Cement Industry Outlook 2021 - Mirae Asset Securities ...

Báo cáo ngành Xi Măng 2021

Mirae Asset Vietnam Research 1

OVERWEIGHT

TIME TO BUY

Analyst: Thien Nguyen,

[email protected]

Cement Industry Outlook 2021

Cement industry report 2021


January 22th, 2021

Opportunity knocks in 2021 2020 summary and opportunities in 2021

Previously, we had projected that the sales volume of Vietnam’s cement industry would fall by

15%, equivalent to rotary kiln efficiency of only 71.3% (versus 93% in 2019), due to the impact of

COVID-19. Our concern was the fear of oversupply when the Tan Thang Cement and Long Son

Cement entered operation in 2020. With two new cement factories, we estimate Vietnam’s total

cement capacity at 106mn tons in 2020 (versus 104mn tons in 2019), with domestic consumption

of only 62mn tons. However, thanks to the Vietnamese government’s effective control of the

pandemic, along with the boost in China’s public investment in 2020-2021, Vietnam’s cement

industry recovered strongly in 2H20. Hence, we estimate that rotary kiln efficiency reached 93%

in 2020.

In 2021, Vietnam’s cement industry should maintain its positive position, based on the following:

1) The recovery of the real estate sector; 2) increasing public investment; 3) declines in interest

rates and debt/equity ratio.

Valuation

Vietnam’s cement industry is trading at a P/E of 8.4x, P/B of 1.1x, and EV/EBITDA of 4.8x,

which is 34% lower than the average valuation of global peers (P/E 12.8x; P/B 1.3x;

EV/EBITDA 6.4x). We believe Vietnam’s cement industry is undervalued as a result of its

poor financial performance during the FY11–18 period, when supply exceeded demand by

around 40% of total capacity. However, the performance of the rotary kiln has been

improved since 2019. Hence, we believe the sector should trade at a P/E of 10.3x and

EV/EBITDA of 5.7x.

Investment thesis

• After slight decline in 2020, forecast domestic cement sales volume set to recover in

2021. In 2020, Vietnam disbursed VND366,244bn (+22.5% YoY) in public investment, with

70% of total disbursement occurring in 2H20. This led to huge demand for building

materials, especially for cement and concrete. We estimate that domestic cement

consumption in FY20 declined only slightly, by 62mn tons (-4.5% YoY). We expect sales

volume this year to recover, reaching 65.7mn tons (+6% YoY).

• Growth rate of domestic construction sector remains at 6.6% (versus 2.12% GDP

growth): Based on statistics from the General Statistics Office (GSO), the value of Vietnam’s

construction in 2020 grew by 6.6% YoY (to VND411,139bn), far outpacing the nation’s

2.12% GDP growth. We believe with many new public infrastructure projects will start in

2021, such as the North-South Highway, will provide a boost to the construction industry

in the period 2021–2025. We project the value of the construction will reach VND452,233bn

(+10% YoY) in 2021F and VND492,956bn (+9% YoY) in 2022F.

• Efficiency of rotary kilns to reach 93% in 2020E and 96% in 2021F, much better than

global peer average of 78%: Due to domestic oversupply, most of Vietnam’s cement

producers have discounted clinker export prices by US$6–8/mt in 2020, in order to avoid

negative cashflow. However, based on the rapid recovery of domestic consumption,

combined with a resurgence in cement demand in China from 2H20, we estimate the

efficiency of rotary kiln only saw a slight decrease to 93% (versus 96% in 2019), and should

rebound to to the normal rate of 96% in 2021.

Recommendation

Ha Tien 1 Cement Joint Stock Company: BUY/TP: VND21,200/Upside: +22.5%

Risk

• Cement producers are directly affected by coal and electricity prices. In 2020, the price of

electricity remained unchanged, thanks to supportive government policies. Coal prices also

remained low, due to the impact of COVID-19. However, we believe that coal demand is

Cement industry report


recovering, and Vietnam’s electricity price will increase by 3–5% in 2021F. We assume if

domestic cement companies are unable to pass through all cost increases via cement price,

their gross profit would decline by 1–2%. Moreover, the cement industry faces the risk of

overdependence on exports to China.

