DRC - Profitability improves YoY yet export demand remains weak

DRC announced its Q1 2024 results with net revenue of VND973bn (USD38.9mn; -13% YoY) and NPAT-MI of VND49bn (USD2.0mn; +94% YoY), fulfilling 19% and 17% of our respective full-year forecasts.
The results slightly trail our forecasts mainly due to weaker-than-expected export volume of radial tires, which is partly offset by slightly higher-than-expected GPM. We thus see slight potential downside risks to our 2024F forecasts, pending a more comprehensive review.
On a YoY basis, net revenue decreased 13%, which is primarily due to a 24% drop in total sales volume of radial tires. This stems from weak demand in the overseas market (-28% YoY) despite resilient domestic demand. We attribute low export volume to 1) weak demand in Brazil and 2) competition in the US market. In addition, we attribute an 11% QoQ lower net revenue to decreasing demand for both bias and radial tires in both domestic and overseas markets, which we believe to be due to seasonal characteristics.
GPM significantly expanded YoY to 16.6% in Q1 2024. We attribute this improvement to the realization of lower-cost inventory procured in the previous quarters following the prices of raw materials cooling down after their peaks in 2022. Meanwhile, GPM slightly decreased QoQ in Q1 2024 due to a 9% QoQ decrease in ASP of bias tires in the domestic market and a smaller contribution to total sales volume from bias and radial tires QoQ.

DRC’s Q1 2024 results

VND bn	Q1 2023	Q4 2023	Q1 2024	QoQ	YoY	Q1 as % of 2024F
Net revenue	1,113	1,097	973	-11%	-13%	19%
COGS	-998	-898	-811	-10%	-19%	19%
Gross profit	115	199	162	-19%	41%	20%
Selling expenses	-67	-71	-87	22%	30%	27%
GA expenses	-15	-14	-18	33%	24%	23%
EBIT	33	114	56	-51%	70%	14%
Net financial income & net other income	-4	8	2	-78%	N.M.	N.M.
PBT	29	122	58	-52%	100%	16%
NPAT-MI	25	94	49	-48%	94%	17%
Gross margin	10.3%	18.1%	16.6%
EBIT margin	3.0%	10.4%	5.8%
NPAT-MI margin	2.3%	8.6%	5.1%

Source: DRC, Vietcap