Viet-Duc Welding Electrode Joint Stock Company

Transcription

1 Industry: Welding electrode Company visit notes November 9, 2016 Viet-Duc Welding Electrode Joint Stock Company Ticker: QHD Reuters: QHD.HNBloomberg: QHD VN Benefitsfrom the policy on tightening transport weight limit areno longer considerable Recommendation NEUTRAL Target price (VND) Market price (9/11/2016) Expected profit SHARES INFORMATION Trading exchange HOSE 52-week price range 26,730-67,500 Market cap 249 Outstanding shares 5,524, day average volume 27,673 % foreign owned 1.04% Foreign room 49% Dividend per share 30% Beta 0.56 We had an appointment with Viet-Duc Welding Electrode JSC., and the notes we made on the company are as follows: Room from tightening transport weight limit is enough to maintain current revenue but insufficient to make great contribution to the growth. The policy on tightening road and sea transport weight limit triggered a growing demand in The policy on tightening transport weight limit in 2014 boosted demand fornew construction of water transport (river ships, barges) and trucks, stimulating a positive growth of welding electrode consumption. According to Vietnam register, more than 4,200 modes of inland water transport have been newly built in Vietnam since 2015, mostly freight transport, up 173% against In addition, truck sales volume of VAMA members in 2015advanced 72% from Since new construction of road and water transport surged, QHD achieved positive growth in 2015 while sales volume of N46 welding electrode used for shipbuilding rose 74% and welding wire mostly used for automotive, motorcycle and mechanical industries soared by 26%. PRICE MOVEMENTS YTD 1T 3T 6T QHD 24.5% -27.4% -21.1% -10.0% HNX-index 1.6% -4.7% 0.3% 1.1% 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Sales volume of QHD's major products (tons) 6,643 3,827 3,855 4,440 2,278 2,862 que N46 que J Dây hàn (tấn) N46 welding electrode J welding electrode Welding wire (ton) Sources: QHD, compiled by BVSC Analyst Trang Che (84 4) ext202 chethimaitrang@baoviet.com.vn Shipbuilders account for roughly 50% of QHD s sales volume. Currently, major products of QHD are N46 welding electrode, J welding electrode and welding wire. Accordingly, N46 is mostly used for shipbuilding industry including ships and barges; J welding electrode is used for cilval construction and welding wire for automotive, motorcycle and mechanic industries.

2 Consumption structure in 2015 by sales volume 6% 19% 45% 30% N46 welding electrode J welding electrode Welding wire Other welding electrodes Que hàn N46 Que hàn J Dây hàn Que hàn khác Sources: QHD, compiled by BVSC Profit margin has recorded a positive growth since 2011 thanks to decreasing material cost. Material cost accounts for roughly 70%-80% of QHD s production costs, in which core materials include steel core wire, chemical composition for the coating such as ferromanganese, mica, rutile,fluorite, etc. Accordingly, cost of steel makes up 35% of QHD s production cost. Selling prices of QHD s products often undergo slower changes than material prices do.as a result, as steel prices have continuously fell since 2011, QHD s profit margin continuouslyincreased from 8% in 2011 to 20% in The company will benefit from this slow adjustment in case of a decrease in steel prices. However, growing steel prices will reduce QHD s profit margin as selling price will experience a slower increase than input prices of steel (QHD suffered a loss of profit margin in while steel prices rose) Correlation between steel prices and profit margin of QHD % 20% 15% 10% 5% 0% Giá thép (USD/tấn - cột trái) Steel prices (USD/ton left column) Biên lợi nhuận gộp (%- cột phải) Gross profit margin (% right column) Sources: QHD, compiled by Along with an increase of profit margin, benefits from the policy on tightening 2

3 transport weight limit boosted sales volume in 2014 and 2015 by 15% and 39% respectively. In addition, since profit margin of industrial products is much better than consumer products, raising the proportion of industrial products in total consumption structure in helped profit in 2014 and 2015 reach an average growth of 90% compared to the previous year. Sales volume and net profit ,000 32,389 30,000 25,000 Lợi Profit nhuận after sau tax thuế (billion (tỷ VNĐ) VND) Sản Sales lượng volume (tấn) (tons) 20,000 15,000 10,000 5,000 4, ,312 5, , , Sources: QHD, compile by BVSC Outlook for the upcoming years The speed of sales volume growth is decreasing in Policy on tightening road transport weight hasboosted the growth of road and sea transport since However, we recognize that the impacts of this policy are being reduced as sales volume growth of truck is declining. In addition, according to QHD, after 2 years of surge in , sales volume in 2016 may be equal to that in Truck sales volume growth M/ % 70% 60% 50% 40% 30% 20% 10% 0% 72% 42% 31% 16% T/2016 9M/2016 Sources: VAMA, compiled by BVSC 3

