MOBILEWORLD INVESTMENT CORPORATION

Transcription

1 MOBILEWORLD INVESTMENT CORPORATION The Music Is Still On Equity Update I November 25, 2016 We assign BUY rating to MWG ticker given following rationales: 9M16 revenue and earnings surged on the back of rapid store expansion. 2016F revenue and NPAT to beat annual targets by 28% and 18% respectively. MWG achieved VND 30.8trn net revenue and VND 1.2trn NPAT in 9M16, implying striking 76% and 65% upsides versus 9M15 respectively. Key growth driver is the rapid expansion of retail outlets, with 469 new stores opened YTD versus 318 in full-year We estimate MWG to end 2016F with VND 44trn revenue and VND 1.6trn NPAT, exceeding annual targets by 28% and 18% respectively. The music is still on: DMX replacing TGDD as MWG s next sales powerhouse, implying upbeat revenue and earnings growth over 2017F-2018F. We view that thegioididong.com (TGDD) chain has entered the mature stage of its expansion cycle while dienmayxanh.com chain (DMX) are still at growth phase, indicating DMX would replace TGDD as MWG s powerhouse over 2017F-2020F. Based on the expansion plan for DMX shared by the Compnay s CEO, we estimate revenue and earnings would continue growing at double-digit rate over 2017F-2018F. Short-term margins downswing as revenue structure leans towards lower-margin business DMX. We forecast gross margins to peak at 16.3% in 2016F but then drop by 30bps to 16% over 2017F-2018F due to the change in revenue structure that leans towards lower-margin business DMX (gross margin: DMX 13-14% vs. TGDD 17%). Meanwhile, net margin would drop 20bps to 4% this year and another 30bps to 3.7% in the next 2 years due to expansion costs for DMX. Gross margin would recover in 2019F and 2020F when DMX matures and can effectively exert its buying power on suppliers for higher discount, which consequently propels net margin back to 4.2%. New growth engines from 2018F onwards. MWG has revealed its new growth engines for post-2017 period when DMX matures to be the grocery chain bachhoaxanh.com (BHX) and the B2C ecommerce website vuivui.com, which are both under pilot testing. While there is high chance MWG would expand BHX chain nationally from 2018F onwards, we hold a conservative view towards the success of vuivui.com. Appealing valuation even in global context. Our 12M-target price is VND 190,000 a 17.2% upside, deriving from DCF methods. MWG currently trades at 15% discount to global average EV/EBITDA while its EBITDA margin delivers 13% premium to global norm, which is appealing. Considering this valuation results and 2017F-2018F upbeat revenue and earnings growth, our investment view is BUY. Key risks. (1) Uncertain synergy between old (TGDD and DMX) and new (BHX) retail chains, (2) Recent growth driven by store expansion appears unsustainable in longterm, and (3) International expansion of TGDD chain contents inherent risks of supply chain inefficiency and business cultural difference. BUY Potential Upside 17.2% Dong Quang Trung, Associate trungdq@tvs.vn Target Price 12-month price target: VND 190,000 Trading Data and Key Metrics Ticker MWG Sector Electronics Retail Listed since July-2014 Price as of 24-Nov , week range (VND 000) 67/161 Market cap (VND bn) 23,796 Shares outstanding (mn) Free Float (mn) day average volume 169, P/ BV (x) P / E (x) 10.7 Dividend yield (%) 0.98 Net Debt to Equity (x) 0.8x Source: TVS Research, Thomson Reuters Data 140% 120% 100% 80% 60% 40% 20% 0% -20% MWG Price Performance Chart VNINDEX Share price performance (%) 3M 12M YTD Absolute Source: Bloomberg Company Description Mobile World Investment Corporation (MWG) is a leading B2C electronics and appliances specialist retailer in Vietnam. The Company operates two retail chains, namely thegioididong.com and dienmayxanh.com respectively specializing in retail sale of mobile devices (35% mkt. share) and household appliances (10% mkt. share). MWG is also piloting the grocery chain bachhoaxanh.com which would fully operate from 2018 onwards. The Company s key competitive advantages include (1) nationwide store network and (2) in-house customized ERP system. Major shareholders are Founders & Related parties (35.0%), PYN Elite Fund (6.74%) and Mekong Capital (5.46%). Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages.

