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DGC – The tailwind is blowing – Initiation

Company Note 11/03/2022    108

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  • Ranked 1st in Vietnam in terms of capacity and technology in phosphorus production, with 48% national market share.
  • We forecast DGC’s NP to reach a CAGR of 21.9% in FY21-23F thanks to increased demand for semiconductors.
  • We initiate coverage on DGC with an ADD rating and TP of VND233,300.

Market Price,

Target Price

Dividend Yield

Rating

Sector

VND187,000

VND233,200

0.93%

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BASIC MATERIALS

Vietnam’s leading phosphorus producer
DGC is the leader in both capacity and technology in phosphorus and derivatives production. The company accounts for ~48% of Vietnam’s yellow phosphorus (P4) capacity and is currently the only feed additive producer in the country. DGC is also Vietnam’s largest producer and sole exporter of thermal and extracted phosphoric acid. DGC’s revenue mainly comes from exports (accounts for 79%) of which India is the main export market, accounting for 25% of DGC’s total revenue in 2021.

The tailwind is blowing
We expect DGC’s net profit (NP) and revenue in FY22F to grow by 48.4%/73.3% yoy due to 1) P4’s revenue surge 70.5% yoy as DGC will keep focusing on selling this product to take benefit from supply shortage in China and Russia-Ukraine conflict and 2) 57.9% yoy increase in phosphoric acids sales (TPA and WPA) thanks to 2 new TPA production lines are expected to run at 80% capacity in 2022. We forecast DGC’s revenue and NP in FY23F to decrease by 4.0%/14.1%, respectively, due to the retreat of phosphorus prices since 4Q22F.

CAV project is the key driver of DGC’s revenue growth in FY25F-28F
DGC’s BOD has approved the construction of Nghi Son Chlor-alkali-vinyl (CAV) project with an investment cost of VND10,000bn, funding with 45% from debt and 55% from owned equity. We expect the plant to be completed and tested in 4Q24F before lauching commercial at 50% capacity in FY25F. We believe the project will be the company’s long-term growth engine due to the current Chlorine deficiency situation in Vietnam. Therefore, we forecast CAV project’s revenue to reach VND5,500bn, contributing 25.5% of DGC revenue in FY25F.

Initiate ADD recommendation with a target price of VND233,200/share
With a stellar FY22F ahead and the long-term potential fromCAV project, we believe that DGC is still attractive despite a 211% price increase in 2021. The target price is based on an equal weighted combination of two valuation methods: DCF (WACC 10.8%, COE 13.0%) and P/E with a target P/E of 9.5x. The upside potential including a rise in yellow phosphorus price, could last until FY23F as China may continue to tighten restrictions on the production of environmental pollution products. Downside risks include 1) selling price of P4 correcting stronger than expected, 2) P4’s export tax risk plus an increase in input material prices (sulfur, coke) which could put pressure on DGC’s gross margin.

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