port). Da Chong port Duong Dong town Bai Vong port In addition, the transportation capacity of Superdong is much higher than its rivals thanks to having a much larger fleet. Specifically, while Ngoc Thanh has only 2 boats for 317 passengers each turn, those of Superdong are 10 boats and 2,691 passengers. With 4 high speed ferry, Thanh Thoi could transport 1,945 passengers each turn. Page 4

5 Air carrier Since the target customers of Superdong are local residents in Cuu Long River Delta region (including 9 provinces), an emerging cheap carrier has not exerted significant impacts on Superdong s operation in the short term. Potential rivals Providing a lot of favorable supports, Phu Quoc has attracted more and more investors in different segments including transportation. In the future, in our opinion, more companies will likely to penetrate this market, making the competition tougher. New investments HelloCon Dao Superdong plans to be the first one to launch Soc Trang Con Dao speedboat route in From 2009 to 2015, the number of tourists travelling to Con Dao increased by 33% per year, of which international tourist rose by 22% per year, according to the report of People s Committee of Con Dao District. In 2015, there were more than 110 thousand turns of tourist coming to this island, rocketing tourism sales 60% YoY to VND460bn. In addition, according to the economic master plan of Con Dao national park to 2030, Con Dao is expected to become one the most attractive tourism destinations in Southeast Asia area. As a result, companies investing in Con Dao will be offered the most favorable treatment similar to Phu Quoc. Generally speaking, investment incentives and tourism potential of Con Dao motivate Superdong to launch Soc Trang Con Dao route. Moreover, the shortest way to come to Con Dao Island from Cuu Long River Delta region is Soc Trang. Just like Rach Gia Phu Quoc, being one of the first exploiters of this new route could bring competitive advantages for Superdong. Superdong needs around VND100bn to put two speedboats into use for this route. Watch me, Thanh Thoi! Superdong is also about to launch highspeed ferries for Ha Tien Phu Quoc route in 2017 to compete with Thanh Thoi Ltd, the only transporter having ferries for this route now. The destination of Thanh Thoi is Da Chong port in the North of Phu Quoc island, having the shortest distance from Ha Tien to Phu Quoc compared to other ports. However, it takes longer time to come to Duong Dong, the centre of Phu Quoc island. As a result, Superdong is going to build a berth for its ferries in Bai Vong port, its current arrived port of speed boats to shorten travel distance and differentiate itself. Total CAPEX including a new berth and two ferries is estimated at USD11 13mn. More speedboats for the existing routes Regarding to the existing routes, 2 additional speedboats will be put into operation in 4Q/2016 and 1Q/2017 to meet increasing demand. According to Superdong, all tickets for Rach Gia Nam Du route until December 2016 have been sold out, showing excess travel demand to this beautiful island. Page 5

6 Improving gross margin Given the fact that diesel oil accounts for 4750% of totall cost, diesel price has made a great impact on the business performance of Superdong. DO price has fallen 46% to VND12.3k/liter in June 2016 since early 2014 due to the global oversupply, leading gross margin to increase to 71% in 2Q2016 from 51% in 1Q ,000 Diesel oil price and SKG's gross margin , VND/liter 15,000 10,000 5,000 0 Jan14 Mar14 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 May16 Jul16 Sep16 % 0.40 DO price Gross margin Source: Ministry of Industry and Trade, Superdong 180 Cost structure of Superdong VNDbn Others Depreciation expenses Staff expenses Materials expenses E Source: Superdong Although the business expansion of Superdong (three additional speedboats and a new Rach Gia Nam Du route were launched in 2015) has increased operating expenses considerably in the past few years, lower DO price has reduced material expenses in both absolute and relative terms. Specifically, operating expenses rose 9% YoY and 15% YoY in 2015 and 1H2016 respectively, material expenses dropped 13% YoY and 15% YoY. In addition, utilization rate has increased to 8085% for Rach Gia Phu Quoc routes and 7075% for Ha Tien Phu Quoc routes recently from approximate average 75% in 1H2014, also contributing to widening gross margin. Since the cost for one boat in one route is the same regardless of the number of passengers, the more passengers per boat, the less cost per person. Page 6

