HPG – The bright spot from HRC makes up for the shortfall from the domestic market

• In 2Q2023, HPG recorded revenue of VND 29.5tn (USD 1.2bn, -21%YoY, +11%QoQ), with sales volume of 1.8 mn tons (-12%YoY, +13%QoQ). Construction steel volume is still at a low, while volume of Hot Roiled Coil (HRC) is the bright spot (~255,000 tons/month, which is 16% higher than the period 2021-2022), thanks to: 1/ HRC Vietnam has no import tax in ASEAN countries, 2/ Demand for HRC and downstream products (galvanized sheet, steel pipe) shows signs of recovery in ASEAN and European countries.
• The 2Q gross profit margin (GPM) was increased to 11% (from the low-level of 6.3% in 1Q23), and gross profit reached VND 3,195bn (USD 134.8mn, +91%QoQ, -51% YoY), when the main material (coking coal and iron ore) downed 19% and 11%, respectively. In term of the bottom line, HPG recorded the 2Q NPAT-MI of VND 1,702bn (-61% YoY, -+278%QoQ), and the 1H23 NPAT-MI reached VND 1,831bn (-85%YoY), fulfilled ~25% of our full-year forecast.
• For 2H2023, in term of domestic market, we expect the sales volume of construction steel can reach 1.7 mn tons (equivalent to 1H23), before the real estate market will officially recover from the end of the 4Q23. In term of exporting HRC, the company has had sales orders until the end of September; and we expect the company's HRC consumption volume can reach 1.1 million tons in 2H2023 (equivalent to 1H203). Thereby, we expect HPG's revenue in 2H23 to reach VND 49.25 tn (2.1 bn USD, down 13% YoY). In term of the bottom line, at the expected net profit margin of 11%, we estimate HPG’s 2H23 net profit of VND 5,436bn (USD 229mn), compared with net loss of VND 3,784bn in 2H22. For 2023, we expect HPG net profit of VND 7,267bn (USD 306.6mn,-14%YoY).
• We use two methods (FCFF and PB) to evaluate the stock; our fair value comes at VND 24,600 value per share, implying a total return of -9.6%as of the closing price on August 30th, 2023, equivalent to a NEUTRAL recommendation for Hoa Phat Group Jsc.