Pangasius Sector – 10M2020 Review and 2021 Prospects

Prolonged sluggish exports with tumbling prices while new Chinese custom inspections are a short-term headwind

After ten months of 2020, pangasius exports came in at USD 1.21 bn, -26% YoY. Of which, volume and price dropped by 9.2% YoY and 17% YoY, respectively, according to the Ministry of Industry and Trade (MoIT). Although markets quickly resumed when governments lifted quarantine orders, export prices have not had a chance to rise as the worry about the possible pandemic outbreak recurrence discouraged buyers to place large orders. Export prices have hit a 5-year low at the end of October.

NKG – Earnings to benefit from favorable material price and the strong demand from the EU in 4Q

NKG’s results are expected to be positive in 4Q owing to the high selling volume and gross margin. NKG will run its factories at full capacity in the next four months due to large export orders to the EU. Therefore, sales will be stable at roughly 200,000 tons in 4Q, which is similar to 3Q. Besides, HRC prices increased continuously to roughly USD 630/ton, thus, NKG’s gross margin will be supported and can vary in a range of 6.5%-7.2% in 4Q. We believe the company’s net income is likely to exceed its target of VND 200 billion. Currently, NKG is trading at VND 14,150, equivalent to a P/E of 11.6x for 2020 and an EPS of VND 1,225.

NTP – Making most out of the situation

NTP has seen contrasting impacts from COVID-19. On the one hand, weak construction demand will cause it to miss out on its 2020’s volume target very likely. It was reported that NTP estimated its 2020 sale volume to hover between 90,000 to 100,000 tons, less than their 104,000-ton target. Its 2020 revenue is going to be 10% lower YoY. On the other hand, PVC reached its historical bottom at USD 740 per ton mid-year (figure 1), 21% lower than the early-2020 level, which gave NTP opportunities to reduce production costs. Indeed, the company has benefited from purchasing a considerable amount of PVC resin, whose price has increased more than 50% since then.

US: small business confidence.

In 2020, the number of small businesses reached almost 32 million, making up nearly 99 percent of US businesses. Small enterprises play an extremely significant role in the US economy and are vital to job creation. There are currently 61 million small business employees in the country, which make close to 42% of the workforce.

HCMC condominium segment in November : Prices surged amid continuous supply shortage

In November without new condo projects launched in HCMC led to price appreciation in existing projects. After two consecutive months of no new projects being launched, we  do not expect any big surprise in December, especially when the Covid-19 has returned. The unwelcomed return of Covid-19 could be the negative news for the market. Despite of that, from our point of view, the impact would not be severe for the mid and long-term period given the success of the Government in containing two previous Covid waves. A positive catalyst would be the support from domestic banks to help homebuyers by reducing housing loan interest rates by 1.8 percentage points. Therefore, the demand in the primary market would be maintained regardless of the recent price surge.

Rice industry update - Falling supply led to higher prices

The short-term decline in supply from Vietnam and Thailand is the main reason that Vietnam’s rice price went up. However, it is likely that Thailand and India's exports volume will grow in 2021, so that Vietnamese rice price may decrease slightly. The challenge comes from the tightening of the rice quality by the Philippines and the opportunity to export to new markets requiring high quality such as Europe, Australia or South Korea. This could  motivate farmers and companies to switch to “professional” production in order to meet the higher standards. Currently, Loc Troi, Vinaseed and Trung An are the "professional" rice producers, so they are more likely to take advantage of these new opportunities.

Seaport Industry Update

Key container terminal zones have regained a positive growth rate in Q3-2020, in line with the gradual improvements in trading activities since June (figures 1 and 3). Accumulated container volume through seaports in 10M-2020 saw a 6% YoY rise, reaching nearly 15mn TEU. Out of key container terminal zones, container throughput volume at Vung Tau terminals has witnessed the most robust rebound in terms of growth rate, continuing to enjoy the high double-digit. This is due to the fact that Vung Tau is home to deep-sea ports that serve many direct US-bound (both West Coast and East Coast) services, coupled with the surge in export value to the US in 2020. In fact, Vietnam is now ranked second among countries exporting to the US, only behind China, increasing its share in terms of recorded shipments to 5.5% in 2020 (figure 4). With this solid momentum, Vung Tau will soon surpass Hai Phong and become the second-most important container terminal zone in Vietnam.

Potential impact of the RCEP on Vietnam may be limited

The signing of the Regional Comprehensive Economic Partnership (RCEP) agreement in mid-Nov of this year has attracted much attention, especially after the US withdrawal from its rival Asia-Pacific trade pact (the Trans-Pacific Partnership (TPP)). After over eight years with 31 rounds of negotiation, the final agreement has been reached without the participant of India.

BMP – Still improving, even though marginally

What surprised us the most was probably that BMP's sales volume in 9M2020 was still growing year-on-year (+ 5% YoY), despite the impact of COVID-19 on the entire real estate-related sectors. In addition, the 25% growth in NPAT was mainly due to the drop in PVC resin prices. As a result, the highest performing 9M since 2017 is the driving force behind the stock price. However, we believe now that PVC prices have completely recovered and now exceeded the pre-2020 level, BMP’s gross margin will gradually return to normal levels from 22- 24%. It might even reduce more if PVC prices remain at this level throughout the quarter.

Renewable energy potential

La Nina is coming back since May 2020 and is set to peak in 2021 and 2022. According to NCEP, the probability that La Nina happens from now to April 2021 is over 60%, higher compared to El Nino and Neutral phenomena. Subsequent to the severe weather in 2019 and early 2020 with droughts, the hydropower segment suffered a decline in volume and revenue terms (Figure 1). The coming back of La Nina is going to benefit hydropower plants in the near term.

VCB – Impact of a potential capital issuance

Vietcombank was approved to make a private placement in 2020-2021 of up to 6.5% of chartered capital to raise funds for future growth and to meet capital requirement (CAR Basel II). Prior to this, Vietcombank reported a CAR of 10.1% in 6M2020, which is higher than the average level of SOBs but still lower than that of private banks. VCB’s CAR at 6M2020 was slightly higher than that at the end of 2019, partially due to a reduction of risk-weighted assets for credit risk. If it had not been the pandemic, potentially causing low loans and credit expansion, VCB would have been only able to sustain a CAR above minimum requirement until the end of 2020 based on the planned credit and asset growth. We think that although raising capital is not urgent as the current CAR is expected to be enough for another 1.5 year of credit expansion, a private placement is necessary for the bank to have a stronger capital buffer. However, the increase in shareholders capital, or deleveraging, could put pressure on ROE, which is one of the benchmarks for multiple valuation. We expect that earnings growth generated from raising capital (which leads to higher credit expansion limit) could reduce the impact of lowered efficiency. We also consider a raise in ROA due to a shift in the type of assets or change in risk appetite to be options VCB could use to support its ROE.

HSG updates

Although the outlook for HSG’s business result in FY20-21 is bright in terms of selling volume, increasing competition and downsides risks in HRC price can harm the segment’s profitability. For 1Q/FY20-21, HSG’s gross margin is better than average, although lower than 4Q/FY19-20, as HRC prices still increased in last two month. Besides, its selling volume in 1Q is still good as export volume remains strong, meanwhile, domestic consumption can increase due to the demand to repair houses and factories. We come up with a fair value of VND 16,800 per share, which is based on P/E, with a target multiple of 7.0x, and FCFF methods (exit EV/EBITDA of 6.3x, WACC of 11.9%). We recommend NEUTRAL for this stock in the Intermediate-term.