Invest in Vietnam: How Your Vietnam Container Shares Could Surge from The TPP

Next Story

Vietnam Macro: Consumption Jump Dragged by Agriculture Slump

May 11, 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.

Ready for a high and sustainable growth period

  • Competitive advantages are built upon high services quality, established brand and expandable capacity
  • New Vip-Greenport would elevate VSC’s industry position and support short-term earnings growth
  • Port operators in Hai Phong could expect a phase of rapid growth but divergent

Outlook and Valuation:
Vinconship JSC (VSC-HSX) is regarded as Vietnam’s leading private provider of container related services (trucking, warehousing and seaport services). The firm headquarters in Hai Phong but does have presences at the country’s major trade hubs. VSC’s competitive advantages are built on 30 year-operating experience, high services quality, integrated asset base (seaport-truck fleet-warehousing facility) and importantly expandable seaport capacity (new Vip Greenport put Phase 1 online in November 2015). In short-term, the initial operation of the new seaport may yet make a major impact on VSC’s earnings given pressure from operating cost and VSC’s ownership at this JV just over half (50.08%).

Nevertheless, in mid and long-term horizon, VSC is expected to be among the most beneficiaries from the increasing trade and export-import cargo activities fostered by FTAs and TPP. In addition, we believe that VSC would soon increase its holding stake at Vip Greenport JV that would eventually inject growth to its bottom-line. Besides, more FDIs coming to Northern Vietnam provinces also lessens the reliance on traditional trade partner China and means healthier sources of cargos. With the above analyses, we recommend investors to ACCUMULATE VSC share on LONG-TERM basis at target price of VND76,000/share (29% upside to the share’s closing price on 14 April 2016).

VSC_ComUpdate_Apr2016eng-1

VSC_ComUpdate_Apr2016eng-1-1

Business credentials, high services quality and expandable capacity constitute VSC’s competitiveness
Vinconship JSC (VSC-HSX) joins big state enterprises including Hai Phong port (PHP-HNX), Sai Gon NewPort (SNP) and Sai Gon port JSC in Vietnam’s leading seaport operator list. Established over 30 years, VSC basically provides container related services such as stevedoring, trucking, warehousing and shipping agency in Hai Phong and Vietnam’s busy trading points. To provide clients an integrated logistics services, the firm decided to venture into seaport services with Greenport project (capacity 360,000Teus/year) going online in 2003. Amid fierce industry competition and Greenport’s full capacity issue, the firm still managed to achieve commendable CAGR of 4% for revenue and 7.8% for PAT during 2011-2015.

VSC currently has 07 subsidiaries and 03 associates all providing logistics services(Table 01). Notably, Vip Greenport JSC (chartered capital VND575 bil) is directly responsible for the operation of new Vip Greenport project (total capacity 500,000Teus/year). The new port commences Phase 1 (capacity 250,000Teus/year) in late November 2015 and expectedly Phase 2 (remaining capacity) in September 2016. Vip Greenport, situated at Dinh Vu peninsula, is a strategic investment because: (1) solving VSC’s issue of Greenport under-capacity, (2) deeper before berth water depth (-9 to -10m) enables the firm to serve vessel weighed up to 30,000 DWT and (3) prepared to capture the projected strong increase in cargo volume as Vietnam pushes for global economic integration.

VSC’s revenue could be structured into three main services: (1) seaport (60%), Depot-warehousing (30%) and trucking (10%). With 2 ports under operation (Greenport and Vip-Greenport), the firm has joined the group of seaports with largest container handling capacity in Hai Phong. In specifics, after Phase 2 going online, VSC’s total seaport capacity would reach 860,000 Teus/year (~2.4 times higher than beginning 2015). Industry wise, only PHP-HNX (Tan Vu and Chua Ve port), GMD-HSX (Nam Hai and Nam Hai Dinh Vu port) and DVP-HSX (Dinh Vu port) have port handling capacity over 500,000Teus/year in Hai Phong. In 2015, VSC handled 350,000 Teus (down slightly 2.7% to 2014) and holds equivalently 8.8% Hai Phong’s container port market share. For Depot and warehousing services, the firm is exploiting nearly 25ha Depot area and a CFS system of 20,000m2 located mainly in Hai Phong. Also, the firm is running a fleet of 140 trucks in Vietnam’s central and northern provinces. So, we believe that VSC’s above competitive advantages would be significant in its business strategy to attract and retain clients (shipping lines).

