VIETNAM SHIPPING & PORT SECTOR UPDATE - JAN 2014

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VIETNAM SHIPPING & PORT SECTOR UPDATE - JAN 2014
 DRY BULK SHIPPING SECTOR UPDATE
The Baltic Dry Index (BDI) rose from c.1000 in early August to c. 2000 in December, doubling in relative term.  Although we think the Recent uptrend of Baltic dry index is not yet sustainable, Dry bulk shipping market seems to gradually bottom out as there is a tendency of dormant fleet growth to satisfy demand growth in 2013.
Vietnamese dry bulk shipping lines such as Vietnam Ocean Shipping JSC – Vosco (VOS:HOSE), Vitranschart JSC (VST:HOSE), Vinaship JSC (VNA:HOSE), etc…have carried minor bulk (grain, fertilizer, metal, mineral, sugar, cement, etc) with fleets of Handysize vessels. We see that the recent uptrend of dry bulk freight did not ensue across the board, nor was it the case for Handysize freight rate. On average, Baltic Handysize index is only 2-3% higher YoY. These Vietnamese dry bulk carriers operate in international routes under voyage or liner charter, where they face stiff competition from foreign carriers (overall, only ~10% of carrying volume in international routes was relegated to Vietnam flagship carriers).
In terms of fundamentals, we see the above mentioned companies are still struggling although they have improved from the restructuring of their fleets and rolled-over their debts to minimize losses. Still, in our estimates, their core businesses would suffer losses in 2014 although less severe than 2013.
During 2011-2013, VOS, VST, and VNA liquidated parts of their fleets and as a result the profit generated helped minimize losses and were slightly profitable.  Due to operating difficulties, VSO, VST and VNA had to negotiate to roll-over/extend portions of their long-term debts (and interest expenses) to alleviate financial burden. In addition, in order to help shipping firms reduce losses incurred during economic malaise, the Ministry of Finance permitted shipping firms like VOS, VST, and VNA (in which Vinalines holds more than 51%) reduce depreciation expense up to 75% for certain vessels in 2012. However, the same practice was not permitted in 2013.

2014 outlook: Break-even if BDI sustainably remains around the 2500-3000 level

According to VOS’s management, operating profit could be break-even if BDI sustainably remains around the 2500-3000 level. Otherwise, for 2014, all hopes for dry bulk shipping companies would come from extraordinary income from disposing old vessels. Talks with those companies’ management revealed that VST has no plans to sell any ships in 2014 while VOS intends to sell 01-02 ships if market conditions are favorable and VNA has no specific plans yet (as they cannot forecast the movement of freight rate).   
LIQUID SHIPPING SECTOR UPDATE
Fundamentally, we see a brighter picture for liquid shipping lines such as PVT, VIP, and VTO as they have been profitable and will likely see upside catalysts in the coming time. Thanks to support from parent companies like PVN, Petrolimex, their businesses are sheltered from economic malaise as their fleets have largely been employed to transport oil and gas for SOEs at rates which we believe is more favorable than market rate.

Petrovietnam Transportation Corporation (PVT:HOSE): 2013’s business improvement and positive outlook has been largely priced in, investors should wait for attractive entry level.

2014 stable outlook:The Company estimates that 2014 would be another encouraging year, given rather stable market (DzungQuat oil refinery) and new opportunities from thermo-electric plants like VungAng 1, Thai Binh 1. DzungQuat refinery will have a maintenance plan in 2014 of roughly two months, which will partially impact revenue of gasonline products and LPG transporation. On the other hand, FSO Kamari will end operation in September 2014, and the company expects to collect an amount of extraordinary income from liquidation although it will reduce revenue from FSO. Furthermore, additional profit (with margin of ~5%) from coal shipping for thermo-electric plants would help compensate profit reduction from FSO Kamari stoppage. We expect coal transportation might generate VND 500bn revenue in 2014.
In terms of valuation,PVT is currently trading at 2013PER of 11.4xx, EV/EBITDA of 7 x and 2013 PBR of 1 x. In comparison with peers in the shipping industry as well as listed companies under PVN, we think that the current valuation is quite fair for PVT. We see some shipping stocks in APAC that are also trading at EV/EBITDA of 7x.
Catalysts in the short term: excellent 2013 results will help sustain the current price. For 6 months’ view, 2013 dividend of 10% in stock would be decided at the AGM next year and is another upside for the stock.
We recommend HOLD for PVT at fair value of VND 12,000/share, equivalent to target EV/EBITDA of 6x and PBR of 1x.

