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Vietnam naturalrubbersector
Global naturalrubber market
Vietnam rubbersector
Stock recommendation
www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES |
28March2011
Vietnam naturalrubbersector
Table of Contents
Global naturalrubber market page
Impressive recovery of naturalrubber price 2
supported by limited supply of naturalrubber 2
Higher demand from China thanks to inventory build-up and recovery
in global automobile sales 3
Higher crude oil prices support NR 5
Vietnam rubbersector page
Vietnam is one of the leading naturalrubber producers in the world 6
… with 85-90% of the production is for export 8
Vietnam has little impact on global rubber price 9
Simple operation model and recurring earnings of domestic companies 10
Vietnam’s rubber companies have limited organic growth but can
benefit from high rubber price and depreciation of VND 11
TRC and DPR are our recommended stocks 12
Tay Ninh Rubber JSC 13
Dong Phu Rubber JSC 22
Phuoc Hoa Rubber JSC 31
Hoa Binh Rubber JSC 40
www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 1
28March2011
Vietnam naturalrubbersector
Vietnam is one of the biggest rubber suppliers around the world. Vietnam currently ranks fifth among
top world rubber producers and third among top world rubber exporters. High growth rate combined with
high production yield will be supportive factors to Vietnam’s naturalrubber sector.
Average naturalrubber price is around 3,000 USD/ton in 2010 and still have positive supports to
maintain this price level in 2011 thanks to (1) strong rubber demand from impressive recovery of world
automobile production industry - controlling 68% of total naturalrubber demand (2) shortage of natural
rubber supply due to drought and decline in international rubber plantations (3) oil price may pick up as
world economic recovery strengthened. However, naturalrubber supply may increase significantly since
2012 as newly planted areas during 2005-2008 start production.
The VietnamRubber Group – the state-owned enterprise – has significant influence over the
Vietnam rubbersector as (1) its subsidiaries controlling around 40% of the total rubber production in
Vietnam (2) exerting controls over most biggest rubber companies, maintaining more than 60% stake in
equitised rubber companies (3) fixing labor cost – the highest proportion in cost of goods sold – at around
40-42% of revenue, a mechanism to smooth earnings when rubber prices increase but also ensure margin
and operational profits when rubber prices fall.
Vietnam’s naturalrubbersector has little organic growth in the next few years. Most listed rubber
companies are facing declining plantations as they can be too old or replanted areas are not ready for
yielding. The revenue growth can only come from increasing rubber prices, which Vietnam has no impact
or influence on.
Investment recommendation:
TRC and DPR are our two stock picks in naturalrubber sector. We appreciate TRC and DPR’s
capability in maintaining outputs over the next two years thanks to their younger age profiles among
peers, considering limited supply is the catalyst of higher rubber prices and improved margin.
TRC DPR PHR HRC
Current price (VND) 56,500 60,000 36,800 62,500
Target price (VND) 68,000 69,000 40,600 51,500
Upside/Downside 20% 15% 10% -18%
Recommendation
ADD ADD HOLD REDUCE
Capitalization (VND bn) 1,702 2,688 2,951 1,079
2010 Consumption volume (ton) 12,800 16,470 31,006 6,518
2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0
2010 Net revenue (VND bn) 758 1,028 1,995 412
2010 Net profit (VND bn) 267.4 395.1 490 95.4
2010 EPS (VND) 8,929 9,188 6,026 5,514
2010 EPS growth (%) 75 74 83 45
PE (x) 6.3 6.5 6.1 11.3
Extending the favourable condition of high rubber price
Hoang Thi Hoa, Manager
Hoa.hoang@vcsc.com.vn
+84 8 3914 3588, ext. 146
Giang Hoang, Analyst
giang.hoang@vcsc.com.vn
+84 8 3914 3588, ext. 142
www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 2
28March2011
Vietnam naturalrubbersector
Global naturalrubber market
Impressive recovery of naturalrubber price
As the global economy recovered after the financial crisis in late 2008 and early 2009, rubbersector
began to see signs of recovery since the second quarter of 2009. Naturalrubber demand started to pick
up thanks to positive moves in the tyre production industry which captures 68% of total naturalrubber
demand.
Moreover, it was in 2009 that the three largest naturalrubber producers (Thailand, Indonesia and
Malaysia), accounting for 72% of total global rubber production cut down about 4.3% of their volume to
stabilize the global rubber price. Consequently, the supply and demand gap has pushed up rubber
price, especially from Q3/2009.
