Company Quarterly Earnings Update – DRC VN – 2019 Q1

Summary of the Q1/2019 results of Da Nang Rubber (DRC VN) 

Q1/2019 results: highlights
  • Q1/2019 net revenue increased by 12.3% yoy to VND 823bn, mainly thanks to strong sales of radial tires, motorbike and bicycle tires. But sales of bias tires declined.
  • The company’s gross margin fell to 9.7% in Q1/2019 from 10.4% during the same period of last year, mainly due to the higher contribution from the less profitable radial tire segment. In fact, radial tires have the lowest gross margin among all product lines due to high depreciation expenses. Operating profit was nearly unchanged at VND 40.5bn compared to Q1/2018. Net financial expenses increased to VND19.6bn from VND 14.5bn as a result of higher interest expenses, which could not be capitalized any more, and higher early payment discounts for customers. The higher net financial expenses caused the net profit to decline by 18.6% yoy in Q1/2019.
Outlook
  • We expect the number of trucks in Vietnam to continue to grow solidly thanks to strong demand from the logistics and from the transportation sectors. This favorable trend should support DRC’s long-term growth.
  • But the competition in this industry is mounting, too, as Chinese tire companies are moving into ASEAN countries. This will have some implications on DRC’s radial tire segment. However, we expect the more profitable bias tire segment to resume momentum and to do well as competition from imported products is still rather low here. But bias truck tires are exposed to replacement risk: Better road conditions might cause truck drivers to switch to radial tires. However, this change is unlikely to happen in the shorter-term, and the risk will be mitigated thanks to the rising number of trucks in Vietnam.
  • DRC lifted all its product prices by about 5% in April. We believe that the higher selling prices will more than offset the negative impact of potentially rising input material prices during the remainder of the year. We project DRC’s net profit to increase by 20.4% in 2019 and by 16.8% in 2020. In 2021, as a part of radial tire factory will be fully depreciated, we expect the bottom line to surge by 89.3% yoy.
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