Equities | Vietnam | Materials - Industrial Metals

Hoa Phat Group (HPG : HSX)

Flashnote 01 September 2020

Buy
Target price: VND28,600
Impressive August sales
Up/downside: 16.5%
▪ HPG announced impressive growth of 65.5% y/y to 320,000 tonnes in
Stock data, as of 31 August 2020 construction steel sales for August 2020. Year to date, the company sold
Price (VND) 24,550 2.13mn tonnes of construction steel, up 20.2% y/y.
52 week high / low (VND) 24,800 / 13,253
Px. perf: (3 / 6 / 12 months) (%) 7.5/ 34.4/ 45.6 ▪ Billet sales continued to be strong at 170,000 tonnes from zero in the same
Shares outstanding (mn) 3,313
Free float shares (mn) 1,988 period last year. In 8M20, total billet sales reached 1.17mn tonnes.
Trading value (5D avg) (VND mn) 303,889
Market Cap (VNDbn) 81,341 ▪ The 3rd Blast furnace has commenced operations from 24 Aug-2020; HPG
Market Cap (USDmn) 3,527 will start selling hot rolled coil (HRC) products from the end of September.
Total FOL shares room (mn) 1,624
Current FOL shares room (mn) 455 ▪ We maintain our Buy rating with a DCF-derived target price of VND28,600.
Foreign owned ratio 35.3%
Foreign ownership limit 49.0%
Event: August long steel sales volumes announced
Price chart
HPG Common (HPG)
Today, HPG released record sales volumes of long steel at 490,000 tonnes
33,600
Closing price Relative To VNIndex (RHS)
364
in August 2020, including 320,000 tonnes (+65.5% y/y) of construction steel
and 170,000 tonnes of billet steel.
28,600 314

23,600 264 In 8M20, total long steel sales for HPG reached 3.29mn tonnes. This
18,600 214 represents a surge of 86.1% y/y and reflects the impact of the Hoa Phat
13,600 164 Dung Quat (HPDQ) Steel Complex phase 1 which commenced operations
8,600 114 from the end of last year.
3,600 64
100
August construction steel sales surged 65.5% y/y
Vol mn

50

Impressive construction steel growth of 65.5% y/y in this August was mainly
9/15

7/16

5/17

3/18

1/19

11/19

thanks to:
• Quickening infrastructure spending - According to the General
Key metrics 12-19A 12-20F 12-21F
Basic financials and growth
Statistical Office (GSO), State investment spending continued to
Net sales (VNDbn) 63,658 83,797 97,301 grow strongly by 45.4% y/y in August 2020 to VND47.4tn, following
Net sales growth 14.0% 31.6% 16.1% rises of 55.3% y/y and 41.2% y/y in July and June 2020
EBITDA (VNDbn) 12,336 18,277 21,933 respectively (Figure 1 below).
EBITDA growth (3.9%) 48.2% 20.0%
EPS (VND) 2,583 2,718 3,308 HPG is the main beneficiary from speedier public spending thanks
EPS diluted (VND)
EPS growth
2,583
(32.6%)
2,718
5.2%
3,308
21.7%
to its leading position in the Vietnam steel industry. HPG’s products
DPS (VND) 500 833 833 are used in many large infrastructure projects, including runway
BVPS (VND) 17,248 16,675 19,150 upgrade projects at Noi Bai and Tan Son Nhat international
Valuation airports, the North-South expressway and thermal plants projects.
EV/EBITDA (x) 9.21 6.65 5.32
P/E (x) 9.50 9.03 7.42 • Expanded market share in the Southern market - Construction steel
P/E diluted (x) 9.50 9.03 7.42
sales of HPG in the South has doubled y/y to 74,000 tonnes last
Dividend yield 2.0% 3.4% 3.4%
Profitability month. In 8M20, total sales in this market came to 506,261 tonnes
EBITDA margin 19.4% 21.8% 22.5% (+100% y/y), which contributed 23.7% to total construction steel
Net margin 11.8% 11.3% 11.9% sales.
SG&A/sales 2.3% 2.2% 2.2%
ROAE 17.0% 18.4% 19.4% (Continued on page 2)
BS/leverage
Current ratio 1.13 1.31 1.56 Figure 1: Vietnam public investment disbursement (VNDbn)
Quick ratio 0.41 0.57 0.78
Total debt (VNDbn) 36,680 44,066 39,900
Net debt (VNDbn) 32,135 39,876 35,034
Total debt/equity 77.0% 79.8% 62.9%
Net debt/equity 67.2% 71.8% 54.9%
EBIT interest coverage ratio 10.4 6.2 6.1

