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VHM: IPO in 17/52018


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VHM: IPO in 17/52018

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VHM: IPO in 17/52018

  1. 1. VHM.HM: IPO IN 17 MAY 2018 A. HIGLIGHTS 1. Increased real demand for low- to mid-end segments and favourable borrowing conditions Source: CBRE Source: JLL & Oxford Economics Firstly, real demand for real estate properties, especially for the low-end and mid-end segments, is expected to increase in the next 10 years. This could be explained by the trend of young people living independentlyof their parents. Statistically, demand for middle-end segment accounted for >50% of total demand in HCMC and Hanoi in 2017, and is expected to increase by 348.2% in HCMC and Hanoi during 2017-2022 (CBRE). This is a positive sign of a sustainable real estate market,andwill boostdemand for borrowing for real estate purchases. Secondly, SBV’s decision to increase the risk-weight from 150% to 200% instead of to 250% as suggested earlier eased concerns about slowing real estate sales.Increasingriskweighting of real estate loans to 250% meansthat foreverynew real estate loan, risk- weightedassetsincrease by2.5timesof the loan;this will significantlydiscourage banksfromlendingtoreal estate buyers. A decision to increase the risk weight to 200% instead shows that the government is less concerned about speculative demand causing real estate bubbles. This will encourage banks to lend to real estate buyers. Statistically, as lending rates decreased continuously from 13.5% to 7.6% during 2012-2017, loan outstanding balance for the real estate market increased by 12.5% from 2015 to 2016. As lending rates are expected to decrease further from 7.6% to 6.5% during 2017-2020, loan outstanding balance for the real estate market is expected to further increase, facilitating real estate purchases and sales.
  2. 2. 2. Strong sales prospects for selling & starting projects VHM’s strategyisbuildingclosedecological urbanareasonthe outskirt of HCMC and Hanoi, with two project pipelines Vincity (for low-end and mid-end segments) and Vinhomes (for high-end segments). With strong real demand in the low-end and mid-end segments, excellent execution in projects for high-end segments in the past, well-positioned locations of ongoing projects, unique closed ecological systems that no other real estate developers offer, and good sales team with 100% for the 2 completed projects, ongoing projects are expected to succeed with good sales rate. Below is my detailed assessment of VHM’s projects in HCMC. Areas Districts Investment opportunities VHM’sprojects Potential issues Urban areas Tan Cang Binh Thanh (+) Location: nearcentraldistricts; (+) Economic activities: commercials, services, tourism,smallindustrial and handicraft clusters → higher-middleincomeresidents; (-) Population density: high (22,642people/km2); (-) Transport infrastructure: (1) frequent traffic jamissues at DanChu -3/2 -CMT8 Crossroad (District 10), Ly Thai To - Le Hong Phong Crossroad (District10); (2) Ben Thanh -Suoi TienMetro Linebridging Nguyen HuuCanh Street& DienBien Phu Street is plannedto go into operations in2020& reduce traffic jamissues inthis area; however,furtherdelay is expecteddueto insufficient budget; (-) Drainage infrastructure: (1) 11 drain locations (the highest number ofdrain locations in HCMC), including Nguyen Huu Canh Street; (2) 'Smart Pump'to reduce drainageinNguyen HuuCanh Street was putinto operations at theend of2017; however, ithas shown inefficiency inaddressing drainageissues in recentrainy reasons; (-) Land bank: limited andexpensive; => There is significant potential for high-endresidential housing; however, it could be expected thatthepaceofdevelopmentoftransport and drainageinfrastructurewill not keep up with the paceofreal estatedevelopment; 3 Vinhomes projects: + Vinhomes CentralPark (722 Dien BienPhu,Ward 22, Binh Thanh District), started handover in2015; + Vinhomes Landmark Serviced Apartment(Dien Bien Phu Street, Binh Thanh District),starting construction in 2018, starting handover in 2019; + Vinhomes Dinh Tien Hoang (Dinh Tien Hoang Street, Ward3, Binh Thanh District), starting construction in 2018, starting handover in 2019; Potentialtraffic jam & drainage issues ifthe3 projects are completely handed over; North- Northeast District 9 (+) Population density: low (2,311 people/km2); (+) Economic activities: education & research; (+) Land bank: large lots available; (+) Transport infrastructure: Long BinhBridge connecting with NguyenXien Streetis expected tobe completed in2018, reducing trafficjamissues near thearea; (-) Transport infrastructure: (1) frequent traffic jamissues at Le Van Viet -Phong PhuTempleIntersection (District 9), La Xuan Oai Street(District9), TayHoa Crossroad (District 9 -Thu Duc), Thu Duc Crossroad(District9 -Thu Duc); (2) Ben Thanh -Suoi TienMetro Linebridging Thu DucCrossroad (District 9 -Thu Duc) is plannedto go into operations in2020& reduce traffic jamissues inthis area; however, further delay is expected to dueinsufficientbudget; (-) Drainage infrastructure: 5 drain locations; => Potentialfor low-endand mid-end residential housing for migrants coming to the district for educational& research purposes, especially for students; 2 Vincity projects: + Vincity NewSaigon (Nguyen Xien -Phuoc Thien, Long Binh Ward, District 9), starting in 2018, starting handover in 2019; + Vincity Tay Thang Long (Long Truong Ward, District 9), starting construction in 