2 2 SUMMARY FINANCIALS Earning Model (VNDbn) 2015A 2016F 2017F 2018F Balance Sheet (VNDbn) 2015A 2016F 2017F 2018F Net sales 25,253 44,032 58,779 69,427 Cash and equivalents ,096 1,294 Cost of sales 21,330 36,944 49,365 58,085 Financial investment Gross profit 3,922 7,088 9,414 11,343 Accounts receivable Selling expenses 2,351 4,259 5,652 6,558 Inventory 4,933 9,325 12,460 13,382 General administration expenses ,044 1,233 Prepaid expenses, other CA 823 1,477 1,972 2,329 Other operating income/(expenses) Total current assets 6,176 11,838 15,760 17,260 EBITDA 1,543 2,341 3,167 4,112 Property and equipment Depreciation & Amortization At cost 1,183 2,419 3,580 4,523 EBIT 1,345 2,068 2,746 3,585 Less accumulated depreciation (356) (628) (1,048) (1,575) Net interest income/(expenses) 40 (14) (19) (22) Net property and equipment 827 1,791 2,532 2,948 Net investment income Net intangibles Others (recurring) Other long - term assets ,211 1,430 Pretax Profit 1,386 2,054 2,727 3,563 Total Assets 7,266 14,563 19,528 21,665 Income tax Tax rate (%) 22% 20% 20% 20% Account Payables 1,971 4,034 5,400 6,065 Minorities Short-term debt 2,053 5,238 6,667 7,040 Net Income 1,072 1,639 2,178 2,847 Other current liabilities, CL 758 1,754 2,342 2,766 EPS (basic, reported) 7,297 10,629 13,710 17,397 Total Current Liabilities 4,782 11,027 14,408 15,871 Weighted shares outstanding (mn) Long-term debt Other long-term liabilities Common dividends declared Total long-term liabilities DPS (VND) 1,425 1,500 1,500 1,500 Stockholders' equity 2,484 3,536 5,120 5,793 Dividend Payout ratio (%) 20% 14% 11% 9% Common Equity 1,469 1,542 1,589 1,636 Dividend cover (X) 5.1x 7.1x 9.1x 11.6x Treasury shares (2) (3) (3) (3) Retained earnings 978 1,956 3,494 4,120 Growth and Margin (%) Budget sources and other funds Sales Growth Minority interest EBITDA Growth Total liabilities and equity 7,266 14,563 19,528 21,665 EBIT Growth Capitalized leases Net Income Growth Capital employed 2,484 3,536 5,120 5,793 EPS Growth Gross Margin Ratios EBITDA Margin ROE (%) EBIT Margin ROA (%) Net Margin ROIC (%) Inventory days Cash flow Statements (VNDbn) 2015A 2016F 2017F 2018F Receivable days Pretax profit 1,386 2,054 2,727 3,563 Payable days Adjustments for: Asset Turnover Depreciation and amortization Net debt/equity 3.5x 3.0x 3.0x 3.2x Change in inventories (2,756) (4,392) (3,135) (922) Interest cover - EBIT(x) 0.8x 1.5x 1.3x 1.2x Change in trade receivables (477) (138) (17) (23) Change in trade payables 1,235 3,185 1, Valuation (Multiples) Other operating cash flow (227) (1,528) (650) (2,026) EV / EBITDA 8.3x 10.7x 8.1x 6.4x Cash flow from operations (641) (547) 774 1,493 P/E 10.7x 15.2x 11.8x 9.3x Net Capital expenditure (587) (1,349) (1,266) (1,029) Dividend Yield (%) 1.8x Acquisition (72) P/B 4.6x 16.2x 16.2x 16.2x Divestures Other investments, net 1 (667) (304) (219) Cash flow from investing (658) (2,015) (1,569) (1,248) Equity issued Net borrowings 1,434 3,185 1, Dividends to shareholders (2) (220) (231) (238) Other financing, net (2) Cash flow from financing 1,430 3,039 1, Net cash flow Opening cash Forex change Notes: CA = current assets; CL = current liabilities Closing cash ,096 1,294 Source: Thomson Reuters historical data, TVS model and forecast

