September 9, 2016
Disclaimer: the opinions expressed herein are that of HSC Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.
- DXG share prices has underperformed YTD given concerns about their poor Q1 performance; dilution fears and some media attention earlier in the year.
- Concerns more or less priced in now.
- We maintain our NPATMI growth of 36% y/y led by a surge in development bookings.
- Cheap valuations at forward diluted P/E of 6.1xs and large discount to NAV.
- Although we see no near term catalyst until the rights issue timeline has been finalized.
- Reiterate Outperform.
DXG share prices has underperformed YTD. Concerns more or less priced in now. Reiterate Outperform
MAIN TAKEAWAYS – DXG’s share price has dropped sharply YTD given concerns about their poor Q1 performance; dilution fears given the proposed doubling of chartered capital and some media attention earlier in the year. As far as fundamentals are concerned we think Q1 was a bit of an anomaly and forecast NPATMI growth of 36% y/y led by a surge in development bookings. The timing of the rights issuance is yet to be decided but we think it will happen sometime in Q3. And once we understand the timing better we would recommend investors take another look.
ACTION – Stock is down 21% YTD and now trades at a large 33% discount to NAV. Cheap valuations combined with decent longer term prospects. DXG’s share price has been a bit volatile as the narrative changes rapidly. Hence they carry more than average price risks. However although we see no near term catalyst until the rights issue timeline has been finalised we do see medium term value in the story.
DXG’s stock price has dramatically underperformed to the sector YTD for several reasons – DXG’s stock price declined 21% YTD given (1) a disappointing Q1 numbers given a significant drop in brokerage & wholesale revenue; (2) dilution worries given company plans to more than double chartered capital from VND1,173 billion to VND2,530 billion (+116%) through the issue 117,205,570 new shares to existing shareholders at the rate of 1:1 and price of VND10,000 per share (this will be VND1,172 billion), stock dividend at the rate of 15% (implies 17,589,535 new shares funded by undistributed earnings) and 1 million ESOP shares at VND10,000 per share (locked for 2 years and also funded by undistributed earnings) and (3) some negative press coverage earlier this year.
The timetable for the rights issue is not clear but is expected to be completed during Q3 – Given the price of VND10,000 and the size of the issue the share has come under heavy selling pressure since the plan was disclosed in late January 2016. One possible reason for this is that existing shareholders have been selling part of their stake in order to buy the share back at par. In Vietnam; forgoing rights carries no reward and therefore in cases of heavy rights issuances at a significant discount to the current share price this often leads to steep declines over the short term.
The capital raising will be used to fund development of a new bought 6.7 ha project – This was part of the larger 30 ha Nam Rach Chiec residential project and they acquired it recently at a price of VND1,072 billion from Keppel Land. This project is called Venice City; and is located in District 2 next to the Long Thanh Dau Giay Highway which runs from the CBD to Dong Nai. The plan is to build 3,100 apartments units. Total investment capital is expected to be around VND5,241 billion of which 22% will come from equity, 25% from debt and the balance will be pre-financed by customers advances. We estimate that the gross profit margin on this project will be 15-25% which is the normal range for a mid-end project in HCMC. As we understand, the company is in the progress to finish necessary legal document to get the approval from SSC and we guess that the issuance will take place at the end of Q2 or early Q3 this year.
HSC forecasts NPATMI will grow 36% y/y – For the whole year, we keep our net sales forecast of VND2,224
billion (+59% y/y) and NPATMI forecast of VND459 billion (+36% y/y) given our following assumptions:
1. We assume that revenue from brokerage & wholesale investment will drop by 5% y/y to VND715 billion given the negative impact of proposed new regulations on sentiment in the overall real estate market. Draft C36 has impacted sentiment since Q1 although we know feel that this may be delayed. Other than that, we note circulars 26/2015/TTNHNN and decree 99/2015/NĐ-CP which guide the execution of the new housing law, including stricter procedures for making loans for future housing projects (also impacts on unfinished apartments) has also been a factor. DXG has two sub segments here; pure secondary market brokerage on behalf of private clients; and selling wholesale blocks of units on behalf of developers. Their brokerage dropped significantly in Q1 as we understand that DXG focused more on the affordable & mid-end segment rather than high-end segment where sales carry lower margins. However in Q1, in the overall market, the proportion of high-end units to total sold units increased compared to last year. According to CBRE, in Q1 2016, the high-end segment accounted for 38% of total transactions, increasing from 24% in Q1 last year. Meanwhile affordable segment contributed around 21% of total transactions, down from 35% in Q1 last year.
2. Although, we estimate revenue from real estate development will increase by 173% y/y to VND1,332 billion based on our view on bookings from the Sunview Town project (which we estimate at VND1,006 billion, +130% y/y), Gold Hill (which we estimate at VND115 billion, +130% y/y) and Luxcity ( which we estimate at VND211 billion) based on the hand over progress of these projects.
3. We forecast revenues from construction will come to VND176 billion (+15% y/y) given the current pipeline.
4. We also assume gross profit of VND833 billion (+26% y/y), giving a lower GPM of 37.5% vs 47.3% in FY2015 on a deteriorating product mix as lower margin development revenues account for a larger percentage of sales. Meanwhile we expect SG&A expenses will increase slightly to VND281 billion (+4% y/y).
As a result, we forecast NPATMI of VND459 billion (+36% y/y), giving a fully diluted EPS of VND1,930.
We would hope that DXG uses more debt options going forward given their low ratios – The debt/equity ratio is low at 0.32xs with total debt coming to just VND543 billion by the end of Q1, FY2016. The company has a relationship with Vietinbank (CTG) and given the low indebtedness we hope that going forward they will consider boosting bank debt instead of tapping shareholders for more equity over the next year or so at least.
Investment thesis – Reiterate Outperform. At the current price, this stock is trading at a forward P/E of 6.1xs and forward P/B of 1.2xs, which looks very cheap compared to other peers. In term of NAV valuation, we estimate their RNAV at VND22,935 per share, which means that the stock is trading at a 33% discount to NAV. DXG has a good track record in the brokerage segment and a decent development pipeline. However, we are somewhat concerned about the degree of dilution which will continue to affect the stock price over the short term. In terms of investment timing we think the stock has hit the bottom. However we would await details on the ex-date for the capital raising at least. We do believe that post issuance this stock price will recover a lot of the lost ground given the strong earnings prospects.
SOME KEY PROJECTS