QNS released its semi-annual audited report for FY 19 with net revenue up 2% yoy and net profit down 7% yoy, reaching VND 4,073bn and VND521bn, respectively. Gross margin increased by 91bps to 27.6% compared with 26.7% over the same period last year. We reiterate our Buy recommendation for QNS at a target price of VND40,500/share.
1. Soy milk segment contributed 49% of net revenue and 79% of gross profit
Net revenue reached VND1,985bn, up 13% yoy mainly due to the recovery of the domestic dairy demand, based on the fact that sales volume increased by 11% yoy. The main contribution to the growth rate still came from two main product lines, namely Calcium Fami and traditional pure Fami products. “Fami Go” products launched last September have not met expectations. The estimated market share is c2% compared with the target of 5%. In the first six months, the average price of sugar and soybean materials decreased by 7% yoy and 14% yoy, respectively. As a result, gross margin improved significantly, increasing 544bps to 45% compared with 39% over the same period last year.
In early June, QNS launched three new product lines including low-sugar calcium Fami, pure low-sugar Fami and new Fami Calcium. In August, it introduced a new product line of pure Fami added high-protein. Management stated that the sales volume of soy milk in July and August continued to maintain positive growth. So far in 8M 19, soymilk revenue is estimated to have grown by 15% yoy, of which sales volume was up by 13% yoy.
2. Sugar segment continues to slow down profitability, contributing c26% of net revenue and 4% of gross profit
Due to unfavourable weather conditions and prolonged droughts in the Gia Lai sugarcane growing area, sugarcane yields and material output declined, leading to a sharp reduction in sugar output over the same period. In 6M 19, net revenue was down by 11% yoy to VND1,046bn. Sugar consumption and selling price dropped by 3% yoy and 8% yoy, respectively. Gross margin plummeted to only 4% compared with 12.7% in the same period last year.
However, since May, sugar prices have shown signs of recovery. At the moment, the price of sugar purchased at the factory is VND12,000/kg compared with VND 10,400/kg in the first four months. The depreciation of the sugar segment is mainly in Q1 and Q2. Thus, it is possible to partly reduce the cost burden in H2 19.
QNS said that its sugar inventory at the end of June was c47,000 tons, of which 6,000tons came from Pho Phong factory (for internal consumption purpose). Therefore, its sales volume in H2 is c41,000 tons (assuming no additional output from the new crop in Q4), with an estimated selling price of VND12,000/kg.
On the other hand, QNS is continuing to implement a RE refinery project with estimated investment of VND900bn. At the end of June, the company disbursed c57% of the investment capital and allocated VND515bn in the construction in progress (CIP). It is expected that the RE sugar factory will officially come into operation, contributing to QNS’s revenue and profit in the new production year 2019/20.
3. Other businesses (beer, mineral water, confectionery, biomass) contributed VND 1,043 bn in revenue, quite flat compared with the same period last year. Gross profit dropped by 12% yoy to VND194bn mainly due to negative effects from biomass segment. In 6M 19, biomass contributed c3% of both revenue and net profit.
4. SG&A expenses rose by 14% yoy, mainly due to the increase in transportation costs (+25yoy), promotion costs (+64% yoy) and salaries costs (+60%yoy).
5. No extraordinary income vs. VND26bn in the same period last year.
6. Corporate income tax rate increased 669bps to 17.6% as the Vinasoy Bac Ninh factory expired its tax incentives.
In the short run, the negative impact of its sugar segment and the sale of shares from management will be risks to consider when investing in this stock. However, looking at the long-term prospects of the business, we still like this stock given its attractive valuation (trailing P/E of 7.5x) compared with its leading position in the soymilk industry. Furthermore, the soymilk segment’s strategy is to reach US$1bn in revenue in the future. For 2019, we reiterate our Buy recommendation for QNS at the target price of VND 40,500/share.