Vietnamese Demand Comparatively Sound
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Lacking in electric utilities infrastructure, related investment in Vietnam is to sustain. However, we expect the investment schedule for both Europe and ASEAN regions to be delayed due to the Covid-19 outbreak. LS C&S Asia’s shares are currently trading at a 2020F P/E of 12.6x.
Vietnamese demand comparatively sound amid unstable export demand
We maintain a Buy rating on LS C&S Asia. Applying a target P/E multiple of 15x to 12-month forward EPS, we lower our TP from W10,000 to W8,500. We cut our 2020E EPS forecast by 15% on concerns that infrastructure investment activity Vietnam, Europe, and other ASEAN regions will be delayed amid a global economic slowdown stemming from the Covid-19 crisis.
We expect sales of the firm’s optical fiber cable products (one of its main export items) to fall. Of particular note, LSCV (Ho Chi Minh subsidiary) has recorded optical fiber cable sales of W17.0bn over the past two years on exports to Europe and other regions—sales drops in these regions are inevitable in 1H20.
In 1Q20, Vietnam showed GDP growth of 3.8%, a record quarterly low. But, growth in some segments (including manufacturing industries) continues to clock at around 7%. As Vietnam still lacks electricity distribution/transmission infrastructure (relative to its recent large-scale investment in power generation facilities), new orders should sustain. But, delayed execution for one or two quarters looks inescapable. For reference, we estimate that LS C&S Asia’s combined 1Q20 OP from its cable-related businesses upped over 5% q-q.
1Q20 review: OP beats estimate
LS C&S Asia booked 1Q20 consolidated sales of W132.5bn (+8% y-y) and OP of W7.3bn (+21% y-y), with OP topping our estimate of W6.9bn. Helped by an improvement in margins at its distribution arm, LS-VINA (Hanoi subsidiary) recorded 1Q20 OP of W5.3bn (+24% y-y). LSCV posted 1Q20 OP of W3.1bn (+7% y-y) in line with the completion of mid-voltage cables (MV) production line expansion in 2019. Given that an additional facility expansion project for MV cables wrapped up in Feb 2020, related effects should be reflected in earnings from 2Q20. For reference, an addition of one MV cable production line is predicted to translate into roughly US$24.0mn worth of sales.