HHV Initiation report – BUY

DEO CA TRAFFIC INFRASTRUCTURE INVESTMENT JSC (HHV VN)

HHV stands as a leading enterprise in Vietnam’s infrastructure construction sector, specializing in Build-Operate-Transfer (BOT) projects and the maintenance of road tunnels. Given HHV’s extensive experience in executing projects with a total accumulated investment exceeding VND 50 trn, we expect that the company will secure more contracts thanks to the government’s public investment policies. Currently, HHV operates two primary business segments: BOT toll collection and construction. The profit’s CAGR for 2024-2026 is estimated at 18.3%, driven by the following factors:

The BOT segment maintains revenue growth and generates stable cash flow. BOT toll collection contributes 59% of the company’s revenue and 90% of its gross profit. HHV is operating 30km of tunnels and 410km of highways and national roads. We estimate a vehicle traffic growth rate of approximately 5% per annum and a toll fee increase of 15%-18% every three years at each toll station, leading to an 8% revenue growth rate in the BOT segment for the 2024-2026 period. Notably, the synchronization of infrastructure from the North-South Expressway Phase 2 projects and the opening of the Hanoi – Lang Son – Cao Bang route from 2026 will further boost traffic and expand HHV’s BOT toll collection portfolio.

The construction segment: the peak activity projected for 2024-2026. The construction segment accounts for 39% of revenue and 8% of gross profit. Leveraging the government’s public investment boost plan for 2021-2025, HHV has secured several substantial construction contracts. Currently, HHV’s backlog exceeds VND 2,900 bn (about 3 times 2023 construction revenue). We anticipate that HHV will accelerate sales and profit recognition in 2024-2026, with a sales’s CAGR of 16%, as these projects reach completion.

Charter capital increase plan. During the 2024-2025 period, HHV plans to raise over VND 1,490 bn from issuing more than 149 mil shares (~34.5% of outstanding shares), through rights issues to existing shareholders and a private placement. Continuous issuance will provide HHV with additional resources to develop projects, but it also poses a dilution risk for existing shareholders’ EPS. 

High debt ratio but low interest rate sensitivity. HHV’s debt-to-equity ratio exceeds 2x (higher than the industry average of 1.2x), primarily due to a significant portion of its assets being BOT routes funded by long-term loans. Currently, BOT debt constitutes approximately 95% of total debt. However, financial risk is not significant as BOT loan interest expenses are allocated proportionally to toll revenue, rendering them insensitive to interest rate fluctuations. Additionally, HHV is not required to make periodic principal repayments on BOT loans, as these will be transferred to the State upon the completion of the toll collection period.

Rating and valuation. We recommend a BUY rating for HHV with a fair valuation of 16,000 VND per share using DCF method. This valuation is 37% higher than the current price, with a P/E ratio for 2024 of 18.6x and a P/B ratio of 0.8x.