HPG- Sharp earnings downgrade – Update

• HPG posted negative 3Q22 earnings due to weak steel demand, squeezing gross margin (GM) and FX loss, making 9M22 net profit slump 61.3% yoy.
• We made a big earnings downgrade 45.3%-52.6% for FY22-24F EPS on higher input material prices and lower steel selling prices.
• Reiterate Add with a lower TP of VND20,900.

3Q22 results have disappointed us

HPG recorded a loss of VND1,776bn in 3Q22 due to revenue decline of 11.8% yoy, a thin GM and a loss of VND1,013bn in FX revaluation. For 9M22, revenue increased 10.1% yoy while NP dipped 61.3% yoy to VND10,475bn, fulfilling only 44.3% of our full-year forecast. 3Q22 GM was only 2.9% which is a steep drop from 17.5% in 2Q22 due to a large inventory of high coking coal prices from 2Q22. Meanwhile, 3Q22 HRC prices declined 27.4% yoy due to weak demand for steel pipe and galvanised steel as HRC is the key input material for these products.

Times is getting harder for domestic steel makers

Domestic steel industry is currently hit by multi-headwinds: stagnant property market, high input (including coking coal and steel scrap) prices, rising interest rates and weakening VND. Top steel makers, including HPG, POM and VN-Steel have closed or partially closed their production lines. According to Vietnam Steel Association (VSA), country’s steel production volume dropped 7% yoy in 3Q22. Per our estimate, inventory of listed steel makers decreased 22.5% qoq by end-3Q22, making average inventory days drop to 101 days from 126 days in 2Q22.

When will the wind change direction?

We see a few signals that could be frontal passages for wind change: (1) coking coal prices are forecasted to ease from an average US$420/tonne in FY22F to US$258-220/tonne in FY23-24F as supply conditions normalise, (2) the re-openings of Chinese economy will reboot the global steel demand, and (3) the acceleration in Vietnam’s infrastructure development will drive up the demand, partially offset the stagnant residential property market.

FY22-24F earnings forecasts were revised down by 45.3%- 52.6%

The sharp downgrade was based on the weaker-than-expected 3Q22 results, 4.5% lower-than-previous forecasts sales volume and softer GM over FY22-24F.

We cut down 1-year TP by 44.6%, maintain ADD

HPG is traded at FY22-23F P/E of 6.6x/5.3x, not very attractive for short-term investment amid downtrend market. However, we believe largest market share and the most efficient operator are HPG’s key differentiators compared to its peers which will help earnings to recover faster once the winds change. Upside catalyst: new business plans (aluminum and home appliance projects). Downside risks: higher-than-expected interest rates, weaker-than-expected sales volume.

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