INITIATION COVERAGE: BUY

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1 RANG DONG LIGHT SOURCE & VACUUM FLASK JOINT STOCK COMPANY (RAL) June 9, 2017 INITIATION COVERAGE: BUY Current price (08/06/17) VND 125,000 Long term value Undervalued Intrinsic value: VND 150,500 Bloomberg ticker: RAL VN Exchange: HSX Industry: Consumer 52 w high/low (VND) 133,000 / 73,000 Outstanding shares (million) 11.5 Market Cap (VND bn) Free float (mn shares) 11.5 Foreign-owned Ratio (%) 6.7% RAL VN Peers Index VNIndex EPS (VND) 2018 VPBS forecast 17, VPBS forecast 16, , , F 2018F CAGR VND bn VND bn Revenue 9.4% 3,300 3,708 Net profit 3.7% Indicators (12m Trailing) RAL Peers VNI P/E P/B EV/EBITDA 6.4 7,5 11,5 Debt/ Equity Net profit margin 5.5% 8.67% 8.93% ROA 7.1% 7.32% 2.4% ROE 25.1% 13.14% 14.02% Company description: RAL is the leading manufacturer in the lighting and thermos flask industry in Vietnam, with its long-standing brand name and extensive sales network in 64 provinces. The company s headquarters are at Ha Dinh Street, Thanh Xuan Trung Ward, Thanh Xuan District, Hanoi. Business activities: Manufacturing and trading lamp products, electrical equipment, lighting equipment, glass products, and thermos flasks. Q1/2017 results: Total assets: VND2,083 billion (USD92.0 million); Equity: VND664 billion (USD29.3 million); Net sales: VND879 billion (USD38.8 million), up eight percent y-o-y; Net profit: VND48.1 billion (USD2.12 million), up 72 percent y-o-y /16 08/16 09/16 11/16 01/17 03/17 05/17 In our initiating coverage, we give a BUY recommendation for RAL with a target price of VND150,500 per share within the next 12 months due to the following: RAL is a leading company in the production and trade of light bulbs and thermos flasks, with a long-standing brand name and large market share in Vietnam. Unlike its main competitor DQC, RAL has an R&D center to develop products that meet market demand for diverse high-quality products, which enhances RAL's potential competitiveness with both its local and foreign competitors. DQC is also facing major difficulties as its senior management, related to the Ministry of Industry and Trade, are under investigation regarding their assets. Q1/2017 results increased significantly, with net sales up eight percent y-o-y and net profit up 72 percent y-o-y. The main reason was growth in the LED segment which has higher profit margins. Q1/2017 gross profit margin was 20.9 percent compared with 15.7 percent in Q1 last year and 20.5 percent in Prospects for 2017: The plan approved at the General Shareholders Meeting is for revenue of VND3.056 billion (USD135,000) (up four percent) and pretax profit of VND170 billion (USD7.51 million). However, we note that in the last five years, the company's business results and profitability have mostly exceeded their targets, particularly profitability which has consistently outperformed the plan by between 37 percent and 110 percent. VPBS forecasts that RAL's sales will reach VND3,300 billion (USD146 million) for 2017, up 12.3 percent y-o-y, with profit after tax of VND185 billion (USD8.17 million), equivalent to growth 25.9 percent over last year. Stable financial growth: RAL has grown steadily in recent years,, with CAGR of sales for of 7.4 percent, and CAGR of profit of 14.6 percent. Investment plan to increase market share: In , total investment is expected to reach VND520 billion (USD23.0 million), with total investment in 2017 alone of approximately VND100 billion (USD4.42 million). RAL's cooperation with Samsung to develop LED products allows it to use the Samsung brand name on its products, which improves its brand image in quality and technological competitiveness. Page 1

