Equity Analysis /
Vietnam

Vietnam Container Shipping: Q1 19 results – Overcapacity issues drag on operational efficiency

    Tung Do
    Tung Do

    Logistics, Aviation

    Rong Viet
    24 May 2019
    Published by

    VSC’s Q1 19 NPAT fell by 37% yoy. Operational efficiency was negatively affected by overcapacity issues, resulting in berth jams and leading to increased usage of other nearby ports. At the same time, the recognition of non-recurring expenses was also a significant factor affecting the company's profit. However, the sharp fall in VSC’s share price may offer short-term opportunities. We estimate the company's fair value at VND42,000, offering a total return of 14% including a VND1,500 per share cash dividend. We reiterate our Accumulate recommendation.

    By end-1Q 19, VSC completed 28% and 20% of its 2019 revenue and EBT target, respectively.

    Total output (including indirect volume from other ports) reached 280K TEU (+10% yoy)

    • At Green port: The throughput was 100K TEU. The average vessel calls per week decreased to five compared with seven in the same period last year.
    • At VIP Green port (VGR): The throughput reached 180k TEU. The number of calls at this port was almost unchanged at an average of 9-10 times per week. Revenue from Evergreen (client and also a shareholder in VGR) increased slightly by 7% yoy.

    Consolidated gross profit margins fell sharply due to increased indirect volume. Volume received indirectly through other ports accounted for c30% of the total volume in Q1. We estimate that the number of container trans-shipments increased by c15% yoy.

    VGR's gross profit margins also decreased significantly to 18% from 27% in the same period last year. Container yard (CY) jam issues continued to affect VGR's operational efficiency. This issue required higher depot usage to reduce the number of containers in the CY. As a result, outside services expenses related to depot services increased sharply, up 33% yoy, reaching VND110bn, and accounting for 73% of COGS.

    Other loss is not likely to recur. During the early phase of operation, VSC offered trade discounts to clients in order to boost the box volume at GLC depot and GIC depot (subsidiaries of VSC). When the 2018 conditional volume was met, VSC recorded the cost earlier this year. The company shared that these costs will not re-occur thanks to the high utilisation rate of these depots at the moment.

    VSC is trading at 2019 PE of 7.2x and EV/EBITDA of 3.7x. We estimate fair value at VND42,000 based on the PE and EV/EBITDA methods with equal weight. We apply a target PE of 5x, lower than the average 8x PE in the past three years and lower than 6.5x in the previous AP to reflect the negative earnings growth in 2019. For EV/EBITDA, we apply a target multiple of 5x, a premium to the median of port operators in Vietnam, thanks to VSC’s higher EBITDA growth rate.