VINH HOAN CORPORATION (VHC) March 12, 2015

Transcription

1 VINH HOAN CORPORATION (VHC) March 12, 2015 INITIATING COVERAGE: BUY Current price (3/12/2015): VND 40,600 Target price: VND 49,000 Short-term trading recommendation Hold Mid-term resistance level 45,000 Mid-term support level 40,000 Bloomberg ticker: VHC VN Exchange: HSX Industry: Seafood Beta w High / Low (VND 000) 45 / 16.9 Outstanding shares (mn) 92.4 Market cap (VNDbn) 3,752 LTM Avg trading vol 132,084 Foreign-owned ratio (%) 26% Year Div.Yield EPS (VND) 2015 VPBS Forecast 3.4% 3, % 4, % 1, F CAGR (VNDbn) CAGR Revenues 20% 7,686 22% EBITDA 8% % Net income 18% % VHC Selected peer VNI P/E 9.6x 10.1x 13.4x P/B 2.3x 0.7x 1.8x Debt/Equity 113% 185% 107% Profit margin 7.0% 2.1% 9.2% ROE 13.0% 8.7% 13.7% ROA 10.5% 2.3% 2.7% Company description: VHC was established in1997 as a privately-owned entity and listed its shares on the Ho Chi Minh Stock Exchange (HSX) in VHC specializes in farming, processing pangasius and exporting pangasius fillet (80% of revenue),fish powder and oil trading (12%), livestock feed trading (8%) results: Total assets: VND4,751 billion (USD223 million); Net revenues: VND6,300 billion (USD296 million); Net income: VND441 billion (USD21 million) /14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 1/15 We initiate coverage of Vinh Hoan Corporation (VHC) with a longterm BUY recommendation based on the following: We expect strong revenue growth VHC is the largest pangasius exporter in Vietnam: VHC has been the leader in exporting pangasius fillets for five consecutive years and tops the list of exporters to the USA. In addition, VHC is the only company which enjoys zero antidumping tax rates to USA until 2017, resulting in a large advantage compared to its peers. Strong potential revenue growth: The collagen production plant started to operate in Q1/2015 and is expected to contribute around VND180 billion to net revenue. In 2014, VHC s net revenue grew 24 percent and is projected to rise 22 percent in Earnings growth still grow without abnormal return Extraordinary gains led to higher earnings 2014: VHC sold their feed stock production in 2014, generating a gain of VND185 billion (USD8.7 million). After restructuring and acquiring the new plant (Van Duc Tien Giang), VHC continued expanding their production capacity to meet their export growth requirements. In 2015, production capacity will rise 10 to 15 percent and net profit is estimated to be VND340 billion (USD16 million), down 23 percent y-o-y but still 33 percent higher than adjusted 2014 s net profit after excluding extraordinary items. Stock has increased strongly VHC VN Peer Index VNINDEX P/E ratio is relatively attractive: VHC s P/E ratio is lower than its peers whilst its adjusted ROE is higher. Rapid recent price appreciation: Over the past 12 months, VHC s share price has outperformed the market and its peers, increasing 1.7 times. However, based on fundamental growth of VHC, the stock is still a good investment in the long term. Please see important disclosure information at the end of this report. Page 1

2 CONTENTS PANGASIUS PRODUCTION SEGMENT OVERVIEW... 3 Vietnam is the largest pangasius producer... 3 Pangasius farming concentrates at Cuu Long Delta... 3 Value chain of pangasius segment... 4 Pangasius export... 5 VINH HOAN CORPORATION... 8 COMPANY OVERVIEW... 8 Ownership and operation structure... 8 BUSINESS LINES BUSINESS PERFORMANCE Growth Profitability and efficiency Solvency and liquidity FORECAST ASSUMPTIONS VALUATION DCF model Market multiple Sensitivity analysis TECHNICAL ANALYSIS Appendix 1: VPBS forecast Appendix 2: List of antidumping duties (POR 10) Page 2

3 PANGASIUS PRODUCTION SEGMENT OVERVIEW Pangasius contributed second in total seafood export value with 25%, reaching USD1.77 billion in Vietnam is the largest pangasius producer Vietnam s seafood exports continued to gain in 2014 with total export value of USD7.2 billion, an increase of 18.4 percent y-o-y. Prawns were the dominant product. They contributed 50.4 percent to the total value and reported highest growth in 2014 exporting value at 27 percent. Pangasius has taken second position in Vietnam s seafood export with 25 percent share, reaching around USD1.77 billion in export value. As VHC, specializes in exporting pangasius, we only focus our analysis on this segment. Pangasius is a kind of catfish which lives in fresh water in South and South East Asia, resulting from the fact the pangasius fish is only raised by some Asian countries such as Vietnam, Malaysia, Bangladesh, Indonesia, India. Vietnam is considered to be the largest pangasius producer, accounting for 52 percent of the world output (2.1 million tons). According to Global Aquaculture Alliance (GAA) s statistics, total 2015 output of the main pangasius producers is expected to be 2.2 million tons, increasing slightly by 5 percent over Total output of main producers (Vietnam, Malaysia, Bangladesh, Indonesia, India) Other countries'output (mn tons) Vietnam's output (mn tons) E 2015P Source: GAA Pangasius farming concentrates at Cuu Long Delta Pangasius farming is concentrated in the Cuu Long Delta. Dong Thap and An Giang were the two largest farming areas in Unlike other types of seafood which can be either raised or caught, pangasius are farmed fish only. In Vietnam, most of them are raised in the Cuu Long Delta with around 5,500 ha (2014E), an eight percent decline y-o-y. Within this area, An Giang and Dong Thap are the largest raising provinces. Data collected from the Ministry of Agriculture and Rural Development (MARD) s reports showed that the farming area of Vietnam seems to have been relatively volatile since Dependence on exports explains the movement of farming area. Conventionally, farming area increases along with the export booms and then contracts as exports fall. Page 3

