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HPG – Riding on prices upwinds – Update

Company Note 14/12/2020    343

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  • HPG’s 11M20 long steel sales volume reached 4.7m tonnes (+80.8% yoy), equivalent to 93% of our full-year forecast.
  • We lift our FY21-22F EPS forecasts by 9.4-8.1%, on the back of higher steel selling and lower coking coal price assumptions.
  • We reiterate our Add call with a higher TP of VND47,300, on a higher FY21-22 EPS and lower risk-free rate.

Market price

Target price

Dividend yield

Recommendation

Sector

VND 39,250

VND 47,300

1.27%

ADD

Steel

Long steel sales volume surged 34.8% yoy in Nov 20

Hoa Phat Group (HPG) reported construction steel sales volume at 344,000 tonnes (+14.2% yoy) in Nov 2020, in line with our expectation. Billet sales volume reached 170,000 tonnes in Nov 20, double from the 79,989 tonnes in the same period last year. Accumulated 11M20, HPG recorded impressive growth of 80.8% yoy in total construction steel and billet sales volume to 4.7m tonnes, equivalent to 93% of our full-year forecast.

Revise up 4Q20F HRC revenue on higher volume and better ASP

HPG announced hot rolled coil (HRC) production volume of 170,000 tonnes in Oct-Nov 20, which is 15% higher than our expectation. Therefore, we increase our forecast of HRC production volume by 10.9% to 637,500 tonnes in FY20F. This comprises 286,875 tonnes to meet internal demand in FY20F and 350,625 tonnes for sale in FY20F. Meanwhile, we revise up our 4Q20F average HRC price assumption to US$555/tonne (+6.7% vs. previous forecast) to reflect the current rally in HRC price due to short-term supply deficit of HRC products worldwide.

We lift up GPM assumption by 0.9/1.0% pts for FY21F/FY22F

We raise our FY21/22F GPM assumption by 0.9%/1.0% pts thanks to: 1) a 7.4%/16.1% decline in coking coal price forecast, and 2) a 2.8%/1.9% increase in steel ASP, which offset an 8.2%/13.3% increase in iron ore price assumption. Thereby, we revise up FY21-22F net profit by 9.4%/8.1% to VND16,196bn/18,197bn (+27.9%/12.4% yoy).

Reiterate Add with a higher TP of VND47,300

We raise our TP to VND47,300 to reflect the FY21-22F EPS upgrade. Our valuation is based on an equal weighting of: 1) a forward P/E of 10.0x on FY21F EPS, and 2) a DCF valuation over a 10-year projection period. We use a new WACC of 12.2% for our DCF valuation (from 12.9% previously), on the back of a lower risk-free rate at 3% (from 4% earlier). Downside risk: slower-than-expected steel demand growth. Re-rating catalyst: lower-than-expected iron ore price.

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