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%
|Revenue, VND Billion||2,525||3,013||3,571||4,244|
|NPAT less Minority Interest||192||531||405||518|
|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|
|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).
* 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
Table of Figures
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
Telephone 84-(8) 38 236 236
SELECT COMPANY METRICS
|Revenue Mix %||Gross Profit Contribution %|
|Cost Structure %||Capital Structure %|
Source: GMD, VCSC
|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|
|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|
|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|
|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%|
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.
|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|
|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|
|Revenues, VND Billion||614.0||738.0||742.0||892.0|
|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%|
|Revenues, VND Billion||568.0||609.0||650.0||704.0|
|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
|YoY % (FY15 vs. FY14)||Explanation|
|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|
|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|
|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%|
|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.
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|
|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|
|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.
|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.
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.
|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.
|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.
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|
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.
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%|
|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%|
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|
|*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.
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
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|
|Transportation||Storage||Transportation||Handling through Seaports and Air-Terminal for exports||International Shipping|
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.|
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|
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.
|Source: Company data, VCSC.|
ractpacage deploying multiml transportation including
|Figure 18: GMD’s Distribution Centre Network: current and future|
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|
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.|
|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)|
|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|
- 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.
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)|
|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|
|Source: BMI Report|
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|
|Source: SCSC, VCSC forecasts|
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|
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|
…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|
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|
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|
|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|
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|
|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|
|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|
|Figure 50: Revenue by segment||Figure 51: Gross profit contribution of segments|
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|
|Figure 53: Scenario Analysis for reported EPS based on VIG bond conversion year|
Note: Bond coupon payment is assumed to be waived for the year in which conversion occurs
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|
|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%|
|– 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%|
|– 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%|
|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|
|Discounted Cash Flows||FY16||FY17||FY18||FY19||FY20|
|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|
|Comp.||Market Cap(VND bn)||Industry||GPM||NPAT margin||ROE||ROA||TTM P/E||Forward P/E||P/B|
|Average of peers||
|Median of peers||10.0||n/a||1.9|
|Target multiples for GMD||11.0||1.7|
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.
|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.
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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.
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