4 New production line in Hai Duong may not generate profit in Currently, QHD is operating 2 factories of welding electrode and Co2 welding wire and building the third production line of flux-cored arc welding wire: - Welding electrode factory in Thuong Tin, Hanoi has a capacity of 14,000 tons/year (1-shift operation). The factory can operate at full capacity of 42,000 tons/year in case of 3-shift operation. The factory s production line has beensynchronically imported from the GDR since the 70s.Although the factory has come into operation for 40 years, this production line is believed to be more effective than new welding electrode machinery imported from China at the present time as the company annually spends about VND1 billion/year on regularrepair and maintenance. - CO2 welding wire factory generating a capacity of 6,000 tons/year in Hai Duong has come into operation since 2010 and synchronically imported the production line from Italia. - QHD is building the third factory located in Hai Duong to produce fluxcored welding wire at a capacity of 1,200-1,500 tons/year with a total investment amount of VND30 billion, using total owner s equity for investment. Welds using this premium welding product are stronger and tougher than using other types if welding materials (welding electrode or CO2 welding wire). After the factory construction is finished, QHD will be the first company in Vietnam to produce this product (all flux-cored welding wire in Vietnam is imported, mostly from China) This production line of flux-cored welding wire could be operated in late November 2016 and increase QHD s revenue in If the new product is accepted by the market, it would generate a positive profit margin.at a production cost of VND26-27 million/ton and an average market price of VND32 million/ton, profit margin is 15%. However, in 2017, QHD might sell products at production cost to create the market. Moreover, in the first operation year, average fixed cost per unit (depreciation, labor cost, etc.) is enormous since sales volume could be small. Therefore, from our view, QHD should not expect profit contribution from this production line in Long-term risk from import tax on welding materials reducing from 20%- 30% to 0%. From January 1, 2015, import tax imposed on welding materials fell from 20%-30% to 0%. According to QHD, this policy only puts risks on welding wire consumption, as QHD s current production cost of welding electrodes is competitive with that of Chinese products thanks to low depreciation cost and good prices of some domestic materials. Meanwhile, as sales volume of welding wire remains modest, fixed production cost of welding wire is still higher than that of imported products. However, in 2015 and 9M/2016, imported products have yet to deeply penetrated into domestic market since internal enterprises are well creating market and building a barrier of discount policy for sale agents to hinder competition from imported 4

5 products.however, in the long term, we believe thatthe risk of competition with imported products from which safeguard barriers were lifted still exists, reducing profit margin of QHD s welding wire. Steel prices may rise, narrowing profit margin. Profit growth of QHD has mostly attributable to the continuous reduction of steel prices since 2011 due to an ailing global economy. However, we acknowledge that China is cutting coal production to reduce environmental pollution with a target of cutting 1 billion tons of coal per year in the next 3-5 years. This target raised the price of coke one of two major materials to produce steel using blast furnace from US$90/ton in late June 2016 to the current price of US$270/ton, increasing steel prices. Although coal is unlikely to maintain its current prices, the plan of cutting coal production in the next3-5 years may boost coal prices, which increases steel prices in the following years and can affect QHD s profit margin. QHD s market share decreases due to many new factories in the sector, but the company remains leading manufacturer of industrial welding materials QHD was formerly known as a Welding electrode factory established in 1967 under the Ministry of Heavy Industries and operated as the first manufacturer of welding materials in Vietnam. Before 1993, there were only 2 welding material factories and QHD accounted for for 50%-60% of the market share. However, a number of enterprises entered the industry, leading to a fiercer competition and reducing QHD s market share. Currently, QHD is occupying 15% share of welding material market in Vietnam. However, the company remains the leading manufacturer of industrial welding materials. In welding materials industry, using technology to mix flux is the hardest stage of producing welding materials with durable and tough welds. Thanks to its 40-year experience in producing welding electrodes coatings and a team of chemical engineers well trained by Germany experts, QHD is one of the few companies manufacturingself-produce coatings. QHD s industrial products(n46 welding electrode, welding wire, etc.) have been granted certificate of welding materials by Vietnam Register and international certificatesby Germany, Japan, U.K., U.S., Sweden and Russia of welding material quality which were achieved by only a few companies. QHD s N46 welding electrode (making up 55% of the company s welding electrode sales volume) has always been highly rated and widely used for current industries.in addition, the machines and equipment imported from developed countries (Germany, Italy) also bring advantages for QHD compared to domestic welding electrode producers using machines imported from China. Raw materials are mostly imported but incur no foreign exchange risk and high inventory turnover ratio reduces material price fluctuations. Most of QHD s raw materials are imported (mainly from China) due to no domestic products. Since these materials are not directly imported by QHD but through local suppliers and are traded in VND, the companyruns no foreign 5

