Digiworld : SSI updated report on DGW – Target price VND 19,818

Digiworld Corporation (DGW: HOSE): New products to possibly restore growth in 2017

Outstanding shares: 40 mil; Market Cap: USD 31 mil; Average trading value 3M: USD 0.11 mil, Market price: VND 18,050; and Foreign ownership: 11.4%

IT Analyst: Kien Trung Nguyen, CFA,[e-mail]

2016 review

DGW posted revenue and net profit of VND 3,801bn (-9.6% YoY) and VND 67.4bn (-35% YoY). Sales declined mostly due to the fact that DGW no longer had revenue from Nokia/Microsoft phones in 2016. In 2015, Nokia/Microsoft sales was VND 880bn but declined to zero in 2016. However, selling expense/sales increased from 1.5% in 2015 to 2.6% in 2016, lowering net profit margin by 0.7% in 2016. In 4Q16, DGW started to recruit and conducted market research on new healthcare products to distribute and booked significant selling expense.

Segments' revenue	2016 (mn VND)	YoY growth
Laptops and tablets	2,169,830	-2.57%
Mobile phones	1,071,893	-30.16%
Office Equipment	560,324	25.92%

Source: DGW

In line with the whole market, the laptop and tablet segment revenue declined slightly in 2016. In 2016, the PC market declined by 7% YoY in terms of value.

Sales of phones (including iPhone, OBI, Wiko and Intex, Lenovo) experienced negative growth in the absence of Nokia phones. While most brands gained small market shares in Vietnam, DGW cooperated with MobiFone to sell iPhones through MobiFone stores but failed to compete against big retailers like thegiodidong.com (MWG: HSX) and FPTSHOP.com (FPT Retail).

Office equipment continued to post positive growth in 2016 thanks to continuous expansion to new software and hardware products.

Outlook

ICT distribution: According to BMI, the PC market will grow from USD 1.4bn in 2016 to USD 1.7bn in 2020 which implies a compound annual growth rate (CAGR) of +4.1%. After PC sales declined during 2014-2016 as smartphones overwhelmed demand, they expect normalization based on demand for the additional functionalities offered by notebooks and with support from rising incomes.

Mobile phones: At the moment, DWG accounts for only 2% of the mobile market (which is VND 70K bn in 2016). The mobile market is expected to grow at a lower rate in 2017 but maintaining double digit growth in terms of value. The reason behind the subdued market share of DGW is that the company doesn't have key customers like PSD (Samsung) or FTG (iPhone).

Since 15 March, 2017, DGW started to distribute Xiaomi phones in Vietnam. Xiaomi is the top 6 mobile manufacturer in the world after Apple, Samsung, Oppo, Huawei and Vivo and is sold in 20 countries. Xiaomi sold more than 40mn phones in 2016. Xiaomi was quite successful in its homeland and India where it needed only two years to gain 11% market share, ranked second after Samsung. Sales of Xiaomi actually declined from 70mn phones in 2015 as it focuses mainly on online sales and did not spend much on marketing.

Besides phones, Xiaomi provides various ICT products like TV, smart devices and ecosystem products. However, it targets to launch several mobile phone products, accessories and wearable smart devices in Vietnam first. Xiaomi Phone focuses on design with the most updated technology and at competitive prices, which is different from Oppo who focuses on entertainment features but the price is more expensive (due to heavy marketing expense).

As the exclusive distributor for Xiaomi in Vietnam, DGW will look to unlock potential growth in the coming years. Xiaomi is acutely different from the current portfolio of DGW like OBI, Intex or Lenovo.

Besides, DGW will start to distribute LG phones in 2017. We expect that Xiaomi and LG will acquire market share from Samsung, the leading player in Vietnam.

Office Equipment: We expect the segment will grow at 10% p.a. in the next 3 years.

New products: DGW is going to distribute a supplement product in 2017. The project will be launched in 2Q17 but no detail has been disclosed. According to the company, based on the increasing number of middle income class, demand for healthcare is increasing and the market size is huge. The market is still fragmented. The company is going to announce more details on the plan in the upcoming analyst meeting in late March 2017.

Forecast

DGW's sales by segment (VND mn)

Source: SSI estimates

2017 & 2018 estimates

We forecast that the PC segment's sales will grow steadily by 3% YoY to 2019, while OE will maintain at 10% in terms of annual revenue growth. However, phones sales can grow by 15% YoY in 2017 but 50% YoY in 2018 when Xiaomi starts to launch more products (Phone accessories, TVs, wifi routers…) in Vietnam. We estimate that in the next 3 years, Xiaomi will account for at least 3% of the market share in Vietnam (in which sales might reach VND 2tn).

In 2017, we expect sales and net profit might increase by 10% YoY and 20% YoY to VND 4,201bn and VND 81bn. In 2018, we assume stronger growth as Xiaomi contributes more to DGW's phone sales. We expect in 2018, sales and net profit might reach VND 4,899bn (+16.6% YoY) and VND 98bn (20.6% YoY). EPS is expected to reach VND 2,044 and VND 2,466 in 2017 and 2018, respectively.

Investment view

At the current price of VND 17,500/share, DGW is trading at 2017 and 2018 PE and PB of 8.6x and 7.1x, and 0.9x and 0.8x. Although DGW is trading at higher PE than PSD (PE and PB of 6.2x and 1.6x respectively), it is trading at a discount to its book value. As the company is looking for new products to grow, we expect that it desires PE and PB of 9x and 1.2x. However, as the price is very sensitive to the earnings, we put a higher weight for PE method in our valuation model.

		Fair price (VND)	Weight	Weighted fair price (VND)
PE	9x	18,396	70%	12,877.2
PB	1.2x	23,135	30%	6,940.5
Fair price				VND 19,818/share

We set a 1Y target price of DGW at VND 19,818/share, or 13.3% upside and recommend HOLD for the stock.