Invest in Vietnam: The Leading Port Play

April 11, 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.

• GMD announced FY2015 unaudited consolidated net revenues of VND3.58 trillion, (+18.9% y/y).
• Driven by contribution from NHDV port which operated at almost full capacity last year; while cold storage container sales jumped also due to temporary factors.
• FY2015 unaudited consolidated EBT of VND501 billion (-28.6% y/y) as a gain from asset sales dropped out.
• For FY2016, HSC calls for consolidated net sales of VND3.6 trillion (+1.7% y/y) and EBT of VND486 billion, (-2.9% y/y).
• Given full capacity at the ports; and our assumption for a normalization of cold storage sales and a flat ASP.
• The stock price now looks more than fully valued at a fully diluted forward P/E of 17.4 times. Then FOL is full also with no plan to change that for now.
• Downgrade to HOLD from OUTPERFORM. However the possible future sale of any non-operating assets would be an event for the stock price.

GMD FY2015 unaudited results showing bottom line drop 28.6% y/y

MAIN TAKEAWAY – The Company posted unaudited sales up 18.9% y/y driven by contribution from NHDV port which operated at almost full capacity last year. While cold storage container sales jumped also due to temporary factors. Even so, EBT dropped 28.6% y/y as a gain from asset sales dropped out. HSC calls for EBT to decline a further 2.9% y/y this year. Given full capacity at the ports; and our assumption for a normalization of cold storage sales and a flat ASP.

ACTION – Downgrade to HOLD from OUTPERFORM. The stock price rocketed 55.3% last year and now looks more than fully valued at a fully diluted forward P/E of 17.4 times. Then FOL is full also with no plan to change that for now. However the possible future sale of any non-operating assets would be an event for the stock price.

FY2015 EBT drops by 28.6% y/y – Gemadept Corporations (GMD – Downgrade to Hold) recently announced FY2015 unaudited consolidated numbers showing net revenues of VND3.58 trillion, (+18.9% y/y) and earnings before tax (EBT) of VND501 billion (-28.6% y/y). The numbers were higher than our expectation as we were looking for net sales of VND3.47 trillion (+15.1% y/y) and an EBT of VND472.5 billion, (-32.6% y/y).

This enabled GMD to complete 111.9% of their FY2015 top line target and 151.7% of the bottom line target. We recall that GMD projected FY2015 revenue targets of VND3,200 billion, (+6.2% y/y) and earnings before tax of VND330 billion (-52.9% y/y). The reason we are using earnings before tax as a comparative (instead of NPAT as per normal) is due to the fact that the company prefers to use this in their own forecasting.

Port operations showed growth of 54.7% y/y – To VND1.7 trillion. This came about due to a generous y/y comparison as Nam Hai Dinh Vu port (NHDV) operated at 90% capacity last year vs. just 56% capacity in FY2014 due to the normal ramp-up period. For NHDV alone, we estimate that FY2015 port operation revenues of VND643 billion (+83.9% y/y) on a volume throughput of 450,000 Teus. For the port operation segment as a whole, HSC estimates that container volume throughput likely grew by 23.2% y/y to 1.14 million Teus and bulk cargo volume throughput grew by 18.1% y/y to 1.7 million tons. Meanwhile, sales from cold storage container operations in Q2 & Q3 largely accounts for the higher sales growth rate than.

Normally we can attribute sales growth to volume growth or ASP growth. In GMD’s case and some other port companies in the North, last year we saw a flat ASP, a slight increase in volumes and yet topline sales increase a lot. This was thanks to sales from cold storage container segment which depends on the duration of the storage rather than the volume. We understand that the reason was due to delays in cross border trading with China which forced traders of perishable goods to seek cold storage at various Northern ports.

Logistics almost flat y/y – In addition, sales from the logistics segment showed growth of just 0.5% y/y to VND1.9 trillion. Now there has been no office leasing revenues since Q3 FY2014 after the completion of the sale of their 85% stake in Maproco (the owner of GMD Tower) in Q3 FY2014.

Higher GPM on better product mix – Gross profit increased by 52.5% y/y to VND953 billion driven by strong top line growth; higher margin for port operations and with a better product mix. Overall GPM rose sharply to 26.6% compared to 20.7% in FY2014. By segment, port operation GPM came to 41.5% (up from 36.5% in FY2014) while logistics GPM came to 13.1% (compared to just 10.7% in FY2014).

SG&A dips in % terms – Then SG&A as a % of net sales decreased to just 8.7% compared to 10.4% last year on lower materials costs and higher cost synergies amongst GMD subsidiaries.

Return to net financial loss as asset sale dropped out – Meanwhile GMD reported a net financial loss of VND(186) billion compared to a huge gain of VND414 billion in the same period last year. This was driven by several contrasting factors namely; (1) a higher net forex loss of VND80 billion (+122% y/y); (2) a provision reversal of VND5 billion last year compared to a provision against financial investment worth of VND71 billion reported in FY2014. However the largest impact came as the extraordinary income from the GMD Tower disposal dropped out around VND600 billion was booked in FY2014.

