VHC - Improving long-term competitiveness

1Q 2019: Profit margin improved thanks to favorable short-term factors

• 1Q 2019 net revenue was flat (-0.8% YoY) due to weak demand in the US and China while Van Duc Tien Giang's results are no longer consolidated.
• Gross profit margins surged to 24% (1Q 2018: 14%) as many contracts were finalized at the end of 2018 at high selling prices while raw material prices plummeted during the period.
• Combined with profit from affiliates (Van Duc Tien Giang), net income reached VND 307 billion, three times higher than in the same period last year.
• VHC has completed 18% of its revenue plan and 24% of its PAT plan for 2019.

2019: Completing supply chain, expanding market base

VHC will adjust selling prices downwards to trigger a recovery in sales in markets that declined in 2018, to grow in China and to open new markets in the Middle East and Latin America.

In China, VHC will promote retail sales of value-added products via Alibaba’s e-commerce channel, realizing the B2C sales strategy set in 2017.

We forecast VHC's net sales will reach VND 10,086 billion, a slight increase of 8.8% YoY due to lower selling price adjustments while production will increase sharply by 20%. Material fish prices will also decrease when industry production is forecasted to increase 6.6% YoY. Gross profit margins will reach 19%, lower than 22% in 2018. Net income comes at VND 1,273 billion (-12% YoY). EPS is VND 13,448 (-12% YoY).

Valuation and recommendation

Gross profit margins in the remaining three quarters of 2019 are unlikely to remain as high as in 2018 and 1Q 2019. However, compensating for the decline in prices is the ability to expand export markets as well as volumes.

In the long term, the fingerling project will help VHC solve its material fish shortage problem, improve product quality and reduce cost prices. In addition, distribution via Alibaba will help VHC cut costs and directly approach high-income customers who have great demand for value-added products. Differences in customer groups and distribution channels will create conditions for the company to maintain its competitive advantages while the whole industry is boosting exports to China.

RongViet Securities values VHC shares at VND 112,500, 23% higher than the closing price on May 31, 2019 and recommends BUY for VHC. Our target price is 10% lower than in December 2018 due to short-term tensions in some major markets.