Equities | Vietnam

Materials - Industrial Metals

Sector Focus 29 July 2021

Positive impacts from Chinese export tax changes

 The Chinese government just announced that export taxes on chromium iron and
high-purity pig iron will be raised, such that export tax rates of 40% and 20%,
Vo Thi Ngoc Han, CFA respectively, will be applied post adjustment from 1 August.
Director, Head of Industrials Research
han.vtn@hsc.com.vn  Also re. China, export tax rebates of 13% on CRC (cold-rolled coil), GI (galvanized
+84 28 3823 3299 Ext. 314 steel sheet) and GL (galvalume steel sheet) will be removed from 1 August.
 These changes should reduce steel export activities in China; any shortages on
the back of this in global steel sheet supply will support prices. This will benefit for
steel sheet producers in Vietnam including HSG, NKG, and HPG, all Buy-rated.

Chinese export tax changes, in an effort to reduce steel exports

With the aim of promoting the transformation and upgrading of its steel industry and
high-quality development, China’s ‘Customs and Excerpted Rules Committee’ (with
the approval of the Chinese State Council) issued a notice that, starting from 1 August,
export tariffs of chromium iron and high-purity pig iron will be raised, and respective
export tax rates of 40% and 20% will be applied after adjustment.
Furthermore, from the same date the existing 13% Chinese export tax rebate for steel
products (including CRC, GI and GL products) will be cancelled.

Benefits to Vietnamese steel producers

In our view, the lifting of export taxes for chromium and pig irons to 40% and 20%
respectively in China, a major producer, will support (and, likely, push up) export prices
of these products significantly going forward. There are also efforts by China to reduce
the export activities of semi-input materials of steel producers.
The removal of Chinese export tax rebates of CRC and steel sheet products will further
leave a potential shortage in supply to global steel sheet market.
Amongst top five biggest steel sheet producers in Vietnam, we have three listed
companies under coverage including HSG (#1), NKG (#2) and HPG (#5) – they should
all be major beneficiaries from these policy changes.
Currently, export demand for steel sheet products is very strong, mainly from the US
and EU markets. With very strong prices, margins from steel sheet export activities is
abnormally high; this is expected to more than offset for any weakness in domestic
demand due to negative impacts from the COVID-19 resurgence in Vietnam.

Recommendations
We keep unchanged our bullish view on the steel industry on the back of strong steel
prices globally, margin expansion on high export demand, and pent-up demand in
domestic post COVID-19 in Vietnam.
Our ratings on our covered steel companies are all Buy, with TPs of 65,400 (38.9%
upside) for HPG, VND46,200 (25.2% upside) for HSG, and VND41,100 (23.8%
upside) for NKG.
HPG, HSG, and NKG are trading at respective FY21 P/Es of 6.8x, 4.5x, and 2.9x – all
very cheap valuations historically helped by the strong near-term prospects.

Price Rating TP (VND) Up/(down) P/E (x) EV/EBITDA (x) Div. yield (%)
Ticker (VND) New Old New Chg (%) side (%) 2021F 2022F 2021F 2022F 2021F 2022F
Hoa Phat Group HPG 47,100 Buy - 65,400 - 38.9 6.84 6.56 5.51 5.29 2.12 2.12
Hoa Sen Group HSG 36,900 Buy - 46,200 - 25.2 4.45 6.16 3.33 3.93 2.71 4.07
Nam Kim Steel NKG 33,200 Buy - 41,100 - 23.8 2.93 6.32 3.16 5.00 2.92 3.01
Share prices as of 29 July 2021.
Source: Companies, FactSet, HSC Research

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 Sector Focus - Materials - Industrial Metals 29 July 2021

Weakness in domestic demand likely to be more than

offset by strong export activities
New Chinese export policies, effective from 1 August, including (1) the application of
higher export taxes for chromium iron and pig iron and (2) the elimination of 13%
export tax rebates on CRC, GI and GL products will impact positively on Vietnamese
steel producers. These should lead to a slowdown in export activities from China,
and consequent higher export prices. We keep unchanged our bullish view on steel
industry shares despite COVID-19 resurgence in Vietnam, as stronger exports
should more than offset any weakness in domestic demand.

Vietnam steel producers should be beneficiaries with the changes of export taxes in
China. Weakness in domestic demand due to the pandemic is expected to be offset
by strong demand from export markets coupled and consequent higher selling prices
of steel sheet and HRC in 2H21.

