thanh thanhceramic (ttc) - tvs.vn thanh thanhceramic (ttc) company report building material sector...

1

THANH THANH CERAMIC (TTC)

Company report Building material sector

Steel sector

30/May/2014

Key indicators

Current price (VND) 11,700

Market cap (USD mn) 3

Shares outstanding (mn) 6

Avg 1 month traded 5,717

Foreign ownership 2.8%

Thien Viet Securities Company│ www.tvs.vn

1. The local ceramic market has become oversupplied since 2007. Inventory has reached 30% total

production in 2013 forcing players to operate at only 70% total capacity (435 mil.sqm/year).

2. TTC has limited competitive advantage: small-size capacity 5.5 mil. sqm/year, outdated product

portfolio, weak distribution network compared with Prime, Dong Tam Group….

3. Given less growth potential, TTC cut cost as the last resort to survive hardship. But this is not a long-

term solution.

� Cost optimization: running 88% production capacity to drive down unit cost.

� Fuel switch from Furnace Oil (FO) and Diesel Oil (DO) to Coal and Compressed natural gas (CNG),

saving 20 billion VND/year

4. Downside risks than ever:

� The property market recovers slowly, causing ceramic inventory climb to ~30% total production,

despite actively exporting in recent years.

� Harsh competition including trading fraud from Chinese imports

� High transportation cost forces producers to revise selling price up 20-30% starting from 20/4/2014.

� Price hike might encourage buyers to switch to Chinese products.

5. As TTC has less room for growth and encounters stiff competition in today’s oversupply market without

sustainable competitive advantage, we expect TTC 2014 P/E 7.9x, P/B 0.7x and EV/Ebitda 3.8x.

SELL

Price (29/5/2014) 12,300

Target price (VND‘000) 9,000

Target PB (x) 0.7x

Target EV/EBITDA (x) 3.8x

Downside(%) -27%

2014 EPS growth (%) -28.8%

2014 ROE (%) 12.5%

2014 Debt/Asset (%) 4.6

-50%

0%

50%

100%

May-13 Aug-13 Nov-13 Feb-14

Price

TTC VNINDEX

43.15

%56.87

%

FICO Others

Ownership Structure

-

1.0

2.0

3.0

4.0

May-09 May-10 May-11 May-12 May-13

PB (x)

TTC VNINDEX

FINANCIAL METRICS (VND bn)

2Thien Viet Securities Company│ www.tvs.vn

Income statement 2010 2011 2012 2013 2014F

Revenue 234 319 341 331 331

Gross profit 8 27 35 43 36

Operating profit (7) 11 14 17 10

Non-operating profit (0) (1) (1) (0) 1

Profit to shareholders (14) 3 9 14 9

Balance sheet 2010 2011 2012 2013 2014F

Cash & equivalent 4 5 6 18 31

Accounts receivable 12 12 20 22 13

Inventories 80 88 75 70 74

Net fixed assets 51 40 26 22 22

Total Assets 153 153 134 138 146

Short-term debt 51 43 24 7 7

Long-term debt 1 0 0 0 0

Total equity 51 53 62 76 86

Cash flow 2010 2011 2012 2013 2014F

Beginning cash 11 4 5 6 18

Operating cash 6 15 20 31 13

Investing cash (4) (4) 0 (2) -

Financing cash (10) (9) (19) (18) -

Cash generate (8) 2 1 12 13

Ending cash 4 5 6 18 31

Ratio 2010 2011 2012 2013 2014F

Margin

GM 3% 9% 10% 13% 11%

OM -3% 3% 4% 5% 3%

NM -6% 1% 3% 4% 3%

Growth ratio

Sales 18% 36% 7% -3% 0%

EPS -4775% -120% 219% 65% -35%

Profitability ratio

ROA -8% 2% 6% 11% 7%

ROE -23% 5% 15% 21% 12%

Liquitity/solvency

Current ratio (x) 1.0 1.1 1.5 1.9 2.1

Debt-to-asset 34% 28% 18% 5% 5%

Debt-to-equity 103% 81% 39% 9% 8%

Valuation metric

EPS (VND) (2,275) 454 1,449 2,391 1,566

BVPS (VND) 8,453 8,919 10,368 12,759 14,325

1. Main operation: Selling Ceramic & granite tiles using Italian technology with production capacity of 5.5 mil. sqm/year (5

production lines with the latest one was installed in 2003).

TTC is in small size group with capacity below 10 mil. sqm/year.

2. Products have low switching cost and are likely outdated with popular size (max 40x40cm) while market prefers larger

size (50x50cm, 60x60cm or more).