2 OVERVIEW OF INDUSTRY & COMPANY CHANGING TRENDS LED LIGHTING TAKING OVER According to manufacturers, the market for lighting equipment in Vietnam comprises 60 percent domestic and 40 percent foreign goods, with the civil lighting equipment market mostly belonging to local enterprises. The lighting market is divided into distinct segments. China dominates the low-end segment with low-cost fluorescent lamps and LEDs. Local companies have a large market share in the mid-range segment, but they are also competing with brands from Germany, Netherlands and the USA. In this segment, with products mostly being compact and fluorescent lamps, there is fierce competition between three enterprises Dien Quang, Rang Dong, and Philips together with products imported from China. The changing composition of the Lighting Market Source: BCG Lighting-Market Model Services LED luminaires LED lamps Lighting systems Conventional luminaires Conventional lamps Backlight Automotive lighting The structure of the industry is changing, with LEDs replacing traditional bulbs. In the high-end segment, with the rise of high-tech and smart cities, the market for lighting has been shifting to LED-based solutions, replacing compact fluorescent transmitters. LED consumption has grown at a rate of over 210 percent per year over the past five years and has become a trending product in Southeast Asia. According to the Ministry of Information and Communications, Vietnamese households could save percent of their annual electricity costs if they switch to using LED bulbs. Although the price of LED bulbs are two to three times higher, they have three times longer life than compact bulbs of equivalent brightness and are about six times as energyefficient. LED bulbs are made from plastic and aluminum, which are more durable materials and last much longer than compact bulbs which are made of glass. There are also other advantages such as flexible design, soothing tone, and increased safety in production and trade. Page 2

3 According to a survey by LEDinside, TrendForce's LED research division, LED lighting is currently growing at double digits each year worldwide, accounting for about 36 percent of the global market in According to Boston Consulting Group s 2020 Lighting Market Model report, in the specialized lighting segment, LED lamps are replacing traditional lamps in all fields of production and business. By 2020, LEDs could account for up to 80 percent of the specialized lighting market. Current usage of LED bulbs accounts for only 28 percent of total consumption in Vietnam, compared with almost 40 percent in other Asia Pacific countries. RAL therefore has great potential for growth as the company continues to invest in LED technology and manufacturing facilities and utilize its long-standing brand presence. INDUSTRY SWOT ANALYSIS Strengths Weaknesses Opportunities RAL is a strong, long-standing brand, well known to many consumers Diversified distribution system Technological innovation; R&D center to research products. Partnered with global brands like Samsung. Financial resources are stable, growing steadily LED market in Vietnam has strong prospects Increasing electricity costs will drive consumer trends toward energy-saving, long-lasting products Opportunity to gain market share from rival facing difficulties; RAL has been investing heavily in production lines and equipment to increase production capacity Threats COMPANY INTRODUCTION HISTORY Limited experience in manufacturing LEDs which will be the company's future key product High cost of products, from both sales costs and high salaries Harsh competition from low-cost Chinese rivals. Domestic consumers tend to favor foreign goods, and RAL mainly focuses on the local market Need promotional programs to encourage consumers to use LED products Rang Dong Light Source and Vacuum Flask Joint Stock Company is a leading manufacturer of light bulbs and thermos flasks in Vietnam, with a long-standing brand name and extensive sales network in all 64 provinces and cities. RAL's predecessor was Rang Dong Light Source and Vacuum Flask Factory, which was founded in 1961 under Decision No. 003 BCNN/TC of the Minister of Light Industry as one of the first 13 factories established by the Government of Vietnam and Ho Chi Minh in person. On March 30, 2004, the Ministry of Industry transformed RAL into a joint-stock company, and its shares were listed on the Ho Chi Minh City Stock Exchange on December 6, With a long history, the company has built Rang Dong into a very strong brand in Vietnam. From 2012 to date, Rang Dong has consistently ranked among the 500 largest enterprises in Vietnam, the top 1,000 enterprises paying income tax in Vietnam, and the 500 fastest-growing enterprises in Vietnam, according to the Vietnam Ranking Report. Page 3

4 SHAREHOLDER STRUCTURE The company currently has 11.5 million shares in circulation, with all shares freely transferable. The Company s Union is the largest shareholder with percent. Major shareholder Le Thi Kim Yen holds percent and Le Dinh Hung Le Thi Kim Yen's brother owns 9.2 percent. Foreign shareholders own about 6.71 percent. RAL SHAREHOLDERS Union of Rang Dong Light Source & Vacuum Flask JSC 29% Le Thi Kim Yen 40% Le Dinh Hung (Le Thi Kim Yen's brother) Nguyen Doan Thang (CEO) 6% Foreign shareholders 2% 9% 14% Others Source: RAL DISTRIBUTION CHANNELS RAL currently has about 500 agents and over 7,000 retail stores nationwide. The North remains the main consumer market for the company, accounting for 58 percent of total sales, followed by the Southern market with 30 percent of revenue and the Central market contributing 12 percent of sales. Company s consumption channels are: - Conventional sales channel - Construction projects - Supermarkets - Hi-tech agricultural lighting In addition to the main market in the north, the company has six branches in the Central & South regions: Da Nang, Nha Trang, Bien Hoa, Ho Chi Minh City, Tien Giang, and Can Tho. PRODUCTION CAPACITY RAL currently owns two factories, one in Hanoi and one in Bac Ninh, with a total area of 120,000m 2. Rang Dong's annual production capacity is over 15 million LED products, more than 50 million compact fluorescent lamps, about 24 million fluorescent lamp products, and over 18 million thermos products. Actual production (million units per year) RAL LED Compact Fluorescent lamps DQC Sources: RAL, DQC Page 4

