HPG – Awaiting the Dung Quat Steel Complex 2 – Update

• 3Q21 net profit (NP) surged 174% yoy to VND10,352bn, driven by strong growths of both sales volume and prices.
• We revise up FY21-23F EPS by 12.1-17% on higher selling price and input material price adjustments.
• Reiterate Add with a higher TP of VND68,500, following FY22-23F EPS upgrade.

Robust 3Q21 performance to make a stellar 9M21

HPG posted strong 3Q21 results with VND38,674bn (+57% yoy) in net revenue and VND10,352bn in NP (+174% yoy), regarding to: (1) a 9% yoy increase in steel sales volume; and (2) 51%/82% yoy increase in average selling price (ASP) of construction steel/hot rolled coil (HRC). 3Q21 gross margin (GM) widened to 30.7% from 20.9% of 3Q20 but slightly lower than 32.7% of 2Q21. For 9M21, HPG’s topline rose 68% yoy to VND104,969bn and NP increased 207% yoy to VND27,051bn, fulfilling 88.7% of our FY21F forecast.

Market price to reflect the short-term headwinds

HPG’s stock price was underperformed VNINDEX within the past 1 month as the stellar 9M21 results have been almost priced in. Global steel prices have been cooling down since Sep-21 while coking coal prices have hiked in 3Q21 (+120% yoy, +86% qoq), which raised concern over HPG’s GM in the next couple of quarters. We expect HPG’s FY22F earnings to subdued 11.3% in FY22F after a robust FY21F, then pick up 2.0% yoy in FY23F. We expect earnings will be back to 2-digit growth since FY24F driven by new contribution from Dung Quat Steel Complex 2 (DQSC 2) to the company’s business results.

We are confidence about HPG’s longer term outlook

The DQSC 2 (total capacity of 5.6m tonnes) will be built since early next year and inaugurated within 36 months. HPG aims to increase its crude steel production capacity by 66% from now to 14.6m tonnes per annum since 2024F onwards. We expect revenue and net profit to grow 12% and 9% CAGR, respectively, over FY22-25F, buoyed by increasing construction steel demand. In medium term, we see a few catalysts, including: (1) better than expected contribution of newly acquired iron ore mines; (2) better than expected performance of new business (container manufacturing and home appliance); (3) plan to buy treasury shares.

Reiterate ADD with higher TP of VND68,500

We raise our TP to VND68,500 to reflect the FY22-23F EPS upgrade and roll forward our valuation base year to 2022. HPG now trades at 7.6x P/E TTM vs. TOP20 global largest-market capitalisation steel companies’ 7.9x average P/E TTM. We believe that HPG deserves to trade at higher level than its peers given its superior profitability. Downside risk: slower-than-expected steel demand growth.

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