INDUSTRY COVERAGE 22-Nov-2018
Industry MARINE PORT Solid potentials but strongly clustered
Rating OVERWEIGHT Pros: Marine shipping is seeing not only a recovery but also a strong shifting to super-sized container vessels. Table of contents South East Asian maritime routes can be promising alternative choices during China-US 1. Overviews Trade War. 2. Catalysts 3. Financial Performance Seaport is an important node of Vietnam logistic system with strong profitability and cash flows generation. 4. Conclusion & Stock pick Domestic market has a high entry barrier from regulation (foreign ownership limit at 51%, Stock Picks limited land banks and permits). VSC: HOSE (Overweight, VND 50,000) Regulation on port tariffs (lower and upper limits) are tightened to avoid a price war among ports. The new draft about regulated tariffs is a favor for (1) international ports (I and IA 2018F 2019F 2020F classes) and (2) deep-water ports. PER (x) 7.1 6.2 5.3 Vietnam cargo throughput is expected to grow 12-15% annually in the next 3-5 years with PBR (x) 1.2 1.1 0.9 supports from trading activities from current and new FTAs such as VN-EAEUV, Vietnam- EV/EBITDA (x) 2.8 1.8 0.9 Korea (VNKFTA), Vietnam-EU (EVFTA expected to come into effect in 2019), RCEP – DY (%) 5.0% 5.8% 6.8% ASEAN+6 – on-going negotiation, etc., especially CPTPP (expected to be effective in Dec EPS (VND) 5,566 6,442 7,519 2018) and FDI sector. BPS (VND) 32,874 37,016 41,835 North (Hai Phong) and South (HCMC and CMTV-Vung Tau) will be the major hubs of Cyclical industry uptrend with robust Vietnam marine port industry. growth in cargo throughput of Hai Phong. The increase in deploying larger container vessels is an opportunity for container ports, VIP Green has favor location in Hai Phong and support from Evergreen GIC which have a suitable natural depth and equipment. logistics centre to maintain strong growth in the next 3-5 years. Cons: The prospect of Vietnam marine shipping industry is still over-shadowed.
Lack of integration with land infrastructure limits the potential growth of port industry and Bao H. Vo Vietnam logistic in general.
(+84-28) 3914 8585 - Ext: 1460 Newly operating ports can have a short-term impact on the business results in the first 1- [email protected] 2 years with huge required initial investment (usually with high financial leverage) www.kisvn.vn Not all players share the same opportunity: o Small ports in unfavoured locations have limited potential and profitability. o Hai Phong will have higher competition in the long term with a significant amount of additional capacity. o CMTV (Vung Tau) needs an improvement of after-port land infrastructure to boost the potential of this area.
Conclusion: Vietnam marine port industry is expected to enjoy a solid growth rate of 12-15% in the next 3-5 years. High entry barrier and tighten regulation can be considered as a favor for the existing port owners/operators.
Stock picks: VSC
22-Nov-2018 Page 1 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
1. Overview of Vietnam marine port industry Vietnam Cargo Freight Percentage Marine port is an important node of the logistic chain where cargo is transferred from from 2014-2017 road transportation to marine one. In Vietnam, because marine and inland waterways 4.8%0.0%0.4% transportation accounts for around 22.5% of total volume of Vietnam freight, the 5.2%0.0%0.4% marine port industry plays an important role in Vietnam logistics and trading activities. 17.3% 17.1% 5.3%0.0%0.6% 17.6%5.5%0.0%0.7% Vietnam Marine and Inland waterways freight 17.7% ('000 tons)
76.2% 350,000 20% 76.5% 300,000 77.2% 15% 77.5% 250,000 10% 200,000 5% Road Inland Waterways 150,000 0% Marine transport Aviation 100,000 Railway 50,000 -5% Source: GSO, KISVN 0 -10% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Inland Waterways Marine transport Inland Waterways Growth (%) Marine Transport Growth (%)
Source: GSO, KISVN
According to from Vietnam Maritime Administration, the cargo throughputs of Vietnam had a CAGR of 11% in 2010-2017. In which, since 2015 there has been a robust growth of container throughputs mostly correlated with the impressive boost of import/export activities.
Cargo throughputs of Vietnam marine ports CAGR = 11% 800,000 17.5% 20% 14.7% 15.0% 600,000 15% 10.6% 10.5% 10.5% 9.0% 400,000 10% 6.6%
200,000 5%
259,100 286,600 316,600 349,900 373,000 427,816 466,320 536,431 630,157 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018F
Cargo throughput ('000 tons) Growth%
Source: Vietnam Maritime Administration, Vinalines, SNP, KISVN
1.1. Market Segments The marine port industry of Vietnam can be classified into market segments in order to have better insights into the growth and competition among companies.