5 PRODUCTS RAL's main source of revenue is the lighting business, accounting for nearly 70 percent of revenue, within which the main products are conventional lamps, such as normal and compact fluorescent lamps. The range of LED lights is the Company s strategic products, and although they currently account for little more than 20 percent of RAL's revenue, by 2022 LEDs are expected to account for 50 percent of total revenue. Apart from the main lighting products, RAL also produces thermos flasks. This product line has accounted for over 20 percent of RAL's sales in recent years, giving RAL the benefit of product diversification and risk diversification when the lighting market faces difficulties. RAL dominates the thermos flask market in Vietnam, with sales growth in recent years averaging about 10 percent Revenue by product Lighting products Thermos flasks Others Source: RAL Others include auxiliary equipment used with fluorescent and compact fluorescent lamps, and value-added products for the core product lines. LED lighting Vietnam currently has more than 150 companies manufacturing and importing LED lights and this number will continue to increase. There is no national quality standard for LED products, so there is no technical barrier to protect branded manufacturers from competition from low-cost products from China, which are often only usable for a short period and produce dimmer light. The retail price of LED products has tended to decrease rapidly. Since RAL is a large manufacturer, it is able to negotiate with its strategic partners to provide high quality LED chips more cheaply. Quality is RAL s main strategic strength in competing with DQC and Chinese products. Samsung has appointed Rang Dong as one of its five strategic partners in Asia, and consequently RAL is the only company in Vietnam licensed to use the Samsung logo on its products. The quality of the LED chips has a major impact on the longevity and brightness of LEDs, so the use of high quality LED chips from Samsung is evidence of the quality of RAL s LEDs. Page 5

6 Rang Dong cooperates with the world's leading brands Source: RAL. In short, RAL's products excel in terms of usage time, lighting quality, and after-sales service, but this difference is not easily recognized by consumers. Nevertheless, over one to two years, the quality of RAL products and effective marketing plans can help the company to take market share from low cost LED manufacturers. Traditional lamps In its traditional product lines, Rang Dong's advantage is its dominance in construction projects in the Northern part of Vietnam. After investing in a lead-free glass production line in Bac Ninh, Rang Dong has been able to produce high-grade glass, meeting the stringent requirements of difficult markets such as Europe and Japan. With these self-made lead-free glass tubes, the company can replace a large amount of imported materials. Since 2011, Rang Dong has been producing all of its CFL tubes, while most competitors in Vietnam still have to import. Rang Dong therefore has a price advantage over its competitors due to its lead-free glass furnace. 28% Production costs by nature 3% 2% Materials 9% Depreciation Others Salaries External purchases Data from Source: RAL 58% Thermos flasks Thermos flasks are a traditional product of the company, starting production in the company s earliest days. RAL has always been a market leader in thermos flask products and the products are diversified to increase competitiveness and meet the changing needs of the market. In Vietnam, Rang Dong is the only company capable of mass producing thermos flasks, with its primary competitors being imported products from China in the low-cost segment, and products from Korea and Japan in the high-end segment. Rang Dong has over 80 percent market share in Vietnam, and stable revenue from this segment provides high profit efficiency. COST STRUCTURE RAL's main production costs are raw materials for light bulbs and thermos flasks, such as gas, oil, plastic, steel, chemicals, and packaging. Raw materials are mostly provided by local businesses, with limited exceptions such as light bulb filaments and LED chips. Major suppliers are long-term and stable partners, so input materials are relatively stable, leading to stable prices and outputs. The labor costs of the Company are also quite large, though the company is increasingly improving labor productivity and quality. Most of RAL s current investments are high-tech automation Page 6

