DANAMECO MEDICAL JSC (DNM)

Transcription

1 Aug-13 Sep-13 Oct-13 DANAMECO MEDICAL JSC (DNM) Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Company report Plenty of room for potential growth from Medical equipment Leading position in niche market of medical dressings segment (50% market share) with close business relationship with public hospital, clinics, medical centers all over the country. Steel sector Growing demand from expanding/upgrading healthcare resources, thus translating into an expected growth of at least 20% p.a for the next 3-5 years. Positive earnings outlook due to Structural shift to manufacturing segment with higher margin (~40%) Effective cost management with higher productivity plus recent success in self-producing cotton material for gauze and applied domestic sterile packaging technology, leading to ~5%-10% costs saved. Sharp reduction in interest expense Strong balance sheet & improving profitability Deleverage with Debt/Equity down from 1.69x to healthy levels of 0.67x while improving current ratio from 1.1x to 1.6x in the same period. Improving profitability in : ROE (8% up to 33%), ROA (3% up to 13%). 1H2014 Positive Performance : Revenue VND 109bn, +37% y/y, Net income VND 12bn, +98% y/y, Net margin up from 7% to 11%. Undervaluation: DNM is currently trading at 6.3x 2014 PE and 1.6x P/B compared to those of healthcare sector 13.1x and 2.2x, respectively, while offering an attractive dividend yield of 9%. DNM is expected to be traded at fair valuation of 48,300 VND/share within compared to current market price of 33,500 VND/share (as of 11 Aug 2014). BUY Key indicators 12/08/2014 Price (11/8/2014) 33,500 Target price (VND) 48, PE(x) 6.3x 2014 PB(x) 1.6x Upside( %) 44% Dividend yield 9.0% 2014 EPS growth** -14% 2014 ROE 30% 2014 Debt/Asset 32% **DNM issued 1.15 million share in 6/2014 Market cap (USD mn) 6.22 Outs. Shares (mn) by end Avg 1 month daily traded (units) % 100% 50% 0% -50% Price Volume DNM VNINDEX 25,000 20,000 15,000 10,000 5, PE DNM PE VNINDEX PE Ownership structure DNM Chairw omen 12% Others 49% Vinam ed (SOE) 8% MB Securit ies 14% Thang Long Capital 17% 1

2 DNM Financial Metrics (VND Bn) Income statement F 2015F Revenue Gross profit Operating profit Non-operating profit (2) Profit to shareholders Balance sheet F 2015F Cash & equivalent Accounts receivable Inventories Total current assets Net fixed assets Others Total Assets Short-term debt Long-term debt Total liabilities Total equity Total liabilities & equity Cash flows F 2015F Beginning cash Operating cash Investing cash (2) (4) Financing cash (13) Cash generated Ending cash F 2015F Margin GM 23% 32% 33% 31% 31% OM 8% 12% 14% 13% 13% NM 2% 6% 9% 9% 9% Growth ratios Sales 19% 2% -5% 19% 17% EPS** -41% 185% 45% -14% 14% Profitability ratios ROA 3% 9% 13% 14% 14% ROE 8% 27% 33% 30% 28% Liquidity/solvency Current ratio (x) Debt-to-asset 53% 45% 34% 32% 29% Debt-to-equity 169% 130% 81% 67% 59% Valuation metrics EPS (VND) 1,499 4,265 6,177 5,310 6,078 BVPS (VND) 18,292 17,105 20,018 20,384 23,462 Source: Bloomberg 2

3 DNM Leader in a niche market Main operation DNM is seasoned and well-known in trading medical equipment from famous manufacturers: Oricare, Roche, Human, Johnson, B.Braun, Hitachi, Honda, Manufacturing medical consumables: protection products, sterile medical dressings, obstetric gauze, suturing materials, syringes, needles & catheters, ostomy products and surgical loves. The only firm in charge of medical dressings/instruments distribution in Central of Vietnam on behalf of the Ministry of Health & offer cleaning services for all hospitals in Da Nang city. DNM is a market leader in Vietnam medical consumables industry, especially protection products, gauze, latex gloves with 2013 overall market share of 50%. Moreover, DNM medical mask is qualified for exporting to Japan DNM Factories: Hoa Cuong (HC) Factory (6000 sqm in Da Nang): produces medical gauze, protection dress, life jacket, first aid kit. Quang Nam (QN) factory (30,000 sqm in Trang Nhat IZ, Quang Nam Province) producing medical gauze/masks/gloves. Given 5 times larger than HC Factory, QN factory can be expanded easily to support growing demand. Target segment: Hospitals, medical centers, laboratories, clinics and pharmacy shops on nationwide scale. Notably, DNM is the main supplier for many international projects conducted by UNFPA, UNICEF, FIDR, ADRA, JICA, Doctors Without Borders DNM captures the lion s share in local medical gauze market Overall market share 2013 DNM 50% Others 50% Competition strategy Bao Thach, An Lanh, Bong Bach Tuyet, and others Source: DNM Prospectus 2014, TVS research With modern equipment imported from Japan, Korea, Taiwan, DNM complies with international standards in terms of quality and health friendliness ISO 9001:2008, ISO 13458:2003, ISO 14971:2007, GSP to be qualified for exporting requirements. DNM constantly invests in R&D to improve product quality and achieve cost efficiency. The firm has successfully self-produced cotton material for gauze and applied domestic sterile packaging technology, allowing DNM to sharply reduce unit cost (5%-10% cost saved) 3

