We attended HSG’s FY2025 AGM held on March 18, 2025. Below are our key takeaways:

For FY2025, HSG guides for two scenarios, both of which envision a YoY decline in revenue and NPAT-MI, which management attributes to (1) protectionism in export markets, (2) competition from Chinese steel, and (3) slow demand growth. HSG believes these factors will lead to a slowdown in exports in FY2025F. We note that exports accounted for ~60% of HSG’s total sales volume in 2024. In the domestic market, demand is challenged by the over-supply situation in the galvanized steel market (with capacity 3x larger than domestic demand, per HSG’s Chairman).

HSG’s Chairman also shed some light on exports challenges to the US and EU:

The US:

- Subject to a 25% tariff since 2018 (President Trump’s first administration).

- Countervailing duties investigation: For the preliminary result, HSG faces 0%, while other Vietnamese manufacturers face higher preliminary tariffs. The final result will be available in mid-June 2025.

- Anti-dumping investigation: The investigation is on-going, awaiting the preliminary tariff decision. The preliminary AD tariff decision is expected by early April 2025.

- Nevertheless, we see these investigations negatively affecting buyer sentiment due to fear of retrospective duties (if applied). Therefore, exports to the US are currently difficult.

- Previously, HSG exported 10-20k tonnes/month to the US, accounting for ~10-20% of its total exports.

EU:

- HSG will be hit by the EU’s new quota on galvanized steel from Vietnam, effective from April 2025.

- Previously, HSG exported 20-30k tonnes/month to the EU (accounted for ~25-35% of its total exports). 

HSG’s FY2025G guidance

Source: HSG, Vietcap

2. Focusing on developing Hoa Sen Home as a new growth driver for HSG

- In response to external challenges, HSG is prioritizing the expansion of Hoa Sen Home (HSH), starting from 2025F. HSH currently functions as HSG’s construction materials and interior distribution network. 

- In the future, HSG aims to make HSH become Vietnam’s largest Construction materials & Interior supermarket chain. It will serve as a one-stop shop, offering:

• HSG’s traditional products (galvanized steel sheets, pipes, plastic pipes).
• Products from other reputable construction materials/furniture brands.
• HSH-branded products (water, kitchen, sanitary equipment, furniture, etc.).

- We classify the later two categories as non-traditional. 

- Currently, HSG products make up 98% of HSH sales; the goal is to diversify into non-traditional products to improve margins. This is in line with the trend seen in successful cases in Thailand (HomePro, Thaiwatsadu), Indonesia (Depo Bangunan), and the US (Home Depot).

- Business model & store format

• HSH operates under both distribution (B2B) and retail (B2C) models.
• Unlike traditional distribution stores, HSH integrates a warehouse-style space for heavy materials like steel alongside a supermarket-style area for other construction materials and equipment.
• Store sizes range from 1,200m² to 5,000m², with plans for larger stores (10,000-12,000m²), following the success of the above-listed companies

 - Store expansion plan

• Current store count: 120 HSH stores + more than 280 traditional showrooms (400+ total)
• Target: Increase from 120 stores in 2024 to 300 stores in 2030 (adding 25-30 stores/year)

- Revenue & market growth

• Revenue projected to grow at a 16.3% CAGR (2024-2030), from VND13.3tn (USD522mn) in 2024 to VND33tn (USD1.3bn)in 2030, primarily driven by non-traditional product expansion.
• Distribution and retail typically achieve 13%-30% GPM, significantly higher than manufacturers (8-13%).
• Per PwC (HSG’s advisor), Vietnam’s construction materials (conmat) market has substantial growth potential:
  • Conmat spending per capita: Vietnam (USD89) vs. Thailand (USD149), Indonesia (USD106), China (USD279), US (USD1,207)
  • Market size is expected to grow at an 11% CAGR (2024-2033) from USD8.9bn to USD22.4bn
  • 65-70% of B2C customers are open to a supermarket format for purchasing construction materials, per PwC’s survey.