7 Revenue by geographical area Southern 58% Northern 30% Central 12% Data from Source: RAL systems to reduce labor costs. COMPETITION BETWEEN RAL AND DQC RAL and DQC are the two leading lighting companies in Vietnam, with long traditions and distribution networks nationwide. The two companies have many similarities in size and market share, but RAL is more focused in the North and DQC in the South. In addition, RAL focuses on the domestic market, and exports only account for percent of sales. The domestic market, especially the LED market, is expected to thrive in the next few years, while DQC aims to exports 50 percent or more of its sales. Dien Quang has almost doubled its total assets and equity since 2007 and its net sales and profit after tax have outperformed Rang Dong. However, since 2013, Rang Dong has stepped up its investment, and its assets have surpassed Dien Quang in value and are widening the gap. RAL's revenue has also grown sharply, nearly three times the rate of DQC in 2016, showing RAL's growing market share. RAL / DQC comparison Ral DQC % RAL/ DQC Total assets ,049 1,170 1,392 1,531 1,772 2,249 1,986 2,097 Equity Net revenue ,051 1,363 1,748 2,054 2,293 2,600 2,659 2,939 Net income Total assets 1,691 1,571 1,603 1,733 1,844 1,716 1,669 1,863 1,514 1,589 Equity ,088 1,154 Net revenue 1, ,223 1,083 1,035 Net income Total assets 51% 56% 65% 68% 75% 89% 106% 121% 131% 132% Equity 55% 60% 59% 55% 56% 60% 60% 51% 50% 53% Net revenue 70% 220% 226% 234% 285% 326% 288% 213% 246% 284% Net income 25% 3928% 1019% 84% 152% 140% 71% 28% 45% 72% Source: Bloomberg In and again in , Rang Dong increased investment in production, including an expansion of its factory in Bac Ninh, lead-free glass furnaces to produce high-grade glass, and automated production lines for LEDs, while DQC has changed little. With its expansion of production, RAL has achieved a corresponding growth in sales, with an average growth rate of 14 percent in At the same time, DQC has had lower and less stable growth rates, while its fixed assets have changed little, creating a correspondingly lower growth rate and lower market share. A downturn in DQC s stock started at the end of Q3/2016 due to unpredictable business activities, as export revenue dropped sharply. The considerable drop in average selling prices, plus poor export performance, has affected DQC's sales. Return on equity which had been an advantage for DQC over RAL is also declining. Page 7

8 TSCD Fixed assets and revenue - RAL vs DQC ,500 3,000 2,500 2,000 1,500 1, Revenue - RAL Revenue - DQC FA - RAL FA - DQC Source: RAL, DQC DQC's reputation and business results have also been affected by Mrs. Ho Thi Kim Thoa Deputy Minister of Industry and Trade, a major shareholder and former Chairman and CEO of DQC being reprimanded by the Prime Minister for violations related to her work at the Ministry of Industry and Commerce. Mrs. Thoa and her family (including her daughter Ms. Nguyen Thai Nga, who is Deputy General Director of DQC, and her brother Mr. Ho Quynh Hung, who is Chairman of the Board of Directors and General Director) owned more than 34 percent of DQC's shares as of the end of 2016, raising many questions regarding conflicts of interest as well as the process by which these shares were acquired in the first place. In 2016, DQC reached VND1,035 billion (USD45.7 million) in net revenue, down 4.4 percent compared with 2015, with profit after tax of VND203 billion (USD8.96 million), down nearly two percent. In particular, DQC s gross margin decreased from 33.1 percent to 26.6 percent. At the recent 2017 Annual Shareholders Meeting, DQC's management set a net revenue target that increased to just VND1,050 billion (USD46.4 million), but net profit is expected to fall 41 percent, to VND150 billion (USD6.62 million). Furthermore, in the first quarter of 2017, DQC's revenue dropped 20 percent, with a net profit of only VND29 billion (USD1.28 million), down 22 percent y- o-y. In Q2/2017, VPBS expects DQC's earnings to continue to decline as leaders are affected by legal investigations and major rivals, including RAL, are taking advantage of this and holding major promotions for agents to increase market share. The fact that DQC is in a very difficult situation at the moment is a chance for RAL to grow strongly and to dominate the market for domestic lighting in the coming years. RAL's business results have gained momentum since the second quarter of 2016 as profit rose significantly and new LED products entered the market, creating a positive outlook. RAL's Q1/2017 results were positive and the company's 2017 full-year plan also shows high growth expectations, especially given that RAL has often exceeded sales and profit targets in recent years. Page 8