Vietnam Petroleum Transport JSC –Vipco(VIP:HOSE): Possible extraordinary income would spurupside in the medium term, strong free cash flow given a lack of capex plan

VIP previously owned 04 berths at Dinh Vu (02 petroleum and 02 container wharfs). After selling 02 berths to Gemadept Corporation (GMD:HOSE) in 2012, VIP still has 02 petroleum berths with total length of 377m in a 15.26 ha land plot. VIP confirms that it received approval from Hai Phong’s People’s Committee for transforming those berths to container berths, and it is setting business plan for the land piece. It might seek for investors to co-develop a container port or totally transfer to other developers.
VIP has already invested VND 132bn in the land piece. Assuming that the worst case scenario occurs, the land piece will be valued at a similar price that was sold to GMD (USD 13mn), VIP will still record a VND 120bn gain in book value (if it co-develops the port) or profit in P&L (if it sells the land piece), increasing book value of VND 1,500/share.
For FY2013, we expect net profit might reach VND 151bn, resulting in EPS of VND 2,526/share and BVPS of VND 16,234/share.  Upon our recent meeting with company, it was revealed that in 2014, all of its fleet would be leased to Petrolimex under the time charter method. Therefore, VIP’s oil product transportation business would remain stable in 2014. The company does not have any specific CAPEX plans and no plans to acquire new vessels in 2014. Besides, VIP’s management does not expect rate to significantly increase in 2014.  Excluding positive extraordinary profit from land piece sale, we believe EBIT in 2014 will still expand by 45% from VND 51.5bn in 2013 to VND 75bn in 2014 thanks to:
-     Lower interest expense resulted from lower debt balance. Higher financial income resulted from high cash without large capex plan.
-      Lower admin expense in the absence of bad debt provision. It should be reminded that VIP has set aside VND 19bn for provision in 2013.
Investment Opinion:  VIP is trading at 2013 P/B and EV/EBITDA of 0.67x and 3.2x, which is highly discounted to PVT’s (P/B and EV/EBITDA of 1x and 7x). We set lower P/E target for VIP due to its lower market cap and growth potential. Given current valuation, we recommend BUY for the stock at 1Y target price of VND 13,000/share as:
-        Small-scaled but stable and low-risk core business expected in 2014.
-        High free cash flow, VIP has no CAPEX plans. Although this will limit the growth potential of the stock, better financial status will help earnings expand in 2014. Besides, given high retained earnings, VIP will pay cash or stock dividend for 2013.
-        The upside potential from the port sale would be positive catalyst, spawning high earnings and cash flow for VIP.
PORT SECTOR UPDATE
Our recent visit to port companies in Hai Phong revealed that:
-     Through put volume has increased ~7-8% YoY, and is estimated to hover around 7% in the next several years. Oversupply is not likely to develop in the near future. Lach Huyen is in the distant future and would not affect those ports in the medium term.
-     Profit from frozen container storage at all the ports are not as high as in 2012 as border trade with China has been complaisant this year.
-     All ports have growth plans, either via developing logistics business or expanding to new ports to the Dinh Vu area.

Port	DVP	VSC	DXP	Comment
2012 throughput volume	462,700 TEUs	347,000 TEUs	4.37 mn tons	Export-import goods ratio: DVP: 100%, VSC: 80%, DXP: 40%
2013 throughput volume ( P)	468,000 TEUs	350,000 TEUs	4.37 mn tons
YoY Growth	1.20%	0%	0%
2012 revenue	503	779	261
2013 revenue (P)	518	779	200
YoY Growth	9%	0%	--20%
2012 PBT	201	290	103
2013 PBT (P)	219	276	72
YoY Growth	9%	-4.6%	-30.3%	DXP benefited the most from storing frozen containers in 2012. The same cannot be said for 2013.
2012 ROA	25.3%	23.9%	32.5%
2012 ROE	37.9%	32.7%	38.0%
Design capacity	500,000	300,000	180,000
2012 Capacity utilization	85%	116%	123%
2012 PER	4.68x	3.53x	3.29x
Current 2013 PER	8.5x	8.0x	7.0x
Current  2013 PBR	2.0x	1.8x	1.5x
Target 2014 PER	8.5x	8.5x	7.5x	We target higher PER for DVP on its advantages (1) larger capacity (2) capacity not fully utilized (3) advantageous location. VSC deserves higher target PER than DXP thanks to its larger size and active management in seeking growth for VSC, potential growth thanks to logistics.
1-yr TGP	45,700	68,600	55,000	DVP's valuation is before stock dividend
Recommendation	HOLD	HOLD	HOLD

