VIETNAM NATIONAL PETROLEUM GROUP (PLX - PETROLIMEX) PLX PETROLIMEX. INITIAL COMPANY REPORT April, 14 th 2017 PLX: PROFIT 2016 STRONG GROWTH

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1 VIETNAM NATIONAL PETROLEUM GROUP (PLX - PETROLIMEX) INITIAL COMPANY REPORT April, 14 th 2017 PLX PETROLIMEX Exchange Market price (VND) Avg. volume (10d) STOCK INFORMATION (April, 14 th 2016) Market cap (bn. VND) HSX N/A N/A N/A Outstanding shares 1,293,878,081 % foreign ownership 8% EQUITY ANALYST Nguyen Phuong NGUYEN nnphuong@vcbs.com.vn ext 116 PLX: PROFIT 2016 STRONG GROWTH 2016 Earnings: PLX reported 2016 consolidated revenue of VND 123,096 billion, decreasing by 16.21% compared with last year revenue and reaching 91.86% of 2016 target. However, net income in 2016 grew impressively, reaching VND 5,147 billion (+68.35% yoy), while net income of the parent company reached VND 4,669 billion (+71.39% yoy) Outlook: We believe that 2017 will be a promising year for PLX thanks to the two core businesses: petroleum distribution and petrochemical products, which accounted for 85.71% of PLX s revenue. VCBS forecasted that in 2017, PLX s revenue will reach 143,087 billion VND (+16.24% yoy), net income will reach 6,983 billion VND (+10.84% yoy), and net income attributable to shareholders of the parent company will reach 5,057 billion VND (+8.30% yoy). We forecast 2017's EPS of 3,908 VND (calculated using the expected shares outstanding of 1,293,878,081 shares). Recommendation: PLX is one of the largest corporations in Vietnam with a leading position in the petroleum distribution market. The Group has many competitive advantages including its system infrastructure, transportation and distribution network as well as low business risks thanks to the base price regulation. Given bright outlook, we believe that the fair value of PLX to be 55,691 VND per share. Financial indicators Total revenue (VND bn) 195, , , ,097 +/- yoy (%) -2.45% 5.54% % % Net income (VND bn) 1,579 (9) 3,058 5,147 +/- yoy (%) % % N/A 68.35% Total Equity (VND bn) 15,635 14,092 16,291 26,423 D/A (%) 72.80% 74.56% 67.69% 57.23% Gross profit margin (%) 4.07% 3.43% 8.74% 11.54% Net profit margin (%) 0.81% N/A 2.08% 4.18% VCBS reports system VCBS Bloomberg Page: <VCBS><go> ROA (%) 2.75% -0.02% 6.06% 9.42% ROE (%) 10.10% -0.06% 18.77% 22.19% EPS (VND) 1,476 N/A 2,858 3,976 BVPS (VND) 12,086 10,551 15,225 17,931 VCBS Research Department

2 COMPANY PROFILE Description Capital raising history Vietnam National Petroleum Group (Petrolimex), formerly known as The Oil, Lub and Grease Corporation, which was established in 1956 by the Ministry of Commerce, later known as Vietnam Petroleum Corporation. In 2011, the Prime Minister issued a decision on restructure and equitization of Vietnam Petroleum Corporation. In August 2012, Petrolimex officially operated as a public company. According to SCIC's divestment plan, Petrolimex is scheduled to be listed on the HSX in April 2017 with the trading ticker as PLX. - At the time of the IPO in 2011, Petrolimex has a chartered capital of VND 10,700 billion, equivalent to 1,070,000,000 shares with a 94.99% stake owned by the State. - In early 2016, PLX had paid the 2015 dividend as stocks at the rate of 15% of face value. By mid- 2016, Petrolimex has increased its chartered capital and reduced its State ownership through the issuance of million shares to a strategic investor, namely JX Nippon Oil & Energy Vietnam at VND 39,017 per share, equivalent to 8% of its share capital. Those shares are subject to transferable restriction for 5 years. The cash that PLX received from JX Nippon was used to buy back the previous stock dividend by VND 10,600 per share as treasury shares. - As of the end of 11/2016, PLX's chartered capital was VND 12,938,780,810,000, equivalent to 1,293,878,081 shares. Core businesses The core business of Petrolimex is mainly import, export and trading petroleum. In addition, Petrolimex invests in related businesses, which are divided into 8 main sectors including: (1) Petroleum products: As the national leader in petroleum trade, Petrolimex currently occupies about 50% of the domestic market and supplies 7.9 million m 3 (tonnes) of petroleum to the domestic market in At the moment, 70% of PLX's gasoline output is still imported from abroad. Therefore, fluctuations in world s crude oil price as well as the government policy of foreign currency exchange rate have a great impact on business results of this sector. By the end of 2015, PLX owns a tank storage system from North to South with a capacity of over 1.7 million m 3. (2) Lubricants & Petrochemical products: The business is carried out through its member company, Petrolimex Petrochemical Joint Stock Company - PLC, which consists of three main business lines: lubricant, bitumen and petrochemical products. (3) Gas: Operate through its member company Petrolimex Gas Corporation PGC. Gas brand of Petrolimex is one of the most prestigious brands in the market for its quality; compete equally with the gas products of the multinational company - Total Group. (4) Insurance: Petrolimex Insurance Corporation (PJICO) has offered over 50 insurance products and currently holds the leading position in the fields of transportation, construction and installation, petroleum, import and export, and vehicle insurance... (5) Petroleum transportation: This business currently own a fleet of 140,000 DWT of ocean vessels, nearly 100,000 tons of river and coastal vessels, 500km of oil pipeline and more than 1,200 tank trucks with a total capacity of over 9,000 m 3. Fuel transportation business is under the management of the member companies to ensure the transportation of petroleum from abroad to Vietnam and from the wholesale depots to ports and agents throughout the country. (6) Construction: This area is mainly used for internal needs - the development and improvement of infrastructure systems of Petrolimex such as petroleum depots, LPG depots, bitumen warehouse, VCBS Research Department Page 1

