HPG – The turning point would be in 3Q23F – Update

• 4Q22 net loss expanded to VND1,992bn following weak steel demand and squeezing gross margin (GM), making FY22 net profit slump 75.4% yoy.
• We believe HPG’s NP growth could have a slow start for year but the turning point would be in 3Q23F following low base effect, widening gross margin and narrowing financial expense losses.
• Reiterate Add with a higher TP of VND24,400/share.

Output prices increasing slower than input prices amid global cost-driven commodity price rallies while domestic steel demand remains weak

Since mid-Dec 2022, HPG has adjusted its construction steel selling price 6 times, with a total increase of 9.1% (+VND1,360/kg). This was mainly driven by the rally of input materials and higher Chinese steel price, rather than demand improvement. Thus, steel selling price is increasing significantly slower than input material (iron ore, coking coal) prices since the beginning of the year. According to spot commodity prices movements, we estimate that HPG’s EBITDA margin in 1Q23F is 1.8% pts lower than 4Q22.

Key takeaway from HPG’s guidance: 5.7% NP decrease in FY23F

According to management’s guidance, FY23F revenue and NP are expected to reach VND150,000bn (+6.1% yoy) and VND8,000bn (-5.7% yoy), respectively. We believe that this plan was made on the conservative view of HPG’s management amid the current volatile input material prices and weak steel demand. A poor result in FY22 coupled with huge capex for the Dung Quat Steel Complex (DQSC) phase 2 in the FY23-24 period, implies that HPG will not pay any cash dividend for FY23F.

The turning point for net profit growth would be in 3Q23F

We expect that the company’s bottom line will remain sluggish in 1H23F; then the growth will return to positive territory in 3Q23F thanks to (1) steel sales volume increase from a low base in 2H22; (2) widening gross margin when input material prices fall and lower inventory provision and (3) narrowing financial expense losses mainly on the sharp drop of forex losses. Thus, FY23-24F NP will increase 22.2%/41.9% yoy to VND10,366bn/VND14,711bn, according to our forecasts.

Reiterate Add with a higher TP of VND24,400/share

We revise up our TP by 17% to VND24,400/share, following a 30% upgrade P/B multiple thanks to market sentiment for the steel industry has improved amid rising steel prices. HPG now trades at 12.0x/8.7x P/E FY23-24F, not attractive for short-term investment – though this is not unexpected given where we are in the cycle. We believe HPG is in the worst period of cycle business and the most recent data suggests that the recovery speed could be a bit slower than expected. However, we still favor HPG for long-term investment thanks to its leading and expansion market share and solid management team.

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