Binh Duong Mineral and Construction JSC (KSB: HOSE)

Transcription

1 Binh Duong Mineral and Construction JSC (KSB: HOSE) BUY 1Y Price Target: VND 58,500 Current price: VND 48,900 Kien Trung Nguyen, CFA ext May 2016 INDUSTRIALS - VIETNAM Key figures Market cap (USD mn) 51 Market cap (VND bn) 1,144 Outstanding shares (mn) 23 52W high/low (VND 1,000) 51/24.3 Average 3M volume (share) 363,788 Average 3M value (USD mn) 0.72 Average 3M value (VND bn) Foreign ownership (%) State ownership (%) Management ownership (%) Stock performance Company Snapshot N.a Source: Bloomberg Binh Duong Mineral & Construction Joint Stock Company (KSB: HOSE) is the largest construction stone exploiter in Binh Duong Province. KSB was initially founded in 1993 as a state-owned company and equitized in 2006 with 51% owned by the state. In 2007, KSB was listed on the Ho Chi Minh Stock Exchange (HOSE) and increased its charter capital to VND 107bn in 2010, then to VND 180bn in 2012 and finally to VND 234bn in In early 2016, the State Capital Investment Corporation (SCIC) completely divested from KSB at the market price of around VND 37,000/share. Growth written in the stone Business highlights: KSB involves in exploiting construction stone, producing construction materials, operating an Industrial Zone and provide other services. Business performance Prior to 2014, revenue of the stone segment remained weak which resulted in low revenue and profit growth. Since 2014, thanks to a thriving property market and increase spending on infrastructure projects, output of construction stone heightened. Gross profit margin remained stable in the last 4 years at 35-36%, which is similar to that of NNC and DHA. However, SG&A/sales was around 14%, which is higher than C32 (6.1%) and NCC (0.6%). In 2015, revenue and net profit reached VND 738bn (+18.2% YoY) and VND 125bn (+29.5% YoY). Outlook Construction stone segment: We expect revenue of the segment will grow by 15% in 2016 thanks to both output growth (8% YoY) and price hike (7% YoY) as new shareholders require more transparent pricing. In 2017, output is likely to reach more than 4mn m3/year (7.5% YoY) after KSB finishes investing in 2 stone crushers by the end of The company holds abundant reservoirs of kaolin, but capacity remains low, thus Kaolin revenue contribution remains low. However, in the next 3 years, we believe that KSB will direct more attention to kaolin. We believe profit margin of Kaolin might mimic construction stone (30-40%) or even higher as it is used for high value production, including paper and paint. IZ: stable cash flow: IZ is a cash flow generator with 1 payment and long term revenue recording. In addition, service segment offers high margin than other businesses. We believe that in the next 5 years, KSB s IZ will be fully occupied as most of industrial zone in Dong Nai and Binh Duong now nearly full occupied and the company can enjoy recording revenue and profit to the next 45 years. We expect since 2020, IZ revenue might reach VND 60bn/year. In addition, KSB might record earnings surprise (VND 37bn PBT) from transferring Binh Duc Tien Villa in In 2016, we expect that KSB will finish transferring its property project to gain VND 37bn in PBT. As a result, we expect PBT will reach VND 240bn (+47.3% YoY).In 2017, we believe that the stone business will expand even stronger when the company finishes expanding capacity by adding 20% more. We expect revenue and before tax profit might reach VND 987bn (+16.2% YoY) and VND 238bn (-0.6% YoY). Investment view: Based on the two methods, we arrive at a 1Y target price of VND 58,500/share (+20% upside) and recommend BUY for KSB. Risks: Mining business is still dependent on license grating by the Ministry of National Resources. Increase in environment tax is also risk. Page 1

2 Table of Contents 1. Background Business highlights Construction stone Construction materials Industrial Zone Others Historical review Outlook Investment view... 9 APPENDIX: ANNUAL FINANCIAL STATEMENTS ANALYST CERTIFICATION RATING DISCLAIMER CONTACT INFORMATION Page 2