Analysts

Che Thi Mai Trang

trang.ctmai@hsc.com.vn
+84 24 3933 4693 Ext. 4848

Source: GSO, HSC research

Institutional research team

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 Flashnote 01 September 2020

• A three-fold increase in export sales to 54,000 tonnes - YTD, total

export construction steel sales surged 87.3% y/y to 310,422 tonnes,
accounting for 14.6% of HPG’s total construction steel sales.
Traditional export markets for HPG’s products include Japan,
Korea, Australia, Canada and ASEAN countries. Notably, China is
one of HPG’s newer export markets along with Taiwan and African
markets.
YTD, HPG has sold 2.13mn tonnes of construction steel, up 20.2% y/y.

Billet orders received for November 2020

Billet sales in August were 170,000 tonnes. Year to date, HPG has sold
1.17mn tonnes of billet, up from zero in the same period last year.
Moreover, HPG has received billet orders until November with total volumes
equating to 1.5mn tonnes for 11M20. This means that the average billet
sales in the next 3 months will, at the very least, be 130,000 tonnes/month.
China has been the key export market for HPG’s billet sales in FY20 thanks
to its high billet demand, given (1) strong steel demand on the back of
infrastructure spending in China which is being used to cushion the impact
of COVID-19 and (2) billet shortages as a result of environmental protection
measures applied to China’s steel plants.

HPG to start selling HRC from end-September

The third blast furnace of HPDQ (producing HRC) commenced operations
from 24 August 2020 and is expected to see trial production lasting 30 days.
Therefore, HPG will start selling HRC from the end of this September.
Year to date, HPG has successfully produced 129,600 tonnes of HRC to
meet its internal demand, which used slab from its first and second blast
furnaces. Therefore, we think there is only a limited risk of failing to
commence full production from 4Q20.
We believe that HPG will quickly ramp up the third blast furnace output;
Accelerated production is supported by internal demand from HPG’s own
steel sheet and steel pipe divisions. Total internal demand is estimated at
1.2mn tonnes/annum, equivalent to 85% of the third blast furnace’s capacity
of 1.4mn tonnes/annum.
Moreover, the fourth furnace is expected to commence operations from the
beginning of FY21. Once all furnaces are operating, HPG will be able to
produce 8 million tonnes of crude steel/year and will replace Formosa as the
largest steel producer in Vietnam.

Maintaing Buy rating

Our current rating is Buy with a VND28,600 target price. Construction steel
sales were in-line with our expectations while HPG has fulfilled our FY20
billet sales forecast as of 8M20. Our estimates are under review.
Our current FY20 forecasts are for net sales of VND83,797bn (+31.6% y/y)
and a net profit of VND9,481bn (+26.3% y/y).
Figure 2: HPG’s long steel sales volumes (tonnes)
8M19 8M20 % y/y
Construction steel 1,774,093 2,133,177 20.2%
- Southern 252,883 506,261 100.2%
- Export 165,748 310,443 87.3%
-Others 1,355,462 1,316,473 -2.9%
Billet - 1,169,010 n/a
Total 1,774,093 3,302,187 86.1%
Source: HPG, HSC research

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 Flashnote 01 September 2020

Financial statements and key data

Income statement (VNDbn) 12-19A 12-20F 12-21F 12-22F Cashflow statement (VNDbn) 12-19A 12-20F 12-21F 12-22F