 3. Group restructuring plan

a. Establish Hoa Sen Home JSC – a separate entity to take over the Hoa Sen Home chain. 

- Hoa Sen Home chain is the construction materials and interior distribution network of HSG. 

- HSG plans to establish Hoa Sen Home JSC during 2025-2026. 

- Over the next five years, HSG will gradually transfer all assets related to the distribution network to Hoa Sen Home JSC. 

- The new company will focus on stabilizing operations and achieving profitability for the network. 

-  Ownership: Initially, HSG will hold 99%+ ownership of Hoa Sen Home JSC. In the further future, if market conditions are favourable, HSG plans for a public listing of Hoa Sen Home JSC. Its ownership in the company will drop below 50%, making Hoa Sen Home JSC an affiliate company of HSG.

-  Establishing a separate entity for HSH will:

• Enhance operational efficiency
• Specialize in distribution and retail, eliminating integration with the parent company
• Improve HSG’s valuation: According to PwC, manufacturers typically have a P/E ratio of 8x-13x (5-6x for galvanized steel producers, per the Chairman), significantly lower than the 20-30x range for distribution and retail chains. Currently, the Chairman believes HSH is value at multiples comparable to the mother company because it is owned and operated by HSG, which has low valuations due to its nature as a commodity company.

-  The main challenge for establishing a chain like this is high capital requirement. However, HSG’s strong balance sheet, with low short-term debt and no long-term debt, mitigates this risk. HSG benefits from favorable interest rates (3%-3.6%) and has an unused credit line exceeding VND10tn (USD392.2mn), ensuring sufficient liquidity for expansion.

 b. Proposal for private placement of Hoa Sen Plastics JSC (HSN) to strategic investors:

-  HSN is currently a subsidiary of HSG with 99%+ ownership, focusing on selling HSG-made plastic pipes (similar to BMP’s and NTP’s products).

Rationale for the issuance:

-  HSG currently wants to focus on investing in capex for the Hoa Sen Home chain, which necessitates the need for raising capital for HSN.

-  However, the plastic industry’s growth has reached its peak, and market liquidity for plastic stocks remains low, per HSG’s advisor.

-  Therefore, they consider private placement for HSN.

Details on the issuance:

-  Current shares oustanding: 30mn

-  New shares to be issued: 35mn

-  Issuance price: N/A

-  HSG’s ownership in HSN: Will decrease to below 50% post-issuance. HSN therefore will then become HSG’s affiliate company

 4. Share buyback proposal:

- HSG proposes for a share buyback plan of 50-100mn shares (8-16% of current outstanding shares). The ratio could increase to 30%, as permitted by Vietnamese Corporate Law.

-  Based on HSG’s proposal to repurchase 50-100mn shares at current market price of VND18,300/share, the buyback would require VND950bn - VND1.9tn (USD37.3mn – USD74.5mn), vs HSG’s latest quarter net-debt position of VND4.9tn. Therefore, we think this plan, if implemented, is likely to be partially implemented when the stock price is at deep discount.

 5. FY2024 earnings distribution plan:

-  Cash dividend: VND500/share - lower vs our forecast of VND800/share

-  Management remuneration: 1.5% of consolidated NPAT – similar to the previous year

-  Reward & Human resource development fund: max 2% of consolidated NPAT – similar to the previous year

-  Bonus & welfare fund: max 2% of consolidated NPAT – similar to the previous year

-  Charity fund: max 4% of consolidated NPAT – similar to the previous year

 6. Others:

-  Q1 FY2025 NPAT-MI likely to be VND100bn (USD3.9mn; -40% QoQ; -68% YoY), making H1 FY2025 NPAT-MI reach VND266bn (USD10.4mn; -37% YoY; 53% of the best-case guidance; 23% of our forecast).

-  Input Sourcing: Primarily domestic (Formosa, HPG) with imports from Japan, India, Indonesia, Malaysia, Taiwan, South Korea.

-  FX exposure: Minimal risk; HSG generates ~USD600-700mn revenue from exports while spending ~USD200mn on input costs. No USD debt.

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