We attended NKG’s AGM on April 26 which was also the day when NKG reported its Q1 2024 results with net sales of VND5.3tn (USD212mn; +19% QoQ, +21% YoY) and NPAT-MI of VND150bn (USD6mn; +569% QoQ, vs a loss of VND49bn/USD2mn in Q1 2023). Overall, we see that the company’s guidance is quite conservative compared to the first quarter’s results. However, we see downside potential to our forecasts as Q1 2024 sales and NPAT-MI only fulfilled 21% and 18% of our respective forecasts (last updated on February 22, 2023). Our key takeaways are as follows:

Strong sales performance due to recovery in exports demand: NKG reported 19% QoQ and 21% YoY growth in net revenue, attributed to robust exports sales (40% QoQ, 75% YoY) which outweighed sluggish sales in the domestic market (-11% QoQ, -29% YoY). Exports accounted for 70% of gross sales in Q1 2024, up from 60% in Q4 2023 and 49% in Q1 2023.

GPM posted a solid improvement: Q1 2024 saw a GPM of 10.7% (+460bps QoQ, +760bps YoY). We attribute the strong GPM improvement to (1) higher sales volume which reduces unit COGS, and (2) wider spreads between galvanized steel products and HRC input prices. During Q1 2024, HRC input prices mostly remained flat amid sluggish construction demand from China. Conversely, output ASPs benefitted from NKG’s recovery in exports demand, especially demand from the premium US and EU markets which offer high ASPs.

We observe that NKG’s Q1 2024 QoQ GPM improvement of 460bps was larger than the 160bps improvement for HSG (detailed in HSG’s Q2 FY2024 Earnings Flash), which we attribute to NKG’s strategy to focus more on serving the exports markets, notably the US and EU, which offer higher ASPs than the domestic market. NKG’s strategy is to avoid direct local competition with HSG – the most dominant player in the domestic market due to its extensive nationwide network of 550 HSG-branded retail stores (as of end-2023).

SG&A expenses surged YoY from higher freight rates: Q1 2024 SG&A expenses rose by 64% QoQ and 177% YoY. Although NKG did not provide a detailed breakdown of SG&A in its Q1 2024 financial statements (NKG only provides SG&A breakdown in semi-annual and annual audited financial statements), we attribute the surge in SG&A to the recent hike in global freight rates, driven by the Red Sea tension and severe drought in the Panama Canal. We note that shipping costs constituted around 75%-85% of NKG’s total SG&A in each of the last three years.

Solid Q1 2024 NPAT-MI, yet we see downside to our forecasts: Q1 2024 NPAT-MI surged by 569% QoQ, driven by strong sales and GPM recovery, despite higher SG&A expenses. Nevertheless, we foresee potential downside to our forecast as Q1 net sales and earnings only fulfilled 21% and 18% of our respective prior forecasts.

NKG’s Q1 2024 results

Source: NKG, Vietcap’s forecast (last updated on February 22, 2023)

Conservative 2024G earnings guidance: Management guided for a 2024G sales of VND21tn (USD840mn; +13% YoY) and PBT guidance of VND420bn (USD16.8mn; +137% YoY). While NKG’s 2024G sales guidance is reasonable as Q1 results have already achieved 25% of full-year guidance, 2024G PBT seems conservative, given that 45% of full-year target was achieved in the first quarter. Versus our previous forecasts, management’s view is conservative, as detailed in the table below.

NKG’s 2024 guidance

Source: NKG, Vietcap’s forecast (last updated on February 22, 2023).

Nam Kim Phu My (NKPM) plant expansion: The 2024 AGM approved NKG's revised blueprint for constructing a new NKPM factory. According to the updated plan, the facility will boast a total annual capacity of 800,000 tonnes of galvanized steel products, with a total capex requirement of VND4.5tn (USD180mn). Funding for the project will comprise 30% equity, equivalent to VND1,350bn (USD54mn), and 70% debt, equivalent to VND3,150bn (USD126mn). NKG has already contributed VND500bn (USD20mn) to the project, as of end Q1 2024. Management expects construction to start from Q2 2024 and the factory to become fully operational in late-2025/early-2026. 

Previously, NKG intended to develop the factory in three phases, each requiring VND1.5tn (USD60mn) of capex and designed to add another 400,000 tonnes of galvanized steel annually during each phase. However, the revised plan consolidates these phases, with the factory now set to be fully operational upon completion without being divided into stages. The revised total capacity is reduced to 800,000 tonnes p.a. from the initially planned 1.2mn tonnes p.a. NKG has not shared further reasons for the change of plan.

Rights issuance to fund NKPM expansion: To fund the equity amount of the NKPM plan, shareholders approved NKG’s goal to raise VND1.6tn (USD64mn) from a rights issuance of 187mn shares at VND12,000/share (versus April 26’s closing price of VND21,900/share) to existing shareholders, with a minimum target of a 70% subscription rate. The entire proceeds will be dedicated to fund the Phu My plant expansion. We note that, if the subscription rate falls short of 70%, the issuance will be considered unsuccessful, and the proceeds collected will be returned to already-subscribed shareholders, in accordance with NKG’s 2024 AGM documents and Decree 155/2020/ND-CP. The rights issuance is scheduled for 2024 and/or 2025, with the exact date determined by the BOD, depending on the conditions of the stock market.

Bonus shares: Shareholders approved NKG’s plan to issue bonus shares with a 100:20 ratio (i.e., shareholders with 100 shares will get an additional 20 bonus shares), funded from 2023 retained earnings. The issuance of bonus shares is scheduled to occur simultaneously with the rights issuance mentioned previously.

Proposed 2024 ESOP: The AGM approved an issuance of 2.5mn shares (equivalent to 0.95% of total shares outstanding) at the price of VND10,000/share under the 2024 ESOP. The lock-up period is one year for 50% of the issued shares and two years for the remaining 50%.

Dividends: NKG will not pay dividends on 2023 earnings to concentrate resources on funding the NKPM plant expansion.

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