9 UPDATE ON THE COMPANY S FINANCIAL RESULTS OVERVIEW OF BUSINESS OPERATIONS In , RAL's sales grew at an annualized CAGR of 9.1 percent. This was a result of RAL stepping up its investments since 2008, purchasing and upgrading plants and factories. The lighting market in Vietnam is also in a strong growth period Profitability and growth 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% % % % Gross profit margin Net profit margin Growth of Gross margin Growth of Net profit margin Source: RAL Gross profit in 2013 declined despite higher sales, as prices of materials such as plastic resin, mercury, ballast, gas, electricity and so on increased sharply in that year. By 2014, the company had better gross profit than 2013, due to the start of the development of LED products. However, due to the first year of LED products sales, selling costs increased considerably up 30 percent y-oy from discounts and product promotions. Although business activities slowed in 2015, by 2016 revenue had increased significantly up 10 percent compared with 2015 and net profit increased by 56.7 percent. Gross margin increased from 18.1 percent in 2015 to 20.5 percent in 2016, and net profit margin increased from 3.5 percent in 2015 to 5 percent in Page 9

10 ' Cash Other current assets Inventory Non-current assets '000 Short term debt Other liabilities Equity Source: RAL, VPBS RAL has held a cash reserve over the years, including both cash and cash equivalents, as net cash flows from operating activities are maintained at a positive level. Notably, RAL's inventories account for 50 percent of the company's total assets, peaking in 2014 due to the start of LED sales. The company's slow inventory turnover rate in recent years is due to RAL maintaining many longterm suppliers, so purchase and production volumes need to remain sufficiently high to allow negotiation of lower costs. In recent years new models of products have changed rapidly, meaning inventories have not all been consumed before becoming obsolete, though LED lights began to sell in 2015, and the Company's inventories have fallen sharply, accounting for only 40 percent of total assets by 2016 only. Other short-term assets are mainly accounts receivable from distributors, of which the largest is Gia Loc Phat Joint Stock Company, which is a related party, accounting for 38.5 percent of RAL s revenue in The receivable turnover of the Company is days, which is good compared with other producers. RAL's loans are mainly short term, which had higher balances in 2014 due to the increase in selling expenses and higher inventories balances from the introduction of LED products. In recent years, short-term loans have been used to supplement working capital during the year as the Company's inventories have been relatively high. RAL s total short-term and long-term loans as of December 31, 2016 were VND1, billion (USD48.2 million), with a short-term loan balance of VND billion (USD48.2 million) 99.9 percent of total debts. Loans in USD were USD14.7 million, equivalent to VND335 billion, while the remaining loans are in VND, valued at VND billion (USD33.4 million), applying floating interest rates. BUSINESS RESULTS IN Q1/2017 RAL s Q1/2017 business results increased sharply y-o-y In Q1/2017, RAL recorded sales of VND879 billion (USD38.8 million), an increase of 66 percent over the same period last year. Gross profit margin was 20.9 percent, compared with nearly 16 percent in the same period last year and the average of 20.5 percent in the previous year. After-tax profit reached VND48 billion (USD2.12 million), up 72 percent over the same period last year. Net cash flow from operating activities remained positive, especially in Q1/2017, at more than VND63 billion (USD2.78 million), so the Company s liquidity indicators remain positive. Page 10

