Dong Nai Plastics (DNP) “swinging” with M&A

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There are many risks ahead with the business of Dong Nai Plastics.

(TCK) Along with the ambition to expand operations through mergers and acquisitions (M&A) is increasing debt and business risks with Dong Nai Plastic Joint Stock Company (code DNP).

The larger the asset, the smaller the profit

The 2021 Annual General Meeting of Shareholders of Dong Nai Plastic Joint Stock Company took place at the end of June and passed this year’s business plan with a combined revenue of VND 5,919 billion, an increase of 180% compared to the implementation level in 2020; profit before tax was VND 25 billion, equal to 76% last year.

Explaining about setting revenue and profit targets in the opposite direction, the leader of Dong Nai Plastic said, “The Covid-19 pandemic continues to be unpredictable worldwide, so the Company calculates its business plan according to The scenario is more conservative than the baseline scenario, in case the situation and evolution of the epidemic is likely to become more complicated and prolonged in Vietnam”.

The cautious scenario is the common scenario set by many businesses, including Dong Nai Plastics, after 19 southern provinces and cities implemented social distancing to prevent the Covid-19 epidemic. However, the plan for revenue to increase sharply, while profit went back made investors question the company’s business performance.

At the end of the first quarter of 2021, the total assets of Dong Nai Plastics reached more than 12,413.8 billion VND, an increase of nearly 27.6% compared to the end of 2020 after consolidating assets with CMC Joint Stock Company (code CVT). . This is the result of the CMC controlling stake purchase that caught the attention of the market in March 2021.

The acquisition of CMC helps Dong Nai Plastic expand its ecosystem to 32 enterprises and makes the Company one of the leading enterprises in the stock market in terms of the number of acquisitions.

From 2013 2013 10 years ago, Dong Nai Plastics’ main business is manufacturing construction plastic pipes and packaging by the method of processing for the European market and trading materials, plastic additives, water supply and drainage accessories. 2014 saw the company’s turning point with the “encroachment” on investment in the production and supply of clean water.

The ROE of Dong Nai Plastics decreased from 10.94% in 2017 to 0.55% in 2020.

Notably, if the expansion of the operation scale helps the Company’s revenue increase sharply, the Company’s business efficiency will decrease gradually.

ROE (return on equity) has fallen from 10.94% in 2017 to 0.55% in 2020, while ROA (return on charter capital) from 2.62% down to just 0.15% by the end of 2020.

In the first quarter of this year, DNP’s earnings per share (EPS) was only 83 dong/share, much lower than the industry average at 1,283 dong/share, while P/E was 236 times.

Big challenge when expanding industry

The financial report of Dong Nai Plastic shows that, at the end of the first quarter of 2021, the Company’s liabilities are VND 8,671 billion, 2.37 times higher than equity, with more than 71% being debt and finance lease.

Nearly 2 years ago, the leader of Dong Nai Plastic once explained that the company’s financial indicators are not “beautiful” because the business is in the stage of promoting activities to expand its operation scale.

However, in the context of the Company’s business situation facing many difficulties due to the impact of the Covid-19 pandemic, the cash flow arrangement, especially when the business still has ambitions to conduct more M&A deals. In the future, it must be a big problem for businesses.

It is worth noting that although Dong Nai Plastic’s short-term assets at the end of the first quarter of 2021 were more than VND 3,489.8 billion, much higher than vnd 2,958.5 billion in short-term liability, the majority of short-term assets were in financial investments, short-term remables and inventories.

Specifically, the Company’s inventory is VND 1,076.6 billion; short-term receivable is 1,116 billion dong. In which, investors pay much attention to the recoverability of short-term receivables, because these are receivables from agents dealing in pipes, plastic, packaging and accessories of the Company. company.

The Covid-19 pandemic has disrupted supply chains, pushed up prices of construction materials rapidly, thereby reducing consumption in the market. The fact that agents are slow to push inventory will greatly affect the progress of collecting money from agents of the Company.

Returning to cmc acquisition, it is estimated that Dong Nai Plastics had to spend nearly VND 1,000 billion to buy more than 51% of the shares of this enterprise (calculated according to CMC’s share price on the floor at the time of announcement of the transaction).

This increases the scale of total assets as well as the scope of business activities of Dong Nai Plastics, but also increases the debt burden of the Company.

However, the ambition to become the No. 1 supplier in Vietnam in the field of building materials after this deal is facing many challenges when a recent report of the Ministry of Construction emphasized that tiles next to Cement and construction glass are 3 items classified as “red alert” when oversupply is happening.

With ceramic tiles, this industry is facing difficulties in the home market when foreign products flood the market but lack strict control on quality and price.

According to the Vietnam Association of Construction Ceramics, currently, Vietnamese tiles exported to ASEAN countries must apply for a certificate of quality of each country, while imported bricks to the domestic market face no barriers, reducing the competitiveness of domestic goods.

Up to now, the total investment capacity of the three industries of cement, ceramic tiles and building glass has approached the target of 2025 according to the Strategy for Development of Building Materials in Vietnam in the 2021 – 2030 period, with orientation to year 2050. Competitive pressure is pushing down the business performance of enterprises in this industry and this is the risk that Dong Nai Plastics faces when acquiring CMC.

DNP Corp’s profit plan of VND25 billion this year is a figure that does not exclude goodwill allocation and amortization when consolidating subsidiaries (according to Vietnamese accounting standards). Therefore, the profit on the Company’s financial statements is likely to be much lower.

Source: – Translated by