Invest in Vietnam: Kinh Bac Vietnam Real Estate Leading to Big Pay-off

March 30, 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.

• KBC FY2015 sales rose 36% y/y mainly came from the IPs land sales from Trang Due IP, Tan Phu Trung IP and Que Vo IP while NPAT grew 99%.
• KBC dispose stakes in major non-core investments including SGI-Laos, a hydroelectricity plant and Sai Gon Binh Dinh Power Corporation recording financial income of VND290 billion.
• Forward outlook calls for 14.2% increase in NPAT this year based on some IP land sales in Trang Due and then some residential land plot sales. Without one-off gains, 2016 will be a year to prove core competence of the company.
• EPS of VND1,511 (+11.7% y/y) and a forward P/E, P/B of 8.6x and 0.86x, respectively.
• KBC’s share price has partially recovered after a sharp fall due to the overall market correction and some speculative rumours.
• KBC’s share price is still down 1.56% YTD and just 16.67% above the 12 month low. KBC is still a core TPP and EU FTA theme stock and also a very cyclical play where the booking of one or two big contracts may have a significant impact on the top and bottom line.
• Reiterate Buy.

KBC’s consolidated results show NPAT grew 99% y/y. Moderate growth prospects with serious upside potential to forecasts.

MAIN TAKEAWAY – KBC FY2015 sales rose 36% y/y mainly came from the IPs land sales from Trang Due IP, Tan Phu Trung IP and Que Vo IP while NPAT grew 99%. GPM fell however on a less favourable product mix. KBC dispose two stakes in non-core investments including SGI-Laos, a hydroelectricity plant and Sai Gon Binh Dinh Power Corporation recording financial income of VND290 billion. Forward outlook calls for 14.2% increase in NPAT this year based on some IP land sales in Trang Due and then some residential land plot sales. We take a very conservative view on a series of other potential IP land sales given a lack of detail on deal progress. In other words there is very considerable upside to our forecast for this year.

ACTION – Reiterate BUY. Trading at a 34% discount to RNAV and below book valuations are still very cheap. KBC’s share price has partially recovered after a sharp fall due to the overall market correction and some speculative rumours. We see strong over the next few years for this core TPP stock. Kinh Bac Development Holding Corporation (KBC)

FY2015 NPAT rose 99% – KBC’s unaudited consolidated results sales came to VND1.46 trillion, growing 36% y/y while NPAT was reported at VND622 billion, up 99% y/y from a fairly low base. Under FY2015 targets on delayed bookings. Q4 sales alone came to just VND281.11 billion (-42% y/y) while NPAT was recorded at VND263.94 billion (-68% y/y). With this KBC has completed 74% of the full year sales target and 84% of the bottom line target. To remind you, KBC has set a target of VND1.98 trillion (+85% y/y) for sales and VND739 billion (+136% y/y) for NPAT, respectively. While HSC was forecasting VND2.02 trillion (+38.8% y/y) for sales and VND709.8 billion (+14.2% y/y) for NPAT.

Bookings came from land leases and a handful of warehouses – FY2015 bookings struggled to gain traction given slow progress on completing the processing of several large lease contracts. In the absence of these, actual bookings primarily came from the long term lease of 44.3 ha in Trang Due IP, 11.5 ha in Que Vo IP, 24.2 ha in Tan Phu Trung IP. In Q4 alone, bookings for the lease of 4 ha in Trang Due IP; 2 ha in Que Vo IP and 6.5 ha in Tan Phu Trung were made. The bookings in Trang Due IP were mainly from LG satellites. KBC still has several large pending contracts with Chicony (100 ha), Flat Glass (20 ha) in Quang Chau IP, and Korea Circuit (20 ha) in Nam Son Hap Linh IP.

IP land sales bookings strong but other segments mixed – Bookings from IP land sales increased about 55% y/y to VND1.15 trillion vs. VND742.9 billion in FY2014 and accounted for 79% of all revenues. By IP, Trang Due IP is still KBC’s flagship with VND716.96 billion (+130% y/y) in revenues, followed by Tan Phu Trung was VND309.7 billion (+22% y/y) and then Que Vo IP with VND125.9 billion (-29% y/y).

