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Vietnam Approves One-Year Visas for US Citizens

12/10/2015

Price: VND 38,400                    Target Price: VND 44,000                TSR: 19.9%

Market Cap: USD 209m          Daily Val 30 Day: N/A                         Foreign room: 0%

 

Key Metrics 2013A 2014A 2015F 2016F
Revenue, VND Billion 2,525 3,013 3,571 4,244
NPAT less Minority Interest 192 531 405 518
Revenue growth -2.1% 19.3% 18.5% 18.8%
Reported EPS growth 85.2% 176.2% -24.0% 27.7%
Core EPS growth (*) nm -11.5% 755.6% 14.4%
PER at market price (reported EPS) 24.5 8.9 11.7 9.1
PER at market price (adjusted EPS) 77.6 87.6 10.2 9.0
PBR at market price 1.0 0.9 0.9 0.8
ROE 4.6% 12.1% 9.4% 11.5%
Dividend Yield at market price 2.6% 3.1% 5.2% 5.2%
Net Debt / Equity % 29.3% 19.4% 27.3% 27.5%

Notes: (*) EPS growth is calculated on adjusted EPS (less extraordinary profits and less contribution to employee bonus and welfare fund per Circular 200).

 

 
 
   
Key Metrics
Foreign Ownership 49.0%
Foreign Limit 49.0%
Outstanding Shares 116m
Fully Diluted Share Count 162m
12M High VND 43,100
12M Low VND 26,600
Ownership
Re-Collection Pte.Ltd. 12.0%
Deutsche Bank AG & Deutsche Asset Management 1.9%
PYN Elite 5.2%
 
 
 
 

 

* Logistics in Vietnam is a $US 45-50b industry, growing at around 20% per year and is expected to sustain double-digit growth for at least the next 5-10 years.

* Heavy investment in a slew of new Distribution Centers will help GMD lead the domestic logistics industry’s 3PL revolution; Nam Hai Dinh Vu port will continue to be the revenue growth driver in 2016.

* We put a one-year target price of VND 44,000 on GMD, implying a 19.9% total stock return based on the current market price of VND 38,400. 

GMD is poised to ride the third party logistics (3PL) revolution in Vietnam. The 3PL industry in Asia Pacific grew at 10.5% CAGR between 2007 and 2014 (Armstrong & Associates). Since 3PL in Vietnam is still at a nascent stage relative to other Asian peers, it could grow at a rapid rate for years to come. By virtue of its integrated facilities and presence across the logistics value chain, GMD is well positioned to be a leading domestic player in this segment. Since the entire industry is migrating to 3PL, being at the forefront of this trend positions GMD for long-term logistics market leadership.

Brand new Distribution Centers to be near-term earnings catalysts. The recently opened DC3 and Hau Giang Logistics Center will increase total system-wide DC network area and capacity by 21% and 29% respectively to 123,172 m2 and 80,000 pallets. In 2016, the cold storage facility in Hau Giang for Minh Phu Seafood will start generating revenues.

Nam Hai Dinh Vu port to help GMD ride the container traffic boom in the North. The cargo throughput in Hai Phong area grew at 21% CAGR between 2001 – 2014 and will continue to grow on the back of the huge manufacturing FDI into the Haiphong-Bac Ninh-Thai Nguyen industrial cluster. Given Nam Hai Dinh Vu port’s prime location, large capacity and ability to accommodate larger vessels (30,000 DWT) compared to other ports in the North, it should capitalize on the high growth of handling cargo volume in this area over the next 2 years. The completion of a new depot to augment existing capacity constitutes further upside to NHDV’s performance.

Table of Contents

Company at A Glance. 5

Financial Statements. 6

Quarter Results. 7

P&L Forecast 8

Vietnam’s logistics industry is on the cusp of a 3PL revolution and poised for sustained rapid growth  9

Port operations in Vietnam have grown robustly this year despite a moribund global maritime shipping landscape… 10

…and this is reflected in the strong performance of port operators this year relative to that of shipping lines  11

Demand for logistics and port services is expected to take-off in the next few years. 13

The conclusion of major trade agreements and the strong flow of manufacturing-led FDI will boost demand for logistics services….. 13

… with the revival in the domestic economy and manufacturing activity providing that additional oomph  14

The rapid growth in modern trade and internet retailing is increasing demand for specialty logistics services. 14

Infrastructure investments are boosting the capacity and efficiency of ports. 15

Company Overview. 17

Bright outlook for port and logistics segments. 19

GMD is one of a few domestic companies that have a presence across the logistics value chain…   19

…which positions GMD for success in the fast-emerging 3PL segment. 21

Nam Hai Dinh Vu Port is a smart investment given that the existing Nam Hai container port is approaching full-capacity utilization. 25

Gemadept Shipping has maintained a high fleet utilization amid difficult industry conditions. 28

SCSC Air Cargo Terminal will provide GMD exposure to the nascent but high-potential air freight transportation industry in Vietnam.. 29

Air freight transportation is expected to grow fast from a low current base, spurred on by Vietnam’s increasing trade with the rest of the world….. 29

GMD’S SCSC Joint Venture is seeing solid growth and still has ample spare capacity…   30

…which should be absorbed by its diversified customer base in the next few years. 31

GMD is finally looking to get out of non-core businesses. 32

9M2015 update: Impressive growth mainly stemmed from northern ports. 34

Earnings Outlook: port segment to steal the show this year but logistics to become a growth- engine in 2016. 37

2015 Outlook – Port operations to steal the show as idle capacity gets quickly absorbed by growing demand, especially in the North. 37

Outlook from 2016 onwards – Logistics business to take over as the key growth driver as port capacity gets maxed out in 2017. 39

VIG convertible bonds create potential dilution risk. 43

Valuation. 44

DCF Valuation. 45

Peers Comparable Analysis. 46

VCSC Target Price and Rating History. 47

 


 

Table of Figures

Figure 1: Most local companies are 2PL providers. 9

Figure 2: Cargo volume through ports and domestic transportation volume 2005-2014. 10

Figure 3: Cargo volume through ports and domestic transportation volume in 1H2015. 10

Figure 4: Baltic Dry Index. 11

Figure 5: Revenue of domestic logistics companies: 1H2015 vs. 1H2014. 12

Figure 6: Gross Profit Margin of Logistics companies in 1H2015. 12

Figure 7: Foreign Direct Investment into Vietnam.. 14

Figure 8: Performance of key manufacturing industries in 1H2015. 14

Figure 9:Soai Rap channel 15

Figure 10: Cai Mep port zone and transportation infrastructure. 16

Figure 11: GMD’s subsidiaries. 18

Figure 12: GMD’s logistics and port operations footprint in Viet Nam.. 20

Figure 13: GMD activities across the in-bound logistics value chain. 21

Figure 14: GMD activities across the out-bound logistics value chain. 21

Figure 15: Vietnam 3PL industry forecasted growth from 2015-2020. 22

Figure 16: Only 15% of local companies can tap into the 3PL segment 23

Figure 17: GMD has the most expansive DC network by far 24

Figure 18: GMD’s Distribution Centre Network: current and future. 24

Figure 19: GMD’s ports. 25

Figure 20:Nam Hai Port and Nam Hai Dinh Vu Port. 26

Figure 21: Lach Huyen project Location. 26

Figure 22: Demand and supply of cargo handling services in Hai Phong (million TEUs) 27

Figure 23: NHDV is the only port in Hai Phong capable of receiving 30,000 DWT ships. 28

Figure 24: GMD shipping routes. 29

Figure 25: Utilization Rate of Ocean vessels (2014) 29

Figure 26: Largest container fleet operators in Vietnam in 2014. 29

Figure 27: Freight Volume by Transportation Medium.. 30

Figure 28: Potential growth of Air Freight Transportation. 30

Figure 29:  Cargo throughput of SCSC air cargo terminal 31

Figure 30: GMD is able to do provide almost all services along the logistics value chain. 32

Figure 31: Global Natural Rubber prices: no clear bottom in sight 33

Figure 32: Rubber plantation in Cambodia. 33

Figure 33: Rubber subsidiaries of GMD.. 33

Figure 34: Saigon GEM.. 34

Figure 35: Vientiane Laos Complex. 34

Figure 36:Revenue breakdown 9M2015. 35

Figure 37: Revenue growth by segment 35

Figure 38: Expected market shares of Hai Phong port operators in 2015. 35

Figure 39: Revenue breakdown for 2015. 38

Figure 40: Estimated port revenue breakdown for 2015. 38

Figure 41: Forecasted cargo throughput of SCSC air cargo terminal 38

Figure 42: 2015 revenue breakdown by segment 39

Figure 43: 2015 Gross Profit breakdown by segments. 39

Figure 44: Projected capacity utilization for 3 seaports and Phuoc Long ICD of GMD.. 40

Figure 45: Forecast of Revenue and Cargo throughput of DC segment 40

Figure 46: DC forecasted revenue breakdown. 40

Figure 47: Export value and Export volume of MPC from 2007-2015. 41

Figure 48: Location of Cai Cui port 42

Figure 49: Grocery Retail Outlets and Selling Space. 43

Figure 50: Revenue by segment 43

Figure 51: Gross profit contribution of segments. 43

Figure 52: Expected basic EPS from 2015-2017. 44

Figure 53: Scenario Analysis for reported EPS based on VIG bond conversion year 44

Figure 54: Blended target price. 45

Figure 55: Revenue and margin assumptions. 45

Figure 56: DCF assumptions. 45

Figure 57: Disounted Cash Flow. 46

Figure 58: GMD versus peers. 46


Company at A Glance

 

Business                      Logistics/ Port operations

Key Sales Drivers         Demand for logistics services and cargo traffic through seaports

Key Cost Drivers          Outsourcing costs (warehouse, depot and truck rental)

Key Risks                     Foreign competition, downturn in the global economy and trade flows.

