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The RongViet Securites 2017 Sector Outlook and Investment Strategy is available, and we will be releasing their report in segments over the next two weeks. We begin with the Automotive and Retail industry report by Ha My Tran:

AUTOMOTIVE RETAIL INDUSTRY: DEMAND IS STILL STRONG

The automotive retail sector has delivered positive growth in recent periods. We expect that consumption growth will continue to rise due to the increase in disposable incomes and the increased demand for transportation. At the same time, the wave of car imports from ASEAN countries will be stronger following the AITGA roadmap. The business environment for automotive retailers will be more competitive, in which, companies with strong distribution system and good relationship with car manufacturers will have more advantages.

Investment Opportunities

The automotive retail industry in Vietnam is in its preliminary stage of motorization. Vietnam’s per capita income reached USD5,668 in 2016, which reflects its strong middle class. According to GMSIP, a per capita income of more than USD4,000 reflects an increase in the middle class as well as higher demand for car ownership, which usually grows twice as fast.

RongViet Research estimates that there were around 32 cars per 1,000 people in Vietnam in late 2016, which is low compared to other countries exhibiting similar economic conditions (50 cars per 1,000 people). Although the growth of automobile consumption seems to be leveled off, the expected surge in demand for cars in Vietnam is still ahead. We expect that consumption growth in the automotive retail industry in 2017 will reach ~ 20%, which is lower than the current growth rate of 24%; the passenger cars segment is expected to continue maintaining a high growth rate (~ 25 -30%).

Consumer confidence is high, which has boosted the demand for cars. Consumer confidence from Vietnam remained high in recent quarters and standed at 112 in Q4 2016 (according to Nielsen). Vietnam’s infrastructure rank also progressed in the past year, up from #93 (WEF 2015-2016) to #89 (WEF 2016-2017). Therefore, RongViet Research holds the view that the lack of progress in infrastructure is not a major concern for car buyers at the moment. High consumer confidence and improved incomes are key factors that impact the demand for the growth of the automotive industry.

Changes in policies will impact the industry but should not curb demand. 2017 can be considered as an important transformation period of the automotive industry, specifically in the automotive retail policy. From January 1st, 2017, the automobile import tariffs from ASEAN have dropped to 30% compared to 40% in 2016; this will eventually drop to 0% at the beginning of 2018. According to RongViet Research, Agreement on Trade in Goods ASEAN (ATIGA) will significantly increase automotive imports from ASEAN countries. Though this may impact manufacturers and assembly plants, we believe it will not deter consumption. Under the high competition between domestic and imported cars, the Government will have policies aimed at protecting the automobile industry, which include the following:
1. Add additional automotive segments (manufacturing, assembling, import cars) to the category of conditional businesses, which will be in effect in July of 2017. This creates a barrier for small businesses to participate in the automotive value chain.

2. Prospects of policy changes on Special Tax Consumption (STC) from 01/01/2018 will positively impact sales of vehicles with larger than 2.0L capacity because of the second stage of adding up to another 10-15% on STC. However, automotive retailers will focus more on environmentally friendly cars with low capacity to avoid risks from raising STC in the long run.

3. Adjustment of fees and charges for automobile buyers (new car registration fee, registration fee, and charge license plates) also affects the demand for car ownership.

Risks

• The policy of the government of tightening car imports.
• The decline in macroeconomic growth affecting the demand for car ownership.

Automobile Segment Not Performing at Full Potential

In the last 5 years, SVC has recorded remarkable annual sales growth (~17%) thanks to the boom in automobile demand. The automobile segment’s gross margin has decreased gradually over the years, although we expect that the company’s profit margin is still below its potential. The rental and transferring real estate segments contributed to most of SVC’s profit in recent years. Given the low margins of automobile segment, we only expect that its performance will improve gradually, especially in after-sales services, after the IPO of Ben Thanh Group (probably in 2018) – strategic shareholders of SVC.

Investment Rationales

– The company’s automobile business has strong revenue but negligible profit. We estimate that the automotive retail segment (including commercial and after-sales services) accounted for 98% of SVC’s sales in 2016, but only contributed to 13% of its operating profit. If we include additional deductibles, commissions from brand providers, and profit from the joint ventures, this segment contributed ~30% of the parent company’s PAT. According to our estimation, the profit margin before tax of the automotive segment is small (<1%). We believe that this figure can be improved by increasing the proportion of after-sales service segments (gross margin ~15-16%). Moreover, the IPO of Ben Thanh Group will help SVC to have better management, which will reduce its business costs. – SVC owns office buildings and commercial centers for rent at prime locations. The real estate leasing segment was the major contribution to the PAT of the parent company (>50%). This segment has also brought steady cash flow and high profitability. We expect that the profit from the rental office and commercial centers will improve slightly in the coming years.

– SVC continues to book the profits from transferring real-estate. In the last 4 years, SVC has 1-2 transferring real estate projects, most of which were profitable. This year, SVC will transfer 60% of ownership shares of Nam Ky Khoi Nghia Project. SVC can also record a profit from land-transferring projects to Novaland (Pho Quang Project) after completing legal formalities. In addition, another project that is likely to be transferred is Mercure Son Tra – Da Nang, and SVC has found the partner that is in negotiation process.

2017 Forecast

– We estimate that its revenue and profit growth will be 11.0% YoY, and 21.9% YoY respectively.
– We expect that SVC will record profits from transferring Nam Ky Khoi Nghia project this year (~VND60 billion).
– SVC’s 2017 EPS is VND 5,332.

Potential Catalysts

– Transferring-real-estate-project information.

Risks to Our Call

– Real estate projects may not be transferable or being transfered at lower price.

Company Overview


– The potential for revenue growth of SVC is associated with the growth of the automotive retail industry, however, the automobile sector contributes very little to the profitability of the business.
– The Board of Directors of SVC are directors of Ben Thanh Group Executive and have extensive experience in management. However, the complex ownership structure with several joint venture companies and subsidiaries makes the business efficiency unmatched with the scale of the business.
– The business manages its cash flow well by: (1) stable cash flows from rental real estate projects and (2) focusing on its core businesses by divesting many potential real estate projects.
– With its current price, we initiated a NEUTRAL recommendation for SVC, average 1-Y PE of SVC is ~10x.

Price Drivers


1. Cooperating with Volvo.
2. Probus Opportunities Fund continuously buying SVC shares.
3. Transferring the projects at 277-279 Ly Tu Trong.
4. Issuing Resolutions to transfer 60% of ownership shares of Nam Ky Khoi Nghia Project.

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