Supported by high rubber demand and due to seasonal effect as Q1 and Q2 was off-peak season of
rubber supply, rubber price in late April 2010 had exceeded the peak established in July 2008. Although
the price trend paused from June to August due to the supply improvement as rubber producers begin
harvesting season, rubber price continued to rise again and has seen the best performance in the
rubber history to-date. Rubber companies enjoyed a good year when average selling price for 2010 was
above USD3,000/ton, much higher than the pre-crisis level of 2008 of approximately USD2,600/ton. Of
note, world rubber bounced back strongly after the earthquake in Japan in March 2011 and currently
stands high at USD5,500/ton
Figure 1: Movement of Vietnam’s rubber export price
Figure 2: 6 Asian countries account for 94% of total world
production
0
1,000
2,000
3,000
4,000
5,000
6,000
01/05
04/05
07/05
10/05
01/06
04/06
07/06
10/06
01/07
04/07
07/07
10/07
01/08
04/08
07/08
10/08
01/09
04/09
07/09
10/09
01/10
04/10
07/10
10/10
01/11
Latex STR 20 STR 5
USD/ton
Source: VietnamRubber Association (VRA), Association of NaturalRubber Producing Countries (ANRPC)
supported by limited supply of naturalrubber
According to preliminary forecasts of the Association of NaturalRubber Producing Countries (ANRPC),
the world rubber volume might get a maximum increase by 6.3% in 2010. However, by October 2010,
ANRPC adjusted downward the 2010 naturalrubber growth to 5.3% due to bad weather and declining
output in major naturalrubber producing countries, especially Thailand and Indonesia – the two largest
natural rubber producers. Latest report shows a 5.7% increase in global rubber volume in 2010, ANRPC
also forecasts a 5.3% increase in 2011.
Global economic
recovery and declining
supply of top 3 biggest
rubber-producing
countries are major
supportive factors to
surging rubber price.
World supply is
restricted by bad
weather and decline in
international plantations.
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28March2011
Vietnam naturalrubbersector
Figure 3: Rubber production forecast is 5.3% in 2011
Country 2009 2010 Growth 2011 Growth
Thailand 3,164 3,072 -2.9% 3,247 5.7%
Indonesia 2,440 2,843 16.5% 2,938 3.3%
Malaysia 857 970 13.2% 1,050 8.3%
India 820 845 3.0% 890 5.3%
Vietnam 724 750 3.6% 780 4.0%
China 643 647 0.6% 690 6.7%
Srilanca 137 148 8.0% 153 3.4%
Philippines 98 102 4.1% 107 4.9%
Cambodia 34 45 32.4% 63 40.0%
Total ANRPC 8,917 9,422 5.7% 9,918 5.3%
Source: ANRPC
Age structure of rubber trees in most of the producing countries indicates a possibility of large-scale
replanting in 2010 and 2011. The concern over naturalrubber supply seems to persist until end of 2011
as the yielding area is unlikely to expand before 2012 when a large area planted in ANRPC countries,
especially Thailand, from 2005 onwards is expected to start yielding from 2012 and the replanted trees
attain higher yielding stage (in the life cycle of a rubber tree, gestation period is 7 years and productivity
is highest after 10 years of plantation). During the 2005 – 2010 period, a total area of 2,544 thousand
hectare have been planted in ANRPC countries, in which 927 thousand hectare were planted in
Thailand during that period in response to attractive prices and positive outlook of the rubber industry.
Especially, the annual new planted area increased significantly from 2005 – 2008 as prompted by the
high prices of naturalrubber at that time.
Figure 4: Annual new and replanted areas in Thailand
from 2003 to 2010
Figure 5: Total new and replanted areas of naturalrubber
in ANRPC members
Source: ANRPC
As a result, the net effect of replanting old-age with low yielding trees and new supply of higher yielding
ones could lead to changes in the supply after 2011F. In addition, as a result of the current high market
prices of natural rubber, there could be another surge in new plantings for natural rubber, which could
lead to higher than forecasted supply of naturalrubber subsequently.
Higher demand thanks to recovery in global automobile sales and
China’s inventory build-up
Currently, rubber demand for tyre production accounts for around 68% of the total demand. The
recovery of global automobiles sales will have positive impact on the rubber industry. In 2009, China
surpassed US to become the largest automobile producer with sales of 13.6 million cars, up 50% from
The surge in new plant
areas during 2005 –
2008 as response to
high market prices for
natural rubber will lead
to changes in natural
rubber supply after
2012.
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28March2011
Vietnam naturalrubbersector
2008. Automobile sales in China are expected to increase by 15 million cars in 2010 thanks to stronger
domestic consumption and export. The incentive programs of the US and EU’s government in 2009
such as “cash for clunkers” did encourage a large number of vehicle owners to buy new cars by trading-
in their old vehicles. In addition, the rise of higher income earners in Asian countries such as India,
China – who used to own vehicles of only two tyres (mainly motorbikes) - now have a demand to own
private cars which will double the demand for tyres. These are strong market fundamentals that support
the recent recovery in rubber price, rather than speculation as in 2008.