Major Clients                Manufacturing companies, global shipping companies

Leadership                   Mr. Do Van Nhan (Chairman), Mr. Do Van Minh (CEO)

Headquarters                6 Le Thanh Ton street, Ben Nghe ward, district 1, HCMC

Website                        http://www.gemadept.com.vn

Email                           info@gemadept.com.vn

Telephone                    84-(8) 38 236 236

 

SELECT COMPANY METRICS

Revenue Mix % Gross Profit Contribution %
   
Cost Structure % Capital Structure %
   

Source: GMD, VCSC

Financial Statements

INCOME STATEMENT 2014A 2015F 2016F   BALANCE SHEET 2014A 2015F 2016F
VND Billion   VND Billion
Revenue 3,013 3,571 4,244 Cash & cash equivalents 943 1,095 1,051
  Cost of goods sold -2,388 -2,604 -3,110 Short term investment 596 577 570
Gross Profit 625 968 1,134 Accounts receivables 1,071 1,414 1,679
 Sales & Marketing exp -32 -43 -51 Inventories 91 132 135
General & Admin exp -280 -250 -297 Other current assets 150 178 211
Operating Profit (EBIT) 313 675 786 Total Current assets 2,852 3,396 3,646
   Financial income* 665 65 75 Fix assets, gross 3,905 4,719 5,254
   Financial expenses -251 -261 -87 – Depreciation -1,444 1,696 (2,000)
     In which, interest expense -113 -134 -159   Fix assets, net 2,461 3,023 3,254
   Sh’d profit / loss fr associates 25 32 38   LT investment 1,490 1,522 1,560
   Net other income / (loss) -51 LT assets other 1,376 1,184 1,308
Profit before Tax 701 511 653 Total LT assets 5,328 5,729 6,122
   Income Tax -136 -46 -59 Total Assets 8,180 9,125 9,768
NPAT before MI 565 465 594
  Minority Interest -34 -60 -77 Accounts payable 359 369 488
NPAT less MI, reported 531 405 518   Short-term debt 408 982 1,045
NPAT less MI, adjusted, 155 462 536 Other ST liabilities 403 459 542
EBITDA 529 926 1,091 Total current liabilities 1,169 1,810 2,075
 Long term debt 1,480 1,480 1,466
EPS basic reported, VND 4,598 3,288 4,201 Other LT liabilities 311 369 438
EPS basic adjusted (1), VND 477 3,751 4,290 Total Liabilities 2,961 3,659 3,980
EPS fully diluted (2), VND 381 2,973 3,358 Preferred Equity
Note*: 2014 Financial income from selling a 85% stake in Marproco Paid in capital/Issued capital 1,161 1,161 1,742
RATIOS 2014A 2015F 2016F Add. share capital/sh. premium 2,471 2,471 2,471
Growth Retained earnings 1,031 1,241 992
Rev growth 19.3% 18.5% 18.8% Other equity 214 124 141
Op. profit (EBIT) growth % 28.1% 157.6% 16.4% Minority interest 341 469 441
PBT growth 241.1% -27.1% 27.7% Total equity 4,878 4,998 5,347
EPS growth, adjusted -11.5% 755.6% 14.4% Liabilities & equity 8,180 9,125 9,768
 
Profitability  
Gross profit margin 20.7% 27.1% 26.7%   CASH FLOW
EBIT margin 8.7% 18.9% 18.5%   VND Billion
EBITDA margin 17.6% 25.9% 25.7% Beginning Cash Balance 470 943 1,095
NPAT less MI, adj. margin 0.2% 12.9% 12.6% Net Income 565 465 594
ROE 12.1% 9.4% 11.5% Dep. & amortization 268 252 305
ROA 7.1% 5.4% 6.3% Change in Working Capital 28 -346 -80
Other adjustments -507 -4 -65s
Efficiency Cash from Operations 354 367 754
Days Inventory On Hand 16 16 16   Capital Expenditures, net -496 -536 -637
Days AR 127 127 133   Investments, net 680 -24 16
Days AP 50 50 50 Cash from Investing 184 -560 -621
Cash Conversion Days 92 92 99   Dividends Paid -150 -232 -232
  ∆ in Share Capital 17
Liquidity   ∆ in LT debt 72 -13
Current Ratio 2.4 1.9 1.8   ∆ in ST debt 0 574 63
Quick Ratio 2.2 1.7 1.6 Other financing cash flows -3 10 12
Cash Ratio 0.8 0.6 0.5 Cash from Financing -64 352 -170
Debt / Assets 23.1% 27.1% 25.7% Net Change in Cash 474 159 -36
Debt / Capital 27.9% 33.0% 32.0%   Ending Cash Balance 943 1,095 1,051
Net Debt / Equity 19.4% 27.3% 27.3%  
Interest Coverage 7.0 4.6 4.9  

Source: Company financial statements, VCSC forecasts. (1) EPS basic adjusted is earnings per share less extraordinary profits and less contributions to employee bonus and welfare fund per Circular 200.

Quarter Results

2015 1QA 2QA 3QF 4QF YTD Actual as % of Company guidance Company Guidance VCSC Forecast
Revenues, VND Billion 813.3 912.7 935.0 N/A 54% 3,200 3,571
NPAT, unadjusted 81.0 153.0 122.0 N/A 119% 300* 465
NPAT, adjusted N/A N/A N/A N/A N/A
Gross profit margin 24.8% 28.5% 29.3% N/A 27.1%
Op Profit (EBIT) margin 13.3% 20.9% 20.4% N/A 18.9%
NPAT less MI (adj.)margin 8.1% 15.1% 11.1% N/A 11.3%
Revenue, YoY growth 32.4% 23.7% 26.0% N/A 18.5%
Op Profit (EBIT) YoY growth 41.6% -67.2% 236% N/A 116%
Note*: We apply a tax rate of 9% on 2015 EBT guidance provided by the company    
2014              
Revenues, VND Billion 614.0 738.0 742.0 892.0
NPAT, unadjusted 40.0 461.0 33.0 5.0
NPAT, adjusted N/A N/A N/A N/A
Gross profit margin 16.4% 20.1% 21.0% 27.2%
Op Profit  (EBIT) margin 12.5% 79.8% 10.2% 6.4%
NPAT less MI (adj.) margin 6.5% 62.5% 4.4% 0.6%
Revenue, YoY growth 8.1% 21.2% 14.2% 26.7%
Op Profit (EBIT) YoY growth -58.4% 1,931.0% 22.6% 35.7%
     
2013              
Revenues, VND Billion 568.0 609.0 650.0 704.0
NPAT, unadjusted 147.0 -8.0 27.0 -28.0
NPAT, adjusted N/A N/A N/A N/A
Gross profit margin 13.6% 18.2% 18.0% 20.3%
Op Profit  (EBIT) margin 32.6% 4.8% 9.5% 6.0%
NPAT less MI (adj.) margin 25.9% -1.3% 4.2% -4.0%
Revenue, YoY growth -7.5% -9.2% -0.3% 10.7%
Op Profit (EBIT) YoY growth 125.6% -25.6% -23.5% -42.5%

 

Note: NPAT adjusted = NPAT less minority interest less extraordinary earnings

P&L Forecast

 

  FY14A FY15 forecast

 

YoY % (FY15 vs. FY14) Explanation
Revenues 3,013.0 3,571.0 18.5%
Port operation 1,097.0 1,623.0 47.9% Ports in Hai Phong mainly contribute to high growth. Nam Hai Dinh Vu port is assumed to touch 90% capacity utilization for the full year 2015 as it touched 88% capacity utilization in 9M2015
Logistics 1,875.0 1,948.0 3.9 % The new logistics center in Hai Duong and new distribution center DC3 are the main contributors to the growth of logistics business in 2015
Gross profit 625.0 968.0 55.0% Gross Margin to expand from 20.7% in 2014 to 27.1% in 2015. High-margin reefer container services growth due to China-Vietnam land border closure and high capacity utilization at Nam Hai Dinh Vu port are the key drivers of margin expansion
Sales & marketing exp 32.0 43.0 35.0%
General admin exp 280.0 250.0 -10.9% In line with the fall in YTD 9 month G&A expense as a % of revenues
Operating profit 313.0 675.0 116.1%
Non-operating profit 476.0 -62.2 n/a In 2014, there was one-time financial income of VND 617 b from the sale of an 85% stake in Marproco, the owner of Gemadept Tower. In 2015, we expect an unrealized FX loss of about VND 59 b on US-denominated debt of GMD (~USD 40 million balance outstanding)
EBIT 262.0 675.0 158.0% EBIT margin expansion driven by gross margin expansion and growing economies of scale
Interest expense 113.0 134.0 18.6%
Profit before tax 701.0 511.0 -27.1%
Profit after tax 565.0 465.0 -17.7%
NPAT (after minority interest) 531.0 405.0 -23.7%
EBITDA 529.0 927.0 75.0%
Gross profit margin % 20.7% 27.1%
Sales & marketing % sales 1.0% 1.2%
General admin % sales 9.0% 7.0%
Operating profit margin % 10.4% 18.9%
EBIT margin % 8.7% 18.9%
EBITDA margin % 17.6% 24.6%
NPAT margin % 17.6% 11.3%
Effective tax rate % 19.4% 9.0%
         

 

Vietnam’s logistics industry is on the cusp of a 3PL revolution and poised for sustained rapid growth

According to Vietnam Logistics Association (VLR), Vietnam’s logistics industry is worth about 25% of GDP, equivalent to USD 46b in 2014. The industry has been growing at around 20% per year and is expected to sustain double-digit growth for at least the next 5-10 years. According to the ministry of Industry and Trade, Vietnam has more than 1,200 companies providing logistics services, of which 70% are small and medium enterprises. The market share of local companies is only 20-30%, whereas 25 multinational logistics enterprises operating in Vietnam control around70-80% of the market.  Most Vietnamese logistics players are 2PL (secondary party logistics) providers unlike in more developed markets where 3PL providers and integrated supply chain management vendors dominate.

 

Figure 1: Most local companies are 2PL providers
Only 15% of local logistics companies are able to provide 3PL services, namely GMD, Vinafreight, Transimex, Vinafco
85% of local companies mainly provide primary logistics services
Source: ISCEA, VCSC analysis

 

The sustained growth in the country’s economy and trade with the rest of the world over the past two decades has led to rapidly increasing levels of transportation demand, which have put a strain on limited resources. To date, Vietnam’s transport and logistics system has been able to accommodate fast growth despite limited connectivity. However, the shift in the industrial base towards more sophisticated manufacturing (electronics, chemicals and automotive assembly) and the development of modern retail formats are increasing the complexity of supply chain requirements with heightened needs for timeliness and efficiency. This creates an unprecedented opportunity for domestic logistics players to upgrade their capabilities and evolve from 2PL vendors focused just on forwarding and transportation into 3PL providers that provide the entire spectrum of supply chain services and offer tailored solutions to clients.

 

Port operations in Vietnam have grown robustly this year despite a moribund global maritime shipping landscape…

The total cargo volumes through Vietnam’s ports recorded an increase of 10.4% YoY in the first half of 2015 to reach approximately 203m tonnes, of which container cargo clearance volume touched 6.2 million TEUs, up 26% on YoY basis. This growth was largely driven by Vietnam’s rapid emergence as a regional manufacturing hub which is driving imports of both capital equipment and components as well as exports of finished products.

Domestic freight transportation volumes – comprising of road freight, air freight, inland waterway freight, maritime freight and rail freight – grew at a more subdued but still respectable rate of 5.7% YoY to touch 546 million tonnes in the first half of this year. With the continued growth in imports and exports as well as the acceleration in GDP growth, we can expect domestic freight volumes to pick-up slightly in 2016 although the sharp recent slowdown in global trade poses some downside risks.

Figure 2: Cargo volume through ports and domestic transportation volume 2005-2014 Figure 3: Cargo volume through ports and domestic transportation volume in 1H2015
+10.4%
+5.7%
Source: GSO, Ministry of Transport.

The strong performance of the port sector in Vietnam is particularly impressive when you consider the sharp downturn in the global maritime shipping industry. Container freight rates have nosedived prompted by a fall in the volume of seaborne trade. This fall in demand has not been accompanied by a reduction in supply largely because the slump in steel prices has dissuaded shipping lines from scrapping their old vessels; 60% fewer container ships have been scrapped this year compared with the same period last year. At the same time, orders for new ships have boomed, rising 60% YoY in the first 5 months of 2015. These factors have combined to create huge oversupply, thereby pressuring freight rates. The cost of sending a container from Shanghai to Europe, for instance, has almost halved since March of this year (The Economist, October 29th, 2015).

