DGC – Waiting for the bauxite-aluminum project – Update

• Net profit may have peaked in 2Q22 and we expect a weaker earnings growth ( -22.9% vs. 1H22) in 2H22.
• We revise up FY22/23F NP forecast by 32.7%/10.7% to reflect the higher-than-expected 1H22 business results.
• Downgrade to Hold rating with lower TP of VND103,200/share

Robust 2Q22 performance
DGC posted strong 2Q22 results with VND4,002bn (+96.3% yoy) in net revenue regarding to: (1) an 125% yoy increase in yellow phosphorus average selling price (ASP), (2) agriculture phosphates revenue surge 49% yoy thanks to domestic supply shortage as China restrict fertilizer export (including to Vietnam). 2Q22 gross margin (GM) widened to 53.1% (+28.8% pts) mainly driven by higher ASP and cost savings from DGC’s apatite ore mine. As a result, DGC’s NP in 2Q22 achieved VND1,336bn (+314.9 % yoy). For 1H22, DGC’s topline rose 91.6% yoy to VND7,637bn and NP increased 414.9% yoy to VND3,120bn, fulfilling 53.8%/74.9% of our FY22F forecasts. Thus, we revise up FY22/23F NP forecasts by 32.7%/10.7% to reflect the higher-than-expected 1H22 business results.

DGC’s net profit may have peaked in 2Q22
Phosphorus price has dropped nearly 15% to from its peak US$7,200/tonne in May-22 as phosphorus anufacturers in Northeast China have resumed production post Covid-19. We expect phosphorus price to remain stable within US$5,500-US$5,700/tonne in 2H22F thanks to the strong increase apatite ore supply from Tunisia (45% yoy). On the other hand, we believe phosphorus prices unlikely to drop further as China production is narrowed down production following government’s stricter environment policy. Under base case scenario, we expect a softer GM of 40.4% in 2H22 which will result a deceleration in 2H22 net profit growth (-22.9% vs. 1H22).

The new projects are long term catalyst
We see the short-term catalyst for DGC is diminishing following the downturn of phosphorus prices. We expect FY23F NP to decline 28.3% yoy after a robust FY22F. To secure the long-term growth DGC target to invest in two mega production projects of caustic soda (CAV) and aluminum bauxite with total investment of US$1.5bn. The CAV project is expected to come online since 4Q24F and likely to contribute 20% in FY25F revenue. While the first phase of aluminum project might start production since 2025 but we have not reflected this project in our forecast due to lack of information.

Downgrade to Hold as we believe the valuation is fair
We decrease our TP by 3.8% following the rollover to mid-FY22F and target P/E of 8.0x apply on average FY22-23F EPS, downgrade to Hold. Upside potential is longer-than-expected drought in China. Downside risks is phosphorus’s export tax risk which could put pressure on DGC’s business results.

.

Please follow this link for the full report