DRC_TP 27,180 VND_Upside 21.9%_Longterm road_BSC Company Update

We recommend to BUY with DRC shares with a target price of 27,180 VND/share, upside 21.9% with 3 methods P/E (20%), FCFE (40%) and FCFF (40%). Currently, DRC is being traded with P/E = 18.51x, lower than the current regional tire industry average (21.0x).

 

BSC forecasts, in 2019, DRC will record net revenue and NPAT at VND 3,933 billion (+ 10.8% yoy) and VND 157 billion (+ 13.2% yoy), equivalent to EPS 2019 = VND 1,192 / share. Assuming (1) Bias tire consumption will not change much compared to 2018, (2) Radial tire output reaches 450,000 tires, (3) natural rubber price + 0% yoy, rubber price artificial and chemical -5% yoy because oil price is forecasted to decrease, price of black coal is not much volatile, (4) interest rate is expected to decrease because businesses do not need to invest, thus improving NPM margin.

 

- Natural rubber price is forecasted to remain low (about VND 34 million/ton) in 2019, oil price is expected to be -12% yoy to support price reduction of chemicals and artificial rubber.

- Vinachem plans to divest DRC to 36% in quarter 2/2019.

- Price fluctuation of materials.

- High competition for automobile tires.

 

(1) 2018 business results. In 2018, DRC recorded net revenue and NPAT of VND 3,551 billion (-3.2% yoy) and VND 139 billion (-16.3% yoy) due to high competition status, Enterprise is difficult to raise selling prices to compensate for the increase in material costs.

(2) DRC's consumption of automobile tires in 2018 reached 1.084 million tires (-11% yoy) due to the decrease in bias tire production. In particular, the consumption of bias tires reached 708,911 tires (-20% yoy), of which, light truck tires volume was -25.75% yoy. In contrast, Radial tire production grew well, reaching 375,610 tires (+ 12.63% yoy), domestic consumption reached 120,203 tires (+ 13.27% yoy), exports reached 255,407 tires (+ 12.34% yoy).

(3) Raw material prices tend to decrease. On average in 2018, natural rubber prices -19.84% yoy, artificial rubber -15.7% yoy (50% of rubber material prices). However, COGS is still high due to chemical price + 24.8% yoy and black coal + 41.06% yoy, making DRC's gross profit margin decrease to 12% (2017: 12.5%).

(4) Phase 2 of Radial factory went into operation and started supplying products to the market. We expect in 2019, Radial tire production will reach 450,000 tires from this contribution.