THANH THANH CERAMIC (TTC)

Transcription

1 THANH THANH CERAMIC (TTC) Company report Building material sector 1. The local ceramic market has become oversupplied since Inventory has reached 30% total production in 2013 forcing players to operate at only 70% total capacity (435 mil.sqm/year). Steel sector 2. TTC has limited competitive advantage: small-size capacity 5.5 mil. sqm/year, outdated product portfolio, weak distribution network compared with Prime, Dong Tam Group. 3. Given less growth potential, TTC cut cost as the last resort to survive hardship. But this is not a longterm solution. Cost optimization: running 88% production capacity to drive down unit cost. Fuel switch from Furnace Oil (FO) and Diesel Oil (DO) to Coal and Compressed natural gas (CNG), saving 20 billion VND/year 4. Downside risks than ever: The property market recovers slowly, causing ceramic inventory climb to ~30% total production, despite actively exporting in recent years. Harsh competition including trading fraud from Chinese imports High transportation cost forces producers to revise selling price up 20-30% starting from 20/4/2014. Price hike might encourage buyers to switch to Chinese products. 5. As TTC has less room for growth and encounters stiff competition in today s oversupply market without sustainable competitive advantage, we expect TTC 2014 P/E 7.9x, P/B 0.7x and EV/Ebitda 3.8x. 100% 50% TTC Price VNINDEX PB (x) TTC VNINDEX SELL Key indicators 30/May/2014 Price (29/5/2014) 12,300 Target price (VND 000) 9,000 Target PB (x) 0.7x Target EV/EBITDA (x) 3.8x Downside(%) -27% 2014 EPS growth (%) -28.8% 2014 ROE (%) 12.5% 2014 Debt/Asset (%) 4.6 Current price (VND) 11,700 Market cap (USD mn) 3 Shares outstanding (mn) 6 Avg 1 month traded 5,717 Foreign ownership 2.8% Ownership Structure % % 0% May-13 Aug-13 Nov-13 Feb-14-50% May-09 May-10 May-11 May-12 May-13 FICO Others 1

2 FINANCIAL METRICS (VND bn) Income statement F Revenue Gross profit Operating profit (7) Non-operating profit (0) (1) (1) (0) 1 Profit to shareholders (14) Balance sheet F Cash & equivalent Accounts receivable Inventories Net fixed assets Total Assets Short-term debt Long-term debt Total equity Cash flow F Ratio F Margin GM 3% 9% 10% 13% 11% OM -3% 3% 4% 5% 3% NM -6% 1% 3% 4% 3% Growth ratio Sales 18% 36% 7% -3% 0% EPS -4775% -120% 219% 65% -35% Profitability ratio ROA -8% 2% 6% 11% 7% ROE -23% 5% 15% 21% 12% Liquitity/solvency Current ratio (x) Debt-to-asset 34% 28% 18% 5% 5% Debt-to-equity 103% 81% 39% 9% 8% Valuation metric EPS (VND) (2,275) 454 1,449 2,391 1,566 BVPS (VND) 8,453 8,919 10,368 12,759 14,325 Beginning cash Operating cash Investing cash (4) (4) 0 (2) - Financing cash (10) (9) (19) (18) - Cash generate (8) Ending cash

3 Prime Royal Dong Viglacera Catalan Taicera CMC Mikado White Vitaly Chang Yih TTC Red Star My Duc Hong Ha Million sqm/year TTC BUSINESS MODEL 1. Main operation: Selling Ceramic & granite tiles using Italian technology with production capacity of 5.5 mil. sqm/year (5 production lines with the latest one was installed in 2003). TTC is in small size group with capacity below 10 mil. sqm/year. 2. Products have low switching cost and are likely outdated with popular size (max 40x40cm) while market prefers larger size (50x50cm, 60x60cm or more). 3. Target segment: mid-end. TTC plans to enter high-end segment which requires heavy investment in PPE & Design. 4. Oversupply domestic market is TTC s main playground, representing 94% TTC s 2013 sales, supported by over 100 point of sales (POS) in the Central Vietnam & Mekong Delta. TTC s network is still humble as compared with nation wide distribution system of Dong Tam Group (24 subsidiaries & 1800 POS) or Prime Group (100 primary and 1000 secondary distributors) Source: TVS Research Production capacity Taicera 4% CMC 3% Viglacera 4% Chang Yih TTC 1% 2% Mikado Prime 21% 2013 Total production 2% Red Star 1% Vitaly 2% Đồng Tâm, Whitehorse, My Duc, Hong Ha, Royal, Catalan and Others 60% Source: TVS Research 3

4 Mil. Sqm CERAMIC MARKET OVERVIEW TTC faces less growth opportunity in an oversupply industry The world ceramic tile inventory has begun to increase since 2009 due to global economic downturn. This situation unveils limited opportunity for local ceramic producers to liquidate stock via exporting. The local ceramic market has become oversupplied since 2007 as producers mushroomed to take advantage of progrowth policies. From 2011 till now, economic crisis and frozen property market have severely damaged the ceramic market. This situation caused inventory to rocket up to 30% total production despite players operating at only 70% capacity. 12,000 10,000 8,000 6,000 4,000 2,000 - World ceramic tile production and consumption World production (mil. sqm) Surplus (% production) World inventory continues picking up during global economic woes 400 Vietnam Ceramic tile industry Ceramic production Ceramic Consumption Capacity utilization Accum. Inventory (% of production) Source: TVS research World consumption (mil sqm) Source: 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4