22-Nov-2018 Page 2 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
1.1.1 By region With a long-narrow shape spreading from North to South of Vietnam intercepting by geographic elements along the way, the ports in different regions of Vietnam have Group 1 their own markets. Therefore, the across-region competition is generally insignificant. According to the Master Plan of Vietnam Marine Port Industry of Ministry of Transportation (MoT), the port system is classified into 6 groups of regions. Group 2 Group # Region North regions: Quang Ninh, Thai Binh, Nam Dinh, Ninh Binh and Hai 1 Phong Group 3 2 North-Central regions: Thanh Hoa, Nghe An Central regions: Quang Binh, Quang Tri, Thua Thien Hue, Da Nang, 3 Quang Nam and Quang Ngai South-Central regions: Binh Dinh, Phu Yen, Khanh Hoa, Ninh Thuan and 4 Binh Thuan. East-South regions: HCMC, Dong Nai, Ba Ria – Vung Tau, Binh Duong 5 Group 4 and ports in Soai Rap River – Long An. Mekong Delta Regions: 13 provinces and cities of Mekong Delta Area, 6 Phu Quoc and islands in South-West area of Vietnam ocean. Source: Vietnam Ministry of Transportation, KIS VN Group 5 In this report, we re-grouped those groups above into 3 major regions: North (group Group 6 1, 2); Central (group 3 and 4) and South (group 5 and 6).
2016 Cargo throughput 2016 Container throughput percentage percentage
North, 31% North, 32% South , 47%
Vietnam Cargo South, Throughput 2016, 2017 63% by Cargo Types Central, Central, 21% 5%
Source: Vietnam Maritime Administration, KISVN
30% 32% 21% 1.1.2 By cargo type 32% Beside location, ports facilities also serve certain markets as each type of cargo usually requires specific equipment. Any change in type of cargo will require the 13% installment of new facilities. Thus, competition is almost none among ports equipped 44% 12% for different types of cargo and changes in type of cargo will require a substantial 41% facility investment, which may last for years. From that, marine ports can also be divided based on type of cargo: Container Liquid Bulk Transit Bulk (dry bulk) ports: specialized in loading/unloading commodity cargo that is transported unpackaged in large quantities. For instance: grain, coal, gravel, copper, wood chips, etc. Container ports: specialized in loading/unloading goods that are contained in standardized shipping containers (mostly of either twenty- or forty-feet standard length).
22-Nov-2018 Page 3 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Vietnam Cargo Liquid port: specialized in accommodate liquid goods (crude oil, LNG, Throughput 9M.2017 & gasoline, jet fuel, etc.) which are shipped by specific tank vessels. 9M.2018 Automobiles: generally known as RORO – Roll-on/Roll-off. This type of ports is specialized for ro-ro ships to carry wheeled cargo such as cars, trucks, etc. that are driven on and off the ship on their own wheels or a platform vehicle. 26% Passengers: specialized in accommodate cruise ships which provide the 30% transportation service, mostly for tourism purpose. 30% 31% As reported by Vietnam Maritime Administration, in 9M.2018, bulk cargo accounted for the largest percentage of cargo throughput of Vietnam marine ports (45% in metric 12% tonnage). This number was 44% and 41% in 2016 and 2017 respectively. The second 12% 49% type of cargo was the container which accounted for 30% of total Vietnam cargo throughput (in tons equivalent) and reached 13.33 mil. TEUs (+27%YoY). Meanwhile, 45% the throughput of liquid was around 12-13% of the total throughput in recent years and 12% in 9M.2018. In this report, we mainly focus on bulk, container and liquid as they contribute most of Container Liquid Bulk Transit the annual revenue of Vietnam marine ports. Whereas, as most of the tourists in Vietnam travel by land and air transportation, passenger market contributes an insignificant and inconsistent amount of revenue for Vietnam ports; hence, we exclude this type of market in this report. 1.1.3 By port types/sizes Additionally, according to the Master Plan of Vietnam Ministry of Transportation, Vietnam marine ports also have a 3-level classification based on size, purposes, location and affection of the ports as follows: Type 1: National ports that are exceptionally important for the economic-social national and international development. Type 1A: National ports which play as entrances or international transit terminals. Type 2: local/regional ports that are important for economic-social of regional, local development (within Vietnam). Type 3: Ports that are specialized mostly for the operation of local companies.
* Decision No.70/2013/QD-TTg of Vietnam Prime Minister in Nov 2013.
1.2. Companies In this report, we only consider listed companies that are directly operating at least one marine port and providing a similar range of services such as handling, storing, CFS or depot, etc. for bulk and containers (and liquid) cargo.