3 lubricant blending plant, oil pipeline... (7) Petroleum services: the entire petroleum products of Petrolimex are distributed by this business sector. The Petroleum services of PLX combine a distribution network of 2,352 self-owned gas stations and more than 4,000 gas stations belonging to agents within nationwide. Especially, the distribution system of Petrolimex has advantages over rivals such as PV Oil and Military Petroleum... when present in strategic positions such as downtown centers of big cities. (8) Other services: Petrolimex Aviation in the field of fuel supply to airlines (United Airlines, Japan Airlines, Korean Air and Air China...), PIACOM in the field of deploying Enterprise Resource Management program (ERP), PITCO in the field of import-export business... Following the business segments as in the financial statement of PLX, the group has 6 main business activities as follows: Revenue structure by business segments 1.43% 1.99% 3.03% 4.33% 2.91% 86.29% Petroleum distribution Petrochemical products Gas products Insurance services Petroleum transportation services Others Source: 2016 audited FS of PLX Shareholders structure As one of the largest economic groups in Vietnam, PLX has a rather dense ownership structure. Of which, the majority of PLX ownership is still in the hands of the State through the Ministry of Industry and Trade as the representative with 75.87%. The second biggest stakeholder is JX Nippon Oil & Energy - the strategic investor with 8% ownership. It is also the only foreign investor owns PLX shares. In addition, PLX also acquired 11.98% as its treasury stock after the sale of shares to the strategic stakeholder. Thus, the free float shares accounted for 4.15% of the total shares, equivalent to 53.7 million shares (~VND 537 billion market cap as the face value is VND /share). Shareholders structure JX Nippon Oil & Energy, 8.00% Treasury shares, 11.98% Individuals, 3.14% Other institutionals, 1.01% Ministry of Industry and Trade, 75.87% Source: Petrolimex VCBS Research Department Page 2

4 List of subsidaries and affiliates The Vietnam National Petroleum Corporation has 41 member companies, 34 branches and enterprises belonging to the member corporations with 100% ownership, 23 joint-stock companies with over 51% ownership, 3 joint venture companies with foreign partners and 1 branch in Singapore. At present, Petrolimex is operating under the model of an economic group consisting of holding companies: BUSINESS CHARACTERISTICS Member corporations Petrolimex Petrochemical Corporation - PLC Petrolimex Gas Corporation - PGC Petrolimex Insurance Corporation - PJICO PG Tanker Corporation - PG Tanker Member companies 100% ownership - 45 petroleum member companies from North to South > 50% ownership - 21 subsidairies operate in the fields of services related to petroleum, telecommunications and transportation. Subsidairies and Affiliates < 50% ownership - 12 affiliated companies and joint ventures related to fields other than petroleum such as banking, real estate, traffic, building materials (Source: Petrolimex) As the petroleum business contributes the most to the Group's total revenue (85-90% of the total revenue), we will focus on analyzing this business in the context of this report. Input materials: 70% from overseas and 30% from Dung Quat oil-extracting factory Distribution channels: wholesale network and retail network At present, PLX's input material is made up of 30% refined petroleum from Dung Quat Refinery and 70% from overseas, mainly from the Singapore market (accounting for nearly 50% of total sales volume), there are also from Malaysia, Thailand and Korea markets. These are all tax incentives for petroleum imports through the signed trade agreements. Of which, the import tax on diesel, jet fuel from ASEAN countries is 0%, from Korea is 5% and other markets is 7%. Particularly, gasoline imported from Korea is subject to 10% tax, 0.01% lower than other markets. PLX distributes petroleum in both wholesale and retail method through its distribution network, including 2,352 direct-selling stores (up to 2015). PLX's wholesale customers are factories, industrial parks, manufacturing households... PLX's retail customers are individuals who buy gasoline at gas stations. Nowadays, retail sales account for 53 to 58% of PLX's total current ouput. This is also the segment that has achieved good growth over the years, while the wholesale segment remained stable. In addition to distributing gasoline to the domestic market, PLX also has part of its petroleum output reexported to neighboring countries such as Cambodia and Laos, accounting for about 10% of total output. VCBS Research Department Page 3