5 DOMESTIC COMPETIVE LANDSCAPE TTC encounters stiff competition from local players as well as Chinese imports Dong Tam Group Long An Province Second largest ceramic producer in Vietnam with production capacity of 20 million sqm/year Diversified products with ceramic, granite, cement floor tiles, coating, toilet, and windows. Ceramics account for 64%. Factories in Long An, Da Nang & Hai Duong Viglacera Group Viglacera Thang Long: Listed on HNX. Forrmer state-owned company, production capacity of 8.5 million sqm/year Viglacera Hanoi :Bac Ninh Province. Former state--owned company, production capacity of 5.5 million sqm/year Viglacera Tien Son: Listed on HNX. Former stateowned company, production capacity: 6.0 million sqm/year including ceramic and granite YMY Ceramic Tiles Corporation Dong Nai Province Production Capacity: 16 million sqm/ year Catalan Ceramic Bac Ninh Province Production Capacity: 15 million sqm/year Mikado Vung Tau Province 100% Malaysian owned company Production capacity: 10 million sqm/year including ceramic and granite Prime Group Vinh Phuc Province The largest ceramic producer in Vietnam, among top-10 world largest ceramic producer, production capacity of 90 million sqm/year 8 factories in Vinh Phuc, Thai Nguyen and Da Nang 25% world market share Cost is 10% lower than local and regional competitors Import: China, Italia, Spain and others Estimate of million sqm low-end products imported from China Premium products imported from China, Italia, Spain and others White Horse Vung Tau Province 100% Malaysian owned company Production capacity: 10 million sqm/year including ceramic and granite Taicera Dong Nai Province Listed in HOSE. Former foreign owned company Production capacity: 11 million sqm/year including ceramic and granite 55% sales from export CMC Phu Tho Province Listed on HNX. Former state-owned company Production capacity: 10 million sqm/year Chang Yih Dong NaI Province Listed in HOSE. Former foreign owned company Production capacity: 6 million sqm/year TTC Dong NaiProvince Listed on HNX. Production capacity: 5.5 million sqm/year Others: Other ceramic companies with production capacity less than 10 million sqm/year : Red star (Hai Duong) 4 million sqm/year My Duc (Vung Tau) 3.2 million sqm/year Vitaly (HCMC& Binh Duong) 6.5 million sqm/year 5 5

6 OPERATING HIGHLIGHTS TTC cut cost to improve business performance but it is not a sustainable competitive advantage Sales dropped (-2.9%) but COGS dropped deeper(-6%). Thus, Gross margin up by 3%. Since 2012, TTC has used Coal and Compressed natural gas (CNG) instead of Furnace Oil (FO) and Diesel Oil (DO), saving ~VND20 bn /year, making 2013 gross profit up by 8.6 bn VND. If excluding depreciation, COSG dropped by ~VND16bn which is equivalent to the saving amount stated above Profit after tax growth (+65% y/y) underpinned by: Decreasing depreciation* (from VND14bn in 2012 down to VND7bn). VND bn Sales Revenue growth 400 COGS growth Gross margin % F Sales becomes flattening while COSG starts to surge % 40% 30% 20% 10% 0% -10% -20% -30% -40% Interest expense plummeted from VND7.4bn to VND0.6 bn in , as a result of deleverage process in the same period (debt/assets ratio down from 28% to 5%). In view of stabilizing interest rate in upcoming years, positive effect from reducing financial cost is expected to fade. As a result, ROE and ROA both improved to 20.7% and 10.5%, respectively from its 2012 levels of 15% and 6%. 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% ROE ROA F Source: Bloomberg Profitability improved by cutting cost * Vietnam Accounting System (VAS) requires depreciation to be recorded in COGS. 6

7 OPERATING HIGHLIGHTS Coal price is on the increase at the expense of gross profit. Fuel accounts for about 30-45% in ceramic production cost. Therefore, the 4-10% increase in coal price since Jan 2014 could damage TTC s profit margin. Moreover, according to Vinacomin from 2014 onwards, coal exploitation condition becomes tougher which signals higher coal production expense and more upward pressure on coal price. TTC s manufacturing expense is expected to surge in up coming years. The firm s PPE was installed from and no substantial Capex since then which implies higher maintenance cost, thus higher COGS in upcoming years. In fact, Q12014 sales was VND 80.8 bn, +11% y/y while COGS surged by 13%, leading to a drop in Gross margin by 7% y/y. A painful trade off between SGA investment and sales. In , given stiff competition in the ceramic market, growth in selling and admin expenses is always higher than that of sales. This shows diminishing effect in TTC s promotion, thus indicating deterioration in bottom line. 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% SGA growth Sales and SGA growth Revenue growth Source: Bloomberg A painful trade off between SGA investment and sales If TTC keeps investing in SGA to maintain market share while sales become flattening, negative growth in net profit is about to happen. 7

