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|A worker helps move steel products at Hoa Phat Steel Pipe Company in Da Nang. - Photo Hoa Phat Group|
In recent weeks, the trading condition of Hoa Phat shares (HPG) has not been really positive as it has retreated continuously.
Trading at VND43,000 per share in early October, HPG has slumped to only around VND33,000 per share recently, down 23 per cent.
The company’s business performance showed positive results, completing the target plan in the first 11 months of this year. Its chairman Tran Dinh Long has revealed he will purchase more shares. However, HPG prices have not seen much progress.
The deep correction of HPG shares has been driven by not only unfavourable market conditions but also by sharp declines in Chinese steel prices.
According to VNDirect Limited Securities Company, Chinese steel prices are down 11 per cent since the start of November. Domestic steel prices have stayed largely flat over the same period but HPG’s share price has fall by 16.8 per cent over the same period.
According to Reuters, Chinese steel futures dropped for a third consecutive session on Tuesday on concerns that slower demand will persist next year, with prices of steelmaking raw materials - coking coal and coke - retreating.
China’s steel shipments dropped nearly 9 per cent to 63.78 million tonnes in January-November.
"HPG, until recently a darling of most analysts and among the most widely and deeply held stocks among large funds in Viet Nam, is under a sledgehammer. With steel prices in clear correction territory across Asia, investors are pricing in a spillover into Viet Nam even though domestic steel prices appear to be holding up and demand is still strong," VNDirect said in a statement on its website.
The recent pull back could even be justified on the ground the HPG’s valuation had run ahead of the steel price upcycle in late 2017 and over the first half of 2018, helped in no small part by the overall expansion in market-wide valuations over the same period, it said.
“So some retreat in valuations was to be expected. But the tumble in Chinese steel prices is clearly taking HPG’s PE multiple down with it.”
The securities firms said investors were reacting to Chinese steel prices as this was a lead indicator of the domestic steel price trends.
Weakening Chinese steel prices point to building material oversupply which, combined with the sharp recent devaluation in the Chinese yuan, could mean that Chinese steel could well find its way into the Vietnamese market, despite hefty import tariffs of roughly 12-20 per cent.
News that the Chinese government has relaxed environmental norms on steel production, such as no production bans in winter and ability to use lower grade iron ore, means that Chinese steel producers are likely to become more competitive relative to Vietnamese producers, which would affect their profits, such as HPG.
All this at a time when HPG is about to launch a record amount of new long steel capacity into the market with the anticipated commissioning of the Dung Quat complex.
VNDirect said the Chinese economy could be doing even more badly than forecast with actual growth now estimated to be closer to the 4 per cent mark, and the reserve requirement ratio (RRR) cuts at Chinese banks not really appearing to be very effective thus far, another bout of public spending is a real possibility.
“And, as always, this is more likely than not to take the avatar of another infrastructure spending binge even if that means kicking the deleveraging can down the road,” the company said.
According to VNDirect’s equity sales head Lawrence Heavey, HPG looks rather being oversold, on an Relative Strength Index (RSI) basis, and a potential improvement in US-China trade tension “optics”.
This might be an opportunity to accumulate on weakness. But keep a very close eye on Chinese steel prices.