VINGROUP Sowing the Seeds for Sustained Growth

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CBRE Real Estate Outlook – Part 3 (Economic Outlook + Residential Sector)

March 1, 2016

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

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  • VIC announced mixed FY2015 unaudited consolidated results with an above expectation topline of VND33.8 trillion (+22.0% y/y) even as the bottom line undershot by 62% y/y.
  • SG&A increased given a slew of new product launches and rapid expansion in certain segments including retail.
  • Revenue structure tilting more towards recurring income when residential segment has started new investment cycle which we expect the harvest stage will fall in FY2017.
  • Prospects for FY2016 suggest continued top line growth; we also expect a bounce back and increase of 149% in NPAT with the bookings of beach villas which carry high margin.
  • EPS of VND1,739/share (+181% y/y) generating forward P/E of 25.4xs and a P/B of 3.4xs.
  • Strong growth prospects from FY2017 onwards, the stock is trading at a 22.4% discount to RNAV of VND56,800 per share given a large residential pipeline.
  • Reiterate BUY.

VIC’s results were above expectations on a rush of Q4 residential bookings

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MAIN TAKEAWAY – VIC recently announced mixed FY2015 unaudited consolidated results with an above expectation topline even as the bottom line undershot. Despite gross profit rise 9.6% y/y, the GPM fell mainly due to worsening product mix and falling GPM in certain segments. While SG&A increased given a slew of new product launches. Prospects for this year suggest continued top line growth and we expect a bounce back and increase of 149% in NPAT. A large residential pipeline coupled with the sheer pace of expansion in the retail space is leading to a jump in SG&A as VIC continues to sow the seeds of longer term growth. We expect the harvest stage of the current cycle to begin in earnest in FY2017.

ACTION – Reiterate BUY. The stock is trading at a 22.4% discount to RNAV of VND56,800 per share based on the information we have obtained so far. Given strong growth prospects from FY2017 we see value here although fewer near term catalysts.

Vingroup (HSX – VIC) NPAT dropped 62% – VIC the leading real estate developer announced mixed FY2015 unaudited consolidated results showing decent sales and a rather disappointing bottom line in what was viewed as a transitional year. Sales came to VND33.8 trillion (+22% y/y) whereas NPAT fell to just VND1.4 trillion (-62% y/y). And while the sales number came in above expectation and hit 113% of the FY2015 sales target, NPAT fulfilled just 47.3% of target. The shortfall was caused by falling GPM coupled with a surge in SG&A expense as a result of new businesses line expansion. The result was also 4.64% higher compared to HSC’s forecast of VND32.3 trillion (+16.5% y/y) for sales and 43.75% lower in terms of NPAT which was VND2,489 billion (-34.1% y/y).

Sales lead by strong residential bookings in Q4 – With the bulk of residential bookings in the final quarter, residential sales reached VND21.04 trillion (-3% y/y) which was 1.6% higher than our own forecast calling for VND20.7 trillion. Bookings in FY2015 mostly came from Vinhomes Royal City (VND7.1 trillion), Times City (VND3.9 trillion), 54A Nguyen Chi Thanh (VND2.9 trillion), beach villas in Nha Trang, Phu Quoc (VND5.8 trillion), Central Park – villas (VND730 billion), Hai Phong – shop houses (VND380 billion) and then other bookings totaling (VND230 billion). The company’s sales last year of over 10,000 units (up nearly 8 times y/y) and 900 beach villas (these were only offered from last year so no y/y) suggest that bookings will run strong also in FY2016 and into FY2017.

Leasing grows at a moderate pace – Leasing segment revenues grew by 16.5% y/y to VND2.48 trillion, attributable to a 48% increase in leasing floor space to 804,570 sqm given the opening of 10 new shopping malls during the year. Of these, 2 more Vincom shopping malls during Q4 namely Vincom MegaMall Thao Dien (HCMC), Vincom Center Nguyen Chi Thanh and 2 more Vincom Plaza namely Vincom Plaza Viet Tri (Phu Tho province), and Vincom Plaza Long Xuyen (An Giang province). Previously, in Q3, VIC opened 3 shopping malls including Vincom Plaza Bien Hoa, Vincom Plaza Quang Trung (Go Vap district, HCMC) and Vincom Plaza Hai Phong, thus bringing the number of Vincom shopping malls to 16 centers. Or fulfilling 64% of what was an extremely ambitious full year plan which was 25 Vincom centers and megamalls in FY2015.

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We estimate the average occupancy rate of the Vincom centers at over 93% while that of a provincial Vincom plazas is less at around 85%-90%. The provincial centers are tougher to get anchor clients for something that is also seen in the wide variances in the rents per sqm. In fact the rent ranges from USD50-70/sqm for Vincom Centers and from USD13-15/sqm for Vincom Plazas.