3. Target segment: mid-end. TTC plans to enter high-end segment which requires heavy investment in PPE & Design.

4. Oversupply domestic market is TTC’s main playground, representing 94% TTC’s 2013 sales, supported by over 100

point of sales (POS) in the Central Vietnam & Mekong Delta . TTC’s network is still humble as compared with nation

wide distribution system of Dong Tam Group (24 subsidiaries & 1800 POS) or Prime Group (100 primary and 1000

secondary distributors).

TTC BUSINESS MODEL


90

31

20 2015

11 10 10 10 7 6 6 4 3 3

0

10

20

30

40

50

60

70

80

90

100

Pri

me

Ro

ya

l

Do

ng

…

Vig

lace

ra

Ca

tala

n

Ta

ice

ra

CM

C

Mik

ad

o

Wh

ite

…

Vit

aly

Ch

an

g Y

ih

TT

C

Re

d S

tar

My D

uc

Ho

ng

Ha

Mil

lio

n s

qm

/ye

ar

Source: TVS Research

Production capacity

TTC

2%

Chang Yih1%

CMC3%

Taicera4%

Prime21%

Viglacera4%

Mikado2% Red Star

1%

Vitaly2%

Đồng Tâm, Whitehorse,

My Duc, Hong Ha, Royal,

Catalan and Others

60%

2013 Total production

Source: TVS Research

CERAMIC MARKET OVERVIEW


TTC faces less growth opportunity in an

oversupply industry

The world ceramic tile inventory has

begun to increase since 2009 due to

global economic downturn. This situation

unveils limited opportunity for local

ceramic producers to liquidate stock via

exporting.

The local ceramic market has become

oversupplied since 2007 as producers

mushroomed to take advantage of pro-

growth policies. From 2011 till now,

economic crisis and frozen property

market have severely damaged the

ceramic market. This situation caused

inventory to rocket up to 30% total

production despite players operating at

only 70% capacity.

World inventory continues picking up during global economic woes

0%10%20%30%40%50%60%70%80%90%100%

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012 2013

Mil

. S

qm

Ceramic production Ceramic Consumption

Capacity utilization Accum. Inventory (% of production)

Vietnam Ceramic tile industry

Source: www.infotile.com, TVS research

0%1%1%

2%2%

3%3%

4%4%

5%

-

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009 2010 2011 2012

World production (mil. sqm) World consumption (mil sqm)

Surplus (% production)

World ceramic tile production and consumption

Source: www.infotile.com

DOMESTIC COMPETIVE LANDSCAPE


Dong Tam Group | Long An Province

• Second largest ceramic producer in Vietnam

with production capacity of 20 million sqm/year

• Diversified products with ceramic, granite,

cement floor tiles, coating, toilet, and windows.

Ceramics account for 64%.

• Factories in Long An, Da Nang & Hai Duong

Prime Group | Vinh Phuc Province• The largest ceramic producer in Vietnam,among top-10 world largest ceramicproducer, production capacity of 90 millionsqm/year

• 8 factories in Vinh Phuc, Thai Nguyen and DaNang

• 25%world market share• Cost is 10% lower than local and regionalcompetitors

White Horse | Vung Tau Province

• 100%Malaysian owned company

• Production capacity: 10 million sqm/year including

ceramic and granite

Viglacera Group

• Viglacera Thang Long: Listed on HNX. Forrmer

state-owned company, production capacity of

8.5 million sqm/year

• Viglacera Hanoi :Bac Ninh Province. Former

state--owned company, production capacity of

5.5 million sqm/year

• Viglacera Tien Son: Listed on HNX. Former state-

owned company, production capacity: 6.0

million sqm/year including ceramic and granite

Taicera | Dong Nai Province

• Listed in HOSE. Former foreign owned company

• Production capacity: 11 million sqm/year

including ceramic and granite

• 55% sales from export

Chang Yih | Dong NaI Province

• Listed in HOSE. Former foreign owned

company


5

TTC encounters stiff competition from local players as well as Chinese imports

CMC | Phu Tho Province

• Listed on HNX. Former state-owned company


Import: China, Italia, Spain and others• Estimate of 30-40 million sqm low-end products

imported from China• Premium products imported from China, Italia,

Spain and others

Mikado | Vung Tau Province

• 100%Malaysian owned company


including ceramic and granite

YMY Ceramic Tiles Corporation |Dong Nai

Province

• Production Capacity: 16 million sqm/ year

Catalan Ceramic | Bac Ninh Province

• Production Capacity: 15 million sqm/year Others:

Other ceramic companies with production capacity

less than 10 million sqm/year :

• Red star (Hai Duong) – 4 million sqm/year

• My Duc (Vung Tau) – 3.2 million sqm/year

• Vitaly (HCMC& Binh Duong) – 6.5 million

sqm/year …

TTC | Dong NaiProvince

• Listed on HNX. Production capacity: 5.5 million

sqm/year

TTC cut cost to improve business performance but it is not a

sustainable competitive advantage.