4 MANUFACTURING TRADING DNM products & services Medical equipment Endoscopy equipment Hemodialysis Machine Electroencephalograph Ultrasound color Hematology Analyzer (18 Parameters) Medical instruments Protection products Gauze 4

5 Expanding distribution network DNM s primary market includes Central provinces, Central Highland area and other major cities nationwide. Moreover, DNM is aggressively expanding its distribution network further from the urban area via bidding activities of medical supplies. DNM s primary market DNM has been a long-term supplier for many hospitals, clinics, medical centers all over the country and for many national/ international projects (as DNM was an State-Owned Enterprise - SOE before being equitized in 2004). This solid advantage allows DNM to remain firm as the leading gauze manufacturer in Vietnam with overall market share of 50%. DNM distribution channel DNM Da Nang Branch Hanoi Branch Quang Nam Branch Hospitals Clinics Medical centers National/Internatio -nal projects HCMC Branch 1,103 public and private hospitals nationwide Can Tho Rep. Office (to be set up in 2014) 5

6 USD/year USD Mn Vietnam The strongest medical devices market in Asia The Vietnamese medical device market is expected to remain one of the strongest in Asia with CAGR of 16.6%. This will take local market size from USD 710mn to around USD 1.8bn in Medical device imports supply over 90% for the local market. In 2013, the value of imports reached USD 609mn, with a CAGR of 9.2% since Singapore, Japan, China and the USA are the leading suppliers, accounting for 50.4% of imports combined in This bright prospect is bolstered by: Growing demand from huge population entering an aging stage faster (age group 60+ rise from 9.9% to est. 12.3% in ). Heavy investment to meet target 60% market demand supplied by local production by The healthcare system is dominated by the public sector and remains underdeveloped with insufficient, out dated equipment, particularly in rural areas. Quick urbanization rate from a low base +3.03% p.a ( ), creating huge pressure on hospital systems in major cities. Structural shift to an industrialization country has caused shifts in employment structure that affect people s lifestyle and health VN medical device market is expected to grow at CAGR 16.6% in ,000 1,500 1, Vietnam medical device market 710 CAGR 16.6% 1, F 2015F 2016F 2017F 2018F 2019F Source: Espicom Q VN healthcare expenditure still low compared with regional peers 5,917 Healthcare expenditure per capita ,652 2,624 1, Low health expenditure per capita compared to peers indicates a high growth potential in upcoming years. Source: Espicom

7 VND Bn A shortage of medical gauze/protection supplies The medical consumables segment* represents 18% of the overall medical market, in which medical dressings captures 8.2% of this segment value (~VND 430bn). Medical dressings is expected to grow at least 20% p.a to meet the growing demand from expanding healthcare resources (private and public hospitals) as stated in Decree 92/QD-TTg dated 09/01/2013 and 125/QĐ-TTg dated 16/01/ Increase at least 7150 hospital beds by Invest VND 20,000bn for 5 new hospitals to mitigate the current overloading pressure i.e. - BachMai Hospital - Branch 2 (1000 beds) - VietDuc Hospital Branch 2 (1000 beds) - Hochiminh Children Hospital (1000 beds) - Oncology HCMC Hospital (1000 beds) - Orthopaedic & Trauma Institute- 175 Hospital (500 beds) Undersupplied market Currently, there are a few companies that produce cotton wool, gauze and protection supplies given substantial demand from hospitals. Therefore, the majority of medical dressings and protection supplies has to be imported at higher price. According the Ministry of Health, the average hospital beds/ population was 22 in 2013 compared with international standard of 39. Consequently, assuming that the average consumption of medical gauze per bed remains unchanged, demand for medical gauze is expected to surge by 70% to meet WHO s standard. Medical dressings market is expected to enjoy potential growth 1,000 Vietnam dressings market 800 CAGR 20% F 2015F 2016F 2017F 2018F Source: DNM Prospectus 2014 Growing demand from expanding healthcare resources 1150 Private hospital Public hospital 250 Beds (thousand) Source: Espicom Medical Devices Report Q22014 *Medical consumables segment includes medical dressings, suturing materials, syringes, needles & catheters, bloodgrouping reagents, first-aid boxes & kits, ostomy products and surgical glove. 7