Max Berth Vessel Stock Company Name Port Region Cargo Type Port Class Length Note Size (m) (DWT) CAG An Giang Port An Giang Port South Bulk II 106 5,000 CCT Can Tho Port Cai Cui Port South Bulk II 665 20,000 CCT Can Tho Port Hoang Dieu Port South Bulk II 304 15,000 CCR Cam Ranh Port Cam Ranh Port Central Bulk IA 604 50,000 Multi CMP Chan May Port Chan May Port Central II 300 30,000 Purposes Bulk + CNH Nha Trang Port Nha Trang Port Central IA 452 20,000 Passenger
22-Nov-2018 Page 4 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Cai Lan Port CICT Cai Lan Bulk + CPI North I 1348 75,000 Investment International Terminal Container SGP Saigon Port Sai Gon Port South Bulk I 5223 30,000 Saigon - Hiep Phuoc Under- SGP Saigon Port South Bulk I 200 50,000 Port construction Bulk + SGP Saigon Port SSIT South IA 600 100,000 Container Bulk + SGP Saigon Port SP-PSA South IA 600 110,000 Freezing Container Thi Vai General Port Still under- SGP Saigon Port South Bulk IA (ODA) construction SGP Saigon Port CMIT South Container IA 600 200,000 Korean Express - SGP Saigon Port South Container IA 500 50,000 Saigon Port Multi CDN Da Nang Port Danang Port Central I 595 50,000 Purposes Dinh Vu Port DVP Dinh Vu Port North Bulk IA 985 40,000 Investment Bulk + DXP Doan Xa Port Doan Xa Port North IA 210 10,000 Container GMD Gemadept Nam Hai Port North Container IA 144 10,000 GMD Gemadept Nam Hai Dinh Vu Port North Container IA 455 20,000 GMD Gemadept Nam Dinh Vu Port North Container IA 440 20,000 Gemadept Dung Quat GMD Gemadept Central Bulk I 790 50,000 Inter' Port Re-start in GMD Gemadept Gemalink South Container IA 100,000 4Q.2018 HAH Hai An Transport Hai An Port North Bulk IA 150 20,000 CCP Cua Cam Port Cua Cam Port North Bulk IA 272 5,000 NAP Nghe Tinh Port Cua Lo Port North Bulk I 656 15,000 NAP Nghe Tinh Port Ben Thuy Port North Bulk I 120 2,500 Bulk + PDN Dong Nai Port Dong Nai Port South I 244 5,000 Container Bulk + PHP Hai Phong Port Hoang Dieu Port North IA 1720 40,000 Container PHP Hai Phong Port Dinh Vu Port North Bulk IA 985 40,000 PHP Hai Phong Port Hai Phong Port North Container IA 425 20,000 PTSC Thanh Hoa (Nghi Specialized for PSN PTSC Thanh Hoa North Liquid I 390 70,000 Son Port) Nghi Son Quy Nhon New Bulk + QSP Quy Nhon New Port Central I 50,000 Port Container CICT Cai Lan Bulk + CQN Quang Ninh Port North I 1348 75,000 International Terminal Container Southern Bulk + SWC Waterborne VICT Port South I 678 25,000 Container Transport TNP Thi Nai Port Thi Nai Port Central Bulk I 290 10,000 VGR VIP Green Port Vip Green Port North Container IA 377 20,000 Vietnam Container North VSC Green Port Container IA 303.5 20,000 Shipping Vietnam Container North VSC Vip Green Port Container IA 377 20,000 Shipping Bulk + Phu Huu Port Tan Cang Phu Huu Port South I 320 36,000 Container Bulk + QNP Quy Nhon Port Quy Nhon Port Central I 1068 50,000 Container Source: Vietnam Ministry of Transportation, Vietnam Maritime Administration, KISVN
22-Nov-2018 Page 5 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Source: Bloomberg Intelligence, Clarksons Research
Bulk Vessels 12,000 800.0 10,000 700.0 600.0 8,000 500.0 6,000 400.0 4,000 300.0
200.0 DWT Million 2,000 100.0 Number of VesselsNumberof 0 0.0
Current Capacity in DWT (mil. DWT) Active vessels Orderbook
Source: Bloomberg, KISVN
Beside the shipping volume, the bulk rate also has significant improvement; hence, Bloomberg Intelligence expects that the rate will increase from 15-20% in 2018 and 2019 after 50% surge of 2017.
22-Nov-2018 Page 6 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Bulk (BDI) and Container Price Indices 2500 120
2000 100 80 1500 60 1000 40
500 20
0 0 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016 Apr-2017 Apr-2018
Baltic Dry Index (Jan. 1985 = 1000) CTS Global Average Container Price Index (Dec. 2008 = 100)
Source: Bloomberg, KISVN
In container shipping: Similar to bulk segment, container marine shipping has also experienced a recovery in supply-demand since 2016, leading to a rise in capacity utilization. Unlike the dry-bulk, the outlook for raising tariff of container shippers is still clouded by the tough competition and the annual ramp-up of the total capacity. Major ocean freighters continue to hold on to unit-cost cutting strategy by deploying new large and ultra-large container vessels (ULCVs) each year. The current ULCVs (e.g. 2017 OOCL Hong Kong with 21,000TEUs capacity – the world’s biggest one) can cut the transportation cost as much as 30%. Hence, although the profit margin can be enhanced, the downtrend pressure on freight rates will remain high in 2018-2020. Therefore, Bloomberg Intelligence estimate that the container shipping industry could have a calmer sail in 2018 and 2019 from the cyclical recovery in the demand; the enhancing profit margin of ocean freighters could be a positive signal for the marine ports in terms of port tariffs. However, the opportunities are shifting towards ports which have adequate facility to accommodate larger (even ultra-large) vessels.
WCI Composite Container Freight (USD per FEU) 3000
2500
2000
1500
1000
500
0 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017 Jun-2018
Source: Bloomberg, KISVN
For liquid shipping: among this segment, crude oil and LNG shipping are the majority. Oil/crude transportation is strongly related to the changes in OPEC-US production and export policy. As OPEC-led crude output reduction is expected to be extended
22-Nov-2018 Page 7 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
through 2018, according to Bloomberg Intelligence and Clarksons, it appears that U.S. oil export growth will continue regardless and oil demand is still solid. In a special event, the Iran sanction of the U.S. in one hand raises the concern on a hike of fuel price, but in the other hand implies a boost for tanker demand. According to Bloomberg, as China, India and South Korea are the biggest buyers of Iranian crude, the sanction could lead to alternative sources such as the U.S. and West Africa, hence boosting the shipping demand. Thus, altered trade-land dynamics can maintain the growth of the tanker demand.
