VIETNAM FDI PLAY THAT BOASTS 27% FCF YIELD WITH 2X UPSIDE! Launched in 1977, Binh Minh Plastics is Vietnam’s leading manufacturer and trader of plastic pipes and fittings. Founded in 1977, BMP is the leading pipe plastics producer in the Southern area of Vietnam with 50% market share in the area and 25% in the whole country. Company has just been privatized (in this context, privatization means ownership has transferred to private hands from SOE). PVC plastic pipe remains the dominant product line, responsible for 93% of total sales volume. Plastic pipes are an essential product for the big FDI and infrastructure spending in Vietnam. Company's competitive edge is that it is the lowest cost provider in Vietnam.
Company is a compounder with 5 year revenue and OP growing 13% and 7% respectively (100% organic). ROE averaged 27% in last 12 years and ROIC of around 16% historically since 2006 and generates decent FCF (NP to FCF conversion >45%). ROIC dropped significantly in recent years due to strong capex in recent years and NOPAT margins declining due to heavy competition and rising raw material price (PVC). Dividend yield is 6%~8% so can be a good investment even without significant earnings growth. Multiple is low vs. historical avg also.
The set up is interesting due to:
o Private market acquisition value is 2x current price - Company's major stake was divested to Siam Cement (US$18B revenue company) on March 2018 @ VND 2.3TRN for 29.5% stake, valuing the company at VND 7.8TRN or VND96,500 a share. This is actually 2x higher than the current market price. Given that Siam Cement is a franchise cement producer in Thailand that has been generating ROE > 20% and was an informed buyer about the company, current market price may be far too low.
o Company continued to increase dividend despite lower FCF. This seems to be showing the confidence on the recent capex.
o Potentially to exporting to Thailand market with the support from their controlling shareholder, namely Nawa Plastic, would be a wild card for BMP’s prospects. Potentially to exporting to Thailand would be a wild card for BMP’s prospects – At the meeting, the CEO discussed that Nawa is now planning to support BMP to export their plastic pipe to Thailand in the near future. This could be game changing as Siam Cement This strategy would help BMP to increase sales volumes growth. However, detailed information hasn’t been released yet, and therefore we will keep an eye on this issue going forward.
o Players may be consolidating: It is interesting that HSG (second largest player) which has been pushing for aggressive pricing to get share has heavy debt profile and now becoming more rational. Foreign companies are buying up the players in the industry: Previously, SCG had already poured in $121M to acquire seven other Vietnamese plastics firms, according to local media reports. Japan is also gearing up to conquer Vietnam’s plastics sector. Japan-based Sekisui Chemical has become a strategic partner in Tien Phong Plastics, acquiring 25% of the company’s shares last year, and Japan’s Meiwa Pax Group has paid $16.5 million to buy HCMC-based packaging firm Sapaco. South Korea firms have also jumped into the fray, with packaging firm Dongwon Systems acquiring over 97 percent of Tan Tien Plastics in 2016.
o Synergy expected?: Previously, SCG had already poured in $121 million to acquire seven other Vietnamese plastics firms, according to local media reports. Siam Cement also holds shares in a number of companies specializing in the production of household plastics, including Viet-Thai Plastchem, TPC Vina Chemical and Plastic Corporation, and Minh Thai House Component.
o Company finished capex on upgrading it's plant so that it has more automation. FCF improved dramatically in 2019 and now boasting 27% FCF yield and also dividend yield is now 10% & UPSIDE IS 2X!
· Risks
o Rev growth was strong but looks like GPM continued to decline due to higher raw material costs & rising competitive dynamics.
o Competitors like HSG seem to lower price to gain share.
