Q2 21 NPAT reached a new record level due to both internal and external factors
Revenue and NPAT increased by 72% yoy and 254% yoy, respectively, owing to increasing selling prices and additional HRC capacity from Dung Quat.
Finished construction steel and HRC prices increased by 57% and 132% yoy, respectively. Material prices rose at a slower pace, thus, GPM expanded to 32.7% from 18.1% in Q2 20.
Finished construction steel, HRC and steel pipe volumes came in at 983,000 tons (+1% yoy), 667,000 tons, and 191,000 tons (-14% yoy), respectively.
H2 21 outlook: Difficulties in the short term, brighter prospects ahead
The HRC segment's gross profit is expected to increase by 45% in the H2 compared with H1 due to increasing selling price and opportunities in foreign markets. This would translate into a gross margin of 45-50%. The demand for HRC from downstream segments is robust as exporting activities to the EU and North America are likely to be positive until 2022.
The demand for construction steel is forecast to recover in Q4. Thus, selling volume can increase from 0.96mn tons in Q3 to 1.1mn tons in Q4. In the long term, public investments will be a significant supportive factor for demand.
Finished construction steel, HRC and steel pipe volumes are expected to come in at 2.1mn tons (+12.3% yoy), 1.4 mn tons (+98% yoy), and 330,000 tons (-30% yoy), respectively in H2.
We revise down Q3 NPAT from VND8,400bn (US$365mn) to VND8,250bn (US$359mn) to reflect the rising production costs. Besides, we adjust our Q4 NPAT forecast from VND7,600bn (US$330mn) to VND9,700bn (US$422mn). Hence, revenue and NPAT in H2 is expected to reach VND76,800bn (US$3.34bn) and VND17,900bn (US$778mn), increasing by 49% and 112% yoy, respectively. 2021 revenue and NPAT is expected at VND143,100bn (US$6.22bn) and VND34,650bn (US$1.51bn), respectively.
Valuation and recommendation
We revise up our forecasts for NPAT in H2 2021 and 2022 as the steel segment's prospects improve. Decarbonisation in the EU and China is changing the steel industry significantly and boosting steel production costs.
With less strict environmental requirements, we believe HPG can benefit from this trend until H1 2023. The large differences between HRC prices in Vietnam and other regions, such as the US and Europe, are creating opportunities for exporting flat steel with higher profit margins. We expect the company to seize these opportunities from Q4 21, leading to higher NPAT.
In the construction steel segment, HPG faces short-term difficulties caused by the increasing production costs and weak domestic demand in Q3 21. However, the company will still see high growth due to steel demand recovery post-pandemic and the large investments in infrastructure projects.
Using FCFF and PER methods, we come up with a fair value of VND65,700 per share (+11% from our TP in the steel industry report). Together with a cash dividend in the next 12 months of VND1,000/share, the total return is 31%, based on the closing price as of 24 September, 2021. Hence, we reiterate our Buy recommendation.