VHC - Risky investment

(DDTTCO) - The Vinh Hoan Joint Stock Company (VHC) is one of the few seafood companies that has maintained a steady growth since being listed on the stock market. However, the recent decision by VHC to invest idle money in the stock market has left many shareholders worried, as in the past many a giant company has fallen due to an out-of-industry investment.

Seafood processing at VHC.

Seafood processing at VHC.

Crossing milestones

The Vinh Hoan Joint Stock Company was established in late 1997 in Dong Thap Province with an initial charter capital of only VND 300 mn. In 2007, VHC transformed its model into a joint stock company, with its main business being the processing and export of frozen pangasius and yellowtail catfish. In the years following its transformation, VHC crossed many milestones such as receiving the AquaGap certificate in pangasius farming in 2009; becoming a leader in Vietnam in pangasius exports in 2010; receiving the Best Aquaculture Practice (BAP) certificate with a two-star level for their processing plant and farming area in 2011; becoming the first Vietnamese enterprise to receive the Aquaculture Stewardship Council (ASC)  certification for pangasius farming in 2012; starting construction of a Collagen and Gelatin (C-G) factory with capacity for 2,000 tons of finished products per year in 2013; and being the only seafood enterprise on the list of 50 best companies in Vietnam on Forbes list in 2014.

With VHC making methodical investments in value-added production chains, the company was one of the few seafood enterprises that always was able to overcome oncoming market difficulties. For example, 2019 was a challenging year for the company as it faced increased inventory and oversupply in Vietnam from a sharp rise in farm output. However, VHC business results were still very positive with net profit exceeding VND 1,000 bn. This was the second year in a row showing VHC display its second best performance in its history. Previously in 2018, VHC had reported a huge profit of VND 1,442 bn.

This excellent business result was due to the addition of the C-G segment, which recorded outstanding sales growth in 2019, reaching approximately VND 535 bn. According to VHC, C-G had a gross profit margin of more than 40%, compared with the gross profit margin of 22% to 25% in the pangasius group and 12% to 16% in frozen fillet. Therefore, in the long-term, the C-G segment will play a strong role in stabilizing VHC profit margin in the face of changes in the pangasius industry. In 2020, VHC plans to grow the C-G sales by almost 60%.

Negative impact of Covid-19 pandemic

After two years of showing a steady increase in profits to nearly VND 1,000 bn, VHC began to face certain difficulties soon after the Covid-19 pandemic suddenly erupted at the beginning of 2020. The widespread effect of the pandemic caused a fall in demand for pangasius in many main markets. The US and EU markets showed lack of response as consumers in most developed western countries increased purchase of dried, canned and processed foods, and at the same time, moved away from eating out. For instance, VHC sells to restaurant chains in the US market, which accounts for more than 60% of its market, while retail outlets and supermarkets cover the other 40% of its market and with these market turning away, VHC profits began plummeting.

Faced with this dire situation, VHC tried to boost sales in other markets to compensate for the losses from the US and EU markets. China, which is a large market and has successfully been able to contain the pandemic from spreading within its borders, has now reopened many restaurants and eating joints, which are functioning back to normal. However, unfortunately, due to lower selling prices in China and other markets as compared to the US and EU markets, VHC gross profit margin is still under pressure and in decline.

According to the second quarter financial statements of 2020, revenue at VHC plummeted to VND 1,630 bn, down by 19.5%, and profit fell to VND 215.4 bn, down 48.7%. In the first six months of 2020, VHC recorded a decrease in revenue of 14.4%, reaching VND 3,266 bn, and net profit decreased by 49.5%, reaching VND 367.6 bn. Although this decline is lower than the industry average, this is an alarming number for VHC when its profit recorded a reduction rate of upto 50%. With this decline, it is likely that VHC will lose almost VND 1,000 bn in 2020.

Alarm signals

In 2007, VHC listed shares on HOSE at reference price of VND 62,000 per share. Although the seafood sector is experiencing its ups and downs with several businesses going bankrupt, thanks to maintaining stable business results, VHC still maintains the second market share, only after Minh Phu Seafood Corporation (MPC). On the stock market, the price of VHC shares have never fallen below par value. Even at the time the stock market adjusted in early 2019, VHC was still trading above VND 100,000 per share. However, the business results were not so positive due to the impact from the US and EU export markets. At the end of March 2020, when the stock market plunged due to the impact of the Covid-19 pandemic, VHC shares dropped to VND 20,000 per share.

In addition to a decline in profits, VHC shareholders recently expressed new worries on the decision to invest more cash in the stock market. According to statistics at the end of June 2020, VHC held VND 143.5 bn in cash and bank deposits of total VND 1,491 bn. However, VHC financial statements suddenly showed an investment of more than VND 193.5 bn in the stock market. According to a representative of VHC, investing in the stock market was not a long-term strategy of the company but was aimed at taking advantage of an opportunity to optimize the amount of cash when deposit interest rates at banks are much lower than ever before.

Investing in the stock market is not a long-term strategy of VHC, but is aimed at taking advantage of an opportunity to optimize the amount of cash when deposit interest rates at banks are much lower than ever before.
Although the VHC investment portfolio is focused on large-cap stocks in the VN30 (MWG, HPG, FPT), this investment is relatively modest on the corporate balance sheet. However, for shareholders, this is an out-of-industry investment with too many risks at stake, especially in context of several unpredictable movements in the stock market due to the current volatile Covid-19 pandemic scenario.

Shareholders are worried and their worries are very credibly based. There have been bigger and more sound companies than VHC in the past who have had to swallow a bitter pill when they invested in the stock market and lost it all. One such example is the Minh Phu Seafood Corporation, the oldest fisheries company in Vietnam, that  suffered heavy losses in 2008 because of investing large amounts in the stock market in the hope of increasing its capital.

Kim Giang

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