What prospects for HSG?

HSG's 3Q inventory decreased by 15% QoQ. Raw materials in transit fell 73%, showing initiative and efforts of the group in controlling input material costs. In the 2Q FY24 update report, Nguyen Duong Nguyen, analyst at KB Securities Vietnam, mentioned that HSG increased its stockpiling of cheap raw materials in 1H24 when HRC prices fluctuated around the bottom from 3Q22 (USD500-520/ton). However, after HRC prices fell below the above level, he believed that HSG would incur inventory provision costs in 4Q FY24.

In KB Securities Vietnam’s view, the domestic market will be the main driving force for HSG's consumption growth in the coming time with (1) the gradual recovery of the residential real estate market and (2) higher construction demand at the end of the year. With HRC prices falling faster than the average price, HSG should further lower its product prices to improve consumption output while maintaining a GPM of 11-12% in the medium term.

In addition, as mentioned in the 2Q24 report, Nguyen Duong Nguyen also expected the anti-dumping tax on galvanized steel imported from China and Korea to be approved in the coming time, helping to improve domestic galvanized steel sales volume. HSG will benefit the most thanks to maintaining the largest market share of galvanized steel in the domestic market (28.4% by the end of 2023) and its output for FY24/FY25 may hit 1.89/1.98 million tons.

The increase in trade defense measures from HSG's main export markets, such as the US and EU, will have a negative impact on this group’s export output in the short and medium term. However, in the long term, Nguyen Duong Nguyen believed that Vietnamese steel producers would still have some competitive advantages in the export market since (1) the price gap in the US and EU continues to be maintained; and (2) the tax rate applied to steel products imported from Vietnam is lower than the tax rate applied to China.

China's steel export prospects are expected to decline in the coming time as major markets such as the US and EU increase trade defense measures. This has caused steel prices in China to fall by an average of 11% since the beginning of 3Q24 to stimulate domestic consumption demand amid high steel inventories (estimated figures for August 2024 are 13.6 million tons, down 5% MoM but up 6%/4% YoY). With high inventories and lower EBITDA margins, Nguyen Duong Nguyen believed that manufacturers would prioritize inventory reduction and capacity optimization in the coming time, which could put further pressure on steel prices in the short term. However, steel prices may stabilize later when supply and demand in China's domestic steel market rebalance.

HSG's share price has gained by 15% since 2Q FY24 update report, reflecting expectations of (1) a recovery in domestic consumption output and (2) the application of an anti-dumping tax on galvanized steel with China and Korea, before experiencing corrections due to unfavorable developments in steel prices. “We changed our forecast model, reducing HSG's FY24/FY25 net profit by -8.2%/-16.3% compared to the previous period to reflect the impact of declining HRC prices, which will raise HSG's provisioning costs in the short term. Applying two valuation methods, EV/EBITDA and P/E, with targets of 8x/12x respectively, we determine the fair value of HSG for FY2025 at VND22,6000/share (P/E and P/B forward FY2025 are 16x/1.1x), corresponding to a return of 9% compared to the closing price on August 29, 2024,” said Nguyen Duong Nguyen.