1 CMC JOINT STOCK COMPAMY (HNX: CVT) Company report Construction material: Ceramic & Granite Tiles Steel sector 13/05/2015 Key indicators Market cap (VND bn) 387 Outs. Shares (mn) by end 2014 160 Avg 10D trading volume (units) 137,000 Thien Viet Securities Company│ www.tvs.vn Plenty of room for potential growth Real estate shows signs of recovery benefiting from falling interest rate and pro-growth policies: loosen lending requirements regarding VND 30.000Bn package, property foreign ownership are approved. Granite tiles is still undersupplied (the current capacity is 66mn sqm/year vs. forecast 140mn sqm/year by 2020) Positive earnings outlook Sales is expected to surge by 14%p.a in 2014-2018 supported by the 2nd granite tiles production line (5-6mn sqm) likely to come online in Jul 2015 in CMC 2 Factory, making the total capacity up to 13.5mn sqm, (63% capacity is used for granite tiles, equivalent to 13% total capacity of the entire granite tile industry by 2016. Widening gross margin as granite tiles segment (~25% gross margin) gaining ground over ceramic segment from 52% to 72% in sales structure during 2014-2018. Strong balance sheet & improving profitability Despite the current CMC2 expansion, CVT still manage sufficient capital to finance its project with 30% equity and 70% debt, making Debt/Assets ratio remains at healthy levels of 0.49x while keeping current ratio (showing the ability to repay due debt) at 1.3x, a sharp improvement from 0.8x (2013). CVT is currently the most profitable listed firm in tile sector. Its ROE surged from 16% in 2013 to 29.3% in 2014, and 22% in 2015F, due to soaring EBIT margin (from 8.4% to 15% in 2014, & 13.7% in 2015F). Business risks: Stiff competition with local players (Viglacera, Dong Tam, Prime…) and cheap Chinese products, forcing CVT to increase its trade discount. Moreover, outdated ceramic production line requires high maintenance expense. However, CVT is shifting its business to granite tile segment to mitigate this inherent risk. Switching to a lucrative segment, granite tiles, CVT sales and profit are expected to accelerate the next few years. CVT is currently trading at 6.5x 2015 PE and 1.3x 2015 PB while offering an attractive dividend of 25% (5% in cash, 20% in stock). CVT is expected to be traded at 29,000VND/share in 2015 compared to the current price of 23.900VND/share, +21%. BUY Price (12/5/2015) 23,900 Target price (VND) 29.000 2015 PE(x) 6.5x 2015 PB(x) 1.3x Upside( %) 21% Dividend 2015 20%-25% 2015 EPS growth** 11% 2015 ROE 22% 2015 Debt/Asset 49% - 5 10 15 20 01/10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12 01/13 05/13 09/13 01/14 05/14 09/14 PE CVT PE VNINDEX PE -50% 0% 50% 100% 150% 200% 250% 300% Price CVT VNINDEX Vietna m Ceme nt Copr… CEO Nguye n Quan Huy… Song Hong Copr 4% Others 80% Ownership
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CMC JOINT STOCK COMPAMY (HNX: CVT) Company report Construction material: Ceramic & Granite Tiles
Steel sector
13/05/2015
Key indicators
Market cap (VND bn) 387
Outs. Shares (mn) by end 2014 160
Avg 10D trading volume (units) 137,000
Thien Viet Securities Company│ www.tvs.vn
Plenty of room for potential growth Real estate shows signs of recovery benefiting from falling interest rate and pro-growth policies: loosen lending
requirements regarding VND 30.000Bn package, property foreign ownership are approved. Granite tiles is still undersupplied (the current capacity is 66mn sqm/year vs. forecast 140mn sqm/year by 2020) Positive earnings outlook Sales is expected to surge by 14%p.a in 2014-2018 supported by the 2nd granite tiles production line (5-6mn
sqm) likely to come online in Jul 2015 in CMC 2 Factory, making the total capacity up to 13.5mn sqm, (63% capacity is used for granite tiles, equivalent to 13% total capacity of the entire granite tile industry by 2016.
Widening gross margin as granite tiles segment (~25% gross margin) gaining ground over ceramic segment from 52% to 72% in sales structure during 2014-2018.