Meanwhile, the bulk shipping industry has been hit even harder given the sharp slowdown in Chinese commodity imports. The Baltic Dry Index, a measure of shipping rates for commodities such as coal, iron ore, steel and grain, recently touched a 30-year low, having fallen 96% since touching its all-time high in May 2008.

Vietnam’s ports have, however, managed to shrug-off these headwinds in the container and bulk shipping sectors owing to the country’s rapid emergence as a manufacturing hub as well as the strong recovery in the country’s domestic economy. However, the country is not immune to this and a deepening slump in global trade could impact Vietnam’s trade volumes and, consequently, lead to a slowdown in container traffic through Vietnam’s seaports in 2016 and beyond.

Figure 4: Baltic Dry Index
BDI hit a fresh 30-year low of 498 points in November 2015
Source: Bloomberg, VCSC.

…and this is reflected in the strong performance of port operators this year relative to that of shipping lines

 

  • Vietnamese port operators in the Hai Phong port zone such as DVP, VSC or GMD, saw a dramatic expansion in gross margin, mainly stemming from higher cargo volumes (leading to higher utilization) as well as due to a spike in demand for reefer-related services. In 1H2015, there was a backlog of around 1,500 cold containers in the Hai Phong port zone consisting mainly of frozen foods that were temporarily imported into Vietnam via sea for re-export to China via land. Recent tightening of controls by the Chinese along the Sino-Vietnamese border in recent months have prolonged custom clearance time, thereby lengthening the storage period for these reefer containers. Reefer container services carry substantially higher gross margins (~50%) than other regular container-handling services owing to their specialized nature. Such spikes could repeat in the future as border conditions between Vietnam and China remain tense owing to disputes over the East sea.
  • Local pure-play logistics companies that do not have any seaport operations saw a modest improvement in GPM, with the notable exception of TMS. Only TMS which owns a strong system of DCs (distribution centres) was able to improve gross margins substantially by providing more value-added services within its DCs. Nevertheless, revenue growth of pure-play logistics service providers increased rapidly driven by the recovery in the domestic economy as well as trade between Vietnam and the rest of the world.
  • Domestic maritime transportation or shipping companies were pummelled by the prolonged weakness in global shipping freight rates. In fact, global freight rates have remained low with the Baltic Dry Index (BDI) plunging from 12,000 in 2008 to bottom at 509 points in Feb 2015 and then falling again to hit a fresh 30-year low of 498 points in November. The index is likely to stay depressed as the maritime transportation industry continues to suffer from chronic overcapacity and China’s demand for commodities continues to weaken. Meanwhile, container shipping rates have also seen sharp falls owing to the sharp slowdown in global trade activity in recent months.
Port operators: average growth rate of 23.60%

 

Figure 5: Revenue of domestic logistics companies: 1H2015 vs. 1H2014

+5.0%
+26.7%
+55.3%
+3.4%
+27.6%
-25.1%
Shipping: average growth rate of -15.4%
Logistics: average growth rate of 23.64%
+45.6%
Source: Company financial reports
Figure 6: Gross Profit Margin of Logistics companies in 1H2015
Source: Companies’ s financial reports, VCSC

*Note: VNF, TMS, STG, VNT, VNL are pure-play logistics services companies and don’t own any seaports. GMD has port operations and also provides logistics services, but we put it into the port group due to the huge contribution of the port operations segment to GMD’s operating profit. GMD has lower gross margins than pure play port operators due to the contribution of its logistics services business which carries lower margins than port operations.

Demand for logistics and port services is expected to take-off in the next few years.

We see 4 major trends that will support the continued strong expansion of the Vietnam logistics and port operations industry: (1) The conclusion of major trade agreements and the strong flow of manufacturing – led FDI will boost import and export activity between Vietnam and other countries (2) an improving economy and growing domestic demand which will continue to support a broad-based revival in manufacturing activity, (3) The rapid growth in modern trade and internet retailing will require more supply-chain management services (4) the completion of a series of infrastructure projects which will have a particularly marked impact in improving seaport capacity and efficiency.

The conclusion of major trade agreements and the strong flow of manufacturing-led FDI will boost demand for logistics services…

Recently completed and upcoming free trade agreements will boost trade flows. In 2015 Vietnam is likely to sign or conclude negotiations for 6 new Free Trade Agreements (FTAs) both bilateral and multilateral in nature. Furthermore, a few notable FTAs such as the Vietnam-Korea FTA have already been signed and taken effect with tariff reductions currently underway. Major free-trade initiatives that are supposed to be concluded and come into effect within the next 2-3 years include the formation of the ASEAN Economic Community (AEC), the regional comprehensive economic partnership between the 10 ASEAN countries and six partner countries (RCEP) and – most importantly — the FTA with the European Union and the Trans-Pacific Partnership (TPP) both of which concluded negotiations earlier this year. These agreements will open up new opportunities for Vietnam to integrate further and deeper into the global economy and global and regional supply chains. According to VLR (Vietnam Logistics Review), the industries that will benefit most from the above agreements include agriculture, aviation (air transport), automotive, electronics, fisheries, healthcare, rubber products, textiles, apparel, tourism, wood products, food as well as agricultural and forestry products. The consequent movement of goods across borders will spur a surge in demand for logistics services while also boosting cargo clearance volumes through seaports and, to a lesser extent, airports. The AEC in particular will stimulate demand for land-based cargo-handling services.

Vietnam is witnessing a surge in manufacturing-led Foreign Direct Investment. The prospects created by the expected conclusion of the free trade agreements mentioned above are also attracting FDI inflows into Vietnam’s manufacturing sector as reflected in the ongoing shift of major production bases from China to Vietnam by multinational conglomerates such as Samsung, LG as well as Nokia. Such movements tend to boost imports of complex capital equipment and machinery in the near term, thereby driving greater inbound cargo volumes through ports and higher demand for transportation and warehousing services. In the medium-to-long term, this will create sustained demand for logistics services to support inbound movements of raw materials and components and outbound shipments of finished products.

Figure 7: Foreign Direct Investment into Vietnam

Source: Foreign Investment Agency, Vietnam

… with the revival in the domestic economy and manufacturing activity providing that additional oomph

The logistics industry is being further buoyed by the broad-based revival in manufacturing activity as domestic demand recovers. The steady growth in key manufacturing sectors such as textiles, footwear, paper, fertilizer and consumer goods is boosting demand for inbound and outbound logistics.  While some of this growth in manufacturing output reflects Vietnam’s rapid emergence as an export hub as adhered to earlier, it is also being driven by the growth in domestic demand, industrial production and capital investment.

 

Figure 8: Performance of key manufacturing industries in 1H2015

Industries Performance in 1H2015
Steel domestic output growth of 20.0%
Textiles export value growth of 9.0%
Footwear domestic output growth of 19.5%, export value growth of 22.0%
Fertilizer domestic output growth of 2.4% for Urea, domestic output growth of 2.4% for NPK
Paper 3.6% domestic output growth
Cooking oil oil consumption growth of 9.0%
Beverage domestic output growth of 5.6%

Source: Ministry of Industry and Trade

The rapid growth in modern trade and internet retailing is increasing demand for specialty logistics services.

Vietnam has become one of the fastest growing retail markets in the world. Retailing sales grew at 17.5% from 2009 to 2014 to reach VND 1,751t (USD 80b) in 2014 and is expected to touch VND 2,202t by 2019. The modern trade channel penetration is less than 15% in urban areas and just 0-1% in rural areas (4-5% nationwide) but this is increasing fast with several global and domestic players entering the market. This is spurring demand for logistics services while also creating demand for specialized logistics capabilities like cold chain management (for grocery retailers). Internet retailing is another rapidly emerging sector, having grown by 43% in 2014 to VND 11t in value. The complex last-mile delivery and payment collection requirements of internet retailing in Vietnam is driving demand for specialist logistics services.

Infrastructure investments are boosting the capacity and efficiency of ports

Soai Rap channel project: On June 21, 2014, the project for dredging the Soai Rap channel (phase 2) to accommodate vessels with a capacity of more than 50,000 DWT was inaugurated. Before the completion of this project, vessels from the Eastern Sea entering Ho Chi Minh city had to go around the Vung Tau cape, Ranh Rai bay and rivers including Nga Bay, Long Tau, Nha Be, Sai Gon with a total distance of 85 km. Furthermore, Long Tau channel is too narrow to accommodate large cargo ships. Soai Rap channel can now allow large vessels to pick up goods at Hiep Phuoc port. According to Ho Chi Minh city government, the total annual cargo through Soai Rap could reach 150 million tonnes by 2020, up 38% from 109 million tonnes in 2014.

Figure 9:Soai Rap channel
Source: VCSC

Ha Noi- Hai Phong highway: As of June 2015, the construction of this highway was around 90% complete, which is greatly improving connectivity between Ha Noi and Hai Phong. This is an important route as it connects the fast-emerging northern key economic zones with the second largest group of seaports in the country.

Cai Mep port connectivity: The expansion of highway 51 was finished in 2015. Road 965 – the arterial road linking Cai Mep port zone with highway 51 – has also been completed making freight traffic more convenient between Cai Mep and major industrial areas around HCMC. Currently, work is also underway to complete the inter-port route connecting SP-PSA port and SITV port within Cai Mep port zone and should be completed within 2015.

 

Figure 10: Cai Mep port zone and transportation infrastructure

 Source: VCSC

Company Overview

In the 25 years since its establishment, GMD has grown steadily to become one of the biggest domestic logistics service providers in Vietnam and one of the few local players that have capabilities across the logistics value chain. Besides its core business in port operations and logistics services, GMD also has made strategic investments in rubber plantations and real estate projects. GMD’s presence in the port operations segment gives it a unique edge over other logistics service providers in the country — most of whom are pure-play in nature – by allowing it to provide integrated logistics solutions to clients and also using its port operations as a catchment area for sourcing new logistics business.

 

The parent company (Gemadept) mainly provides transportation services, dealer services and office leasing, while seaport operation, warehouses and non-transportation logistics services are managed through the subsidiaries.