4 Vietnam s farming area and output from 2010 to 2015P Vietnam farming area breakdown, Area (ha) Output (thousand tons) E 2015P Vinh Long Others 7% 8% Ben Tre 13% Can Tho 15% An Giang 22% Dong Thap 35% Source: MARD Source: MARD Value chain of pangasius segment Pangasius production is under the control and guidance of MARD and the Ministry of Industry and Trade (MOIT). 40 percent of the farming area supplying pangasius belongs to independent farmers and 60 percent belongs to companies. Famers: small-scale pangasius farming of less than five ha/farm. Normally farmers sign off-take contracts with processing plants. There are a small number of farmers who raise pangasius spontaneously without signing contracts with plants. Production companies: own large-scale farms. These companies aim to establish vertically integrated operations (VIO) from feed mills, hatcheries, farms, and processing plants. 90 to 95 percent of products of companies (mainly frozen fillets) are exported. Domestic consumption of pangasius is trivial, accounting for only five to 10 percent of output. Vietnam s pangasius value chain Source: VPBS Page 4

5 Pangasius export Vietnam pangasius exports increased modestly by 2% y-oy in volume and 4% in value in The US has consistently been Vietnam s largest pangasius export market. Vinh Hoan and Hung Vuong companies are the leaders in pangasius export. From 2008 to 2014, pangasius export value has grown at CAGR of three percent. In 2014, pangasius exports were estimated at USD1.77 billion in value and 794,000 tons in volume, increasing slightly by four percent in value and two percent in volume y-o-y. Vietnam s pangasius export value (USD mn) Source: VPBS collected In 2014 Vietnam exported pangasius fish to a total of 153 markets. The six main markets, (Europe, the USA, ASEAN, Brazil, Mexico, China & Hong Kong, contributed 66 percent of the value. The US consumed the highest share of Vietnam s pangasius, followed by Brazil, Mexico and China & Hong Kong. Vietnam diversified its export markets in Vietnamese companies shifted from their traditional markets to other markets to mitigate the risks from macroeconomic trends. Exports to ASEAN countries, South America and the Middle East increased by 12.2 percent, 15.5 percent and 16.4 percent respectively. Long-established markets still contributed heavily but were reduced year over year, such as North America, which fell 6.4 percent and the EU, which fell 10.6 percent. At the same time, exports to Brazil, Mexico, Colombia, Arab Saudi and Egypt increased significantly by 13.8 percent, 20.4 percent, 20.4 percent, 20.2 percent and 25 percent respectively. On the other hand, value exports to the US, Russia and Ukraine reported the largest contractions with negative growth rates of 14.2 percent, 25.6 percent, 22.3 percent respectively. Export volume breakdown by region, 2013 vs Top 10 importing countries in value, % 25% 9% 13% 11% 14% 7% 9% 22% 30% 18% Asean North America EU South America Middle East Others Country Value (USD mn) USA Brazil Mexico China & Hong Kong Spain 72.5 Colombia 70.1 Arab Saudi 59.0 Holland % Thailand 43.6 UK 40.9 Note: inside circle data, outside circle Source: Vietnam custom Page 5

6 In 2014, according to Vietnam custom s data, Vinh Hoan and Hung Vuong topped pangasius exports, accounting for 12 percent and 8 percent of total value. These two companies export value outweighed their followers. There are no standards for the conversion ratio from pangasius input to fish fillets; we estimate that approximately 2.0 to 2.5 kg of pangasius input can process to one kg of fish fillet, depending on the processing technique and specific products. Accordingly, gross profit margins of processing companies can vary from seven to 15 percent. Pangasius average export prices and input prices (VND/kg), 2014 Top 10 pangasius export companies, ,000 49,000 44,000 39,000 34,000 29,000 24,000 19,000 Input prices Export prices Company Value (USDmn) Vinh Hoan Corp 207 Hung Vuong Corp 140 Navico 109 Agifish 85 Bien Dong Seafood 76 Tafishco 76 I.D.I Multinational 64 Hung Ca 59 Dai Thanh 56 Godaco 49 Source: VPBS collected Source: VASEP Factors impact pangasius export Antidumping tax The main issue affecting exports to the US is antidumping tax. On January 16, 2015, the U.S. Department of Commerce (DOC) finalized duties imposed on certain frozen pangasius fillets imported from Vietnam during the tenth antidumping duty administrative reviews (POR10) from August 1, 2012 to July 31, Accordingly, duty rates for 23 pangasius exporters (see appendix) were revised from USD1.20/kg in POR9 to USD0.97/kg in this time. On the other hand, the Vietnam-wide rate was adjusted upward from USD2.11/kg to USD2.39/kg. In other words, during this review period, the DOC also decided to increase the tax rates for all other Vietnamese exporters off the list from USD2.11 per kilogram to USD2.39 per kilogram. The only one qualified Vietnam exporter which did not suffer from dumping duties was Vinh Hoan Corporation. The next review, POR 11, will be completed in Food safety The stagnant economy in Europe has clearly impacted consumption demand. As result, 14 of the top 20 European countries to which Vietnam exports pangasius reported a downtrend in import value. In addition, food sanitation is a major concern when exporting to European countries. The EU s Rapid Alert System for Food and Feed (RASFF) detected Nitrofurazone, a prohibited substance in 11 batches of imported Vietnam pangasius in December The European authorities have issued severe warnings on this issue. Similarly, Russia and Korea also detected antibiotics residues in Vietnamese pangasius. Russia banned Vietnamese pangasius imports at the end of January 2014 but nullified the ban from August Page 6

