What will become a long-term driver for NKG?

1Q sales of NKG hit VND5,291 billion (19% QoQ, 21% YoY) with consumption reaching 254,503 tons (15% QoQ, 31% YoY), gradually rebounding to the peak in the 2021-2022 period. Export volume was 172,703 tons (38% QoQ, 65% YoY), earning VND3,710 billion in revenue (40% QoQ, 75% YoY). Some of NKG's main export markets include the US, Mexico, and the EU. According to management, sales volume in 2Q24 could increase by 10% QoQ.

KBSV expected the 2024 consumption output of the steel maker to reach 1.03 million tons (103% of the year's plan), of which revenue from export channels will still contribute a large proportion of total revenue thanks to the large price gap between the US and EU markets. Besides, it believed that domestic consumption will also continue its recovery trend in the coming time when construction and production of machinery, electronic equipment, and home appliance increase.

1Q GPM rose 757bps YoY, reflecting (1) a recovery from a low base after high-priced inventory was handled in 2023 and (2) a strong improvement in operating capacity compared to 1Q last year (79% vs 62%). We believe that the steel industry is entering a new cycle, and steel prices will rebound from 2H24 thanks to (1) higher domestic prices with rebounding consumption and (2) a recovering China real estate market, boosting prices for the global steel market in the period 2024-2026. KBSV projected GPM of NKG to be 8.7% and 8.5% for 2024 and 2025, respectively.

According to the management, Nam Kim Phu My Steel Mill should begin construction in April 2024 and start production in 1Q26. The project has a designed capacity of 800,000 tons/year and should help increase NKG's total capacity to 2,000,000 tons/year (67% compared to current) when it operates at its full capacity. The steelworks will focus on making high quality products to participate in new fields such as industry, automobiles, and household appliances (which have higher prices and help to improve GPM for NKG).

Investment capital for the project is VND4,500 billion, and the debt-to-equity ratio is 70 - 30., NKG has paid VND500 billion on site clearance and application for a construction permit. To raise capital for the steel mill, NKG plans to issue 131 million shares (50% of the outstanding) to existing shareholders for VND12,000/share or 2,500,000 ESOP shares for a par value of VND10,000/share. Both of the of the above options are expected to be implemented in 2024-2025. Once completed, it would mobilize VND1,605 billion (equivalent to 36% of investment capital for Nam Kim Phu My).

The NKG stock price has increased by 6% YTD. At times, it rose nearly 20% after the market correction in April, reflecting the prosperous 1Q24 business results and expectations about a strong bounce-back this year. KBSV expected the upward trend of steel prices to support continued improvement in the performance of the company. Besides, NKG's long-term prospects are also strengthened when Nam Kim Phu My Steel Mill goes into operation in 1Q26. KBSV determined the target price of NKG to be VND31,000/share, corresponding to EV/EBITDA and P/B forward valuations of 7.1x and 1.2x, respectively, with an expected return of 24% compared to the closing price on May 28, 2024.