8 Plenty of room for potential growth DNM s sales growth momentum remains firm at CAGR of 16.6% during albeit economic slowdown in recent years. We believe the firm can achieve its 2014 s target of +19% overall sales growth in 2014 based on (1) Leading position in niche market of medical dressings segment (2) Growing demand from expanding/upgrading healthcare resources opens a valuable opportunity for DNM manufacturing segment to capture the 20% growth in medical dressings market value. (3) VND 36.5bn unrecorded revenue in 2013 from 2 contracts providing medical equipment for Medical Support Fund Project MOH and Medical Support Project in South Central Coast due to late equipment delivery. Manufacturing segment - DNM s most important growth engine The firm s revenue structure has dramatically changed with manufacturing segment gaining more weight from 40% in 2010 to 60% in 2013 and is estimated to achieve 70% due to: (1) DNM s leading status in high quality medical gauze and protection supplies plus DNM s long term business relationship with public/private hospitals, medical centers as well as international healthcare bodies. (2) Higher pressure from local rivals and more presence of foreign medical manufacturers i.e. B.Braun, Olympus, Toshiba, Johnson&Johnson, Siement, Charwembly, Kalstoct which translating into smaller proportion in revenue structure. However, DNM s trading segment still remains highly competitive over local rivals and is expected to follow the overall growth of local medical device market. Plenty of room for potential growth in revenues Manufacturing segment becomes DNM s powerhouse 100% 80% 60% 40% 20% 0% Service Trading products Manufact. Products CAGR 16.6% F 2015F Source: DNM Revenue structure % Manufact. Products % Trading % Service Source: DNM 8

9 Effective cost management Positive change in cost structure Material and labor cost represent 74% COGS, compared to 80% in 2011, especially material s stake down from 59% to 50%. This structural change indicates that DNM was successful in lowering material cost and improving productivity. Improving gross margin Cheaper material, higher productivity combined with DNM s recent success in self-producing cotton material for gauze and using domestic sterile packaging technology, allowing DNM to sharply reduce material cost (5%-10% cost saved). Moreover, the firm s strategy to increase manufacturing segment (with higher gross margin) from 50% to 60% also supports gross margin to surge from 22% in 2009 to 33% in We expect the percentage of manufacturing segment to account for up to 70% of revenue structure by 2020, thus boosting overall gross margin to higher level. Sharp reduction in interest expense Lowering lending rate has added positive catalyst in DNM s business performance since In particular, lending rate has dropped from 18% to 10% during , making EBT/EBIT improve sharply from 0.32x to 0.81x in the same period. Given favorable conditions to support local medical firms and loosen monetary policy to support economic growth, DNM is expected to take advantage from low financing expense in period. Structural change in COGS components 2011 Depreci ation 2% Outsou rcing 20% Labor 19% others 0% Materi al 59% 2013 Outso urcing 11% Depre ciation 3% Labor 24% others 12% Improving gross and EBIT margin due to effective cost management Cotton material, papers.. Materi al 50% Source: DNM 35% 30% 25% 20% 15% 10% 0% F Interest burden (EBT/EBIT) Gross margin Source: DNM EBIT margin 5% 9

10 VND Bn Optimizing selling and admin expense DNM optimizes its operating cost by: Constantly investing in business expansion via selling activities (reserving 7% of total revenue). We expect DNM will continue to allocate more budget for this strategic move beyond 2014 to increase its current market share from 50% to 60% or more. Reducing administrative expense reduction from 13% to 12% of total sales in According to DNM AGM 2014, the firm plans for a further cut to 11% of total sales in 2014F. As a result, SG&A/revenue drop from all time high of 20% in 2012 to 18% in 2014F (~VND 45bn). Over the 1H2014, selling and admin expense were VND 7bn, +23% y/y and VND 8bn, -28% y/y, respectively. The latest results have uncovered a dramatic change in the percentage of each SG&A component in total revenue. Accordingly, administrative expense/revenue decreased from 14% in 1H2013 to 8% in 1H2014 while selling expense/revenue remained at 7%, the same level of last year. Currently, DNM has up to VND 30bn in SG&A budget for the 2H2014. Given positive performance in 1H2014, we expect DNM can optimize its administrative cost at lower level than forecasted budget 11% of sales (~VND 27bn) while maintaining selling expense at 7% of sales, thus dragging SG&A/revenue below target of 18% (~VND 45bn). 25% 20% 15% 10% DNM drove down admin expense to optimal level 5% 0% 20% 13% 7% Positive business performance Q Selling expense/sales SGA/sales Admin expense/sales 18% 11% F Source: DNM 21 SGA Admin expense Selling expense F 1H2014 Source: Bloomberg % VND 30bn budget for 2H

