Equity Analysis /

Vinh Hoan Corporation: Q1 19 profit margin improves on favourable short-term factors

    Tam Pham
    Tam Pham

    Fishery, Insurance

    Rong Viet
    3 June 2019
    Published by

    Q1 highlights: Net revenue was flat (-0.8% yoy) due to weak demand in the US and China, while Van Duc Tien Giang's results are no longer consolidated. Gross profit margins surged to 24% (14% in Q1 18) as many contracts were finalised at the end of 2018 at high selling prices, while raw material prices plummeted during the period. Combined with profit from affiliates (Van Duc Tien Giang), net income reached VND307bn, three times higher than in Q1 18. VHC has completed 18% of its revenue plan and 24% of its PAT plan for 2019.

    2019: Completing supply chain, expanding market base

    VHC will adjust selling prices downwards to trigger a recovery in sales in markets that declined in 2018 – to grow in China and to open new markets in the Middle East and Latin America.

    In China, VHC will promote retail sales of value-added products via Alibaba’s e-commerce channel, realising the B2C sales strategy set out in 2017.

    We forecast VHC's net sales to reach VND10,086bn, a slight increase of 8.8% yoy due to lower selling price adjustments, while production will increase sharply by 20%. Material fish prices will also decrease with industry production forecast to increase by 6.6% yoy. Gross profit margins will reach 19%, lower than 22% in 2018. Net income will be VND1,273bn (-12% yoy) and EPS VND13,448 (-12% yoy).

    Valuation and recommendation

    Gross profit margins in the remaining three quarters of 2019 are unlikely to remain as high as in 2018 and in Q1 19. However, the ability to expand export markets as well as volumes will compensate for the decline in prices. 

    In the long term, the fingerling project will help VHC solve its material fish shortage problem, improve product quality and reduce cost prices. In addition, distribution via Alibaba will help VHC cut costs and directly approach high-income customers who have great demand for value-added products. Differences in customer groups and distribution channels will create conditions for the company to maintain its competitive advantages, while the whole industry is boosting exports to China.

    We value VHC shares at VND112,500, 23% higher than the closing price on May 31, 2019 and recommend Buy. Our target price is 10% lower than in December 2018 due to short-term tensions in some major markets.