• 2013 Sales dropped (-2.9%) but COGS dropped deeper(-6%).

Thus, Gross margin up by 3%. Since 2012, TTC has used Coal

and Compressed natural gas (CNG) instead of Furnace Oil

(FO) and Diesel Oil (DO), saving ~VND20 bn /year, making

2013 gross profit up by 8.6 bn VND. If excluding depreciation,

COSG dropped by ~VND16bn which is equivalent to the

saving amount stated above.

• 2013 Profit after tax growth (+65% y/y) underpinned by:

– Decreasing depreciation* (from VND14bn in 2012

down to VND7bn).

– Interest expense plummeted from VND7.4bn to

VND0.6 bn in 2011-2013 , as a result of deleverage

process in the same period (debt/assets ratio down

from 28% to 5%). In view of stabilizing interest rate in

upcoming years, positive effect from reducing financial

cost is expected to fade.

As a result, ROE and ROA both improved to 20.7% and 10.5%,

respectively from its 2012 levels of 15% and 6%.

OPERATING HIGHLIGHTS


* Vietnam Accounting System (VAS) requires depreciation to be recorded in

COGS.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2009 2010 2011 2012 2013 2014F

ROE ROA

Source: Bloomberg

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

50

100

150

200

250

300

350

400

2009 2010 2011 2012 2013 2014F

%VND bnSales Revenue growthCOGS growth Gross margin %

Profitability improved by cutting cost

Sales becomes flattening while COSG starts to surge

• Coal price is on the increase at the expense of gross profit.

Fuel accounts for about 30-45% in ceramic production cost.

Therefore, the 4-10% increase in coal price since Jan 2014

could damage TTC’s profit margin. Moreover, according to

Vinacomin from 2014 onwards, coal exploitation condition

becomes tougher which signals higher coal production

expense and more upward pressure on coal price.

• TTC’s manufacturing expense is expected to surge in up

coming years. The firm’s PPE was installed from 1993-2003 and

no substantial Capex since then which implies higher

maintenance cost, thus higher COGS in upcoming years. In fact,

Q12014 sales was VND 80.8 bn, +11% y/y while COGS surged by

13%, leading to a drop in Gross margin by 7% y/y.

• A painful trade off between SGA investment and sales. In

2010-2013, given stiff competition in the ceramic market,

growth in selling and admin expenses is always higher than that

of sales. This shows diminishing effect in TTC’s promotion, thus

indicating deterioration in bottom line.

OPERATING HIGHLIGHTS


-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013

SGA growth Revenue growth

Source: Bloomberg

Sales and SGA growth

If TTC keeps investing in SGA to maintain market share

while sales become flattening, negative growth in net

profit is about to happen.

A painful trade off between SGA investment and sales

• Lower production cost by running at high capacity (88%

compared with industry 70%) and switching to cheaper fuel (Coal

and CNG).

• Position as hi-end producer to stay away from price war with

Chinese product in low-end segment.

• Product improvement by introducing more attractive design and

larger size i.e. 30x45cm, 50x50cm, 60x60cm or more. This is a

less crowded segment which has seen higher profitability and

growing demand recently.

However…

• Targeting higher segment and diversifying product portfolio

require heavy investment in modern technology which TTC

cannot afford at the moment as the property market shows slow

recovery.

• Moreover, TTC seems to be slower than rivals (Prime, Dong Tam

Group… or even Chinese imports) in offering attractive design &

large size products to market. This situation limits TTC’s

opportunity to maintain its market share and sales growth.

COMPETITVE STRATEGY


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2009 2010 2011 2012 2013Output (mil.sqm)

% capacity utilization

% industry capacity untilazation Source: TVS research

TTC keeps running at high capacity to lower unit cost

TTC encounters more risks than ever…

• The local real estate market shows little sign of recovery while foreign demand for ceramic tiles is still weak.

• Harsh competition from Chinese imports in terms of price, product design and discount policy (~20% compared with local

practice of 10%).

• Trading fraud from Chinese imports has not come to an end. Despite 25% import tax, Chinese ceramic tiles still freely flow

into Vietnam by claiming extremely low import price (50-70% lower than real price). The situation would become worsened

when the import tax on Chinese tiles will be lowered according to Vietnam’s WTO commitments.