Tanker average rate (USD/DWT) 140 120 100 80 60 40 20 0 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017 Jun-2018
Source: Bloomberg, KISVN
Overall, the shipping industry is expected to keep its on-going recovery in freight demand, ensuring the potential growth of cargo throughput of marine ports in 2018- 2020. Nonetheless, growth could vary among ports, especially container ones, when more and more large vessels are deployed every year. In the other side, the uncertainty of the fuel price could be a threat to the recovery of freighters’ profitability, but this issue will not directly affect the marine ports as the fuel expense does not account for a significant part in the operating expenses of ports. 2.1.2 Regional potentials in middle of Trade War Asian trade lanes account for a major part of global container throughput. According to data from Bloomberg and Container Trades Statistics Ltd., as of Oct 2018, among top 10 largest global shipping hauls (in TEU shipped), Intra Asia, Asia-North America and Asia-Europe are the largest ones. Additionally, the current balance of shipping demand in Asian hauls is mostly weighted in trades from/to China. The trade war between China and the U.S, still having no sign to end soon, is causing more concerns to the wide range of its impacts (e.g. trading activities, cargo freight, etc.). Although this kind of extreme event indeed can cause traumatic economic effects, firstly to both China and the U.S, the situation of marine ports in South East Asian countries can have a silver lining.
22-Nov-2018 Page 8 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
% Container Volume by Lane 100% 90%
80% 43.9% 43.7% 45.2% 43.7% 43.9% 45.2% 43.3% 70% 60% 5.1% 4.6% 4.7% 4.9% 4.2% 4.9% 4.9% 4.2% 50% 4.4% 4.3% 4.7% 4.7% 4.5% 4.3% 9.8% 40% 10.8% 10.6% 11.0% 10.9% 10.2% 10.4% 12.5% 30% 11.6% 10.2% 10.3% 11.0% 10.9% 11.2% 20% 26.6% 10% 24.2% 23.8% 25.0% 25.6% 24.0% 26.0% 0% Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Dec-2017
Intra Asia Asia-North America Asia-Europe Europe-Europe Europe-Asia Others
Source: Bloomberg, Container Trades Statistics - CTS, KISVN
With new import tariffs, the cargo from China to the U.S (and vice versa) will likely to find better alternative destinations. Moreover, large manufacturers with plants located in China can also find a new place for their plants in the nearby South East Asian countries (like Vietnam). This strategy can be even used by Chinese manufacturers themselves in order to change the origin of their products to avoid the China-specific tariff when entering the U.S. Hence, as the direct shipping routes from the U.S to China can have a tough time, the demand will not decline but move to other routes. In other words, South East Asian logistic providers in general and marine ports in specific can benefit from this event. 2.2. Local catalysts 2.2.1 Robust potential from trade activities In Feb 2017, Vietnam Prime Minister signed the Decision No. 200/QD-TTg, which aims to enhance the competitiveness and development of Vietnam Logistic till 2025. In other words, Vietnam Government considers logistic development as one of the critical missions and focuses in the next following years. And marine port – an important node in the logistic chain – is not an exception. According to the Master Plan (original in 2014 and revised plans in 2017) of Vietnam Ministry of Transportation (MoT), the total cargo throughput of Vietnam marine ports is projected to reach 869.6 million tons in 2020 (implied CAGR of 15-17% from 2017 to 2020) and 1,542.5 million tons in 2030 (implied CARG of 8.5% from 2017 to 2030).
22-Nov-2018 Page 9 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Projected Cargo throughputs of Vietnam marine ports
2,000,000 17% 17% 20% 16% 18% 15% 1,542,500 15% 16% 1,500,000 14% 11% 10% 11% 12% 9% 1,000,000 869,600 10% 749,879 7% 630,157 6% 8% 536,431 427,816 466,320 6% 500,000 316,600 349,900 373,000 259,100 286,600 4% 2% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2030F
Cargo throughput ('000 tons) Growth%
Source: Vietnam maritime administration, Vinalines, KISVN
As can be seen from the table below, imports and exports account for more than 50% of the total cargo throughput of Vietnam marine port system. Moreover, Vietnam has one of the most opening economy worldwide with total trade approximately to 200% of GDP. Hence, the import/export activities will be a crucial motivation for the future growth of Vietnam marine ports.