3 1. Background Binh Duong Mineral & Construction Joint Stock Company (KSB: HOSE) is the largest construction stone exploiter in Binh Duong Province. KSB was initially founded in 1993 as a state-owned company and equitized in 2006 with 51% owned by the state. In 2007, KSB was listed on the Ho Chi Minh Stock Exchange (HOSE) and increased its charter capital to VND 107bn in 2010, then to VND 180bn in 2012 and finally to VND 234bn in In early 2016, the State Capital Investment Corporation (SCIC) completely divested from KSB at the market price of around VND 37,000/share. Shareholder structure Ownership structure 9.98% 18% DRH Forein Investors other shareholders 72.02% Source: KSB After SCIC divestment, DRH was the only significant shareholder left with 9.98% ownership. DRH currently is a property and construction company. The company also is investing in construction materials business. However, at the recent AGM, DRH appointed two representatives (one is chairman of TTF- Mr Thanh and one is CEO of DRH- Mr Dat) to the BOM and one to the Board of Supervisors and replaced the existing chairman, Mr Hai (which is also the CEO of KSB). Mr Hai now only holds CEO position. Therefore, we believe that DRH and its related parties now control the company. Page 3

4 2. Business highlights Revenue structure Stone Construction Materials IZ others % 20% 40% 60% 80% 100% Source: KSB 2.1. Construction stone Construction stone is the key revenue and profit contributor of KSB for many years. For the last 4 years, the segment contributed more than 80% of revenue. KSB is the largest stone exploiter and producer in Binh Duong and Dong Nai provinces with capacity of more than 3mn cubic meter/year and abundant reservoirs. KSB C32 DHA NNC Annual capacity 3.3mn cubic meters 1.2mn cubic Meters 1.77mn cubic meters 2.6mn cubic meters 1. Tan Dong Hiep (2years, 4.22mn m3) 1. Tan Dong Hiep (2 years, 2.4mn m3) 1. Nui Giao (9 years, 200K m3/year) Nui nho mine ( to 31Dec2017, 2. Phuoc Vinh (2017, 1.15mn m3, 2. Phu Giao (under 2. Tan Cang 3 ( 8 years, 4mn m3) License period extendable to 18mn m3) negotiation, > 10mn m3 490K m3/year) Tan Lap Mine and Reservoirs 3. Tan My (14 years, 20.1mn m3) reservoirs) 3. Thach Phu 2 (10 years, (to 2030, 14mn 4. Tam Lap (under negotiation, 13mn m3) 818K m3/year) m3) Currently, Tan Dong Hiep contributes 2.1mn m3/ of the total 3.33mn m3 of KSB. Tan Dong Hiep is very conveniently located near river ports and has best quality. Although KSB and C32 are exploiting stones from the same mine, their selling prices are different. Companies ( 2015 figures) Sold output ( m3) Revenue ( mn VND) Selling price ( VND/m3) KSB 3,746, , ,691 C32 1,285, , ,825 Source: SSI s statistics The difference in selling prices can be traced to the sales policy in which KSB sells to middlemen while C32 sells to the end users. We believe this lowers the Margin of KSB s stone segment by 2-3% compared to C32. Page 4