P/E on CB dilution as high as 16.2 times – As for the bottom line, EBITDA rose 59.6% y/y to VND926 billion. Although NPATMI fell to VND401 billion, (-24.4% y/y). FY2015 basic EPS was VND3,370 generating a FY2015 basic P/E of 11.6 times on the current price of VND39,100. EV/EBITDA is 6.5 times. However, if we include the dilution impact of the CB, FY2015 diluted EPS would come to just VND2,410 generating a fully diluted trailing P/E of 16.2 times. While EV/EBITDA would be more expensive at 7.6 times.

For FY2016, HSC calls for net sales to increase 1.7% y/y and for EBT to decline by 2.9% y/y – Given a strong y/y comparison and the one-off positive factors that boosted earnings last year we are more circumspect on the forward outlook. For FY2016, HSC forecasts consolidated net sales of VND3.6 trillion (+1.7% y/y) and EBT of VND486 billion, (-2.9% y/y). HSC assumes the following;

(1) Expect sales from port operation will be flat y/y – To VND1.68 trillion (+0.9% y/y). Given 2 contrasting factors; higher volumes and normalized sales from cold storage container. Specifically, we assume that the throughput volume will grow to 1.2 million Teus (+5.2% y/y), and 1.5 million tons (-11.8% y/y). Of which, we assume NHDV will operate at 100% of its designed capacity of 500,000 TEUs/year and contribute VND728 billion, (+13.1% y/y) to the top line. And that growth from other container ports will be slight as they already operate at roughly full capacity for several years already. In contrast, we expect that sales from cold storage sales will drop back to normalized levels this year or a drop of 29.3% y/y and thus cap port operation sales as a whole.

As a reminder, GMD currently owns and operates 4 ports: Nam Hai and NHDV (container ports) in Hai Phong; Dung Quat (bulk cargo port) in Quang Ngai and Phuoc Long ICD (container port) in HCM. With a total capacity of 1.2 million TEUs per annum (for the 3 container ports) and another 2.5 million tons per annum (for the bulk cargo port).

(2) Expect sales from logistics segment will increase by a 4.2% y/y on warehouse capacity expansion – Here we forecast sales of VND1.96 trillion (+4.2% y/y). GMD’s logistics division includes Distribution Center (DC), shipping, trucking, freight forwarding, project cargo and air cargo terminal. For this year we assume;

• Shipping activities (the largest sub-segment) will show growth of 2% y/y. Given two contrasting factors, namely higher volumes and a lower ASP on lower input fuel costs.
• And then we assume DC and warehouse operation will grow 22.4% y/y to VND213 billion with the launch of the new DC 3 in Binh Duong which only became operational in Q1 this year. Plus there are 3 new DC and warehouse projects under construction since late last year. And these are expected to be operational from Q3 this year. Making a small contribution at year-end. As for the other sub segments we assume steady state growth given no specific expansion plan for this year. (We discuss the expansion plan for logistics further below).

GPM to dip a little – We then assume total GPM will slightly decrease to 25.1% from 26.6% in FY2015. By segment, we forecast gross profits for port operations will decrease by 7% y/y (GPM of 39.3% vs. 41.5% in FY2015) on a smaller contribution from cold storage container which carries the highest margin (about 60%). Then we expect gross profits for the logistics segment will rise 3.5% y/y (GPM of 13% flat on FY2015).

Meanwhile we think SG&A as of sales will be unchanged

Estimate net financial loss to narrow slightly – HSC then assumes net financial loss will narrow to VND(148) billion. As one-off provision for goods lost during transportation totaling VND30 billion in FY2015 drops out. Furthermore our earnings estimate for this year doesn’t assume any contribution from the possible sale of the remaining 15% stake in Maproco. Should the stake be sold however, we assume a gain of up to VND112 billion.

Contribution from SCSC and other associates will be flat y/y – We expect that the air cargo services provider, Saigon Cargo Service Corporation (SCSC; with 29.82% owned by GMD) and other associates will contribute VND30 billion, (+1.4% y/y) to GMD’s earnings. Although we expect that for this year, SCSC will report net revenues of VND407 billion, (+19.6% y/y). On higher goods volume of 96,278 tons, (+15% y/y). However we expect SCSC’s NPAT will edge up only to VND146 billion (+1% y/y) on a higher CIT rate (of 20% vs. 10% last year).

Forward diluted P/E at 17.4 times. Not very attractive at this level – All in all, we also forecast the company will show an EBT of VND486 billion, (-2.9% y/y) and a NPATMI of VND374 billion, (-6.8% y/y). Given that NHDV enjoys a tax holiday (4 years of tax exemption and 9 years of 10% tax rate). However we assume that profit belonging to minority interests will still increase y/y as NHDV will grows at a faster pace than GMD as a whole. GMD holds an 85% stake in the port.