Vietnam Cargo Throughput Percentage 100% 21% 30% 30% 26% 80% 30% 60% 33% 33% 35%
40% 31% 29% 28% 28% 20% 24% 24% 24% 24% 0% 2016 2017 9M.2017 9M.2018
Export Import Domestic Transit
Source: Vietnam Maritime Administration, KISVN
For the next 3-5 years, in our estimation, the prospect of Vietnam trading activities are positive. The current and up-coming FTAs such as FTA VN-EAEUV, Vietnam-Korea (VNKFTA), Vietnam-EU (EVFTA finished negotiation phase on Dec 2015 and is expected to come into effect in 2019), Regional Comprehensive Economic Partnership (RCEP – ASEAN+6 – on-going negotiation), etc., especially CPTPP (TPP without the U.S., which was officially signed in Mar 2018 and is expected to come into effect from Dec 2018) can boost significantly Vietnam international trading activities with other countries. In other words, these FTAs will be able to fuel the growth of 12-15% annually of Vietnam cargo throughput in the next following years. Although potentials for each port will depend on several factors as mentioned above, the general growth of this industry can be robust at least till 2020.
22-Nov-2018 Page 10 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
1.1.1 Regulations – Higher entry barrier In April 2017, Vietnam Government officially released Decree No. 37/2017/ND-CP which revised the regulation of the marine port industry. Accordingly, the contributed capital from foreign investors must not exceed 51%. Furthermore, according to the revised Master Plan, since 2011, Vietnam MoT has revised the specific plans for 6 groups by region in Vietnam marine port system. The establishment or expansion of marine ports has been tightened in order to avoid supply-demand imbalance, which had happened in the previous period. On one hand, beside other strategic and financial elements such as large required initial investments for adequate facilities and equipment, good connection with marine freighters, etc., the plan raises the entry barrier for this industry as available land banks and permits for establishing new ports are extremely restricted by the government. Thus, the existing companies which have land banks for marine port projects or already have marine ports possess key adventurous assets in Vietnam logistics industry in general. On the other hand, the current regulation also strictly controls the size and type of marine ports in each region. Therefore, the capacity, expansion ability and purpose of each port are also regulated accordingly, affecting directly and noticeably the long- term potential prospects of ports. Specifically, IA or I-type ports have much higher long-term development For example, according to the master plan, ports in Hai Phong are classified as type IA – national ports that are also terminals for international trades – and planned to accommodate 178.5-210 million tons of cargo (bulk, container) in 2030. Meanwhile, ports in Quang Tri are planned to be local ports and to accommodate only 2 million tons of cargo (bulk only) in 2030; hence, it is much more difficult for ports in Quang Tri to expand further. 2.2.2 Clustered competition In the Northern Area: Accounting for 14% of Vietnam cargo throughput in 2017 (this number in 9M.2018 was 20%) and having a growth rate of 27%YoY in 2017 in terms of total cargo throughput (this was 25%YoY in 9M.2018), Hai Phong is also witnessing a fierce competition among local seaports. The situation of ports in this city was dramatically changed by: (1) The construction of Bach Dang Bridge (from Feb 2015 to Apr 2018): on one hand, the bridge is a node in Hai Phong-Ha Long-Van Don Highway, which will connect 3 major economic hubs of North Vietnam (Hanoi – Hai Phong – Quang Ninh). On the other hand, it also separates potentials of ports in Cam River into two different ways: larger vessels (>10,000 DWT) cannot approach the upstream ports and have to move to downstream ones. This led to a short-term fierce price competition when upstream ports lowered their tariffs to retain their existing customers in 2016 and 2017. However, this competition has been eased significantly since the beginning of 2018 when the construction of Bach Dang Bridge came into the final stage and the new regulations* on port tariffs have also been applied in Hai Phong.
(*Archive No. 14714/BGTVT-VT and Decision No. 3863/QD-BGTVT)
22-Nov-2018 Page 11 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Vessel Calls 180 160 Upstream Downstream 140 120 100 80 60 40 20 0 Transvina Nam Hải Đoạn Xá Chùa Vẽ Green Vật Cách Hải An Đình Vũ Nam Hải VIP-Green Nam Đình Lạch Port Đình Vũ Port Vũ Huyện
1Q.2016 2Q.2016 3Q.2016 4Q.2016 1Q.2017 2Q.2017 3Q.2017 4Q.2017 1Q.2018 2Q.2018 3Q.2018
Cargo Throughput (million tons)* 3.5 3.0 Upstream Downstream 2.5 2.0 1.5 1.0 0.5 0.0 Transvina Nam Hải Đoạn Xá Chùa Vẽ Green Vật Cách Hải An Đình Vũ Nam Hải VIP-Green Nam Đình Lạch Port Đình Vũ Port Vũ Huyện
1Q.2016 2Q.2016 3Q.2016 4Q.2016 1Q.2017 2Q.2017 3Q.2017 4Q.2017 1Q.2018 2Q.2018 3Q.2018
Source: Maritime Administration of Hai Phong, KISVN estimation*
(2) Lach Huyen International Port (HITC): with the 1st Phase started operating in May 2018, HITC is drawing more and more attention. One of the concerns is about raising competition among downstream ports. Nonetheless, we estimate that the risk from oversupply is still insignificant at least until 2020 due to: Different market segment: HITC is aiming toward large regional-haul mother vessels (>50,000 DWT) while the market of the other downstream ports is <40k DWT domestic or intra-Asia short-haul feeders. Additionally, the segment of HITC also has higher regulated ceiling and floor tariffs compared to the other downstream ports (around 10- 13% higher) and the road toll-fee of about $20/TEU through Tan Vu-Lach Huyen Bridge raises freight cost. Thus, it seems to be not profitable for most of the short-haul feeders or small vessels to move from the other downstream ports to HITC. Limited road infrastructure: When the location of HITC already leads to a longer travel distance from cargo sources (industrial zones in the region), the road infrastructure connecting Hai Phong with HITC is also limited with the only one Tan Vu-Lach Huyen Bridge, which has already faced congestion issue. Hence, it seems to be suitable for large mother vessels, which require a water-depth level that downstream ports cannot have and also have a much more cost-saving advantage from larger vessels’ capacity.
