Company Overview
HPG is Vietnam’s largest steel producer with 24% and 29% market shares in construction steel (current designed capacity of two million tons per year) and steel pipes, respectively. Other minor businesses include industrial manufacturing, real estate development and animal feed production.
Key Summary
- We reiterate our BUY rating on HPG and trim our target price by 4% to VND74,100/share as we maintain our key assumptions for HPG’s construction steel segment, but increase the WACC.
- Solid Q1 results with strong top-line YoY growth of 27% was supported by both healthy volume growth and selling price increases. Meanwhile, margins remained resilient despite the industry-wide downward margin trend, driving 14% NPAT-MI YoY growth.
- We lower our 2018 NPAT-MI forecast by 3% to VND9.1tn (USD402mn, +14% YoY), as we lower forecasts for the galvanized steel and agricultural segments due to a challenging industry outlook.
- We reiterate our confidence on the outlook for HPG’s construction steel core business. Robust demand from domestic construction activity and healthy global steel supply-demand dynamics will offer solid support to sales volume and prices over the medium term.
- Our 2018F P/E at 9.9x implies attractive upside given HPG’s solid fundamentals and outlook for growth coming from capacity expansion of its Dung Quat Steel Complex.
Domestic construction activity and capacity expansion will support steel sales volume. HPG’s construction steel and steel pipes sales volume rose 7% and 19% in Q1 2018 vs Q1 2017, respectively. As HPG already maxed out its capacity in 2017 with 2.2 million tons sold, we maintain our 10% volume growth forecast for construction steel, equivalent to 2.4 million tons. The additional capacity will come from the Dung Quat Steel Complex, whose first rolling mill of 600,000 tons will come online in July 2018 and the full operation of 2 million tons will come in Q3 2019.
Limited disruption expected from maintenance of one BOF in Q2 2018. HPG paused operation of its Basic Oxygen Furnace (BOF) No. 2 (one out of three HPG BOFs) and some other related works from the end of March 2018 to the end of May 2018. This is the first maintenance cycle for BOF No.2 since it started operating in 2013. As this is pre-scheduled maintenance, HPG boosted its reserves of billets in advance to ensure a full supply of billets for steel production during these months.
2018 profit forecasts trimmed as competition heats up in local galvanized steel market. Amid fierce competition between local galvanized steel producers, we lower our sales volume assumption for HPG’s galvanized steel plant to 300,000 tons vs 400,000 tons (full capacity) and lower our gross margin forecast from 15% to 13%. We also expect the agriculture segment to post a slight loss due to weakness in the animal feed industry. This has led us to trim our full-year NPAT-MI forecast by 3%.
Balanced global supply-demand dynamics support steel selling prices. As global steel markets rebalance, finished steel selling prices continue to exhibit strong recovery momentum despite the volatility in underlying iron ore prices. HPG’s construction steel ASP has risen 31% to VND13.7mn (USD601) since the end of June 2017 and is up 7% YTD, while iron ore prices have fallen by 5% and 13% over the same periods, respectively. For HPG, we maintain our assumption for construction steel ASP of VND11.8mn per ton in 2018 (USD520, +3% vs 2017 average) as China rebar prices are also softening in addition to iron ore prices, creating downward pressure on domestic and HPG steel ASP.
To see the full analysis report. Please contact to my email: Hong.nguyen@vcsc.com
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