5 USD/barrel Pricing determination: The ceiling retail price is the base gasoline price, the wholesale price is not imposed and is inversely proportional to the margin margin giá bán lẻ trần là giá xăng dầu cơ sở, giá bán buôn không bị áp trần và tỷ lệ nghịch với biên LN định mức 1. Retail pricing mechanism According to the inter-ministerial regulation by the Ministry of Industry and Commerce and the Ministry of Finance, the petrol retail selling prices are governed by the market mechanism with the base petrol prices being the ceiling selling prices calculated on a 15-day cycle as follows: Base price = {CIF price + Import tax + Special consumption tax} x Exchange rate + VAT + Fixed operating cost + Deduction for Price stabilization fund + Fixed profit + Environmental protection tax + Other taxes, charges and deductions in accordance with current law Gasoline E5, E10 Gas Diesel fuel Paraffin Mazut oil Import tax 16.22% 2.10% 0% 0% Special consumption tax 10% 8% VAT 10% 10% 10% 10% Fixed operating cost (VND/liter) 1,050 1, Deduction for Price stabilization fund (VND/liter) Fixed profit (VND/liter) Environmental protection tax (VND/liter) 3,000 1, Source: Ministry of Industry and Commerce In particular, the CIF price is the global oil price (the average price announced by Platts in the Singapore market of 15 days prior to the date of adjustment of the preferential import tax rates of related petrol and oil) plus the costs of bringing petroleum from overseas to Vietnam ports. Base on the petrol base price and the use of the Price stabilization fund (if any), wholesalers and distributors of petroleum may adjust their prices (up/down) but not higher than the base price announced by the Ministry of Industry and Trade and Finance (except for a few special cases). Correlation between fixed profit margin and import price of RON % 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% RON 92 import price (USD per barrel) Fixed profit margin Source: Ministry of Industry, VCBS estimations VCBS Research Department Page 4

6 One thing worth noting in the calculation of retail base price is that the lower the global oil price, the higher the profit margin of distributors because the profit is always fixed at VND 300/liter, not subject to the fluctuation of input prices. This is also one of the reasons for PLX's surge in profits since the base price has been applied (as of November, 1 st 2014) given amid rising domestic consumption and the global oil prices maintaining at a low level. 2. Wholesale pricing mechanism At present, the Vietnamese governement still does not have specific regulations applicable to the pricing policy of petroleum wholesalers. However, the pricing policy of PLX in particular and other petroleum distributors in general are based on the following mechanism: Retail prices > Wholesale prices Small agency prices > Big agency prices Late payment prices > Pre-paid prices Factors that affect revenue growth Factors that affect gross profit growth Like other businesses, the key factors that have positive correlation to PLX's revenue growth are the selling price and the fuel consumption that PLX supplies to the market. Remarkably, in the past few years, the global crude oil prices have shown strong volatility causing PLX's sales to become greatly affected by input prices. In addition, the output price since 2014 is regulated by the Government Decree No.83/2014/ND-CP on petroleum trading at the base price, applicable to all petroleum distributors across the country. Therefore, we believe that in order to assess the revenue growth rate of PLX in an objective manner, it is necessary to eliminate the effect of the output price (especially the fluctuation of crude oil price - the main component of the selling price). Therefore, PLX's biggest impact on PLS's revenue growth is domestic fuel consumption. Although sales of petroleum distributors in general and PLX in particular are subject to the base price, PLX's gross margin can still be widened by: - Effective inventory management: PLX has the ability to easily change its inventory turnover regarding fluctuations in input petroleum prices thanks to a tank storage system that is larger than its actual demand. - CIF price optimization: The CIF price includes the purchasing price of petroleum and the transportation price, which are not completely controlled by the base price. In the calculation of the base price, these two costs are the average costs of all petroleum distributors throughout the country. And with the advantage of its size, PLX always has the lowest CIF price in the domestic market because: (1) PLX is the largest wholesale hub in the country so owns a higher bargaining power on the purchasing prices than distributors; (2) PLX has its own transport fleet, separate transit depots, so transport costs are lower than the average price that constitutes the base price. - Import tax differential: According to the Government's Decree No. 83/2014/ND-CP on petrol and oil trading, the preferential import tax rate (MFN for countries in the WTO) of 16.22% is applied for the base price s calculation, while PLX's tariff on petroleum imports from ASEAN and South Korea is only 0-10%. Therefore, PLX still makes benefit from this import tax differential. - Saving from fixed operating costs: this operating cost is known as the domestic petrol transportation costs of the distributors, including both which of wholesale and retail at actual temperature. Owning a large storage tank system, which is regularly maintained in good condition, PLX's actual petrol transportation costs are often lower than the fixed operating cost implied in the base price. VCBS Research Department Page 5