 

Figure 11: GMD’s subsidiaries
No Subsidiary name Business activity Chartered Capital (VND bn) % Owned by GMD
1 Phuoc Long port Co.Ltd Logistics 100 100%
2 Logistics company Gemadept One member Co.Ltd Logistics 8 100%
3 Gemadept (Malaysia) Ltd Logistics 15 100%
4 Gemadept (Singapore) Ltd Logistics 15 100%
5 Gemadept Hai Phong One member Co. Ltd Logistics 24 100%
6 V.N.M General transportation services Co. Ltd Logistics 5 100%
7 Pacific  Maritime transport One member Co.Ltd Shipping 3 100%
8 IT services Vi Tin Co.Ltd IT n/a 100%
9 Logistics Bien Sang One member Co.Ltd Shipping n/a 100%
10 Rubber industry Pacific Co.Ltd Rubber n/a 100%
11 Pacific Pearl Co.Ltd Rubber n/a 100%
12 Grand Pacfic Shipping Jsc Shipping, Forwarding n/a 100%
13 Pacific LotusJsc Rubber n/a 100%
14 Nam Hai port Jsc Port operation n/a 99%
15 Nam Hai Dinh Vu Jsc Port operation 400 85%
16 Gemadept Dung Quat international port Jsc Port operation 50 79%
17 Vung Tau transportation agency Jsc Construction and Shipping 14 70%
18 GemadeptNhon Hoi international port Port operation 12 53%
19 Hoa Sen Gemadept port Jsc Port operation 141 51%
20 ISS Gemadept Vietnam Logistics 3.2 51%
21 Multimodel transport Co.Ltd Forwarding, Logistics n/a 51%
22 Vietnam Maritime transport PO Co.Ltd Shipping n/a 51%
23 Pacific Pride Jsc Rubber n/a 100%
Source: GMD

 

Bright outlook for port and logistics segments

GMD is one of a few domestic companies that have a presence across the logistics value chain…

In the 25 years since its establishment, GMD has grown steadily to become one of the biggest domestic logistics service providers in Vietnam and one of the few local players that have capabilities across the logistics value chain and a range of different logistics assets such as ports, distribution centres, depots and ICDs. GMD has leveraged this presence across the logistics value chain to become a provider of integrated, end-to-end logistics services. Another key advantage of GMD is its complete ownership of assets across the logistics value chain which provides it more control than would be possible if it simply leased these assets from third party facilities or if it relied on outsourcing vendors to fill in portions of the logistics service chain. Following is a description of GMD’s logistics asset base:

 

Seaports: GMD owns and operates a total of 5 seaports distributed along the northern, central and southern coastline of Vietnam. GMD’s port network collectively handled around 595kTEUs worth of container cargo and 1.44 million tonnes of bulk cargo (only through Dung Quat seaport) in 2014, accounting for 5.8% of total container volumes and 0.4% of seaport bulk cargo volumes handled through Vietnam’s ports that year.

 

Airport cargo terminal: Located on an area of 14.3 ha in Tan Son Nhat airport, SCSC consists of two main zones including an airfield with a total area of 52,000 m2 that can accommodate three Boeing 747- 400F aircraft simultaneously, and a cargo storage area with a total area of 91,000 m2 and a designed capacity of 200,000 tonnes of cargo per annum. The total cargo volume through SCSC air cargo terminal reached 71,308 tonnes in 2014 (+14.7% yoy) implying that there is still ample room to grow volumes through this facility without having to make additional capital investments.

 

Inland Cargo Depots (ICDs): Located on an area of 12 ha on Ha Noi highway, in Thu Duc district of HCMC, Phuoc Long ICD has more than 20 years of operating history and provides a range of services ranging from customs clearance, trucking and barging to container freight station (CFS) storage. The total cargo volume through Phuoc Long ICD in 2014 touched 442,000 tonnes (+9% YoY).

 

Distribution Centres (DCs): Currently, GMD’s DC system includes: DC 1, 2 and 4 and An Thanh DC in Binh Duong province. In Q3 2015, DC 3 in Binh Duong province and logistics centre in Hai Duong were put into operation. DC3 has a total area of 11,000 m2 and a capacity of 18,300 pallets, while the logistics centre in Hai Duong is a traditional warehouse (not for pallet storage) with a total area of 10,000 m2. These two new facilities boosted GMD’s total system-wide DC network area and capacity by 21% and 29% respectively to 123,172 m2 and 80,000 pallets. In Q3 2016, the cold storage facility in Hau Giang for Minh Phu Seafood is likely to commence operations; this cold storage facility has an area of 15,000 m2 and a capacity of 50,000 pallets and is significant because it marks GMD’s entry into an emerging and highly promising cold chain segment of logistics which carries higher margins and is expected to grow rapidly on the back of growing penetration of modern format grocery retailing as well as the surge in F&B retailing across Vietnam.

 

Trucking Fleet: the company owns a sizeable fleet of 155 container truck heads, 51 small trucks (type 1.5-5 tons) serving short routes and 250 chasses. GMD also has 10 vendors with capacity of more than 200 trucks of all types. In 2015 and 2016, GMD intends to purchase 50-100 more small trucks for local in-city distribution.

 

Barge Fleet: GMD owns and operates 14 inland waterway barges with capacity for each ranging from 50-100 TEUs. GMD intends to invest in another 1 to 2 barges towards the end of this year or early next year with capacity ranging from 120 to 180 TEUs to focus on the Vietnam-Cambodia route.

 

Maritime shipping fleet: GMD owns 4 feeder vessels, namely Pacific Gloria, Pacific Pearl, Pacific Grace and Pacific Express with a combined capacity of 2,983 TEUs. In 2014, GMD’s maritime shipping fleet realized an average utilization of about 90%. Expanding this fleet is not really a priority for GMD given the weakness in global shipping freight rates; these assets complement GMD’s other logistics services by helping provide an end-to-end solution to clients.

Having its own fleet of transportation vehicles is asset-intensive but allows GMD far more control in managing its logistics network than would be possible through outsourcing or leasing of third party vehicles, thereby allowing it to optimize operations and maintain service levels.

 

Figure 12: GMD’s logistics and port operations footprint in Viet Nam
Source: GMD
*Note: Apart from SCSC which is a joint venture in which GMD owns 29%, all the above facilities are fully owned and operated by GMD.

 

 

 

 

 

 

 

 

 

 

Figure 13: GMD activities across the in-bound logistics value chain

   

Suppliers

Transportation Storage Transportation Plants/ Factories
Facility  

 

 

 

Out of scope

– 155 container truck heads, 250 chasses

– 14 River barges running along CaiMep- Phuoc Long route and Sai Gon- Phnom Penh route.

-Distribution center cluster including DC1, DC2, DC3, DC4 and AnThanh DC in Song Than industrial park, Binh Duong province.

– Logistics center in Hai Duong city.

– Logistics center in HauGiang.

– 155 container truck heads, 250 chasses.

– 14 River barges running along CaiMep- Phuoc Long route and Sai Gon- Phnom Penh route.

 

 

 

 

Out of scope

Activities  

Out of scope

Transportation of input materials / parts / components Inventory management, supply/demand forecasting Transportation of input materials / parts / components  

Out of scope

Source: GMD, VCSC

 

Figure 14: GMD activities across the out-bound logistics value chain
   

Plants/ Factories

Transportation Storage Transportation Handling through Seaports and Air-Terminal for exports International Shipping
Facility  

 

 

 

 

Out of scope

– 155 container truck heads, 250 chasses

– 14 River barges running along Cai Mep- Phuoc Long route and Sai Gon- Phnom Penh route.

-Distribution centre cluster including DC1, DC2, DC3, DC4 and An Thanh DC in Song Than industrial park, Binh Duong province.

– Logistics center in Hai Duong city.

– Logistics center in Hau Giang.

– 51 small trucks type 1.5-2 tons serving for short and local routing.

– 155 container truck heads, 250 chasses for long-haul.

– 14 River barges running along Cai Mep- Phuoc Long route and Sai Gon- Phnom Penh route.

– SCSC Air-Cargo Terminal.

– 5 seaports across Vietnam including Nam Hai, NHDV, Hoa Sen, Gemalink and Dung Quat.

– Phuoc Long ICD.

– 4 container feeder vessels operating along Intra-Asia routes.
Activities  

Out of scope

Transportation of intermediate and finished goods, Forwarding. Inventory management, CFS, Labelling, Packaging Transportation of finished and intermediate goods, Forwarding Cargo handling, Depot management, Forwarding Maritime transportation of finished and intermediate goods
Source: GMD, VCSC

 

…which positions GMD for success in the fast-emerging 3PL segment.

 

As an integrated logistics service provider and the outsourcing partner of choice for multinational 3PL incumbents, GMD has an advantage among other local players. GMD’s ability to provide integrated logistics services by virtue of its presence across the logistics value chain has positioned it as the front-runner among a handful of local companies that are now able to provide third-party logistics (3PL) services. While 3PL is a relatively new business for GMD and currently accounts for less than 10% of total logistics revenues, it is expected to grow fast as the logistics market in Vietnam matures and more international companies set up a manufacturing presence in the country, spurring demand for integrated supply-chain services and solutions (developed-countries have long-surpassed the 2PL generation and hence companies from these countries are habituated to procuring 3PL services from their logistics vendors).

According to management, in 2014, GMD’s 3PL business achieved revenue growth of 28% and EBIT growth of 175% compared with 2013. Low-base notwithstanding, this is an impressive development considering that the 3PL market in Vietnam is dominated by foreign giants such as DHL Logistics, Damco, FedEx and APL. Only 3 Vietnamese listed logistics companies are currently able to provide some stages of 3PL services includes Gemadept, Vinafco and Transimex. According to Armstrong & Associates, the 3PL services market in Vietnam touched USD 1.5 bn in 2014. Given that the 3PL industry in Asia Pacific grew at 10.5% CAGR between 2007 and 2014 (Armstrong & Associates), and given that Vietnam’s 3PL market is among the least developed markets in the region, we believe that Vietnam’s 3PL industry could grow at least as fast as the market in the region as a whole for several years to come. Hence, this business could become a major growth driver for GMD in the medium-to-long term.

 

Figure 15: Vietnam 3PL industry forecasted growth from 2015-2020
Source: VCSC forecast based on data of Armstrong & Associates.

 

Because there are few local players that can play in this space, GMD – as one of the largest fully integrated logistics service providers in the country and a pioneer among local companies in the space – is a leading local contender for success in the 3PL market. Furthermore, GMD will not need to take the multinational incumbents in this market head-on as these foreign players do not necessarily want to own logistics assets in Vietnam – they compete purely on the basis of their expertise and systems. Hence, they need to rely on outsourcing logistics services to local partners, and GMD – by virtue of being one of the largest and reputed vendors with integrated logistics capabilities – is best positioned to win this business. As GMD provides services to these multinational 3PL providers, it can also learn from them in the process and, ultimately, start taking 3PL business from them. Currently the local 3PL market entrants are “flying under the radar” of the global players because of their low capabilities and tiny market share, allowing them to gradually nibble away at the market share of the global players. By the time they become serious competitors, they will have strong leverage owing to their local asset base. Hence, we believe that rather than trying to defend their position in the 3PL segment at that juncture, the multinationals will start focusing on 4PL solutions, the next stage in the evolution of the Vietnam logistics market.

Figure 16: Only 15% of local companies can tap into the 3PL segment
Source: Frost and Sullivan, VCSC analysis

 

GMD’s strong network of Distribution Centres will be a key asset in its quest for 3PL market success. Distribution centres (DCs) mark the next stage in the evolution of traditional warehouse management are born out of the need for growing demand for supply chain management services for large-scale production. Unlike traditional warehouses which simply provide goods storage and security services, DCs provide inventory management and tracking services.

