Furniture Maker in Vietnam Still Too Rich

April 13, 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.

• TTF audited numbers for FY2015 differ significantly to the previous unaudited numbers with an increase in the top line even as the bottom line was reduced sharply compare to the unaudited numbers.
• For FY2015, the audited NPAT number decreased sharply by 33% after the adjustment to VND205 billion, (+205% y/y) from the previous unaudited numbers of VND305.4 billion.
• This was mainly due to the booking of provision against the old inventories devaluation, higher production cost, interest expense, forex loss and other expenses.
• AGM delayed for a number of weeks to April 15th instead of March 31st initially.
• For FY2016, HSC now forecasts net sales will come to VND3,233 billion, (+17.5% y/y) and that NPAT will grow to VND264.1 billion, (+28.9% y/y).
• FY2016 diluted EPS would come to VND1,310 and translating into a forward P/E of 15.5 times. Which is rather expensive.
• Downgrade to SELL.

TTF audited numbers for FY2015 differ significantly to the previous unaudited numbers. Downgrade to SELL

Significant adjustments in audited reports – TTF have just posted their audited FY2015 FS. Accordingly, the audited numbers have been changed significantly. With an increase in the top line even as the bottom line was reduced sharply compare to the unaudited numbers. In more detail:

1. Audited net sales came to VND2,752 billion, (+88.6% y/y) which is 7.5% higher than the VND2,560 billion reported in the unaudited FS.

2. Audited GP decreased significantly to only VND345.5 billion, (+25.1% y/y) from the previous report of VND438.6 billion. This was mainly due to VND36 billion worth of provision against inventories diminution and other production cost.

3. Financial expense increased to VND70.5 billion, (+11% y/y) compared to the unaudited report number
of VND56 billion given higher interest rate expense and forex losses.

4. Other income then also decreased by VND7.6 billion from VND80.2 billion to VND72.5 billion, (+511% y/y).

5. Finally, the audited pre-tax profit and NPAT number decreased sharply by 34% and 33% after these adjustment to VND240.7 billion, (+183.5% y/y) and VND205 billion, (+205% y/y) from the previous unaudited numbers of VND365.3 billion and VND305.4 billion.

AGM delayed for a number of weeks – It seems that the internal accounting controls are less than optimal. The company has also delayed their AGM date. They planned to hold the AGM on March 31st however as the audited FS was just finished on March 29th this has meant that they have to postpone their AGM to mid-April.

HSC forecasts FY2016 will grow 28.9% y/y – For FY2016, given the changes in the FY2015 numbers, HSC now forecasts net sales will come to VND3,233 billion, (+17.5% y/y) and that NPAT will grow to VND264.1 billion, (+28.9% y/y).

1. We assume GPM will improve to 16.3% from 12.6% last year given a higher contribution from domestic market sales including sales to various major residential projects.

2. Expect provisions against old-inventories will decrease significantly this year.

3. And that SG&A expenses comes to VND153.3 billion, (+15.9% y/y).

4. While we estimate that the net financial loss will widen to VND(59.3) billion from VND (42.7) billion on the higher financial loss with the decrease in interest expense reversal.

5. Assume other income then also will decrease to only VND1.6 billion this year comparing to VND72.5 billion in FY2015 as loan exemptions drop out.

Dilution a major factor also – Then we assume that TTF will issue 69.7 million shares, (for a 48.2% increase in outstanding shares) in the 2-H this year. Hence this means that FY2016 diluted EPS would come to VND1,310. At today’s price of VND20,300/share, TTF is trading at a forward P/E of 15.5 times. Which is rather expensive.

Investment thesis. We downgrade the stock from Underperform to SELL. As we think current valuations at 15.5xs forward P/E is still expensive. TTF was the darling of the market last year given speculation of a strategic partnership with VIC which was duly announced fairly recently. In addition the company has successfully restructured debt and managed to show a significant improvement in FY2015 performance compared to previous years. Based on a bounce in the sales of their extensive range of furniture plus some lumber.

Given the massive run in the stock price over the past 12 months all of this we priced in and more. And indeed post strategic partnership announcement the stock had already come off quite a bit. TTF’s share price already decreased sharply in early March on dilution concerns given that TTF will issue a significant amount of shares to VIC in order to convert their convertible loans into equity. So TTF’s price has already dropped by 40% since the peak of VND33,800/share at the end of January this year and 29.3% YTD.

This latest news is likely to spur another wave of selling however in the stock. For longer term investors we note that the company has a decent business model and has made significant progress but seems their accounting controls have let them down. TTP may also be a future catalyst as the 2.5-5% tariff on imports into the U.S. market should be eliminated.

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