SMC and the hit-the-jackpot rumor

One month ago, SMC stock was illiquid and showed almost no fluctuation. Until now, it has been increasing from 14,000 VND to 18,000 VND, approximately 30 percent in price, along with pumped transaction volume. ĐTTC had an interview with Mr. Nguyen Ngoc Anh, SMC’s President cum CEO, discussing about this fascinating change. He shared that:

There may be quite a bundle of attributes for an increased price in the stock market. To my mind, there could be three of them that have been driving the change in SMC stock recently.

First, the stock market was showing positive movements, increased liquidity. First-rate stocks did quite a big surge. Favorable real estate information also adds a boost to family industries such as cement, and steel. SMC has been profitable in recent years despite the fact that the steel industry falls into bottom cyclicality. Its accumulation of products sold and market share gives an assurance to lure investors. Plus, foreign investors are deemed to increasingly purchase SMC stock.
Second, SMC has been keeping an annual cash dividend payout ratio of 15 percent for three to four years. Dividends were paid during financial years and finished right after SMC audited financial statements were released. Couple with the price range of 14,000 VND to 15,000 VND, SMC dividend yield is quite an appeal for investors who appreciate dividend-paying stocks.
Third, it was rumored that SMC “hit the jackpot” after acquiring a contract to provide materials for a huge project in the country’s central areas.
 
Ask: Do you have any ideas regarding the rumor?
SMC signed a steel distribution contract with Hưng Nghiệp Formosa Hà Tĩnh Ltd., owner of Formosa steel factory. After the seeding phase, this project has started to roll out and requires a huge amount of construction materials. It is estimated that SMC will provide 100,000 tons of various types of steel for Formosa.
In the short term, till 2013, each month reports 10,000 tons of steel provided. On the other hand, SMC is also the supplier of construction steel, built up section steel, hot rolled steel for the factory’s other contractors who build offices, worker accommodation.
Within the steel industry, market participants are well aware of others’ business and operations. Thus, it is not surprising that the rumor even spread out before contract signing.
Why didn’t SMC announce Formosa contract right after the signing or release the information at shareholders’ April meeting? Why does SMC pick this time for the annoucement?
From the contract commencement till June, SMC had just supplied Formosa with 7,000 tons of steel, whereas SMC monthly output rests at around 60,000 tons. It is evident that Formosa contribution was not significant with regards to SMC total monthly ouput.
It is forecasted that SMC will provide Formosa with 70,000 tons of steel, which is about 10 percent of SMC’s 2013 output of 650,000 tons. Formosa contract stands a profitable deal, but is not determinative or significant to SMC businesses in terms of qualitative or quantitative criteria. Only after Jun 2013 does the quantity supplied to Formosa climb up, for that reason, this is the right chance for the contract announcement.
One provision that worths mentioning is that SMC and Formosa do not fix the agreed quantity, but rather negotiating it depending on time horizons. Every month, Formosa performs a survey on market steel price and SMC, in response, will propose a level of price that best suits itself.
The announcement is to ensure that investors, especially individual, low net-worth investors could grasp the information in time. SMC investor relationship management unit is also supposed to be responsive to market doubts and rumors and to make timely clarification before supervisory scrutiny. This, again, confirms the transparent and sound investor-and-public relation management of SMC.
 

SMC factory in Quang Minh IZ, Ha Noi

 
In these three recent years, SMC has built one coil center for each year. Is Formosa contract a signal that SMC is heading back to construction steel market?
Absolutely not, this is an evidence for SMC position as a top-rated steel distributor. SMC’s 25-year brand originates from construction steel market, whereas coil centers have just been developed for seven years.
SMC distribution capacity has always been regarded as top-notch by contractors and manufacturers. Regardless of the downturn in real estate and civil engineering market, SMC is capable of a 400,000-ton steel output on average yearly.
Our planned distribution is 425,000 tons this year. It took us four months for Formosa contract negotiation. SMC had to prove financial positions, distribution capability. Plus, we have a little aid as we were distributing Formosa products ten years ago in the South.
With current capacities and advantages, SMC has been granted favorable low-interest credit lines by banks. Had it not maintain the development, a coming-back would not guarantee such comforts
 
- May you reveal SMC business bottom line in April and May when steel industry was still facing challenges?
Having making use of increased steel price, SMC reached a 180,000-ton output, and 45 billion after-tax profit, the best in company history. We are having troubles as steel price dropped in April and May
Decreased price leads to greater pressure on selling to improve cash conversion cycle. In the midst of stiff competition, we register a profit of 5 billion in April and 3 billion in May. This was a great effort of the whole company.
More importantly, just after this year’s first five months, SMC total output marked 300,000 tons, approximately half of yearly plan, and substantially surpassing last year’s figure (of 225,000 tons). Construction steel, particularly speaking, had seen a 210,000-ton output for the first five months of 2013. In these recent two months, commercial firms reportedly have reduced inventory and worldwide steel manufacturers also cut off their production.
 
Thank you for the discussion
Thai Ca (ĐTTC)
 
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