3 VNDtrn VNDbn 3 9M2016 BUSINESS PERFORMANCE UPDATE & OUTLOOK 9M16 revenue and earnings surged on the back of rapid store expansion Key growth driver is the rapid store expansion, with 469 new stores opened YTD versus 318 in full-year MWG achieved VND 30.8trn net revenue and VND 1.2trn NPAT in 9M16, implying striking 76% and 65% upsides versus 9M15 respectively despite the surging VND 484bn sales deduction due to Galaxy Note 7 recall issue in 3Q16. TheGioiDiDong.com (TGDD) is still the flagship business that generates 70% of total revenue (VND 21.9T) while DienMayXanh.com (DMX) has been gradually increasing its portion to 30% (VND 8.8T) from 18% last year. We believe key growth driver is the rapid expansion of retail outlets, with 469 new stores opened YTD (365 TGDD and 104 DMX) versus 318 in full-year 2015, rather than a demand pull since the whole sector (electronics consumer goods) grew by only 18.4% over the same period 1. These aggressive market developments have allowed MWG to possess 38% mobile phone market share (+8% vs. 2015) and 17% electronics & household appliances market share (+7% vs. 2015). Figure 1: 9M16 revenue and earnings surged on the back of rapid store expansion Figure 2: which came at the cost of declined average store sales Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1, Store Net revenue Net profit Average store sales-tgdd (LHS) No. of store-tgdd (RHS) Average store sales-dmx (LHS) No. of store-dmx (RHS) Source: Company data Source: Company data, TVS Research SSSG 1 remains healthy at 10% for TGDD and 13% for DMX in 9M16 but quarterly average store sales dropped to historical low, implying new stores are generating less revenue than existing ones According to our research, SSSG 2 remains healthy at 10% for TGDD and 13% for DMX in 9M16. However, quarterly average store sales dropped to historical low of VND 8.8bn for TGDD and VND 21.4bn for DMX in 3Q16, implying new stores are generating less revenue than existing ones. Our research signifies a 30-50% discount in revenue comparing new to existing stores, which is justifiable given MWG s strategy to expand business in countryside where purchasing power is weaker than in urban zones. It s also worth noticing this strategy has lengthened inventory days to 92 days (2015: 84 days) due to (1) extended time required for shipping inventories to 1 Euromonitor International 2 Same-store sales growth (SSSG), or identical-store sales growth, refers to % change in revenue generated by a retail chain's existing outlets over a certain period