• Outdated equipment from 1993- 2003 can become a burden for TTC regarding possible repair and substantial maintenance

cost.

• Transportation cost has rocketed 2-3 times as the Government requires transporters to follow the registered loading

capacity. This sudden hike in cost will undoubtedly hit the producer’s already thin margin.

• Selling price is revised up by 15-20% from 20/4/2014 onwards, to compensate for the expensive transportation cost, hence,

creating a chance for Chinese imports.

BUSINESS RISKS


VALUATION


0

50

100

150

200

250

300


PE (x)

TTC VNINDEX

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


PB (x)

TTC VNINDEX

Given current oversupply crisis and stiff competition, only a few firms in

this sector struggled to earn tiny profit, thereby using P/E valuation

would be inappropriate.

We suggest applying P/B and EV/EBITDA to value TTC VN on

comparable basis.

TTC VNMkt Cap

(bnVND)

CURRENT

EV/EBITDA

EV/EBITDA

2013P/B

Gross

margin

2013 (%)

EBITDA

MARGIN

2013 (%)

EBITDA

GROWTH

2013 (%)

TTC VN 69,504 2.55x 2.55x 0.9x 13.02 7.09 (16.79)

CYC VN 55,183 4.44x 4.72x 0.5x 13.95 9.03 9.20

CVT VN 116,912 3.07x 3.45x 1.0x 13.56 13.35 69.67

TCR VN 244,945 6.91x 7.01x 0.4x 12.18 5.13 (23.37)

VIT VN 84,150 3.63x 4.27x 0.7x 15.31 15.91 9.91

VHL VN 234,000 2.03x 2.49x 0.8x 21.05 16.71 17.62

Average 3.77x 4.08x 0.71x 14.84 11.20 11.04

1. Building benchmark ratio

Source: Bloomberg

VALUATION


Scenario analysis

Worst

case

Base

case

Best

case

2010 2011 2012 2013 2014F 2014F 2014F

Sales growth % 18.3% 36.2% 7.0% -2.9% -3.0% 0.0% 1.0%

Gross margin % 3.2% 8.5% 10.1% 13.0% 9.8% 11.0% 13.0%

SG & A % 6.2% 5.0% 6.0% 8.0% 9.0% 8.0% 8.0%

BPS 13,197 14,325 15,365

EBITDA 3.1 10.5 17.3

Scenario Probability BPS

EBITDA 2014 (BN

VND)

Worst case 25% 13,197 3.1

Base case 60% 14,325 10.5

Best case 15% 15,365 17.3

Expected value 14,199 10

Target price (VND)

P/B target 0.7x 10,083

EV/EBITDA target 3.8x 7,966

Outs. share (mil) 6

Average target price 9,025

Market price 29/5/14 12,300

Growth -27%

As TTC has less room for growth and encounters stiff competition

in today’s oversupply market without sustainable competitive

advantage, we expect TTC stock price to drop by about 27% within

next year.

2. Building scenario

3. Projecting expected value

4. Building target price

TTC’s bottom line depends heavily on (1) sales

growth, (2) COSG & (3) SGA. Thus, we conduct

scenario analysis based on expected changes of

these 3 elements.

Worst case: TTC will miss 2014 target with at

least -3% fall in sales, gross margin down to

9.8% due to higher production expenditure and

SGA will rise by 1% to maintain market shares.

Base case: TTC will meet 2014 target.

Best case: TTC will exceed 2014 target with sales

+1% (in line with market growth), gross margin

and SGA remains the same as 2013.

However, we don’t expect TTC will likely to

exceed 2014 target given more business risks

stated above.

ANALYST CERTIFICATION

We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report

accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any

specific recommendations or views expressed in this report.

DISCLAIMER

@Copyright by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or

disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (TVS).

The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor

any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS

therefore does not take any responsibilities for any investor’s decisions.

DISCLAIMER


HO CHI MINH

63A Vo Van Tan St, District 3

Floor 9, Bitexco Nam Long Building

Tel: +84 (8) 299 2099

Fax: +84 (8) 299 2088

HA NOI

22 Lang Ha, Dong Da

TDL Building

Tel: +84 (4) 220 3228

Fax: +84 (4) 220 3227

RESEARCH DEPARTMENT INVESTMENT BANKING

Email: [email protected] Email: [email protected]

BROKERAGE DEPARTMENT

Ho Chi Minh

Email: [email protected]

Ha Noi

Email: [email protected]

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