The first players to adopt this service in Vietnam were companies producing or distributing fast moving consumer goods (FMCG) like Unilever, P&G, Vinamilk and Masan. In 2015, Gemadept invested in the third DC in Song Than industrial park in a bid to catch up the increasing demand from the FMCG sector. The new DC will lift GMD’s total DC area to 123,172 m2 and is expected to be put into operation at the end of 2015. Once DC 3 commences operations GMD will become one of the biggest DC operators in Vietnam. This strong DC network will help GMD provide a wide range of services across the 3PL chain including traditional services such as forwarding, custom clearance, transportation, cargo handling, distribution, delivery and value-added services such as inventory management, packaging and labelling.

 

Total DC area (sqm)

Figure 17: GMD has the most expansive DC network by far

 

Source: Company data, VCSC.

ractpacage deploying multiml transportation including

 

Figure 18: GMD’s Distribution Centre Network: current and future
Source: GMD

GMD can continue to grow its nascent 3PL business by piggy-backing on its blue chip and diversified DC customer base. Currently, GMD’s 4 biggest DC customers are Samsung, Kinh Do Corporation (now Mondelez International), Masan and Vinamilk. GMD currently satisfies around 80% of inventory management and warehousing services demand for Samsung’s plant in the South of Vietnam. Meanwhile, its 2 distribution centres (DCs) in Song Than industrial park are now operating at full capacity and serving giants in the Fast Moving Consumer Goods (FMCG) industry such as Kinh Do Corporation (now Mondelez International), Masan and Vinamilk. It is worth noting that Samsung, the biggest customer of GMD, only accounts for about 5-10% of total cargo volume handled through GMD’s DC system. This shows that despite having some very large, blue-chip clients, GMD’s client base is diversified, thereby mitigating customer concentration risk.

Nam Hai Dinh Vu Port is a smart investment given that the existing Nam Hai container port is approaching full-capacity utilization.

In May 2014, GMD opened the Nam Hai Dinh Vu (NHDV) port in the special economic zone Dinh Vu-Cat Hai as part of a strategy to expand its presence in the North. This was a wise move given that the North of Vietnam is expected to see an unprecedented surge in container traffic on the back of growing manufacturing FDI flows into the region and the emergence of major manufacturing clusters. Also, with GMD’s old Nam Hai port having totally maxed out its capacity and other new ports in the South still in construction mode, Nam Hai Dinh Vu has become the main driver of port operations revenue growth over the short-to-medium term.

 

Figure 19: GMD’s ports
Port Name Status Capacity Utilization Ship size (DWT) Location
Nam Hai Operation 156% 10,000 Hai Phong
Nam Hai Dinh Vu Operation 80 – 90% 30,000 Hai Phong
Dung Quat Operation 90% (mainly bulk) 70,000 Quang Ngai
Gemalink (deep water port) Construction Phase N/A 200,000 Ba Ria
Hoa Sen Construction Phase N/A 50,000 Ba Ria
Phuoc Long (ICD) Operation 90% Ho Chi Minh
Source: GMD

 

We believe that the NHDV port will benefit GMD’s port business for the following reasons:

  • Prime location confers significant pricing power. Hai Phong is the focal point for both import and export activities in the North due to its location favouring manufacturing and transporting activities and its proximity to the main maritime hubs in East Asia. In 1H2015, cargo volume through ports in Hai Phong and Quang Nam reached 64.2 mil tonnes (+7% YoY), accounting for about 33% of total cargo volume through the ports in Vietnam. These ports have benefited greatly from the Dinh Vu industrial park in Hai Phong which has attracted plenty of FDI capital in recent years; needless to say, proximity to these ports has also made it possible for this park to attract as much investment.

 

Located in the downstream portion of the Cam River– the gateway for goods moving in and out of Hai Phong city — Nam Hai Dinh Vu port has the most favourable position compared to others in Hai Phong. The downstream portion of River has greater depth and offers a wider turning area which allows it to accommodate bigger cargo vessels. Actually, the fact that big cargo vessels can easily visit NHDV port right in the estuary area without have to go deep into the Cam river also saves fuel costs and time for shippers. Therefore, unlike like other small port operators located upstream along the Cam River, NHDV port doesn’t need to reduce cargo handling tariffs to stay competitive in the face of oversupply. Furthermore, the location of Nam Hai Dinh Vu port is also not affected by the construction of Bach Dang bridge, currently underway and expected to be completed by 2017; this construction work is disrupting shipping traffic into the upstream part of the Cam river, favouring NHDV (see Bach Dang bridge in figure 21)

 

Figure 20:Nam Hai Port and Nam Hai Dinh Vu Port.
Ports can accommodate 20,000-30,000 DWT vessels and have more pricing power
Ports only accommodate 10,000 DWT vessels
Ports located in this area have less pricing power
Source: VCSC, Google Maps

 

Figure 21: Lach Huyen project Location
Source: Vietnam shipbuilding

 

  • Tariffs in the Hai Phong port zone should rise over the medium-term despite the commissioning of the new Lach Huyen port. A local overcapacity situation has existed continuously from 2004 until now and led to severe competition, pressuring cargo handling tariffs. Container cargo handling tariff for foreign shippers in the area fluctuated around USD 33-38 per TEU in 2014 and showed no improvement in 2015. However, in the long-term from 2015 to 2020, given the expected average growth rate of 10.8% in cargo volumes through Hai Phong, demand will outstrip total capacity in the Hai Phone port zone and again in 2020 despite the commissioning of Phase 1 of the new Lach Huyen deep water port. As a result, container handling tariffs in the region should hold-up and possible even improve over time.

 

Figure 22: Demand and supply of cargo handling services in Hai Phong (million TEUs)
FORECAST
+19% CAGR Cargo Handling volume CAGR between 2000-2014

 

 

Source: VPA, Port operators’ data

*Note: Our forecast total capacity in the Hai Phong area between 2019-2020 already included the expected capacity of Lach Huyen phase 1 coming onstream in 2019.

 

  • Ability to receive large ships at the same time creates economies of scale: With 2 berths with depth of up to 11.5m, 2 quayside gantry cranes (QCs)and a ship turning area of 250m, Nam Hai Dinh Vu port is capable of accommodating two 30,000-DWT vessels simultaneously. Each of the QCs is capable of 40 moves per hour which is in line with best-in-class international ports and significantly higher than the 20-30 moves per hour currently realized by cranes at other ports in Hai Phong. This allows for higher cargo handling volume throughput and, consequently, higher GPM. In fact, the GPM of NHDV port is about 40-45%, much higher than the average GPM of about 30-35% realized by others port in Hai Phong. The port has a total container cargo-handling capacity of around 500,000 TEUs per annum but, according to management, can reach breakeven point if the annual cargo handling touches just 250,000-280,000 TEUs. Capacity is currently constrained by limited depot space (for handling of empty containers) but can actually rise to 650,000 TEUs per annum once the depot space is expanded, which constitutes further upside to this port’s performance.

 

 

Figure 23: NHDV is the only port in Hai Phong capable of receiving 30,000 DWT ships.
Province Port Area Port name Stream name Number of berths Capacity (TEUs) Wharf length Max ship size
Hai Phong Chua Ve Nam Hai Cam River 1 200,000 144 m 10,000 DWT
Hai Phong Chua Ve Doan Xa Cam River 1 250,000 210 m 10,000 DWT
Hai Phong Chua Ve Transvina Cam River 1 200,000 169 m 10,000 DWT
Hai Phong Chua Ve Green Port Cam River 2 400,000 303.5 m 10,000 DWT
Hai Phong Chua Ve Chua Ve Cam River 5 800,000 880.0 m 10,000 DWT
Hai Phong Chua Ve Tan Cang 128 Cam River 1 200,000 225.0 m 10,000 DWT
Hai Phong Chua Ve Hai An Cam River 1 300,000 150.0 m 20,000 DWT
Hai Phong Dinh Vu NHDV Bach Dang 2 500,000 455.0 m 30,000 DWT
Hai Phong Dinh Vu PTSC Dinh Vu Bach Dang 1 300,000 250.0 m 20,000 DWT
Hai Phong Dinh Vu Dinh Vu Bach Dang 2 500,000 427.0 m 20,000 DWT
Hai Phong Dinh Vu Tan Vu Bach Dang 5 800,000 955.0 m 20,000 DWT
Hai Phong Dinh Vu Tan Cang 189 Bach Dang 1 200,000 160.0 m 10,000 DWT
Source: VCSC

 

  • Diversified customer base mitigates risk: Currently the customer base of Nam Hai Dinh Vu port is relatively diversified with more than 10 international shippers, including: China Shipping, Zim Lines, T.S Lines, China United Lines, A.S Lines, Jin Jiang shipping, Yang Ming, CMA – CGM, MSC, PIL, KMTC, C.K Lines, N.Y.K and OOCL. So far this year, TS Lines has emerged as the biggest customer of Nam Hai Dinh Vu port, accounting for about 26-29% of total cargo throughput here, while the second biggest customer is AS Lines with about 11% of total throughput of the port.

 

Gemadept Shipping has maintained a high fleet utilization amid difficult industry conditions.

The company’s fleet include 4 ocean vessels and 14 river ships that mainly operate along the Vietnam-Cambodia route, intra-Asia route and domestic routes. In 2014, shipping business handled 205,448 TEUs of cargo, equivalent to USD 39m in sales, contributing 45% of logistics revenue. GMD downsized its river fleet from 16 barges to 14 barges at the end of 2013 in an effort to maintain an average utilization ratio of 90% for its fleet, in face of a global downturn in the shipping industry. With regional shipping volume picking up in line with a revival in the domestic economy, GMD intends to invest in another 1 to 2 barges towards the end of this year or early next year with capacity ranging from 120 to 180 TEUs each to focus on the Vietnam-Cambodia route. Although shipping contributes modest profits to GMD this business line will continue to play an important role as: (1) Shipping is an integral part of the fully-integrated logistics offering that GMD competes on, and (2) it helps maintain relationships with existing customers as well as helping source clients for other logistics services such as warehouses and forwarding.

Figure 24: GMD shipping routes Figure 25: Utilization Rate of Ocean vessels (2014)
Ocean Vessels Capacity (TEUs) Utilization Rate (%)
Pacific Gloria 699 96.4%
Pacific Pearl 699 93.0%
Pacific Grace 836 87.4%
Pacific Express 749 74.2%
TOTAL 2,983

Source: GMD

 

Figure 26: Largest container fleet operators in Vietnam in 2014
Source: Department of Maritime Transportation, Vietnam, VCSC

 

SCSC Air Cargo Terminal will provide GMD exposure to the nascent but high-potential air freight transportation industry in Vietnam

Air freight transportation is expected to grow fast from a low current base, spurred on by Vietnam’s increasing trade with the rest of the world…

Air is still a relatively underdeveloped medium for freight transportation in Vietnam, accounting for just 0.02% of total freight transportation volumes in the country last year. Since air transportation is largely used for cross-border freight movements, it should receive a major fillip due to the slew of recent free trade agreements that Vietnam has signed up to and which will increase Vietnam’s integration into the global trading system. Given that Vietnam’s export-oriented manufacturing sector typically involved downstream assembly-type activities, most factories rely on a slew of imported parts and components some of which might have to be shipped in via air due to the shorter order lead teams. Furthermore, some exported products – those with limited shelf life (fresh produce or frozen meat / seafood), those that are fragile or high-value in nature (eg. electronic parts) or those that need to be shipped out on short lead times – will need to be shipped by air, rather than sea ships. The air freight transportation industry grew by 10% last year and BMI expects Vietnam’ s air freight volumes to grow at about 6.5-7% from 2015 to 2019.We believe this is somewhat conservative and growth might even accelerate with the recent finalization of whole host free trade agreements and the expected implementation of TPP, expected in 2017.

