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Vietnam natural rubber sector
Global natural rubber market
Vietnam rubber sector
Stock recommendation
28 March 2011 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
Higher demand from China thanks to inventory build-up and recovery
in global automobile sales 3
Higher crude oil prices support NR 5
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 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 VIET CAPITAL SECURITIES |
28 March 2011
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
Vietnam natural rubber sector
Extending the favourable condition of high rubber price
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 natural rubber sector.
Average natural rubber 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 natural rubber 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, natural rubber supply may increase significantly since 2012 as newly planted areas during 2005-2008 start production.
The Vietnam Rubber Group – the state-owned enterprise – has significant influence over the Vietnam rubber sector 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 natural rubber sector 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 natural rubber 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.
Current price (VND)
Target price (VND)
Upside/Downside
Recommendation
Capitalization (VND bn)
2010 Consumption volume (ton)
2010 Average selling price (VNDmn/ton)
2010 Net revenue (VND bn)
2010 Net profit (VND bn)
2010 EPS (VND)
2010 EPS growth (%)
PE (x)
TRC DPR
56,500 60,000
68,000 69,000
20% 15%
ADD ADD
1,702 2,688
12,800 16,470
60.3 61.2
758 1,028
267.4 395.1
8,929 9,188
75 74
6.3 6.5
PHR HRC
36,800 62,500
40,600 51,500
10% -18%
HOLD REDUCE
2,951 1,079
31,006 6,518
63.4 63.0
1,995 412
490 95.4
6,026 5,514
83 45
6.1 11.3
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28 March 2011 Vietnam natural rubber sector
Global natural rubber market Impressive recovery of natural rubber price...
Global economic recovery and declining supply of top 3 biggest rubber-producing countries are major supportive factors to
surging rubber price.
As the global economy recovered after the financial crisis in late 2008 and early 2009, rubber sector began to see signs of recovery since the second quarter of 2009. Natural rubber demand started to pick up thanks to positive moves in the tyre production industry which captures 68% of total natural rubber demand.
Moreover, it was in 2009 that the three largest natural rubber 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
Latex STR 20 STR 5 USD/ton
6,000
5,000
4,000
3,000
2,000
1,000
0
Source: Vietnam Rubber Association (VRA), Association of Natural Rubber Producing Countries (ANRPC)
World supply is restricted by bad weather and decline in international plantations.
www.vcsc.com.vn | VCSC
...supported by limited supply of natural rubber
According to preliminary forecasts of the Association of Natural Rubber 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 natural rubber growth to 5.3% due to bad weather and declining output in major natural rubber 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.
VIET CAPITAL SECURITIES | 2
28 March 2011 Vietnam natural rubber sector
Figure 3: Rubber production forecast is 5.3% in 2011
Country Thailand Indonesia Malaysia India Vietnam China Srilanca Philippines Cambodia
Total ANRPC
Source: ANRPC
2009 2010 Growth 3,164 3,072 -2.9% 2,440 2,843 16.5% 857 970 13.2% 820 845 3.0% 724 750 3.6% 643 647 0.6% 137 148 8.0% 98 102 4.1%
34 45 32.4%
8,917 9,422 5.7%
2011 Growth 3,247 5.7% 2,938 3.3% 1,050 8.3% 890 5.3% 780 4.0% 690 6.7% 153 3.4% 107 4.9% 63 40.0%
9,918 5.3%
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 natural rubber 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 natural rubber at that time.
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