11 RAL's positive business performance in Q1/2017 was from the increase of the highly profitable LED segment, active cost reduction, sharp falls in the cost of input materials such as LED chips, and increased labor productivity, resulting in a sharp increase in profit after tax. The Company's gross profit margin has improved steadily since 2015, at an average of 18.1 percent in 2015 and 20.5 percent in 2016, rising to 20.5 percent in Q1/2017. The company continues to implement innovative policies, improve management efficiency, reduce costs, and increase labor productivity, so net profit margin is expected to remain satisfactory despite increasingly fierce competition in the market. In particular, the company's inventory turnover ratio, which is normally very high, has improved considerably. Inventory turnover days have fallen from 188 days in 2015 to 144 days in 2016, and in Q1/2017 continued to fall to about 119 days. Inventory balance fell from over VND1,000 billion (USD44.2 million) at the end of 2015 to VND692 billion (USD30.6 million) at the end of Q1/2017. Cash and cash equivalents increased by six percent, from VND478.3 billion (USD21.1 million) to VND506.9 billion (USD22.4 million). Short-term borrowings fell slightly, from VND1,090.6 billion (USD48.2 million) as of January 1, 2017, to VND1,065.2 billion (USD47.0 million) as of March 31, 2017, with long-term loans remaining unchanged and at very low levels of less than one percent of total loans. The ratio of debt to equity decreased from 1.77 to 1.61, as cash flow from operating activities improved positively in PROSPECTS AND FORECASTS For 2017, VPBS forecasts net sales for RAL of VND3,300 billion (USD146 million), up 12 percent y-oy, and earnings after tax of VND185 billion (USD8.17 million), up 26 percent y-o-y, based on the following assumptions: 1. Business plan and budget for 2017 Shareholders approved a plan for revenue in 2017 of VND3,056 billion (USD135 million), up four percent, and pre-tax profit of VND170 billion (USD7.51 million) up around 10 percent y-o-y due to high competition. However, we note that from , RAL's gross revenue steadily exceeded its plans at an average rate of nine percent, and profit before tax at a rate 37 percent to 110 percent higher than planned. The Company s business results are directly affected by the move from traditional lamps to LEDs in 2016, LED production increased by 87 percent as well as technical improvements and cost savings. ESOP Issuance: The Company intends to issue 345,000 ESOP shares in Q4/2017, at a price not lower than the book value of the company at the time of issue (transfer restricted), and will issue ESOP in if profit exceeds plans. The diluted earnings per share index was consequently reduced by three percent. 2. Investment plans With its competitor facing difficulties, RAL is planning on fixed asset investment in , with an expected total investment of VND520 billion (USD23.0 million), aimed at moving the company to the Industry 4.0 automation paradigm. If more market opportunities open up, the company will be able to increase its asset investment to adapt quickly due to its significant cash reserves and low leverage. The total investment in 2017 is expected to be VND100 billion (USD4.42 million), of which, the company will invest VND40 billion (USD1.77 million) in a glass furnace thermosensor and VND20 billion (USD883,000) to automate the CFL lamp and thermos flask production line to increase labor productivity and reduce costs. In addition, the company will spend VND30 billion (USD1.32 million) on LED product automatic production lines to increase LED production capacity Page 11

12 to 20 million products per year, and VND10 billion (USD442,000) to upgrade laboratory and management systems. 3. Production output and selling prices of commodities in general increased sharply - Traditional lighting items: Although the Company will be gradually reducing its production of traditional lighting products in the future, output and revenue from traditional lamps will generally remain stable for the time being, at the same level as in recent years. We expect 2017 output to remain unchanged, and 2018 output to fall about one percent, with average annual prices down about three percent due to competition and changes in consumer tastes, corresponding to a fall in revenue of more than three percent. - LED products: Given the current market share growth rate and RAL's growing domestic market advantage, RAL's sales of LED products are expected to increase sharply. It is expected that, in the next five years, the company will invest in a modern, million bulb LED automated factory. According to the plan, LED revenues will account for more than 50 percent of total revenue by 2022, compared with the current rate of 20 percent. We forecast that LED output will increase by million units per year, with LED prices down about 2.5 percent per year due to reduced LED chip prices. Revenue from LEDs is projected to increase sharply by percent in Thermos flasks are the Company s traditional products, leading the market with over 80 percent of domestic market share. With stable growth in recent years, we expect this product line to continue to grow steadily and maintain a revenue ratio of over 20 percent of total revenue of the Company. Production output is expected to increase by eight percent per year for the next two years, and the average selling price will increase by five percent, thus revenue will increase by percent per year. 4. Cost of goods sold Gross profit margin in 2017 is expected to be 21.2 percent, and 20.8 percent in The main cost structure is as follows: - Raw materials account for percent of COGS, with prices of most raw materials in the coming years increasing, including gas, oil, electricity prices, and input components. However, the price of LED chips, the main input for LED products, is on a downward trend due to increasing supply and lower average production costs. LED technology is a relatively new technology that changes constantly and will increasingly aim at lower costs to get closer to users. - Salary costs account for a high proportion of the company's costs, and average salary rates are expected to increase by five percent per annum in the coming years. However, because the company is investing in automated production lines, the number of employees will not necessarily increase in parallel with the growth rate of revenue in the future. - Fixed asset depreciation expenses account for a small proportion of the company's total expenses, only two to three percent in recent years. Depreciation expenses are expected to increase relative to the Company's investment in the coming years. 5. Selling and administrative expenses - Selling expenses are expected to increase dramatically in 2017, which is consistent with the Company's plan to expand market share and boost sales. The costs of promotion and discounts Page 12