Then warehouse sales, all in Que Vo IP were worth VND224.7 billion (-2.1% y/y). Most of this was booked in Q4 with the sale of 4 warehouses totaling VND140 billion. In contrast to IP land sales, warehouses lease revenue dropped 77% y/y to just VND8.15 billion with bookings of VND5.89 billion from Que Vo IP and VND2.3 billion from Quang Chau IP. No warehouses were leased in Trang Due or Tan Phu Trung IP last year which was the main reason for the dip in segmental income. Other incorporated IP services such as electricity, water, etc. brought in about VND72.6 billion (+19% y/y). Since services revenue corresponds closely to IP land sales, this has increased slightly from VND15 billion/ quarter to VND18 billion/quarter recently.

GPM slid on a less favourable product mix – Gross profit came to VND596.6 billion (1.5% y/y); by segment gross profit from IP land leases came to VND425.2 (+13.1% y/y); from warehouse sales came to VND126.4 billion (-15.1% y/y) and then from warehouse leasing came to VND4.4 billion (-82.5% y/y). Aggregate GPM dropped from 55% last year to 40.9% this year. By segment GPM from IP lease came to 37.8% vs. 51.8% in FY2014; then for warehouse sales to 56.3% vs. 64.9 % in FY2014 and warehouse leasing to 54.1% vs. 70.6 % in FY2014.

Overall margin decline can be traced to the deterioration of segment GPM plus a worsening product mix. And then not helped by the relatively fewer bookings from high margin warehouse sales and leases during the year and then the deleterious effect of the one-off accounting treatment in Q2.

Financial income up as KBC disposes of more non-core investments – Net financial income came to VND275.8 billion (vs. a loss of VND148.3 billion last year). Due to the fortuitous combination of higher income and lower expenses.

Financial income rose 120% y/y to VND317.12 billion due to the stake disposal. During 2015, KBC booked non-recurring financial income of VND290 billion from the sale of a total of 48.3 million shares in Sai Gon Binh Dinh Power Corporation. Additionally, KBC also recovered VND190 billion from its investment in SGI – Laos, a hydroelectricity plant, by selling the entire 19 block of million shares. Although KBC had no financial gains on this deal, we still consider it as a fairly successful withdrawal from a non-core investment. We expect KBC will continue to dispose the rest of its stake in Sai Gon – Quy Nhon Minerals Corporation. This now accounts for 75% of long-term financial investments. However, the process may take some time. Then the remaining other 8 investments are modest in size and 5 of them relate to IP business. So we assume KBC is unlikely to dispose of them.

Then financial expense fell 86% y/y to VND41 billion due to a reduction in interest expense and bond fees to VND88.2 billion (-65% y/y). Plus a reversal of a provision for non-core investment disposed amounting VND50 billion.

With this NPAT came to VND622 billion (+99%) EPS of VND1,353 per share (+49.67% y/y).

Debts dropped significantly as a result of KBC’s effort in pro-active repayment – By the end of FY2015, long-term debts had declined to VND2.41 trillion (-24.5% y/y), consisting of VND1.5 trillion (-61.57% y/y) in corporate bonds and VND881 billion (+58.7% y/y) worth of long-term bank borrowings. Both categories have been restructured with extended payment terms and lower interest rate. KBC has been using the VND800 billion raised from issuing CBs last year to finance other debt repayment.

The better than expected results were driven by (1) surge in sales in Trang Due IP in Q3 and great sales improvement in sales Tan Phu Trung IP; and (2) one-off booking of gains from an investment disposal. We think that the sales in the ideally located Trang Due IP are at least partly attributable to the IP itself being upgraded into Dinh Vu Economic zone that gives tenant more investment incentives and then the increasing popularity of northern based IPs given TPP. Regarding Tan Phu Trung, KBC has noted increasing demand for that location also. In our last meeting with the KBC Chairman, he mentioned an investment policy draft that if passed, may spur investment dynamics in HCMC and surround.

HSC FY2016 forecasts NPAT growth of 14.2% in the absence of one-off gains – HSC forecasts full year net sales of VND2,024 billion (+38.8% y/y) and NPAT of VND709.81 billion (+14.2% y/y). Based on the following assumptions;

(1) We assume that IP lease will come to VND1,738 billion (+51% y/y). For this we assume that KBC will book VND803 billion (+12% y/y), VND371.6 billion (+20% y/y) and VND163.6 billion (+30% y/y) in Trang Due IP, Tan Phu Trung IP and Que Vo IP, respectively.

(2) Then we assume that they sell a total of 4 ha of land plots for a total of VND400 billion in the Phuc Ninh residential project.