 

Figure 27: Freight Volume by Transportation Medium
( tonnes) 2012A 2013A 2014E
Road Freight 722,156 765,070 811,395
Inland Waterway Freight 168,493 180,812 192,886
Rail Freight 7,003 6,525 6,729
Air Freight 178.7 183.7 195.64
Source: BMI Report

 

 

Figure 28: Potential growth of Air Freight Transportation

Source: BMI

GMD’S SCSC Joint Venture is seeing solid growth and still has ample spare capacity…

In order to capitalize on the growth potential in the air freight transportation industry and also to complete its integrated logistics offering, Gemadept partnered up with ACV (Airport Corporation of Vietnam), A41 JSC and other financial investors to create the SCSC joint venture. In this JV, Gemadept is the biggest shareholder with 29% ownership, while ACV owns 16%, A41 JSC owns 15% and financial investors own 24%. With a total investment amount of USD 50 million, SCSC cargo terminal is built on an area of 143,000 square meters at Tan Son Nhat International Airport. The cargo terminal commenced operations in 2010 and consists of three main areas:

  • Parking area for airplanes: 52,000 square meters, enough to accommodate 3 B747F aircraft or 5 A321 aircraft simultaneously.
  • Cargo terminal area: 27,000 square meters, capable of handling up to 350,000 tonnes of cargo per year.
  • Storage areas, parking and office building: 64,000 square meters.

Cargo throughput at SCSC grew at an impressive 63% CAGR between 2010 and 2014. In 2015, we expect that SCSC can realize 85,570 tonnes of cargo throughput, equivalent to 24% of capacity utilization. This clearly indicates that there is still huge available room for growth in this business before GMD has to make another round of capital investments to expand capacity. Furthermore, because air freight is mainly used for transportation of electronic goods or high-valuable goods or goods that need to be transported urgently, air freight facility operators can command premium pricing, allowing them to realize gross profit margins of 60-66%, much higher than that realized through seaport operations.

Figure 29:  Cargo throughput of SCSC air cargo terminal
+63% CAGR

 

tonne
Source: SCSC, VCSC forecasts

…which should be absorbed by its diversified customer base in the next few years.

The customer base of SCSC is very diversified with many major global airlines such as Thai Airways, Hong Kong Airlines, Sichuan Airlines, Saudi Arabian, Emirates Sky cargo, Cargolux, Lufthansa, Singapore Airlines, Turkish Cargo as well as the emerging local champion, Vietjet Air.

 

In 2013, SCSC station secured 2 international quality certifications including the certificate of IATA safety assessment for ground service unit (ISAGO) and certificate of security standard (Standard A – the highest standard) TAPA for the station’s air cargo (TAPA – class A). In 2014, SCIC secured certification standards applicable to aviation security in EU countries (RA3). These accreditations should allow it to grow with its existing clients as well as win new clients in the future as Vietnam’s flight connectivity with the rest of the world rapidly improves.

 

With SCSC, GMD nearly completed its fully- integrated logistics value chain in Vietnam – the only one segment that GMD is not really present in is international maritime shipping but, in hindsight, this seems to be a good move because of the bleak outlook for the global shipping industry.


 

Figure 30: GMD is able to do provide almost all services along the logistics value chain
(Maritime/Logistics Agents) (Distributions Centres, CFS, Bonded warehouse)

 

 (Air cargo Terminals)

 

(International Shipping)
(Forwarding) (Seaports)

 

 

(International Shipping)

 

 

(Transportation)
Source: VCSC

 

GMD is finally looking to get out of non-core businesses

 

GMD’s rubber assets might be up for sale but not anytime soon…As of June 30th 2015, Rubber plantation assets amounted to more than VND 1,200 bn on GMD’s balance sheet, accounting for 14% of total assets. Currently this primarily comprises a total of 30,000 ha of plantation area in the Mondulkiri province of northern Cambodia of which 10,000 ha have already been planted. GMD is continuing to invest into this project, planting an additional 1,000 ha each year. While management does not disclose how much they plan to invest into the business in 2016 and 2017, we can roughly estimate this based on the annual increase in plantation acreage. We estimate that the company is investing around US$ 0.5m each year into the project. The project is expected to start generating revenue from 2017 onwards as the first batch of rubber trees become harvest-ready. However, given the uncertainty around rubber prices and production volumes we do not factor any cash flows from this rubber project into our valuation or financial forecasts.

 

While GMD is continuing to invest into this project, the company is also open to the idea of divesting at least a portion of its stake to a strategic buyer. Management claims that the company has been recently approached by several rubber producers from Malaysia, Indonesia and India, suggesting that at least a partial divestment of these assets might be possible in the near future. We believe that the project could be quite attractive for a strategic buyer due to following attributes of the project assets:

  • Favourable natural conditions: Fertile land, 100-125m above sea level, average temperature: 26.8oC – 28.7oC, annual rainfall > 1,600 mm.
  • Large land bank of 30,000 Ha with Land Use Rights; it is worth noting that the government of Cambodia has now stopped handing out land concessions to foreigners making this land very valuable
  • Developed infrastructure.
  • Completed necessary legal formalities (Investment license, certificate of incorporation, sub-decree of land use rights).
  • Environmental impact assessment completed: independently conducted by URS in accordance with IFC standards.

However, management might be prolonging the buyer search process in the hope that a) greater planted acreage and production from the first batch of rubber trees might provide a lift to valuation, and b) rubber prices might recover from the current depressed levels into next year.

 

Figure 31: Global Natural Rubber prices: no clear bottom in sight
Source: World Bank

 

Since there are no concrete plans yet for divestment and given that it is very challenging to estimate what the exit valuation will be, we do not factor in a divestment into our financial projections.

 

Figure 32: Rubber plantation in Cambodia Figure 33: Rubber subsidiaries of GMD
Source: GMD

…but the company seems committed to divesting its real estate holdings on the back of the recent property market recovery. In 2014, GMD sold 85% stake in its subsidiary Marproco, — which owns Gemadept Tower – to Korean Partner CJ and recorded VND 617 b in financial income. The remaining 15% stake in Marproco is expected to be sold to CJ in 2016 (this has not been factored into our forecasts and constitutes additional upside to our TP). As for its two other real estate assets, namely Saigon GEM in Ho Chi Minh city and Vientiane Laos Complex in Laos, GMD is currently still finalizing legal formalities and paperwork, following which it can presumably start looking for buyers. It is worth noting that neither of these projects have been developed yet – GMD simply owns the land use rights and, once the paperwork is completed, will sell these to a developer. The fact that management has displayed no interest in developing these projects despite a strong recovery in the property market sends a positive signal of their intent to focus on GMD’s core business. In GMD’s consolidated balance sheet, its 2 existing real estate assets are valued at VND 236 b and we think it is fair to assume that both could be sold at well above book value. However, just as in the case of the rubber assets, we have not factored a divestment of the real estate assets into our financial projections as there is no buyer yet and it is difficult to predict the sale value of these assets.

 

Figure 34: Saigon GEM Figure 35: Vientiane Laos Complex
Source: GMD

 

9M2015 update: Impressive growth mainly stemmed from northern ports.

 

GMD recently announced 9M2015 business results showing audited net revenue of VND 2,657b (+26.9% YoY, completing 83% of the full year top line target) and EBT of VND 390b (-41% YoY, and surpassing its full year EBT target by 18%. It is worth noting that the sharp fall in EBT is due to the fact that in the first half of 2014, GMD recorded VND 617b in one-time financial profit through the sale of an 85% stake in its subsidiary Marproco (owner of Gemadept Tower) to Korean partner CJ. If we exclude this one-time income, EBT in 9M2015 was 7.4x the figure in the same period last year.

Figure 36:Revenue breakdown 9M2015 Figure 37: Revenue growth by segment
Source: GMD,VCSC

 

In 9M2015, GMD’s northern ports were the main driver of top line growth and made up for the absence of rental office leasing (we note that Gemadept Tower was sold to Korean Partner CJ in 2014). Port operations recorded VND 1,275 bn in sales (+81% YoY) of which ports in Hai Phong played a pivotal part with more than 70% contribution to total port operation revenue:

  • Nam Hai Dinh Vu (NHDV) port: in 9M2015, the cargo volume through the port reached about 340.000 TEUs, equivalent to 90% capacity utilization, which was much higher than the level of 59% realized in 2014. The impressive growth was mainly driven by a higher-than-expected number of large vessels running along intra-Asia routes entering NHDV port. Actually, the fact that big cargo vessels can easily dock at NHDV port without have to go deep into the Cam river saves save a lot of fuel costs for shippers and this helped NHDV grab market share from neighbouring competitor ports. Secondly, its prime location allows NHDV to compete without having to slash cargo-handling tariffs unlike those ports located further upstream along the Cam river (the average handling tariff for 20 feet cargo container is about USD 36-40 per TEU in Hai Phong). Thus, it is able to realize strong volume growth without having to slash prices.

 

Figure 38: Expected market shares of Hai Phong port operators in 2015
Source: VPA, VCSC forecast

 

  • Nam Hai port: stabilized at an average capacity utilization of 100% during 1H2015, which helped to dispel doubts that its cargo volume would be cannibalized by the commencement of NHDV port operations. In fact, the two ports are operating in different segments; while NHDV mainly accommodates 20,000-30,000 DWT vessels running Intra-Asia routes linking Hai Phong to the largest Asian Hub ports such as Shanghai and Busan, Nam Hai port only serves 10,000 DWT feeder ships which mainly operate on the route connecting Hai Phong and Hong Kong port.

 

Gross margin expanded dramatically driven mainly by higher capacity utilization of NHDV port and a spike in demand for reefer container services. Gross profit in the 9M2015 period touched VND 737 bn (+82% YoY), equivalent to a GPM of 27.7%, versus only 19.3% realized in 9M2014. The strong improvement in GPM was driven by margin expansion of the port business, which contributed about 77.5% of total Gross Profit. GPM of port operations rose to 44.8% from 34.7% in 9M2014 because of high capacity utilization of Nam Hai Dinh Vu port and higher-than-expected reefer container volume. According to GMD management, NHDV port’s breakeven capacity utilization is around 50%. In the 9M2015, period, NHDV handled a total cargo volume of 340,000 TEUs, equivalent to 90% capacity utilization. Also in 9M2015, there was a backlog of more than 2,000 cold containers in the Hai Phong port zone consisting mainly of frozen foods that were temporarily imported into Vietnam via sea for re-export to China via land. Recent tightening of controls by the Chinese along the Sino-Vietnamese border in recent months have prolonged custom clearance time, thereby lengthening the storage period for these reefer containers. Reefer container services (handling, electricity service) carry substantially higher gross margins (can be up to 50%) than other regular container-handling services owing to their specialized nature. Such spikes could repeat in the future as border conditions between Vietnam and China remain tense owing to disputes over the East sea.

