HPG update – BUY

HPG’s longer term outlook remains positive as capacity expansion has begun, however the company is unlikely to repeat last year’s stellar results as short term margin pressures mount and capacity limitations restrict growth. We maintain our BUY recommendation with a pre-issuance target price of 54,870 VND/share at the end of 2022, equivalent to a forward P/E of 6.4x.

In May 2022, total crude steel production of Hoa Phat reached 780,000 tons, increasing 16% yoy. While total steel sales of all kind reached 660,000 tons, increasing 10% yoy. Construction steel sales in May reached 393,000 tons, increasing 21% yoy as May 2021 was a low base when Ho Chi Minh city went into lockdown period due to COVID-19. Exporting activities also contributed to the positive operation results of Hoa Phat as the company exported 167,000 tons of steel in May (+100% yoy).

In 5 months of 2022, Hoa Phat produced 3.6 million tons of crude steel (+10% yoy), while total steel sales reached 3.4 million tons (+5% yoy). Construction steel is still the main product of the company, contributing 2 million tons to the total sale volume (+26% yoy), in which 631,000 tons of construction steel sales comes from exports (+100% yoy). Sales volumes of HRC steel reached 1.2 million tons, slightly higher than 2021.

Company outlook and valuation update

Domestic construction steel prices have reduced to 17,800 VND/kg due to low demand from builders. Although this price level is 14% higher than average of 2021 (15,900 VND/kg), it is still 2.1% lower than 5M average in 2022 of 18,210 VND/kg. Construction steel prices reached the peak in the middle of March at 19,500 VND/kg before reversing trend when China applied mass lockdowns in early April. Domestic real estate development activities have slowed as access to credit by real estate developers has become more difficult following some recent events that have lead to more scrutiny on capital raising through the credit markets.  Although the limitations in real estate credit could help to stabilize the market, it makes it more difficult for developers to raise funds for new project through the banking system or debt markets. Moreover, global steel prices remain subdued by low construction and industrial activities in China as lockdowns have been preventing many development activities. 

For the long-term, as lockdowns in China are lifted, steel demand for industrial and construction activities will return and global demand is expected to revert to pre-China lockdown levels. We also expect global steel prices can recover to the level of 800 USD/ton by the end of 2022 as economic activities in China recover.

We expect HPG can reach 154,026 bil.VND revenue (+3.4% yoy) and 24,828 bil.VND (-26.4% yoy) net profit in FY2022. Our projections are 3.7% and 0.6% lower to the company guidance in revenue and net profit, respectively, as we put a cautious view on the recovery of both domestic and global steel price till the end of 2022. Combining both DCF and P/E method, we derive a target pre-issuance price of HPG to the end of 2022 at 54,870 VND per share, equivalent to a 6.4x F. P/E multiple.