Does QNS retain its "sweet flavor"?

In June, the QNS stock of Quang Ngai Sugar JSC surpassed its one-year historical top, and it remains one of the stocks on which investors place their expectations for future operations.

The forecast is made notwithstanding exchange rate concerns and the potential impact of increasing levies on sugar-containing items.

*QNS investing in additional nut milk product lines to expand revenue*

Q2 Forecast

QNS reported net revenue of VND 2,542 billion (18%) and pre-tax profit of VND 579 billion (62%). According to DSC Research, QNS's strong profit growth compared to the same period can be attributed to: (1) higher sugar prices in Q1/2024; (2) lower production costs due to increased productivity in the sugarcane region and stable operation of the sugar production line.

However, DSC Research observes that local sugar prices have fallen, forcing QNS's gross profit margin to fall by 8% from the previous quarter. Following record earnings, QNS expects overall income in 2024 to be VND 9,000 billion, with PTP at VND 1,500 billion, a considerable decrease from 2023.

QNS' profit margin is likely to improve further in Q2 as soybean prices, a crucial raw material for its milk division, fall. According to the Vietnam Commodity Exchange (MXV), soybean prices have remained at a four-year low as of July 16. The MXV commodity price index continues to fall in Q2/2024, reflecting a negative trend in the pricing of several agricultural commodities. This is a favorable indication for QNS since imported soybeans make up a big amount of raw soybeans (70%). However, as payments for imported items are paid in USD, QNS may not profit greatly from the price drop.

Challenges for QNS

According to MAS data, the dairy industry as a whole has an impact on QNS's soy milk segment, with milk consumption in Q1/2024 reaching 47 million liters (-3%) due to low consumption demand. It is known that QNS intends to launch two new lines of nut milk products in July, which MAS believes will be a driving force for revenue development in the dairy area.

For the sugar segment, QNS has a springboard from its expansion plan, which is based on 2023 outcomes and the government's support programs for the sector. This segment's profit margin is predicted to remain high in 2024, ranging from 29 to 31%.

*VND 579 billion is QNS's pre-tax profit in Q1/2024, up 62% compared to the same period in 2023.*

Analysts are optimistic about the ethanol plant project, which will enable QNS complete the value chain of sugarcane - sugar - biomass electricity - ethanol and provide additional revenue streams in the future.

Meanwhile, the Special Consumption Tax (SCT) Law and the modified Value-Added Tax (VAT) Law propose increasing the VAT rate on sugar goods and by-products from 5% to 10%. If these rules are enacted, the beverage industry would face extra pressure from rising production material costs owing to increasing sugar prices. The SCT may raise product prices, diminish purchasing power, and affect revenue and profitability. If enterprises do not reflect these expenses in their selling prices, the tax will lower their earnings.

Although QNS is well-regarded for its medium- and long-term prospects, investors should be aware that the "sweet flavor" of QNS might "turn sour" due to price volatility, international trade rules, and financial hazards...