7 COMPETITIVE ANALYSIS Main competitors The petroleum distribution sector is one of the sectors protected by the State and dominated by two large State corporations, which are PV Oil and PLX. Additionally, there are only 29 domestic companies who are licensed wholesale distributors in Vietnam. Composition of Petroleum distribution market Other distributors 35% PLX 48% PV Oil 17% Source: VCBS This sector currently has virtually no foreign competitors due to current regulations. Particularly, a foreign investor is only permitted to participate in the gasoline retail market by purchasing shares of a domestic retail company if that investor also invests in a domestic refinery. This is the reason that JX NOE bought 8% of PLX s shares and agreed to co-invest along with Petrolimex in Nam Van Phong oil refinery project. In the near future, PLX s first foreign competitor will be Idemitsu Q8 Petroleum as this company became a licensed distributor and retailer in Vietnam since April Idemitsu Q8 Petroleum is a joint venture between Idemitsu Kosan and Kuwait Petroleum International (KPI). Idemitsu Kosan and KPI are holding a total of more than 70% stake in the Nghi Son oil refinery project. Accordingly, Idemitsu Q8 Petroleum is expected to sell products produced by Nghi Son oil refinery from mid Company s position in the industry In the petroleum sector, PLX is assigned by the government the task of maintaining a leading role in the domestic market, ensuring timely and sufficient supply of petroleum products to cover demand of the economy and enhancing national security. Therefore, since its establishment, PLX has always been the market leader in petroleum product distribution in Vietnam, maintaining a market share of 48 % - 50% of the national consumption. PLX possesses many competitive advantages against its largest competitor - PV Oil: Distribution system Storage system Petrolimex - 2,352 affiliated stores; - More than 2,800 agent stores - Presence in remote area (e.g., border area, islands) - 2,200,000 m3 - Pipeline system - Deep-water storage Source: VCBS PV Oil affiliated stores; - More than 2,500 agent stores - 800,000 m3 - No pipeline system - No deep-water storage VCBS Research Department Page 6

8 As a result, Petrolimex brand has gained prestige and a high-ranking position in the retail market, which is trusted by consumers more than other petroleum distribution brands in the market. Porter s 5 forces analysis Threat of New Entrants: LOW - High barriers to entry: Complex regulation requirements to become licensed distributor (Decree No. 83/2014/ND-CP) Threat of New Entrants Bargaining Power of Buyers: LOW - Retail price is controlled by the government Bargaining Power of Suppliers Industry Rivalry (*) Bargaining Power of Buyers Bargaining Power of Suppliers: LOW Threat of Substitutes: LOW - Various supply sources such as ASEAN, South Korea, China, and Russia. - PLX is a large buyer and therefore, has bargaining power. Threat of Substitutes - Electric vehicles such as electric cars and electric bikes are not yet popular. (*) Industry Rivalry: LOW PLX does not face intense competition in the domestic market businesses due to the low number (only 29) of licensed distributors and retailers in the market. PLX held 48% market share, followed by PV Oil, holding 20% market share. Peer Analysis PLX has the highest total assets and total equity among companies in the peer group. However, its ROA and ROE are not exceptional Information of some listed companies operating in gasoline distribution on the Vietnam stock exchanges: Ticker Assets (bn. VND) Equity (bn. VND) D/A Net profit margin ROA (ttm) ROE (ttm) EPS (ttm) BVPS PLX 54, , % 4.20% 9.52% 22.26% 3,606 17,933 COM % 3.16% 20.72% 25.80% 7,771 30,122 HTC % 5.31% 18.04% 33.56% 6,920 20,623 PPY % 1.64% 11.48% 18.80% 2,626 13,967 SFC % 3.80% 8.33% 20.34% 3,815 18,757 TMC % 1.11% 6.29% 11.85% 1,799 15,191 Avg % 3.00% 12.97% 22.07% 4,586 19,732 Last updated: Q4.2016, PLX values are not included in the average value calculation VCBS Research Department Page 7

9 VND billion million m3 VND billion million m3 FINANCIAL ANALYSIS PLX is superior to other petroleum distribution companies listed in Vietnam in terms of total assets and total equity. While PLX s Debt/Total Assets ratio is significantly high, it should not raise concern as PLX s Interest-bearing Debt/Total Assets remains at 18.18%. In terms of profitability, PLX s profit margin of 4.20% is higher than industry average. However, PLX s ROA and ROE are not outstanding. ROA at 9.52% is lower than industry average while ROE at 22.26% is close to industry average. (See PLX s detailed financial analysis below) 350, , , , , ,000 50,000 0 Revenue & sales volume of PLX , , , , , ,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - (2,000) Profits and sales volumes of PLX ,205 12,841 7,984 6,950 7,097 5,147 3,058 1, Net revenue Sales volume Gross profit Net income Sales volume Source: VCBS Performance in : From 2012 to 2015, although PLX s sales volume grew steadily at 5.08% CAGR, the company s revenue and profit did not achieve the same growth rate. The period can be divided into 2 major phases: before and after November 1st, the day that the government s Decree 83 on petroleum business regulation took effect. Before Decree 83: PLX's earnings were more sensitive to the volatility of global oil prices and exchange rates as the Group could not actively adjust selling prices to allocate risks. Therefore, from 2012 to 2014, PLX s revenue and profit did not correlate. Notably, in the second half of 2014, as global oil prices plunged 57.10% and PLX was required to maintain 30-day inventory at minimum, the Group reported 2014 net loss of VND 9 billion while the parent company reported a net loss of VND 365 billion. After Decree 83: Taking effect since November 1st, 2014, Decree 83 made a clear impact on PLX s earnings in PLX s 2015 earnings were remarkably improved despite the downtrend of global oil prices as PLX was less exposed to the volatility of global oil prices and exchange rates thanks to a more flexible pricing mechanism. As a result, while 2015 revenue declined (-28.95% yoy), gross profit increased sharply (+80.94% yoy) and 2015 net profit reached VND 3,058 billion, 93.67% higher than net profit in 2013 (the Group reported a net loss in 2014). Overall, we believe that after Decree 83 took effect, since 2015, the growth in sales volume will be the main driver of PLX s earnings. Performance in 2016: PLX reported 2016 consolidated revenue of VND 123,096 billion, decreasing by 16.21% compared with last year revenue and reaching 91.86% of 2016 target. The main cause of this decline was an VCBS Research Department Page 8