22-Nov-2018 Page 12 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Source: Google Map, KISVN
Operator 2017 Utilization 2017 2018 2019 2020 Unit: k. TEUs rate (%) Capacity Capacity Capacity Capacity VIP-Green VSC 95% 500 800 800 800 Nam Hai Dinh Vu GMD 131% 500 500 500 500 Nam Dinh Vu GMD 0 500 500 1,000 Tan Vu PHP 96% 1,000 1,000 1,000 1,000 Dinh Vu DVP/PHP 110% 600 600 600 600 Lach Huyen (1st Phase) Tan Cang 0 150 800 1,100 Total Capacity of Downstream * 2,600 3,550 4,200 5,000 (k. TEUs) Total capacity of Downstream * 36.4 49.7 58.8 70.0 (equivalent in mil. tons) Total Cargo Throughput in Hai Phong 92.0 105.8 121.7 139.9 (mil. tons) Downstream capacity*/ 40% 47% 48% 50% Hai Phong cargo throughput (%) Source: DVP, PHP, GMD, VSC and KISVN estimation Container port market * including Lach Huyen International Port shares in HCMC in 2016 and 2017 Overall, from our estimate, despite the addition of large ports like HITC, downstream ports can only afford up to 50% of total cargo throughput in Hai Phong in 2020 thanks 7.0% to organic growth and shifting cargo flow from upstream ones. The ports in downstream area are expected to have a robust prospect at least till 2020. 10.4% In the Southern Region: Cat Lai (Ho Chi Minh City) and Cai Mep Thi Vai (CMTV, Vung Tau), two major hubs for the Southern region, have relatively different competition situation. 89.6% In Ho Chi Minh City, the largest player in the marine port industry is Tan Cang Saigon 93.0% (Saigon New Port-SNP), which operates Cat Lai Port, which accounted for 89.6% of cargo throughput of Ho Chi Minh City and 32% of Vietnam cargo throughput in 2016 SNP Others (excl. Barging throughput). The market share of SNP in HCMC was 92.5% and 91% in 2017 and 1H.2018. Source: 9M.2018 report of SNP
22-Nov-2018 Page 13 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Additionally, in Hiep Phuoc area – which has been planned to be the next marine hub of HCMC, SNP has already established Tan Cang – Hiep Phuoc 16.5ha terminal to accommodate 50,000 DWT vessels with the designed capacity of 650k TEUs/year in 2015 as an expansion of Cat Lai Port. Therefore, with that unique position in HCMC, the competition is not direct from other port operators, which focus on alternative services such as barging, ICDs, Depots or bulk port services for industrial zones through inland waterways.
Cargo throughput of Cat Lai Port (excl. barging)
5,000 13% 12% 14% 4,500 12% 11% 12% 4,000 3,500 10% 3,000 8% 6% 2,500 5% 2,000 4% 6% 1,500 4% 1,000 2% 2% 500 2,558 2,597 2,870 3,202 3,616 3,821 3,976 4,470 4,695 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018F
Cargo throughput ('000 TEU) Growth %
Source: SNP, KISVN
In CMTV, Vung Tau – around 40km away from Cat Lai, this area with several advantages including a natural water depth suitable and expandable to accommodate larger vessels in general, substantial amount of available land banks, etc. has been planned to be a major container terminal of the South of Vietnam as well as an international marine entrance since 2009. However, the situation is heavily clustered. According to Vietnam Maritime Administration, 3 of 20 marine ports in CMTV (TCTT, CMIT and TCIT), which provide port services for container, are running at 80-90% of their designed capacity while the others are either in “frozen stage” or working at 10- 20% capacity or even lower and serving dry-bulk cargo rather than container as designed (e.g. SP-PSA owned by Vinalines and Saigon Port JSC.). There are several reasons for this issue: 1. One of the noticeable reason is the lacking of after-port road infrastructure. This causes the logistic cost from CMTV to nearby industrial zones (cargo source) higher than that from Cat Lai Port. Thus, the majority of vessels still prefers Cat Lai than CMTV, especially the handy vessels or small feeders (<40k DWT). Only larger vessels, which the channel to Cat Lai Port cannot accommodate, will use the services of ports in CMTV. 2. Container freighters, which operates large vessels, will choose the ports which have adequate facility to accommodate their vessels (again depends on depth and length of berths, equipment, etc.). Therefore, the old ports, especially in the upstream, cannot afford those criteria are obviously out of the competition.
