The entire textile industry value chain has been badly affected by the coronavirus pandemic and STK is no exception. In our opinion, Q2 will be worse as many large markets continue to fight the pandemic. The economic uncertainty brought on by the pandemic could lead to lower spending on some types of goods, including apparels, which would indirectly affect yarn demand. However, we believe that STK can somewhat limit the impact of this trend thanks to: (1) its production shift towards highly profitable recycled yarn, (2) the relocation of textile production from China to Vietnam and other Asian countries, and (3) the increasing trend of using domestically made yarn by Vietnamese garment companies to take advantage of the EVFTA tariff incentives.
We estimate STK’s fair value at VND21,400/share. Combined with a cash dividend of VND1,500/share in the next 12 months, the expected return is 30% compared to the closing price on 12 May 2020. We maintain our Buy recommendation. The target price has been slightly adjusted by 7% compared from our 2020 Strategy report to reflect the impact of Covid-19.
Q1 20 key highlights
- Q1 revenue increased slightly by 2% yoy, reaching VND617bn.
- Sales volume grew by 11% yoy and the average selling price decreased by 8.3% yoy.
- With the supply of yarn and fabrics from China to Vietnam plummeting due to the coronavirus pandemic, STK actively reduced its selling prices to stimulate demand and expand market share. According to the company, domestic and international customers have increased their orders from STK to make up for the supply shortage from China. However, in the second half of March, customers have cancelled or postponed orders as many other countries began deploying pandemic measures. According to the company, if it weren't for the pandemic, Q1 revenue would have increased by 10% yoy.
- PBT was VND58bn, down slightly by 2.7% yoy, but PAT was flat at VND52bn thanks to lower corporate income tax expenses.
- We expect demand for to decline in Q2 and recover gradually in tH2 20.
- Revenue in 2020 could reach VND1,966bn, down 12% yoy.
- At present, most of China's yarn factories have fully resumed production. Competition from China in the remaining months of the year, together with the decline in oil prices, may cause the price of virgin yarn to plummet by 11%. For recycled yarn, the selling price for the whole year may increase slightly by 3% due to the eco-friendly fashion trend in large brands and the chip prices for making recycled yarn not being affected by oil price. We forecast recycled yarn to contribute about 41% of total revenue, higher than 35% in 2019. The gross profit margin, therefore, will increase to 16.6% (2019: 15.9%), despite the average selling price falling by 3.6%.
- In 2020, the company will recruit a German expert to the position of Deputy General Director in charge of technology and product research and development, and two other experts in market development and manufacturing. Together with the costs of pandemic prevention and legal advice related to the anti-dumping lawsuit, the cost of administration in 2020 could increase by 12% yoy. In general, 2020 PAT is estimated at VND182bn, down 15% yoy, equivalent to an EPS of VND2,570/share.