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Song Hong Garment: Positive 2019 results; gross margins improve to highest level

    Thao Dang
    Thao Dang

    Food & Bev, Textiles

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    Rong Viet
    10 February 2020
    Published byRong Viet

    MSH released its unaudited consolidated 2019 financial statements – the results were positive. Net revenue reached VND4,425bn (+12% yoy) and NPAT-MI reached VND452bn (+ 22% yoy). Gross margin improved by 90bps to 21%, the highest level thanks to: (1) optimising production costs and (2) changing its product mix through the increase of FOB proportion on revenue, which brings a higher profit margin than the CMT method. We estimate that FOB revenue went up by 18% yoy to VND3,248 bn, accounting for 60% of its garment capacity. CMT sales declined by 16% yoy to VND725bn.

    In Q4 19, revenue grew slightly by 1% while NPAT-MI dropped by 3%. Gross profit grew higher than sales growth (+6% yoy) and financial expense recorded a significant decline of 73% yoy, but not enough to offset the increase in SG&A (+38% yoy). SG&A expenses to sales grew by 324bps to 12.1% from 8.8% over the same period last year, eroding its net income.

    For 2020, management expects that the FOB segment will contribute US$165-170mn in revenue (+18-21% yoy) thanks to the contribution of jacket orders from its new customer – Walmart (producing about 6mn products). Based on that, its FOB method accounts for 70% of total capacity. The delivery time is expected from April to August 2020, so we expect its business results from Q2 onwards may record a significant growth. Regarding its bedding segment, which delivers the highest gross margin (36%-40%), the firm also plans to enhance its export markets to Asia. Accordingly, MSH will internationalise its packaging and quality to penetrate into new markets (the firm already exported its bedding products to Japan and Korea). The firm will launch a new bedding collection in March 2020, and its sales is expected to increase by 1.5 times compared to the same period last year.

    Regarding SH10 factory, the factory is expected to be put into operation by the end of 2020, as a part of land clearance hasn’t finished yet. This is three quarters later than schedule. We forecast that SH10 will run at 50% of capacity in 2021 and takes about 3 years to reach the breakeven point.

    Generally, in the short run, the firm’s main risk is the delay in delivery from fabric material suppliers in China under the negative impact of the coronavirus (nCoV) epidemic, as China is still its main material suppliers. It is likely that the firm has to increase its production and wage costs in order to meet its delivery for fashion brands on time. However, this is still a good fundamental firm with high cash dividends maintained over the years and its stock price has adjusted quite sharply since the peak of 2019 (mainly due to the impact of the US-China trade war and the information that its large shareholder, FPTS, registered to sell shares). In our view, investors can consider buying this stock when there's some positive developments to the nCoV epidemic. For 2020, we still maintain our Buy recommendation for MSH with a target price of VND60,000/share.