BMI View: The poor business climate for cement in Vietnam has exposed the structural weaknesses in the country's cement market, namely excess capacity and low export levels. We believe that there will be some attempt to resolve these weaknesses in 2013 such as accelerating the retirement of older cement plants and increasing cement exports. We do not however expect significant consolidation to take place among Vietnamese cement companies as these companies continue to enjoy comfortable margins.
The cement sector in Vietnam has had a tough year in 2012. According to data from the Vietnam General Statistics Office, cement volumes in the country had contracted by 4.3% year-on-year (y-o-y) in 2012, the first time since 2005. Poor export activity (a key driver of non-residential building activity), a real estate market in significant oversupply and a fall in infrastructure investment have all contributed to a decline in the demand for cement in Vietnam ( see our online service, January 15 2013, ' Construction Recovery Continues Amidst Tenuous Times ' ).
|Off Its Peak|
|Vietnam - Cement Volumes Data|
This poor business climate for cement has affected cement sales for Vietnamese companies. According to the Vietnam Cement Association (VCA), cement sales in Vietnam fall by 3.5% y-o-y to reach 54mn tonnes in 2012. This has in turn affected the financial performance of Vietnam's cement companies, with almost all of the major Vietnamese cement companies listed in the Ho Chi Minh City Stock Exchange suffering a sharp decline in operating profits in FY2012.
Beside poor domestic demand for cement, we believe that structural weaknesses in Vietnam's cement sector had also led to this poor financial performance by t he country's cement companies.
The fragmented nature of Vietnam's cement market had allowed excessive investment to take place over the past decade. The sector used to be monopolised by the state-owned company, Vietnam Cement Industry Corporation (VICEM), but a move by the government to liberalise the market since the 1990s has seen the entry of several private companies or joint-stock companies that are typically owned by VICEM and multinational companies. As a result, the sector has become significantly fragmented, consisting of numerous small-scale players. In a bid to gain market share and meet strong demand - construction real growth in Vietnam averaged 9.8% per annum between 2001 and 2010 - these small-scale players had aggressively expanded their production capacity. We estimate that Vietnam's total cement production capacity is just over 70mn tonnes in 2012, placing the country close to being one of the top ten largest cement market in the world even though the country's nominal GDP is barely top 60 in the world.
|Countries Listed By Cement Production, 2012e, mn tonnes (LHS)|
This unchecked increase in capacity led to a massive oversupply in cement as the construction sector entered into a downward cyclical phase in 2011 and much of 2012. According to data from VCA, cement consumption in Vietnam was only 45mn tonnes in 2012, compared to a total cement production capacity of over 70mn tonnes. This combination of excess production capacity and falling domestic consumption left cement companies with high levels of inventories, prompting them to engage in aggressive price cuts to sell their cement stock.
A Better 2013
As we move into 2013, we expect Vietnamese cement companies to continue to look to draw down their inventories. The government is seeking to boost economic growth in 2013 and has carried out interest rate cuts to bring the rates to its lowest in a year. This should be favourable for cement demand as not only would Vietnamese companies benefit from a lower cost of capital, making them more inclined to take up new projects or carry out capital-intensive construction works , but municipal and provincial governments could also find the necessary financing for their infrastructure plans.
|Monetary Conditions Conducive|
|Vietnam - Policy Rate, % & Headline CPI - Housing & Construction Materials, % y-o-y|
We also expect Vietnamese cement companies to seek other markets for their cement stocks. Many of its neighbouring countries such as the Philippines and Thailand are carrying out large-scale construction plans and are already facing shortages in building materials. This trend is already unfolding, though we note that infrastructure impediments in the port sector could curb the country's ability to increase cement exports. According to data from the VCA, cement and clinker exports rose by 30% in 2012 to reach 8.5mn tonnes.
|Vietnam - Cement Production Forecasts|
Despite the difficulties facing Vietnamese cement sector, we do not expect significant consolidation among the companies. This is because margins for these companies are still relatively positive and above regional peers. For example, Siam Cement , one of the largest building material producers in South East Asia, had an operating margin of 4.3% in FY 2012, while the average operating margin for Vietnamese cement companies listed in the Ho Chi Minh City Stock Exchange was more than 15% in the same year. Instead, we could see older cement production plants be allowed to retire at an earlier date.
Overall, we expect cement production to achieve decent growth in 2013 and this is reflected in our forecasts. We are forecasting cement production to grow by 5.6% in 2013.
|Latest FY Results||Market Cap (US$)||Revenue Growth (% y-o-y)||Operating Profit Growth (% y-o-y)||Operating Margin, %||Net Debt/Equity, %||Interest Coverage Ratio|
|NA = Not Available. *Net Profit Exchange rates accurate as of 15/02/2013. Source: Annual Reports, Bloomberg, BMI|
|BECAMEX ASPHALT AND CONCRETE||12/2012||13.2||12.2||4.8||16.5||-16.0||NA|
|BIM SON CEMENT||12/2012||23.9||7.0||-15.1||13.8||326.8||1.3|
|BINH DUONG MINERALS & CONST*||12/2012||17.1||2.8||-19.8||20.4||-20.0||NA|
|BUT SON CEMENT||12/2012||20.9||-4.4||NA||-95.7||NA||NA|
|HATIEN 1 CEMENT||12/2012||50.4||10.3||-18.1||14.4||527.2||1.0|
|HOANG MAI CEMENT||12/2012||22.3||8.1||-12.5||14.9||86.3||2.2|
|NUI NHO STONE||12/2012||17.1||0.1||-20.6||29.9||-64.0||NA|
|VINACONEX ADVANCED COMPOUND*||12/2012||23.9||8.4||NA||NA||NA||NA|