GKM: Company visit – New product shift to lift profit margin?

What’s new?

• We spoke with management at GKM, which is moving from bricks into higher margin quartz-based engineered stone.
• The company plans VND 50 bn of debt financing in 2H20 to double its engineered stone capacity to 250,000 sqm.
• GKM guides for consolidated FY2020 PAT of VND16.2bn, a five-fold increase YoY.

Our view

• The global quartz market should post volume CAGR of 5.5% in 2018-2021, thus delivering stronger volume growth than that of alternatives products.
• Capacity expansion may result in increased leverage. FY2020E net debt/equity may double to 61% as a result.
• Trailing valuations appear high, but 2019 financials do not reflect the product shift.

Penetrating into high margin quartz-based engineered stone. GKM’s new products to be launched in March 2020 target natural stone replacement and luxury interiors in the domestic market. According to management, the new products are 50% cheaper than alternative natural stone, but gross margin should be about 50% with net margin of 20%.

Expanding production capacity. The new production line has annual capacity of 120k sqm. Total investment is VND 150bn, of which VND 30bn is funded with debt. Management states that the breakeven point is 40k sqm. The company plans a VND 50bn debt financing in 2H20 for a second production line that would double its annual capacity to 250k sqm. FY2020E net debt/equity may double to 61% as a result.

Y2019 PATMI declined by 32% YoY to VND 3.1bn despite a 12.7% YoY increase in revenue to VND 143bn. However, unheated bricks generated just 16.7% gross margin and 2.2% net margin due to intense competition in traditional products. The YoY PATMI decline was also partially due to the 43% YoY increase in SG&A to VND 13.8bn, which was attributable to its expansion into the stone business.

Company guidance. Management expects quartz-based products to generate VND70bn in revenue and VND9bn in PAT in 2020. GKM guides for consolidated FY2020 PAT of VND16.2bn, a five-fold increase YoY. Looking forward, management forecasts PAT of VND51.9bn in 2022, equivalent to 77% CAGR in 2020-22.

Our view. According to US researcher Freedonia, the global quartz market should post volume CAGR of 5.5% in 2018-202, thus delivering stronger volume growth than solid surface (2.9%), laminates (1.5%), and natural stone (2.2%). However, revenue contribution from the new products to GKM’s FY2019 income statement was low, which explains the stock’s apparently rich valuation of 75x TTM PE and 1.4x 2019 P/B.

For the complete report, please access here: GKM Company Visit note

Analyst: Binh Truong, binh.truong@yuanta.com.vn