7 Government policies In 2014, many legal documents related to the pangasius segment s development have been established. Decision 3885 and Decision 36 are the two most significant of these. Decision 3885/QĐ-BNN-TCTS: The Decision set up a development plan for the Cuu Long Delta until Some targets have been set for the medium term. We note that 2015 estimated numbers are relatively conservative and not much different from 2014 s actual numbers. Development plan to 2020 Item 2015P Breeds (billion) 3.0 N/A 3.5 Value added products/total products (%) N/A 8-12% 15-20% Farming area (ha) 5, Output of pangasius materials (mn tons) Export values (USD bn) Source: MARD Highlighted legal documents in pangasius segment in 2014 Decision 36/2014/NĐ-CP: this is a detailed guidance for farming, processing and exporting pangasius, causing pressure to exporters. The most important articles in the Decision are: The ice-glazing ratio (ratio of ice glaze to gross weight) of exported pangasius products must conform to regulations of importing countries. In other cases, the ice-glazing ratio must not exceed 10 percent. The amount of water must not exceed 83 percent of the net weight (weight of pangasius fillets after removing the ice glazing). Currently only 10 percent of companies apply pangasius processing practices following these standards. Applying these standards would force the export prices to rise 10 to 20 percent in order for exporting enterprises to earn a profit. Given the current situation, MARD sought approval from the Government to delay the effective date of the Decision until the end of Therefore, in the short term pangasius companies are temporarily unaffected by the new regulation. According to The Codex Alimentarius Commission (CODEX), the conventional ice-glazing ratio following international practices is maximum 5 percent. In a nutshell, the export companies have to be wellprepared for changes anyway. Document Issued date Issuer Content Effective date Circular 198/2014/TT-BTC 12/18/2014 Ministry of Finance Guidance on cost calculation of pangasius material 2/15/2015 Decision 4669/QĐ-BNN-TCTS 10/28/2014 MARD Guidance on application of VietGAP (Vietnamese Good Agriculture Practices) on farming pangasius 10/28/2014 Decision 3885/QĐ-BNN-TCTS 9/11/2014 MARD Development plan on farming pangasius at Cuu Long Delta until /11/2014 Circular 23/2014/TT-BNNPTNT 7/29/2014 MARD Guidance on proceeding Decision 36/2014 9/12/2014 Decision 36/2014/NĐ-CP 4/29/2014 Government Regulations about farming, processing and exporting pangasius 6/20/2014 Source: VPBS collected Page 7

8 VINH HOAN CORPORATION COMPANY OVERVIEW Vinh Hoan Corporation (VHC) was established in late 1997 as a private company in Sa Dec town, Dong Thap province. VHC specializes in farming, processing pangasius and exporting pangasius fillet. In 2007, VHC converted to a joint stock company and officially listed its shares on the Ho Chi Minh Stock Exchange (HSX) with 30 million shares outstanding at the end of that year. At the end of 2014, charter capital of VHC was VND924 billion (USD43.3 million). Ownership and operation structure The company aimed to focus on pangasius its core business and on its collagen project, which had been invested through the past six years. That is the reason why they decided to sell its food processing plant, which VHC considers non-core business and doesn t affect much to company activities after divestment. In August 2014, VHC sold their 70 percent ownership of the Vinh Hoan 1 Feed JSC (VH1) feed livestock production plant to Pilmico International Ltd. Even though the company sold one segment in their value chain, VHC believes they have bargaining power in purchasing feed livestock given their large production scale and close relationship with suppliers. On the other hand, VHC bought Van Duc Tien Giang, a company which also raises and processes pangasius fillets, enhancing company s production capacity. Accordingly, VHC operates as a vertically integrated exporter with nearly the full value chain from farming- manufacturing processing trading and exporting. Company s value chain Source: VPBS VHC has five subsidiaries and one long term investment, which are operating to support the company s trading materials and exporting finished products, including: Page 8