COVID-19 impacts negatively in domestic demand on steel

While the outlook for exports looks positive given recent developments (especially
those in China), demand locally is looking harder. Indeed, under Vietnam’s ‘Directive
16’ (D16), most construction projects have been stopped. Only urgent and the
important projects (such as the Metro in HCMC) are allowed to continue, although
strict containment measures apply.
Therefore, domestic demand for steel products (including all types of construction
steel, steel pipe and steel sheet) will likely be hit sharply during 3Q21 lockdowns.
However, we expect the pandemic to be gradually contained through 3Q21 – this is
our house view, based on government vaccination targets – at which point we can
expect pent-up demand to drive steel product demand recovery.
The impacts look to be different for each of our covered steel companies; we discuss
each of these below.
Hoa Phat Group
As Figure 1 shows, HPG’s construction steel and steel pipe are largely hit by COVID-
19 resurgence in Vietnam as most of these products are consumed domestically.
Figure 1: Sales breakdown by markets, HPG
Construction steel and steel pipe are biggest hit by COVID-19
FY17 FY18 FY19 FY20 1H21 Notes
Construction steel
Export portion 7.6% 10.1% 9.6% 15.9% 19.9% Mostly hit by COVID-19
Domestic portion 92.4% 89.9% 90.4% 84.1% 80.1%
Billet
Export portion 100.0% 100.0% 100.0% No impact by COVID-19
Domestic portion 0.0% 0.0% 0.0%
Steel pipe
Export portion 1.7% 2.5% 2.7% 2.6% 4.3% Mostly hit by COVID-19
Domestic portion 98.3% 97.5% 97.3% 97.4% 95.7%
Steel sheet
The company easily push its export activities to
Export portion 52.6%
maximize the profitability during pandemic
Domestic portion 47.4%
HRC product
All HRC's products have been made with forward
Export portion 0.0% 0.0%
contracts. No impact by pandemic
Domestic portion 100.0% 100.0%
Total
Export portion 6.3% 8.4% 13.3% 43.1% 24.6%
Domestic portion 93.7% 91.6% 86.7% 56.9% 75.4%
Source: HSC Research

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 Sector Focus - Materials - Industrial Metals 29 July 2021

Meanwhile, export demand for steel sheet remains strong and HRC orders, which are
signed on forward contracts, remain on track. For these segments, we see relatively
limited downside in 3Q21.
With regard to selling prices, HRC prices in 3Q21 are likely to continue to be very
strong at USD973/tonne (+24.8% q/q) while construction steel prices have remained
unchanged in July. Strong HRC and export steel sheet prices will continue to result in
margin expansion in 3Q21.
Regarding production during lockdown period: Management has also advised that
HPG has prepared a back-up plan in case Hai Duong and Dung Quat are locked down
(key factory locations) but details are unavailable as yet.
It is our view that if the current COVID-19 outbreak is gradually contained by the end
of August, 3Q21 earnings will remain strong y/y – and even q/q – and that HPG should
remain on track to meet our FY21 forecasts, which call for net sales and net profit of
VND157tn (+74.3% y/y) and VND30.8tn (+129.1% y/y) respectively.
HPG is trading on an FY21 P/E of 6.8x and an FY22 P/E of 6.7x. This is cheap versus
its average 1-yr forward P/E of 8.5x (since beg-FY19). We retain our Buy rating on
HPG and our target price of VND65,400 (upside: 38.9%). Any weakness in the share
price is a good opportunity to Buy.
Hoa Sen Group
HSG’s factories are located in a total of five provinces across North, Central and South
of Vietnam. Of which, the key factories are located in Ba Ria - Vung Tau (in the
Southern area) and Nghe An and Binh Dinh (each in the Central area). The company
has been able to keep its factories running as it has implemented effective
containment measures.
According to the company, 50% of the workers in its factories remain onsite full time
in order to remain isolated. HSG takes care of accommodation and meal expenses for
these employees over the lockdown period and also pay an additional allowance. The
additional costs are not significant relative to total operating costs and the benefit of
keeping key factories running smoothly is enormous.
Domestic demand for steel products can be expected to be impacted negatively as a
few construction projects can fully meet the necessary social distancing requirements
under the government’s Directive 16.
The key domestic products of HSG including steel sheet (accounting for 37.6% of total
steel sheet volumes) and steel pipe products (accounting for 93.2% of steel pipe
volumes).
Figure 2: Sales volume breakdown, HSG
Export volume accounted 51.7% of total volume in 9M21
Tonnes 3Q20 3Q21 Growth y/y 9M20 9M21 Growth y/y
Steel sheet 281,979 487,775 73.0% 835,712 1,316,780 57.6%
Domestic 157,119 183,476 16.8% 427,544 463,518 8.4%
Export 124,860 304,299 143.7% 408,168 853,262 109.0%
Steel pipe 116,559 147,141 26.2% 274,070 393,230 43.5%
Domestic 110,221 137,068 24.4% 263,593 361,997 37.3%
Export 6,338 10,073 58.9% 10,477 31,233 198.1%
Total steel volume 398,538 634,916 59.3% 1,109,782 1,710,010 54.1%
Total domestic 267,340 320,544 19.9% 691,137 825,515 19.4%
Total export 131,198 314,372 139.6% 418,645 884,495 111.3%
Portion to sales
Domestic 67.1% 50.5% 62.3% 48.3%
Export 32.9% 49.5% 37.7% 51.7%
Source: VSA, HSC Research

Following discussions with the company, we have learned that in July, domestic
demand for steel sheet and steel pipe is estimated to have decreased by around 30-
40% relative to the same period pre-COVID-19. We currently forecast that HSG will
sell about 40,000-50,000 tonnes of steel per month domestically in 4Q21 (a decrease
53-63% versus the same period pre-COVID).