Figure 6: Monthly passenger car sales in China is
maintaining at high level for over a year (in units)
Figure 7: Monthly passenger car sales in India is also on
increasing trend thanks to higher domestic demand (in
units)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Source: Bloomberg
Being the largest naturalrubber producer, Asia is also the main consumer, accounting for two thirds of
the world naturalrubber consumption. China is the largest consumer of natural rubber, accounting for
more than 32% of the global demand in 2009.
Figure 8: Tyres account for the largest demand for rubber
Figure 9: Asia accounts for two thirds of the world natural
rubber consumption and China is the largest natural
rubber consumer in the world
Source: ANRPC, International Rubber Study Group (IRSG)
In 2009, China, India and Malaysia captured 47% of total global rubber demand. Import demand from
China is anticipated to keep increasing when China is building up its naturalrubber inventory as it
anticipates the limited supply in Q1-Q2 of 2011. Closing stock of naturalrubber in ANRPC countries
also keeps increasing in recent years thanks to higher demand and better price trend during the first few
months of the year.
Current recovery in
rubber prices is based
on strong market
fundamentals, originated
from the recovery in
global automobile sales.
Rubber demand rising in
line with the recovery in
tyre production industry.
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28March2011
Vietnam naturalrubbersector
Figure 10: China is building up its naturalrubber
inventory
Figure 11: Closing stocks at year end in ANRPC
countries
0
20
40
60
80
100
120
140
160
2007 2008 2008 2009 2009 2010 2010 2011
'000tonnes
Source: ANRPC, Bloomberg
Demand for naturalrubber in China and India may keep increasing as automobile industry in China is
expected to grow at 8%/year in the period 2011 – 2015. Automobile sales in India are also on rising
trend as more middle and high-income earners have higher demand for private cars. Based on the
International Rubber Study Group (IRSG)’s estimate, global demand for naturalrubber may reach 12.4
million tons by 2015 and 14.2 million tons by 2020, but the worldwide naturalrubber production can only
reach 13.6 million tons/year in 2020, not taking into account new planting areas that may be stimulated
from the current high market prices of naturalrubber as last seen in the 2005-2008 period.
Higher crude oil prices support NR
Rubber price is believed to have a close relationship with oil price. This is often explained by the
presumption of a replacement between naturalrubber and synthetic rubber. Based on historical data of
crude oil price and naturalrubber price (Thai RSS3) from 2002 to 2010, the correlation coefficient
between oil price and naturalrubber price is quite significant at 83%. As a result, naturalrubber prices
normally changes in the same direction with oil price and vice versa.
Figure 12: Naturalrubber accounts for around 43% of
total rubber demand
Figure 13: Rubber price changes in the same direction
with oil price.
0
20
40
60
80
100
120
140
160
‐
1,000
2,000
3,000
4,000
5,000
6,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
ThaiR SS3 WTIcrushing
U
S
D
/
t
o
n
U
S
D
/
b
a
r
r
e
l
Source: IRSG, Reuters
Synthetic rubber consumption accounts for around 55% of total global rubber demand. Synthetic rubber
is synthesized from oil and requires different technology, which explains a close correlation between
natural rubber price and crude oil price. Currently, there is a gap between naturalrubber price and
crude oil price, which partly comes from a higher increase in naturalrubber price in comparison with oil
price. Therefore, naturalrubber price is under some pressures to adjust downward to close to gap.
However, as the world economy recovery strengthens, crude oil price is expected to pick up gradually,
closing the current gap between naturalrubber price and crude oil price. Based on recent forecast of
Correlation coefficient
between oil price and
natural rubber price is
83%.
Demand for natural
rubber may reach 12.4
million tons by 2015 and
14.2 million tons by
2020.
Crude oil price is on
recovery trend, driven by
bullish sentiment about
the global economic
outlook.
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28March2011
Vietnam naturalrubbersector
Goldman Sachs, the medium term outlook for oil prices is quite positive, supported by global oil
stockpiles shrink and oil production tightens. On a long run, we believe that rubber prices and oil prices
will both benefit from price appreciation in key commodities, maintaining the close relationship between
them.
Vietnam rubbersector
Vietnam is one of the leading naturalrubber producers in the world
In 2009, Vietnam’s naturalrubber volume ranked fifth worldwide with total production volume of 724
thousand tons. Total export volume increased 10% to 731.4 thousand tons in 2009, 800 thousand tons
in 2010, and total export turnover of naturalrubber reached USD2.35bn in 2010.