VSC_ComUpdate_Apr2016eng-2

VSC_ComUpdate_Apr2016eng-3-1

Hai Phong port operators’ earnings prospects would benefit from a strong growth in cargo throughput, however, at uneven proportion

VSC_ComUpdate_Apr2016eng-3-2

Demand for logistics services, especially at seaport, is positively related to Vietnam economy’s trading activity. In the backdrop set by sluggish recovery of developed countries and slowing down China, Vietnam becomes a bright spot by continuingly posting a 10% annualized growth in 2015 trade value. FDI sector, as we analyzed, is key contributor to the “two-digit” growth rate achieved in the past years. According to Vietnam Foreign Investment Agency (FIA), total FDI disbursement to Vietnam has risen to average USD10.2 billion per annum since joining WTO in 2017. Therefore, by quickening the global economic integration process via FTAs, Vietnam would be able to lure more FDI, especially in manufacturing sector, capitalizing on still competitive labor cost, large consumer market and lower tax regime. In fact, nearly 2/3 of Vietnam’s 2015 total trade value came from FDI companies. As a result, port operators and logistics services providers would benefit from increasing demand for imports (raw material, machinery) and exports (garment, wood products and footwear).

VSC_ComUpdate_Apr2016eng-4

From FIA statistics, Vietnam’s Northeastern provinces (Bac Ninh, Ha Noi, Hai Duong, Hai Phong,…) attracted almost half total registered FDI in 2015 (about USD10 billion). Hai Phong, having the following advantages: (1) being Northern Vietnam’s major trade gateway by sea, (2) hugely improved public infrastructure (Highway 5B, 10, Hanoi-Hai Phong expressway,) and (3) situated on Northeastern Asian shipping route (Vietnam-China-Koreas-Japan), expects to become a “busy” cargo hub in the coming years. Actually, total trade turnover and cargo passing via Hai Phong saw CAGR of 12.5% and 9.6% respectively during 2011-2015. In 2016, the People committee of Hai Phong forecasts a continuing 16% annualized growth of cargo thanks to large FDI projects going online such as LG Electronics Vietnam, Bridgestone tyre plant and Japanese rare earth producer Shin-Etsu.

However, geopolitical matter between Vietnam and China is a possible risk to logistics operation in Northern Vietnam (Hai Phong in particular). Given the fact nearly 2/3 of cargos going through ports here are Chinese destined “temporary import for re-export” goods via border trade (mainly agricultural and frozen food product), any negative development between the two countries could hamper the cargo flow and create short-term pressure on Hai Phong port infrastructure. Looking forwards, we believe increasing FDI to Northern Vietnam’s industrial zones would help diversify cargo origins and hence bring healthy growth to logistics business here.

Hai Phong port operators’ performances would see a strong divergence
In mid-term, we expect Hai Phong seaport sector would experience “a surplus in capacity from small upstream ports and capacity shortage of container ports in Dinh Vu “. Actually, international shipping firms would prefer to be serviced at ports in Dinh Vu area with deeper water depth allowing them to minimise cost by using bigger vessel. As a result, competition between upstream ports (Doan Xa, Nam Hai, Greenport, Chua Ve,…) would greatly intensify.

VSC_ComUpdate_Apr2016eng-5

The current port utilization rate in Hai Phong area is approximately 90%. Many of listed ports such as Hai An (HAH-HSX), Nam Hai (GMD-HSX), Dinh Vu (DVP-HSX) are running 20-25% over designed capacity. So, given the high likelihood that container via port continued to grow at 15-16% per annum, Hai Phong is likely to face a shortage in container seaport capacity in late 2017. More importantly, as we emphasize, the expected additional volume of containers in the future would be unevenly allocated between ports. In other words, 04 ports in Dinh Vu area including Nam Hai Dinh Vu (GMD-HSX), Vip-Green (VSC-HSX), Dinh Vu (DVP-HSX) và Tan Vu (PHP-HNX) are those that service much of cargo increase.

VSC_ComUpdate_Apr2016eng-6

New Vip Greenport expects to be VSC bottom-line’s growth engine in the coming years. Essentially, Vip Greenport’s geographically advantageous location with deeper channel depth, wider water surface and sitting just next to Dinh Vu industrial zone (cargo source) shows VSC management’s vision and enables it to capture a surge in cargo throughput as FTAs taking effects. Currently, VSC is exploiting Phase 1 of the new port with one berth (200m long) and schedules to put Phase 2 in operation in September 2016.

In short-term, the main cargo source for Vip Greenport would come from strategic shipping line Evergreen with 3-4 vessels per week and increase to 6-8 vessels per week after Phase 2 coming online. VSC also serves a list of respectable liners such as TS Lines, APL, OOCL and Cosco. Due to Phase 2’s operation time in 3Q2016, Vip Greenport could handle 300,000 Teus in 2016 (~ 60% capacity) and could increase to 450.000Teus in 2017 (or 90% capacity). So, the new port is estimated to record 2016 PAT of VND36 billion and VND106 billion in 2017 (Vip Greenport would pay corporate tax rate of 0% in the first 4 years of making profits and incur preferential tax rate of 5% in the following 9 years).