11 1H2014 Sound business results 1H2014 Performance confirms DNM s bright prospects with: Revenue VND 109bn, +37% y/y Gross profit VND 32bn, +18% y/y Net income VND 12bn, +98% y/y Net margin considerable increased from 7% to 11% These sound business results were explained by: Acquisition of many large contracts to supply medical gauze for hospitals and government projects. Better exploitation material resources & other inputs, optimize production activities to boost productivity and drive down unit cost. The drop in 1H2014 gross margin was due to the acceleration of trading segment revenue which has lower gross margin the manufacturing segment. Taking advantage of falling lending rate as interest expense dropped from VND 3bn to VND 2bn, -38% y/y. Reducing operating expenses to optimal level, especially admin expense from VND 11bn down to VND 8bn, -28% y/y. We believe that DNM can leverage on its market leader status, effective cost management plus well-established business relationship with public hospitals, medical centers (as DNM was an SOE before being equitized in 2004) to expand its business and translate into positive business results in 2H 2014 and upcoming years. Positive business performance 1H2014 Interim PL (VND Bn) Q Q H2013 1H2014 Revenue COGS Gross profit Gross margin 38% 28% 34% 29% Interest expense Selling expense Admin expense NI NI/Revenue 6% 11% 7% 11% Source: DNM 11

12 Strong balance sheet & improving profitability Strong balance sheet & High liquidity Flexible and timely financial structuring allowed DNM to advance during economic hardship. DNM started its deleveraging process by reducing 11% of total debt in 2012 ~VND8 bn (of which 92% short term debt with high lending rate of 18% p.a) and VND18 bn in 2013 (with lending rate 15% p.a). This helped DNM decrease its Debt/Equity and Debt/Ebitda ratio down from 1.69x and 4.47x to healthy levels of 0.67x and 1.5x, respectively, while improving current ratio from 1.1x to 1.6x in the same period. Improving profitability Uptrend in ROA and ROE is supported by solid growth in Ebit margin and EBT/EBIT DNM achieves efficiency in operation by: Conducting asset restructuring to maximize capacity utilization Investing effectively in technology & equipment to improve product quality and productivity Focusing on In-house R&D (i.e. self-producing cotton material) to mitigate external reliance and drive down input cost This proper strategy then translates into constant growth in EBIT margin, the main factor that drives DNM s profitability ratios higher: ROE rose from 8% to 33% while ROA up from 3% to 13% in Effective deleverage results in improving liquidity Profitability underpinned by solid growth in Ebit margin and interest burden Current ratio Debt/Equity Debt/EBITDA F Source: Bloomberg Interest burden (EBT/EBIT) ROE ROA EBIT margin F 35% 30% 25% 20% 15% 10% 5% 0% 12

13 Valuation Given stable demand from both domestic and foreign markets, plus DNM s market leader status with solid competitive advantages, we highly appreciate the prospect of DNM in the upcoming years. Given DNM s specific business model that can hardly be found in any listed comparable local company, we suggest applying DCF valuation approach to value DNM. D/E target 30% D/(D+E) 23% E/(D+E) 77% Cost of debt 10% Tax rate 22% Risk free rate (Ref. Vietnam Gov. Bond) 8.7% Beta (Ref. Bloomberg) 0.34 Equity risk premium (Ref. Damodaran, Stern, NYU and Vietnam ratings upgraded by Moody s from B2 to B1, as of Jul 2014) 11.75% Cost of equity 12.7% WACC 11.6% Long term growth rate (in line with GDP growth) 5% Discounted value (VND Bn) 2014F 2015F 2016F 2017F 2018F 2019F 2020F FCFF PV of FCFF PV of terminal value PV of firm PV of debt 54.6 PV of Equity Outs. Share (million) 4.1 Value per share (VND/share) 48, Source: Bloomberg Given available room for growth, especially its manufacturing segment, plus expanding distribution network, solid competitive advantages and closed relationship with public hospitals, DNM is expected to be traded at fair valuation of 48,300 VND/share during compared to current market price of 33,500 VND/share (as of 11 Aug 2014). PE DNM PE VNINDEX PE 13

14 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 14