8 COMPETITVE STRATEGY Lower production cost by running at high capacity (88% compared with industry 70%) and switching to cheaper fuel (Coal and CNG). Position as hi-end producer to stay away from price war with Chinese product in low-end segment. Product improvement by introducing more attractive design and larger size i.e. 30x45cm, 50x50cm, 60x60cm or more. This is a less crowded segment which has seen higher profitability and growing demand recently. However Targeting higher segment and diversifying product portfolio require heavy investment in modern technology which TTC cannot afford at the moment as the property market shows slow recovery % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Output (mil.sqm) % capacity utilization % industry capacity untilazation Source: TVS research TTC keeps running at high capacity to lower unit cost Moreover, TTC seems to be slower than rivals (Prime, Dong Tam Group or even Chinese imports) in offering attractive design & large size products to market. This situation limits TTC s opportunity to maintain its market share and sales growth. 8

9 BUSINESS RISKS TTC encounters more risks than ever The local real estate market shows little sign of recovery while foreign demand for ceramic tiles is still weak. Harsh competition from Chinese imports in terms of price, product design and discount policy (~20% compared with local practice of 10%). Trading fraud from Chinese imports has not come to an end. Despite 25% import tax, Chinese ceramic tiles still freely flow into Vietnam by claiming extremely low import price (50-70% lower than real price). The situation would become worsened when the import tax on Chinese tiles will be lowered according to Vietnam s WTO commitments. Outdated equipment from can become a burden for TTC regarding possible repair and substantial maintenance cost. Transportation cost has rocketed 2-3 times as the Government requires transporters to follow the registered loading capacity. This sudden hike in cost will undoubtedly hit the producer s already thin margin. Selling price is revised up by 15-20% from 20/4/2014 onwards, to compensate for the expensive transportation cost, hence, creating a chance for Chinese imports. 9

10 VALUATION Given current oversupply crisis and stiff competition, only a few firms in this sector struggled to earn tiny profit, thereby using P/E valuation would be inappropriate. We suggest applying P/B and EV/EBITDA to value TTC comparable basis. 1. Building benchmark ratio TTC VN Mkt Cap (bnvnd) CURRENT EV/EBITDA EV/EBITDA 2013 P/B Gross margin 2013 (%) EBITDA MARGIN 2013 (%) VN on EBITDA GROWTH 2013 (%) TTC VN 69, x 2.55x 0.9x (16.79) CYC VN 55, x 4.72x 0.5x CVT VN 116, x 3.45x 1.0x TCR VN 244, x 7.01x 0.4x (23.37) VIT VN 84, x 4.27x 0.7x VHL VN 234, x 2.49x 0.8x Average 3.77x 4.08x 0.71x PE (x) TTC VNINDEX May-09 May-10 May-11 May-12 May PB (x) TTC VNINDEX May-09 May-10 May-11 May-12 May-13 Source: Bloomberg 10

11 VALUATION 2. Building scenario Scenario analysis Worst case Base case Best case F 2014F 2014F Sales growth % 18.3% 36.2% 7.0% -2.9% -3.0% 0.0% 1.0% Gross margin % 3.2% 8.5% 10.1% 13.0% 9.8% 11.0% 13.0% SG & A % 6.2% 5.0% 6.0% 8.0% 9.0% 8.0% 8.0% BPS 13,197 14,325 15,365 EBITDA TTC s bottom line depends heavily on (1) sales growth, (2) COSG & (3) SGA. Thus, we conduct scenario analysis based on expected changes of these 3 elements. Worst case: TTC will miss 2014 target with at least -3% fall in sales, gross margin down to 9.8% due to higher production expenditure and SGA will rise by 1% to maintain market shares. 3. Projecting expected value Scenario Probability BPS EBITDA 2014 (BN VND) Worst case 25% 13, Base case 60% 14, Best case 15% 15, Expected value 14, Building target price Target price (VND) P/B target 0.7x 10,083 EV/EBITDA target 3.8x 7,966 Outs. share (mil) 6 Average target price 9,025 Market price 29/5/14 12,300 Growth -27% Base case: TTC will meet 2014 target. Best case: TTC will exceed 2014 target with sales +1% (in line with market growth), gross margin and SGA remains the same as However, we don t expect TTC will likely to exceed 2014 target given more business risks stated above. As TTC has less room for growth and encounters stiff competition in today s oversupply market without sustainable competitive advantage, we expect TTC stock price to drop by about 27% within next year. 11

12 DISCLAIMER ANALYST CERTIFICATION We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any specific recommendations or views expressed in this report. by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (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) HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) Fax: +84 (4) RESEARCH DEPARTMENT research.hcm@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn BROKERAGE DEPARTMENT Ho Chi Minh brokerage.hcm@tvs.vn Ha Noi brokerage.hn@tvs.vn 12