DBC – Margin under pressure – Update

• 2Q21 revenue grew 18.2% yoy to VND2,708bn but net profit (NP) plunged 46.5% yoy to VND215bn due to gross margin compression.
• 1H21 revenue grew 11% yoy to VND5,280bn while net profit subdued 22.7% yoy to VND580bn, fulfilling 54.5% of our FY21F forecast.
• Reiterate Add with unchanged TP of VND64,000.

2Q21: compressing margin dented bottom line growth

DBC‘s 2Q21 core businesses revenue (including Animal feed and Farm & Food segment) rose 22.7% yoy to VND2,546bn. Meanwhile, other revenue from commercial activities and real estate slumped 24.7% yoy to only VND162bn as DBC‘s restaurants, hotels were closed and the handover progress of the Lotus Center residential complex was slower during 2Q21 when Covid-19 hit Bac Ninh province. Gross margin kept downtrend to 18.1% in 2Q21 from 24.4% in 1Q21; much lower than 25.1% in 1Q20. Consequently, 2Q21 NP plunged 46.5% yoy vs 4.6% yoy growth seen in 1Q21.

Material prices spike squeeze gross margin in FY21-22F

Both corn and soybean prices increased by 73.5% yoy/ 65.7% yoy, respectively, in 1H21, lifting animal feed prices up 10-15% yoy. Meanwhile, live hog prices and baby chicken prices decreased by 12.9% yoy and 12% yoy in 1H21, respectively. Therefore, 1H21 GPM narrowed by 6.3% pts yoy to only 21.7%. We expect global agricultural prices to rise 14%-15% yoy in 2021F, followed by a slight gain in 2022F. However, the company are able to convert a part of the increasing materials cost to selling prices to reduce the burden on the GPM. Therefore, we project the GPM drop down to 20.8% in FY21F and 18.8% in FY22F.

We maintain our forecasts for NP in FY21-22F

Though the nationwide lockdown since mid-Jul has challenged supply chain, we see that the selling prices hike of food (meat, eggs) is able to offset for the drop of sale volume. Thus, we maintain DBC’s revenue growth forecast of 15.1% yoy/6.4% yoy in FY21-22F. Meanwhile NP decreased by 24.0% yoy/15.8% yoy to reflect our assumption of 19.9% yoy/8.0% yoy plunge in 2021-22F live hog price.

Reiterate Add with unchanged TP of VND64,000

We remain Add call for DBC with TP based on an equal weighting of DCF valuation (with WACC of 12.9%, COE 14.2%, and LTG 1.0%) and target P/E of 7.0x. Re-rating catalyst includes higher-than-expected pork prices. Downside risks include a faster-than-expected fall in pork prices and higher-than-expect prices of input material for animal feed.

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