LICOGI 16 (LCG) 17 SEP 2014 BUY. Key metrics

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1 Capital Insight Client Innovations LICOGI 16 (LCG) 17 SEP 2014 BUY Target BUY (VND 000) <7.5 Target EXIT (VND 000) 10.0 Upside 33% Dividend yield 0.0% 2014 EPS growth N/A 2014 ROE 3.0% 2014 Debt/Asset 24.4% VISIT NOTE 100% Price 80% LCG VNINDEX 60% 40% 20% 0% 9/ /2013 3/2014 6/2014 9/ % CONSTRUCTION PB (x) LCG PB VNINDEX PB 9/2009 9/2010 9/2011 9/2012 9/ Key metrics Market cap (USD mn) 118 Outstanding shares (mn) 56* 30-day trading vol (# of shares) 675K Foreign ownership 19.0% BOD s ownership 6.0% * Not include 20mn new share issuance Major shareholders Red River Holding 5.0% SSI 1.9% Thien Phong JSC 1.9% Overview Licogi 16 (LCG) is a construction and real estate company. With 2 years of consecutive losses, the company is at risk of delisting if it makes another loss this year. All eyes centre on Formosa project worth VND1,651 bn which could save the company from leaving the market. Formosa began operating in Jul, 2013 and estimated to complete in 18 months We recommend to buy the stock should price fall under VND7,500/share (PB of 0.7x) on market correction and exit at an estimated VND10,000/share (PB at 0.9x). Our target price for LCG is still conservative at PB 0.9x for the stock still be trading 10% discount to peers (HBC, CTD and FCN). Although 2-years of deep losses does put some investors on a cautious stance, LCG s prospect from 2014 onward looks brightening from a series of construction projects to be booked and large, cheap land bank to be utilized when the real estate market unthaws. Here are several rationales for our strong conviction on the stock 2014 a turnaround year: LCG is confident to remain profitable this year after 2 years of consecutive losses. Its positive performance in 2014 mainly comes from: 1. Formosa project being on schedule: LCG reveals to earn 15% gross profit from this project. The firm expects to complete more than VND800bn contract value this year. 2. Good gross margin from other projects: gross margin ranges from 10-20% for National Road, Lam Dong Hospital, and other infrastructure projects. Our analysis in the Investment strategy for risky stocks shows that if LCG reaches its target sale of VND1,363 bn this year with more than 10% gross margin, the company will be profitable 3. Minimal loss from subsidiaries and affiliates: LCG already booked 84% provision for its investment in the Orient Biofuel Company (OBF) last year. In the worst case scenario, LCG only has to book at max VND18bn provision for further loss from OBF s investment where LCG has 22% ownership. 4. At the end of 1H2014, LCG made 13bn consolidated net profit, of which nearly half came from Formosa project. We expect the company to be more profitable in the 2H2014 with a higher booking value of VND450bn from Formosa out of VND800bn target value. Potential to grow beyond 2014: LCG plans to grow sales by 20% in 2015 and 8% in 2016, mostly from construction business. LCG also has several real estate projects to develop when the property market warms up. Most noteworthy are residential projects in Bao loc, Lam Dong (52k m2), Nam An in HCM city (7k m2) and Hiep Thanh in D12, HCM (12.5ha).