Investment thesis

A. Limestone quarries a strategic advantage.

1. Majority of limestone reserves are in Northern Vietnam

Limestone is the primary material for clinker (a solid material produced in the manufacture

of Portland cement as an intermediary product), while 60% of Vietnam’s current limestone

quarries are located in Northern and Central Vietnam. According to Atlas Vietnam and the

Ministry of Natural Resources and Environment (MONRE), Ninh Binh, Quang Ninh, Nghe An,

and Thanh Hoa provinces possess the largest limestone reserves. We estimate the limestone

reserves in these provinces to be 4.1bn MT, accounting for 22% of total national limestone

reserves. 60 of Vietnam’s 87 clinker rotary kilns are located in the North and Central Coast,

whereas only five clinker rotary kilns are found in the South. The Northwestern provinces

and Central Coast also have sizable limestone resources, accounting for 20% of the total

national reserve. However, due to the those limestone reserves are all the located in rural

area, along with the oversupply status, we believe MONRE will not approve any new cement

factories in either region. Thus, we argue the major supply of cement in 2020–2025 period

will be provided by plants in the Hong River Delta in the North and Kien Giang province in

the South.

Figure 1. Allocation of limestone resources and correlation between supply and demand by

region

Source: MONRE, Vietnam Atlas, Vicem, Mirae Asset Vietnam Research

According to Atlas Vietnam, limestone mines in the Southern region are only distributed in three

provinces: Binh Phuoc, Tay Ninh, and Kien Giang. In particular, the Tay Ninh-Kien Giang region



has the largest reserves, equivalent to 2bn MT, or 10.7% of total national reserves (2005 Atlas

Vietnam survey). After merging the Kien Luong factory complex, HT1 has two cement-clinker

grinding stations in the two largest raw-material areas, namely Kien Giang and Binh Phuoc.

Currently, the total output of HT1’s clinker is 4mn MT, of which 3.6mn MT is for the internal

production of the Long An, Phu Huu, Kien Luong, and Binh Phuoc cement grinding stations,

meeting 100% of clinker demand for HT1. Therefore, in the Southern region, any cement

company that owns a limestone mine will enjoy a competitive edge. We believe that Ha Tien 1

will gain benefits, as they own two limestone quarries in Kien Giang and Binh Phuoc. The

company’s gross profit margin is projected to reach 17.7%, compared with the cement industry

average of 13%.

2. Oversupply in North, but overdemand in South

Due to plentiful limestone reserves in the Northern and Central Coastal provinces, the Northern

region has the highest density, with 60 of Vietnam’s 87 cement factories, leading to oversupply

there. In FY19, the central and northern regions consumed about 47.3mn MT of cement, with

total capacity reaching 75mn MT, creating 27.7mn MT of excess cement. In detail, the quantity

produced by the Northern, the Central, and Southern regions is 33.1mn tons, 16.3mn tons, and

27mn tons, respectively.

We estimate the total domestic demand exports (excluding clinker) in 2020 be unchanged, at

76.2mn tons (flat YoY). We estimate the total supply of Vietnam cement industry in 2020 reached

108mn tons, including 60.9mn tons in the North, 35.1mn tons in the Central region, and 12.1 mn

tons in the South. Excluding clinker exports, the Southern region is likely to experience a shortage

of at least 14.9mn tons, accounting for 55% of Southern demand. Thus, we highly regard the

company that own limestone quarries, such as Ha Tien 1 and TAFiCO, as they control the source

of raw materials and have above-average gross profit margins.