22-Nov-2018 Page 14 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Source: GMD, KISVN
After eliminating the “unusable capacity” of frozen ports, we can see that the average utilization rate of this area in 2017 was around 87.14%. When the congestion issue in Cat Lai is at its peak, there are opportunities for ports in CMTV, but only which can satisfy the criteria above. On the other hand, Vietnam MoT from early 2018 has actively looked for solutions to boost the situation in CMTV to match with the potential of this area. In the Central area: In comparison with the above two areas, the market of the Central is relatively small (21% bulk-dry cargo and only 5% container throughput of Vietnam) and concentrated in several ports. Moreover, most of the ports are providing cargo transportation for certain nearby industrial zones or companies. For example, ports in Dung Quat (Quang Ngai), the local large bulk port (accounted for 18% cargo throughput of this region in 2016), mostly transports the bulk cargo for nearby Dung Quat industrial zone and Dung Quat oil refinery plant. Regarding to container, 90% of container throughput of this region in 2016 was through Danang, Quang Nam and Quy Nhon Ports. Thus, each port almost has its own market and the competition is relatively low compared to other regions.
22-Nov-2018 Page 15 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
2016 Central Region 2016 Central Region market share market share (container throughput - TEU) (bulk throughput- ton) 0.1% 0.0%
9.5% 18.3% 29.7% 16.8% 15.3% 53.6% 10.8% 20.0% 14.4% 11.4%
Danang Quang Nam Quang Ngai Quy Nhon Quy Nhon Nghe An Danang Thanh Hoa Ha Tinh Others Nha Trang Others
Source: Vietnam Maritime Administration, KISVN
3. Financial performance 3.1. Profitability In this report, we only consider listed companies that are directly operating at least one marine port and providing a similar range of services such as handling, storing, CFS or depot, etc. for bulk and containers (and liquid) cargo. As can be seen from the graph below, both gross and profit margins of the marine port industry are significantly higher than other parts of the logistics chain. With the huge required initial capital expenditure (leveraged) and at least 1-2 initial years to fulfill the capacity, the profitability of ports is usually low in these first operating years before lifting up when the utilization rate can pass the break-even level (around 60% in average).
Profitability Profitability 35% 32% 32% 4,500 25% 28% 4,000 20% 30% 25% 25% 3,500 20% 25% 22% 3,000 14% 13% 15% 20% 24% 2,500 12% 11% 22% 9% 15% 19% 2,000 9% 8% 17% 10% 8% 7% 15% 1,500 6% 10% 4% 11% 1,000 5% 5% 1,119 1,698 2,410 2,323 3,333 4,185 500 0% 0 0% 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
Net Income Gross margin Net margin ROE ROA
In some cases, ports that are operating stably for years with a significant utilization rate can achieve a noticeable gross margin and net margin (up to nearly 50% in gross margin and 45% in net margin respectively).
22-Nov-2018 Page 16 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
3.2. Financial Leverage and Cash flows One of the distinct advantages of the logistics industry in general and the marine port industry in specific is their cash flow generation ability. When the utilization rate passes the break-even level, not only the profitability but also the cash flows of ports is dramatically enhanced. In 2017, we can see a 1-year setback in the FCF of this industry after an uptrend from 2013 to 2016 because (1) the utilization rates of some new ports (started operating in 2016) were not high enough to enhance the cash flows and (2) some companies also started investing in their new ports.
Financial Leverage Cash Flows 2,500 15% 3,500 18% 20% 18% 2,000 3,000 10% 16% 1,500 12.2% 11.1% 2,500 14% 11% 1,000 5% 12% 2,000 9% 500 10% 1,807 2,161 -0.4% 331 0% 1,500 6% 8% 0 1.5% 5% 6% -500 -83 -694 -1,244 1,000 -3.0% -5% 2% 4% -1,000 500 -5.6% 164 526 1,146 1,450 881 3,063 2% -1,500 -10% 0 0% 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
Net Debt Net Debt/ Equity FCF FCF/ REV
With a substantial amount of annual net cash flows, marine ports can reduce their financial leverage which is significantly high in the beginning of the operation. As can be seen in the graph, the financial leverage of port operators has been sharply declined since 2015. As some ports of the considered companies filled up quickly their capacity in 2016 and 2017, 2018 can be seen as a milestone for a cash flow cyclical of those ports with robust growth rates and strong cash flows. 3.3. Growth Growth is not an attractive feature of marine ports. If the ports have a quick fulfillment in the capacity, their growth rate ramps up in the first several years of operation, but then it will slow down noticeably when reaching their designed capacity. Moreover, if those ports are not expandable to raise their capacity further, which requires not only a significant amount of capital but also an available land bank nearby, the growth rate will be mostly stalled and flat. Then the growth will come from rising service tariffs, but this is also dependent on the competition situation in the region. Growth 60% 52% 20,000 42% 44% 40% 26% 15,000 15% 14% 15% 20% 12% 10,000 5% -4% 0% 5,000 11,202 12,768 13,367 15,432 17,225 -20% 0 2014 2015 2016 2017 2018 Net Income Net Income Revenue Growth Profit Growth