10 VND/liter USD/barrel overall decline of crude oil and petroleum product prices, especially in the beginning of Specifically, according to Platts Singapore, which Vietnamese government used to determine base prices, the price of RON 92 petrol average in 2016 was USD per barrel on average, 19.12% lower than the average price in 2015 at USD per barrel. However, declining revenue was not a significant concern for PLX as gasoline consumption volume in 2016 still saw good growth at 8.35% yoy, reaching 11,552,602 m 3 (or tonnes for mazut oil). Gross profit margin in 2016 improved significantly compared with in 2015, increasing from 8.74% to 11.48%, due to: (1) PLX s selling prices were based on base price determined by the Ministries of Industry and Commerce and the Ministry of Finance using new mechanism. The new mechanism used 15- day average of global oil prices to determine base price and included other features to limit the impact of oil price volatility on base price. (2) The fixed profit of 300 VND/liter regardless of changes in oil prices helped increase PLX s gross profit margin when oil prices fell (as explained above). Comparison of RON 92 buying/selling prices in ,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, RON 92 selling price (VND per liter) RON 92 import price (USD per barrel) Source: Ministry of Industry and Trade, Platts Singapore (selling price is MoIT s base price, purchasing price is based on prices reported by Platts Singapore) Notably, PLX s financial expense decreased from VND 2,591 billion in 2015 to VND 844 billion in 2016, a 67.42% reduction. This financial expense decrease can be explained by the following reasons: (1) Interest expense decreased by 5.90% yoy as PLX issued new equity to its strategic partners and pay off part of its debt (about VND 5,786 billion). (2) State Bank of Vietnam s new policy regarding exchange rates helped stabilize exchange rates in As a result, PLX s loss due to changes in foreign exchange rates in 2016 declined by 82.44% yoy. (3) PLX did not have to make a loss provision for Petrolimex Singapore as it did in Therefore, PLX s provision for investment losses decreased from VND 1,702 billion in 2015 to VND 779 billion in 2016 (-54.23% yoy). Previously, due to the sudden plunge of global oil prices in Q4.2014, Petrolimex Singapore suffered a cumulative loss of about VND 130 billion. However, from 2015, as oil prices fluctuated in a moderate range, Petrolimex Singapore was able to cover its previous loss and reported positive accumulative profit. Therefore, the Group's profit grew sharply in Consolidated income before tax reached VND VCBS Research Department Page 9

11 6.300 billion (+68.11% yoy, exceeding 2016 target by 58.78%), as follows: Fields EBT (billion VND) % of total EBT Petroleum retail % Petrochemicals, asphalt, chemicals % Transportation % Aviation fuel % Construction, design, infrastructure % Warehouse % Insurance, banking % LPG % Two foreign companies % Source: Petrolimex Net income in 2016 grew impressively, reaching VND 5,147 billion (+68.35% yoy), while net income of the parent company reached VND 4,669 billion (+71.39% yoy). Financial health Capital structure: PLX's debt tends to decrease over the years. Debt ratio by the end of 2016 changed significantly compared with in Capital structure 20% 22% 24% 21% 12% 11% 9% 10% 68% 67% 67% 69% 32% 7% 61% 43% 6% 52% Short-term libilities Long-term libilities Owners' equity Source: Financial reports of PLX In Q2 2016, PLX issued new equity to its strategic shareholders, increasing its equity capital by 8%. The Group used the majority of this new cash flow to reduce its interest-bearing debt (-37.10% ytd) and buy back its bonus shares (approximately 6.68% of total equity). As a result, short-term debt/total assets decreased from 7% in 2015 to 6% in 2016, long-term debt/total assets decreased from 61% in 2015 to 51% in Solvency: By of the end of 2016, PLX s liquidity ratios are markedly improved. The current ratio was higher than 1, reaching 1.20 times an improvement from 0.97 times in EBIT/interest expense ratio was at a very safe level of times, much higher than 7.39 times in 2015 as the Group significantly reduced its debt in VCBS Research Department Page 10