9 List of VHC s associate and long term investment Subsidiary Unit Charter capital VHC s ownership Main business Vinh Hoan 2 Food Co., Ltd VNDbn % Trading rice products Vinh Hoan Collagen 5 JSC VNDbn % Producing collagen and gelatin from fish skin Van Duc Tien Giang Food Export JSC VNDbn % Trading aquatic food Octagone Holdings Pte Ltd USD 700, % Trading aquatic food and export and import gelatin and collagen products Vinh Hoan Hau Giang VNDbn % Aqua farming, trading feed livestock products Long-term investment Vinh Hoan (USA) Inc. USD 499,912 15% Trading aquatic food Source: Company s report Among VHC s subsidiaries, Vinh Hoan Hau Giang and Octagone are the most recently established subsidiaries in late December Octagone focuses on trading VHC s gelatin and collagen products in the Singapore market whilst Vinh Hoan Hau Giang is the latest purchased processing plant of VHC. The shareholder structure of VHC is relatively concentrated with 25 percent foreign ownership and 55 percent internal ownership. Approximately 19 percent is freefloated in the market. Red River Holdings and Vietnam Investment Fund are the two largest institutional holders of VHC whilst Ms. Truong Thi Le Khanh, Chairwoman cum CEO of VHC, holds 49 percent of the company s shares. The management board of VHC includes experts in pangasius production and financial management. Especially, Ms. Truong Thi Le Khanh has made a great contribution and influence on the company s current development. Ownership structure as of 30/1/2015 Management structure Others 19% Management board and related 55% Red River Holding Vietnam 16% Investment Fund 5% Other foreign owership 5% Name Position Year of birth Stock owners hip Board of Directors Ms. Truong Thi Le Khanh Chairwoman % Ms. Nguyen Ngo Vi Tam Member % Mr. Huynh Duc Trung Member % Mr.Jean-Eric Jacquemin Member % Mr. Vo Phu Duc Member % Board of Management Ms. Truong Thi Le Khanh CEO % Ms. Truong Tuyet Phuong Procurement Director % Ms. Nguyen Ngo Vi Tam Marketing & Sales Director % Mr. Huynh Duc Trung Project Director % Ms. Nguyen Thi Kim Dao CFO % Ms. Ho Thanh Hue Production Director % Source: Company s report Page 9

10 BUSINESS LINES VHC is the Vietnam market leader in exporting pangasius. In 2014, total pangasius export value was USD207 million, +25% y-o-y. Around 80 percent of VHC s products are exported and 20 percent are traded domestically. In 2014, total pangasius export value of VHC was USD207 million, an increase of 25 percent y-o-y. In VHC s main business line, it is estimated that 80 percent of revenue came from exporting pangasius, eight percent from livestock feed trading and 12 percent from other activities, such as fish powder and fish oil, rice trading. VHC s pangasius export value VHC s revenue breakdown Others VHC's pangsius export value (USD mn) Growth (%) Livestock (fish oil, feed fish 50% trading powder) 8% 45% 12% % 35% 30% 25% 20% 15% 10% 5% 0% Pangasius fillets export 80% Pangasius export Source: Company s report, Agromonitor Input: In 2014, total area of pangasius build-out of VHC reached 400 ha, fulfilling up to 70 percent of their pangasius input need. Three farms totaling 37.7 ha are qualified for international standards of the Aquaculture Stewardship Council (ASC). The remaining 30 percent of raw materials need is supplied by local farmers which have had long term cooperation with VHC, helping the company in controlling quality and managing inputs. VHC also has their own 47 ha hatchery, meeting 40 percent of their need. Production: After purchasing Van Duc Tien Giang plant, total processing capacity was up to 450 tons/day with four plants, 30 percent higher than 2013 s capacity. In 2015, VHC intends to raise their capacity by 10 percent by installing one more production line. In the next three years, VHC targets to continue to expand their capacity via both constructing new facilities and M&A deals. Export: Vinh Hoan is the leader in pangasius exports with total export value of USD207 million with export value s CAGR of 13 percent from 2010 to Based on 2014 export results, VHC has remained the top pangasius exporter for five consecutive years with 12 percent market share, increasing from 9.4 percent in VHC s main products are pangasius fillets. White fillets account for 90 percent of volume and sell at the highest prices. The others are light yellow and light pink fillets. In terms of regional breakdown, VHC is Vietnam s largest export company to North America, mainly the USA, and to Europe, mainly the UK and Holland. Vinh Hoan is the only company to export at a USD0/kg import duty. This is a big advantage in exporting to the US market and this tax advantage may last at least until Page 10

11 VHC s pangasius export breakdown by country, % 3%2%5% USA EU 7% Australia Hongkong Canada 59% China 20% Others Source: Company s report, Agromonitor Other trading products Other trading products include livestock feed trading, which accounts for eight percent of revenue, and others, such as fish powder and fish oil, rice export, which account for 12 percent. Livestock feed trading: Besides purchasing livestock feed for internal use, VHC does trading livestock feed, accounting relatively stable revenue of six to eight percent thanks to their bargaining power from large scale of production. Others: VHC has researched and developed many other value-added products from processing pangasius fillets, including deli burg, fish nuggets, provo cake, and other by-products, such as fins, fish oil, and fish powder. Furthermore, VHC started to export rice in 2012, but this is not a strength of the company. Accordingly VHC intends to divest their investment in rice trading. In general, trading auxiliary products has added around 12 percent to VHC s net revenue. Gelatin & Collagen: These are highly refined products from fish skin, used in cosmetics, confectionery products, and photographic processes. VHC expects to have additional revenue from gelatin exports and collagen production by investing VND424 billion (USD20 million) in its Vinh Hoan 5 (VH5)- collagen production plant. This plant began operations in January 2015 and is expected to begin earning revenue in April. The company s capacity is 2,000 tons/year, of which 1,000 tons is collagen and 1,000 tons is gelatin. Around 80 to 85 percent of VHC 5 s output will be sold overseas via import companies (B2B method). BUSINESS PERFORMANCE From 2010 to 2014, net revenue had a CAGR of 20%. Pangasius export s CAGR was 13%, doubling the industry average. Growth From 2010 to 2014, VHC s net revenue grew at a CAGR of 20 percent. VHC recorded impressive net revenue growth of 24 percent y-o-y in 2014 to reach VND6,300 billion (USD296 million). The pangasius segment made up 80 percent of total revenue, reaching VND5,044 billion (USD237 million. In 2014, revenue growth of pangasius exports came from a five to six percent price increase coupled with a 16 to 17 percent rise in volume. Page 11