Strong balance sheet & improving profitability Despite the current CMC2 expansion, CVT still manage sufficient capital to finance its project with 30% equity and
70% debt, making Debt/Assets ratio remains at healthy levels of 0.49x while keeping current ratio (showing the ability to repay due debt) at 1.3x, a sharp improvement from 0.8x (2013).
CVT is currently the most profitable listed firm in tile sector. Its ROE surged from 16% in 2013 to 29.3% in 2014, and 22% in 2015F, due to soaring EBIT margin (from 8.4% to 15% in 2014, & 13.7% in 2015F).
Business risks: Stiff competition with local players (Viglacera, Dong Tam, Prime…) and cheap Chinese products, forcing CVT to increase its trade discount. Moreover, outdated ceramic production line requires high maintenance expense. However, CVT is shifting its business to granite tile segment to mitigate this inherent risk. Switching to a lucrative segment, granite tiles, CVT sales and profit are expected to accelerate the next few years. CVT is currently trading at 6.5x 2015 PE and 1.3x 2015 PB while offering an attractive dividend of 25% (5% in cash, 20% in stock). CVT is expected to be traded at 29,000VND/share in 2015 compared to the current price of 23.900VND/share, +21%.
* In 2014, CVT issued 8 mn shares to increase charter capital from VND 80bn to VND 160bn. ** The firm also plans to issue ~3.2 mn shares and pay out VND500/share as 2014 dividend, making the diluted 2015F EPS of 3.077 VND/share.
The world ceramic tile inventory has been increasing since 2009 due to the global economic downturn plus more Chinese, Indian companies have entered to the market and increased their production recent years. This situation blocked local producers from liquidating stock via exporting.
Likewise, Vietnam ceramic market (including: ceramic and granite tiles has become oversupplied since 2007 as producers mushroomed to take advantage of pro-growth policies. Moreover, economic recession and frozen real estate market have hammered the ceramic market since 2011. This situation caused inventory to rocket up to 30% total production although players has been operating at only 70% capacity. In 2012, the utilization rate dropped to 75% (of 360mn sqm ceramic tile capacity) and 60% (of 66mn sqm granite tile capacity).
The recent recovery of property market (due to falling interest rate, increase government spending to upgrade infrastructure system etc.) has allowed local players to reduce inventory and revive their businesses.
Tile demand is still on upward trend until 2020 but the door is open for granite tile segment only. According to Ministry of Construction, ceramic tile demand is forecasted to reach 350mn sqm/year (90mn sqm for exports) (compared to current capacity of 360mn sqm/year), which means no more approval for greenfield and expansion plan in this segment. On the contrary, granite tiles is still undersupplied as the current capacity is only 66mn sqm/year vs. the forecast 140mn sqm/year by 2020.
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Products: Granite products accounted for 52% of total revenue in 2014 (vs. 48% of ceramic) and capture 80% stake in total profit.
Distribution network: 80 distributors across the country, in which 83% of 2014 sales came from the Northern region. CVT targets to increase granite sales in Southern region by 30% in 2015-2016 due to strong demand in this area.
Flexible in business strategy:
The domestic tiles industry includes (1) Small size market with poor designs & thin margin due to low entry barrier, stiff competition, especially from Chinese imports. (2) Larger size market with various designs and high margin because of high entry barrier, fewer players and growing demand (3) Hi-end segment, mostly imported from Italia, Spain serving specific customers segment.
CVT has switched from small sizes (30x30cm) to bigger size tiles (larger then 50cm*50cm) and from ceramic to granite tiles in response to growing demand & to stay away from a dead-end price war with Chinese & local products.
Factories: CVT has 2 factories: CMC1 (5mn sqm/year of ceramic tile) and CMC2 (3.5mn sqm/year of granite tile). CVT is expanding the capacity by installing a new 5-6mn sqm granite production line since Sep 2014 to increase total capacity up to 13.5mn sqm/year. The new granite line is expected to come into production from July 2015 onwards, making CVT to acquire 13% total capacity of the entire granite tile industry.
Easy access to stable material sources: CVT is located Viet tri, Phu Tho with available reserve of its most important material-feldspar (3.9mn tons) and other mineral materials.