Doan Xa Port (DXP: HOSE): 1-yr TGP VND 55,000. HOLD

2013 preview: DXP’s management hints that handling volume in 2013 would be around 4.3 mil tons (~230K Teus) which is identical to previous years’ volumes. Handling rate was remained unchanged for domestic customers (from Vinalines and VOS) but was a half of that for foreign customers. However, in terms of profit, the company anticipates negative growth. Frozen container storage activity generated ~VND 80 bn in revenue in 2012, but this amount is estimated to decrease by ~50-70% in 2013 as border trade with China becamemore complaisant.  In 9M13, DXP revenue and profit before tax totaled VND 148 bn and VND 53.4 bn (down 21% and 23% YoY) given theabove mentioned reasons.
Recent updates:Upon our recent meeting with the company, we havelearned that DXP is keen on expanding its port business to the Dinh Vu area. Therefore, they are considering to purchase VIP’s 02 berths (380 meter length) in the 15ha land plot. However, DXP admits that a total investment of around USD 50 mn (USD 20 mn for the land plot and USD 30 mn for construction) will exceedDXP’s current financial capabilities. DXPis working on due diligence to submit to Vinalines.
Estimates and Investment View:  We maintainestimates for 2013 of VND 200bn in revenue and VND 54bn in NPAT. 2013EPS comes to VND 6,856/share. As handling fee is unlikelyto increase in 2014, we expect that revenue in 2014 will advance slightly by 3% Profit before tax is expected to grow at similar level to VND 58bn, resulted in EPS of VND 7,346/share.
Our 1-yr TGP for DXP comes to VND 55,000/share, anchoring on target PER of 7.5x and PBR of 1.7x. Please note that if DXP’s above mentioned development plan is not realized, we believe that high cash dividend( 50% cash dividend, resulted in yield of 11%) will be maintained in the coming years. Therefore, at current market price, we recommend investors to HOLD the stock.

Dinh Vu Port Development and Investment JSC (DVP:HOSE): 1-yr TGP VND 45,700. HOLD

2013 preview: Total handling volume is estimated to reach ~500k TEUs (equivalent to ~5 mil tons), adding ~8% YoY.2013 profit target of VND 180 bn in PBT would be exceeded. Loading and unloading fees remained almost identical YoY, while other service fees slightly increased. SITC remains the port’s primarycustomer, contributing 35% to total revenue. For 2013, our forecasts for DVP are as follows: (1) revenue would increase by 9% mainly thanks to increases in cargo volume (2) NPAT advances by 8.5% to VND 204 bn. 2013EPS is estimated at VND 5,101 while 2013BVPS would be VND 19,919. We forecastthat DVP will continue to enjoy meager but stable handling and logistics business with SITC and KMTC. 2014 would be another good year for the company with estimated revenue and PBT of VND 538bn (adding 4 %) and VND 231bn (adding 5.4%) respectively. 2014EPS comes to VND 5,377/share.
Investment view: Based on 1-yr target PER of 8.5x, 1-yr TGP for DVP arrives at VND 45,700/share. As DVP has no significant capex plansin 2014, we expect cash dividend for 2013 would be high( 20-30% cash dividend)  thanks to its high cash position. Investors should consider adding the stock at price weakness. Relatively, DVP always receives higher valuation in terms of PER and PBR in comparison with VSC or DXP. We think that investors have already taken into consideration DVP’s advantages of (1) larger capacity and (2) advantageous location of the port, ( 3) retained earnings from logistics JV with SITC.

Vietnam Container Shipping Corporation – Viconship (VSC: HOSE): Revise up 1Y TP to VND 68,600

As reported in our last report on VSC, VSC’s volume is expected to expand by 5-7% in 2013. However, as handling fee declined by 5% in 2013, and frozen containers’ revenue declined by VND 30bn in 2013, revenue is expected to remain flat in 2013. However, PBT is expected to reach VND 275bn, declining slightly by 4.6% YoY due to lower interest income resulted from lower interest rate.
In 2014, VSC sets conservative revenue and PBT targets of VND 750bn and VND 270 bn (1% lower than that in 2013)  based on continuous decline in handling fee (approximately 5% in 2014) and frozen containers’ revenue. However, we still expect revenue and PBT might increase by at least 7% and 3.4% YoY to VND 834bn and VND 286bn, respectively in 2014, resulting in EPS of VND 8,071 thanks to:
-     New CFS (area of 7,500 square meters) is expected to commence operation in Feb 2014. Together with the first CFS, logistics segment is expected to generate VND 30bn in PBT in 2014, counterbalancing the absence of frozen containers’ profit.
-     The volume is expected to continue to expand by at least 5-7% in 2014 thanks to increasing demand for import and export. Increase in volume will partially offset the impact from the decline in handling fee.
VSC will pay an additional 25% cash dividend for 2013 which will be decided in Fed 2014. For 2014, VSC maintain its target dividend of 30%. However, the dividend might be in cash or stock depending on its expansion plan in 2014. The company is going to expand its port operation to Dinh Vu area. If the company initiates the plan, it might opt to pay stock dividend.  In addition, this presents a prime opportunity for VSC to grow in the long term as the current port is running at full capacity and there is limited room for the company to grow unless it expands its port activities.
We revise up 1Y target price of VSC to VND 68,600/share, equivalent to 2014 PE of 8.5x, similar to DVP,   and reiterate our HOLD recommendation for the stock based on:
-     New CFS will help VSC grow in the coming year when the occupancy rate increases and expect to run at full capacity in 2015.
-     VSC maintains high dividend ratio. Stock dividend might be a catalyst for this illiquid stock
-     Ease in FOL will be a positive catalyst for the stock
-     Ambitious expansion plan promising long term growth
-     Long term profit contribution from associates, including DNL (37% ownership), PTSC Dinh Vu ( 23%), and potential investment in Danang Port ( 15%).