22-Nov-2018 Page 17 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
22-Nov-2018 Page 18 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Source: Bloomberg, Stoxplus, KISVN
22-Nov-2018 Page 19 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
FINANCIALS MODEL Mkt cap: VND 1,999bn. CASH FLOWS AND 2016 2017 2018F 2019F Unit: VND bn. 2016 2017 2018F 2019F BS ITEMS (VND bn.) Net Revenue 1,082 1,303 1,695 1,826 Increase in WC -113 59 -179 -60 Sales growth (%) 17% 20% 30% 8% Capex 456 372 75 81 Port Service 707 847 1,084 1,139 Other cash flow items 273 -34 0 0 Logistics 375 456 611 687 Free cash flow -176 64 653 591 COGS 686 895 1,186 1,257 Share issues 0 49 0 0 Gross margin (%) 37% 31% 30% 31% Dividends paid 89 92 100 115 SG&A 65 76 99 106 Increase in net debt 266 -21 -553 -476 EBITDA 509 529 614 671 Net debt, end of year 279 258 -294 -770 EBITDA margin (%) 47% 41% 36% 37% Enterprise value 2,450 2,503 1,695 1,219 Depr’n & Amort’n 177 197 203 209 Total equity 1,515 1,710 1,921 2,170 Operating profit 331 332 411 462 Minority interests 167 241 274 315 Operating margin (%) 31% 25% 24% 25% Shareholder’s equity 1,349 1,469 1,647 1,855 Net interest expenses 30 40 28 13 BVPS (VND) 29,602 29,307 32,874 37,016 As % of avg. net debt 21% 15% -154% -2% Net debt / equity (%) 18% 15% -15% -36% Interest cover (x) 10.9 8.3 14.8 35.1 Net debt / EBITDA (x) 1.3 1.0 0.5 0.4 Other profit/loss 10 7 9 8 Total assets 2,397 2,479 2,520 2,746 Tax 49 35 46 53 Net debt = debts – cash & equivalent Effective tax rate (%) 16% 12% 12% 12% KEY RETURN AND 2016 2017 2018F 2019F Net profit 262 264 346 404 VALUATION RATIOS ROE (%) 19% 17% 20% 21% Net margin (%) 24% 20% 20% 22% (excl. minority interest) Minorities 11 27 33 41 ROA (%) 11% 11% 14% 15% Net attributable profit 251 237 313 363 ROIC (%) 18% 16% 21% 27% Number of shares (m) 45.6 50.1 50.1 50.1 WACC (%) 15% 15% 15% 15% EPS (VND, bonus- 4,463 4,214 5,566 6,442 PER (x) 9.2 9.7 7.1 6.2 adjusted) EPS growth (%) -10% -6% 32% 16% PBR (x) 1.4 1.4 1.2 1.1 DPS (VND) 2,000 2,000 2,000 2,300 PSR (x) 1.9 1.6 1.2 1.1 Payout ratio (%) 41% 47% 36% 36% EV/EBITDA (x) 4.9 4.8 2.8 1.8 EV/Sales (x) 2.3 2.0 1.0 0.7 Dividend yield (%) EBITDA = Net revenue – (COGs -Depr’n&Amort’n)– SG&A expenses 4.4% 4.9% 5.0% 5.8% (bonus-adjusted) EBIT = EBITDA – Depr’n&Amort’n
Net interest expenses = interest expenses – interest income Other profit/loss consists of other financial income/expenses, profit share from JVs/associates and other income/loss. Payout ratio = Dividend paid / Net attributable profit.
22-Nov-2018 Page 20 Equity Research - KIS Vietnam Securities Corp. Bloomberg: KISVN
Contacts:
HCM City Head Office Hanoi Branch Level 3, Maritime Bank Tower Level 6, CTM Tower 180-192 Nguyen Cong Tru St., District 1, HCM City 299 Cau Giay, Cau Giay District, Hanoi Tel: (+84 28) 3914 8585 Tel: (+84 24) 3974 4448 Fax: (+84 28) 3821 6898 Fax: (+84 24) 3974 4501
Institutional Sales
Ms. Uyen Lam Head of Institutional Sales (+84 28) 3914 8585 (x1444) [email protected]
KIS Vietnam Securities Corp. Our Recommendation System
OVERWEIGHT: where we believe prospective 12 months VND total return (including dividends) will be 15% or more. NEUTRAL: where we believe it will be -5% to 15%. UNDERWEIGHT: where we believe it will be -5% or less.
Disclaimer
This report has been issued by the KIS VN Securities Corporation (“KIS”) with the instructional contributions of KIS VN Securities Corporation whose employees are specified in the publication. This report is for information of its institutional and professional customers.
This report is and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe for any investment. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investors are advised make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular circumstances such as their financial situation, investment objectives and other considerations.
In preparing this report, we have relied upon and assumed the accuracy and completeness of all information available from public and other sources which we believe to be reliable, but which we have not independently verified. KIS makes no express or implied guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information.
Opinions, estimates, and projections expressed are current opinions of the authors as of the original publication date appearing on this report only and the information, including the opinions contained herein, and are subject to change without notice.
KIS and its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, companies mentioned herein. Further, KIS and its affiliates, and/or their officers, directors and employees involved in the preparation or issuance of this report may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives in a manner that may be consistent or inconsistent with this report and opinions expressed therein. As a result, investors should be aware that KIS and its affiliates and/or their officers, directors and employees may have a conflict of interest that could affect this report.
This report shall not be copied, reproduced, distributed (in whole or in part) or disclosed by recipients to any other person without the express permission of KIS in writing.