7 Business performance Sales and profit grow at two digits VND bn 2015 YoY 6M2016 YoY Sales % % Gross profit % % Gross margin (%) Operating profit % % Operating profit margin (%) Net interest expenses 7 50% 6 150% Other incomes 0 0 Net income % % Profit margin (%) EPS bonusadjusted (VND) 5,106 66% ROA (%) 40 ROE (%) 41 Thanks to the tourism development of Kien Giang province and especially Phu Quoc island, Superdong recorded outstanding doubledigit sales growth. Of note, the majority of travelers to Phu Quoc use waterway as said above, boosting sales of Superdong. Specifically, net sales of Superdong reached VND305bn in 2015 and VND189bn in 1H2016, up 36% and 22% YoY. Of which, the majority of sales growth in 2015 was contributed by the 87% sales increase from Ha Tien Phu Quoc route to VND101bn from VND54bn in After opening late 2015, Rach Gia Nam Du route saw the highest sales growth to VND28bn in 1H2016, increasing its contribution in total net sales to 15% (behind 51% of Rach Gia Phu Quoc route and 34% of Ha Tien Phu Quoc route). Meanwhile, decreasing material price and higher utilization rate helped the bottom line outpace that the top one. Net profit jumped 70% YoY to VND175bn in 2015 and 34% YoY to VND119bn in 1H2016. Sales by route of Superdong M2016 VNDbn Value Proportion (%) Value Proportion (%) Value Proportion (%) Ha Tien Phu Quoc Rach Gia Phu Quoc Rach Gia Nam Du Shuttle Source: Superdong Favorable tax rate For transportation business in Kien Giang, Superdong will have to pay the statutory tax rate of 10% only during its lifetime as an incentive for companies investing early into underdeveloped areas like Kien Giang. Moreover, business income tax on the fleet of Superdong is currently reduced or exempted. Specifically, Superdong I and Superdong II boats are entitled to 50% BIT reduction until 2020; those of Superdong III and Superdong IV boats are 50% until 2022 and the remaining boats are currently Page 7

8 exempted from tax. As a result, Superdong saved VND34bn and VND21bn tax expenses in 2015 and 1H2016, respectively. Capital structure Abundant cash and equivalents with no debt resulted in extremely strong liquidity for Superdong. Accordingly, cash and equivalents accounted for 67%, 77% and 86% in current assets at the end of 2014, 2015 and 1H2016, respectively. Of which, shortterm saving made up major proportion, contributing approximate VND7bn financial incomes to the business results of Superdong. In addition, thanks to the nature of its business selling its service mostly in cash, receivables and inventories also took modest proportion in its assets H2016 Current ratio Quick ratio Liabilities/ Equity (%) Debt/Equity However, having no debt increases the cost of capital of Supedong. Given the fact that the current local borrowing rate is at 10year low, a little debt will unlikely put any pressure on Supedong but improve capital structure and increase ROE. Moreover, as the operating cashflow of Supedong is very stable and is even increasing, we believe bank creditors are willing to offer very favorable loan terms to Superdong. Valuation We value each SKG share at VND101.2k at the end of 2017 based on multiple approach. SO OVERWEIGHT. In our valuation, we do not price in new Soc Trang Con Dao route and ferry project for Ha Tien Phu Quoc route due to the lack of sufficient information. Waterway transit service industry 2017 estimate for SKG 2017 price for SKG PER 13.4x EPS = VND7, ,200 No Ticker Name Mkt Cap (USD) TTM PER (x) 1 ATTICA GA Equity Attica Holdings S.A 195,606, SKG VN Equity Superdong Kien Giang Corp 137,453, KS Equity CHUNIL EXPRESS CO.,LTD. 129,167, MOLS DC Equity MolsLinien Corp 131,451, Mkt cap weighted average PER 13.4x * Excluding outliners and negative data. Source: Bloomberg. Data as of 26/09/2016. Page 8