4 4 distant stores and (2) slower sale flows in rural areas. Nevertheless, cash conversion cycle remains constant at 58 days (2015: 56 days) thanks to improved payable days of 36 days (2015: 30 days), and thus we anticipate no extra pressure created on MWG s working capital. 9M16 gross margin peaked alltime high of 16.3% while net margin dropped by 20 bps to 4% due to extra performance bonus accrual and increasing branding expenses for dienmayxanh.com Gross margin peaked all-time high of 16.3% in 9M16 (vs average of 15.2%), contributed by 200 bps increment in TGDD s gross margin (15% to 17%) while that of DMX remains at 13%. We anticipate skyrocketing revenue size of TGDD has allowed MWG to bargain larger sales discount from its suppliers, which directly helped lift up gross margin. In contrast, 9M16 net margin dropped by 20 bps to 4% (vs. 4.2% in 2015) due to (1) higher performance bonus accrual for MWG s employees since 9M16 revenue and earnings have already completed 90% annual targets, and (2) increasing branding expenses for DMX amounting roughly VND 100bn in 3Q16. Indeed, 9M16 SG&A expenses/revenue ratio increased 140 bps to 11.2% from 9.9% in 9M F-2020F outlook for Electronics Retail indicates slower sector growth Electronics Retail recorded 20% YoY growth in 2015 (market size VND 140trn), with Telecommunication and Electronics & Household Appliances are fastest growing segments (31.9% YoY to VND 65trn and 18.3% YoY to VND 51trn respectively) Telecommunication segment to post another considerable upside of 26.7% YoY growth in 2016F, but then stagnates over 2017F-2020F at CAGR of 2% Vietnam s Electronics Retail recorded strong YoY growth of 20% in 2015 with total market size is valued at VND 140trn (2014: VND 116trn). Telecommunication (tablet, smart phone etc.) and Electronics & Household Appliances (TV, fridge etc.), two coremarkets of MWG, continue leading sector growth in which the former grew by 31.9% YoY to VND 65trn and the latter by 18.3% YoY to VND 51trn. Our research indicates growth drivers for Telecommunication segment consist of: widespread availability of internet connections via various public Wi-Fi hotspots and high-speed 3G & 4G broadbands has triggered demand for mobile handsets, specially smartphone that dominantly generates 2/3 of segment value, dropping average-unit-price of mobile phone thanks to technology advancements, which now averagely costs as low as VND 1m for a feature phone and VND 4m for a smartphone 3, and flexibility of installment payments (4/10 MWG s customers apply for this payment method 4 ) has encouraged more first-time-buyer as well as enabled existing users to replace their devices more often to enjoy the best features of the latest models. Though our forecast point to these factors will support another considerable upside of 26.7% YoY growth in 2016F, we think Telecommunication would stagnate over 2017F-2020F with CAGR of 2%. The main reason for this stagnation is the curtailing demand for smartphone, considering 3G & 4G penetration rate would slowly increase until 2020F after reaching the all-time high 50% next year. Furthermore, the 3 Euromonitor International, TVS Research 4 Company data

5 Household '000 Net Income VNDm million people 5 excessive 131% penetration rate of cellular mobile phone versus global average of 97% 5, the declining tech-savvy population (aged yrs), and the constant 2-year replacement cycle also imply headwinds against sector future growth. Figure 3: Rising middle-income class continue triggering demand for electronics retail sector 35,000 30,000 25,000 20,000 15,000 10,000 5, <$5,000 $5,000-25,000 $25,000+ Average spending per item Source: BMI, Euromonitor, GfK, TVS Research F 2017F 2018F 2019F 2020F Figure 4:...but declining tech-savvy age group and stagnating cellular phone penetration rate imply slower sector growth over 2017F-2020F % 131% 134% Source: BMI, GSO, VNTA, TVS Research 136% 139% 140% 139% 2014A 2015A 2016F 2017F 2018F 2019F 2020F Tech-savvy (15-39 yrs) Cellular phone penetration rate 155% 150% 145% 140% 135% 130% 125% 120% Electronics & Household Appliances segment would continue seeing double-digit growth of 14.3% in 2016F before moderating to 7-10% over 2017F-2020F (CAGR 8.2%) Electronics & Household Appliances segment would continue seeing double-digit growth of 14.3% this year, primarily boosted by the rising number of middle-income households (net income p.a. $5,000-25,000) which would likely spend more on modernizing their houses. Forecast by Euromonitor also indicates average spending per item of the whole sector would increase to VND 4.1m in 2020F from the current VND 3.7m. Our research signifies this segment s growth rate would due to enlarging value base. The music is still on: DMX to replace TGDD as MWG s next sales powerhouse TGDD chain has entered the mature stage of its expansion cycle while DMX chains are still at growth phase; we forecast DMX to replace TGDD as MWG s sales powerhouse over 2017F-2020F After attending the recent Investor Meeting, we view that TGDD chain has entered the mature stage of its expansion cycle while DMX chain are still at growth phase. Particularly, the CEO shared MWG s ambitious plan to ramp up the electronics & household appliances business and possess 30% market share next year (current 17%) by (1) doubling the number of DMX existing stores and (2) spending at least VND 100bn on DMX branding activities. Meanwhile, there will be less new TGDD stores opened next year to ensure the efficiency in managing existing stores that reached more than 900 locations by end-3q16 (MWG s target is 1,100 TGDD stores by end-2017). This message implies DMX would replace TGDD as MWG s powerhouse over 2017F-2020F. We estimate MWG to end 2016F with VND 44trn revenue and VND 1.6trn NPAT, exceeding annual targets by 28% and 18% 5 International Telecommunication Union (