 

The logistics segment grew at a moderate pace but witnessed significant margin expansion. Logistics segment recognized VND 1,382 b in revenue, up 2.5% on the same period in 2014. Gross profit margin of this segment expanded by 200bps to touch 12%. Though there is no clear disclosure from management on the reasons for the margin expansion, we believe that the increasing contribution of 3PL and DC services to total revenue played a big role.

 

Adjusted for non-recurring income last year, 9M2015 saw a 7.4x increase in core-EBT on the same period last year, driven by strong revenue growth and gross margin expansion. On a reported basis,9M2015 PBT touched VND 390bn, dropping by 41% YoY because there was no financial income from asset disposals as was the case in 2014.It is worth noting that gross profit growth has a disproportionately large impact on GMD’s net margins owing to its relatively high operating leverage. This means that a large part of the profit growth is a reflection of growing economies of scale within both the logistics and port operations.

Earnings Outlook: Port segment to steal the show this year but logistics to become a growth- engine in 2016.

 

 

 

Forecasted 18.5 % growth in Sales Forecasted 18.8 % growth in Sales Forecasted 9.8 % growth in Sales
2015
2016
2017
Port system In Hai Phong to play a pivotal role with NHDV port’s rising capacity utilization to be the key driver

 

New Depot to help increase capacity for NHDV port; DC3, Logistics Center in Hai Duong and SCSC air-cargo terminal to be key drivers as well The cooperation with MPC to start paying-off

 

 

2015 Outlook – Port operations to steal the show as idle capacity gets quickly absorbed by growing demand, especially in the North

We expect the port business to be the star performer in GMD’s portfolio in 2015 with forecasted revenue of VND 1,623b (+48% YoY) and forecasted port gross profit of VND 730 b (+83% YoY, contributing 76% of 2015 total gross profit) within which the port system in Hai Phong will contribute about 70% of port revenue. Phuoc Long ICD and Dung Quat port will contribute about 25% and 5% of revenue, respectively. Specific prospects for each port are as follows:

  • GMD’s Hai Phong port system (70% of port revenue): the total cargo volume through the port system in Hai Phong is expected to touch 666,000 TEUs (+39% YoY), of which Nam Hai Dinh Vu port and Nam Hai port will contribute 450,000 TEUs (+53% YoY) and 216,000 TEUs (+8% YoY), respectively. NHDV’s utilization is likely to reach 90% of designed capacity by the end of 2015, which will be much higher than the planned utilization of 70%.
  • Dung Quat port (5% of port revenue): Dung Quat port is now operating at 90% of designed capacity (mainly for bulk cargo) with throughput volume of 10,000 tonnes per day. In 2015, the port completed an infrastructure upgrade to be able to accommodate 70,000 DWT vessels. We project a 7.3% growth in sales for this port in 2015, mainly basing on the increasing workload of freight handling for wood chips, a typical export commodity from the central region of Vietnam.
  • Phuoc Long ICD (25% port revenue): will reach a capacity utilization of 97%. By the end of 2015, the total throughput volume of this ICD is expected to touch 481,780 TEUs (+9% YoY).

 

Figure 39: Revenue breakdown for 2015 Figure 40: Estimated port revenue breakdown for 2015
Source: VCSC

Income from associates is expected to grow 27% YoY in 2015 because of impressive growth of SCSC, the air cargo terminal as well as an increase in GMD’s ownership stake in the operation from 27% to 29%. We project that the cargo throughput of SCSC will grow at 20% YoY to touch approximately 85,570 tonnes for the whole of 2015. As a result, the expected revenue and EBT in 2015 is VND 325 b (+18% YoY) and VND115 b (+19.6% YoY) respectively.

 

Figure 41: Forecasted cargo throughput of SCSC air cargo terminal
Tonne
Source: SCSC, VCSC forecast

 

Logistics to realize modest growth with DCs being the main driver. We expect revenue from logistics segment will touch 1,948 b (+3.9% YoY), with revenue growth being mainly driven by the distribution centers (DCs). We forecast the cargo throughput of GMD’s DC system will reach 1,979,082 cbm (+29% YoY) with the commissioning of the Logistics Center in Hai Duong in Q3 and DC3 in Q4. The shipping business, which accounts for about 45-48% of logistics revenue is expected to grow at 8-10% in this year given the higher demand for container vessels on domestic routes. The gross profit of this business line is projected to reach VND 238 b (+18% YoY), equivalent to GPM of 12.2%, in line with year-to-date performance.

Overall, we expect total revenue and NPAT to touch VND 3,571 b (+18.5%) and VND 465 b (-18% YoY) respectively. It is worth noting that the decrease in 2015 NPAT is mainly due to the high base effect created by the huge financial income of about VND 617 b realized last year from the sale of a 85% stake in Marproco, the owner of Gemadept tower to partner CJ. In fact, the core- NPAT based on our forecast is expected to grow by 13x versus 2014.

 

Figure 42: 2015 revenue breakdown by segment Figure 43: 2015 Gross Profit breakdown by segments
Source: VCSC Source: VCSC

Outlook from 2016 onwards – Logistics business to take over as the key growth driver as port capacity gets maxed out in 2017.

Port operations will reach full capacity by the end of 2016 but NHDV capacity expansion to still be a major growth catalyst in that year. In 2016, port operations revenue is expected to grow at 24% with Dung Quat port and Phuoc Long ICD possibly reaching full utilization of their designed capacities and Nam Hai Dinh Vu port also approaching 100% utilization. It is worth noting that the new Depot in Nam Hai Dinh Vu can possibly increase the cargo-handling capacity of Nam Hai Dinh Vu to 650,000 TEUs per year from the current 500,000 TEUs. We believe that the Nam Hai Dinh Vu port will continue to be key growth driver in 2016 with handled cargo volume through this port expected to increase by 33% compared to that of 2015 – this implies that utilization will rise to 92%, still leaving some room for growth in 2017. GMD also plans to re-launch the Gemalink deep-water port project at Cai Mep-Thi Vai area in 2016 once the infrastructure system in this area is relatively complete. However, we do not factor this into our forecasts as there is still some uncertainty over the completion time frame and, consequently, over when this port will start contributing to earnings.

Figure 44: Projected capacity utilization for 3 seaports and Phuoc Long ICD of GMD
Port Designed capacity Projected cargo throughput in 2016 Capacity utilization
Phuoc Long Port (TEU) 500,000 515,505 103.1%
Nam Hai Port (TEU) 200,000 231,120 115.6%
Nam Hai Dinh Vu Port (TEU) 650,000* 600,000 92.0%
Dung Quat Port (tonne) 2,000,000 1,570,800 78.5%
Source: VCSC forecasts

*Note: the beginning designed capacity of Nam Hai Dinh Vu port is only 500,000 TEUs. However, the new Depot in Nam Hai Dinh Vu is projected to increase the maximum capacity to 650,000 TEUs in 2016.

 

Distribution Centre revenue is expected to grow at 25-28% in coming years as a series of DCs are put into operation starting in 2015 and 2016. Three major projects include: (1) The logistics centre in Hai Duong which was put into operation in July 2015 and (2) The DC3 in Song Than industrial park, Binh Duong province which was put into operation in November 2015 and (3) The DC in Hau Giang in cooperation with Minh Phu which will be put into operation in Q32016.

We expect that DC3, Hai Duong Logistics and Hau Giang DC will reach capacity utilizations of 80%, 60% and 30% respectively and collectively contribute about 22% of total DC revenue in 2016.

 

Figure 45: Forecast of Revenue and Cargo throughput of DC segment Figure 46: DC forecasted revenue breakdown
Source: VCSC forecast

 

 

The cooperation with MPC can be a milestone in GMD’s guest for logistics market leadership and an entry into the high-potential cold-chain niche. In May 2015, GMD announced the establishment of Mekong logistics Corp, a joint venture between GMD and the frozen shrimp producer MPC (Minh Phu) in which GMD owns 51% stake and MPC owns the remaining stake. The joint venture will deploy a logistics centre at Song Hau industrial zone, Chau Thanh district, Hau Giang province at a total investment cost of VND 670 bn. The first phase, the logistics centre is designed to have a total capacity of 50,000 pallets and total warehouse area of 15,000m2. MPC has made a commitment of guaranteeing enough cargo volume to maintain a minimum of 60% of total capacity of this distribution centre, equivalent to maintaining a minimum daily average of 47,000 cbm worth of occupied storage volume. Phase 1 is expected to commence operations from Q3 2016.

We believe that the cooperation with MPC is a wise strategic move for the following reasons:

  • Minh Phu is the dominant seafood exporter in Viet Nam: MPC, Vietnam’s largest seafood exporter focusing on frozen shrimps, realized a 22.4% CAGR in export value and 19.2% CAGR in export volume in the period between 2007 and 2014. With more than 94% of total revenue coming from exports, MPC needs a very large cold storage system to store raw materials as well as finished goods. Because frozen shrimps have a shelf-life up to 2 years, MPC regularly purchases cheap raw shrimp opportunistically and times its exports of processed shrimp based on pricing trends and seasonality to maximize profit. During 2015, because world shrimp prices fell on average by 30%, MPC had to store finished goods in cold stores and limit exports in order to avoid losses. This made inventory rise by 39% in 1H2015 and the cold storage system was overwhelmed. With continued volatility in shrimp prices, MPC’s cooperation with GMD is critical to its operation, thereby allowing GMD to secure a minimum cargo commitment from MPC. According to our survey, the cold storage price per m2 per month is about USD 6-8, which is 40-60% higher than that of normal warehouses and implying that a warehouse with 15,000 m2 total area and 50,000 pallets (equivalent to about 80,000 m2 storage space) has a total estimated annual storage revenue potential of VND 160-180 b, once fully utilized.

 

Figure 47: Export value and Export volume of MPC from 2007-2015
Source: MPC, VCSC, Note: the export value for 2015 is the company’s target.

 

  • This will generate additional business for GMD’s port operations: From Cai Cui port in Hau Giang province, MPC’s cargo can be easily transported to Cai Mep port system by its barge fleet for export to overseas markets. With GMD restarting work on the Gemalink deep water port in Cai Mep as management recently announced, it will be able to provide a seamless solution to Minh Phu while at the same time capturing this additional value in Minh Phu’s logistics chain. This is a case-in-point about how GMD generates synergies between its logistics and port operations business lines. In the case that Gemalink cannot be completed by 2017, GMD can also use CMIT or TCIT in Cai Mep-Thi Vai for export.