12 Consolidated net revenues 7000 Net revenue (VND bn) Source: Consolidated financial statements Profitability and efficiency Gross profit margins of VHC moved downward from 20 percent in 2010 to 12.5 percent in However, the gross profit margin did improve from 11.8 percent in VHC s 2014 gross profit margin is comprised mainly of those from pangasius (13 percent), livestock feed trading (7 percent) and other activites (11 percent). There are certain reasons to explain the volatily of VHC s gross marign in 2014: (1) Seasonality of pangasius farming: Normally it takes six to eight months for fingerlings to grow into food-sized fish of approximately 1 kg. Accordingly, the internal farming of VHC falls into Q3 and Q4, improving gross profit margin thanks to the lower rate of purchasing input from farmers (35 to 40 percent). On the other hand, in Q1 and Q2, gross profit margins are relatively low due to the higher rate of ouside purchases (60 to 65 percent). (2) Stability of outside supply from farmers: As farmers raise pangasius spontaneously, they expand their farming when pangaius prices are high and downsize their farming in the opposite situation. This magnifies the volatility as there is always lag between farming area and pagasius price movement. VHC sets long term relationships with local farmers by supportting them in terms of farming techniques and capital to mitigate the impact from outside supply volatility. (3) Restructurings and expansion: Because VHC sold VH1 and purchased Van Duc Tien Giang, profit of VH1 was recorded in the first seven months of 2014 while profit of Van Duc Tien Giang was consolidated since the last four months of last year. Taking all of these into account, gross margin in Q3/2014 reached the peak with 17 percent, improving the whole year s margin. Page 12

13 Gross profit margins in quarter (%) Profitability ratios (%) 18% 16% 14% 12% 10% 17.0% 13.0% 12.2% 12.5% 12.3% 10.9% 9.7% 10.0% 20% 15% Gross margin EBITDA margin PBT margin Net profit margin 8% 6% 10% 4% 2% 5% 0% Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 0% Noted: 2014 Net profit margin and PBT margin are reported numbers (Still include abnormal return) Source: Consolidated financial statements Meanwhile, selling and administrative expenses (SG&A) continued in an uptrend, rising from VND233 billion (USD11 million) in 2011 to VND398 billion (USD18.6 million) in 2014, accounting for six percent of net revenue. Accordingly, VHCs EBITDA margin was eight percent in 2014, increasing from 6.5 percent in In 2014, VHC sold their 70 percent stake in VH1. The total selling value was VND401 billion (USD19.6 million), resulting in a capital gain of VND185 billion (USD8.7 million). This led to soaring financial income from VND93 billion (USD4.4 million) in 2013 to VND241 billion (USD11.3 million) in Meanwhile, financial expense fell significantly in 2014 from VND91 billion (USD4.3 million) in 2013 to VND61 billion (USD2.9 million) in 2014, bringing net financial income to VND180 billion (USD8.5 million). VHC enjoyed a corporate tax rate of 16 percent in 2010 due to tax exemption for investment in new. But this increased to 22 percent in Net profit reached its highest level of the last five years at VND441 billion (USD20.7 million, which was three times higher than 2013 s net profit. This equated to a net profit margin of 6.6 percent in 2014, double that of If we eliminate the abnormal return from selling VH1, net profit of VHC would be VND255 billion (USD12 million), which is still an impressive result with 45 percent growth over last year. VHC achieved a 22 percent ROE in 2014, which was much higher than 2013 s result of 11 percent. This was due to: (1) A significant increase in total assets, resulting in a much lower total asset turnover; (2) net profit margin rising to seven percent thanks to abnormal returns from selling the subsidiary VH1; and (3) The equity multiplier increasing dramatically from 1.73 in 2013 to 2.46 in If we eliminate the abnormal return from selling VH1, adjusted ROE would have been 16 percent in VHC normally pays dividends under cash and share methods. In 2014, the company paid share dividends with a ratio of 2:1 (a shareholder owning two existing shares received one additional share). In addition, VHC issued 197,790 ESOP shares. Accordingly, current outstanding shares of VHC are 92.4 million shares, up 50 percent y-o-y. Page 13

14 Return on assets and return on equity Return on equity analysis 35% 30% 25% 20% 15% 10% 5% 23% 12% Owner's equity (VND bn) Total assets (VND bn) ROE (%) ROA (%) 32% 16% 16% 11% 7% 6% 22% 9% Total asset turnover (times) Equity multiplier (times) Net margin (%) 12% 10% 8% 6% 4% 2% 0% % Source: Consolidated financial statements Source: Consolidated financial statements Solvency and liquidity VHC s debt-to-equity ratio recorded an upward trend from 47 percent in 2010 to 113 percent in One characteristic of the seafood production industry is that firms require large working capital, which means that a large proportion of debt is short term loans. At the end of 2014, total loans were VND2,090 billion (USD98 million), of which 97 percent were short term. The short term loans of VHC were noticeably four times higher than the 2013 s year-end number, used to finance working capital and two susbidairies, Van Duc Tien Giang and VH5 collagen plant. However VHC s ability to cover interest expense is high with an interest coverage ratio of 9.6x. Capital structure and leverage analysis Interest coverage Ratio (EBIT/I) Total loans/ equity (%) % 100% 80% 60% 40% 20% 0% Source: Consolidated financial statements Liquidity ratios of VHC were positive with average current ratios from above 1.2x and an average quick ratio of 0.7x. This implies strong liquidity management. As of December 31, 2014, VHC had VND89 billion (USD4 million) of cash and cash equivalents. Page 14

