Dien Quang JSC Led by LED Sales Looks to Have a Bright Future

March 15, 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.

• DQC FY2015 results fell on weak exports as having sold off cheap inventories in 2014 and then switched to LED products.
• Even as domestic sales jumped 20% led by LED products. Following a major marketing campaign early in the 2-H FY2015.
• FY2015 net sales came to VND1,097 billion, (-10.3% y/y) while net profit then came to VND206 billion, (-12.9% y/y).
• FY2016 forecasts calls for net sales of VND1,292 billion, (+17.8% y/y) then NPAT increase of 10.7% to VND228 billion as we expect both domestic and export sales will grow well driven by LED lamp sales.
• The company’s focus on new products is paying off while they are finding new sales channels as well. Slippage in GPM should be offset by a lower SG&A sales ratio.
• Stock has corrected in recent months and forward valuations of 7.7 times looks reasonable given the growth prospects.
• Decent small cap idea and possible TPP beneficiary going forward. Rate Outperform.

DQC FY2015 results fell on weak exports. Decent prospects however. Rate Outperform

MAIN TAKEAWAY – Having sold off cheap inventories in 2014 and then switched to LED products, DQC exports came up short last year. Even as domestic sales jumped 20% led by LED products. Following a major marketing campaign early in the 2-H. SG&A was well controlled even so. FY2016 forecasts calls for NPAT increase of 10.7% as we expect both domestic and export sales will grow well driven by LED lamp sales. The company’s focus on new products is paying off while they are finding new sales channels as well. Slippage in GPM should be offset by a lower SG&A sales ratio. While the long standing Cuban receivable issue is gradually coming to an satisfactory conclusion.

ACTION – Rate as Outperform. Stock has corrected in recent months and forward valuations of 7.7 times looks reasonable given the growth prospects. Decent small cap idea and possible TPP beneficiary going forward.

Dien Quang Lamp (DQC) recently released rather sluggish FY2015 results – Accordingly, the company posted net sales of VND1,097 billion, (-10.3% y/y) given sagging export sales and completing 87.5% of the whole year target. While net profit then came to VND206 billion, (-12.9% y/y) given the combination of lower sales, a GPM squeeze and rising marketing expenses to promote the new LED product range. Even so this was 33.5% above a rather low balled target.

Sales decline mainly on a sharp fall in export sales – HSC estimates FY2015 export sales came to around VND250 billion, (-52.1% y/y) as the disposal of cheap inventories which boosted FY2014 sales came to an end. In addition, most of the export sales were booked in the 2-H FY2015 due to a switch in export products with LED lamps replacing compact lights and buyers required time to test DQC’s new products before placing bulk orders. However, we understand that domestic sales increased by 20.8% y/y to VND847 billion. In Q3 last year, DQC launched a major marketing campaign to promote LED products costing over VND22 billion, (US$1 million) domestically.

As a result we estimate LED’s lamp sales accounted for more than 20% of total FY2015 net sales comparing to just 10% in FY2014.

Q4 sales doubled – Coming to VND505 billion and accounting for 46% of FY2015’s net sales. Of this export sales were estimated at VND180 billion from close to zero in the same period in FY2014. While, we estimate domestic sales of around VND325 billion, jumping 38.7% y/y. As exports were ramped up and the impact of the marketing campaign were felt. Even so Q4 GPM dropped to 27.5% compared to 32.8% in Q4 FY2014 and 35.4% in 9 months FY2015. On a lower ASP as the company moved to boost sales and gain market share for new products.

Gross profit fell 16.2% y/y last year as GPM dropped back – Gross profit came to VND357 billion, (-16.2% y/y) and translating into a GPM of 32.6%.vs. 34.8% in FY2014. However, GPM fluctuated quarter by quarter from a Q2 peak of 43.7% to a Q4 low of 27.5%. The main factor was the dropping out of cheap inventories which carried a very high margin in FY2014. Then a surge in price promotions in Q4 as the company sought to offer LED products at attractive selling price also played a role.