13 will increase in Selling expenses have accounted for 9 10 percent of revenue in recent years, and in 2017 are expected to account for nearly 10.5 percent. - Administrative costs normally account for approximately three percent of total revenue, and no significant change is expected. 6. Financial income and expenses Financial income and expenses accounted for a small proportion of net sales, about 0.6 percent and 1.7 percent respectively. Financial income in 2017 is expected to increase correspondingly to the positive cash flow from operating activities, with income from deposits accounting for nearly 80 percent of financial income. Interest expenses account for 95 percent of RAL's financial expenses, which is expected to decrease slightly because short-term loans balances are expected to fall due to RAL's positive cash flow in Cash flows Because the company had highly positive cash flow in 2015 and 2016, it is expected that the investment in machinery and equipment next year will not require financing from loans. Cash flows from production activities are expected to remain positive in the coming years and inventories will tend to decrease, so we believe that the Company's loan balances will decrease accordingly. In FY2017, net profit is expected to reach VND185 billion (USD8.17 million), up 26 percent y-o-y. The corporate tax rate is 20 percent, and RAL's real income tax ratio is estimated at around 21 percent by VPBS. EPS for 2017 is expected to be VND16,100 (USD0.71) per share, not accounting for the impact from the Company s bonus and welfare fund. INVESTMENT RISKS The risks associated with RAL are as follows: 1. Competitive risks: The lighting market in Vietnam has fierce competition from DQC and foreign competitors, especially from China, which currently have a very high market share in low cost lighting. RAL will need to have a clear strategic direction in terms of product quality and product value to sustain and expand its existing market share. The company's traditional products incandescent and fluorescent lamps are expected to see reduced consumption in the future, so RAL needs to work on promoting LED products to consumers. 2. RAL's inventory balance is quite large, accounting for 50 percent of total assets in previous years. However, inventory balance had fallen by the end of 2016 and in Q1/2017 only accounts for 40 percent of total assets. However, inventory balance could increase if future sales are unable to meet the planned increase in production. 3. Risks of raw material price fluctuations: Prices of raw materials, such as plastics, oil, and gas, may increase even while sales prices inexorably decrease due to competition. However, the Company s profit margin saw positive results in 2016 and 2017, which is a good sign of RAL coping with these risks. RAL has long-term suppliers, and so does not suffer too much from fluctuations in raw materials prices and can negotiate good input prices. Page 13

14 4. Distributor of the Company is a major shareholder, with the risk of passing on pricing pressure and transferring profits to other parties. However, factual data shows that, ever since the first transaction with Gia Loc Phat, the business results of the company have tended to improve. We assess the risks associated with this as not significant at present. 5. The Company's bonus and welfare fund is quite high 25 percent of net profit, which puts pressure on the Company s profit and affects dividend payments for RAL shareholders. 6. The stock has low liquidity, averaging at 31,000 shares per session. VALUATION We give a BUY recommendation with a target price of VND 150,500 per share, which is equivalent to an increase of 20 percent from the current price, based on P/E and EV/EBITDA multiples valuation methods, with respective weightings of 67 percent and 33 percent, to value RAL s share price: Valuation method RAL Target VND/share Weight EV/EBITDA ,627 33% P/E ,280 67% Target price (VND/share) 150,500 Local peer is QDC. In addition, we selected seven foreign companies in Asia. The revised target price corresponds to a targeted P/E of 9.3, which is still low, but this is explained by RAL s bonus and welfare fund rate that is higher than the market average, expected to be 25 percent of net profit in Market EV/ P/B P/E Bloomberg ROA (%) ROE (%) Company name Country Cap EBITDA code (mil 12m 12m 12m Relative Relative USD) Dien Quang Lamp Joint Stock Company DQC VN Vietnam % 16.4% Lakshmi Electrical Control Systems Ltd LKEC IN India % 23.3% Salzer Electronics Limited SZE IN India % 11.2% Shenzhen Jiawei Photovoltaic Lighting Co.. Ltd CH China 1, % 10.5% Tai Sin Electric TSE SP Singapore % 15.6% StrongLED Lighting System Cayman Co Ltd 5281 TT Taiwan % 9.9% Luxpia Co Ltd KS Korea 6 4.6% 5.0% Median 5.8% 11.2% Rang Dong Light source & Vacuum flask JSC Data at 8/6/2017, Source: Bloomberg, VPBS Page 14

