DGC – Better than expected profitability – Update

• We believe DGC is the standout given its ample net cash position allows the company to enjoy the deposit rates hike and strengthening US$.
• We lower TP to VND79,200/share due to change in project Chlor-Alkali-Vinyl but big share price swing gives an upgrade to ADD opportunity.

3Q22 performance remains intact

DGC posted strong 3Q22 results with VND3,696bn (+76% yoy) in net revenue regarding to: (1) an 50% yoy increase average selling price (ASP), (2) 52% yoy in agriculture phosphates revenue. 3Q22 gross margin (GM) widened to 44.5% (+24.1% pts yoy) mainly driven by higher ASP and cost-saving technology. 3Q22 earnings grew 195.8% yoy, making 9M22 pace to 318.4% yoy to VND4,535bn, largely in line with our forecast.

Taking advantage from supply shortage from China

Yunnan – one of 4 largest yellow phosphorus producing hub in China has implemented the “Energy Efficiency Management Plan from Sep-22 to May-23” which dragged the ultilisation ratio of phosphorus enterprises in Yunnan to 41% in Oct from 69% in Sep. We expect phosphorus prices to stay at range US$4,600-US$5,300/tonne until 1H23F before slowing down in 2H23F as 1) China suspends policy to limit phosphorus production and 2) lower input coke prices. Overall, we revise up FY22-23F earnings by 2.7%/7.4% following the increase 6.1%/4.8% phosphorus ASP.

DGC benefits from both higher deposit rates and FX volatility

DGC is a net exporter with 80% of revenue in US$, 40% of cost of goods sold in US$ and no US$ debts. Thus, the company has limited risk or even slight advantage on the strengthening US$. Additionally, given its low D/E ratio (16%) and a net cash/share of VND17,703/share at end-3Q22, DGC likely enjoys the current deposit rates hike.

Change in chlor-alkali-vinyl (CAV) plan

DGC will crop the size of its CAV project’s first phase — from operating 150,000 tonnes of caustic soda p.a. from early 2025 to only 50,000 tones from mid-24, in order to focus on investing in bauxite – aluminum projects. Thus, we lower our forecast FY25-26F NP from the chlor-alkali-vinyl (CAV) project by 30%/25%.

Upgrade to ADD rating with lower TP of VND79,200/share

We lower DCF valuation by 21.1% based on a 19.2%/23.5% FY25-26F EPS downgrade due to change in project plan CAV. The recent share price slump has dragged DGC’s FY23F P/E to only 4.6x, 54% discount to its 3-year average. We believe this valuation is relatively attractive for a country leading phosphorus producer with nearly risk-free to FX volatility and rate hike. Upside potential is longer-than-expected supply shortage from China. Downside risks include higher investment cost and implementation risks of the upcoming CAV project.

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