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HPG - Becoming The “Steel King”

We believe HPG is becoming the “Steel King” in the domestic market for playing an important role in the industry’s supply chain owing to the Dung Quat Steel Complex in terms of geography, value chain and product range. The complex will, firstly, help the company expand in the the Southern part of the country. Secondly, HRC capacity will enable HPG to move upstream in the flat steel value chain as it probably will become a supplier for domestic coated steel producers. Lastly, high-quality wire rods and PC steel, as import-competing products, are going to expand HPG’s product mix to more niche markets for steel products.

We think that despite its remarkable capacity expansion, HPG still has cost of production advantages which will enable it to achieve sustainable sales growth. Its BOF furnaces can maintain HPG’s strength against most domestic steel makers in terms of production costs. Moreover, we believe that HPG is more efficient than Formosa Ha Tinh (FHS)  in terms of unit cost. 

HPG will be able to improve its gross margin owing to both internal and external factors. Despite weakened steel prices, HPG's gross margin can be expanded from 18.1% (2019E) to 20.5% in 2020F with the support from coking coal (-10%, yoy) and iron ore (-8%, yoy). Moreover, HPG’s sustainable gross margin allows it to survive during unfavorable market conditions. Even if steel prices go down, it could be a catalyst for HPG as weak competitors might get eliminated from the market.

Using FCFF, PE and PB methods, we come up with a fair value of VND 33,400 per share, equivalent to a total return of 32% based on the closing price on January 16th, 2020. Hence, we recommend to BUY  this stock.