TCM – Potential earnings growth has been priced in – Update

• In FY20, TCM’s revenue declined 4.8% yoy and net profit soared 27.5% yoy, respectively making up 102.3% and 101.2% of full year forecast.
• The agreement with Adidas is the key driver for FY21F NP.
• We downgrade to Reduce from Hold as we believe the potential growth has been priced in.

2020 business results in line with our expectation

TCM’s revenue decreased 12% yoy to VND752bn in 4Q20 due to drop in Personal Protected Equipment (PPE) revenue. 4Q20 revenue from gauze masks and PPEs fell 72% qoq due to lower demand from its clients. Overall, in FY20, TCM’s net revenue reached VND3,470bn (-4.8% yoy), making up 102.3% of our full-year forecast. Excluding the contribution of gauze mask and PPE products, FY20 garment revenue dropped 24.6% yoy, while fabric and yarn sales reached VND694bn (+22.1% yoy) and VND278bn (-21.1% yoy).

FY20 bottomline grow significantly mainly thanks to PPE segment

In FY20, TCM’s gross margin increased 1.8% pts due to the new contribution of the PPEs segment and new orders from Adidas in 4Q20. We estimate GM of PPE segment to range from 25-30%, higher than GM of FOB orders (17%-20%). Total debt decreased 25.8% yoy as TCM was about to pay-off long-term debts, which mainly financed the knitting factory; thus, interest expense decrease 48% yoy. Therefore, TCM’s net profit soared 27.5% yoy to VND276bn.

The agreement with Adidas is the key driver for FY21F NP

The current surge in TCM’s stock price is partly explained by the news on TCM’s agreement with Adidas. According to TCM, the company will produce sportswear in the form of FOB order. We expect Adidas orders to fill 12m units/years of Vinh Long factory (~40% sewing capacity) and contribute 30% of total garment revenue in FY21F.

FY21F results look solid on the back of garment sales

We raise FY21F revenue forecast by 5.1%, equivalent to VND3,844bn (+8.4% yoy) to reflect revenue from Adidas orders. We also increase FY21F GPM assumption by 0.5% pts and net financial income by 20.3%. As a results, TCM’s net profit is estimated to rise 24.3% yoy to reach VND343bn in FY21F.

Downgrade from Hold to Reduce

We increase our target price by 67.5% to VND59,800 as we now apply FY21F EPS and raise our target P/E to 12x. We downgrade our rating from Hold to Reduce as all the positive factors appears to be fully priced in. Re-rating catalysts include 1) Stronger-than-expected rise of fabric demand from domestic market and 2) higher-than-expected order volume from Adidas. Downside risk: worsening Covid-19 situation in TCM’s main export markets.

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