NKG – Demand recovery on foreign market

• In 2Q2023, NKG recorded revenue of VND 5,500bn (USD 232mn, -24%YoY, +26%QoQ), with sales volume of 236.6 thousand tons (-9%YoY, +21%QoQ). Of which, c. 67% was to exported markets (ASEAN, EU) owing to the demand recovery, especially from 2Q23. The 2Q gross profit margin (GPM) was increased to 9% (from the low-level of 3.1% in 1Q23), and gross profit reached VND 496bn (USD 20.9mn, +260%QoQ), when the main material (Hot Roiled Coil - HRC) is trade at the average price of USD 637/ton (-9% QoQ). It has also decreased its days of inventory on hand to 107 in 2Q, to avoid the risk of HRC price instability. As a result, NKG recorded the 2Q NPAT-MI of VND 125bn (-38%YoY), after recorded net loss in 1Q23.
• For 2H2023, we expect the sales volume can reach 464.4 thousand tons (increased by 8% compared to 1H23), mostly comes from export markets, and currently there is no new trade interventions (such as anti-dumping and countervailing duties) from key markets (EU, ASEAN). The 2H23 revenue will be VND 8,397bn (USD 354.3mn, -4%YoY).
• Because of the uncertainty of China’s residential market - the main customer, the material price may be at the current low-level of USD 600/ton. However, there is risk that strong fluctuation might occur in 2H2023, and with the appropriate inventory policy, we expect NKG can maintain the GPM of 7% in 2H. In term of the bottom line, at the expected net profit margin of 2.8%, we estimate NKG’s 2H23 net profit of VND 234bn (USD 9.9mn), compared with net loss of VND 775bn in 2H22.
• We use two methods (FCFE and PB) to evaluate the stock; our fair value comes at VND 20,100 value per share, implying a total return of -1.5%as of the closing price on August 15th, 2023, equivalent to a NEUTRAL recommendation for Nam Kim Group Jsc.