12 Liquidity Ratios EBIT/interest payment Cash ratio Quick ratio Current ratio Source: PLX 2016 consolidated financial statements Cash flows: In 2016, cash flow from operating activities fell sharply compared with in 2015 (-25.64% yoy) mainly due to PLX s stockpiling its inventories (+13.14% yoy), particularly goods in transit ( % yoy, equivalent to about VND 409 billion). Also, as PLX increased its debt repayment after issuing new equity, cash flow from financing activities of PLX fell compared with last year (-32.86% yoy). Meanwhile, cash outflow for investing activities increased sharply compared with the same period last year (+98.32% yoy). The cash flow is primarily used to purchase fixed assets and other long term assets (2,689 billion VND), including billion VND to invest in PLX s transportation and distribution system OUTLOOK Industry outlook Domestic petroleum consumption in 2017 is forecasted to reach million tons (+ 15% yoy) The petroleum distribution industry is relatively stable and bears almost no risk of incurring significant loss as the industry is protected by the government through the base price policy and the industry is less affected by market volatility. Therefore, the growth prospects of the industry will mainly depend on domestic demand. We think the prospect of the industry is quite optimistic in Consumption in the country could reach million tons (+15% yoy) due to: The number of vehicles in Vietnam is rising: we forecast that in 2017, the number of cars on the road will reach about 3.2 million vehicles (+14.29% yoy) and the number of motorcycles will reach 52.5 million vehicles (+6.06% yoy). This is the basis for growth of petroleum demand. Public investment projects developing the transportation facilities will be restarted. The cycle of public investment projects is often associated with the political cycle of 5 years and 2017 will be the beginning of a new cycle. We believe that the resurgence of projects that expand the transportation system will lead to an increase in traffic flow and indirectly trigger growth in domestic petroleum consumption. Company outlook We believe that 2017 will be a promising year for the oil and gas industry in general and for PLX in particular. PLX s two core businesses, which accounted for 85.71% of PLX s revenue and 72.30% of PLX s income before tax, both have optimistic growth prospect: 1. Petroleum retail segment s growth will be driven by (a) increasing domestic petroleum consumption as automobile traffic across the country is growing strongly (+30% yoy in 2016, 19.66% CAGR in the last 4 years) and the number of domestic and international flights is on a VCBS Research Department Page 11

13 rising trend; (b) PLX aims to increase the proportion of non-petroleum revenue in the total revenue of each store to 50%. We think that PLX will likely cooperate with convenience store chains such as 7-Eleven, K-mart, and V-mart to fully utilize its store network, a strategy adopted by global petroleum distribution companies. 2. Petrochemical segment will also have positive outlook thanks to growth in the asphalt industry. Due to the political cycle of 5 years, 2017 will be the year that the new government restarts BOT highway projects. Therefore, we believe that 2017 will be a bright year for the asphalt industry as well as PLX s petrochemical segment Forecast Based on the growth prospects as presented above, VCBS forecasts PLX s 2017 business results using some key assumptions as follows: (1) PLX s sales volume in 2017 to grow by 8% yoy; (2) Global oil prices to follow a sideways trend; (3) Ministries of Industry and Commerce - Finance Union will change the calculation of the base prices for petroleum products so that the base prices closely follow expenses of firms in the industry. As a result, we forecast 2017 gross margin of 11%, lower than the 11.54% in 2016; VCBS forecasted that in 2017, PLX s revenue will reach VND 143,087 billion (+16.24% yoy), net income will reach VND 6,983 billion (+10.84% yoy), and net income attributable to shareholders of the parent company will reach VND 5,057 billion (+8.30% yoy). We forecast 2017's EPS of VND 3,908 (calculated using the expected shares outstanding of 1,293,878,081 shares). Investment risks - The price of PLX stock after the listing will likely not reflect the intrinsic value of the stock. PLX is a leading large-cap stock in Vietnam stock market. Before the listing, PLX is also one of the most active stocks with high trading volume in the OTC market. Therefore, some speculators who bought PLX in the OTC market might have higher expectation of PLX s value than VCBS and try to push the stock price in the few days after the stock listing before realizing profit. VALUATION - Gross profit may decrease: Currently, the Ministry of Trade and Industry has recognized the shortcomings in the current mechanism for calculating the base price of petroleum products and there have already been some proposals to modify the mechanism for the benefit of the consumers. The possibility that the new calculation mechanism will be adopted, shrinking PLX s gross profit in the near future is high. - Competitive risks: In 2017, the Nghi Son oil refinery will officially operate and its products will be distributed by Idemitsu Q8 Petroleum, threatening PLX s market share. However, it is possible that in the initial period of operation, the quality of Nghi Son s products will be inconsistent while its selling prices will not be completive due to the plant s high depreciation cost. As a result, PLX will not face significant competition from this newcomer in the short term. Multiples method: Intrinsic value VND 50,211 per share Most of the listed petroleum distribution companies in Vietnam have much smaller scale than PLX. Therefore, we have selected a number of companies in Asia that are comparable to PLX in terms of total assets, total equity and revenue and have the petroleum distribution segment accounted for at least 70% of their total revenue. Although conventionally, the P/E and EV/EBITDA of Vietnam companies are considered to be lower than the average of companies in other Asian countries, we do not put a discount on PLX s multiples due to the Group s substantial scale. VCBS Research Department Page 12

