Rising costs cast doubt on wood companies growth prospects

June, 29/2022 - 09:14

As wood export turnover is rebounding with rising demand in the domestic market, the revenues of wood enterprises are expected to advance. 

Inside a wood production line of Trường Thành Furniture Corporation. — Photo truongthanh.com

HÀ NỘI —  As wood export turnover is rebounding with rising demand in the domestic market, the revenues of wood enterprises are expected to advance. 

However, skyrocketing prices of raw materials and logistics costs will weigh on these companies’ gross profit margin in 2022.

VNDIRECT Securities Corporation (VNDIRECT) estimated that the total revenue of listed wood and wood products companies in the first quarter (Q1) of 2022 rose by 10.2 per cent year-on-year thanks to the recovery of wood producers in the south.

After the social distancing order was lifted, most wood companies in the southern region resumed operations at 90 per cent capacity in the first quarter of 2022, while in the second half of 2021 it was only 60-65 per cent.

The export wood enterprises achieved better business results in Q1 of 2022. Specifically, Trường Thành Furniture Corporation (HoSE: TTF) and Phú Tài JSC (HoSE: PTB) witnessed impressive growth during the period, mainly boosted by strong demand from US customers and high inventories in Q4 of 2021.

Financial statements showed that net revenues of Trường Thành and Phú Tài reached VNĐ537.5 billion (US$23 million) and VNĐ1.72 trillion, respectively up 71.8 per cent and 22.5 per cent over last year.  

An Cường Wood - Working JSC (UPCoM: ACG)’s net revenue and net profit in Q1 of 2022 climbed 8.7 per cent and 18.7 per cent on-year, respectively, thanks to gains in export revenue and declines in selling costs.

Meanwhile, domestic wood producers such as Vinafor (HNX: VIF) and GEWOODCO (UPCoM: MDF) posted negative growth, due to high input materials and rising competitive pressure from the wood plank segment as other businesses continuously expanded capacity during the 2021-22 period.

Nevertheless, there is a common factor among wood industry businesses, that is whether their revenue increases or decreases, the gross profit margin of most companies declined in 2022 due to higher input materials and logistics costs.

Of which, the gross profit margin of the wood segment of Phú Tài dropped 1.4 percentage points compared to the same period in 2021, to 21.3 per cent, because the prices of imported sawn pine and round pine rose 52 per cent and 38 per cent respectively. The increase in wood prices is due to the impact of the Russia-Ukraine conflict and high logistics costs.

The gross profit margin of GEWOODCO also slid 6.2 percentage points during the same period, due to a 20 per cent gain in input wood prices since January 15.

Higher demand but costs soar

Market research and consulting firm Grand View Research forecast that the US wooden furniture market value would grow by around 7.9 per cent in the five years from 2022 to 2027, driven by significant growth in single-family houses, while home loans in the US are at the highest level since 2018, with home loan contracts up 8 per cent over last year in April.

Analysts expected that high demand for housing in the US would boost the purchase of wooden furniture products in 2022-2023.

The timber industry is also said to benefit from China's reduction in production capacity. 

Despite countries around the world easing COVID measures, China continued to pursue the zero COVID policy with prolonged lockdowns in many areas such as Jiangsu, Jilin, Guangdong and Shanghai. Three of the ten largest wood manufacturers in China have had to close factories in Shanghai and Jiangsu due to the impact of COVID-19.

Experts believe that the policy will promote the shift of orders to Việt Nam. Currently, China is still Việt Nam's main competitor in the US furniture market, accounting for 22.5 per cent of the US wood furniture import value in 2021.

VNDIRECT expected that enterprises with a large proportion of wooden furniture exports to the US, such as Phú Tài, Trường Thành and Nam Hoà Trading & Production Corporation, would have advantages over others. 

Moreover, demand in the domestic market might also recover thanks to the return from the residential real estate market.

The securities firm forecast that the real estate market would witness a recovery in the supply side in 2022, as developers would focus on boosting sales to improve cash flow. This was reflected in the prospects of strong growth in sales of listed real estate companies this year.

Even though there are many advantages to revenue growth, higher prices of raw materials add pressure on the gross profit margin of enterprises in 2022. 

The ban on exporting logs to European countries and the US by the Russian Government has tightened the global raw materials supply, leading to soaring prices.

According to financial website Trading Economics, the price of lumber in the US advanced 25 per cent in Q1 to $1,412 a board foot. The gross profit margin of most wood and furniture companies was reduced in Q1 due to high input materials and post-logistics costs.

VNDIRECT believed that the gross profit margin of wood and furniture companies in 2022 would be affected, as the supply shortage would continue to push up the price of wood materials. This year, the gross profit margin of wood and furniture companies would continue to fall 0.4-0.6 percentage points, VNDIRECT said.  

Container shipping costs have increased from $1,500 per 40ft container (Shanghai-Los Angeles route) in July 2019 to nearly $8,852 per 40ft container in March, six times higher over the last five years.

Although transportation costs have shown signs of cooling down in April, down 10 per cent from the previous month, the securities company still expected that logistics costs would remain at a high level, approximately $7,000 per 40ft container in 2022 due to current high oil prices.

"High logistics costs may affect the gross profit margin of wood and furniture companies in 2022”, said VNDIRECT. — VNS