CVT – Acceleration from 2015 onwards
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TTC 2%
Chang Yih 1%
CVT 3%
Taicera 4%
Prime 21%
Viglacera 4%
Mikado 2%
Red Star 1%
Vitaly 2%
Đồng Tâm, Whitehorse,
My Duc, Hong Ha,
Royal, Catalan and
Others …
The 2013 picture of tile production sector (including grannite & ceramic tiles)
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2013 Production Capactity Sqm Bn
Source: TVS research
Capacity will reach 13.5mn sqm/year since Jul 2015
(67% for granite tiles)
CVT to capture 13% total capacity of the entire granite tile industry by 2016
CVT started building CMC2–phase 2 in September 2014 with total capital expenditure would be around VND 300Bn as follows.
Product type: Granite tile Designed Capacity: 5-6 million sqm/year Expected finish installation: July 2015
Investment details Unit: Million VND
Construction cost 44,290
Equipment 216,811
Construction advisory fee 6,974
Interest expense 4,032
Provisions 4,492
Working capital 20,000
Total investment 296,600
Financing source
Equity 80,000
Debt 216,600
Part of the investment recorded as PP&E as of 2014
76,463
Additional loans in 2015 140,000
In AGM 2015, CVT also plan to carry on an investment scheme up to VND 110bn in 3Q 2015 and VND 481bn in 4Q2016 (see table below).
This project is considered the main catalyst that helps CVT to become stronger in the competitive landscape, among the leading players such as Prime, Dong Tam, Royal, Viglacera, Taicera… The CMC 2- Phase 2 factory is expected to boost CVT’s granite sales from VND 316bn (2014) to VND 830bn in 2020, CAGR of 18%. This will become the CVT’s major source of revenue, given other ceramic production lines in factory CMC 1 all reach full depreciation and require regular maintenance from 2014 onwards.
Investment details Million VND
Starting in 3Q2015
Increase capacity of line 2 in CMC 1 Factory from 3mn to 5mn sqm/year
75,000
Invest a new packaging factory 12,499
Invest a new Nano rubbing machine
20,384
Total 107,884
Starting in 4Q2016
CMC 2 factory expansion 481,000
As CVT is in the final stage of its granite tile investment in CMC 2 factory (expected to come online in 3Q1015), the additional investment plan stated above indicates the BOD’s strong determination to benefit from the recovery of the real estate market. This plan would require the firm to reduce its liquidity or use higher leverage to finance the project. Anyway, we think it’s too early to analyze this effect on the firm’s financial status. Therefore, we have not considered this plan in our model, yet.
Favorable condition as real estate shows signs of recovery & interest rate remains at low levels
• Vietnamese government has released a new decision that allows foreigners to buy properties in Vietnam and this is expected to boost the real estate sector as well as construction material sectors.
• The VND30,000bn credit package still has available room for borrowers. According to Ministry of Construction, more than VND 9,400 Bn was approved and the outstanding loans recorded around VND 4,900 Bn as of 15/12/2014. Moreover, legal requirements to qualify for the loans have been loosen thus signaling easier access for homebuyers to cheap credit.
• Real estate in the North has bounced back with more than 11,500 housing transactions recorded in 2014, +100% yoy (MoC) and total real estate inventory has decreased significantly to VND 74,000 Bn, -22% yoy as of 15/12/2014 (MoC). Sales are expected to remain strong, while more launches of new projects and re-started projects will be announced. By the end of 2016, about 14,200 apartments from 25 projects are expected to come online (Savills).
• Deposit and lending rates have been falling in 2014. In particular, lending rate down from 15%p.a to 8%p.a while deposit rate dropped to 6%p.a from 8%p.a.
CVT to benefit from the growing demand for granite tiles
Growing demand for granite tiles: customers now prefer to have their houses/building installed by bigger sizes and better quality tiles, which have boosted granite tile demand recently.
The local ceramic/granite tile industry is still under governmental protection with import tax up to 40%.
Additional granite tile capacity of 5mn sqm from CMC 2 - Phase 2 which will finish installation by Jul 2015 is expected to increase the firm revenues by at least 40% given surging demand for this kind of product.
During Jan-Mar 2015, CVT also restructured its 01 line in CMC Factory 1 to produce outdoor ancient tile, the unique production line in Vietnam to prepare for growing demand in local market.