14 Ticker Country Short name Assets (bn. VND) Equity (bn. VND) D/A Avg. P/E Avg. EV/EBITDA 933 HK BrightOil Petro 97,714 33, % HK Shanghai Dashe 20,048 10, % BCP TB Bangchak Petrole 64,645 27, % JP San-Ai Oil Co. 36,953 15, % Average P/E approach: Source: Bloomberg, updated on 28/03/2017 Fair value = Average P/E of PLX s peers x 2017 forward EPS = x 3,908 = 50,609 EV/EBITDA approach: Fair value = Average EV/EBITDA of PLX s peers x est. EBITDA/share for 2017 = 8.07 x 6,189 = 49,945 PLX is a major corporation in Vietnam with many different business segments, in which depreciation expense of the petroleum business segment only accounts for only 3.54% of PLX s total depreciation expense. Therefore, we choose to use a weight of 60% for the EV/EBITDA approach to eliminate the impact of depreciation expense on determining the fair value of PLX. Valuation of PLX using the multiples method: Method Price (VND/share) Proportion P/E approach 50,609 40% EV/EBITDA approach 49,945 60% Fair value 50,211 DCF method: Fair value is VND 61,172 per share Assumptions: 1. PLX s gasoline sales volume will grow at 8% per year in the next 5 years from 2017 to Global crude oil prices will move sideways and remain stable. 3. Growth of other segments as follows: Business Petrochemicals 4.00% 4.00% 4.00% 4.00% 4.00% Gas products 1.36% 1.36% 1.36% 1.36% 1.36% Insurance 7.00% 7.00% 7.00% 7.00% 7.00% Transporttation services 5.00% 5.00% 5.00% 5.00% 5.00% Others 10.00% 10.00% 10.00% 10.00% 10.00% VCBS Research Department Page 13

15 4. We use betas of petroleum distribution companies listed in Vietnam to calculate the beta of PLX: Ticker Leverated beta Avg. tax rate of 3 latest years D/E Unleverated beta COM % HTC % PPY % SFC % TMC % PLX % Cost of capital: - Risk free rate: R f = 6.11% (10 years bond yield) - Equity risk premium: R p = 12.09% (source: Aswath Damodaran) - Beta = 0,40 - k ce = R f + Beta x R p = 6.11% x 12.09% = 11.00% - k d = R d x (1 - t) = 5.58% x (1 20%) = 4.46% - WACC = 8.72% 6. Perpetuity growth rate after 2021: g = 2% Unit: billion VND 2017F 2018F 2019F 2020F 2021F Net profit Depreciation Interest * (1 - t) Net working capital CapEx FCFF Net borrowing FCFE Outstanding shares FCFF method FCFE method Fair value by DCF method VCBS Research Department Page 14

16 Target price: VND 55,691 per share Combining the multiples valuation and discounted cash flow valuation methods, we believe that the fair value of PLX is VND 55,691 per share. Method Price (VND/share) Proportion Multiples method 50,211 50% DCF method 61,172 50% Fair value 55,691 INVESTMENT PERSPECTIVE Target price: VND 55,691/share PLX is one of the largest corporations in Vietnam with a leading position in the petroleum distribution market. The Group has many competitive advantages including its system infrastructure, transportation and distribution network as well as low business risks thanks to the base price regulation. Therefore, we evaluate PLX as a good fundamental stock with significant growth potential as for domestic petroleum demand is expected to continue increasing. We forecast 2017 revenue of VND 143,087 billion (+16.24% yoy), income before tax of VND 6,983 billion (+10.84% yoy), income attributable to shareholders of the parent company of 5,057 billion VND (+8.30% yoy). We forecast 2017 EPS of VND 3,908 (calculated using the expected shares outstanding of 1,293,878,081). Based on this forecast, we believe that the fair value of PLX to be VND 55,691 per share. PLX is expected to be listed on HOSE sometime between April 18, 2017 and April 21, 2017 at offering price higher than VND 40,000 per share. Currently, PLX is traded on the OTC market at around VND 49,000 to 50,000 per share. We will update our investment recommendation after official information about PLX s listing date and offering price is available. VCBS Research Department Page 15

17 PLX INITIAL APPENDIX COMPANY REPORT INCOME STATEMENT (bil. VND) 2017F 2018F 2019F 2020F 2021F Revenue 143, , , , ,041 COGS 127, , , , ,367 Gross profit 15,740 17,345 18,689 20,126 21,675 Selling expense 8,585 9,461 10,194 10,978 11,822 General & administrative expense 1,182 1,302 1,403 1,511 1,627 EBIT 5,973 6,582 7,092 7,637 8,225 Financial income 1,086 1,196 1,290 1,390 1,497 Financial expense 979 1,078 1,162 1,251 1,348 Other profit Profit from associated companies and joint ventures EBT 6,983 7,695 8,293 8,931 9,618 Income tax expense 1,397 1,539 1,659 1,786 1,924 EAT 5,586 6,156 6,634 7,144 7,695 Minority interest EAT attributable to shareholders 5,057 4,818 5,245 5,701 6,194 Basic earnings per share (VND) (excluding funds) 3,908 4,307 4,641 4,998 5,383 CONSOLIDATED BALANCE SHEET (bil. VND) 2016F 2017F 2018F 2019F 2020F Cash and cash equivalents 14,958 19,520 24,170 29,401 35,195 Short-term investments 2,855 3,125 3,496 3,864 4,270 Receivable 5,943 6,549 7,057 7,599 8,184 Inventory 9,458 10,423 11,231 12,094 13,025 Other current assets 5,301 5,841 6,294 6,778 7,299 Total short-term assets 38,515 45,459 52,249 59,737 67,974 Fixed assets 16,096 16,005 15,937 15,893 15,875 Long-term investments 2,637 2,637 2,637 2,637 2,637 Other long-term assets 2,127 2,324 2,594 2,862 3,158 Total long-term assets 20,860 20,966 21,168 21,393 21,670 TOTAL ASSETS 59,375 66,424 73,417 81,130 89,645 Payable 11,238 12,388 13,328 14,352 15,456 Short-term debt 8,181 9,015 9,714 10,461 11,266 Other current liabilities 10,756 11,853 12,772 13,753 14,812 Total short-term liabilities 30,174 33,256 35,814 38,566 41,534 Long-term debt 2,921 3,218 3,468 3,734 4,022 Other long-term debt Total long-term liabilities 3,146 3,466 3,744 4,039 4,358 TOTAL LIABILITIES 33,321 36,722 39,559 42,605 45,892 Share capital & APIC 16,788 16,868 16,977 17,086 17,207 Retained earnings 7,626 10,605 14,017 17,891 22,263 Treasury stock -1,551-1,551-1,551-1,551-1,551 Other capital TOTAL EQUITY 22,302 25,366 28,894 32,882 37,380 Minority interest 3,752 4,336 4,965 5,642 6,372 TOTAL CAPITAL 59,375 66,424 73,417 81,130 89,645 CASH FLOW STATEMENT (bil. VND) 2016F 2017F 2018F 2019F 2020F Cash flow from operations 7,207 8,279 8,783 9,469 10,163 Cash flow from investing activities -2,081-2,342-2,603-2,772-2,995 Cash flow from financing activities -1,521-1,376-1,529-1,466-1,375 Net changes in cash 3,604 4,562 4,650 5,231 5,794 Cash and cash equivalents, beginning of period 11,354 14,958 19,520 24,170 29,401 Cash and cash equivalents, end of period 14,958 19,520 24,170 29,401 35,195 VCBS Research Department Page 16