15 Liquidity analysis Quick ratio Current ratio Debt-to-equity 47% 56% 94% 41% 113% Debt-to-capital 32% 36% 49% 29% 53% Interest Coverage Ratio (EBIT/I) EBITDA / (I + Cap Ex) Source: Consolidated financial statements, VPBS summary In general, VHC has better profitability and lower levearge than its peers. Among listed seafood production companies, VHC and HVG are quite similar in terms of company size. While VHC focuses mainly on the US, UK, Holland and Australian markets, HVG penetrated scatterly to other European and American countries like Spain, Brazil, Mexico, Russia, leading to different profit margins. We also note that except for AAM, other peers have higher debt ratios than VHC even when the company has multiplied its debt level by four times. VHC and peers comparison Name Ticker Charter capital (VND bn) Gross margin (%) ROE (%) Net margin (%) Debt/Equity (%) An Giang Fisheries Import & Export JSC AGF Hung Vuong Corporation HVG 1, Mekong Fisheries JSC AAM Cuulong Fish JSC ACL Bac Lieu Fisheries JSC BLF Seafood JSC No 1 SJ Average Vinh Hoan Corporation VHC Current ratio Noted: VHC s ROE is adjusted numer which excluded abnormal return Source: Consolidated financial statements Page 15

16 FORECAST ASSUMPTIONS Revenues and gross profits We forecast revenue CAGR of 22 percent over the next five years based on the following rationale: VHC continues to enjoy a 0% antidumping rate for exports to the US until In addition, the recovery of US economy guarantees strong growth of VHC exports. While other pangasius exporters are impacted by antidumping taxes, the position of VHC in USA market is expected to remain at the highest ranking with increasing volume of 20 percent per year. Accordingly, the US market will continue to be the dominant market for VHC in the medium term. Collagen plant (VH5) starts to increase contributed profit in VHC expects that VH5 will record VND180 billion (USD8.5 million) in revenue and VND20 billion (USD0.9 million) in net profit in In the next two years, the plant will run at 55 percent capacity in 2016 and 80 percent in 2017, earning net profit of VND62 billion (USD3 million), an increase of 310 percent, and VND100 billion (USD5 million), an increase of 61 percent. VH5 s business plan Item 2015P 2016P 2017P Capacity (%) 35% 55% 80% Revenue (VND bn) Net profit (VND bn) Source: Company s report Domestic growth: we forecast domestic sales will continue to grow at 17 percent per year and account for 20 percent of total revenue. VHC currently self-supplies around 60 to 65 percent of their inputs and we expect that this number will increase slightly to 70 percent in the next five years. The stability in input can help VHC partly improve their gross margins from 12.5 percent in 2014 to 14 percent in For 2015, we project VHC s revenue will rise 22 percent y-o-y to VND7,686 billion (USD361 million). Net profit is projected to be VND321 billion (USD15 million), down 23 percent y-o-y. However compared to 2014 profit before extraordinary items, 2015 net profit will still increase significantly by 33 percent. Financial activities We forecast financial income and expenses as below: Interest income: 10 percent of cash and cash equivalents, including interest from deposits, interest income from receivables. Interest expenses of bank loans: at an average of 11 percent Other financial income: We assume that VHC will divest their Vinh Hoan 2 Food company, which trades rice in the forecast period at the invested value. Accordingly, there will no capital gain on the divestment. Page 16

17 Tax rates We forecast income tax expenses by multiplying profits before tax (excluding share of profit of associates as this amount is profit after tax of associates) by appropriate tax rates. According to Decision no. 218/2013/ND-CP issued on December 26, 2013, the corporate income tax was lowered from 25% to 22% in 2014 and 20% from 2016 onwards. Consequently, the effective tax rate will be as common standard. Balance sheet We make the following key assumptions with regard to VHC s consolidated balance sheet: Day sales outstanding: remaining stable at 46 days Day inventory outstanding: remaining stable at 96 days Day payables outstanding: payables to suppliers outstanding remains at 16 days Current assets and current liabilities: remaining stable as a percentage of related consolidated revenues and expenses Capex: We forecast VHC invest an average of VND250 billion (USD11.6 million) in the next five years on production capacity expansion, purchasing farming area. Short term borrowings: accounting for 20 to 30 percent of sales depending on working capital needs. Long-term borrowings: current items will be paid off gradually. Dividends: we expect that VHC will maintain their cash dividend of VND1,500 to VND2,000/share. VALUATION We employed the two methods of valuation, discounted cash flow (DCF) and market multiples (price to earnings) to derive a fair value of VHC at VND49,000 per share. Valuation matrix Fair price Weight (VND/share) DCF method 55,239 70% 38,667 P/E method 35,021 30% 10,506 Fair stock price 49,174 DCF model We use the discounted cash flow (DCF) model to value VHC as we believe future cash flow remains the key fundamental value-driver of VHC stock. Our DCF model suggests a target price of VND55,239 per share for the stock. Our inputs for the DCF model are as follows: The risk-free rate is taken from the yield of 5-year local currency Government bond yields, which is equivalent to 5.4%. The expected market return is expected to be 14.5%. VHC s beta is estimated to be Cost of equity is estimated to be 13.73% by using the capital asset pricing model (CAPM). Weighted average cost of capital (WACC) is calculated to be 13.3%. Page 17

