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Simons Trading Research

Author: simonsg   |   Latest post: Mon, 11 Nov 2019, 3:46 PM

 

Sembcorp Industries - Solid Foundations for Continued Growth in Vietnam

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  • We recently visited Sembcorp Industries’s industrial parks located north of Ho Chi Minh City, Vietnam, and came away with a positive impression on the company’s long-term growth strategy for the country.
  • Unfortunately, near-term headwinds in the offshore-marine sector will continue to overshadow positive developments in Sembcorp Industries’s core business segments in our view, thus we maintain our HOLD recommendation with a slightly lower fair value of S$2.22.
  • Entry price: S$2.00.

What’s New

Exposure to a fast-growing country.

  • Together with a strong partner in state-owned conglomerate Becamex, SEMBCORP INDUSTRIES (SGX:U96) developed its first Vietnam-Singapore Industrial Park (VSIP I) more than 23 years ago north of Ho Chi Minh City (HCMC). As of end-1H19, the company has a total of eight industrial parks covering nearly 8500ha spread throughout south, central and north Vietnam. At the current sales trajectory, Sembcorp Industries has another 5-6 years of landbank left.
  • Based on land size, Sembcorp Industries’s Vietnamese industrial parks account for nearly 70% of the company’s total industrial park exposure. While Sembcorp Industries does not disclose profits at the country level, it reported S$31m in profit from operations for “Rest of Southeast Asia” for 1H19, or 7% of its total operating profit.

Solid clients and great location.

  • We visited the VSIP I and II industrial parks as well as Habitat and Sun Casa which are the company’s maiden forays into residential property development, catering to its clients needing residences near the industrial parks. Sembcorp Industries’s clients are in non-polluting industries mainly engaged in manufacturing (eg precision engineering, automotive components, F&B, etc.) and electronics, who come from the US, Europe, Korea, Japan and Singapore, among others.
  • The key attraction appears to be proximity to the major population, logistics and financial centre in HCMC as well as Sembcorp Industries’s reputation for operating well-planned and maintained facilities.

Going greener.

  • In a recent announcement, Sembcorp Industries disclosed that it will bring a range of energy and utilities solutions (eg renewable energy, waste-to-energy, wastewater treatment and water recycling) to VSIP’s various integrated townships and industrial parks as well as other Becamex-owned industrial parks and facilities in Vietnam. See Sembcorp Industries' announcements.
  • Sembcorp Industries has already installed a 51kw-peak rooftop solar farm on top of its 12,000 sf office in Binh Duong and will look to roll this out gradually to its other industrial parks. We view this as a key differentiator for Sembcorp Industries and believe that it is a key pull factor for international clients with environmental, social and governance policies.

Stock Impact

Sembcorp Industries’s competitive advantage is in urban planning in our view.

  • Having established a solid track record in developing and maintaining a full suite of services at its industrial parks, it appears that Sembcorp Industries is able to charge a premium for its assets but still fully sell them out. We believe that in the near to medium term, the company will be able to capitalise on this track record and expand into other countries in Asia.

A great country to be in:

  • Vietnam’s economy expanded 7.3% y-o-y in 9M19 (2Q19: 6.7%), beating market expectations and above the Bloomberg median forecast of 6.8%. The main growth drivers were industry & construction (+9.4% y-o-y) and services (+6.9% y-o-y).
  • According to UOB Economics, Vietnam’s economic growth in 2019 is likely to be supported by healthy Foreign Direct Investment (particularly from Korea, China, Taiwan and Hong Kong) and public investment flows. The country reported an inflation rate of 1.98% in Sep 19 (Aug 19: 2.26%).

Earnings Revision / Risk

No changes.

  • We have not made any changes to our forecasts at this time.

Valuation / Recommendation

Maintain HOLD.

  • We reiterate our HOLD rating on Sembcorp Industries with a slightly lower target price of S$2.22 due to our lower fair value estimate for Sembcorp Marine (SGX:S51) published on 2 Sept 19. See report: Sembcorp Marine - Secures New Contracts But Not At A Turning Point Yet.
  • In our view, the earnings outlook for Sembcorp Industries is very much dependent on its 62%-owned subsidiary which has struggled with order wins in the current 2H19. Thus, we believe there is downside risk to earnings in the next few months which will continue to overshadow positive developments in Sembcorp Industries’s core business.
  • Entry price is S$2.00. See Sembcorp Industries share price.

Risks.

  • Downside risks include lower-than-expected orderbook wins for its O&M segment. Meanwhile, upside risks include a smaller-than-expected settlement of the corruption investigation at its offshore marine subsidiary, and increased oil-industry spending.

Share Price Catalyst

  • Improvement in Sembcorp Industries’s urban business segment in China.
  • Higher-than-expected gains from asset divestment in Singapore and Middle East.

Source: UOB Kay Hian Research - 7 Oct 2019

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Labels: Sembcorp Ind

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