9 SKG FINANCIALS MODEL Price: 86.1k Target: 101.2k Mkt cap: VND2,951bn Unit: VNDbn E 2017E 2018E Net Revenue Sales growth (%) COGS Gross margin (%) SG&A EBITDA EBITDA margin (%) Depr n & Amort n Operating profit Operating margin (%) Net interest expense Interest cover (x) Other profit/loss Tax Effective tax rate (%) Net profit Net margin (%) Minorities Net attributable profit Number of shares (m) EPS (VND, bonusadjusted) 5,106 6,656 7,554 8,908 EPS growth (%) DPS (VND) 1,000 1,000 1,000 1,000 Payout ratio (%) EBITDA = Net revenue (COGs Depr n & Amort n) SG&A expenses EBIT = EBITDA Depr n & Amort n Net interest expenses = interest expenses interest income Other profit/loss consists of other financial income/expenses, profit share from JVs/associates and other income/loss Payout ratio = Dividend paid / Net attributable profit CASHFLOW AND BS ITEMS (VNDbn) E 2018E Receivable turnover (x) Inventory turnover (x) Payable turnover (x) Increase in WC Capex Other cashflow items Free cash flow Share issues Dividends paid Increase in net debt Net debt, end of year Enterprise value 2,707 2,562 2,328 2,046 Total equity ,210 Minority interests Shareholder s equity ,210 BVPS (VND) Net debt / equity (%) Net debt / EBITDA (x) Total assets ,238 Net debt = debts cash & equivalent We do not project CAPEX for Soc Trang Con Dao route and Ha Tien Phu Quoc ferry plan. If included, total CAPEX for 2017 and 2018 are approximate VND400bn. KEY RETURN AND VALUATION RATIOS E 2017E 2018E ROE (%) (excl minority interest) ROA (%) ROIC (%) WACC (%) PER (x) PBR (x) PSR (x) EV/EBITDA (x) EV/Sales (x) Dividend yield (%) (bonusadjusted) Page 9

10 Contacts: HCM City Head Office Level 3, Maritime Bank Tower Nguyen Cong Tru St., District 1, HCM City Tel: (+84 8) Fax: (+84 8) Hanoi Branch Level 6, CTM Tower 299 Cau Giay, Cau Giay District, Hanoi Tel: (+84 4) Fax: (+84 4) Equity Research Head of Equity Research Mr. Huy Hoang, CFA (+84 8) (x1450) Senior Associate Energy, Commodity, Logistics Mr. Vu Tran (+84 8) (x1459) Senior Associate Consumerrelated Ms. Nu Le (+84 8) (x1460) Senior Associate Real estate Mr. Trung Hoang (+84 8) (x1457) Macro Research Head of Macro Research Mr. Vien Bach (+84 8) (x1449) Technical Associate Mr. Quang Nguyen (+84 8) (x1461) Institutional Sales Director, Sales Ms. Uyen Lam (+84 8) (x1444) Page 10

11 Our Recommendation System OVERWEIGHT: where we believe prospective 12 month VND total return (including dividends) will be 15% or more. NEUTRAL: where we believe it will be 5% to 15%. UNDERWEIGHT: where we believe it will be 5% or less. Disclaimer This report has been issued by the KIS VN Securities Corporation ( KIS ) with the instructional contributions of KIS VN Securities Corporation whose employees are specified in the publication. This report is for information of its institutional and professional customers. This report is and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe for any investment. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investors are advised make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular circumstances such as their financial situation, investment objectives and other considerations. In preparing this report, we have relied upon and assumed the accuracy and completeness of all information available from public and other sources which we believe to be reliable, but which we have not independently verified. KIS makes no express or implied guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. Opinions, estimates, and projections expressed are current opinions of the authors as of the original publication date appearing on this report only and the information, including the opinions contained herein, and are subject to change without notice. KIS and its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, companies mentioned herein. Further, KIS and its affiliates, and/or their officers, directors and employees involved in the preparation or issuance of this report may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives in a manner that may be consistent or inconsistent with this report and opinions expressed therein. As a result, investors should be aware that KIS and its affiliates and/or their officers, directors and employees may have a conflict of interest that could affect this report. This report shall not be copied, reproduced, distributed (in whole or in part) or disclosed by recipients to any other person without the express permission of KIS in writing. Page 11