Net financial income increased to VND90.5 billion, (+11.8% y/y) – Mainly thanks to a 17% decline in financial expense plus a 3% increase in financial income. The sharp fall in financial expense was explained by the sharp decline in interest expense. In FY2015, the company paid only VND3.4 billion in interest expense comparing to VND18.1 billion in FY2014 as the company has already repaid most of their bank loans. At the end of FY2015, the company has only VND66.8 billion in outstanding borrowings, compared to VND310.6 billion at end FY2014. And most of this is short-term debt to fund working capital needs.

SG&A expense fell 7.5% y/y – Coming to VND186 billion and accounting for 17% of net sales vs. 16.4% in FY2014. The selling expense mainly due to the Q3 marketing campaign Then amongst administration expense, we note a provision reversal amounting VND3.3 billion or so.

Pre-tax profit and net profit fell 12.9% y/y to VND267.3 billion and VND206 billion, respectively – Given the squeeze in GPM plus a slightly higher SG&A as a % of net sales. FY2015 EPS then came to VND6,189 translating into a forward P/E of 8.8 times.

FY2015 cash dividend looks attractive – According to DQC, the minimum FY2015 cash dividend would be around VND3,000/share and giving us a dividend yield of 5.5%. Which looks quite attractive for this stock.

Cuba receivable issue will be wound up next year – HSC estimates the company received around US$9 million in FY2015, equivalent to VND195 billion or so. So it means, after 5-years of payment, the outstanding balance of overdue receivables is now estimated at US$10.5 million, (equivalent to VND234 billion or so). In our previous note, we mentioned that the company hoped to receive the final payment from Cuba by the end of FY2016. However, we now understand this final payment will be delayed to Q1 FY2017. Given that, the long-term unearned revenue amount of VND71.1 billion related to this receivable issue will be booked as financial income in FY2017 instead of in FY2016.

For FY2016, HSC forecasts 17.8% growth in net sales and 10.7% increase in NPAT – The company hasn’t finalized their FY2016 target yet however HSC forecasts the company will deliver net sales of VND1,292 billion, (+17.8% y/y) and NPAT of VND228 billion, (+10.7% y/y). Our key assumptions are as below;

1. We assume domestic sales will increase to VND1,016 billion, (+20% y/y) and that export sales will normalize and grow 10% y/y to VND275 billion or so.

2. We further forecast ASP will drop by 3-5% and expect GPM to shrink further to 32% vs. 32.6% last year.

3. Expect net financial income will come to VND81 billion, (-10.4% y/y) on lower forex gains as the Cuban receivables amount will decrease gradually in FY2016.

4. Estimate SG&A expense of VND210.8 billion, (+13.3% y/y) accounting for 16.3% of net sales from 17% last year.

5. Finally, HSC forecasts the company will enable to earn a pre-tax profit and net profit of VND289.5 billion, (+8.3% y/y) and VND228 billion, (+10.7% y/y) respectively.

6. Assuming no change in AOS, FY2016 EPS would come to VND7,074 translating into a forward P/E of 7.7 times.

Strong domestic growth while export market will see a recovery – Domestic growth is being driven by product innovation given the strong replacement demand for new LED lamps. However, DQC is expanding their sales into residential & office development projects where account receivables days are far longer than in the retail channel. Hence, the company needs to watch this carefully to minimize overdue receivables. Then we think export sales will return to normalized growth based on LED products. And so after a tepid year, growth prospects look good with double digit growth expected for both top line and bottom line this year. Then in FY2017, the company will be able to book an extraordinary financial income amount of around VND71 billion plus a tax incentive for the new factory. These are the long-term catalysts for the stock.

DQC has various catalysts and an attractive valuation – Market price of DQC has been fallen over the last 3 months by around 25% after reaching a peak of VND71,000/share in mid-November last year. Even so there was a positive reaction to FY2015 numbers. Give the growth prospects driven by new products and also new sales channels plus attractive valuations given a forward P/E of 7.7 times not to mention the dividend yield of 5.5% we rate DQC as an Outperform.

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