Can fruit revitalize HAG?

Transcription

1 Hoang Anh Gia Lai Group (HAG) [Non-Rated] Visit note Report Date: June 21, Current Price: VND9,060 Rev Growth 10.2% 104.7% 3.2% EPS Growth 71.7% -65.4% N/A GPM 40.2% 29.7% 15.5% NPM 47.6% 8.0% -15.8% EV/EBITDA 13.6x 16.2x 39.1x P/Op CF N/A 5.5x 3.9x P/E 5.8x 16.7x N/A 40% 20% HAG VNI 0% -20% -40% Jun-16 Sep-16 Dec-16 Mar-17 Industry: Conglomerate HAG VNI Company Overview: Market Cap: $370.0 mn P/E (ttm) N/A 16.3x Hoang Anh Gia Lai Group is a conglomerate with a heavy Foreign Room: $160.7 mn P/B (curr) 0.6x 2.3x focus on agriculture, including rubber, palm oil and fruit ADTV30D: $1.9 mn Net D/E 1.7x N/A plantations in Vietnam, Laos and Cambodia. The company State Ownership: 0% ROE -7.5% 14.1% also has a mixed-use property project in Yangon, Myanmar. Outstanding Shares: mn ROA -2.1% 2.4% Fully Diluted Shares: mn Phap Dang, CFA Senior Manager phap.dang@vcsc.com.vn ext. 143 Can fruit revitalize HAG? We joined HAG s tour to Gia Lai Province (Vietnam), Laos and Cambodia to visit its fruit plantations, which are HAG s latest bid to improve its financial condition. We were impressed with the scale and the quality of HAG s plantations, whose output is being exported to China. In terms of the domestic market, HAG is in talks with Mobile World Corp (MWG, which we rate BUY) to supply fruit to MWG s grocery chain BachhoaXANH, which makes lots of sense as the latter needs a high-volume and stable supply of fresh produce to accelerate its store roll-out. The sight during our trip of HAG palm oil trees not being cared for was a good reminder of past missteps and why the company has been widely thought of as having no way out. These fruit plantations may give HAG a chance to come back to life. How did fruit plantations come about for HAG? Saddled with debt and facing cash flow constraints caused by its heavy investments in rubber and palm oil, HAG needed something that could utilize its existing agricultural infrastructure but generate cash flows faster, unlike rubber and palm oil, which take years of cultivation before harvesting. Fruit emerged as a suitable candidate, especially passion fruit, which only takes about six months from planting to harvest. HAG started to plant fruit seeds in early ,686 ha of tropical fruit as of May 18, HAG has planted 17 kinds of fruit, led by passion fruit (1,483 ha), dragon fruit (2,988 ha), banana (2,826 ha) and mango (3,983 ha). In terms of geography, Vietnam, Laos and Cambodia account for 2,111 ha, 8,731 ha and 7,845 ha, respectively. HAG expects to reach a total of 20,800 ha of fruit plantations by YE2017. Per HAG, planting a wide variety of fruit is one way it reduces risks related to fluctuating market demand or plant diseases. HAG guides for revenue of VND2.6 trillion (USD113 million) from fruit sales in Per the annual report of its agriculture subsidiary HAGL Agrico (HSX: HNG), HAG targets VND1.06 trillion (USD46 million), VND680 billion (USD30 million) and VND843 billion (USD37 million) in revenue from passion fruit, dragon fruit and banana, respectively, in Sales of passion fruit have already started, while sales of banana are slated to begin in July 2017, followed by dragon fruit. Sales should ramp up quickly in 2018 as harvest areas expand. HAG s key market is China, whose fruit and vegetable imports from Vietnam have been surging. According to the Customs Office, Chinese imports of fruits and vegetables from Vietnam rocketed from USD435 million in 2014 to USD1.7 billion in In 5M 2017, See important disclosure at the end of this document VCSC<GO> June 21,

2 Vietnam s fruit and vegetable exports to China reached USD1.1 billion, jumping 41% vs 5M By exporting to China, HAG takes advantage of (1) the close proximity of its plantations to China, (2) rising Chinese fruit consumption as a result of its fast-growing middle-income class, and (3) the tropical climates in Vietnam, Laos and Cambodia to grow fruits that do not grow well in China, especially during winter. A partnership between HAG and MWG, if it happens, will benefit both sides. Per HAG, the company is in discussion with MWG to supply its fruit to MWG grocery chain BachhoaXANH. MWG has visited HAG s fruit plantations and was impressed with them, per our discussion with MWG. If it goes through, this partnership will enable HAG to establish a toehold in the domestic market. On the other hand, it will bolster BachhoaXANH s store roll-out, as securing high-volume, stable sources of fresh produce has been one of BachhoaXANH s biggest challenges. HAG expects good margins from fruit sales. Per HAG, COGS for its passion fruit currently amounts to about VND12,000-VND13,000 per kilogram compared to an average selling price of about VND20,000, implying a 35%-40% GPM. As commercial harvests and sales of other fruits have not taken place yet, their cost structures have not been made clear. However, HAG expects similar margins to, if not better than, passion fruit. Per HAG, its robust fruit margins are premised on (1) its extensive scale, which allows it to skip middlemen (i.e. small traders) and sell directly to major traders and wholesale markets in China, (2) premium pricing vs local farmers on the back of its large and stable supply, consistent quality and traceable sources (i.e. volume comes from one producer instead of being collected from various farmers), (3) a shorter route-to-market that underpins both efficient transportation and preservation of fruit quality, and (4) high yields backed by suitable climate conditions and sound cultivation practices aided by concentrated land, the plantations close proximity to big rivers, HAG s drip irrigation system and consultation from agricultural experts. See important disclosure at the end of this document VCSC<GO> June 21,