15 TECHNICAL ANALYSIS June 8, 2017 RAL (VND/share) Analysis period 3 to 6 months Current price 125,700 Highest in 3 months 136,000 Lowest in 3 months 94,190 Current MA ,040 Current MA45 120,896 Medium-term resistance 145,000 Medium-term support 112,000 Technical signal Weak supply and weak demand Neutral RAL price history Source : VPBS After failing to move beyond the short-term accumulation area, RAL returned to the support area of VND123,000 per share. After four consecutive sessions of decline, supply has shown signals of a rapid fall, reflected in the low match order volume in recent sessions while intraday fluctuations have been relatively high. On the other hand, demand was also weak and unstable. The current bright spot in the supply and demand relationship is probably the strong demand at the end of the session, when RAL s price reverted to the short-term support. This has helped RAL to retain the current short-term support. The MACD, RSI, and STO trend indicators are moving quite negatively due to the stock being in a trend of continuous decline. With weak demand, we think it is unlikely that RAL will reverse course soon, and needs more time to re-test the short-term support of VND 123,000 in the short term. Consequently we give a neutral recommendation for RAL at the current price level. Page 15

16 APPENDIX Income statement Balance sheet (billion VND) 2015A 2016A 2017F 2018F (billion VND) 2015A 2016A 2017F 2018F Net revenue 2, , , ,707.5 Current assets 1, , , ,754.0 COGS 2, , , ,935.3 Cash & equivalents Gross profit Receivables SG&A Inventories Operating profit Short term investments Financial income Other cur assets Financial expenses Long term assets Other income Long term receivables Profit before tax Fixed assets Income tax Other non-cur assets Profit after tax Total assets % Net profit margin 3.5% 5.0% 5.7% 5.5% EPS (VND) 8,162 12,788 16,263 17,724 Current liabilities Account payables Financial ratios Short term borrow ings (billion VND) 2015A 2016A 2017F 2018F Other current liabilities Valuation multiple Long term liabilities P/E * 7.12* Long term borrow ings EV/EBITDA Other long-term liabilities P/B Total liabilities P/S Equity Cash dividend yield 35% 45% 50% 50% Charter capital * Multiple w as diluted by 3% due to ESOP release at the end of 2017 Share premium Profitability Retained earnings Gross profit margin 18.11% 20.54% 21.23% 20.83% Other equities EBITDA margin 8.27% 9.61% 10.35% 9.89% Total Liabilities & Equity Net profit margin 3.53% 5.00% 5.67% 5.50% ROE 17.37% 23.88% 29.72% 28.31% Cash flow statement Leverage (billion VND) 2015A 2016A 2017F 2018F Interest coverage ratio Cash from Operation Debt/total asset Cash from Investing Activities Debt/Equity Cash from Financing Activities Current ratio Net change in cash Quick ratio Opening cash balance Closing cash balance Page 16

17 GUIDE TO RATINGS DEFINITION VPBank Securities (VPBS) ratings are based on a combination of short-term and long-term analysis. We use the following long-term ratings system: Undervalued: Expected return, including dividends, over the next 12 months is greater than 15%. Fully-valued: Expected return, including dividends, over the next 12 months is from (-10%) to 15%. Overvalued: Expected return, including dividends, over the next 12 months is below (-10%). CONTACT INFORMATION For further information regarding this report, please contact the following members of the VPBS research department: Le Anh Minh, CFA Director Fundamental Analysis minhla@vpbs.com.vn Nguyen Bao Trung Analyst trungnb@vpbs.com.vn For any questions regarding your account, please contact the following: Ly Dac Dung Head of Retail Sales & Brokerage dungld@vpbs.com.vn Ext: 335 Tran Thanh Bach Associate Director of Prestige Wealth Management bachtt@vpbs.com.vn Ext: 2607 Vo Van Phuong Associate Director of Retail Sales & Brokerage phuongvv@vpbs.com.vn Ext: 130 Domalux Associate Director of Retail Sales & Brokerage domalux@vpbs.com.vn Ext: 128 Tran Duc Vinh Associate Director of Retail Sales & Brokerage vinhtd@vpbs.com.vn Ext: 369 Nguyen Danh Vinh Associate Director of Retail Sales & Brokerage vinhnd@vpbs.com.vn Ext: 146 Le Kien Cuong Senior Sales Associate Institutional Sales & Brokerage cuonglk@vpbs.com.vn Ext: Page 17

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