With impressive increase in export volume, Vietnam has surpassed Malaysia to become the third
biggest naturalrubber exporter in the world. In 2010, Vietnam’s total rubber area is about 715 thousand
ha in which 445 ha are ready for harvesting.
Figure 14: Vietnam is the world fifth largest producer and
third largest exporter of naturalrubber
Figure 15: Rubber area and productivity of main
producing countries in 2009
Source: ANRPC
Thanks to government’s incentive measures to develop rubber plantations, Vietnam has the fastest
growth rate among leading NR producing countries. During the period from 2003-2009, the annual
growth rate of total rubber area and total rubber harvesting area was 7.5% and 7.9% respectively.
Plantation productivity has improved remarkably during the past six years. Vietnam’s harvesting to
reach in 2009 1.72 ton/ha, similar to that of Thailand.
Figure 16: Vietnam export volume and value increase
dramatically over the past 10 years
Figure 17: and production yield of Vietnamnaturalrubber
improved largely within the past 5 years
0
500
1,000
1,500
2,000
2,500
0
100
200
300
400
500
600
700
800
900
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Export volume ('000 tonnes) Rubber export (USD mn)
'000ton
USDmn
Source: ANRPC
Vietnam records the
fastest growth rate in
leading countries in term
of productivity.
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28March2011
Vietnam naturalrubbersector
The government outlined a plan to develop Vietnamrubber plantations until 2020. With new plantation
area of 30,000-40,000 ha/year, Vietnam’s rubber area may reach 1 million ha and 1.2 million tons of
volume by the end of 2020.
Figure 18: Development plan of Vietnamrubber industry to 2020
Region 2010 2015 2020
Southeast ha 385,000 406,000 420,000
Central Highlands ha 231,000 300,000 420,000
Central Coast ha 70,000 96,000 110,000
Northwest ha 14,000 48,000 50,000
Total area ha 700,000 850,000 1,000,000
Total volume tons 750,000 880,000 1,200,000
Source: VRA
Vietnam Rubber Group (VRG) is the biggest state-owned enterprise whose subsidiaries control about
269.3 thousand hectares of total rubber plantations in 2009, corresponding to 40% of total nationwide
area and 85% of export production. VRA’s total production in 2009 was 298,800 tons, accounting for
41.2% of the nationwide volume. All currently listed naturalrubber companies (PHR, TRC, DPR, HRC)
are members of VRA, except for TNC.
Figure 19: Production and sales volume of VRA members in 2009
Company/Region 2009 Production (tons) 2009 Sales volume (tons)
Southeast 242,290 266,697
1 Dau Tieng rubber company 45,898 53,186
2 Dong Nai rubber company 45,280 47,897
3 Phu Rieng rubber company 27,500 28,238
4 Binh Long rubber company 24,775 25,052
5 Phuoc Hoa rubber company (*) 24,092 32,393
6 Dong Phu rubber company (*) 16,802 19,593
7 Loc Ninh rubber company 15,048 14,037
8 Tay Ninh rubber company (*) 13,211 13,095
9 Tan Bien rubber company 12,421 13,798
10 Ba Ria rubber company 6,420 7,259
11 Hoa Binh rubber company (*) 5,118 6,300
12 Binh Thuan rubber company 4,480 4,618
13 Rubber Institution 1,245 1,231
Highlands 48,240 50,499
14 Kontum rubber company 10,350 10,600
15 Chu Se rubber company 9,015 10,122
16 ChuProng rubber company 7,600 7,840
17 Mang Yang rubber company 6,250 6,212
There is large potential
in the naturalrubber
industry
VRA controls around
40% of the total rubber
production and 85% of
rubber export in
Vietnam.
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28March2011
Vietnam naturalrubbersector
18 ChuPah rubber company 6,150 6,557
19 Eah'Leo rubber company 5,230 5,000
20 Krongbuk rubber company 3,645 4,168
Central coast 8,335 10,365
21 Quang Tri rubber company 6,042 8,082
22 Ha Tinh rubber company 1,283 1,237
23 Quang Nam rubber company 830 830
24 Quang Ngai rubber company 180 216
Total 298,865 327,561
Source: VRA (*) Listed rubber companies
The natural conditions in the Southeast region are very suitable for rubber development. Total rubber
area in the Southeast region is estimated to account for 67% of total plantation in the whole country.
Thanks to high productivity in the region of about 1.9 ton/ha, annual harvesting volume is almost 79% of
total productivity in Vietnam.
