We attended DGC’s 2024 AGM on March 29, 2024, in Hanoi. For the short-term outlook, industrial phosphorus chemical (IPC) bottomed out. For the medium-term outlook, DGC is making good progress in chlor-alkali, bauxite-aluminum, and new phosphorus projects. DGC disclosed only a small acquisition project in ethanol. Overall, we see downside risks to our 2024 forecasts but upside to our medium-term forecasts, pending a fuller review.

Our takeaways are as follows:

Source: DGC, Vietcap

Sales volume: DGC is now operating at full capacity (including the new P4 factory) due to strong demand from East Asian and US customers.

Selling price: The Q1 2024 price slumped due to the Indian market, which was worse than our expectation. The P4 price to Indian customers was only ~USD3,500/tonne. However, high-end East Asian customers increased their contribution in March. DGC expects prices to increase going forward and ASP to be lifted by the above customer mix improvement, which is in line with our expectations.

It did not disclose details on acquisition projects. The potential targets in the industry could increase DGCs capacity by 30%-40%, per our estimate. These would provide significant upside to our forecasts provided a reasonable acquisition price. 

Per DGC, the most premium product – semiconductor grade phosphoric acid - has many barriers to entry which will take DGC a long time to breach: 

- A separate and clean factory as well as technology for top acid impurity.

- Close proximity to a semiconductor plant.

- The close-knit supply chain of East Asian players.

3. Agricultural phosphate:

Both sales volume and selling prices are strong, especially to the Indian market, due to geopolitical tensions, including the Israel-Hamas conflict that disrupted Moroccan phosphate rock sales.   

DGC plans to spend VND10bn to at least increase its total phosphate rock reserve by 50%. We estimate additional cost savings of VND4tn (USD160mn) to be generated over 3-5 years. This has not been reflected in our forecast.

DGC plans to ensure 15 years of self-supplying most of its rock from its current reserve that will last five years. It will continue to apply to explore and participate in State auctions of new mines. Per DGC, the State-owned Vietnam Apatite Ltd. could put up Vietnam’s largest mine for auction.

DGC plans to produce LFP materials and assemble battery cells in the medium term. These are the upstream and downstream chains of the supply. The company is not able to conduct the middle and most value-added chain of producing the cells but will pursue this in the long term. 

In terms of LFP materials, although DGC’s LFP does not have a significant cost advantage vs China’s solvent extraction LFP, it is confident that it can sell because of its Japanese, South Korean, and US customers not willing to buy from China due to political tensions. Such demand will be reflected in its business results from 2025 onward.

This project’s construction will be kickstarted in Q3 2024. Thanh Hoa Province will have paid the compensation to relocate nearby residents by mid-2024, which will enable the company to obtain the construction permit. DGC guides for  annual revenue of VND2tn and NPAT of NVD200bn.

In terms of PVC, DGC will bring this high-value-added product back to the project in 4-5 years after the new technology of gold catalysts are proven in China and the UK. Previously, DGC cut it from the project due to the unproven technology and capital requirements for bauxite-alumina.

Per DGC, it should be the quickest to build a factory and most efficient producer among the current applicants. DGC believes auctions of bauxite mines - which are hundreds of square kilometers in area - are unlikely. It thinks that applicants will build factories first and the Government will come up with a special mechanism to allocate mines to them later.

On March 23, DGC signed an MOU with Dak Nong Province regarding bauxite-alumina. The next step for DGC is to obtain an investment license. It expects all approvals to take two years and construction will also take two years. Consequently, the earliest possible revenue stream could be in 2027.

Capex: 

- USD2.3bn (per the MOU with Dak Nong Province); 

-  USD700mn (DGC's estimate for the first phase)

Funding: DGC could conduct a rights issue or IPO of the project to partly fund the project. It current has USD400mn of cash on hand.

Annual capacity: 

- 2 million tonnes of alumina.; 300,000 tonnes of aluminum (per the MOU with Dak Nong Province).

- 1.2 million tonnes of alumina p.a. (DGC's estimate for the first phase).

Vietcap's revenue estimate at 100% of phase 1 capacity utilization:

-  USD480mn/year - 123% of DGC's 2023 revenue.

DGC will auction for Dai Viet Ltd.’s ethanol plant in Dak Nong Province soon. Because the owner went bankrupt, the floor price that Agribank put up after four years is attractive: ~VND100bn compared to annual revenue of VND1tn. This plant buys tapioca from farmers in the province as input material and sells ethanol to domestic buyers. This has not been reflected in our current forecast.

Merging with UPCOM:PAT to simplify corporate structure: This subsidiary is 51% owned by DGC and accounts for 30% of DGC’s yellow phosphorus capacity. DGC has not come up with details. We note that this move is very similar to DGC’s series of swapping and issuing new shares to consolidate its corporate structure during 2017-2018. However, the project faces two challenges: PAT’s shareholders prefer its high payout ratio over DGC and DGC will have to pay ~VND200bn in tax for such an acquisition.

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