18 DISCLAIMER DISCLAIMER This report is designed to provide updated information on the fixed-income, including bonds, interest rates, some other related. The VCBS analysts exert their best efforts to obtain the most accurate and timely information available from various sources, including information pertaining to market prices, yields and rates. All information stated in the report has been collected and assessed as carefully as possible. It must be stressed that all opinions, judgments, estimations and projections in this report represent independent views of the analyst at the date of publication. Therefore, this report should be best considered a reference and indicative only. It is not an offer or advice to buy or sell or any actions related to any assets. VCBS and/or Departments of VCBS as well as any affiliate of VCBS or affiliate that VCBS belongs to or is related to (thereafter, VCBS), provide no warranty or undertaking of any kind in respect to the information and materials found on, or linked to the report and no obligation to update the information after the report was released. VCBS does not bear any responsibility for the accuracy of the material posted or the information contained therein, or for any consequences arising from its use, and does not invite or accept reliance being placed on any materials or information so provided. This report may not be copied, reproduced, published or redistributed for any purpose without the written permission of an authorized representative of VCBS. Please cite sources when quoting. Copyright 2012 Vietcombank Securities Company. All rights reserved. CONTACT INFORMATION LY Hoang Anh Thi Head of Research Department lhathi@vcbs.com.vn NGUYEN Nguyen Phuong Equity Analyst nnphuong@vcbs.com.vn VIETCOMBANK SECURITIES COMPANY Ha Noi Headquarter Ho Chi Minh Branch Da Nang Branch Nam Sai Gon Transaction Unit Giang Vo Transaction Unit Can Tho Representative Office Vung Tau Representative Office An Giang Representative Office Dong Nai Representative Office Hai Phong Representative Office Binh Duong Representative Office Floor 12 th & 17 th, Vietcombank Tower, 198 Tran Quang Khai Street, Hoan Kiem District, Hanoi Tel: (84-4) ext: 140/143/144/149/150/151 Floor 1 st and 7 th, Green Star Building, 70 Pham Ngoc Thach Street, Ward 6, District No. 3, Ho Chi Minh City Tel: (84-8) Floor 12 th, 135 Nguyen Van Linh Street, Thanh Khe District, Da Nang City Tel: (84-511) ext: 801/802 Floor 3 rd, V6 Tower, Plot V, Him Lam Urban Zone, 23 Nguyen Huu Tho Street, Tan Hung Ward, District No. 7, Ho Chi Minh City Tel: (84-8) Floor 1 st, Building C4 Giang Vo, Giang Vo Ward, Ba Dinh District, Hanoi Tel: (84-4) Floor 1 st, Vietcombank Can Tho Building, 7 Hoa Binh Avenue, Ninh Kieu District, Can Tho City Tel: (84-710) Floor 1 st, 27 Le Loi Street, Vung Tau City, Ba Ria - Vung Tau Province Tel: (84-64) /75/76/77/78 Floor 7 th, Vietcombank An Giang Tower, Hai Ba Trung, My Long Ward, Long Xuyen City, An Giang Province Tel: (84-76) Floor 1 st & 2 nd, 79 Hung Dao Vuong, Trung Dung Ward, Bien Hoa City, Dong Nai Province Tel: (84-61) Floor 2 nd, 11 Hoang Dieu Street, Minh Khai Ward, Hong Bang District, Hai Phong City Tel: (+84-76) Floor 3 th, 516 Cach Mang Thang Tam Street, Phu Cuong Ward, Thu Dau Mot City, Binh Duong Province. Tel: (+84-76) VCBS Research Department Page 17