5 Abundant Reservoirs: Based on the existing mines, we estimate that the outstanding reservoirs of KSB are 56mn m3. Accordingly, at the current capacity of 3.3mn m3/year, it will take more than 10 years to exploit the existing mines. At 2016 AGM, shareholders approved for capacity expansion by investing in 2 stone crushers with capacity of 350tons/each for Phuoc Vinh and Tan My mines. We expect the two crushers might help increase capacity by 20% starting in early A broad market: According to Decision No.1469/QD-TTg issued on 22 Aug 2014, total demand for stone in Vietnam will increase by 50% in the next 5 years or 9% annually, reaching 181mn m3/year in which demand from Southeastern Vietnam is expected to increase from 31mn m3/year to 45mn m3/year in Demand for stone will come from (1) infrastructure projects including highway and metro line, and (2) residential buildings in Ho Chi Minh City like Thu Thiem Urban Township where the soil is weak and need stone to support big buildings. Although every provinces and cities need stone for construction, in the South, most of the mines are located in Binh Duong, Dong Nai, Binh Phuoc and Tay Ninh provinces. Binh Duong and Dong Nai provinces are the closest to Ho Chi Minh City Construction materials Besides construction stones, KSB also produces and exploit other construction materials including kaolin, bricks, sand and concrete. Kaolin: KSB owns several kaolin mines with abundant reservoirs. However, this is not a strong focus of the firm: Mines Reservoirs Capacity Annual Revenue Minh Long 22 years, 7.77mn m3 16.7K m3/year VND 22.9bn Tan Lap 6 years, 121K m3 14K m3/year Others materials Types Unit P Sand Exploited m3 90, ,998 1,110,000 Sold 84, , ,000 Revenue VND 13,204,554,383 14,165,932,079 16,000,000,000 Kaolin Produced m3-61,598 50,000 Revenue VND - 1,000,000,000 Bricks Produced Units 39,501,140 40,909,733 40,100,000 sold Units 39,526,172 41,576,593 40,000,000 revenue VND - 36,237,164,151 40,000,000,000 Concrete Pipe Produced M 54,487 54,200 50,000 Sold M 31,955 51,659 50,000 Revenue VND 15,154,908,707 27,182,554,534 31,000,000,000 Page 5

6 2.3. Industrial Zone IZ Dat cuoc Dat Cuoc Expansion 1phase Total area ha For sales ha Sold ha Remaining ha Expected revenue VND bn PBT VND bn Unearned revenue VND bn 171 Current selling price USD 45-50/sqm Leasing period 45 Y 50 Y Dat Cuoc Industrial Zone is located in the eastern area of Binh Duong Province. The IZ has convenient location which is 40km from HCM City, 38km from Saigon New port, 41km from Saigon Port, 40km from Tan Son Nhat Airport, and 20km from the center of Binh Duong province and 32km from the center of Dong Nai Province. KSB began selling IZ space since 2010 and recorded approximately VND 4bn/year sales from the segment. By the end of 2015, unearned revenue reached VND 171bn, which is allocated for the remaining of 45 years of contract. In 2015, KSB only sold 12.8ha of IZ and expects to sell 20ha of IZ in Since 2016, the company also started the expansion project of Dat Cuoc IZ with total space of 136.5ha. Besides space for leasing, KSB provides F&B and water treatment services. The service segment contributes VND 10bn revenue in 2015 with margin 40-50%. Since 2016, the company will start to develop the Dat Cuoc Expansion project and we expect that in the next 5 years, the first phase space will be fully occupied Others KSB provides 5mn liters of clean water for the local province with revenue of 6bn VND. It also has a wedding center. However, the two segments do not contribute much to its revenue and profit. Page 6

7 3. Historical review Financial performance 800, , , , , , , ,000 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Revenue PBT Revenue Growth GPM SG&A PBT growth PBT margin % Source: KSB Prior to 2014, revenue of the stone segment remained weak which resulted in low revenue and profit growth. Since 2014, thanks to a thriving property market and increase spending on infrastructure projects, output of construction stone heightened. Gross profit margin remained stable in the last 4 years at 35-36%, which is similar to that of NNC and DHA. However, SG&A/sales was around 14%, which is higher than C32 (6.1%) and NCC (0.6%). In 2015, revenue and net profit reached VND 738bn (+18.2% YoY) and VND 125bn (+29.5% YoY). Page 7