Figure 20: Allocation of rubber area by zones Figure 21: Allocation of rubber volume by zones
Source: VRA
With 85-90% of the production is for export
Annually, 85-90% of Vietnamnaturalrubber is consumed in foreign markets. In 2009, Vietnam exported
natural rubber to 71 countries, in which China was the largest importer with the annual growth rate of
6.6%, reaching 494.6 thousand tons or USD 789 million. Total export turnover of naturalrubber in 2009
was USD1.2 bn and the turnover in 2010 is USD2.35bn thanks to good rubber prices in the year.
Rubber plantation is
mainly focused in the
Southeast re
g
ion.
Tyre production industry
in the region is the key
source of demand for
NR products of Vietnam.
[...]... CAPITAL SECURITIES | 10 28 March 2011 Vietnam natural rubber sectorVietnam s rubber companies have limited organic growth but benefit from high rubber price and depreciation of VND Rubber price continues to stay high thanks to supply shortage Exchange rate is another element supporting domestic rubber companies As global rubber prices are still in upward trend, Vietnam s rubber export prices also move in... Motorbike %products/ demand Source: VRA Vietnam has little impact on global rubber price Vietnam s rubber prices are normally cheaper and have no impact on the world rubber price In spite of being the world fifth largest producer and third largest exporter of natural rubber, Vietnam only contribute approximately 7% of rubber volume into total global naturalrubber supply compared to roughly 20% of... the largest exporter – Thailand In addition, as two third of Vietnamrubber is exporting to a sole consumer - China, Vietnam is fully impacted by fluctuations in international rubber price as well as changes in global rubber production and global rubber demand In addition, as the brand name of Vietnamrubber has not been set up, Vietnam s rubber selling prices are usually cheaper than those of Thailand...28 March 2011 Vietnam natural rubber sector Figure 22: Export products structure of Vietnamese rubber Figure 23: China is the main consumer of Vietnamrubber – 68% of Vietnam export Source: VRA Domestic consumption market is quite small, only accounting for 1015% of total quantity Domestic consumption volume in 2009 was about 120 thousand tons of rubber, corresponding to 14.1% of... the structure of the plantations VIET CAPITAL SECURITIES | 11 28 March 2011 Vietnam natural rubber sector TRC and DPR are our top picks in the sector Among listed naturalrubber companies, we like TRC and DPR In addition to benefit from global rubber price, we appreciate TRC and DPR’s capability in maintaining output as their rubber plantations will be in age of high productivity and volume in coming... incurring losses especially when rubber prices fall dramatically For this reason, rubber companies are able to control cost of goods sold and keep their gross profit margin of over 20% even when rubber prices fell remarkably as in 2008 Vietnam s government considers rubber trees as one of the strategic plants for export and poverty reduction Therefore, Vietnamrubbersector receive many supports from... addition to cheap land renting cost, rubber companies are also supported in terms of selling price In the end of 2008 and beginning of 2009, when rubber price dropped deeply, the Government permitted VietnamRubber Association to buy all domestic rubber in order to stabilize rubber price and ensure a minimum profit for rubber companies We analyse two scenarios when rubber price is at the 2010 lowest... VRG such as Dau Tieng, Phu Rieng Rubber, Dong Nai Rubber, Binh Long Rubber, and Tan Bien Rubber also produce CV50-60 but with much lower percentage in revenue (10% for Dau Tieng Rubber) Purchasing rubber from third-party producers provides additional profits As operating profit margin of purchasing rubber from third parties for processing is historically low at 3-4%, rubber companies only maintain trading... prices Average rubber price for 2010 is USD3,000 per ton, or VND58.5 million/ton, the highest level in the rubber history Moving into 2011, the discrepancy between global demand and supply is still a supporting factor to rubber prices As of February 2011, rubber s off-peak season, world rubber price reaches over USD5,000 per ton while domestic price also reaches around VND100mn Vietnam s rubber companies... from high rubber prices, rubber companies also earn better financial income thanks to currency conversion As the majority of rubber plantation is either too old or not mature enough to start yielding, rubber companies have limited organic growth over the next few years, at least until 2013, when a large area of new rubber plantations planted in 2005 starting production Figure 27: Annual new rubber plantation . 28March2011 Vietnam natural rubber sector Table of Contents Global natural rubber market page Impressive recovery of natural rubber price 2 supported by limited supply of natural rubber 2. Vietnam natural rubber sector Global natural rubber market Vietnam rubber sector Stock recommendation www.vcsc.com.vn. Vietnam rubber sector page Vietnam is one of the leading natural rubber producers in the world 6 … with 85-90% of the production is for export 8 Vietnam has little impact on global rubber