 

 

 

Figure 48: Location of Cai Cui port
Source: VCSC, Google maps

 

The partnership with MPC marks GMD’s entry into the high potential cold-chain segment of the logistics market which is heavily underserved. According to Frost & Sullivan, climate controlled logistics is one of the highest potential and yet, most underserved segments of the logistics market in Vietnam. According to StoxPlus, the country’s total cold chain capacity is just 473 thousand tons which includes total system-wide capacity at a given point in time (goods in cold storage + goods in cold transit). The continued entry of major modern format grocery retailers and the increasing export of farming and seafood products are expected to create multiple opportunities for Cold Chain specialists. Additionally, due to Vietnam’s traditional “eating fresh” society, the “frozen food” retail sector is currently fragmented and the Cold Chain industry is under-invested. However, the demand for frozen products is increasing with changing lifestyles in urban areas, putting the limited existing Cold Chain infrastructure under pressure. Each year Vietnam incurs a loss of at least USD 2.5 b in distribution of farming products and seafood. This is equivalent to a loss rate of approximately 25%, extremely high compared to other countries, even those at similar stages of development. In order to remedy this situation, the government has introduced various financial incentives in order to attract foreign investment into this segment. Japanese firms currently make up the largest percentage of foreign specialists operating in the country. As a pioneer among local companies in this segment and given its expansive DC network, GMD has a great opportunity to capitalize on the explosive growth in this segment (refer to pages 6 and 7 of our Logistics Sector Pre-Initiation Report from September, 2015).

 

Figure 49: Grocery Retail Outlets and Selling Space
Source: Euromonitor, 2014

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Figure 50: Revenue by segment Figure 51: Gross profit contribution of segments
Source: VCSC

VIG convertible bonds create potential dilution risk

Vietnam Investment Fund II (VIG) holds USD 40 m convertible bonds of GMD with their conversion rights exercisable in 2015. The conversion price is about VND 19,397 per share which is equivalent to 88% of the one-month average price leading up to issuance and implying that these are well “in-the-money” and conversion is imminent. Due to the anti-dilution clause in affirmative covenants, the conversion price is subject to adjustment in favour of VIG in case that GMD issues share dividends (2:1) as planned in January of 2016. Thus, if VIG exercises the conversion option in 2016, EPS dilution will be an imminent risk and could impact the share price – we calculate that a total of 46.4 million shares could be issued to VIG if it exercises its conversion rights (assuming the above mentioned conversion price and a VND/USD forex rate of 22,500), amounting to around 29% of total outstanding shares, post-issuance.

 

Figure 52: Expected basic EPS from 2015-2017
2015F 2016F 2017F
Basic EPS (VND) 3,288 4,201 4,741
Source: VCSC

 

Figure 53: Scenario Analysis for reported EPS based on VIG bond conversion year
2015F 2016F 2017F
VIG converts in 2015 2,973 3,002 3,388
VIG converts in 2016 3,288 3,358 3,388
VIG converts in 2017 3,288 4,201 3,680
 

Note: Bond coupon payment is assumed to be waived for the year in which conversion occurs

Source: VCSC

 

Valuation

We value GMD using a combination of discounted cash flow analysis, P/E and P/B in a ratio of 20%,40% and 40% respectively.

 

For our comparable analysis, we use a mix of P/E and P/B; P/B is important because the company has a large and growing asset base and some of these assets will not maximize their income-generating potential until a few years out.

For 2016, we expect GMD will reach VND 4,244 b in sales (+19% YoY) and VND 518 b in NPAT after MI, equivalent to a fully-diluted EPS of about VND 3,358 per share. Based on the 10th Dec closing price of VND 38,400, GMD is trading at a 1-year forward P/E of 11.7x; we believe that a leader in a high potential industry that is growing substantially faster than the economy should trade at least at the same multiple as the overall VN Index’s forward PE multiple of 12-13x. Given the forecasted shareholders equity of VND 5,347b at the end of 2015, the fully-diluted BVPS at the end of 2016 will be about VND 32,897 implying that the company is currently trading at a 1-year P/B ratio of 1.2x, which also looks very cheap compared to the peer average of 2.0x and especially considering the company’s near-term earnings outlook and market leadership. The low P/B reinforces our point above that the company has invested quite heavily in its asset base over the past few years and some of these assets are yet to generate revenue (eg. Gemalink Port and the Rubber project) or have simply not maximised their asset turnover (eg. NHDV port, the new DCs). While a slight discount could be warranted due to the uncertain and non-core nature of the rubber assets (~15% of total assets on the books), we feel that such a deep discount to peers is not warranted because a) this asset is likely to start generating revenues in the next 2-3 years and this is not priced in by the market, or b) a divestment of this asset in the near future is a realistic possibility.

We use a target 1 year forward P/E of 11.0x and target P/B of 1.7x (15% discount to peer average to reflect risk around rubber assets) on the fully-diluted 2016 EPS and YE 2015 BVPS, respectively. This, together with our DCF method, gives us the blended target price of VND 44,052 per share.

 

 

Figure 54: Blended target price
Methods Weighting Target Price
P/E 40% 36,069
P/B 40% 55,926
DCF 20% 36,220
Blended target price   44,042
Source: VCSC

DCF Valuation

Figure 55: Revenue and margin assumptions

Assumptions FY16 FY17 FY18 FY19 FY20
Revenue (VND b) 4,244 4,661 5,059 5,481 5,953
Revenue growth % 18.8% 9.8% 8.5% 8.3% 8.6%
   Port growth 23.6% 9.5% 6.8% 4.5% 4.0%
      – Nam Hai Dinh Vu 36.6% 12.3% 8.2% 4.1% 3.1%
      – Nam Hai 11.8% 5.1% 4.0% 4.0% 4.0%
      – Phuoc Long ICD 11.8% 7.8% 6.2% 6.3% 6.3%
      – Dung Quat 5.3% 2.9% 2.9% 2.9% 3.0%
Logistics growth 14.9% 10.1% 10.1% 11.6% 12.3%
      – Shipping 11.9% 5.1% 5.1% 6.1% 6.1%
      – Distribution centers 29.3% 21.0% 8.8% 8.4% 8.2%
      – Other logistics services 7.1% 7.1% 7.1% 7.1% 7.1%
Gross profit margin % 26.7% 27.1% 27.3% 27.2% 26.7%
Operating profit margin % 18.5% 18.9% 19.1% 19.0% 18.5%
Net profit margin % 14.0% 14.4% 14.8% 14.8% 14.6%

 

Figure 56: DCF assumptions

Cost of Capital     FCFF (5 Year)  
Beta 0.8 PV of Free Cash Flows 1,712
Market Risk Premium % 7.0 PV of Terminal Val (2.0% g) 5,031
Risk Free Rate % 6.7   PV of FCF and TV 6,741
Cost of Equity % 12.0 add Cash & ST investments 1,561
Cost of Debt % 4.8 less Short & Long-term debt 1,901
Debt % / Equity % 49.3 less Minority Interest 516
Equity % 67.0   Equity Value 6,403
Effective Tax Rate % 12.0 Fully-diluted Shares, million 162
WACC % 9.4   Price per share, VND 36,220

 


Figure 57: Discounted Cash Flow

Discounted Cash Flows FY16 FY17 FY18 FY19 FY20
EBIT 786 881 968 1,040 1,104
   add Depreciation 305 341 382 427 475
   less Tax (59) (66) (74) (80) (86)
   less Capex (637) (699) (759) (822) (893)
   less Working cap increase 60 (182) 29 (176) 6
Free Cash Flow 455 275 547    389 607
Present Value of FCF 415 229 415 269 383
Total PV of FCF 415 644 1,059 1,329 1,712

 

Peers Comparable Analysis

Figure 58: GMD versus peers

Comp. Market Cap(VND bn) Industry GPM NPAT margin ROE ROA TTM P/E Forward P/E P/B
GMD* 4,665 Port, logistics 20.7% 17.6% 11.3% 6.7% 13.8 9.1 0.9
DVP 2,100 Port 43.6% 42% 30.0% 24.0% 8.9 n/a 2.7
VSC 2,236 Port 35.0% 27.8% 25.6% 18.9% 9.5 10.2 2.2
CLL 813 Port 46.7% 32.3% 20.0% 14.7% 10.2 n/a 1.6
TMS 1,474 Logistics 21.1% 31.2% 20.0% 14.9% 13.7 11.7 2.8
PDN 466 Port 37.0% 17.8% 16.1% 11.0% 9.7 n/a 1.5
Average of peers  

 

11.0 11.0 2.0
Median of peers 10.0 n/a 1.9
Target multiples for GMD   11.0 1.7

Note: GMD P/E and P/B calculation does not factor in potential dilution from VIG convertible bond exercise.

VCSC Target Price and Rating History

 

VCSC Rating and Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.

RATING DEFINITION
BUY Total stock return including dividends over next 12 months expected to exceed 20%
OUTPERFORM (O-PF) Total stock return including dividends over next 12 months expected to be positive 10%-20%
MARKET PERFORM (M-PF) Total stock return including dividends over next 12 months expected to be between negative 10% and positive 10%
UNDERPERFORM (U-PF) Total stock return including dividends over next 12 months expected to be negative 10%-20%
SELL Total stock return including dividends over next 12 months expected to be below negative 20%
NOT RATED The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company.
RATING SUSPENDED A rating that happens when fundamental information is insufficient to determine an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock.

Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.

Small Cap Research: VCSC Research covers companies with a market capitalisation of up to US$50mn, inclusively. Clients should note that coverage may not be consistent and that VCSC may drop coverage of small caps at any time without notice.

Target price: In most cases, the target price will equal the analyst’s assessment of the current fair value of the stock. The target price is the level the stock should currently trade at if the market were to accept the analyst’s view of the stock, provided the necessary catalysts were in place to effect this change in perception within the performance horizon. However, if the analyst doesn’t think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3) Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.

Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative.


Disclaimer

Analyst Certification of Independence

I,Hai Hoang, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

VCSC and its officers, directors and employees may have positions in any securities mentioned in this document (or in any

related investment) and may from time to time add to or dispose of any such securities (or investment).VCSC may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment.

Copyright 2013 Viet Capital Securities Company “VCSC”. All rights reserved. This report has been prepared on the basis of information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the completeness and accuracy of such information. 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 VCSC and are subject to change without notice. This report is provided, for information purposes only, to institutional investors and retail clients of VCSC in Vietnam and overseas in accordance to relevant laws and regulations explicit to the country where this report is distributed, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their investment decisions based upon independent advice subject to their particular financial situation and investment objectives. This report may not be copied, reproduced, published or redistributed by any person for any purpose without the written permission of an authorized representative of VCSC. Please cite sources when quoting.

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by VCSC issued by VCSC has been prepared in accordance with VCSC’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by VCSC in Australia to “wholesale clients” only. VCSC does not issue or distribute this material to “retail clients”. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of VCSC. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, VCSC will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between VCSC and the customer in advance. Korea: This report may have been edited or contributed to from time to time by affiliates of VCSC. Singapore: VCSC and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale.Pakistan: For private circulation only, not for sale.New Zealand: This material is issued and distributed by VCSC in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. VCSC does not issue or distribute this material to members of “the public” as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of VCSC. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. United States: This research report prepared by VCSC is distributed in the United States to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Decker&Co, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Decker&Co, LLC in the US shall be borne by Decker&Co, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if VCSC Broker or Decker&Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker&Co, LLC and VCSC is permitted to provide research material concerning investment to you under relevant legislation and regulations.

 

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