Increase in profits
In recent months, steel stocks have made the strongest jump in the stock market, often showing an increase by even four times. For instance, the Hoa Sen Group Joint Stock Company (HSG) traded at VND 4,500 per share eight months ago, but now HSG has exceeded VND 19,000 per share, a four time increase. Similarly, the Nam Kim Steel Joint Stock Company (NKG) went from around VND 4,400 per share at the end of March to make a sudden jump to touch VND 12,000 per share, a strong increase by nearly three times. Another leading company in the steel industry, the Hoa Phat Group Joint Stock Company (HPG), made the strongest rally since being listed on the stock market. At the end of March, HPG was trading at VND 15,300 per share, but is now trading at around VND 37,000 per share.
The reason for this sharp increase in steel stocks in the stock market is because the price of raw material has now dropped considerably, and construction activities have once again returned to normal with many public investment projects having been restarted. The demand for steel products has again recovered strongly since the end of the second quarter, which had fallen sharply in the first four months of the year. Steel enterprises have also made substantial gains in the export market due to lower and favorable tariffs under the Free Trade Agreements such as EVFTA and CPTPP. All these factors supported the steel industry to revive once again since the last quarter, with profits of HPG, HSG and NKG increasing by 115%, 26% and 1,331%, respectively.
Leaders offload shares
The huge jump in profits of the Nam Kim Steel Joint Stock Company (NKG) surprised many investors because at this point in 2019 the company was still struggling and working on plans to sell off assets to pay back debts due to heavy losses. According to the third quarter financial report, revenue increased only 10% to reach VND 3,376 bn, but profit after tax increased more than thirteen times to touch VND 82.6 bn.
With this result, the Board of Directors of NKG recently approved investing in the construction of a centralized warehouse and relocating their steel pipe workshop. This decision is aimed at increasing production and maximizing the capacity of the plating plants by reducing production costs and increasing business efficiency. These projects will be built over an area of 4ha at an investment cost of about VND 250 bn, of which 25,000 sq. m. will be for the steel pipe workshop and warehouse. According to Mr. Ho Minh Quang, Chairman of Board of Directors at NKG, the plan is to buy new construction land or buy out operating enterprises in the first quarter of 2021.
Meanwhile, even as the Board of Directors of NKG have been deciding to expand production and business activities by taking advantage of the fast recovery of the steel market, one of the members of Board of Directors, Mr. Vo Thoi, has decided to quit the company. Mr. Thoi has registered to sell all 775,090 shares he has held in the company which are equivalent to 0.43% of total shares. At trading price of about VND 12,000 per share, Mr. Thoi is expected to earn around VND 9.3 bn.
However, compared with HSG or HPG, the number of shares sold by Mr. Thoi is very small. According to the latest information from HPG, Mr. Doan Gia Cuong, Vice Chairman of Board of Directors, has registered to sell 24 million HPG shares by agreement from 27 November to 26 December. Notably, the person who bought all of these shares was Mr. Tran Dinh Long, Chairman of the Board. At current price, the amount of money he has spent to buy back these shares is about VND 900 bn. In addition to Mr. Cuong's transaction, PENM III fund, that is related to Board Member Hans Christan, has registered to sell off 76.5 million HPG shares.
At the Hoa Sen Investment Group Company Limited (HSG), Mr. Le Phuoc Vu, Chairman of the Board, has registered to sell 30 million shares from 25 November to 24 December, through agreement transaction and order matching. The reason for the transaction is to address company financial needs. It is known that the Hoa Sen Investment Group Company Limited holds 73.14 million shares of HSG, equivalent to 16.45%. If the transaction is successful, the company will earn about VND 550 bn, reducing the holding rate to only 9.7%.
Although the business results of steel companies such as NKG and HSG were positive, these companies are still heavily weighed down by loans. HSG had for long been reducing prices in an attempt to increase market share, so when the steel industry was in trouble it led to a financial imbalance. Now HSG must restructure to grow once again and also reduce its huge debts. HSG has therefore decided against going ahead with the ambitious steel project in Ca Na in Ninh Thuan Province which had a total investment cost of almost USD 10 bn. By the end of the third quarter, HSG has now reduced the total amount in loans from VND 16,000 bn to around VND 11,000 bn.
Meanwhile, HSG still largely depends on short-term debt and still has a financial imbalance. Therefore, though the company profit margin has improved compared to previous years, it depends heavily on the price of raw materials of HRC. The strong growth in the third quarter was mainly due to the rapid decline in input materials, but that advantage was only short-term. This fact, plus the hot rise in stock price has made many securities companies term HSG a high level risk.
The sudden business growth at NKG came from the recovery of domestic consumption and positive export growth. In contrast, NKG galvanized steel sheet market share narrowed to 15% compared to 16% in the same period in 2019. According to the third quarter financial statement, accumulated in nine months of 2020, NKG revenue reached VND 8,141 bn, down by 9.3%. Notably, finance revenue decreased by VND 14 bn, reaching VND 64 bn, while the remaining costs increased, such as finance expense increased by VND 24 bn, reaching about VND 227 bn, selling expense increased by VND 40 bn, reaching VND 183 bn, and management expenses increased nearly VND 14 bn, reaching around VND 66 bn. This shows that the restructuring process in this company has not really brought about the expected results.
Financial problems at NKG are the same as at HSG, which are not bright at all. By the end of the third quarter, total liabilities at NKG had increased by VND 100 bn to touch nearly VND 5,147 bn, of which short-term loans were at VND 3.463 bn, and long-term debt was at VND 587 bn, almost down by VND 116 bn compared to the beginning of the year.