Hotel& Entertainment segment grew 37% y/y as room count surged – YTD hotel& entertainment segment revenues came to VND2.86 trillion (+37% y/y) boosted by higher occupancy and the opening of the Vinpearl Phu Quoc Resort & Villas, Vinpearl Nha Trang Bay Resort & Villas, and Vinpearl Ha Long Bay Resort with a corresponding 610, 500 and 380 new rooms added. By the end of FY2015, the total rooms number was 4,000 (+67% y/y). And while we estimate the average occupancy rates are nearly 60% varying by projects we think REVPAR (revenue per available room) fell to about VND1,075 million/room/year, down 28% y/y as many of the new rooms carry special promotional rates to boost occupancy.

In January FY2016, VIC introduced the 8th Vinpearl resort located in Hon Tre Island namely Vinpearl Golf Land Resort & Villa. The new resort has 400 rooms, which means the total number of rooms is now 4,400. We, therefore, expect the hotel & entertainment revenues can reach VND3.2 trillion (+11.96% y/y) in FY2016.

Hospital sales showed steady growth by 17% y/y to reach VND771 billion – Thanks to co-operation with more insurance providers which has helped to substantially expand the client’s base. In FY2015, VIC opened 2 new hospitals, one in Phu Quoc island and one in Vinhomes Central Park project. This added 150 and 178 new beds respectively bringing the total number to 1,078 beds (+55.7% y/y). To date, VIC has put into operations 3 international hospitals and 2 clinics.

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Education segment revenues rose over 2 fold y/y – Education segment revenues rose sharply to VND524 billion at FY2015 end. VIC now operates 1 elementary, 1 high school and 1 nursery in VinhomesTimes City, along with other 3 nurseries in Vinhomes Riverside, 54A Nguyen Chi Thanh and Royal City. With approximately 10,000 students now, compared to 6,300 students at the end of FY2014. The tuition fee for each pupil is roughly VND33 million/year excluding additional fees for F&B, transport, uniforms, books etc. Vinschool education system now offers education from nursery through to high school. We believe in the growth for education segment given the untapped demand for a well facilitated education for middle earners. Once the growth rate levels off, we think that the steady state revenue growth from the education segment will mirror the number of completed units handed over in VIC’s residential projects.

Retail business revenues increased over 9 fold on rapid expansion – Meanwhile the fairly new retail business saw revenues expand over 9 fold y/y to reach VND4.25 trillion in sales. At the end of FY2015, we estimate the total number of Vinmart stores was 21 (+3 times y/y) with Vinmart+ standing at nearly 150 units (+6 times y/y) nationwide. VIC plans to open 100 Vinmart and 1,000 Vinmart+ by the end of FY2017 and currently they have achieved 21% and 15% respectively of the 3 year target. In order to do so, we believe that VIC will continue to do selective M&A in the future. Following the Oceanmart and Maximark deals. We also see growing competition from foreign retailers such as Aeon (Japan), Emart (Korea), BigC and Metro (bought by a Thai investor).

Vinmart and Vinmart+ operations appear to be doing reasonably well and is in better shape than some of their other chains such as Vinpro. The average size of a Vinmart store is 3,000 to 15,000 sqm while that of a Vinmart+ is 150 to 300 sqm. The Vinmart store are typically located in VIC shopping centers which sell more than 40,0000 SKUs ranging from food, clothing, health and beauty, to home ware and accessories. Whereas Vinmart+ is convenience stores located in most bustling areas to serve instantly the customers’ need with mainly foods and drinks. Supermarket sales have also been boosted since the trial of website Adayroi was incorporated online and VinEco agriculture products complying with VietGAP and GlobalGAP are being distributed through Vinmart and Vinmar+ to the weight of 30 tonnes/day.

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The Vinpro electronic retail chain has the same underlying concept as the Vinmart chain with two sub brands Vinpro and Vinpro+, respectively. However, the rapid expansion of a unproven concept chain in the tricky consumer electronics segment is riskier. Nevertheless, from a strategic point of view, the expansion of an electronic retail chain makes sense given (1) it’s a fast growing segment; (2) a successful retailer generates a high level of cash flow; and (3) helps fill out a lot of the available space in Vingroup shopping centers. By December FY2015, there were 12 Vinpro stores and 98 Vinpro+ whose average size is 3,000 sqm/store and 200-500 sqm/store, respectively.

Revenue structure tilting more towards recurring income when residential segment has started new investment cycle – Residential revenues accounted for 62.2% of the top line compared to 78.5% last year. Leasing revenues made a stable contribution of more than 7%. And despite contributing from just 1.5% to 2.3% of total revenues, the education, hospital and management services segment showed remarkable growth of 101%, 17% and 189% y/y, respectively. Then retail revenues contributed 12.6% of the top line, jumping jumping over 10 fold from just 1.7% in FY2014. Finally construction services contributed VND848.55 billion to total revenue compared to VND16.8 billion in FY2014.

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Recurring income streams totaled VND11.64 trillion (+98% y/y) in FY2015, accounting for 34.4% of the top line vs. 21.2% in FY2014. Put in perspective, it was a transitional year for residential bookings and we believe the ratio will skew back in the opposite direction over the next 2 years as residential bookings increase as new projects are handed over.