Operating highlight: Revenue to rocket from mid 2015
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Granite segment adds most weight in sales growth
Sales has already increased since 2013 after CVT began to sell granite tiles from CMC2 factory (Phase 1). Sales recorded at VND591 bn, +102% yoy (2013), VND607 bn, +2.8% yoy (2014) and it is expected to increase even more when CMC2 factory (phase 2) come into production from Q3 2015 onwards.
Standing from a conservative perspective, we expect the new factory will run at low utilization rate 50%-60% of designed capacity in 2015. New volume from the new factory is forecasted to add 45% y/y growth in granite tile sales and boost overall sales growth by 25% in 2015, while ceramic segment is expected to see roughly 3.5% growth in sales due to property market recovery.
Given limited supply in granite market, we believe this expansion plan will help CVT’s granite tiles segment to gain more ground up to 75% sales in 2020 (from 2013 level of 52%).
CVT to target the southern region
CVT’s revenue structure by geography reveals that the Northern region represents 83% total sales in 2014 (compared to 88% in 2012) mainly because the firm is located in Phu Tho Province and its distribution network remains strong in this area. However, focusing on this area would be very risky for CVT in the long term given high density of ceramic manufacturers, especially Prime and Viglacera, as well as imported Chinese tiles.
Meanwhile, sales from Southern shows positive sign with CAGR ‘2011-14’ of 66% underpinned by growing demand for granite tiles and dynamic property market. Hence, CVT targets to increase granite sales in area by 30% in 2015-2016 and we believe in this feasible move.
Material accounts for 68% in CVT’s cost structure in which clay and feldspar capture the majority. As CVT restructures its business with a focus on granite tiles segment, feldspar is expected to increase its stake in the firm’s cost structure in upcoming years. Therefore, the availability and input price of feldspar strongly influence CVT’s margin.
As CVT is located Viet tri, Phu Tho with available reserve of its most important material-feldspar (3.9mn tons) and other mineral materials, the firm can have easy access this stable material sources. Therefore, CVT could mitigate the shortage and price risk regarding its main input.
Growing investment selling activities
Digging further in SG&A structure, the fall of selling expense/sales (from 2% to 1%) is the main reason that explains for the drop in SG&A/sales ratio from 7% to 6% in 2011-2014. This shows that CVT didn’t spend much for selling activity over the past years yet booking growing revenue in 2013 & 2014.
However, as the Northern region becomes more crowded with higher pressure from local players and Chinese imports, we expects the firm would allocate more budget from 2015 onwards for selling activities in both the Northern and the Southern area, apart from higher trade discount for distributors which is booked as revenue deduction in Income statement.
Materials mainly include clay and feldspar. There proportion may vary as follows - Ceramic: 70% clay and 30% feldspar - Granite: 30% clay and 70% feldspar.
In 2012, CVT made a strategic move to transform its 2nd ceramic production line into granite line to prepare for a shift in market demand for granite tile.
Granite tile products not only give CVT a higher margin (~25% vs ceramic tile of 14% in 2014 - Source: CVT) but also become the first choice of many households because of its quality, size variety and colors for floor installing.
Granite tiles will also help CVT get rid of the harsh competition with Chinese products which are sold at lower prices than Vietnamese tiles by using trading fraud to avoid taxes and allow them to lower the prices.
Profit margin to enjoy strong improvement
Granite tiles output with higher margin than ceramic tile was boosted higher last year (2013). Therefore, gross margin of CVT jumped up to 20.4% in 2014 from 13.6% in 2013. Growing share of this segment in the coming years would allow the firm to maintain its overall margin at around 20% or more.
Better cost management as SGA and interest expense remain at the same level as 2013 allows CVT to enjoy a surge in operating and net margin to 15% and 9%, respectively, in 2014.
Higher EBIT margin and falling financial cost in 2014 supported CVT to record ROE and ROA of 29.3% and 9.3%, a sharp rise compared to 10% and 3%, respectively in 2012. CVT’s profitability ratios are expected to slow down right after the firm finishes its current project due to financial expense burden and depreciation but will accelerate later as the new factory reaches full capacity.