Figure 2: Correlation between cement demand and supply in specific regions Figure 3: Allocation of rotary kilns

Source: FiinPro, Vicem, Mirae Asset Research Vietnam

B. Consumption expected to rise in 2021

The domestic market is facing an oversupply of 36mn tons per year (33% of the production

capacity in 2020). As a result, Vietnam clinker export prices are always about 20% lower compared

with those of neighboring countries, like Thailand and Indonesia. The average clinker export price

in 2020 was only US$32/mt (-15% YoY), reaching the bottom of the 2015–2020 period.

In our view, the fear of oversupply has pushed domestic cement companies to cut cement prices

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Red River Delta

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Central Highlands

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Mn tons

Cement demand Cement supply



to gain market share. Our research indicates that from the 1Q20 until 3Q20, retail prices for all

companies declined by 5–7%, while export prices fell by 15%. However, it is worth noting that

retail prices improved by a modest 2–3% in 4Q20. In addition, in FY20, electricity prices

remained unchanged, while coal prices fell to US$126/mt (-28%). Combining all good and bad

elements, we estimate the gross profit margin of the cement industry in 2020 only reduce by 2%,

equivalent to 12%.

Table1: Comparison of cement retail prices in Ho Chi Minh City (VND/bag)

Name Region Cement type 12/2019 04/2020 10/2020

Ha Long Hong River Delta and Northwest PCB40 74,000 71,000 71,300

Nghi Son North and North Central PCB40 75,000 70,000 72,400

Bim Son North and North Central PCB40 69,500 66,800 67,200

Tam Diep Hong River Delta PCB40 68,500 65,000 66,000

Hoang Mai Hong River Coast PCB40 68,500 65,500 66,800

Hai Van Hong River Coast and Central PCB40 66,250 64,000 65,000

Insee Southeast and Mekong Portland/PCB40 89,000 84,000 85,500

Fico Southeast and Mekong PCB40 78,000 73,000 75,000

Ha Tien Southeast and Mekong Portland/PCB40 88,000 81,700 84,800

Source: Ba Dinh Cement JSC, Hiepthanh Trading, Duc Thanh Materials, T&T Trading, Mirae Asset Vietnam Research

We believe 2021 will be a turning point for the cement industry, based on the recovery of the

real estate sector and the upward trend in public investment. We forecast the total sales volume

of the industry (including exports) in 2020, 2021, and 2022 to be 100mn tons (+1% YoY), 104.5mn

tons (+4.5 YoY), and 110.3mn tons (+5.5% YoY), respectively. In particular, cement sales volume

(for both the domestic and export market) in 2020, 2021, and 2022 is expected to reach 76.2mn

tons (+0% YoY), 80.25mn tons (+5.3 YoY), and 84.3mn tons (+5.3%). We strongly believe that the

efficiency of the rotary kiln will bounce back to the historic peak seen in 2019, at 96% in 2021F.

Figure 4. Projected consumption in domestic market in FY12–24 Figure 5. Projected export quantity of cement and clinker

Source: VNCA, Vicem, MAS Research Vietnam

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1. China’s public investment boosts clinker consumption

As mentioned in our Steel/Galvanized Steel Industry Outlook 2021 (see our industry report of

January 21th, 2021 for Steel industry, Get out of the dark), China has mobilized US$530bn from

sovereign bonds. Specifically, the disbursement for infrastructure in 2020 rose sharply to 34%

(versus 1.3% in 2019), equivalent to US$163bn. We believe China’s increased public investment

will be positive for construction material producers in neighbouring countries, especially for

Vietnamese producers of steel and cement, the two core materials in infrastructure development.

For the 2017–2020 period, China progressively increased the amount of imported cement and

clinker from Vietnam. In 2020, China accounted for 57% of Vietnam’s total cement exports (versus

7% in 2017). In light of massive demand from China, we are optimistic about the Chinese export

market, with cement and clinker export sales volume to China in 2021 forecast to reach 38mn

tons (+11.7% YoY).