18 VHC s terminal growth rate is assessed to be 10% based on the leading position of VHC in pangasius export, the potential of VH5 collagen plan in the long term. Market multiple We use market multiple P/E to derive the value of VHC stock. We chose listed seafood companies and excluded the outlying companies. The short list comprised of six peers and we derived the relative price of VHC of VND35,021/share. Selected peer comparison Company name Ticker P/E P/B EV/EBITDA ROE (%) An Giang Fisheries Import & Export JSC AGF Hung Vuong Corporation HVG Mekong Fisheries JSC AAM Cuulong Fish JSC ACL Bac Lieu Fisheries JSC BLF Seafood JSC No 1 SJ Average Vinh Hoan Corporation VHC VHC's relative price (VND/share) 35,021 Note: ROE of VHC is adjusted number after eliminating abnormal return Source: Bloomberg, Company s data, VPBS forecast Sensitivity analysis Sensitivity of WACC and terminal growth rate to a DCF stock price Terminal growth rate 0% 7% 8% 9% 10% 11% 12% 13% 10% 61,175 90, , ,558 (323,615) (191,343) (88,465) 11% 43,674 58,779 87, , ,286 (1,077,857) (132,252) WACC 12% 32,840 41,915 56,489 83, , ,326 (301,614) 13% 25,777 31,860 40,802 55,239 82, , ,753 14% 20,205 24,395 30,167 38,622 52,203 62, ,042 15% 16,224 19,295 23,342 28,916 37,082 42,777 74,717 16% 13,128 15,457 18,424 22,334 27,718 31,252 48,277 Sensitivity of growth rate of 2015 revenue growth rate and gross margin of VHC to DCF stock price 2015 gross margin 0% 12% 13% 14% 15% 16% 2015 revenue growth 21% 50,859 52,208 53,558 54,908 56,258 22% 51,396 52,752 54,106 55,462 56,818 22% 51,933 53,034 55,239 56,017 57,377 23% 53,158 54,542 55,964 57,312 58,696 23% 53,680 55,092 56,482 57,873 59,263 Page 18

19 TECHNICAL ANALYSIS The technical chart showed an uptrend period of VHC when it broke out of the accumulation phase of 36,000-39,000 then rose to the highest price at 45,000 on February 24, After peaking at this level, VHC has adjusted and now it is trading below the MA10 days but above the mid-term support level of the MA50 days at about 40,000. VHC s trading volume has been decreasing recently, lower than the moving average of last ten sessions, which indicated that both of buying force and selling pressure were weak. Therefore, we recommend to HOLD for VHC at the time of this issuing report. Ticker VHC (VND/share) Horizon analytic 3 to 6 months 3-month highest price 45,000 3-month lowest price 35,100 Current 50-day MA 39,800 Current 100-day MA 38,100 Mid-term resistance level 45,000 Mid-term support level 40,000 Recommendation HOLD Page 19

20 Appendix 1: VPBS forecast (*) unaudited results Income Statement (VND bn) (*) 2015F 2016F 2017F 2018F 2019F Pangasisus Fillets Revenue 4,178 5,040 6,149 7,502 9,152 11,165 13,622 (% revenue) 82% 80% 80% 80% 80% 80% 80% Other Revenue 917 1,260 1,537 1,875 2,288 2,791 3,405 (% revenue) 18% 20% 20% 20% 20% 20% 20% Total Revenue 5,095 6,300 7,686 9,377 11,440 13,957 17,027 Growth rate 21% 24% 22% 22% 22% 22% 22% Cost of Goods Sold COGS of Pangasisus Fillets 3,635 4,435 5,411 6,601 8,054 9,825 11,987 COGS of Others 857 1,075 1,175 1,518 1,723 1,945 2,691 Total CGS (excluding depreciation) 4,381 5,399 6,456 7,970 9,609 11,584 14,473 CGS % of segment revenue 86% 86% 84% 85% 84% 83% 85% Depreciation in CGS Reported Cost of Goods Sold 4,491 5,510 6,586 8,119 9,777 11,770 14,678 Less: Depreciation included in CGS Cost of Goods Sold 4,381 5,399 6,456 7,970 9,609 11,584 14,473 Gross Profit ,230 1,407 1,830 2,373 2,554 Gross Profit Margin 12% 13% 14% 13% 15% 16% 14% Selling Expenses General & Admin Expenses Income from Affiliated Companies EBITDA ,156 1,571 1,599 EBITDA Margin 6% 8% 10% 9% 10% 11% 9% Depreciation Amortization EBIT ,007 1,403 1,413 Financial income Financial expenses Interest Expense Foreign Exchange Losses (Gains) Other Financial Expenses Losses (Gains) Net Financial Income (Expense) (204) (237) (288) (283) (277) Other Income 5 (8) Pretax Income ,121 1,136 Income Tax Expense Effective Tax Rate 23% 22% 22% 20% 20% 20% 20% Income Before XO Items Extraordinary Loss Net of Tax Minority Interests XO Items & Minority Interest Net Income Page 20

