VAM 3Q09 Corporate Earnings Update ( Nov 16, 2009)
Generally the results are good and many companies have achieved 80% of their earnings targets for the year. Sectors which have done well are real estate, construction materials (including plastics, cement) and ports. The property market has warmed up after a lack-luster 1H09 and transactions are being busily reported, especially in Northern Vietnam. The port operators are still enjoying good earnings, with port fees increasing 10-15% this year, due to lack of supply...
The Food & Beverage sector continued to be steady with most companies on track to achieve their full-year earnings targets. Aquaculture exporters reported mixed results, with the industry leaders performing well and smaller players suffering from high cost inventory and lost markets. Pharmaceutical sector is inline although no breakthrough is expected. Auto components also did well but next quarters may be more difficult due to higher material costs.
Banks had a tough quarter as NIM dropped around 20% QoQ amidst increasing competition for funding. Insurance companies are still making losses from core business and furthermore hit by losses from bond investments in the rising yield environment. Shipping companies have done slightly better in 3Q09 compared to 1H09 but the outlook is still rather bleak as shipping rates are expected to improve only toward end 2010.
1. Food, beverage and tobacco
Most companies in this sector have on average reported that they have already met 80% of their FY09 revised earnings targets. Confectionary and dairy companies are the best-performers in the sector with better profitability thanks to seasonal factors, enhanced product-mix strategies, low material costs and incremental sales. Cooking oil manufacturers, contrary to the trend, posted net loss for 3Q09 due to poor forecasts on the downtrend in material prices and lack of pricing power. Extra income from revaluations of certain assets has played major role on the P/L of some companies in 3Q09. There might not be substantial change between 4Q actual earnings and managements’ forecast: dairy product sales may slow down a bit as winter is coming, while confectionary companies may sustain good business as buyers may stock up products for the Lunar New Year (Tet) holidays. Q/Q growth rate in 4Q might not be as strong as one year ago as Tet comes later than usual. We are not predicting a rebound in the short-term for cooking oil firms due to tough competition and high inventory risk.
Aquaculture exporters reported mixed results, with the industry leaders performing well and smaller players suffering from high cost inventory and lost markets. In the first 9 months of 2009, Vietnam exported US$985 million of pangasius products, a 9% decline year-on-year. 3Q09 recorded declining demand in the EU, especially in Spain, Germany, the Netherlands and Poland as a result of negative media publicity relating to Vietnamese pangasius quality. On the other hand, the U.S market (having been a difficult market to enter in the past due to technical and tax barriers) increased its market share from 8.8% to 9.7% of total aquaculture export value in the same period. As a result, companies whose export markets heavily depend on the EU without having substitute markets started to suffer operating loss from high cost inventory and low selling price. The market leaders having a strong reputation, good management, fully integrated value chains, no product quality issues, and market stability still performed well and found no difficulties in achieving their profit target. The aquaculture sector will likely perform better in Q4, the peak season as usual, although concerns of raw material shortages may continue to plague the industry, potentially impacting the processors that are not vertically integrated.
Pharmaceuticals companies released 3Q09 results with relatively good earnings growth although net sales seemed to be similar y-o-y. This year, companies in this sector emphasize on earnings growth by changing their sales mix: high margin products are prioritized while low margin ones are continuously reduced. Up to 3Q09, pharmaceutical companies on average met over 84% of their full year profit target whereas sales reached only 70%. This year, the largest-cap player has changed its accounting policy in recording commission to dealers from selling expense to sales deduction causing net sales to grow modestly y-o-y whereas selling expenses appear to have been cut significantly. Furthermore, several companies also benefited from extraordinary income from asset sales and bad-debt provision reversals. The Government’s stimulus package also helped pharmaceuticals companies start investment in new factories after having been previously delayed for a long time. Their access to low interest bank borrowings will probably save financing costs and improve their bottom-line. In the context of very conservative plans for 2009, we believe that pharmaceutical companies’ business targets are highly achievable.