6 6 respectively. We forecast TGDD to sustain the current 10% SSSG until end-2016f before dropping to 5% in 2017F and 2.5% in 2019F. Our forecast has already factored (1) the slowdown of telecommunication segment as discussed earlier, (2) the cannibalization risk from DMX that also sells similar products as TGDD, and (3) TGDD would be no longer the expansion priority of MWG from 2017F onwards. Conversely, we estimate DMX s SSSG would increase to 15% over 2016F-2017F on the back of (1) growing electronics & household segment and (2) further branding investments for DMX, then fall to 10% in 2018F when MWG s management team may shift their expansion focus to new business units (to be discussed later). Based on historical data, we predict new stores sales of both chains, which likely locate outside urban zones, to be 50% of existing ones over the forecast period. Figure 5: Forecasted store expansion and revenue growth of TGDD and DMX 2015A 2016F 2017F 2018F 2019F 2020F Thegioididong (TGDD) SSSG 10.0% 10.0% 5.0% 5.0% 2.5% 2.5% New store sales/existing store sales 59% 45% 50% 50% 50% 50% Existing stores ,184 1,284 1,334 New stores, net Total stores ,184 1,284 1,334 1,364 Average monthly rev_existing store (VNDbn) Average monthly rev_new store (VNDbn) Subtotal revenue (VNDbn) 20,769 30,625 35,424 38,766 40,509 41,988 YoY % growth 54% 47% 16% 9% 4% 4% Dienmayxanh (DMX) SSSG 13.0% 15.0% 15.0% 10.0% 10.0% 5.0% New store sales/existing store sales 57% 56% 50% 50% 50% 50% Existing stores New stores, net Total stores Average monthly rev_existing store (VNDbn) Average monthly rev_new store (VNDbn) Subtotal revenue (VNDbn) 4,482 12,927 22,299 30,661 38,071 43,105 YoY % growth 97% 188% 73% 38% 24% 13% Source: Company data, TVS Research Note: DMX store has 2 formats DMX-mini and DMX-regular whose floor size are sqm and 500-1,000 sqm respectively; we estimate DMX-mini/DMX-regular ratio is 2:1 given the difficulty in finding large space for DMXregular Our analysis indicates MWG and DMX to possess 46% and 53% market share in 2020F The growing sales will allow MWG to gain more market share from direct competitors. Base on the calculated market size, market share of TGDD and DMX would respectively increase to 46% and 53% in 2020F from the currently 38% and 17% in value term, assuming no new major electronics retailer enters the market.

7 VNDbn Store 7 Figure 6: DMX to replace TGDD as MWG s sales powerhouse over 2017F-2020F 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, , Source: Company data, TVS Research 1, ,334 1, A 2016F 2017F 2018F 2019F 2020F Revenue TGDD (LHS) Retail stores TGDD (RHS) Revenue DMX (LHS) Retail stores DMX (RHS) 1,600 1,400 1,200 1, Figure 7: but margins would drop in the next 2 years by cause of this transition 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 15.5% Source: Company data, TVS Research 16.3% 16.1% 16.0% 16.3% 16.5% 4.2% 4.0% 3.7% 3.7% 4.1% 4.2% 2015A 2016F 2017F 2018F 2019F 2020F Gross margin Net margin Short-term margins downswing as revenue structure leans towards lower-margin business DMX Gross margin to peak at 16.3% in 2016F before dropping by 30 bps to 16% over 2017F-2018F due to the change in revenue structure that leans towards lower-margin business DMX Net margin to drop 20 bps to 4% in 2016F (2015: 4.2%) and another 30 bps in 2017F-2018F by cause of expansion costs for DMX; we forecast this ratio to subsequently bouce back in 2019F-2020F Our research indicates current gross margins of TGDD and DMX are c.17% and c.13-14% respectively. We forecast MWG s 2016F gross margin will see a significant enhancement of 80 bps, peaking at 16.3% thanks to the steady expansion of highermargin business TGDD. This ratio would drop by 30 bps to 16% and hover around this point over 2017F-2018F due to the change in revenue structure that leans towards lower-margin business DMX, before bouncing back in 2019F when DMX matures and can effectively exert its bargaining power on suppliers. Particularly, we expect TGDD s gross margin to sustain at 17% while DMX s to raise by 1-3% to 14-16% over the forecast period. In contrast, we predict net margin to drop 20 bps this year by cause of expansion costs for DMX, including (1) branding expenses amounting roughly VND 100bn in 4Q16 and (2) higher depreciation expenses for DMX stores whose capex per store are US$ 200,000 for DMX-mini and US$ 300,000 for DMX-full (vs. US$ 100,000 per TGDD store). Because DMX would expand at fast pace till 2018F said the CEO, our analysis signifies net margin to shrink another 30 bps over the next 2 years. The recovery of gross margin as analyzed above would subsequently propel net margin up to 4.2% in 2020F.