21 Balance Sheet (VND bn) (*) 2015F 2016F 2017F 2018F 2019F Current Assets Cash & Near Cash Items Short Term Investments Accounts & Notes Receivable ,179 1,438 1,755 2,141 A/R DOH Inventories 1,097 1,415 1,692 2,089 2,519 3,036 3,793 Inv DOH Other Current Assets Total Current Assets 1,661 3,201 3,716 4,225 4,983 5,966 6,924 Long-Term Assets Gross Fixed Assets 1,199 1,479 1,729 1,979 2,229 2,479 2,729 Accumulated Depreciation ,102 1,288 Net Fixed Assets ,073 1,193 1,295 1,377 1,441 Long Term Investments Intangibles Other Long Term Assets Total Long-Term Assets 889 1,370 1,509 1,629 1,731 1,813 1,877 Total Assets 2,550 4,571 5,225 5,855 6,714 7,780 8,801 Current Liabilities Accounts Payable A/P DOH Accrued Expenses Short Term Borrowings 512 2,026 2,460 2,813 3,203 3,489 3,746 Other Short Term Liabilities Total Current Liabilities 902 2,628 3,109 3,531 3,995 4,370 4,756 Long Term Liabilities Long Term Borrowings Other Long Term Liabilities Total Long Term Liabilities Total Liabilities 993 2,698 3,169 3,581 4,035 4,415 4,799 Equity Preferred Equity Share Capital & APIC 805 1,151 1,151 1,151 1,151 1,151 1,151 Retained Earnings ,106 1,511 2,197 2,835 Other Equity Total Shareholders Equity 1,468 1,856 2,039 2,257 2,662 3,348 3,986 Minority Interest Total Liabilities & Equity 2,550 4,571 5,225 5,855 6,714 7,780 8,801 Page 21

22 Cash Flows (VND bn) (*) 2015F 2016F 2017F 2018F 2019F Net Income Depreciation & Amortization Changes in Working Capital (274) (290) (404) (541) (615) (745) (1,013) Other Non-Cash Adjustments (3) Cash From Operation Activities (55) (5) Disposal of Fixed Assets Capital Expenditures (197) (393) (250) (250) (250) (250) (250) Increase/Decrease in Investments 836 (880) Other Investing Activities Cash From Investing Activities 639 (1,273) (250) (250) (250) (250) (250) (Dividends Paid) (5) (165) (139) (139) (139) (139) (185) Proceeds from borrowings 5,627 5, Repayments of borrowing (6,285) (4,531) (10) (10) (10) 5 (3) Increase (Decrease) in Capital Stocks Other Financing Activities Cash From Financing Activities (663) 1, Beginning Cash Balance Net Changes in Cash (100) (185) Expected Ending Cash Balance Ratio Analysis (*) 2015F 2016F 2017F 2018F 2019F Valuation Ratios Price Earnings PEG EV to EBIT EV to EBITDA Price to Sales Price to Book Profitability Ratios Gross Margin (ex. Dep) 12% 13% 14% 13% 15% 16% 14% EBITDA Margin 6% 8% 10% 9% 10% 11% 9% Operating Margin 4% 6% 8% 8% 9% 10% 8% Profit Margin 3% 7% 4% 4% 5% 6% 5% Return on Avg. Assets 6% 12% 7% 7% 9% 12% 10% Return on Avg. Equity 11% 25% 16% 17% 22% 27% 22% Leverage Ratios Interest Coverage Ratio (EBIT/I) EBITDA / (I + Cap Ex) Tot Debt/Capital Tot Debt/Equity Liquidity Ratios Asset Turnover Accounts Receivable Turnover Accounts Payable Turnover Inventory Turnover Current Ratio Quick Ratio Page 22

23 Appendix 2: List of antidumping duties (POR 10) No. Exporters Duty rate (USD/kg) 1 Hung Vuong Group Asia Commerce Fisheries Joint Stock Company Binh An Seafood Joint Stock Company Cadovimex II Seafood Import-Export and Processing Joint Stock Company C.P. Vietnam Corporation Cuu Long Fish Joint Stock Company Dai Thanh Seafood Company Limited Fatifish Company Limited GODACO Seafood Joint Stock Company Hiep Thanh Seafood Joint Stock Company Hoang Long Seafood Processing Company Limited International Development and Investment Corporation Nam Viet Corporation Ngoc Ha Co., Ltd. Foods Processing and Trading NTSF Seafoods Joint Stock Company Quang Minh Seafood Company Limited QVD Food Company Ltd Saigon-Mekong Fishery Co., Ltd Southern Fisheries Industries Company Ltd TG Fishery Holdings Corporation Thien Ma Seafood Company Limited Thuan An Production Trading and Services Co., Ltd Vinh Quang Fisheries Joint-Stock Company 0.97 Vietnam-wide rate Page 23

24 GUIDE TO RATINGS DEFINITION VPBank Securities (VPBS) uses the following ratings system: Buy: Expected return, including dividends, over the next 12 months is greater than 15%. Hold: Expected return, including dividends, over the next 12 months is from -10% to +15%. Sell: 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: Barry David Weisblatt Head of Research Ngo Thu Ba Senior Fundamental Analyst Pham Tran Huong Giang Fundamental Analyst For any questions regarding your account, please contact the following: Marc Djandji, CFA Head of Institutional Sales and Brokerage & Foreign Individuals Ext: 158 Ly Dac Dung Head of Retail Sales and Brokerage Ext: 335 Vo Van Phuong Director of Retail Sales and Brokerage Nguyen Chi Thanh 1 - Ho Chi Minh City phuongvv@vpbs.com.vn Ext: 130 Tran Duc Vinh Director of Retail Sales and Brokerage Lang Ha - Ha Noi vinhtd@vpbs.com.vn Ext: 369 Domalux Director of Retail Sales and Brokerage Nguyen Chi Thanh 2 - Ho Chi Minh City domalux@vpbs.com.vn Ext: 128 Nguyen Danh Vinh Associate Director of Retail Sales and Brokerage Le Lai - Ho Chi Minh City vinhnd@vpbs.com.vn Ext: Page 24

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