HPG – Cheap but lacking catalysts in short term – Update

• We lowered FY22-24F EPS by 6.7%-13.3% on higher input material prices.
• Current valuation (5.4x P/E 2022) is cheap but lacking near-term catalyst.
• Reiterate Add with a lower TP of VND57,800.

The Chairman was pessimistic about the steel industry outlook for the rest of 2022…

HPG’s management has set modest FY22F guidance with VND160tr in revenue (+7% yoy) and net profit after tax (NPAT) of VND25tr-30tr (lower than FY21 NP of VND34.5tr). At the Annual General Meeting (AGM) on May 25, 2022, the Chairman shared that the challenges of margin pressure would persist for the rest of 2022, following the steel prices drop but input material prices surge. That partially explained the recent HPG market price correction of 30.0% in the past six months, underperforming the VNIndex benchmark of 10.8%.

… but we think it’s not as bad as feared, at least for HPG

Thanks to the advantage of economies of scale production, extensive distribution system and proven inventory management capabilities, we believe that HPG will be the few steel companies in Vietnam that can keep GM not to dropping significantly in FY22F thanks to (1) non-weather supply disruptions will ease in 2H22F (La Nina weather event often peak in Australia in 1Q) will lower coking coal price; and (2) China – HPG’s important export market, has started to reopen in June, which will have a positive impact on steel demand and support the steel prices. We expect HPG’s net profit to decrease 14% yoy to VND29,665bn in FY22F, before slightly increasing 1% yoy to VND29,966bn in FY23F.

Is HPG undervalued?

HPG is now traded at 5.4x P/E 2022, which is historical-low within the last 10 years. We expect revenue and net profit to grow 10.7% and 6.8% CAGR, respectively, over FY22-25F, buoyed by increasing domestic steel demand. Given the Dung Quat Steel Complex 2 (DQSC 2) to bring the HPG’s crude steel production capacity by 66% from now to 14.6m tonnes per annum from 2025F onwards, we believe this current valuation is yet attractive for long-term investment. However, there is lacking of strong catalyst for the rest of 2022. Major projects such as DQSC 3, Australian iron ore mine, Pho Noi urban area and aluminum project do not have much information yet and still need time to contribute to HPG’s results. Meanwhile, according to Fitch Solutions’ Mar 2022 note, average global steel prices will remain high at US$980/tonne (+3% yoy) in 2022 then soften to US$850/tonne (-13% yoy) in 2023.

Reiterate ADD with lower TP of VND57,800

We lowered FY22-24F EPS by 6.7%-13.3% on higher input material (including iron ore & coking coal) price adjustments. Thus, we revised down our TP by 15.6% to VND57,800. Re-rating catalyst: new business plans (aluminium and home appliance projects) to develop the value chain. Downside risk: slower-than-expected steel demand growth.

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