Figure 6. Proportion of Vietnam’s export markets

*Inner circle: 2018; middle circle: 2019; outer circle: 10M20

Source: VNCA, Bloomberg, Mirae Asset Research Vietnam

2. Sustainable growth of domestic construction

Cement consumption is driven by the construction industry. According to GSO statistics,

Vietnam’s construction industry in 2020 reached VND411,139bn, up by 6.6% (compared with

2020 GDP growth of 2.12%). It is expected that investment in infrastructure projects, like the

North-South Highway and ring roads in major cities, will contribute to construction sector growth

in the 2021–2025 period, when the sector’s value is projected to be VND452,233bn (+10% YoY)

in 2021F and VND492,956bn (+9% YoY) in 2022F. Based on the positive prospects of the real

estate and construction sectors, we forecast clinker price will be traded at US$34–36/mt in 2021F.

Therefore, we expect the gross profit margin of the cement industry to improve by 1–2% to 14%

in 2021F.

Figure 7. Projection of construction industry value and growth rate

29.7%

25%17.5%

27.8%

45.2%

18.4%

9%

27.3%

57%

17.4%

5.6%

20% China

Philippines

Bangladesh

Other

https://masvn.com/api/attachment/file/1599797787127-V1_VN_Galvanized-steel-Outlook.pdf



Source: GSO, MOC, Mirae Asset Research Vietnam

3. Domestic consumption expected to recover in FY21

Since FY18, Ministry of Natural Resource and Environment has granted no licenses for new clinker

rotary kilns. In the FY19–20 period, only two new projects were put into operation, the Tan Thang

cement plant (2mn ton capacity) and the Long Son cement plant (2.5mn ton capacity). The total

capacity of Vietnam cement plants is estimated to reach 108mn tons in FY21, with no sharp rise

in FY22–25.

Domestic consumption of cement in the FY12–19 period experienced a sustainable trend, with

CAGR of 4.6%, equivalent to FY19 domestic consumption of 64.9mn tons (accounting for 38% of

FY19 total capacity). We expect domestic consumption to reach 62mn tons (-4.5% YoY) in FY20

and 65.7mn tons (+6% YoY) in FY21. Compared with our previous forecast of a 20% decline in

domestic consumption of cement in FY20 (see our initiation report of May 4th, 2020 for Cement

Ha Tien 1, Long live the king), real domestic demand of cement remains stable.

4. Clinker price unlikely to fall further

According to our research and GSO data, Vietnam’s average clinker export price decreased to

US$30-32/mt (-15% YoY), which was the lowest export price in the period 2015-2020. However,

we strongly believe export clinker price unlikely to fall further thus we estimate the break-even

leval at the price of US$27–28/mt. Thanks in part to effective control of the COVID-19 pandemic

through mass vaccinations, we forecast the clinker price to bounce back to US$34–36/mt in 2Q21.

Despite the low current clinker price, it is remarkable that producers are still able to maintain

their export volume in 2020. Therefore, we see the recovery of cement demand in 2021 will boost

selling prices by about 5% in 2021. Furthermore, we project the industry gross profit margin will

correspondingly increase by 1.5–2%, to an industry average gross margin of 15% in 2021.

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021f 2022f

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Construction value (VNDbn - LHS) GDP (% - RHS) % growth of construction value (% - LHS)

https://masvn.com/api/attachment/file/1599712311328-V1_EN_Initialcoverage_HT1_M_1_ed_S.pdf



Figure 8. Clinker export price (FOB) Quang Ninh port

(US$/ton)

Figure 9: Estimated clinker production capacity and rotary kiln

efficiency in FY15–21 period (mn tons; %)

Source: Ba Dinh Cement JSC, General Department of Vietnam Customs, GSO, Mirae Asset ResearchVN

VALUATION OF CEMENT INDUSTRY

Vietnam cement industry valuation still attractive once oversupply issue is solved

After the outbreak of COVID-19, stocks related to the cement industry moved in correlation with the

VN-Index. From the bottom in April 2020, the VN-Index recovered by 200%, to 1,180 bps by January

2021.