8 4. Outlook Construction stone segment: We expect revenue of the segment will grow by 15% in 2016 thanks to both output growth (8% YOY) and price hike (7% YoY) as new shareholders require more transparent pricing. In 2017, output is likely to reach more than 4mn m3/year (7.5% YoY) after KSB finishes investing in 2 stone crushers by the end of Although gross profit margin is not likely to improve much as the most convenient mine will expire after 2017, we believe selling expense will decline as it is much higher than NCC (0.6%) and C32 (6.1%). The Phuoc Vinh, Tan My and Tam Lap mines, although has abundant reservoirs, their location is approximately 10km far from the river port and it offer the lower quality than Tan Dong Hiep Mine. As the stone resource now become scare, buyers must accept the higher price for stone. Because the government has limited license for exploiting stone, and demand for infrastructure and property projects remain high, and based on the forecast of the Ministry of Construction, we expect that the stone market will continue to grow by more than 10% to The company holds abundant reservoirs of kaolin, but capacity remains low, thus Kaolin revenue contribution remains low. However, in the next 3 years, we believe that KSB will direct more attention to kaolin. We believe profit margin of Kaolin might mimic construction stone (30-40%) or even higher as it is used for high value production, including paper and paint. IZ: stable cash flow: IZ is a cash flow generator with 1 payment and long term revenue recording. In addition, service segment offers high margin than other businesses. We believe that in the next 5 years, KSB s IZ will be fully occupied as most of industrial zone in Dong Nai and Binh Duong now nearly full occupied and the company can enjoy recording revenue and profit to the next 45 years. We expect since 2020, IZ revenue might reach VND 60bn/year. Earnings surprise from property transfer At the AGM, shareholders approved to transfer the Binh Duc Tien villa to record immediate profit. According to management s calculation, it will generate VND 120bn in revenue and VND 37bn in PBT. We believe the transaction will be implemented in mid In 2016, we believe that key drivers are still stone and industrial zone. We expect that revenue will reach VND 849bn (+15.1% YoY), consistent with the company s target. However, we believe that GPM will improve by 1% and SG&A will decline by 1% since Core profit before tax might reach VND 202bn (+24% YoY) which is higher than the company target as expect the new owner will help improve profit margin of KSB Actually, in 1Q16, sales and PBT grew by 9% and 16.1% YoY. In 1Q16, stone business was affected as KSB extended the Tan Dong Hiep license. In 2016, we expect that KSB will finish transferring its property project to gain VND 37bn in PBT. As a result, we expect PBT will reach VND 240bn (+47.3% YoY). In 2017, we believe that the stone business will expand even stronger when the company finishes expanding capacity by adding 20% more. We expect revenue and before tax profit might reach VND 987bn (+16.2% YoY) and VND 238bn (-0.6% YoY). Page 8

9 5. Investment view KSB is a diversified company with valuable mines including construction stone and kaolin mines. The existing mines are enough for the company to exploit for the next 15 years. In addition, the industrial zone segment is a long term and stable cash generator for the next 45 years. KSB has high cash balance (20% of total assets and 75% of charter capital) and no debt. We apply two methods to valuate KSB: 1. Multiple: KSB is trading at 2016 and 2017 core P/E of 6.4x and 6.5x, 2016 and 2017 P/B of 1.8x and 1.5x, which are quite low. Ticker Market cap (mil 2016E Net Outstanding Price 12M Trailing VND) Profit shares (mil) (VND) EPS (VND) P/E BV P/B C32 543,200 79, ,500 6, , NNC 900, , ,500 9, , DHA 359,856 30, ,800 1, , Total 1,803, ,400 Industry average (Market cap weighted) 7.09 Industry average Compared to its peer, KSB is the largest market cap stock, with longer mine license. We believe that it should desire PE of 9x and PB of 2x. VND/share PE PB Fair price 56,124 53,490 54, DCF method: Capital Asset Pricing Model (CAPM) Capital Asset Pricing Model (CAPM) Levered beta 1.3 Levered beta 1.2 Risk free rate 6.5% Risk free rate 5.0% Risk premium for Vietnam 11.0% Risk premium for Vietnam 8.0% Cost of equity 20.80% Cost of equity 14.60% Weighted average cost of capital Weighted average cost of capital Cost of equity 20.80% Cost of equity 14.60% Cost of debt 11.00% Cost of debt 9.00% CIT rate 20.00% CIT rate 20.00% Equity/(Equity +Debt) 100.0% Equity/(Equity +Debt) 100.0% WACC 20.80% WACC 14.60% Consolidated (VND million) F 2017F 2018F 2019F 2020F EBIT 162, , , , , ,488 Abnormal adjustments Adjusted EBIT 162, , , , , ,488 Effective CIT rate (%) 23.0% 20.0% 20.0% 20.0% 20.0% 20.0% EBIT(1-T) 125, , , , , ,790 Add: Depreciation 32,241 37,569 44,450 47,890 51,331 54,424 Less: CAPEX 59, , ,000 50,000 50,000 50,000 Less: Change in WC (47,925) 4,532 4,362 2,900 3,418 3,760 Free cash flow to firm 145, , , , , ,455 Terminal growth(*) Terminal value 1,804,488 Discount period Discount factor Present value 104, , , , ,720 Terminal PV 669,907 Page 9