Through the first 3Q09, companies in the oil and equipment services sector on average fulfilled over 80% of FY09 sales target and have already achieved full year profitability targets with one quarter left to spare. The one drilling service company posted 26.2% sales growth y-o-y while the bottom-line dropped 3.1% y-o-y due to higher corporate tax rate. In fact, we saw a margin squeeze in drilling services this quarter as the current charter rate falls by 30% compared to 1H09. Although drilling demand in Vietnam remains strong in the short and mid-term, the declining global rate inevitably has a negative impact on the local rate as oil contractors’ demand lower prices in correlation with dropping oil prices. Therefore, low earnings in 2H09 are inevitable. For petroleum technical services, the one company in this sector had strong quarterly results with 29% sales growth y-o-y as they did not need to reduce the freight charge for specialized ship services. This company is still in a growing phase which requires significant capital investment, equity and debt financing. According to management, there is unlikely to be a significant jump in Q4 results, thus companies’ earnings for 2009 are expected to exceed their initial targets by 10%.
Large-cap companies posted good results in 3Q09, having so far achieved 80% and 83% of FY09 sales and profit targets, respectively. Specifically, some corporate earnings were even 2-3 times higher than initial targets due to overly conservative management forecasts. In Q3, the largest thermal power plant in Northern Vietnam performed very well even though it is usually the low season in its business. Owing to a shortage of output from hydropower plants, additional volume was required by EVN, and the company was able to improve efficiency to meet the extra demand. Overall, companies in this sector are considered to have little volatility in terms of profitability due to stable earnings from core business and additional financial income from their large cash balances. Earnings growth going forward will likely come from added capacity through existing plant expansion and investments in new projects. However, corporate earnings in the next few years are not expected to jump significantly as the industry decision making is still dominated by EVN, who currently holds majority stakes in most utilities companies. Besides, the ability to increase selling price is very unlikely as long as EVN, a monopoly, has politically mandated control to set the price it wants to buy electricity, and does so on a cost-plus basis. In 4Q09, except for some companies being subject to high interest expense and potential forex loss, most companies are expected to hit their business targets shortly and even outperform by the end of the year.
6. Property sector
Most of the listed property developers are on track to outperform their full year targets due to the following reasons: reasonable targets based upon revenues booked from past transactions, additional income from financial activities and revaluation of assets, the recovery of the real estate market in 2Q09 and the beginning of 3Q09 and a couple of bulk sale deals. The market is moving in two directions in 2 parts of the country; it is buoyant in the North and quiet in the South. Northern players are beneficiaries of the capital city expansion while in the South, prices have dropped slightly and transactions have slowed down due to the new taxation regulations and high interest rates. The outlook for FY10 is quite promising as companies have made good sales in FY09 and they will book these revenues next year.
7. Auto components
3Q09 results are still good despite surging material costs and all companies in the sector have far exceeded full year targets with one quarter to spare. Sales growth is sound thanks to high demand for replacement parts as a result of the increasing number of automobiles in the country. Profitability, however, might not be sustainable in the near term as it is unlikely that the sector will continue to benefit from such low material costs, which normally would account for over half of COGS. Earnings in the next few years may be driven by added capacity and diversification into real estate, as some companies in the sector have good land-banks in Ho Chi Minh and Hanoi.
The state-owned Vietnam Coal and Minerals Corporation (TKV) is the majority shareholder in all listed coal companies, thus making it the only buyer of these coal miners’ products. Coal companies merely act as contractors and will sell all products to the parent company earning a fixed profit margin. The business, therefore, is stable, has pedestrian growth, and it is no surprise if these companies exceed the FY09 earnings’ targets by a few percent as scheduled. Other mineral companies’ businesses are quite divergent; some have completed full year plans within 9 months, while some may fail to reach their targets due to export restrictions induced by the State, which stated that some natural resources need further processing before being exported. Although the restrictions are being introduced in steps to curtail earnings shock, most companies still report poor results in the first half, and therefore full year targets might not be accomplished.