8 8 New growth engines for post-2017 period Figure 8: Expansion roadmap of MWG s flagship retail chains Source: Company data, TVS Research Note: Peak implies the relevant retail chain has entered the mature stage of its expansion cycle New growth engines for post period when DMX matures are the grocery chain bachhoaxanh.com and the B2C ecommerce website vuivui.com While we estimate BHX s store expansion over this period for reference purpose (780 stores and VND 12.4trn revenue in 2020F)... MWG has revealed its new growth engines for post-2017 period when DMX matures to be the grocery chain bachhoaxanh.com (BHX) and the B2C ecommerce website vuivui.com, which are both under pilot testing. We sense that MWG is fairly conservative with BHX when spending entire 2 years (2016 & 2017) to study this new business, which targets the VND 1.37trn grocery retail (US$ 61.5bn) currently predominated by traditional retailers (local marts and street vendors take up 95% sales value) 6. According to the CEO, MWG will open 40 BHX stores in 2016 and increase the size to just 80 stores next year in order to carefully assess its operational efficiency and profitability. Given the Company s investment criteria for BHX are (1) VND 500m monthly store sales and (2) positive EBITDA per store, we think there is high chance MWG would expand BHX chain nationally in the next 2 years since average monthly turnover of pilot stores has already reached VND 1.2bn as of November Though we currently do not include financial data of BHX from 2018F onwards into our valuation model due to the uncertainty in launching this retail chain, we still estimate BHX s store expansion over this period for reference purpose. Particularly, we refer to the comparable chain Vinmart+ that opened 830 stores sizing 100 sqm per store in the last 2 years 7. Given BHX store size is sqm or 300 sqm on average, we estimate its expansion speed to be 1/3 that of Vinmart+, implying 140 new store opened in 2018F. In the best case that BHX is able to grow profitably, we forecast a 200% expansion rate of new BHX stores during 2019F-2020F considering TGDD and DMX s historical expansion tendency. We assume SSSG for this chain to be 10% and new-store-sales/existing-store-sales ratio to be % over the forecast period. Gross margin is 15% based on the management s target while capex per store is US$ 50, Euromonitor International 7 Retail Analysis (

9 9 Figure 9: Forecasted store expansion and revenue growth of BHX 2015A 2016F 2017F 2018F 2019F 2020F Bachhoaxanh (BHX) SSSG 10.0% 10.0% 10.0% 10.0% New store sales/existing store sales 100.0% 100.0% 100.0% 75.0% Existing stores New stores, net Total stores Average monthly rev_existing store (VNDbn) Average monthly rev_new store (VNDbn) Subtotal revenue (VNDbn) ,056 3,194 7,986 12,474 YoY % growth 120% 203% 150% 56% Source: Company data, TVS Research...we think now is a bit early to discuss about vuivui.com s impact on MWG s operational and financial performances, and will come back to this matter in later updates Regarding vuivui.com, we think now is a bit early to discuss about its impact on MWG s operational and financial performances. According to the CEO, MWG ambitiously expects vuivui.com to become an Amazon of Vietnam, which will bring this ecommerce website to direct competition against well-established players such as Tiki, Lazada and Sendo. Therefore, we now hold a conservative view towards this new business unit due to (1) expectedly fierce competition and (2) uncertainty about how vuivui.com will differentiate itself from existing platforms. We will come back to this matter after the press conference introducing vuivui.com in December-2016.

