HPG – Encouraging growth momentum – Update

• HPG’s 9M20 net profit was above at 89.9% of our full-year forecast, driven by the robust performance of the steel segments.
• We lift our FY20-22F EPS forecasts by 22.7-38.4% on the back of higher steel sales volume and lower coking coal price assumptions.
• We reiterate our Add call with a higher TP of VND40,500.

What is behind HPG’s impressive uptrend in recent 3 months

HPG’s share price increased by 33.8% in the past three months, nearly double the increase of VNIndex (+20.2%). In 3Q20, domestic steel rebar average selling price (ASP) fell 10.4% yoy to VND10.7m/tonne and iron ore price rose 14.3% yoy to a 6-year peak of US$100.2/tonne. HPG’s net profit surged 115.0% yoy to VND3,773bn in 3Q20, 30% above market consensus. We think that production volume of Dung Quat Steel Complex (DQSC) jumped tenfold yoy, contributing 56.9% of HPG’s total sales volume in 3Q20 (compared with 11.4% in 3Q19), which helped DQSC achieve earlier-than-expected economies of scale. 9M20 net profit soared 57.4% yoy to VND8,801bn, fulfilling 89.9% of our previous full-year forecast.

What make us confident in HPG for the next two years

We are now more optimistic about DQSC, thanks to 1) DQSC Phase 1’s higher-than-expected utilisation rate of 98.6%, based on our estimate; 2) blast furnace No.3 and Hot Rolled Coil (HRC) factory of DQSC Phase 2 produced 340,000 tonnes of HRC from Aug 20 till end-Oct 2020 (equivalent to 160% monthly production volume of our previous forecast), and 3) better-than-expected EBITDA margin which helped DQSC surpass pretax breakeven level in 9M20, after just two years in operation. We estimate DQSC’s EBITDA margin was 22.5% in 9M20, approaching other factories’ EBITDA margin of 25.1%. Thus, we raise our FY20/21/22F EPS by 25.7/37.1/41.0% to reflect: 1) higher sales volume due to a combination of better demand (quickening public investment spending) and more contributions from DQSC; and 2) lower coking coal price assumptions due to weak demand in major importing countries (India, Japan) in 1H20.

Has HPG’s growth potential been fully priced in?

HPG now trades at 8.9x/7.4x FY20/21F P/E vs. regional peer’s 7.9x FY20F median P/E. However, we believe that HPG deserves to be rerated thanks to its robust earnings outlook and superior profitability vs regional peers.

Reiterate Add with a higher target price of VND40,500

We raise our TP to VND40,500 to reflect the increases in our FY20-22F EPS. Our valuation is based on an equal weighting of: (1) a forward P/E of 9.0x on FY21F EPS; and (2) a DCF valuation over a 10-year projection period. Downside risk: slower-than-expected steel demand growth. Re-rating catalyst: lower-than-expected iron ore price.

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