3 Figure 1: HAG s 2017 guidance VND bn guidance Revenue 6,441 6,335 Passion fruit N/A 1,055 Dragon fruit N/A 680 Banana N/A 843 Beef cattle 3,465 1,240 Rubber Myanmar property 460 1,142 Others 2, Gross profit 1,010 2,185 Passion fruit N/A 437 Dragon fruit N/A 303 Banana N/A 354 Beef cattle Rubber Myanmar property Others PBT -1, Source: HAG Figure 2: HAG s fruit plantations by variety Variety Size (ha) Mango 3,983 Dragon fruit 2,988 Banana 2,826 Green pomelo 1,684 Passion fruit 1,483 Jackfruit 1,448 Coconut 1,198 Longan 654 Orange 510 Durian 495 Avocado 464 Tangerine 213 Rambutan 183 Sugar apple 181 Star apple 173 Guava 131 Mangosteen 72 Source: HAG (as of May 18, 2017) See important disclosure at the end of this document VCSC<GO> June 21,

4 Figure 3: Commercial details of HAG s fruit plantations Time to first harvest (months) Useful life (years) Yield of first harvest (tons/ha/year) Mature yield (tons/ha/year) Dragon fruit Banana Mango Longan Jackfruit Durian Avocado Rambutan Green pomelo Terracotta orange Sweet orange Tangerine Sugar apple Guava Coconut ,000 fruit 16,000 fruit Source: HAG Figure 4: Vietnam s fruit and vegetable exports between China and other countries (USD mn) 2,500 2,000 1,500 1, M 2017 China Others Source: Custom office, FAVRI, VCSC See important disclosure at the end of this document VCSC<GO> June 21,

5 HAG s passion fruit grading line in Gia Lai Province (Vietnam) Passion fruit plantations in Laos See important disclosure at the end of this document VCSC<GO> June 21,

6 Dragon fruit plantations in Laos See important disclosure at the end of this document VCSC<GO> June 21,

7 Banana plantations in Cambodia Mango plantations in Gia Lai (Vietnam) See important disclosure at the end of this document VCSC<GO> June 21,

8 Rating and Valuation Methodology Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price current price)/current price + dividend yield, and is not related to market performance. This structure applies from May 27, RATING BUY OUTPERFORM (O-PF) MARKET PERFORM (M-PF) UNDERPERFORM (U-PF) SELL NOT RATED RATING SUSPENDED DEFINITION Total stock return including dividends over next 12 months expected to exceed 20% Total stock return including dividends over next 12 months expected to be positive 10%-20% Total stock return including dividends over next 12 months expected to be between negative 10% and positive 10% Total stock return including dividends over next 12 months expected to be negative 10%-20% Total stock return including dividends over next 12 months expected to be below negative 20% The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company. A rating that happens when fundamental information is insufficient to determine an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock. Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12- month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly. Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. See important disclosure at the end of this document VCSC<GO> June 21,

9 Contacts Corporate Head Office Hanoi Branch Bitexco Financial Tower, 2 Hai Trieu Street 109 Tran Hung Dao District 1, HCMC Hoan Kiem District, Hanoi Transaction Office Transaction Office 10 Nguyen Hue Street Nguyen Cong Tru Street District 1, HCMC District 1, HCMC Research Research Team Barry Weisblatt, Head of Research, ext barry.weisblatt@vcsc.com.vn research@vcsc.com.vn Digvijay Singh, Senior Manager, ext 145 Logistics and Transportation Banks, Securities, Insurance Anirban Lahiri, Senior Manager, ext Nghia Dien, Analyst, ext Phu Pham, Analyst, ext Son Tong, Analyst, ext 116 Macro Oil & Gas, Power and Fertilizer - Hien Nguyen, Analyst, ext 132 Duong Dinh, Manager, ext Luong Hoang, Analyst, ext Tram Ngo, Analyst, ext Thanh Nguyen, Analyst, ext 173 Consumer and Pharma Phap Dang, Senior Manager, ext 143 Retail Client Research - Dao Nguyen, Senior Analyst, ext 185 Duc Vu, Manager, ext Nghia Le, Analyst, ext Nga Nguyen, Analyst, ext Ninh Chu, Analyst, ext 196 Real Estate, Construction and Materials - Thanh Tran, Analyst, ext 139 Hong Luu, Manager, ext Anh Nguyen, Analyst, ext Vy Nguyen, Analyst, ext 147 Institutional Sales and Brokerage & Foreign Individuals Head of Institutional Sales Vietnamese Sales Michel Tosto, M. Sc. Dung Nguyen ext ext 136 michel.tosto@vcsc.com.vn dung.nguyen@vcsc.com.vn Retail & Corporate Brokerage Ho Chi Minh City Hanoi Quynh Chau Quang Nguyen ext ext 312 quynh.chau@vcsc.com.vn quang.nguyen@vcsc.com.vn See important disclosure at the end of this document VCSC<GO> June 21,