2 2 LICOGI 16 (LCG) VISIT NOTE Strong cash flows this year to pay off debts and reduce interest expense burden 1. Transferred Sky Park Residence for VND143.5bn at cost. Up to now, the company has received VND108bn 2. Issued 20mn shares at VND7,500/share to strategic partners. From our recent visit to LCG, the firm reveals that the buyers will transfer money over next week. 3. Plan to sell the building at 24A Phan Dang Luu for at least VND55bn at cost Not only LCG is highly leveraged with Debt/Equity up to 60%, it also bears high interest rate, more than 10%. In 1H 2014, LCG incurred VND28.6bn in interest expense for total debts of VND465bn (roughly 12.3% interest rate on average). The series of projects transferred and share issuance this year will generate cash to pay off at least 30% total debt and alleviate much interest pressure in the coming time Risks of further loss from affiliates: LCG has a number of subsidiaries and affiliates handling on different projects which makes it a challenge to measure accurately the company s performance. Out of 7 affiliates, the Phu Hoi Urban Area JSC is the biggest one with VND303.8bn invested capital from LCG. Phu Hoi is a joint venture between LCG (30%) with Vinaland Eastern Limited and Vinaland Heritage Limited. According to LCG, Phu Hoi only incurs a minimal operation loss of VND1bn quarterly which makes minimal impact on LCG s consolidated results. However, a cluster of small scale impacts can altogether makes a surprised big one. If LCG had to book loss from Phu Hoi, VND18bn remaining provision for OBF and other unexpected loss from affiliates this year, its consolidated profit would fluctuate on a thin line. Recent Corporate news: 10, Sep, 2014: LCG moved from supervision to warning status 18, Aug, 2014: LCG explained 2Q 2014 business result: - Parent company financial statements: Profit after tax in 2Q2014 was VND16.8bn, higher than in 2Q2013 s because revenue increased 353%yoy and the firm only made VND128bn provision for long term financial investments this year compared to a higher provision last year. - Consolidated financial statements: Profit after tax in 2Q2014 was VND13bn, higher than in 2Q2013 s because revenue increased 292%yoy 11, Jul, 2014: LCG has signed auditing contract with Ernst &Young Vietnam Co., Ltd to audit its 2014 financial year. 09, Jul, 2014: Board resolution approved to set up BOT-Highway 38 JSC at VND72.5bn. The Board of Directors assigned Mr. Phi Ngoc Anh and Mr. Nguyen Huu Tri as representatives for 14.5% stake each in the new firm

3 3 LICOGI 16 (LCG) VISIT NOTE FINANCIAL METRICS (VND bn) Income statement F Revenue 1, ,159 Gross profit Operating profit (47) 116 Non-operating profit 40 (7) (189) (27) Interest expense (93) (81) (59) (56) Net profit 170 (37) (306) 26 Strong sales from Formosa and other construction projects Balance sheet F Cash & equivalent Accounts receivable Inventories Net fixed assets Total Assets 2,201 2,018 1,936 2,029 Short-term debt Long-term debt Total Liabilities ,088 1,140 Total equity 1,219 1, Already booked provision for major loss from subsidiaries and affiliates Cash flows F Beginning cash Operating cash (58) 131 Investing cash (157) (72) (26) - Financing cash (16) (138) 91 (35) Ending cash Ratio F Growth Sales 52% -55% -59% 307% EPS -52% NA NA NA Margin GM 19% 17% 9% 15% OM 17% 8% -16% 10.0% NM 11% -5% -108% 2.2% Profitability ROA 8% -2% -16% 1% ROE 15% -3% -31% 3.0% Liquitity/solvency Current ratio 1.4x 1.4x 1.3x 1.3x Debt-to-equity 47% 39% 64% 56% Valuation metric EPS (VND) 3,023 (650) (5,441) 335 BVPS (VND) 20,629 19,475 14,113 10,943 Source: Company data, TVS estimates Intend to reduce the high Debt/Equity ratio

4 4 LICOGI 16 (LCG) VISIT NOTE LICOGI S 5-YEAR PLAN (VND bn) Income statement F 2015F 2016F 2017F 2018F Revenue 227 1,188 1,443 1,560 1,618 1,700 Gross profit Financial income Financial expense Interest expense SG&A Operating profit EBT Net profit Balance sheet F 2015F 2016F 2017F 2018F Cash & equivalent Accounts receivable Inventories Net fixed assets Total Assets 1,872 1,586 1,708 1,811 1,787 1,911 Short-term debt Long-term debt Total Liabilities 1, Total equity ,033 1,146 1,225 1,322 Source: LCG s data

5 5 LICOGI 16 (LCG) VISIT NOTE ANALYST CERTIFICATION We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any specific recommendations or views expressed in this report. by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (TVS). The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. THIEN VIET SECURITIES COMPANY HO CHI MINH 63A Vo Van Tan St, District 3 Floor 9, Bitexco Nam Long Building Tel: +84 (8) Fax: +84 (8) HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) Fax: +84 (4) RESEARCH DEPARTMENT INVESTMENT BANKING BROKERAGE DEPARTMENT research@tvs.vn ib.hcm@tvs.vn brokerage.hcm@tvs.vn