Given this HSC forecasts FY2016 basic EPS of VND2,878 generating a basic forward P/E of 13.6 times. Meanwhile, forward EPS with CB dilution will come to just VND2,246 which translate into a P/E of 17.4 times.

For short and medium term, growth will depend on logistics expansion – As ports operation are close to full capacity. There are several logistics projects in the pipeline as follow;

• In April FY2015, GMD broke ground on DC 3 at the Song Than Industrial Zone, Binh Duong province. The DC has a total area of 10,500m2 with capacity of handling up to 13,000 pallets per year at a cost of VND100 billion or so. It was completed at FY2015- end and comes into operation from this year. This is GMD’s third DC in Song Than IZ. GMD will now operate a total DC area of 83,000m2 (capacity of 80,000 pallets per year) in this IZ.
• In May 2015, GMD announced the establishment of a new logistic and port complex in Cuu Long, Hau Giang province (in the South) on a site of 15 ha. The new established company will have chartered capital of VND670 billion. GMD will contribute VND341.7 billion equivalent to a 51% stake. While Minh Phu Seafood (MPC) will hold the balance of 49%. Phase 1 of this project is under construction at an expected cost of VND400 billion. They will also build a DC area including a dry storage warehouse on an area of 15,000m2 to operate from Q1 FY2017 and then a cold storage warehouse on an area of 30,000m2 to come into operation from Q3 FY2016. The cold storage warehouse will offer storage for MPC goods (60%) and then also be available to other seafood companies (40%) in the region. In Phase 2, depending on the flow of goods and the market demand, they will consider developing a small port in this site. Time for construction and capex for Phase 2 has not yet been finalized.
• Then also in May last year, GMD started the construction of a DC in Hai Duong province (in the North) on an area of 16,000m2 in a site offering a total of 30,000m2. This is located in Hai Duong Inland Container Depot (ICD) and approximately 50 km distant from Nam Hai and Nam Hai Dinh Vu port. It will come on stream from Q3 this year. Capex for this DC will be VND250 billion or so.
• In addition, in June 2015, GMD announced establishment of Nam Hai Logistics JSC in Dinh Vu Industrial Zone (Hai Phong) with the chartered capital of VND120 billion. GMD will contribute VND78 billion, which approximates a 65% stake. This includes a depot with a total area of 10-15 ha and is expected to operate from this year end. This will serve as a backfield for GMD’s two current ports in Hai Phong (i.e. Nam Hai and Nam Hai Dinh Vu port) and also as a logistics center for demand arising from Dinh Vu Industrial Zone (Hai Phong). The total capex for this project is around VND400 billion. It will come on stream from Q3 FY2016.

GMD currently have a total of 8 DCs with a total area of 98,000m2. Thanks to these new DCs, the total DC area will increase to 155,000m2, boosting capacity by 58.2% y/y. We estimate that total capex for GMD’s expansion will come at around VND400-500 billion in this year. They will use both debt and equity to fund the expansion at the ratio of 70/30. GMD’s medium term goal is to be the 3PL leader in Vietnam and they already provide nationwide distribution for some large local companies (in the consumer goods sector for example).

Now based on the our estimate for DC sales in FY2015 we think the new capacity, were it to operate at full capacity, could add an incremental VND200 billion or so to GMD’s annual sales in future.

Asset disposals less likely now as the list of remaining non-core holdings is short – In the past, profits have been partly driven by asset disposals. Which ensured speculative interest in the stock but also had a distortive effect on the P&L and valuations. However the list of for sale assets has now shrunk with (1) the half developed rubber project in Cambodia and (2) some land in CBD HCMC the only sizeable assets left. They have been looking for buyers for the rubber plantation; however given the state of the industry this may take time. And of course, in any event, the process could take a few years to finalize. Of course, the announcement of any sales of a non-operating assets would be significant for the stock.

Downgrade to HOLD from OUTPERFORM on lack of neat term catalysts – GMD is gradually increasing the focus on the core logistics business including ports operations and logistics; which we view as a positive sign. However this process will take a few years to finalize. GMD core port & logistics business makes it the market leader in the sector in Vietnam with a 7-10% share of ports and market leadership in the airport & 3PL segments. And long term the eventual construction of the Gemalink Cai Mep port in Vung Tau-Ba Ria will only reinforce that position. However this port is unlikely to kick off until FY2017-2018 at the earliest. Meanwhile growth is constrained and it’s always tough to follow a standout year like FY2015. In the meantime valuations have adjusted to this fact and the stock appears to be fairly valued for now. Stock price increased 55.3%% last year and is now down 6.6% YTD. While FOL is full. We downgrade the stock to HOLD.

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