HSC Securities: RE Sugar Processors to Benefit from Developments

Posted by HSC Securities

CBRE: Vietnam Retail Infographics

Oct 26th, 2016

Sugar association proposes that future sugar imports be raw sugar only with the auctions conducted at the beginning of the year

This would benefit RE sugar processors by eliminating refined sugar imports
Currently over half of imports mandated under WTO consists of already refined sugar
This more active stance may be seen as part of the consolidation of industry
Change in timing of the auction would also better suit processing companies

The Vietnam sugarcane and sugar association (VSSA) has made two suggestion to the government concerning the auction for the right to import estimated 89,000 tons of sugar under the WTO commitment in 2017. Accordingly the VSSA has suggested (1) that the auction to be held in Q1 2017 instead of Q3 previously. To coincide with the active sugar processing season from November to June. And (2) that all of the sugar imported under quota system consist of raw sugar only instead of less than half currently.

Currently there are 40 sugar plants nationwide with total designed capacity of around 155,300 tons of sugarcane per day, of which 50% of capacity is used to process refined extra (RE) sugar and the rest is normal refined sugar (RS) and brown sugar. Local processors can process both kinds but RE sugar carries higher margin (we estimate at 17% vs. 14%).

This would benefit RE sugar processors by eliminating refined sugar imports – If the suggestion is approved, this would obviously be good news for (1) Sugar processing companies as they will have more raw sugar to process and sell (2) for those which can process RE sugar from raw sugar such as Bien Hoa Sugar JSC (BHS), Thanh Thanh Cong Tay Ninh Sugar JSC (SBT – Underperform), Lam Son Sugar JSC (LSS) as they can lower their production cost if they can get the quota. Last season SBT used about 100,000 tons of raw sugar while LSS used 14,000 tons of raw sugar of which 5,000 tons were imported under quota.

Currently over half of imports mandated under WTO consists of already refined sugar – Last month in Hanoi the Ministry of Industry and Trade (MOIT) held an auction for the right to import 85,000 tons of sugar including 40,000 tons of raw sugar and 45,000 tons of RE sugar under the WTO commitment for 2016. At a starting price of VND1 million/ ton, MOIT collected VND139.5 billion from the auction. The right to import 40,000 tons of raw sugar was won by Bien Hoa Sugar JSC (BHS) 14,444 tons, Thanh Thanh Cong Tay Ninh JSC (SBT) 14,444 tons and Khanh Hoa Sugar 11,110 tons.

This more active stance may be seen as part of the consolidation of industry – Hence we can suppose that BHS & SBT might be the future main beneficiaries of such a proposal. And also follows the sale of HAG’s sugar plantation in Lao which will be operated by or the other (or both). Not to mention the ongoing intense speculation about a possible merger between both companies.

sugar-sector-brief-2

Change in timing of the auction would also better suit processing companies – Normally crushing season starts in November (some can start a bit earlier) and ends in April, then the plants who can process RE sugar from raw sugar will continue production till May – June. For season 2015/16 all over the country sugarcane plantation area decreased 6.7% to 284,367 ha and total sugarcane volume decreased 8% to 18.3 million tons meaning yield of 64.4 tons/ha. Process sugar volume came to 1,237,300 tons (-12.73% y/y), of which refined sugar contributed 630,000 tons. For current season the VSSA estimated crushing sugarcane volume of 15 million tons (-18% y/y) giving sugar volume of 1.4 million tons. While the USDA reported that in last season 2015/16 Vietnam’s sugar consumption reached 1.97 million tons (+8.6% y/y) and forecast consumption for 2016/17 will come to 2 million tons (+1.3% y/y).

sugar-sector-brief-3

Global Disclaimer

Copyright 2016 Ho Chi Minh Securities Corporation (HSC). All rights reserved. This report has been prepared and issued by HSC or one of its affiliates for distribution in Vietnam and overseas. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of HSC and are subject to change without notice. HSC has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. The information herein was obtained from various sources and we do not guarantee its accuracy or completeness. Prices and availability of financial instruments are also subject to change without notice. This published research may be considered by HSC when buying or selling proprietary positions or positions held by funds under its management. HSC may trade for its own account as a result of short term trading suggestions from analysts and may also engage in securities transactions in a manner inconsistent with this report and opinions expressed there in. Neither the information nor any opinion expressed in this report constitutes an offer, nor an invitation to make an offer, to buy or to sell any securities or any option, futures or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments. Officers of HSC may have a financial interest in securities mentioned in this report or in related instruments. This research report is prepared for general circulation for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report. Investor should note that the prices of securities fluctuate and may rise and fall. Past performance, if any, is no guide to the future. The financial instruments discussed in this report may not be suitable for all investors. Investors must make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives. As this report is HSC’s property and not public information, this report and any part of this report may not be copied, reproduced, published or redistributed by any person for any purpose without the express permission of HSC in writing. Please cite sources when quoting. Any Party shall be liable to HSC for any cost, loss or damage incurred by HSC or HSC clients as a result of any other breach under this Disclaimer in accordance with law.