September 28, 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.
Stable operation prevails over peers
Outlook and Valuation
Being a well-established agrochemical company, VFG owns numerous advantages in terms of experience as well as distribution system that few companies in this industry have. In the situation that Vietnam agriculture is suffering from several difficulties due to unfavorable weather condition, maintaining growth momentum is a notably bright spot compared with other companies while Vietnam pesticide market is dominated by imported goods from China.
In the period of 2016-2017, VFG took a transformation which gradually shifted from segments bringing low added-value work (packaging, distribution) to the stage of bringing higher value (mixing, blending). This is expected to be the main engine of VFG’s growth in long term while increasing domestic production and reducing imports from China are long-term orientation of Vietnam agricultural chemical industry.
For 2016, VFG earnings result is projected to grow by 8% (in revenue) and 4% (in profit) respectively. However, we expect VFG to have a better breakthrough on profitable growth next year with the forecast of 14% yoy. FY16 and FY17 EPS are expected to reach VND7,361 per share and VND8,402 per share, respectively. The intrinsic value of VFG is projected to be VND112,000 per share, 27% higher than the closing price on 22nd September 2016. Therefore, we recommend ACCUMULATION in the LONG-TERM for VFG’s stock.
Vietnam Fumigation Group (VFG – HSX) is the second leading company in Vietnam agro-chemical industry (the first place is Loc Troi Corporation and its previous name was An Giang Plant protection product JSC). The Company has 4 main businesses including Agrochemicals and seeds, Pestman, Fumigation services and Office leasing. In 2001, the company completed the equitization procedure and was officially listed on HOSE in 2009. (Appendix 1: VFG ‘s equitization process)
Apart from two traditional businesses which are Fumigation service and Pest control, Pesticide is considered as its core business. Owning a wide-spread distribution network, VFG is chosen as a strategic partner by many globally well-known brands such as Syngenta, Kumiai, Sumimoto, Nipon Soda, etc. to distribute their crop sprotection products in Vietnam. In particular, sales from Sygenta accounts for 65% total revenue of this segment. In which, Anvil (fungicide), Karate (insecticide), and Sygnenta genetically modified corn are the most well-known labels.
Vietnam pesticide industry: Imported products dominate domestic market
Among the inputs of agricultural value chain, except domestic fertilizer industry which could basically meet domestic demand, pesticide and seed mainly depend on imports.
The value of pesticide and related imported materials recorded steady growth rates at high level during 2011-2014 period. Over the last two years, although demand for imported agrochemical products have decreased, that of Chinese products has remained high. In 8M2016, the total imported value of pesticide and imported materials to Vietnam was USD453 million, down 7.3% y-o-y, in which, half was from China.
The value of Vietnam pesticide market was USD800 million in 2015 and is expected to reach 6.8% of CARG annually in 2016-2020 (Mordor Intelligence). There are currently 300 pesticide distributors and producers nationwide, while domestic production capacity is only able to supply about 30,000 to 40,000 tons per year, lower than domestic demand of 165,000 to 170,000 tons per year.
For the whole Vietnam pesticide market, Chinese products account for 40% of total supply and are distributed through many mid and small distributors. The remaining market belongs to foreign firms such as Syngenta (distributed by Loc Troi and VFG), Bayer or local well-established companies (HAI, SPC).
In term of demand, due to harsh weather conditions, the pesticide industry recorded a dip of 8% in 2015 volume. Statistics from Ministry of Agriculture and Rural Development demonstrates that during 7M2016, total cultivated area has decreased by 7% y-o-y due to the impacts of weather and climate changes. Nevertheless, regarding of 2H2016 and 2017 prospects for input demand, the end of drought weather condition would support the recovery of agricultural production in Mekong and Red River Delta.
VFG – Stable growth through market expansion
The Mekong Delta covers an agricultural area of 3.96 million ha and supplies a half of food production for the whole country. Therefore, this area is also a major market for agrochemical companies. Regarding VFG, the Southern market contributed over 75% of total revenue and 79% of total profit. However, this region was also adversely impacted by drought and salinization in 1H2016, which led to a decrease in demand for fertilizer and pesticide.
