HPG – Strengthening market leadership – Update

HPG posted strong 2Q21 results, with net revenue increase 72% yoy to VND35,188bn while net profit jumping 354% yoy to VND9,721bn, on the back of 1) 42% yoy increase in total steel sales volume, 2) 40% yoy increase in construction steel ASP. 2Q21 gross profit margin (GPM) widened to 32.7% from 26.2% of 1Q21 and much higher than that of 18.1% of 2Q20. For 1H21, revenue rose 67% yoy to VND66,295bn. and net profit increased 232% yoy to VND16,670bn, fulfilling 73.5% of our FY21F forecast.

Acquiring the new iron ore mine to solidify the input

In May 2021, HPG successfully acquired the 4-million-ton-capacity Australia’s Roper Valley iron ore mine (RVIM). Together with the iron ore mine in Ha Giang province, HPG’s total ore production capacity has increased to 4.8m tonnes p.a, meeting about 30% of the company demand, per our estimate. We expect that new iron ore mine will run at 75% of design capacity, adding about 5% to HPG‘s FY22F pre-tax profit (~ VND1,530bn). HPG’s management target to buy more iron ore and coking coal mines in near future.

Changes to FY21 – 23F forecasts

We expect the global steel rebar price to decrease towards the long-term average of US$600/tonne. The FY21F domestic steel price is expected to reach VND14.6m/tonne (+28% yoy), before falling to below VND13.5m/tonne by the end of FY22F, given the government‘s effort to control the price. We raise our FY21F net profit forecast by 34.2% to VND30,496bn (+126.7% yoy) on a 3.8% upward revision in FY21F revenue to VND153,629bn (+70.5% yoy) and 4.5% pts increase in GPM assumption. We also increase our FY22/23F net profit forecasts by 16.1%/13.2% to VND28,049bn/VND28,766bn, respectively, to reflect the new iron ore mine in Australia to the model.

Reiterate ADD with a higher TP of VND62,600, following EPS upgrade

Our valuation is based on an equal weighting of: 1) a target P/E of 10.0x on FY21F EPS, and 2) a DCF valuation over a 10-year projection period. HPG’s stock price has dropped 13% in the last 2 months and makes the company’s valuation more attractive. Re-rating catalyst: new business plans (container manufacturing and new miners) to develop the value chain. Downside risk: slower-than-expected steel demand growth.

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