GEX FOREIGN INVESTORS
Target price: VND 26,600
Share price (28-Dec-2018): VND 22,150
|(bn VND)||3Q18||3Q17||YoY||2Q18||QoQ||% annual target completed||Margin|
|NI attributable to shareholders||334||195||71.7%||70||376.0%||8.7%||5.9%||2.1%||6.5%|
Source: GEX, SSI Research
Q3 business results look quite positive, with revenue and profit before tax arriving at VND 3.83 tn and VND 483 bn, growing by 15.4% YoY and 37.6% YoY respectively. Cumulatively, GEX revenue and PBT up to 9M 2018 reached VND 10.049 tn (+16% YoY) and VND 1.103 tn (+45% YoY).
Electrical equipment – The decline in profit from transformer and electrical meters (due to EVN’s lower disbursement )in 9M18 has been mitigated by the profit growth in cable and wire, brought on by a lower copper price.
Business results of key GEX subsidiaries
|Revenue(VND bn)||Gross profit (VND bn)||Gross margin||PBT (VND bn)|
|Electrical equipment subsidiaries|
|Cable and wire (CAV)||1,887||2,445||30%||183||270||9.7%||11.0%||110||167||52%|
|Electrical meter (EMIC)||166||149||-10.2%||N/a||N/a||N/a||25||12||-51%|
|Logistic and utilities subsidiaries|
|Revenue||Gross profit||Gross margin||PBT|
Source: Companies, SSI Research
EVN disbursement slowdown adversely affects transformer and meter business results: The revenue from transformer subsidiaries including THI and HEM increased positively by 37% YoY to VND739bn thanks to the low base in 3Q17. Cumulatively, revenue from these 2 subsidiaries in 9M18 still dropped by -15% YoY to VND 1.857 tn. Gross profit in Q3 declined by -27% YoY, which implies a sharp gross margin contraction from 32% in Q3 to 17% during Q3 2017.
At the same time, revenue and pretax profit from meter business (EMIC) also declined by -10.2% and -51%YoY respectively due to intense competition from other manufacturers as the market is quite fragmented. There was also a -40% YoY decrease in the average price after EVN had set the ceiling price for the product in 2018.
The decline in profit from transformers and meters are also largely attributed to the slowdown in EVN investment in 2018, as the sales to EVN accounted for over 50% of total transformer revenue and 90% of total meter revenue. According to EVN, the total CAPEX disbursement of EVN up to 9M18 reached VND 65 tn, a decline by -6.4% YoY. The number of electricity networks completed and newly launched up to 9M18 also dropped by -30% compared to the same period last year. In addition, the trend of customers from the southern market switching to cheaper transformer lines in order to reduce construction expense also led to margin contraction of the product line.
On the contrary, the cable and wire is the sub-segment with highest revenue growth in the electrical equipment segment, with revenue and PBT growing by 30% and 52 respectively, comprising 63% of total revenue and 56% of consolidated results for GEX during the quarter. Excluding the tripling in revenue from materials and by-products that carries virtually no profit, CAV’s revenue from the core business of cable and wire would still attain a positive growth of 19% YoY. As only 12% of CAV’s revenue in 9M18 comes from EVN, the company is not materially affected by the slowdown in EVN investment. On the contrary, since CAV sales to EVN used to be quite low, the company can more easily push sales to this channel after consolidating into GEX who has developed a good relationship with EVN, which has partly contributed towards the positive growth of total CAV revenue in Q3.
CAV’s 3Q18 revenue and gross profit breakdown
|Revenue (VND bn)||Gross profit (VND bn)||Gross margin|
|Cable and wire||1,792||2,123||19%||217||305||41%||12%||14%|
|Materials and by-products||119||337||183%||2||(3)||-288%||1%||-1%|
Source: CAV, SSI Research
The gross margin of CAV also improved from 11% in 3Q17 to 12% for Q3 this year thanks to the correction in input costs. The price of copper, which accounts for around 70% of cable production costs, has corrected by 15% from its peak in early June to Sep due to the greater concern of global uncertainty that can directly affect the world-wide copper demand.
Utility & logistic: Revenue and gross profit from utilities in Q3 tripled to VND 150 bn and VND75 bn respectively, mainly thanks to the consolidation of VCW back in Apr 2018. On a standalone basis, revenue from water supply of VCW has been quite stable at VND 118 bn (+14% YoY from low level in 3Q17 and flat QoQ), and the profit from VCW in the quarter also increased by 31% YoY. The positive growth is attributed to the increase in sale volume to Ha Dong Water Company after the customer increased its water distribution capacity. In the meantime, revenue and PBT from STG also attained strong growth of 31% YoY and 65% YoY respectively, to VND 469 bn and VND59 bn thanks to improvement in port operation of both STG parent and its subsidiaries along with the logistic industry.
The divestment from Vinakip helped to boost PBT growth: In Q3, GEX booked a financial income of VND 140 bn from its full divestment of its 72.4% stake in Vinakip (UPCOM: KIP), a small subsidiary which produce household electrical equipments such as breaker, switch and aptomat. The divestment was planned to be at the beginning of the year. However, actual financial profit is much higher than the company’s expected level of VND 50-60 bn than it was previously.
Excluding all of the one-off profit events, PBT in 3Q18 would have advanced by 16.7% YoY, whereas the PBT in 9M18 would slightly drop by 3% YoY.
Cumulatively, the revenue and profit in 9M18 have accomplished 67% and 61% of the annual targets respectively.
|(bn VND)||9M2018||9M2017||YoY||% annual target completed||Margin|
|NI attributable to shareholders||724.9||446.2||62.5%||7.2%||5.1%||6.5%|
Source: GEX, SSI Research
Outlook and estimates
Given core business results in Q3, we fine-tune our 2018 revenue forecast by 2% to VND 13.961 tn (+16.5% YoY). However, we revise up our PBT forecast by 20% to VND 1.778 tn (+8% YoY) given the higher-than-expected profit from the Vinakip divestment in Q3. In addition, in the fourth quarter, GEX expects to book another profit of VND40-50 bn from the divestment of CAV’s 51% stake in Hanoi Plastic (UPCOM: NHH).
In 2019, we expect the total revenue and PBT can increase by 13% and 1.7% YoY to VND 15,783 bn and VND 1,628bn. Excluding the one-off profit, the 2019 PBT would be expected to advance by 19%YoY supported by the expected recovery in EVN disbursement. Regarding the electricity network, EVN in the near term will accelerate the deployment of Vung Ang – Doc Soi – Pleiku 2 500 kV transmission line, with around 742km of length passing through 9 provinces from central to southern Vietnam. The project has a total investment value of VND 12 tn, and would help to enhance the transmission capacity of the 500 kV of the national power system. This project upgrades the supply of electricity to the South during the coming time to meet future demand in this area.
On the other hand, the profit from utility is expected to increase by 29% YoY, thanks to the commencement of the Ninh Thuan Solar Energy Plant in the middle of the year, with capacity of 50MW, equivalent to 69% of the current capacity. The plant is expected to enjoy a favorable price of $0.0935/kwh on a flat fee basis for 20 years.
Valuation and investment view
At the current price, GEX is trading at PER 2018 and 2019 levels of 9x and 8.7x respectively. Our rating for the stock is Outperform, with a 1-year target price of VND 26,600 deriving from the Sum-of-the-parts method. We revise down the PER targets electrical equipment and utility from the levels of 12.5x and 10x respectively to 11x and 8x respectively due to weaker market condition.
|Business segment||2019F||2019 EPS||Target PE||Value per share|
(Source: SSI Securities Services)
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