Global investors who seek exposure to the Vietnam stock market often do so via ETFs or Closed End Funds (CEFs) that hold the larger and more liquid companies. Such companies are usually prominent constituents on various Vietnam stock indices such as the VN-Index, FTSE Vietnam Index, MSCI Vietnam Index etc.
In this blog post I shall discuss one such large Vietnam stock, the Hoa Phat Group (HOSE:HPG). I thought might be useful to regularly provide a broad overview of the stocks you might see pop up in fund manager holdings. The purpose is not to provide buy or sell recommendations. However a quick summary of key drivers for future performance will be the aim, and readers can make their own mind up of whether Hoa Phat Group is a good stock to buy?
WHY HOA PHAT GROUP?
Hoa Phat Group is a clear success story for shareholders in Vietnam over the last decade. Despite that, it trades on a very low P/E ratio. Whilst dividends have not been much to speak of historically, they may ramp up in future years. Investors looking to gain exposure to the thematic of Vietnam’s future infrastructure spend, may well be tempted to take a close look at Hoa Phat Group.
AN OVERVIEW OF THE HOA PAT GROUP (HOSE:HPG) BUSINESS
Hoa Phat Group is the leading industrial manufacturing group in Vietnam. Over 80% of revenues relate to steel production, where they have a large market share of above 30%, with aims to get to 40%. Their agricultural business segment is also experiencing high growth rates. They have generally traded on a single digit PE ratio and are well positioned for Vietnam’s strong focus on infrastructure development.
Background of Hoa Phat Group
The first establishment of the Hoa Phat company name occurred back in 1992. In the 1990s they went from equipment, then furniture, then established Hoa Phat Steel Pipe Company. In the early 2000s they expanded into construction, refrigeration and real estate.
2007 was a significant year when Hoa Phat Group Joint Stock Company restructured as the ultimate parent company and listed on the HCMC stock exchange.
Very impressive corporate story of Vietnam
Sometimes a picture tells the story of success so I shall leave the below 10 year revenue / profit growth chart here.
Source: Hoa Phat Group 2020 Annual Report
Hoa Phat Group revenue / profit mix.
Below is the segment break down if where revenue / profits are coming from.
Source: Hoa Phat Group 2020 Annual Report
Hoa Phat Group steel market share growth.
Due to Hoa Phat Group’s outstanding success in the last decade, they are now the clear leading player in terms of Vietnam’s manufacturing construction steel.
FACTORS TO DECIDE ON WILL HOA PHAT GROUP SHARES KEEP RISING IN 2022?
Execution of investment in Dung Quat Complex 2 – This is a very large project for Hoa Phat Group that had already been in planning for a long time. It has a design capacity of 5.6mn tons, including 4.6mn of hot rolled coil (HRC). Demand for HRC relates to material for production of many products such as steel pipes, galvanised steel sheets, automobile spare parts and household appliances.
This project could become operational in 2024 and as a result could help annual revenues jump by 60-70%.
Demand story remains strong from Vietnam infrastructure spend / housing rebound – Vietnam has some major plans in terms of infrastructure over the next few years at least that are visible drivers to benefit Hoa Phat Group. The government has made strong commitments within their budget plans on the likes of Airports, highways, rail systems and seaports.
The real estate outlook also looks relatively solid as more certainty comes back into hopefully a post covid world.
Market share – The chart I showed earlier showed how Hoa Phat has grown quickly to be the dominant local player in steel. Having said that, there is still room to win even more market share.
Dividends – This is somewhat tied into the first catalyst of the execution of investment in Dung Quat Complex 2. The company has flagged higher cash dividends when this ramps up. Sometimes I observe that markets wake up to re-rating cheap valuations when the operating cashflow and resultant dividends is clearly on display for everyone to see.
VIETNAM STOCK MARKET VALUATIONS – HOA PHAT GROUP PE RATIO, YIELD ETC.
Hoa Phat Group PE Ratio – 4.1 times
Hoa Phat Group dividend yield – 1.2%
* Source: TIKR data captured on June 14th 2022
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HOA PHAT GROUP SIZE IN TERMS OF VIETNAM STOCK INDEX AND COMPONENTS
Hoa Phat Group at the time of writing is about the 9th largest company of my searches of Vietnam stock list of the largest companies. The market cap in USD is circa $6 billion.
IS HOA PHAT GROUP A GOOD UNDERVALUED VIETNAMESE STOCK TO BUY FOR 2022?
The stock had a rapid rise in 2021 particularly over the first part of the year. So much so that investors could be forgiven for thinking they have missed the boat on this. However since around November of last year the stock has had a large decline. The falls have particularly gathered pace in 2022 amidst very weak global and Vietnam stock markets.
Despite the great share price performance of 2021, the stock still trades cheaply. As I highlighted above in the TIKR research data, the stock is on a trailing P/E of just 4 times!
Digging a bit further with the TIKR data, analysts numbers suggest margins and profits could come under pressure compared with 2021. On analysts forecast numbers for 2022 we are a talking about a P/E however of still circa 5 times. After this year’s numbers analysts have strong EPS growth forecasted for 2023 & 2024.
You could argue it will always trade a bit cheap. It would be labelled as a cyclical type company by many market participants. Perhaps it would be more vulnerable to a global demand shock than most. With inflation the huge story across the globe in 2022 thus far, I can understand Hoa Phat Group shares underperforming the market. The company is still in expansion mode so perhaps rising costs pressures are a worry in the shorter term.
Over the last year or so in global stock markets investors seem to be waking up to the fact (for a change compared to the few years prior!), that things like high certainty of shorter term earnings and cashflows do matter. More importantly, so does the valuation you pay for a stock.
Despite all the macro risks around and some viewing this as a cyclical stock, I would think the current low valuation stands you in good stead of doing well over the next few years with Hoa Phat Group Stock.
Their dominant market share, scale, and position to cater for the Vietnam government’s strong appetite for infrastructure development put it an ideal place. Additional capacity is quickly coming online, assisting the company’s cash flows to ramp up over the next couple of years. This paves the way for Hoa Phat to become a solid high dividend paying stock by 2023/2024.
I spend my time in Vietnam’s south and Ho Chi Minh City and can certainly relate for the need of big infrastructure projects such as another international airport, more highways and efficient rail networks etc. This sort of need won’t go away anytime soon.
As an aside, I note that VinaCapital would have been a regular seller of this stock which could have to some extend contributed to holding back the price growth at some stages when the stock was going up last year. Such selling though is not because they don’t like the stock. It grew to more than 20% weight from performing so well in their VOF fund. It is therefore natural to expect they would do a bit of trimming for risk management purposes, and to rebalance to weights clients would be more comfortable with.
OTHER VIETNAM STOCK INDEX COMPONENTS REVIEWS
If you are interested in similar summaries and analysis on other larger Vietnam listed stocks here are some other links to check out.
And should you want a very quick description of the largest 10 companies listed on the Vietnam stock exchange, be sure to visit the below blog post I made last year.
VIETNAM LARGEST 10 COMPANIES ON STOCK MARKET
I summarize the largest Vietnam companies by market cap:
Is Vietnam a good investment?
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