Conversely, VFG’s business result is in compliance with 2016 guidance plan. In 1H2016, revenue and NPAT achieved a half of 2016 plan, generating VND 1,157 billion in revenue (+10% yoy) and VND 74.94 billion (+8%) in profit respectively. Facing fierce competition from domestic and Chinese products, VFG could be seen as a remarkable story when it could maintain positive growth momentum.
During 2013-2015 period, Loc Troi, which is the key player, experienced a decline in agrochemical sector. At the same time, VFG’s revenue in this segment achieved positive improvement (Table 2). SPC, which is well-established pesticide manufacturers and has the same size as VFG, recorded a slow growth over the last few years. Maintaining continuous improvement during industry down-turn could be an evidence that the expansion in market share of VFG resulted from its noticeable advantages.
Firstly, VFG is one of two exclusive distributors for product lines of herbicides, insecticides, fungicides and seeds of Syngenta. In Vietnam, Syngenta is a trusted and long-standing brand and the company owns a factory with the capacity of 16,000 tons/year to manufacture and distribute pesticides and high quality cultivars. While Loc Troi, the distributor of Syngenta along with VFG, shifted into rice-related businesses and has been continuously losing market share, the growth of VFG recently showed that the company has taken the advantage of being a distributor of Syngenta to develop its pesticide distribution segment.
Secondly, with over 20-year of experience in agrochemical industry, VFG has built a wide-spread distribution network from the North to the South and Cambodia. At the present, VFG’s sales system consists of 15 branches, 350 employees, 400 agents, 2.500 retailers with 4,500 model farmers. Additionally, the ability to provide credit to agents as well as farmers is also a strength of company operating in the agricultural sector. In comparison with other agricultural chemicals companies, the agricultural chemicals segment’s profit margin of VFG are at the high level (~ 27%), only behind Loc Troi.
2016-2020 outlook: Gradually reducing low added value segments
Agricultural production is expected to recover in the 2H2016 due to the impacts of La Nina which increase the rainfall in Vietnam (IPSARD) and reduce the adverse effects of drought. It would become a tailwind for pesticide firms including VFG in coming years. In addition, the current consumption trend that moving towards clean products could become a condition for agricultural producers and farmers
taking a deeper look into. As a results, they could shift to a safer and more effective use of pesticides. Therefore, VFG would indirectly gain from this trend in long-run through distributing well-known brand names.
According to the Industrial Development strategy with the vision to 2020 – 2030, the Government planned to produce sufficient agricultural products to meet domestic demand and reduce the dependence on China. Put in the whole context that Vietnam agricultural chemicals Industry is trapped at basic works such as distribution, packing and packaging, VFG is one of the pioneers that move up from low added-value segments to self-production. In particular, in April 2016, VFG initiated the construction for agricultural chemical plant in Long An to replace the old factory in Le Anh Xuan Industrial Park. New plant has the total capacity of 9,500 tons/year, three times higher than the old one (capacity: 3,500 tons/year). Total investment is around VND150 billion with 4.5 year payback period.
After a first couple of years putting into operation, the factory is expected to maintain at 50-60% of total designed capacity which helps to increase profit by 10-15% compared to current earnings. In 2016-2020 period, the company aims to achieve a growth rate of 14% in revenue and 20% in profit because of expansion plan to low-income demand. Regarding its targeted growth rates, the ability to penetrate new market is concerned us most at this time. This also heavily depends on the investment strategy for distribution network. Moreover, climate change is another potential risk for VFG’s business activities.
Novotel Nha Trang – Expecting earnings consolidation in 2017
Apart from VFG’s core activities, investment in Novotel Nha Trang is the remarkable story in VFG’s business activities. In 2004, Hai Yen-Ltd (Initial charter capital is VND60 billion) was established, based on the joint-venture between VFG and Fococev Ltd with the ratio of 2:1 to build Novotel Nha Trang. However, due to the conflict of interest after increasing Hai Yen’s capital (current charter capital is VND90 billion), Novotel’s annual profit since 2008 has not been consolidated into VFG’s business results. According to VFG’s 2015 financial statement, total investment capital in Hai Yen Ltd is VND180 billion (31/12/2015).
According to VFG, the dispute resolution process since 2013 between VFG and Fococev has made a big improvement in 1H2016. However, both sides still need more time to negotiate the amount that VFG has to spend to acquire Novotel Nha Trang. Under a conservative perspective, we expect that at least into 1H2017, VFG could resolve this dispute.