In mid and long-term, we strongly believe cargo growth rate would maintain from 12-15% a year given the positive impact from FTAS and TPP. With this scenario, ports in Hai Phong would run full capacity in 2017 (graph 04) and face “under-capacity” situation starting in 2018 (additional cargo amount of 460,000Teus). To be prepared to capitalize on that, VSC plans to invest a new Depot located near the new port (area of 10ha) with estimated cost of VND160billion. The addition of new depot could help VSC to handle an extra 200,000-250,000Teus/year if cargo movement uninterrupted. Based on our experience, the acquisition of new land and Depot surface construction could take up to a year. So, It is likely that the new Depot would come online in late 3Q2016 and hence just in time to add needed stevedoring room in 2018. As a result, we project the new port could handle a total of 600,000 Teus in 2018 (or 120% its capacity) and reach its maximum in 2020 of 750,000Teus.

From 2020 onwards, we expect the port sector here would experience a drastic change. That is the operation of Lach Huyen (Phase 2) and fast rising cargo volume at that time would be sufficient for international liners to open more inter-continental routes operated by “mother vessels” from Hai Phong. This would hence have negative impact on feeder vessel services from Vietnam and hence cargo throughput at ports in Dinh Vu could reduce subsequently. However, we see a strong reason for Vip Greenport (VSC-HSX) and other ports in Dinh Vu area to continue to benefit from rising cargo passing by at least until 2020 when competition threat from Lach Huyen would start to kick in.

VSC_ComUpdate_Apr2016eng-7

VSC’s earnings result forecast
Currently, Greenport runs at full capacity (360,000Teus) and VSC has had 70,000-80,000 Teus per year serviced at PTSC Dinh Vu (PSP-Upcom). With the outlook in Table 02, Cam river upstream ports are likely to get in a fierce services price competition, that then puts pressure on Greenport services fee. We forecast Greenport’s 2016 throughput to remain as last year (or 350,000Teus) and contract 10,000 Teus per year subsequently. In summary, total throughput handled by VSC port system (2 ports) could reach 650,000 Teus in 2016 and record a rise of 33% to VND705 billion in revenue (included reefer services).

While CFS’s business growth is limited to the warehouse capacity and the rate of cargo movement, the commencement of Vip Greenport Phase 1 promises to add 200,000-250,000 containers to be handled at Depot. This would hence bring up VSC’s total Depot throughput to 600,000 Teus and the equivalent revenue recorded VND227 billion in 2016.

For trucking services, unexpected truck fleet expansion in late 2014 subsequent to the truckload control policy imposed by Vietnam MOT has resulted in oversupply situation in Northern market. In addition, higher operating cost (driver wage and road toll) would reduce VSC’s trucking operation profitability this year. Similarly, we estimate revenue of reefer services to record 2/3 of that in 2015 on basis of normal Vietnam-china border trade circumstances. With the above analyses, we estimate VSC’s 2016 revenue to grow 30%yoy and Gross profit up 12.4%yoy.

Positive cargo outlook would boost Vip Greenport project’s return measure and VSC increasing stake at this Joint venture enhances VSC’s bottom-line.
To measure Vip Greenport’s effectiveness, we did compute this project’s IRR based on the 10 year- Free cash flow (FCF) from 2016 to 2025 (equivalent to expected project lifetime). The FCF is divided into 2 periods: (1) annual FCF is projected based on port utilization rate (Table 04) from 2016 to 2020 and (2) non-growing annual FCF during 2020-2025 period. The result comes up with the project IRR of 14.6%, higher than project WACC of 10.8%. In addition, Hai Phong is considered as the transit port for frozen foods temporarily imported and re-exported to Southern China provinces via border trade. VSC, therefore, could repeat the extraordinary earnings as seen in 2015 during our forecasted timeline and consequentially shorten investment payback period and boost project’s return.

Regarding the financing structure for Vip Greenport, we project VSC debt would peak in 2016 after Vip Greenport completes all required investments and could run at its designed capacity. In particulars, the firm’s borrowing estimated at VND 800 billion as of 2016 year-end and go down ~~VND100billion each year down the road. Accordingly, 2016 interest expense could be VND 50 billion (capitalized interest expense in 2016 of VND6 billion-mainly construction expense) and goes down to VND 38 billion in 2020. With the forecast of Vip Greenport exceeding its designed capacity from 2018, we are confident that VSC would be able repay its borrowings early and hence reduce financial expense pressure.