10 PV of FCFF - Operating 1,278,874 Cash & cash equivalents 175,310 ST Investments 0 Total Firm Value 1,454,183 Debt 0 Equity Value 1,454,183 No. of shares 23,400,000 Value of a share (VND) 62,145 We don t apply the terminal growth for this company but discount the cash flows of the company in next 15 years (assuming 3% growth after 2020) Based on the two methods, we arrive at a 1Y target price of VND 58,500/share (+20% upside) and recommend BUY for KSB. Risks: Mining business is still dependent on license grating by the Ministry of National Resources. Increase in environment tax is also risk. Page 10

11 APPENDIX: ANNUAL FINANCIAL STATEMENTS VND Billion F 2017F VND Billion F 2017F Balance Sheet Income Statement + Cash Net Sales Short-term investments COGS Account receivables Gross Profit Inventories Financial Income Other current assets Financial Expense Total Current Assets Income from associates LT Receivables Selling Expense Net Fixed Assets Admin Expense Investment properties Income from business operation LT Assets in progress Net Other Income LT Investments Profit Before Tax Other LT Assets Net Income Total Long-Term Assets NI attributable to shareholders Total Assets ,111 Minority interest Current Liabilities In which: ST debt Basic EPS (VND) 4,838 4,552 7,374 7,330 + Non-current Liabilities BVPS (VND) 27,005 22,371 26,745 31,075 In which: LT debt Dividend (VND/share) 3,000 3,000 3,000 3,000 Total Liabilities EBIT Contributed capital EBITDA Share premium Retained earnings Growth + Other capital/fund Sales 15.9% 18.2% 15.1% 16.2% Shareholders' Equity EBITDA 8.5% 23.6% 42.2% 2.0% Total Liabilities & Equity ,111 EBIT 11.4% 29.9% 47.3% -0.6% NI 16.2% 29.5% 53.0% -0.6% Cash Flow Equity 6.4% 7.7% 19.6% 16.2% CF from operating activities Chartered Capital 0.0% 30.0% 0.0% 0.0% CF from investing activities Total assets 13.0% 7.5% 13.9% 16.2% CF from financing activities Net increase in cash Valuation Beginning cash P/E Ending cash P/B P/Sales Liquidity Ratios Dividend yield 9.5% 8.0% 6.3% 6.3% Current ratio EV/EBITDA Acid-test ratio EV/Sales Cash ratio Net debt / EBITDA Profitability Ratios Interest coverage na na na na Gross Margin 35.2% 35.8% 36.8% 36.8% Days of receivables Operating Margin 19.0% 22.0% 23.3% 23.3% Days of payables Net Margin 15.5% 17.0% 22.6% 19.3% Days of inventory Selling exp./net sales 10.8% 8.4% 8.0% 8.0% Admin exp./net sales 5.5% 5.8% 5.5% 5.5% Capital Structure ROE 20.5% 24.8% 33.4% 28.2% Equity/Total asset ROA 13.2% 15.5% 21.4% 18.4% Liabilities/Total Assets ROIC 20.5% 24.8% 33.4% 28.2% Liabilities/Equity Debt/Equity ST Debt/Equity Source: KSB, SSI Research Page 11

12 1. ANALYST CERTIFICATION The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. 2. RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%, while a HOLD rating implies returns between -9% and 18%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. 3. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time, and no unpublished price sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. Page 12

13 4. CONTACT INFORMATION Institutional Research & Investment Advisory Kien Trung Nguyen, CFA Research Manager Tel: (844) ext. 510 Phuong Hoang Hung Pham Giang Nguyen Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) Fax: (848) info@ssi.com.vn HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) Fax: (844) info@ssi.com.vn Page 13