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 Sector Focus - Materials - Industrial Metals 29 July 2021

As such, in this context the company is trying to push export volumes as fast as
possible in order to maintain and maximize the utilization rate of their facilities. A higher
percentage of exports will also result in improved margins.
It should be noted that we agree with HSG management that domestic demand will
surge once social distancing measures are eased and construction projects can
resume.
We understand that HSG has signed back-to-back forward contracts for all export
orders until end-November. The average export volume per month will then be
120,000 tonnes. This is substantially higher than the 95,000 tonnes per month
exported in the first 9M21 and the 85,000 tonnes exported in 4Q20.
Together with domestic volume of around 40,000-50,000 tonnes per month, total steel
sales volumes are expected to amount to 160,000-170,000 tonnes in 4Q21. This
represents a 20-24% decrease in sales volumes versus the same period pre-COVID-
19.
It should also be noted that export prices (for July through Nov. of this year) look likely
to be even higher than those seen in the 9M21 period. This trend in steel prices reflects
continued strong demand in the EU and North America. Therefore, export margins are
set to expand going forward and, when coupled with a better product mix (and despite
the negative impact of the drop in domestic demand), likely profit remains in-line with
our forecasts. We therefore keep unchanged our FY21 earnings forecasts calling for
net profit of VND4,058bn (+251.8% y/y).
HSG is trading on FY21-22 P/Es of 4.5x and 6.2x, respectively. We maintain our Buy
rating on HSG with TP of VND46,200 (25.2% upside).
Nam Kim Group
NKG has largest export portion to sales amongst three steel listed companies with
58.8% of total sales volume in 1H21. The key export markets of NKG are US and EU
markets.
During lockdown, the company have organized all of the workers in its factories remain
onsite full time in order to remain isolated. NKG takes care of accommodation and
meal expenses for these employees over the lockdown period and also pay an
additional allowance. The additional costs are not significant relative to total operating
costs and the benefit of keeping key factories running smoothly is enormous.
Domestic demand for steel products (both steel pipe and steel sheet) can be expected
to be impacted negatively as a few construction projects can fully meet the necessary
social distancing requirements under the government’s ‘Directive 16’. However, the
company will proactively to focus their production for steel sheet products (meaning
reducing steel pipe products) to speed up the delivery time of export orders during
lockdown period. This could help them to minimize the impacts of domestic weakness
demand.
Figure 3: Sales volume breakdown, NKG
Export volume accounted for 58.8% of 1H21 sales volume
Tonnes 2Q20 2Q21 Growth y/y 1H20 1H21 Growth y/y
Steel sheet 104,767 228,362 118.0% 223,039 422,867 89.6%
Domestic 55,365 75,633 36.6% 105,976 118,270 11.6%
Export 49,402 152,729 209.2% 117,063 304,597 160.2%
Steel pipe 42,835 49,915 16.5% 72,835 95,358 30.9%
Domestic 42,835 49,791 16.2% 72,835 95,234 30.8%
Export 0 124 n/a 0 124 n/a
Total sales volume 147,602 278,277 88.5% 295,874 518,225 75.2%
Domestic 98,200 125,424 27.7% 178,811 213,504 19.4%
Export 49,402 152,853 209.4% 117,063 304,721 160.3%
Portion to sales 100.0% 100.0% 100.0% 100.0%
Domestic 66.5% 45.1% 60.4% 41.2%
Export 33.5% 54.9% 39.6% 58.8%
Source: VSA, HSC Research

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 Sector Focus - Materials - Industrial Metals 29 July 2021

Export prices in 2H21 are looking even higher than those in 1H21 thanks to the strong
prices in US and EU markets. While the input material prices, HRC, have been
decreased about 10% or so to USD920-950/tonne from peak of USD1,050/tonne or
so in May-21. This helps NKG to continue expand its margins in 2H21. We therefore
keep unchanged our FY21 net profit forecast calling for VND2,013bn (+582% y/y).
NKG is trading at a very cheap valuation of FY21-22 P/Es of 2.9x and 6.3x
respectively. Retain our Buy rating on NKG with TP of VND41,100 (upside 23.8%).

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 Sector Focus - Materials - Industrial Metals 29 July 2021

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