DRC_The return of tires_BSC_Việt Nam Company Update_EN

Valuation
We recommend Tracking DRC stock with target price of 29,939 VND/share (upside 6.9% from the March 16, 2018 closing price) based on 3 valuation methods FCFE, FCFF and PE.

Earning forecast
Based on BSC's forecast, motorcycle and bicycle tire output are expected to grow 2% and 5% yoy respectively. Automotive tire production is forecasted to increase by 9% yoy, in which the Bias tire production would decline slightly, the Radial tire would reach 480,000 tires in 2018. Natural rubber prices are expected to remain unchanged. Therefore, the company would record revenue and EAT of DRC will reach VND 4,309 billion (+ 17.4% yoy) and VND 212 billion (+ 31.1% yoy) respectively, equivalent to EPS of 2018 at VND 1,675/share.

Catalyst
- DRC would put the stage 2 of Radial factory into operation with the investment equal half of stage 1, increasing the total capacity to double.
- Rubber price is forecasted to decrease 5% - 8%
- Vinachem would divest from DRC to 36% in 2018


Investment risks
- The fluctuation of input material price affects the profit of DRC.
- High competition for automotive tires.

Investment Highlights
- Business results in 2017 plummeted. In 2017, DRC's revenue was VND 3,668.8 billion (+ 9.2% yoy), EAT down to VND 161.7 billion (-59% yoy).Sales of Bias tires fell 5.04%, while that of radial tires increased to 34.2% which helped improving gross margin of radial tires.
- Price of bicycles, motorcycles and cars increased by 5% in the first quarter of 2018. This contributes to improving margins on DRC's products.
- The rubber price is forecasted to decrease 5-8% in 2018 which would help DRC recover their business results.
- DRC would put the stage 2 of Radial factory into operation with the investment equal half of stage 1, raising the total capacity of radial tires to 600,000 tires/year. DRC is expected to put the second phase into operation in 3Q2018 and is planning to produce 480,000 tires this year.
- Vinachem is planning divestment in the DRC to 36% in 2018.