Tellimer

Song Hong Garment: Rebound from a low base; high capacity expansion from 2022

  • Business recovers in 2021; increasing material prices and freight are short-term problems that drag down profit margins
  • New factory Song Hong 10 will be completed in November 2021 and will operate at full capacity from May 2022
  • Our one-year target price is VND64,200/share. We have a Buy on MSH

Business recovers in 2021. Increasing material prices and freight are short-term problems that drag down profit margins.

New factory Song Hong 10 will be completed in November 2021 and will operate at full capacity from May 2022, raising total capacity by 20%. Song Hong 10 will focus on complex items, of which 50-60% are FOB orders.

Extraordinary income from recovering part of bad debt of New York & Company.

At the current market price, PER forward of 2021 and 2022 are 7.6x and 6.7x, respectively, lower than PER of 8.6x in 2020. Our one-year target price is VND64,200/share. With an expected dividend of VND3,500/share, the total return is 28% compared to the closing price of 11 May, 2021. We have a Buy on MSH.

Q1 21 results

The company recorded revenue of VND945bn (+1% yoy) and NPAT of VND92bn (+44% yoy). Gross profit margin improved sharply from 17.1% in Q1 20 to 22.8%. The reason was that the cost of materials for finished goods sold in Q1 21 was lower than in Q1 20, along with the reversal of provisions for inventory devaluation of VND12bn. With this result, the company has completed 22.5% of the revenue plan and 33.8% of the profit guidance.

Forecasts

We project that MSH's revenue and NPAT in 2021 will reach VND4,474bn and VND389bn, respectively, with an increase of 17.3% yoy and 67.6% yoy, based on the assumptions:

  • Garment sales increase by 12% yoy to VND3,709bn with FOB orders accounting for 80% of sales, compared to 73% in 2020 (according to our estimates).

  • The bedding segment grow by 40% yoy, reaching VND700bn.

  • Raw material costs will increase by 20% yoy. The rise was stronger than that of revenue, leading to a decline in gross profit margin to 17.7%, from 19.7% in 2020.

  • Selling expenses will grow by 30.7% yoy due to a sharp increase in freight rates from the last quarter of 2020.

  • General and administrative expenses decline by 57.2% thanks to the reversal of provision for NY&Co. bad debt of VND81bn.

In 2022, revenue and NPAT could reach VND5,810bn and VND516bn, corresponding to an increase of 29.8% yoy and 32.8% yoy, respectively. Gross profit margin is 20% higher than in 2021, as we expect the supply of materials will be less stressful.


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