Steel manufacturers had an average 3Q09, with earnings on par with what they achieved in 2Q09. However, an influx of cheap imports from ASEAN began to threaten local players in 3Q09. Because of the AFTA agreement, the government cannot impose protective tariff on imports from ASEAN as it did with Chinese producers. Long steel manufacturers will be affected first because foreign players have penetrated the local market for a long time and now dominate 70% market share of wire rod. 4Q09 looks to be tough, as net profit is expected to drop 10-15% compared to 3Q.
Compared to the peak in 2008, rubber prices have decreased about 40% but the current price is the same as one year ago. The average price in 2009 is expected to decline 35-40% Y-o-Y only, not 50-60% as initially forecast. The situation is not as pessimistic as originally thought, and net profit of most rubber companies may only decrease 40-45% in the worst case scenario. Vietnamese rubber plantations are not under significant pressure to decrease yield because they are above breakeven. The good news is that breakeven prices for Malaysian and Thai producers are around US$1,500 per ton, almost 70% higher than Vietnamese producers’ ($850-900 per ton). Hence, most of the listed companies stated that they have not had to decrease output by much (only 5-10%).
Due to strong domestic demand and pricing power, leaders in this industry can maintain high gross margin like in 2Q09. The outlook for 4Q should be at least same or better than 3Q because 4Q is the peak season for construction in Vietnam. Furthermore, plastic resin prices will likely remain stable in 4Q09. Furthermore, manufacturers have sufficient inventories for production in the last quarter of this year. This industry is in general a high growth industry with currently attractive valuations.
1H09 results were disappointing, although slightly improved compared to the previous quarter, 3Q09 results were still poor. Most bulk carriers had to sell old ships to generate profit and cash flow. When the global economy recovers, the shipping industry will take off. Expectations are that this sector will perform better starting in 3Q10. However, only some leaders can benefit from global economic recovery because they exploit international routes and do not depend on only a few big customers.
3Q09 results are good due to both buoyant demand and 20% extra stockpiling over normal levels as investors believe prices will rise in the future. The outlook is positive in 4Q09 because it is peak season for construction. However, transfer pricing is a major concern in the cement industry. The South represents 40% of total market share, but regional manufacturers are able to satisfy only 50% of the demand. Therefore, shortages will occur in the South while surplus occurs in the North. However, top players can ensure their output will be taken up because of their strong brand name.
Still doing well due to supply shortage and hence fee increases (up 10-15%). According to the Government’s master plan, 8 groups of ports will be constructed from the North to the South through 2020. However, under-developed infrastructure is an obstacle for port development. So, demand is still greater than supply in the next few years until new ports are developed, but small and/or remote ports are unlikely to be competitive.
3Q09 Net Interest Margin dropped because of competition for capital. However, banks benefited from reversion of previous provisions for losses. 4Q09 is tough as further reversions are quite unlikely. Furthermore, credit growth may be capped at 30%, so banks cannot promote loans to customers to boost income. In 4Q09, most banks will focus on long term funding that will make them more capable to offer long term loans to customers in 2010. FY09 earnings are predictable barring any major unforeseen circumstances, but provisions for bad debts are still difficult to predict given banks opaque balance sheets.
Core business is still making losses. Some insurance companies benefited from the strong stock market performance this quarter and managed to cover their bond investment losses (from yield compression) with new stock gains. However, FY09 net profit is not impressive as they cannot invest aggressively in stocks. In 2010, the situation is not better; most companies will continue to rely on financial investments as the sector is fiercely competitive. Even the industry leaders are having to decrease premiums as well as increase commissions to retain their market shares.
We think that the market has passed its initial recovery stage where most stocks enjoyed price appreciation. Going forward, the market will be more selective and biased toward companies with good earnings potential based on the current and near-term economic outlook. In the medium and long term, we continue to be bullish on the market’s recovery and certain stocks with strong fundamentals will continue to outperform.