DGC consolidates its position through M&A

With high entry hurdles in the market, BSC thinks that DGC's active search for M&A prospects, together with the optimization of manufacturing activities, will assist to improve its leading position.

Net Profit Decreases

According to the Q1/2024 financial report, DGC generated roughly VND 2.4 trillion in revenue, a 4% reduction from the same time last year.

The cost of items sold grew by 2%, to more over VND 1.6 trillion. As a result, DGC's gross profit dropped by 14% to VND 766 billion.

Other cost categories did not have a substantial influence on DGC's business outcomes. As a result, the firm finished Q1/2024 with a net profit of VND 673 billion, almost 15% lower than the same time last year and the lowest profit since Q3/2021.

DGC said that the decline in income was the primary cause of the slump throughout the time. Specifically, income from fertilizers, DAP, detergent powders, and cleaning products climbed while revenue from yellow phosphorus and H3PO4 declined by 7%. Prices for these products plummeted as markets declined both nationally and globally.

DGC's 2024 annual general meeting adopted a revenue strategy of more than VND 10 trillion and a post-tax profit of VND 3.1 trillion. With the aforesaid statistics, DGC has met 23.4% of its sales objective and approximately 23% of its post-tax profit target after Q1/2024.

Negative Cash Flow

In its Q1/2024 financial report, DGC surprisingly reported a record negative business cash flow of VND 1,773.94 billion, compared to a positive VND 18 billion in the same period; investment cash flow was marginally negative at VND 79.2 million. Since its debut on the HoSE in 2014, DGC has never had such a big negative cash flow.

In terms of capital sources, as of the end of Q1/2024, short-term liabilities had decreased by 98.1% compared to the beginning of the year, resulting in a reduction of VND 1,236.4 billion, or 0.2% of total capital. The substantial decline in short-term obligations in the first quarter of 2024 might be the principal cause of DGC's record negative primary business cash flow.

In terms of investment plans for 2024, DGC intends to establish the Nghi Son - Duc Giang Plastic Caustic complex in phase 1 at a cost of VND 500 billion; the Alumin project will continue to be explored and surveyed for an investment license; and extend and enhance reserves at Mine 25 for VND 10 billion. DGC plans to combine Phospho 6 Company into Duc Giang Lao Cai Chemicals LLC and explore a merger with Apatit Phosphorus Joint Stock Company (PAT) into the Group. However, DGC's negative cash flow will make it harder to raise funding for these initiatives.

Challenges in Expanding Operations

In view of a considerable reduction in major industry income, DGC is considering moving its investment focus to the Nghi Son - Duc Giang project as a key driver of development in the next years. DGC intends to begin construction on the Nghi Son - Duc Giang project phase 1 in June 2024. BSC forecasts this project to be completed in stages, with 50% capacity in 2025 and full capacity in 2026, contributing to DGC's net revenue and gross profit.

DGC also bought Phospho 6 Joint Stock Company, expanding its yellow phosphorus capacity by 9,800 tons per year, resulting in a 16% increase in overall capacity. DGC's goal in developing yellow phosphorus capacity is to build a chain of thoroughly processed phosphorus products such as phosphoric acid, STPP, and so on, consequently boosting income and profit for the business. DGC also bought Tia Sang Battery Company (TSB) with the intention of entering the Lithium battery industry based on phosphorus—a important product in the growing electric car sector.

DGC's constant search for M&A prospects to optimize production activities will help to consolidate the company's industry leadership position. Furthermore, DGC's deeper participation in the value chain from input to manufacture and processing of output goods will improve earnings and provide it a competitive advantage over other chemical businesses in the industry.

DGC has hurdles in properly implementing the plan, including lower than projected phosphorus pricing and production volumes, legal concerns, potential environmental issues, and tax policy risks.