6 exchange risk. Also, normally, QHD usually reserves raw materials and finished goodsin less than one month, reducingthe risk of strong material price fluctuation. All debts are short-term debts with prudent policy on making provision for risks. QHD has no long-term debts as all debts are short-term debts to satisfy demand for working capital. In addition, QHD s policy on making provision for risks is relatively prudent. The company will make full provision for receivables which are 6 month overdue. Consumption risk incurs mostly in large distributers. Roughly 80% of QHD s products areallocatedby 9 major distributers having long partnership with QHD in decades. This dependence may trigger risk in sales volume, revenue and profit if QHD loses 1 of them. Recommendation QHD is a leading manufacturer of industrial welding materials. With benefits from policy on tightening road transport weight limit, N46 welding electrode and welding wire produced by QHD recorded a positive growth in The Government in recent years has showed orientation towards developinginland waterways, reducing road transport to avoid traffic congestion and reducing cost of road repairs caused by overloading by implementing policies on tightening road transport weight limit(2014), operating a number of new shipping routessuch as North-South coastal shipping route, Hai Phong - Viet Tri route, Ha Long Mong Cai route, separating the State management function with the task of maintenance service and preparing for models of maintenance management tendering to improve maintenance efficiency and quality of transport routes. However, these policies showed clear efficiency in as the volume of newly-built inland water transport soared by 173% in 2015, increasing sales volume of QHD by 39% in In 2016, the growth of sales volume slowed down and QHD s 2016 profit is forecast to be equal to 2015 profit (VND32 billion of profit after tax). In 2017, since the newly-operated project of flux-cored arc welding wire may not generate profit, the impact of policy on tightening road transport weight limit is less significant, and steel prices may climb, we believe that QHD is unlikely to maintain 2016 profit. Given the market price as at 07 November 2016, its PE forward 2016 is 7.7x. With a prospect of few significant changes for Q4/2016 and 2017,this PE forward, from our view, isappropriate for QHD share. We, therefore,rate NEUTRAL on the company s share. 6

7 DISCLAIMER I, analyst Trang Che, confirm that I am totally honest and have no personal motivation in making this report. All information in this report has been verified carefully and is deemed to be the most reliable; however, I shall take no responsibilities with regard to the accuracy and completeness of the information provided herein. Viewpoints, comments and assessments in this report are of my personal opinions with no purpose of advising the readers to buy, sell or hold any securities. This report is only for the purpose of providing information; readers should only use this analysis report as a source of reference. Bao Viet Securities Joint-stock Company (BVSC) and I shall take no responsibilities to investors as well as subjects mentioned in this report for losses incurring during investments or incorrect information about the enterprise. This report is an asset of Bao Viet Securities Joint-stock Company. Therefore, no part of this report may be (i) copied or duplicated in any form by any mean or (ii) redistributed without the prior consent of Bao Viet Securities Joint-stock Company. CONTACT Research and Investment Advisory Department - Bao Viet Securities Joint-stock Company Equity Research Macro & Market Research Luong Luu Deputy Head of Research luuvanluong@baoviet.com.vn Phuong Le Deputy Head of Research ledangphuong@baoviet.com.vn Binh Nguyen Deputy Head of Research nguyenxuanbinh@baoviet.com.vn Ha Nguyen Banking, Insurance nguyenthuha@baoviet.com.vn Yen Nguyen Consumer goods nguyenthihaiyenb@baoviet.com.vn Thang Bach Chief economist bachngocthang@baoviet.com.vn Trang Che Fertilizer, Steel, Electricity chethimaitrang@baoviet.com.vn Khanh Le Oil & Gas leduykhanh@baoviet.com.vn Yen Tran Economist tranhaiyen@baoviet.com.vn Trang Phan Natural Rubber, Sugar phanthuytrang@baoviet.com.vn Ngoc Nguyen Real Estate nguyenchihongngoc@baoviet.com.vn Anh Tran Market strategist tranducanh@baoviet.com.vn Thao Dinh Port & Logistics dinhthithuthao@baoviet.com.vn Phu Truong Automobiles & Parts truongsyphu@baoviet.com.vn Bach Tran Technical Analyst tranxuanbach@baoviet.com.vn Dung Nguyen Information Technology nguyentiendung@baoviet.com.vn Hang Ha Clothing & Accessories hathithuhang@baoviet.com.vn Hieu Duong Building materials duongduchieu@baoviet.com.vn Hao Thai Water Infrastructure ngokim.thanh@baoviet.com.vn 7

8 BaoViet Securities Joint Stock Company Hanoi Headquarter: No 8 Le Thai To, HoanKiem, Hanoi Ho Chi Minh Branch: 8 Floor, No 233 Dong Khoi, Dist 1, HCM city Tel: (84 4) Tel: (84 8)