• We attended DRC’s Analyst Meeting and AGM in Da Nang on April 23 & 24, 2024.
• Management expects stronger demand from the domestic market in 2024 vs 2023 and expressed optimism about higher export volume to the US market in 2024.
• We see slight potential downside risks to our 2024F forecasts due to slower-than-expected progress of the radial tire factory – phase 3 project, which is partly offset by potential price hikes starting from Q3 2024.
• At the AGM, 2024 guidance was approved including net revenue of VND5.2tn (+16% YoY) and NPAT-MI of VND228bn (-7% YoY). Management attributes the divergence in net revenue and NPAT-MI growth targets to the incorporation of depreciation expenses from the radial tire factory – phase 3, expected to come online in Q4 2024. The targets are equivalent to 98% and 128% of our respective forecasts. We believe DRC’s profit guidance is conservative as the company beat its PBT guidance by 30% on average over the past five years.
• The AGM approved FY2023 cash dividends of VND1,200/share (4% yield). The advance FY2023 cash dividend of VND500/share was paid in January 2024. We expect DRC to pay the outstanding VND700/share during the remainder of 2024.

1. Radial tire factory – phase 3 project: DRC has finished roughly 60% of the radial tire factory – phase 3 project (expected capex of VND600bn) to increase its capacity to 1 million radial tires p.a. Management targets to finish the entire project in Q4 2024 vs the company’s previous target for Q2 2024, which is due to longer-than-expected approval for the fire prevention design. Having said that, management expressed confidence in finishing the project earlier than the target. In addition, DRC has brought the completed portion of the project into operation. Despite this, the project's progress is slower than our current assumption for the entire project coming online in early 2024.

2. Guidance for demand in 2024:

* Domestic market: Management expects stronger demand in 2024 vs 2023, which is supported by (1) Vietnam’s higher 2024 GDP growth target vs 2023 and (2) government support policies (e.g., the Government’s requirement to use products from domestic manufacturers in projects of State-owned enterprises). Despite this, competition against Chinese tire manufacturers that mainly compete by offering low prices will heighten in 2024, per management.

* Export markets:

- US: DRC expects higher export volume to the US starting from Q2 2024 and price hikes starting from Q3 2024. These are driven by the improved reputation of DRC’s products and potential positive impacts from the US investigation into truck and bus radial tires (TBR) exported from Thailand. The US preliminary determination for the investigation is scheduled to be released on May 14, 2024, and its final determination is scheduled for July 28, 2024. To minimize the potential negative impacts if the US issues affirmative decisions for the investigation, Thai exporters lowered their selling prices in the US to accelerate sales in Q1 2024. As such, DRC faced heightening competition in the US during the quarter. As inventories of exported tires from Thailand will be gradually used up, DRC expects higher export volume to the US starting from Q2 2024. In addition, management expects to raise its selling prices in the US starting from Q3 2024, enabled by the improved reputation of DRC’s product in the US. Having said that, the magnitude of price hikes depends on the actual competition landscape at that time.

- Brazil: In March 2023, Brazil introduced a 16% tariff on tire imports to protect domestic producers, causing difficulties to exporters like DRC. Management targets to maintain flat export volume to Brazil YoY in 2024.

3. Other information about DRC’s operations:

* Input costs: Management attributes the increases in rubber prices in Q1 2024 due to the low supply of rubber as a seasonal factor. However, DRC expects rubber prices to decrease gradually in the remaining quarters of the year. As the company stocks input materials around two months in advance, we believe expected lower rubber prices starting from Q2 will support GPM starting from Q3.

* Logistics costs: DRC negotiated with some logistics service providers to be offered lower logistics costs starting from June 2024. Management stated that sea freight costs decreased by around 10%-15% in March 2024 vs 2M 2024.

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