In 2021, we believe that increased public investment, combined with recoveries in the real estate and

construction sectors, will enhance the prospects of the cement industry. Currently, cement exporting

companies are trading at a P/E of 12.8x, P/B of 1.3x, and EV/EBITDA of 6.4x. Vietnam’s cement sector

is trading at a P/E of 8.4x, P/B of 1.1x, and EV/EBITDA of 4.8x, which is 34% lower than other countries’

cement sectors average. We argue the undervalued status is the result of oversupply in the past.

However, the performance of the rotary kilns began to improve from 2019. Therefore, we believe that,

in 2021, the cement industry should be revaluated at a P/E of 10.3x and EV/EBITDA of 5.7x, equivalent

to 20% upside for Vietnam’s cement industry as a whole.

Among listed companies, Ha Tien 1 Cement JSC is our top pick in material construction industry in

2021 outlook, due to its remarkable improvement in business operations and the prospect of strong

profit growth from 2021.

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Figure 9. Cement industry valuation of countries: P/B, EV/EBITDA (x) Figure 10. Cement industry valuation of countries: P/E (x),

dividend yield (%)

Source: VNCA, Vicem, MAS Research Vietnam

Cement industry’s risk

Coal price and electricity price elasticity risks: Cement industry always face a great risk against coke

and electricity prices, when they account for 40-45% clinker production cost. Specifically, in cement

industry, clinker prices account for more than 60% of the raw material costs of cement. However, the

market leading cement companies that own limestone quarries such as HT1 or BCC have locked the

price of imports coal 3 months in advance; therefore, we believe that this risk will not be significant in

1H21.

Covid-19 risk: Risks from Covid-19 are still present, as large-scale vaccinations have not yet taken

place. This could affect the overall recovery, as well as the production capacity, of the steel and

galvanized steel industry..

Export market risks due to the high dependence on Chinese market: Since 2017, China gradually

became Vietnam's largest importer of cement & clinker. Currently, China accounts 50% of total

Vietnam exports (cement and clinker). We assume if China stops its infrastructure stimulus policies,

Vietnam exports volume will drop by 25-30% in the short and medium term.

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Cement industry report 2021


[Vietnam] Construction - Raw Materials

Ha Tien 1 Cement JSC (HOSE: HT1)

A new decade begins

Mirae Asset Securities (Vietnam) LLC.

Nguyen Đang Thien, [email protected]

Valuation and recommendation We upgrade our recommendation for Ha Tien 1 Cement JSC (HT1) to Buy (from Hold) and raise our

target price by 26% to VND21,200/share, with our new forecast net profit of 2020 and 2021 to be 30%

higher, compared with the previous report (September 3, 2020 – HT1 2Q20 update).

With the prospect of clinker prices recovering from 2Q21, we argue that HT1’s PCB40 cement price will

improve by 5% in 2021, equivalent to VND1.16mn/ton. We forecast HT1 sale volume and revenue in

2021 to be 7.8mn tons (+9.2% YoY) and VND8,525bn (+14% YoY), respectively. Another highlight of

HT1 should be its balance sheet, as HT1 will pay down VND550bn in long-term debt in 2H21. Therefore,

we forecast from 2022F, HT1 will increase its cash dividend by up to VND2,000/share, equivalent to a

dividend yield of 9.5% annually (versus 5.5% for Vietnam’s 12-month savings rate).

Investment thesis Forecast NPAT in 2021F will surpass historic peak, thanks to reduction in long-term debt: In 2021,

HT1 will repay another VND550bn of remaining long-term debt, thereby decreasing the net debt-to-equity ratio to 30% (compared with 42% in 2020). From 2022F, we forecast 98% of HT1’s debt will be

short-term debt. Consequently, we forecast HT1’s interest expense in 2021F to reach VND123bn (-14%

YoY), raising HT1’s net profit to VND840bn (+20.6% YoY).