10 10 KEY RISKS Uncertain synergy between old (TGDD and DMX) and new (BHX) retail chains BHX has a complete different business model from TGDD and DMX, which requires MWG s management team to resolve the key question of managing short shelf-life inventories. Besides that, 95% of grocery retail is controlled by traditional retailers while the remaining 5% is fiercely competed by other modern grocery chains have laid down another question of differentiation for BHX to gain market share. As MWG specializes in electronics retail whose products are purely imperishable, there is risk the Company is not able ultilize its available know-how to effectively operate BHX. Recent growth driven by store expansion appears unsustainable As discussed above, we view the recent revenue and earnings growths were driven by rapid store expansion rather than a surge in organic demand. This implies the current growth model appears unsustainable and an economic downturn would severely impact MWG s business performance. International expansion of TGDD chain contents some inherent risks In the recent Investor Meeting, MWG s CEO shared the international expansion plan initiated with TGDD stores opened in Cambodia next year. Though we view this go-global approach a positive sign showing the intention of MWG s management to diversify revenue stream, operating overseas still contents inherent risks of (1) inefficient supply chain and (2) business cultural differences.

11 2017EBITDA Margin 11 VALUATIONS and RECOMMENDATIONS Our 12M-target price is 190,000 a 17.2% upside, deriving from DCF. Considering this valuation results, 2017F-2018F upbeat revenue, and earnings growth, our investment view is BUY. DCF method Our DCF-based 1Y target price is VND 190,000 with an implied 2017F EV/EBITDA of 10x. MWG s 2017F EV/EBITDA of 8.1x appears appealing as it currently trades at 15% discount to the global norm of 9.3x, while MWG s 2017F EBITDA margin delivers 13% premium to global benchmark (5.4% vs 4.8%). Figure 10: Valuation appears appealing in global context 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% EV/EBITDA BIG.BK COM7.BK 6281.TW KS MVID.MM MWG.HM PRD.WA 2450.TW 6154.TWO Source: TVS Research for MWG, Thomson Reuters for other stocks Figure 11: DCF-based target price calculation for MWG (VND bn) 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F EBIT 2,068 2,746 3,585 4,198 4,527 4,729 4,839 4,930 4,950 4,970 EBIT (1-tax) 1,655 2,197 2,868 3,358 3,622 3,783 3,871 3,944 3,960 3,976 D&A expenses Change in working capital (2,125) (1,694) (212) (2,065) (718) (521) (217) (446) (30) (57) Capex (1,349) (1,266) (1,029) (720) (513) (538) (552) (563) (565) (567) FCFF (1,547) (342) 2,154 1,156 2,987 3,361 3,761 3,606 4,042 4,032 PV of FCFF (1,533) (310) 1, ,074 2,134 2,185 1,916 1,965 1,793 Beta 1.06 WACC 9.3% Terminal growth rate 0.5% Terminal value 18,710 Enterprise value 31,598 Less: Net debt 2,221 Equity value 29,377 Number of shares (mn) 154 Equity value per share (VND) 190,000 Source: TVS Research

12 12 ANALYST CERTIFICATION I, Dong Quang Trung, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies or its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RATING and VIEWS Buy (B), Neutral (N), Sell (S) Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions 12-month rating Definition Buy Total Stock s Return Potential > 15% Neutral Total Stock s Return Potential between (-15%) and 15% Sell Total Stock s Return Potential < (-15%) Short-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to rise within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target. DISCLAIMER Copyright 2016 Thien Viet Securities JSC (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of 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.

13 13 THIEN VIET SECURITIES JOINT-STOCK 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 Duy Nguyen (Mr.), Manager Equity Capital Market duynh@tvs.vn Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn Trang Vu (Ms.), Senior Analyst Basic Material trangvtt@tvs.vn Bach Nguyen (Mr.), Analyst Oil & Gas bachnkv@tvs.vn Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Quang Luong (Mr.), Analyst Team Assistant quanglt@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn