BSC_Company report NKG ICB 1757 BSC 10 06 2015

We maintain NKG’s target price as in our previous report, which was 19,105 VND/share. We expected 2015 Earnings After Tax (EAT) achieves VND 120 billion, corresponding to EPS 2015 of VND 3,008, and NKG is currently trading with PE forward = 4,39x, which is an attractive level compared to the current PE in HSX of 12,75x.

Q1/2015 EAT of NKG reached VND 20.45 billion (+102.03% yoy), thanks to the increase in the company’s market share of coated steel sheet by 4%, the improvement in gross margins and the reduction in interest expense. (1) According to the VSA, in the first 3 months of 2015, NGK consumption of steel pipes reached 10,699 tons (+15.29% yoy, accounting for 3.8% market share), consumption of coated steel sheet reached 57,670 tons (+87.29% yoy, accounting for 13.3% market share - an increase of 4%, and remained No. 2 in the market). (2) Although steel prices fell sharply, the increase in demand helped NKG increase Q1 gross profit margin slightly to 5.91%, higher than the figure in Q1 2014 of 4.94% (3) Interest expense was VND 13.18 billion, a decrease by 61% compared to Q1 2014, which helped improve Q1 2015’s earnings.

Gross profit margin of NKG can be significantly improved since 2Q2015 when the cold-rolled line will start operation. The 2nd cold-rolled system of NKG with capacity of 200,000 tons/year will operate from March 2015, bringing the total designed capacity of cold-rolled line to 400,000 tons/year. Operating capacity of this new line is currently at 80-90%, will help NKG to save about 30 USD/ton of cold-rolled products.

The NOF Aluminium Zinc Coated line with capacity of 100,000 tons/year will be into operation from 7/2015. Currently, the capacity of Aluminium Zinc Coated line is 150,000 tons/year. This product has the highest profit margin and account for 77% of the exports and 39% of domestic consumption of NKG.

We expect that EAT 2Q2015 is about VND 40-45 billion, NKG estimated that total consumption in Q2 2015 could reach 82-83 thousand tons. Aside from that, the pressure to reduce profit margins will be lower due to the decline trend of HRC price has been slower, HRC price is trading around 400 USD/ton.