VHC: Expanding its high-margin collagen business

What’s new?

► Sales recovered 11% MoM in May after the Covid-19 slowdown in April.

► Expanding its high-margin collagen and gelatin production by 3.5x this year.

► EVFTA will remove EU import tarrifs, thus boosting long-term growth.

► VHC set out a conservative 2020 PAT target due to uncertain export markets

Our view

► The collagen business is highly profitable with 55%-60% gross margin.

► Increased collagen capacity should thus boost overall profitability despite the lower margin of pangasius fillet shipments of about 15%-17%.

► VHC has a clear chance to return to its growth trajectory after 2020 given its increased collagen capacity and the EVFTA

Sales recovered in May. May 2020 sales slid 3% YoY but increased 11% MoM to reach VND551bn, a substantial recovery from the -21% MoM decline in April. VHC notes that the EU market led the recovery with 21% MoM sales growth to reach VND143bn.

Conservative 2020 target given uncertain export markets. VHC proposed target PAT of VND 1,063bn (-9.8% YoY) for its base case and VND 800 bn (-32.1% YoY) for its worst case scenario. Covid-19 has resulted in a 45% fall in shipments to the US, which accounted for 54% of 2019 sales. Thus, the short-term demand trends are unpredictable.

Expanding high-margin collagen & gelatin production. VHC plans to invest VND 205bn to expand its collagen production capacity by 3.5x to reach 3,500MT per year, operational in Aug 2020. The collagen business has been operating at full capacity, accounted for 7% of FY2019 revenue, and generates a higher profit margin (55%-60%) than that of its other products. VHC claims that they are the world’s only vertically integrated collagen and pangasius producer, and their control over inputs enables them to run at higher sustained utilization than peers.

EU–Vietnam Free Trade Agreement (EVFTA) to enable growth. The current EU import tariff of fisheries products from Vietnam is 5.5%, but this will be reduced to zero in the next three years as a result of the EVFTA. VHC expects this to enable increased fisheries export growth. Exports to the EU accounted for 14% of VHC’s 2019 revenue.

Our view. VHC has a high chance of returning to its strong growth trajectory in 2021 given 1) the low base of 2020 due to Covid-19; 2) the increased contribution of high-margin collagen; and 3) the EVFTA, which should boost VHC’s exports to the EU. The stock is trading at an attractive valuation of 6.8x TTM PE

For the complete report, please access here: 20200623 VHC company visit notes edited v2

Analyst: Binh Truong, binh.truong@yuanta.com.vn