Gross profit came to VND11.4 trillion; up 9.6% y/y but GPM was 33.8% vs. 37.5% last year. The slippage in GPM came from a (1) deteriorating product mix and (2) falling margins in several segments. Lower margins of retail segment while the normally high margin components including leasing, hotel& entertainment segment recorded a fell in GPM for a variety of reasons:

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(1) Residential for sales margins increased – Residential for sales gross profit rose 5% y/y to VND8.4 trillion. The margin rose to 39.9% compared to 36.8% last year. We expect the residential margin will rise to 45% by the end of 2016 when more beach villas which carry higher margin will be booked for 2016.

(2) Leasing GPM slipped as new provincial malls have lower margin compared to matured malls – Total gross profit was VND1.33 trillion (+7% y/y). Then compared to last year, GPM of leasing down from 58.4% to 53.5% which we think was due to the lower occupancy rate while still incurred high initial cost at opening period in the new provincial based shopping malls.

(3) Hotel & Entertainment GPM falls due to new hotels and entertainment centers openings – Gross profit fell significantly to VND443.9 billion (-45% y/y). Likewise, GPM collapsed from 38.9% down to 15.5% on heavy promotions and discounts to attract visitors. They hope that margins will bounce back on higher room rates once the new business are grounded and occupancy rates have stabilized. What is notable however is that competition in this segment is getting tougher with more hotels and resorts opening in Phu Quoc and Nha Trang. However, we think VIC has its own competitive advantages by having more value added activities such as Vinpearl land, Safari zoo, etc. in their resorts.

(4) Retail segment GPM still remains low as new store opening soars – Gross profit reached VND546.3 billion, up 3.7 times. GPM also recovered to 12.8% vs. just 3% last year. While GPM of the retail segment has jumped its remains below the average GPM of the company and acts as a drag. The sheer pace of expansion has led to economies of scale but also some barely profitable stores while depreciation costs have also surged. Longterm, we think the GPM of the retail segment will gradually increase to 15-18%.

Bottom line lagged far below target – NPAT was affected by the lower gross profit and also affected by the (1) 131% surge in SGA expenses to VND6.72 trillion because of simultaneous expansion in several business segments. (2) Net financial loss to narrow VND(1,171) billion While financial income rose 47% y/y to VND1.98 trillion, the financial expense slightly dropped only 10% y/y to VND3.15 trillion.

HSC expects NPAT bounce back and jump 149% y/y in FY2016 – We forecast FY2016 sales of VND42.6 trillion (+25.9% y/y) and NPAT of VND3.5 trillion (+149% y/y). Based on the following assumptions:
(1) We expect residential real estate bookings will come to VND24.4 trillion (+16.2% y/y) with the remaining booking of VND500 billion from Royal City, VND2.5 trillion from 54A Nguyen Chi Thanh, VND5 trillion from Times City Phase 1&2, VND7.9 trillion from Central Park and VND8.5 trillion from resort villas.

(2) We assume leasing income will keep growing at 16% given the rapid growth in shopping malls. GPM to range between 50% and 55% over the next 2 years.

(3) Estimate that Hotel & Entertainment income will grow nearly 30% given a steady increase in rooms offered. However we don’t expect the GPM will improve much and expect it to remain under 20%.

(4) We assume that Retail revenues keep growing dramatically at 1.5 times as the ramp-up still continues. And expect GPM grow to 15%.

(5) Expect revenues to continue to have sharp growth especially education, management services and construction services.

(6) Project GPM improves to 35% due to a greater weight in high margin segments such as villas and other residential bookings helping to anchor GPM.

(7) Net financial loss to narrow to VND(953) billion on higher cash balance and that SG&A expenses will rise about 24% to VND8.2 trillion due to the rapid expansion of various segments.

And so we forecast the company will deliver an EPS of VND1,739/share (+181% y/y) generating forward P/E of 25.4xs and a P/B of 3.4xs.

We estimate FY2016 residential booking hold a lot of promise with the remaining balance of Royal R6; Nguyen Chi Thanh – apartment component (VND2.5 trillion); Times City phase 1&2 (VND5 trillion) and Vinhomes Central Park – villas (VND7.9 trillion) and resorts/villas in Nha Trang, Phu Quoc (VND8.5 trillion). Thus real estate bookings would come to VND24.4 trillion (+16.2% y/y).

VIC ambitions have gone overseas given its recent foray into the Australian property market with a USD16.1 million purchase of land in Sydney’s central business district. The site, fronting 183-185 Clarence Street in Sydney, is 1,030 sqm. There is no development approval as yet, but VIC proposed scheme to develop mixed use complex including a 172-room hotel.

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Beyond FY2016 forward prospects look positive – Valuations look rather expensive for now although longer term prospects beyond this year look positive. Based on the projects information we obtained so far, we estimate RNAV is VND56,800 per share, meaning the share prices is trading at a 22.4% discount. VIC’s share price is down by 7.16% YTD and trading about 20.82% above the 12 month low. The available FOL currently amounts to about 283,374,098 shares or 14.6%. Reiterate BUY.

FINANCIAL RATIO

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