Net sales 63,658 83,797 97,301 112,683 Operating cashflow 7,715 11,373 16,611 21,038
COGS (52,473) (68,784) (79,406) (92,095) Investing cashflow (18,064) (3,317) (1,323) (9,388)
Gross profit 11,185 15,013 17,894 20,588 Financing cashflow 12,378 (8,411) (14,612) (10,881)
Net financial income (711) (2,160) (2,522) (1,978) Net cashflow 2,029 (355) 675 769
SG&A (1,442) (1,860) (2,111) (2,389)
Operating profit 9,031 10,993 13,261 16,221 Cash & equivalents at period start 2,516 4,545 4,190 4,865
EBITDA 12,336 18,277 21,933 24,658 Forex effects 0 0 0 0
PBT 9,097 11,025 13,233 16,199 Cash & equivalents at period end 4,545 4,190 4,865 5,634
NPAT 7,578 9,570 11,645 14,579
Net profit 7,508 9,481 11,537 14,443 Free cash flow (10,712) 5,559 13,248 17,070
Balance sheet (VNDbn) 12-19A 12-20F 12-21F 12-22F Key ratios 12-19A 12-20F 12-21F 12-22F

Assets Basic Financials and Valuation

Current assets 30,437 44,756 58,527 66,982 EPS (VND) 2,583 2,718 3,308 4,141
Cash & cash equivalents 4,545 4,190 4,865 5,634 EPS diluted (VND) 2,583 2,718 3,308 4,141
Short-term investments 1,374 3,352 5,838 11,268 EBITDA (VNDbn) 12,336 18,277 21,933 24,658
Receivables 3,561 5,028 6,811 7,888 BVPS (VND) 17,248 16,675 19,150 22,457
Inventories 19,412 25,139 29,190 33,805 DPS (VND) 500 833 833 833
Other current assets 1,544 7,047 11,823 8,387 P/E (x) 9.50 9.03 7.42 5.93
P/E diluted (x) 9.50 9.03 7.42 5.93
Long-term assets 71,339 68,174 61,303 59,306 EV/EBITDA (x) 9.21 6.65 5.32 4.50
Long-term receivables 28 36 42 49 P/B (x) 1.42 1.47 1.28 1.09
Fixed assets 68,685 64,900 57,602 55,119 Dividend yield 2.0% 3.4% 3.4% 3.4%
Investment properties 577 585 593 600 Profitability
Long-term investments 46 84 97 113 Gross margin 17.6% 17.9% 18.4% 18.3%
Other long-term assets 1,943 2,514 2,919 3,380 EBITDA margin 19.4% 21.8% 22.5% 21.9%
Goodwill 61 55 50 45 Pretax margin 14.3% 13.2% 13.6% 14.4%
Total assets 101,776 112,930 119,830 126,287 Net margin 11.8% 11.3% 11.9% 12.8%
SG&A/sales 2.3% 2.2% 2.2% 2.1%
Liabilities and equity ROAE 17.0% 18.4% 19.4% 21.0%
Liabilities 53,989 57,429 56,021 51,383 ROAA 8.3% 8.8% 9.9% 11.7%
Current Liabilities 26,984 34,248 37,457 38,977 Liquidity
Long-term Liabilities 27,005 23,181 18,564 12,407 Current ratio 1.13 1.31 1.56 1.72
Quick ratio 0.41 0.57 0.78 0.85
Owners' equity 47,623 55,249 63,448 74,408 Leverage
Share capital 27,611 33,133 33,133 33,133 Total debt/equity 77.0% 79.8% 62.9% 46.9%
Retained earnings 15,877 17,033 24,078 33,594 Total debt ratio 53.0% 50.9% 46.8% 40.7%
Funds and other capital 4,136 5,083 6,237 7,681 EBIT interest coverage ratio 10.4 6.2 6.1 8.1
Minority interest 163 252 361 496 Efficiency
Days sales outstanding 19.4 18.8 22.2 23.8
Total liabilities and equity 101,776 112,930 119,830 126,287 Days in inventories 117 119 125 125
Days payables outstanding 56.4 46.3 49.5 45.5
Net debt 32,135 39,876 35,034 29,231 Cash conversion cycle (days) 80 91 98 103
Source: Company data, (F): HSC forecasts

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Add: Expected to rise by between 5% and 20% on an absolute basis in the next 12 months
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