2020; Potentialtraffic jam & drainage issues ifthe2 projects are completely handed over; South District 10 (+) Location: nearcentraldistricts; (+) Population density: very high (40,638people/km2); (+) Economic activities: commercials, services, small industrial and handicraft clusters (+) Transport infrastructure: no major trafficjam hot spots; (+) Drainage infrastructure: no majordrainlocations; (+) Land bank: limited &expensive; => Potentialfor high-endresidentialhousing; 1 Vinhomes project: Vinhomes Ky Hoa (LeHong Phong Street, Ward12, District 10), starting construction in 2019; N/A Surburban areas Northwest Cu Chi (+) Population density: low (819 people/km2); (+) Economic activities: agriculture, fisheries & manufacturing (with many large industrial zones/clusters withtotalarea of1760.64 ha) => low-to middle-incomeresidents; (+) Transport infrastructure: complete national/provincial/county highway and ringroad system; connecting to HCMC via Highway No.22; (+) Land bank: large lots available; cheap, high, easy toclear; => There are potentialfor low-endandmid-end residentialhousing for industrial local and migrant workers, and potentialfor high-endtourism& entertainment activities due to its locked-awayposition with only one entry by Highway No.22. However,for low-end andmid-end residentialhousing,strong awareness-raising sales activities are required; + 1 Vinhomes project: Leman GolfCourse(Cu Chi District), starting construction in 2020; + 1 Vincity project: Vincity Cu Chi (Cu Chi District), starting constructionin 2020; N/A South Can Gio (+) Population density: low (100 people/km2); (+) Economic activities: mainlyagriculture& fisheries; (+) Transport infrastructure: complete national/provincial/county highway and ringroad system (+) Land bank: large lots available; => Potentialfor high-endbeach tourism and eco-tourismactivities; 1 Vinhomes project: Vinhomes Long BeachCan Gio (Can Gio Distirct); starting constructionin 2021; N/A Source: Statistics Office in Ho Chi Minh city, Sumitomo, Tuoi Tre Online, Vinhomes, VOV & own research
  3. 3. 3. Profit-booking period in 2018 & 2019 As at 31/12/2017, VHM and its associates had unrecognized revenues of 74,314 billion VND from 8 projects, including Vinhomes Central Park, Vinhomes Park Hill, Vinhomes Green Bay, Vinhomes Golden River, Vinhomes The Harmony, Vinhomes Imperia Hai Phong, Vinhomes Dragon Bay, and Vinhomes Skylake. In 2018, VHM and its associate are expected to hand over most apartments and recognize 92% of these revenues, as detailed below. 2018 2019 Income from real estate businesses Net revenues 24,614 80,338 EBT 6,826 26,003 Net income 5,461 20,803 Income from associates EBT 15,145 7,577 Net income 12,116 6,062 Total income EBT 21,971 33,581 Net income 17,576 26,864 (*) Revenues are recongizedaccording to contract completion method, when real estate properties are handed over and full pay ments are received. VHM’s conslidated financial statements only incorporate from financial statements ofassociates items after EBT, not revenues. Source: VHM’s Prospectus B. P/E VALUATION VHM’s P/E clearly indicates that the stock is undervalued. Although VHM’s D/E before IPO implies significant risks, strongprospects of VHM’s projectsindicate strongoutlook. With outperforming ROE and just slightly expensive price, the stock is clearly being undervalued. Ticker Company Name Headquarter Market Cap (mil USD) P/E ROE Dividend Yield D/E VHM.HM Vinhomes JSC Vietnam 13,003 19.44x (*) 58.8% - 415.80% NVL.HM No Va Land Investment Group Corp Vietnam 1,975 18.04x 5.82% 0.03% 142.34% KDH.HM Khang DienHouseTrading and InvestmentJSC Vietnam 605 19.66x 2.84% - 31.80% ALI.PS Ayala Land Inc Philippines 11,758 23.77x 4.62% 1.55% 105.40% LH.BK Land and Houses PCL Thailand 4,104 12.00x 4.02% 6.28% 97.86% Average 18.37x 4.33% 2.62% 94.35% (*) As estimated in VHM’s Prospectus Source: Thompson Reuters The explanationforunderpricedVHMcouldbe VHM’schoice of IPOmethod of bookbuilding(*). Firstly,the reasonfor IPOis the mere issue size of $1.35b, whichisthe largestissue inVietnamsince TCB’s raising$922m, and requires informationsymmetry. Secondly,the justificationforbookbuildingmethod couldbe the factthat VHMwantedto maintain relationshipwithregularinvestors,andthusadoptedbookbuildingapproachtooffersolicitedpricesand allocate shares ona discretionarybasistopreferredinstitutional investors incase of oversubscription. VHM couldbe expectedtoincrease inbothshorttermandlongterm.In the short term, the undervaluedVHMwill increase toitsintrinsicvalue.Inthe longrun, as a resultof the long-termrelationshipwithinstitutionalinvestors,VHM isexpectedtoreceive significantprice supportanddemonstratesolidperformance. Retail investorswishingtobuyVHMcan onlydo so viaunofficial channels,asthe stockisalreadyoversubscribedby institutional investorsbythe firsttradingdayandall 3-millionstocks placedbyretail investorswere void.Buyingvia unofficial channels involves3mainrisks: 1. Uncertaintiesassociatedunofficial channels; 2. Dependence onmarketmakers(DragonCapital); 3. Uncertaintiesaboutoff-markettransactions; -- (*) There are 3 IPO pricing mechanisms,differing in terms ofpricesetting and shareallocation methods: Price setting mechanism Share allocation mechanism Fixed price Underwriters determinethepricebased ontheirvaluation Pro-rata basis Auction Investors submit bids abovetheminimumprice, and shares are sold at theprices between the IPO price and thecap prices Pro-rata basis Book building Underwriters determinethepriceafter soliciting regular investors at roadshows; Discretionary basis