Fishing for Higher Returns
July 14, 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
- 1-H exports rose 12.5%. On volumes growth of 18.5% as ASP declined.
- We expect 1-H net sales of VND3,464 billion, up 8.5% y/y and net profit at VND251 billion, up 34.9% y/y.
- We have revised up our FY2016 net sales forecast by 1.5% from VND7,655 billion to VND7,773 billion and net profit forecast by 19.5% from VND425 billion to VND508 billion, up 57.5% y/y.
- Reiterate Outperform.
- Stock is up a lot this year however valuations are still reasonable given a forward P/E of 9.1xs.
VHC guidance suggests strong 1-H given export performance. HSC revised up net profit forecast by 19.5%. Reiterate Outperform.
MAIN TAKEAWAY – 1-H exports rose 12.5%. On volumes growth of 18.5% as ASP declined. Although in the last month, ASP has jumped as a competitor raised prices as it faced a higher tariff from the US authorities. Then the collagen business has finally begun to make a decent contribution and boosts margins also. For the full year we have revised up both sales and net profit forecasts now calling for NPAT growth of 57.5% y/y. VHC’s best of breed status based on its vertical value chain; expansion into lucrative side products and high QC reputation seems to be paying off these days. However its current very high market share in the US may be unsustainable once competitors recover from their difficulties.
ACTION – Reiterate Outperform. Stock is up a lot this year however valuations are still reasonable given a forward P/E of 9.1xs.
Strong volume sales boosted by a very late recovery in ASP – In 1-H FY2016, we know that Vinh Hoan Corporation’s (VHC – Outperform) total export value came to US$139.8 million, up 12.5% y/y. Of which volume rose by 18.5% y/y even as the ASP declined by 6%. In fact ASP dropped in the first four months and then increased by 9.6% y/y and 10% y/y respectively in May and June mostly due to a price surge in the US market. Price moved higher in early June when Bien Dong Seafood, one of the three major exporters to the US, was required to pay the additional tax of US$0.16 per kg for their sales volume in the US during the POR 7. This additional tax of US$0.16 takes up 5.7% of their average selling price of around US$2.8 per kg and led to an immediate increase in Bien Dong’s current selling price. VHC then followed suit.
VHC management also estimates that Q2 net profit will come at above VND150 billion, up 77.8% y/y. HSC estimates Q2 net sales of around VND1,864 billion, up 10% y/y. According to our estimates, net margin in Q2 could reach 8%, the highest level since 2014 as a result of the higher ASP.
We think 1-H NPAT rose 34.9% y/y – As such we expect 1-H net sales of VND3,464 billion, up 8.5% y/y and net profit at VND251 billion, up 34.9% y/y. Revise up sales and NPAT forecast for FY2016.
HSC now looks for NPAT to rise 57.5% y/y – We have revised up our FY2016 net sales forecast by 1.5% from VND7,655 billion to VND7,773 billion and net profit forecast forecast by 19.5% from VND425 billion to VND508 billion, up 57.5% y/y on higher expectation on selling price and profit margins given their advantage in the US market where two of their closest catfish competitors face difficulties. Below are our key assumptions:
1. We assume fish export volume will be 91,032 tons, up 16% y/y and generating fish export value of US$276.6 million, up 21.5% y/y due to ongoing market share gains in the US market and expansion in other markets like China, Australia, Canada and South American countries.
2. Expect average selling prices will rise by 4.8% y/y. Most of the price increase will come from the US market with expected increase of 10% y/y. The uptrend started in June and we expect it would continue in Q3. Assume fish segment gross margins will be 16.5% or higher than last year’s level of 14%.
3. That the collagen business will make the first meaningful contributions with net sales of VND137 billion assuming factory utilization rate of 40%. Most of these sales to come from exports. Collagen gross margin of 20% based on company’s projection which is higher than their average margins.
4. We project overall gross margins can increase to 15.1% compared to 12.2% last year.
5. There is no significant forex loss like last year as the company no longer borrows USD. 6. We expect SG&A as % of sales to rise to 6.6%, up from 5.3% last year with more spending on marketing of new products and direct sales campaigns.
With this we forecast EPS will come to VND5,283 generating a forward P/E of 9.1x. And a BVPS of VND26,147 for a P/B of 1.8x.
Investment thesis – Reiterate Outperform. FY2016 has been a very good year for VHC with strong sales growth in the key US market as well as aggressive expansion into other markets. We also expect profit margin to improve in the coming years given their strategy towards high margin products. The risk over the threatened strict USDA inspection regime has now more or less been withdrawn by the US. Share price has increased by 54% since our recommendation on 26 May but with higher earnings forecast, the valuation still looks fairly reasonable.
FINANCIAL RATIO