Coal price declined 49% in 2020, helping gross profit margin to remain at 18%: Since the start of

2020, coke prices have fallen by 49% to US$107/mt. Currently, coke accounts for 30% of clinker

production costs, and clinker accounts for 56–62% of the raw material cost (raw materials account for

74–77% of HT1's COGS). We believe this is how HT1 could increase the discount rate for agencies to

maintain market share at 33% in the Southern market in 2020. We estimate gross margin remained at

17.7% in 2020 (~2019).

Dividend yield looks very attractive at 9.5% annually from FY22: In FY20, HT1 planned to pay a cash dividend of VND1,200/share, equivalent to a dividend yield of 6%. During the FY17–19 period, HT1

always maintained a very high payout ratio of 65% (2017 payout ratio: 78%; 2018: 89%; 2019: 61%).

According to the debt repayment schedule in 2021 and 2022, we project that operating cash flow will

improve significantly, to VND1,544bn (+20% YoY) and VND1,723bn (+11.6% YoY), respectively. As a

result, we believe that HT1 will increase its dividend for 2021F to VND1,500/share and for 2022F to

VND2,000/share, corresponding to a dividend yield of 7.1% and 9.5%, respectively.

Key data

OP (21F, VNDbn) 1,176.7

Market cap (VNDbn) 6,925

Consensus OP (21F, VNDbn) n/a Outstanding shares (mn) 382

EPS growth (21F, %) +20 Free float (%) 20.3

Market EPS growth (21F, %) n/a Foreign ownership (%) 5.9

P/E (21F, x) 9.6 Beta (12M) 0.9

Market P/E (x) 18.4 52-week low 9,850

VN-Index 1,156 52-week high 18,400

Share performance Earnings and valuation metrics

(%) 1M 6M 12M

Absolute 10 26 20

Relative 2 -2 5

FY (31/12) FY17 FY18 FY19 FY20 FY21 FY22

Revenue (VNDbn) 8,209.0 8,376.4 8,838.6 7,483.3 8,525.1 9,187.0

OP (VNDbn ) 1,027.8 1,080.1 1,189.1 1,015.3 1,176.7 1,372.9

OP margin (%) 12.5% 12.9% 13.5% 13.6% 13.8% 14.9%

NPAT ( VNDbn) 485.9 641.4 745.0 696.7 840.2 948.4

EPS (VND) 1,188 1,674 1,980 1,848 2,226 2,511

ROE (%) 9.4% 12.4% 13.9% 12.5% 14.3% 15.7%

P/E (x) 10.2x 7.5x 7.7x 11.5x 9.6x 8.5x

P/B (x) 0.5x 0.5x 0.5x 0.5x 0.5x 0.5x

Dividend yield (%) 8% 12% 8% 6% 7% 10%

Source: Mirae Asset VN Research projection

BUY (Upgrade)

TP:

VND21,200

(Upside +22.5%)

50

70

90

110

130

Jan 20 Mar 20 May 20 Jul 20 Sep 20 Nov 20 Jan 21

(%) VN-Index HT1 VN

https://masvn.com/api/attachment/file/1599799515464-Final_VN_HT1_Update-1H20.pdf

Báo cáo ngành Xi măng 2021


6/01/2021

APPENDIX 1

Important Disclosures & Disclaimers

Analyst certification

The research analysts who prepared this report (the “Analysts”) are subject to Vietnamese securities regulations. They are neither registered as research analysts in any

other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect

the personal views of the Analysts primarily responsible for this report. Mirae Asset Securities (Vietnam) LLC (MAS) policy prohibits its Analysts and members of their

households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member

of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in

the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or

indirectly related to the specific recommendations or views contained in this report but, like all employees of MAS, the Analysts receive compensation that is determined

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client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or

MAS except as otherwise stated herein.

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