The most notable investment thesis is the stability of Novotel Nha Trang hotel’s business activities. Average annual revenue and NPAT are VND100 billion and VND 34 billion, respectively. Novotel Nha Trang is a 4-star hotel located in the central of Nha Trang City, Khanh Hoa Province. Having many favorable geographical conditions help Nha Trang city attract a lot of tourists each year. In the last 3 years, this coastal city attracts more than 4 million passengers with the growth rate of 15-20%/year. In addition, the average room occupancy rate in Nha Trang – Khanh Hoa hotels maintained at high level ~70% and could have reached 80-85% during peak time (from February to September).
To reinforce the investing rationale in VFG, we conducted an independent valuation based on discounted income approach. With the assumption that Novotel’s occupancy rate is 70% and a long-term growth of 2%, Novotel Nha Trang hotel’s value is estimated at VND334 billion. Novotel being consolidated is likely to add VND4,000 per share to VFG share value. However, due to the unclear dispute at the Novotel Nha Trang, we do not include the component in the valuation.
In 2016, Novotel Nha Trang planned to achieve VND110 billion in revenue and VND35 billion in PAT respectively. Thus, if the negotiation between VFG and Fococev has stridden, we estimate the consolidated profit of VFG to increase by 25% based on 2015 earnings.
Outlook and valuation
Being a well-established agrochemical company, VFG owns numerous advantages in terms of experience as well as distribution system that few companies in this industry have. In the situation that Vietnam agriculture is suffering from several difficulties due to unfavorable weather condition, maintaining growth momentum is a notably bright spot compared with other companies while Vietnam pesticide market is dominated by imported goods from China. In the period of 2016-2017, VFG took a transformation which gradually shifted from segments bringing low added-value work (packaging, distribution) to the stage of bringing higher value (mixing, blending). This is expected to be the main engine of VFG’s growth in long term while increasing domestic production and reducing imports from China are long-term orientation of Vietnam agricultural chemical industry.
For 2016, VFG earnings result is projected to grow by 8% (in revenue) and 4% (in profit) respectively. However, we expect VFG to have a better breakthrough on profitable growth next year with the forecast of 14% yoy. The reasons are changes in revenue structure when the proportion of self-produced goods increases thanks to new crop protection factory in Long An province. The biggest risk for VFG’s growth is climate change which will negatively impact sales activities.
FY16 and FY17 EPS are expected to reach VND7,361 per share and VND8,402 per share, respectively. The intrinsic value of VFG is projected to be VND112,000 per share, 27% higher than the closing price on 22nd September 2016. Therefore, we recommend ACCUMULATION in the LONG-TERM for VFG’s stock.
Appendix 1: VFG’s equitization process
Appendix 3: Agrochemical Industry: The Game of Big Players
The Agrochemical industry is a part in the agricultural value chain, which is highly sensitive to economic conditions, climate changes and commodity prices. Recently, land used for agriculture has deteriorated when the rate of urbanization maintains at high level. As a result, to meet the growing demand for food, the conversion from the traditional model to intensive farming is crucial.
In 2015, value of global pesticides market achieved USD 51.2 billion, down by 10% yoy. This decrease was resulted from the appreciation of US Dollar, low agricultural commodity prices and weak demand due to El Nino effect. According to Syngenta, the demand for agrochemical focuses on Herbicides (44%), following by Fungicides (23%), Insecticides (24%), Seed treatment (6%)…
In addition, because global agrochemical market is in the hands of several large players such as Syngenta (Switzerland), Dow (China), Dupont (USA), Bayer (Germany)…, those companies possess greater pricing power. Along with the development of technology and growing demand of clean & safe products, there are more and more new agrochemical products with advanced technology, increasing effectiveness, lesser doses and higher safety. The combination of those factors has gradually increased the price of agrochemical products in the last few years.
According to Market Research, value of global pesticides industry was estimated at USD 58.4 billion in 2015. Its CARG growth in 2016-2021 period is expected to be 5.15%/year and could achieve USD 70.57 billion in 2021. In which, Asia region would experience the highest growth rates (average 7.13% per year) and will be the major targeted market of the global leading agrochemical groups.
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