- Construction rock is an essential material in public infrastructure and residential projects
- With demand for construction rock served locally, we provide an in-depth look – we are positive on the industry overall
- We focus on two notable stocks: Hoa An JSC (HSX: DHA) and Binh Duong Minerals & Construction JSC (HSX: KSB).
Construction rock is an essential material in public infrastructure and residential projects, with the products mainly derived from magma, sedimentary and metamorphic rocks. Demand for construction rock is served locally due to high transportation costs and large local reserves. There are four main factors that determine the selling price of the products: supply and demand, mine location, stone quality and colour. In this 18-page report, we provide an in-depth look at this basic materials sector (we are positive on the sector) with a special focus on two notable stocks in the industry – Hoa An JSC (HSX: DHA) and Binh Duong Minerals & Construction JSC (HSX: KSB).
Demand for houses in the Southwest region continues to be healthy. The demand for construction rocks in the Southwest region has been largely served by the Southeast mines in the past few years. Among the 13 provinces in the Mekong Delta region (or Southwest region), only An Giang and Kien Giang have rock quarries. Although over the past 10 years the number of newly built houses and the number of square meters of built houses in the Mekong Delta region have always been higher than in the Southeast region, the percentage of households without a home in that region is still the highest in the country. Despite the same starting point of 5.7 per thousand households without their own house in both regions in 2009, this figure decreased to 1.2 per thousand in the Southeast region, while the number was 4.2 per thousand in the Mekong Delta region at the end of 2019. For current quarries of listed enterprises, mine clusters near Dong Nai river such as Thanh Phu, Thien Tan, Tan My may have an advantage of delivering from the Southeast to the West.
Public investment shows signs of rising again. Although the transportation demand between the two areas of Ho Chi Minh City and the Southwest region is high, only 40km of expressways (Ho Chi Minh City-Trung Luong) has been built in the South out of a total 1,000km of highways in Vietnam. Understanding the necessity of infrastructure in the South, by the end of 2019, the government had closely instructed securing capital for the Trung Luong-My Thuan Expressway project. For highway projects to the Southwest region, rock quarries of VLB, CTI, DHA and KSB near the Dong Nai river area could deliver to these projects by waterway. While mine clusters in the Tan Cang area would be favoured once construction starts on the Long Thanh Airport project. In addition, these mines could provide rocks once construction begins on the Dau Giay-Phan Thiet highway, although the location is not as favourable as the Soklu mines of VLB or Xuan Hoa mine of CTI.
Replacing Tan Dong Hiep and Nui Nho quarries. According to our estimates, Tan Dong Hiep and Nui Nho accounts for about 10% market share of construction rocks in the Southern region. However, after two successful renewals, the two quarries have officially stopped mining since the end of 2019. Currently, mining enterprises in these two areas such as KSB, NNC and C32 can only collect the leftover during the process of restoration of the environment. As a result, the supply from these two quarries will decrease in 2020 and 2021 and will completely disappear afterwards. Based on the quality of rock and location, the Tan Cang mine cluster in Bien Hoa, Dong Nai emerges as the main candidate to replace the two quarries. A number of listed companies own quarries in this cluster such as VLB, DHA, CTI, DND and DGT.
Risks: Because the rock industry correlates with local construction activities, this industry is subject to the business cycle. However, in addition to common risks like other industries, the rock industry is subject to strict supervision from state agencies with regulations and fees. According to financial statements from companies in the industry, fees related to the mining sector account for an average of 14% of revenue. In particular, the three main types of fee in the field of mining rock are the natural resource consumption tax, the environmental protection fees and royalties. The natural and resource consumption taxes are often the largest cost for companies in this industry. The resource tax rate in the calculation structure also tends to increase in the long term and may increase to a maximum of 15% from the current 10% under the current Law on Resources Tax. The cost of granting mining rights (royalties) has just been added by the state since 2013. In general, taxes and fees of the state tend to increase to supplement the State Budget's revenue and to avoid wasteful of non-renewable resources.
In addition, local authorities scrutinise the process of obtaining new quarrying permits, extension permits or deeper mining permits. Presently, the process of applying for permits takes more time as environmental requirements are a big concern. To mine a new quarry, companies would need to join an auction. Meanwhile the exploration of reserves can take several years and in case the rock quality or reserves are not as expected, this would cause cost companies a fortune. On the other hand, there is currently no product that can replace rocks in an economical way. Although developed countries have used steel slag and cast-iron slag as an alternative, this trend in Vietnam is still underdeveloped and more research is needed to put it into practice.
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