Quang Ngai Sugar Join Stock Company (UPCOM: QNS) owns five strategic business units: QNS Sugarcane planting, manufacturing and trading; Dung Quat beer manufacturing and trading; Thach Bich beverages & mineral water manufacturing and trading; Biscafun confectionery manufacturing and trading; Vinasoy soymilk planting, manufacturing and trading & other auxiliary units for a complete value chains. (malt manufacturing, mechanical engineering, water solution treatments, sugarcane & soya seedlings etc.)
I. Favorable Business Nature
(1) Brand moats have expanded:
- A diversified product portfolio under the brand Fami & Vinasoy accounts for ~85% Vietnam soymilk market share or an annual volume of 300 million liters. (By end 2016, each Vietnamese consumes average 3.9 soymilk liter per year. By 2020, CAGR Vietnam soymilk consumption is approximately 15% per year, equal 6.7 liter per capita and Vinasoy is expected to keep its market leader position and its volume could be reached 480 million liters per year).
- For local markets: Dung Quat beer, Thach Bich mineral waters and Biscafun
confectionery brands are well-known among local consumers (Central provincial Quang Ngai, Binh Dinh, Danang, Quang Nam), of which Dung Quat beer holds firm 70% market share in Quang Ngai (1.3 million population) with consumed 75 million beer liters per year (90% consumed in Quang Ngai market) and Thach Bich mineral water volume is stable at 80 million liters each year. However, these brands are less favorable compared to Vinasoy due to mature markets and compete fiercely with other brands in their fields.
(2) Sugarcane manufacturing reaches economy of scale driving costs down and is the best class in Vietnam: 55-60 thousands of planting hectares with sugarcane yield 75-80 tons/ha (highest in Vietnam thanks to large sample fields accumulation in Highland Gia Lai and modern agricultural technology application). Total commercial sugar volume could reach 365k MT/year (~15-20% total Vietnam sugar market share). Bagasse byproduct is taken advantage for biomass electricity manufacturing with capacity of 110mW.
(3) Thach Bich mineral water is famous for its quality and is obtained exclusively
from mineral waters mines in Tra Bong, Quang Ngai province – a unique resource ownership.
(4) Advantages of distribution network in FMCG sectors for Vinasoy milk (156 exclusive distributors with 142,000 selling points – among the top In Vietnam, only behind Vinamilk, Unilever, Masan etc. , Thach Bich mineral water (128 exclusive distributors with 3,700 selling points) and Dung Quat beer (60 exclusive distributors with 4,500 selling points).
(5) A gradually complete value chain by securing soya seedlings area guarantees qualified non-GMO local soya raw materials which the company has conducted R&D for many years. Other competitors cannot reach this level due to slowness, smaller market shares & lack of product concentration.
(6) Bigger unbeaten R&D budget for a better gain on Vietnamese consumer insights and serving them with a more expanding & innovative Vinasoy product portfolio.
With these favorable advantages, the company’s ROIC is always higher than 40%, cash conversion cycle circa 30-35 days (very healthy among Vietnam FMCG sector) and a healthy balance sheet with equity multiplier around 2.0x during the period 2011-2016 and coming years remaining it status.
(1) Sugarcane unit: assumed stable volume 365k MT/year, normalized selling price at 650 U$D/MT (ignoring commodity price’s volatility) & net margin circa 3.5-5% (popular in this sector in Vietnam), earnings could feasibly reach 10 million U$D per year.
(2) Biomass electricity unit: assumed stable capacity 110mW, normalized electricity price at 0.053U$D/kWh (secured by government guarantee scheme) & net margin in circa 30% as company expects, earnings could be 5.7 million U$D per year.
(3) Beer unit: assumed stable volume 75 million beer liters/year, normalized selling price at 0.6U$D/liter as reported & net margin ~14% (average in the Vietnam beer sector), net profit is at 6.4 million U$D per year.
(4) Beverages & mineral water unit: assumed stable volume 80 million liter/year, normalized selling price at 0,3U$D/liter as report & net margin ~6% (popular among Vietnam mineral water segment), earnings could be 1.5 million U$D/year.
(5) Confectionery unit: assumed stable volume 7.6k ton/year as 2016, normalized selling price at 2,700 U$D/ton & net margin 6%, earnings could be 1.3 million U$D per year.
(6) Soymilk unit: assumed 480 million liters/year,0.6U$D/liter & net margin 25% thanks to economy of scale & brand &exclusive non-GMO input security, soymilk could contribute at least 72 million U$D/year, not to mention better gross margin following by higher net margin and higher price thanks to strengthened and leading brand & cost control and exports.
Total earnings could reach ~97 million U$D/year, of which mainly sugarcane related activities (sugar & biomass electricity) contribute ~16.2%; 6.6% by beer & 74% – the largest by soymilk.
Assumed P/E for fair valuation is in the range of 12-16x,intrinsic value could be in the range 1,164-1,552 million U$D. (Preferred P/CF ratio is not used due to lack of sufficient data in each unit reporting; P/E ratio instead.)
Current valuation as of 14 December 2017 is 678mil U$D, therefore, upside potential is ~170-230% in the long run.
3. Parties involved in buying & selling QNS stocks
- Currently there are approximate 3,000 shareholders, of which ~77.7% individuals (mostly BOD, BOM, employees & their relatives). The rest 22.3% belongs to institutional shareholders. This favorable ownership makes QNS stocks liquid for buying and holding at favorable mispriced valuation. Strategic business units are not reported independently for investors to evaluate which ones are performing well whilst others are lagging behind or have any problems; therefore not all investors/shareholders could analyze fairly accurate whole business as well as every units.
- Besides, BOD & BOM have been issued shares continuously each year for Employees Stock Ownership Program (ESOP) to which independent investors cannot evaluate this scheme’s fairness. Especially, 2017 business plan beholds sales growth 5.7% to 322 million U$D while net profit slumps abruptly 87% to only 8 million U$D without any explanation while continuing offering ESOP.
- BOD & BOM have been sticking with the business since it was still under the Soviet planning-oriented impact and almost got old for retirement which investors question the rationality of capital employing to which extent and whether they are running any units just because for other reasons such as local laboring, political issues even its economic nature is deteriorating or very bad?
Since BOD & BOM keep buying more shares even expected bad year, my concern regard corporate governance is less impacted by acting the same action like what they are doing. There are more things to do in this domain, especially independent board member(s).