Operating highlight: high liquidity & strong balance sheet
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Liquidity ratios shows positive sign after 2012
Better business performance since 2012 has translated into improvement in liquidity especially current ratio and cash ratio which started to bounce from bottom of 0.8x & 0.1x, respectively, (in 2012) to 1.3x & 0.5x (in 2014). The interest coverage ratio (EBIT/interest expense) also followed this uptrend from 2.2x to 4.1x over the same period.
The firm’s liquidity ratios are expected to undergo a ‘temporary’ downward pressure until the new factory comes into production in 3Q2015.
Strong balance sheet despite a temporary surge in debt/equity
CVT is currently in the middle of its new factory installation which requires substantial cash. The CMC 2-phase 2 plant is financed with VND 80bn of equity and VND 220bn of debt. We expect the firm will need an additional debt of VND 140bn in 2015 to finish installation in Jul 2015 and fund its working capital later on. This will boost the debt/equity ratio from 122% to 141% in 2015, but still in healthy level and lower than 2012 -2013’s level.
In view of the growing need of granite tile, the leading status of CVT in this segment, this expansion plan is very promising and is expected to create more income streams for CVT after 2015. Hence, we expect the firm will be able to allocate enough capital for debt repayment, thus reduce the debt /equity ratio down to safe range of 100% - 120%.
High liquidity
Source: Bloomberg, TVS research
CVT deleveraged to healthy level
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• CVT recorded positive business performance in 1Q2015 with net sales of VND 153bn, +31% y/y and gross profit of VND 27bn, +40%, due to widening gross margin up from 16.3% to 17.5% in Q12015.
• In 1Q2015, the firm allocated SG&A expense less than last year, making the ratio SG&A/sales down from 6% to 4%. Deeper analysis shows that CVT strongly cut its admin expense from 5.5% to 3.4% of sales. This move is in line with CVT’s optimization in cost management to prepare for tougher competitive conditions.
• CVT’s higher margin and cost reduction in 1Q2015 resulted in significant growth in operating income and bottom line of VND 21bn and VND 12.2bn, respectively.
• As sales starts to accelerate from 2Q to peak at 4Q of the year (the seasonality factor), we expect CVT would enjoy more positive results in the next coming months.
• The ceramic market has already been oversupplied since 2007 in both local and oversea markets would creates more challenges for CVT and other ceramic producers to liquidate outdated inventory.
• Stiff competition in both ceramic/granite lines, especially from Chinese imports and local manufacturers which could lead to a dead-end price-war in both mid & low-price market segment or a trend of higher trade discount for distributors.
• Probable surging lending rate to curb inflation which hammers CVT’s probability as the firm still increases its financial leverage to finance the current expansion projects
• Possibility that real estate market will become frozen again.
• Outdated manufacturing lines in CMC1 (3 lines installed since 1996, 1997) that requires high maintenance cost.
Given potential growing demand from domestic markets, real estate has shown sign of recovery, we highly appreciate the prospect of CVT in upcoming years, especially when they finish installing CMC2 phase 2 factory. We suggest applying Comparable (P/E) and DCF approach to value CVT stock.
Viglacera Tien Son Joint Stock Co 213,344 12.6 6.0 7.57 1.37 4.18 19.99
VHL.HN Viglacera Ha Long JSC 513,188 20.5 7.2 4.79 1.27 3.07 24.60
Average 15.0 5.8 5.7 1.1 3.2 20.5
Source: Reuters CVT proves to be more profitable than peers in term of Gross/Operating margin, EV/EBITDA and ROE while its P/E still lower than peer average, indicating that CVT is currently undervalued. In view of these above strengths, we believe the reasonable valuation of CVT stock to stay at 2015 P/E of 7.5x
B. DCF approach: CVT stock is valued at 30,300 VND/share with the following assumptions:
C. Summary
DCF Assumptions
Target D / E 120.0% Cost of debt 12.0% Tax Rate 22.0% Risk-free rate 6.8%
As the company is still expanding its business with many challenges ahead, we remain conservative when conducting CVT valuation. CVT is expected to be traded at a reasonable valuation of VND29,000/share in 2015-2016 compared to the current market price of VND23,900/share (as of May 12, 2015).
We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any specific recommendations or views expressed in this report.
DISCLAIMER
@Copyright by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (TVS). The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor’s decisions.
DISCLAIMER
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