Basic chemicals sector – The start of a down cycle

• We expect that discretionary demand of Vietnam‘s export chemical markets such as the China and the U.S will soften further into 2023F.
• We expect the NP of basic chemicals companies to slow down due to weaker demand amid the global economic slowdown.
• Our stock pick is DGC.

A sluggish start to the year 2023

Vietnam‘s basic chemicals (yellow phosphorus, DAP and MAP fertilizer,..) export value grew 25.3% yoy in 2022 to US$5.6bn. However, value growth started easing since 3Q22 (+29.5% yoy in 3Q22; +25.3% yoy in 4Q22) following both muted global demand and weakening selling prices. According to General Department of Vietnam Customs (GDVC), China is the largest importer of Vietnam chemical in 2022 with an import value of US$1.18bn (+21.0% yoy) due to the shortage the supply in China. 2022 exporting to Japan and India markets reached US$0.73bn and US$0.7bn, decreasing 13.0% yoy and increasing 12.5% yoy, respectively. For the first 2.5M23, the export turnover of basic chemicals only reached US$930m (-10.9% yoy) ranking 12th in the total export items of Vietnam in 2.5M23.

Global demand of yellow phosphorus will slow down in 2023

The economic downturn leads to a decrease in demand for electronic goods and semiconductors in 2023. World Semiconductor Trade Statistics forecast the global semiconductor market to shrink 4% in 2023. Thus, global demand for yellow phosphorus – the input for semiconductors will drop 15% yoy in 2023. Besides, yellow phosphorus prices have peaked out since 2Q22 and are expected to range between US$4,500-5,000 in 2023. We forecast Vietnam‘s yellow phosphorus exporters (DGC, PAT, DDV) will experience a contraction about 25-35% yoy in FY23F net profit from high base FY22.

Lower caustic soda prices following the China‘s reopens

The domestic price of caustic soda is highly dependent on the China because China exports about 40% of the demand for caustic soda in Vietnam. Chinese caustic soda price decreased 15.8% since Nov-22 following the re-operation of caustic soda factories return to operation in 2023 and weak demand for aluminum consumption. Furthermore, China reopen its economy will improve caustic soda supply in Vietnam. Thus, we forecast caustic soda price to reach range US$700-US$800/tonne in 2023 (-15% yoy). Since the price contract is usually signed 3 months in advance, we believe that the NP of the caustic soda companies such as CSV, HVT in the 1H23 will be lower compared to 2H22

Our stock pick is DGC

We prefer stocks that are having attractive valuations despite being in a down cycle. Thus, our stock pick is DGC. In addition, the Chlor-alkali-vinyl (CAV) project’s phase 1 completion in 3Q24F will become the main revenue growth driver; contributing 25% of annual revenue and making DGC’s sodium hydroxide factory number 1 in commercial capacity in Vietnam.

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