Invest in Vietnam: Your Guide on Rubber Sector Growth

May 16, 2016

Disclaimer: The opinions expressed herein are that of  RongViet Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.

Expecting on replacement segment

Slow growth in Q1 profit. In Q1/2016, net revenue and PAT only reached VND 746 billion (-3% yoy) and VND 88 billion (+1% yoy) respectively. Additionally, gross profit margin also declined by ~2% yoy, although the material price slumped strongly compared with last year. The reasons are (1) the average selling price decreased by 12% in 2015 and additional 2% in Q1/2016, (2) depreciation expense increased by ~34% yoy due to an adjustment in depreciation method of Radial line since Q2/2015, which offset the increase in contributing from material price decrease.  A notable factor was that the revenue decrease was much less than the selling price slump; meaning that selling volume got significant growth (~10%).

The radial outlook:

In Q1/2016, DRC sold 49,619 units, achieved 18.7% of 2016 plan (265,000 units), in which, export volume was 21,613 units. The spotlight should be emphasized that in Q2/2016, DRC exported the first container to US market, focusing on mid-range products, of which prices are only 20% of premium ones. In near future, US government may impost 35% anti-dumping tax on made-in-China tires (the current tax rate of 15%). Thus, DRC can improve price competitive advantage in US market. Additionally, in April 2016, DRC also achieved BIS certificate for exporting tire to India, became the unique Vietnamese supplier. Therefore, penetrating the Indian market in upcoming period will help consumption volume reach phase 1 capacity.

In 2015, the radial line depreciation expense was VND 203 billion (total depreciation expense of VND 246 billion). According to our 2016 assumption based on this depreciation method with stable selling price, average rubber price of USD 1600/ton and the consumption volume of 250,000 units, radial segment can slightly exceed breakeven point.

Recommendation and Valuation: In short-term, Radial plant prospect is not certain due to uncertain issues when phase 2 comes into operation and demand increase of radial tire consumption. However, DRC also maintains the stable growth thanks to Bias tire demand in replacement segment. We concern that material price could recover significantly and (especially natural rubber) reduce DRC gross margin. Therefore, it is difficult for DRC and other domestic tire manufactures to raise selling price, which results from competitive pressure of Chinese low-price products.

Currently, we maintain our recommendation of “ACCUMULATE” for this ticker with target price of VND 52,000 per share.

Exhibit 1: 1QFY2016

Exhibit 2: 4QFY2015 performance analysis

Brief updates

The ability to expand market share in the north due to SRC relocation. The factory at 231 Nguyen Trai street, Ha Noi will relocate to expand production capacity. The construction will delay SRC’s manufacture activities; thus, DRC and CSM are planning to penetrate into the north market.

Increase in dividend. In 2016, DRC are paying dividend with 30% in cash and 30% in bonus share. The dividend in bonus share is higher than usual rate.

Change in Chairman of BOD. In December 2015, Mr. Phan Van Tien was elected to replace Mr. Nguyen Van Thieu as Chairman of BOD

Result Update

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Rating Guidance

Disclaimers