(3) Regarding other segments, we expect KBC will sell 5 warehouses worth VND175 billion (-22% y/y) and as a results of increasing demand for IPs land, we assume the warehouse leases will bounce back and reach VND23.9 billion (+194% y/y).

(4) Last but not least we believe the incorporated services which will keep growing reasonably at 20% to VND87 billion.

(5) Aggregate GPM will back to about 48% without one-off accounting treatment that surged COGS during Q2/2015.

(6) Net financial income remains slightly positive amounting VND90.16 billion, implying a slippage of 67.3% y/y given no one-off financial income recorded from stakes disposal while the interest expense continues to reduce.

(7) SG&A expenses may rise 58% y/y up to VND202.4 billion as a results of more activities needed for the sale of Phuc Ninh residential area.

By all the above projections, we forecast NPAT reaches VND709.8 (+14.2% y/y) for FY2016. Resulting in an EPS of VND1,511 (+11.7% y/y) and a forward P/E, P/B of 8.6x and 0.86x, respectively.

In terms of other near term catalysts, we would also note plans for a 5% stock dividend KBC still owes to shareholders. Which we expect may be realized by the end of 1-H FY2016 when the stock price has presumably recovered further.

FY2016 is the year to prove core competence – Last year a one-off booking of investment disposal contributed significantly to the bottom line result. However, since there are no more large investments to dispose of, KBC will have to rely on core business growth from now on. Which depends on how much land they lease from IPs and then how other business lines perform. Including the new income source; namely selling land plots for residential usage.

For our outlook for FY2016, and harking back to our previous report, we have noted a possibility that KBC would sell land plots in the Phuc Ninh residential area. The total area for sale comes to about 6 ha which could generate VND600 billion in revenues and more than VND300 million in gross profit. The company has assured us that there is strong interest in this project. However to date, KBC has never sold residential land plots, and in our last meeting with the company, there were still debating whether to sell this directly to clients or hire a third party like Dat Xanh Group (DXG) to sell on their behalf. In our model we they will sell 4 ha of land plots for a total of VND400 billion.

The other major possibility for this year is the sale of another 50 ha in Trang Due IP with LG. To recap on their recent sales progress, KBC signed the contract to lease the first 40 ha with LG in FY2012 and the deal took three years to complete. The price of the initial contract was USD42.5 per sqm. In Q3 FY2014, KBC signed an MOU to lease another 50ha at a price of USD63 per sqm, thus we estimate the total amount will be VND662 billion. The price of second contract was much higher than the first one and the lease price in Trang Due IP

currently ranges between USD71-75 per sqm. Other than LG, since late 2014, several major customers such as Chicony, Flat Glass, Korea Circuit, and Vision, etc. have approached KBC looking to lease IP land however we’ve heard little about the progress of these pending contracts. Hence for the time being, we omit these contracts from our projections given the uncertainty surrounding these projects. Once we have a clearer idea, we will adjust our forecast.

Since the key IPs in Hai Phong and Bac Ninh province are situated in prime locations especially Trang Due IP which was upgraded into Economic Zone, we expect the selling price of these IPs will keep rising given increasing demand. We note that average sales prices for these key IPs were about US$65-70 per sqm in FY2014 while in FY2015 it was already US$72-75 per sqm. We believe that Trang Due IP’s land bank is sufficient for at least 5 years and will play the main role in attracting FDI flows into KBC properties especially from Japanese, Korean and Taiwanese investors.

The stock looks fairly cheap – KBC has partially recovered after a sharp fall at the beginning of the year due to overall market correction and some speculative rumours. However, KBC’s share price is still down 1.56% YTD and just 16.67% above the 12 month low. Furthermore, the stock is also trading at a 34% discount to our RNAV of VND19,200 per share. The RNAV has been revised slightly up to reflect higher rental prices in KBC’s IPs as well as better assets structure of the company. Open FOL is 98,040,553 shares amounting to 20% of the total OS. Since the room for foreigners isn’t full, KBC has no plans to open up the FOL in the short term. KBC is a very cyclical play where the booking of one or two big contracts may have a significant impact on the top and bottom line. Plus they can easily increase their overall land bank (and also RNAV) by raising the ownership stake in various associates. KBC is currently holding onto IPs in Vietnam’s Northern, Central and Southern regions to take advantage of FDI flows in the country and is thus a core TPP and EU FTA theme stock. Reiterate Buy.

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