VSC_ComUpdate_Apr2016eng-8-1

Currently, VSC stake at Vip Greenport JSC is at 50.08%(down from 65%) after the JV made a share issue to Evergreen worth VND125 billion. We see the participation of the large international shipping line Evergreen strategic which not only help guarantee the source of cargo for Vip Greenport at initial stages but also show the trust on VSC’s long-term upheld value in high services quality provided. To create earnings growth driver in the long-term, it is highly possible that VSC would increase its ownership at the new port by acquiring additional 23.5% stake held by VIPCO(VIP-HSX)- whose BOD would like to divest non-core business. If so, VSC would need to pay out at least VND135 billion (equivalent to 23.5% VIPCO stake at JV at par value). With a sound financial position and the annual operating cash flow (~VND300 billion), we believe VSC is financially capable of completing this deal in the future.

Valuation
We use a combined valuation method of DCF (FCFF) and relative valuation (P/E and EV/EBITDA) to determine VSC value. For relative method, we think the respective the EV/EBITDA of 7.8x and 12x for P/E are appropriate given VSC business scale and growth prospect.

VSC_ComUpdate_Apr2016eng-8-2
VSC_ComUpdate_Apr2016eng-9-1

VSC_ComUpdate_Apr2016eng-9-2

Outlook and Valuation:
Vinconship JSC (VSC-HSX) is regarded as Vietnam’s leading private provider of container related services (trucking, warehousing and seaport services). The firm headquarters in Hai Phong but does have presences at the country’s major trade hubs. VSC’s competitive advantages are built on 30 year-operating experience, high services quality, integrated asset base (seaport-truck fleet-warehousing facility) and importantly expandable seaport capacity (new Vip Greenport put Phase 1 online in November 2015). In short-term, the initial operation of the new seaport may yet make a major impact on VSC’s earnings given pressure from operating cost and VSC’s ownership at this JV just over half (50.08%).

Nevertheless, in mid and long-term horizon, VSC is expected to be among the most beneficiaries from the increasing trade and export-import cargo activities fostered by FTAs and TPP. In addition, we believe that VSC would soon increase its holding stake at Vip Greenport JV that would eventually inject growth to its bottom-line. Besides, more FDIs coming to Northern Vietnam provinces also lessens the reliance on traditional trade partner China and means healthier sources of cargos. With the above analyses, we recommend investors to ACUMULATE VSC share on LONG-TERM basis at target price of VND76,000/share (29% upside to VSC’s closing price on Apr 14 2016).

VSC_ComUpdate_Apr2016eng-10

VSC_ComUpdate_Apr2016eng-11

Disclaimers

This report is prepared in order to provide information and analysis to Rong Viet’s clients only. It is and should not be construed as an offer to sell or a solicitation of an offer to purchase of subscribe for any investment. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. The readers should be aware that Rong Viet may have a conflict of interest with investors when does this research. Investors are advised make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives. Rong Viet will not take any responsibility for any loss/damages occurred as a result of using the information herein.
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
The information herein is believed by Rong Viet to be reliable and is based on public Sources believed to be reliable. We do not warrant its accuracy or completeness. Opinions, estimations and projection expressed in this report represent the current views of the author as of the original publication date appearing on this report only and the information, including the opinions contained herein, are subject to change without notice.
This report shall not be copied, reproduced, published or redistributed by any person for any purpose without the express permission of Rong Viet in writing.
Copyright 2016 RongViet Securities Corporation.

More From the Author

  • Significant Changes in Tax Policies for the Fertilizer Industry
  • Stock Market and Banking Liquidity in 2017
  • How the Rampant USD is Affecting the Dong
  • Invest in Vietnam: 3 Stocks To Profit From Price Discounts
  • Invest in Vietnam: How You Should Be Reading Market Cap-To-GDP
  • Invest in Vietnam: Should You Invest in Saigon Beer?
  • Invest in Vietnam: How You Should Pick Stocks, not Chase Trends
  • Invest in Vietnam: Your Vietnam Macroeconomic Overview
  • Invest in Vietnam: Central Hydropower Back to Routine
  • Invest in Vietnam: Bullish on Agrochemical
  • Invest in Vietnam: Southern Gas Rising in Financial Capability
  • Invest in Vietnam: Picking Stocks for Sustainable Gains as Liquidity Falls
  • Invest in Vietnam: Looking For Low Valuation Stocks Part 2
  • Invest in Vietnam: Looking For Low Valuation Stocks
  • Vietnam & BREXIT
  • Invest in Vietnam: Automobile Market May Diverge Due to Tax Adjustment
  • Invest in Vietnam: Vietnam Power Strategies
  • Invest in Vietnam: Your Guide on Rubber Sector Growth
  • Invest in Vietnam: Bullish Vietnam Textile Investment on Back of TPP
  • Invest in Vietnam: Your Updates On Enthusiasm & Profit Taking
  • Leave a Reply

    Subscribe Today

    We will send directly to your inbox the latest Vietnam investment commentaries, travel tips and "in the know" tidbits! 
    Join the Vietnamese IN CROWD!
    First Name
    Email address