FPT CORPORATION. FOX Listing as Short-term Catalyst

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1 FPT CORPORATION FOX Listing as Short-term Catalyst Equity Update I January 12, 2017 FPT Corporation (Ticker: FPT) just released his 11M2016 business results with following highlights: NOT-RATED Son Nguyen, Senior Analyst sonnt@tvs.vn 11M2016 results saw flat revenue and moderate improved net income. For 11M-2016, FPT reported revenue of VND 35,872 billion (+0% YoY) and net profit of VND 1,730 billion (+8% YoY). Foreign markets play increasing important roles as Revenue and PBT accounted for VND 5,451 billion (+31% YoY) and VN 806 billion (39% YoY) respectively. Across all subsectors, Retail (33%); Online Advertising (30%) and Software outsourcing (29%) had the biggest YoY growths, while Distribution and Manufacturing sector suffered a negative YoY growth rate (-30.6%). Listing FPT Telecom (Ticker: FOX) as short-term catalyst. FPT Telecom is to list its 137 million of shares on UpCOM on 13 th Jan 2017 under FOX ticker. The initial trading day s price will be VND 54,000 VND. Currently FPT Corporation held around 45.65% stake of FPT Telecom, the second largest shareholder behind State Capital Investment Corporation (SCIC). We expect FPT Telecom listing will create short-term catalyst for FPT when it does provide information transparence, and enforce stringent corporate governance. In addition, FPT s intention to acquire more SCIC s stake of FPT Telecom implies FPT s focus on the high-margin business segment like Technology and Telecom. Just quick view, we highlight FPT Telecom s business performance. FPT Telecom reported VND 4,922 billion in revenue and VND662 billion in net profit in 9M2016 with trailing 9M2016 EPS of VND 4,832. Figure: FPT Telecom Performance Quarter-On-Quarter Trading Data and Key Metrics Ticker FPT Sector Technology Listed since 13-Dec-2006 Price as of Jan 12, 2017 VND 45, week range (VND 000) 48,500-38,522 Market cap (VND bn) 21,110 Shares outstanding (mn) Free Float (mn) day average volume 435,477 Trailing P/ BV (x) 2.34 Trailing P / E (x) % 20.00% 10.00% 0.00% % 1-Dec-15 1-Jan-16 1-Feb-16 1-Mar-16 Source: TVS, Thomson Reuters Data Price Performance Chart FPT 1-Apr-16 1-May-16 Source: TVS, Thomson Reuters Data Price Perf. (%) 3M 12M YTD Absolute Source: TVS research, Thomson Reuters Data 1-Jun-16 VNIndex 1-Jul-16 1-Aug-16 1-Sep-16 1-Oct-16 1-Nov-16 1-Dec-16 2,000 1,500 1, Revenue Net income 1,543 1,635 1,744 1,283 1,322 1, Q1/16 Q1/15 Q2/16 Q2/15 Q3/16 Q3/15 Company Description Founded in 1988, FPT Corporation is a Vietnamesebased information technology conglomerate. The company operates in various sectors including Technology, Telecom, Trading, Retail, and Education. FPT expands into 19 countries and is among one of the most well-known Vietnamese companies. Revenue Structure Source: FPT Telecom % total revenue Valuation. We expect FY2016 FPT would somewhat surpass last year performance by achieving VND39,900-40,200 revenue and VND 1,940-1,960 billion earnings. EPS ranges from VND 4,220 to VND 4,350. Currently FPT is trading at 10.8x 2016EPS. 2% 23% Technology Telecom 58% 17% Distribution & Retail Source: Company data, TVS research 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 11M2016 BUSINESS PERFORMANCE UPDATE Software Outsourcing and System Integration contributed most to moderate improvement in 11M2016 net income. In 11M2017, FPT reported revenue of VND 35,872 billion and profit before tax (PBT) of VND 2,631 billion (+8% YoY). Net profit accumulated to VND 1,730 billion (+8% YoY) which is equivalent to earnings of VND 3,771 per share (+8% YoY). Figure 1: 11M2016 Business Performance VND bn 11M M-2016 % change YoY Revenue 35,886 35,872 0% Profit before tax 2,437 2,631 8% Net income 1,595 1, % EPS (VND) 3,498 3, % Although FPT completed 88% and 98% of 11M s targets of revenue and PBT, the company s revenue was merely equivalent to 78% of guidance. Similarly, 11-month PBT only achieved 83% of 2016 s plan. An improvement in net income was credited to better performance from Software Outsourcing and System Integration. On the other hand, a drop in revenue was partly due to a slowdown from Distribution & Retail sector. We expect FPT surpass slightly last year performance by achieving VND 1,940 1,960 billion earnings, implying EPS of VND 4,220 4,350. Last year, FPT also missed its yearly guidance by 4% on revenue and 68% on profit. It is more realistic to expect that the last month of 2016 could not save the company from falling short of this year s earnings guidance. We forecast that in 12M2016 FPT would somewhat surpass last year performance by achieving VND39,900-40,200 revenue and VND1,940-1,960 billion earnings. EPS ranges from VND 4,220 to VND 4,350. Foreign markets remain a bright spot. Revenue and PBT of foreign markets accounted for VND 5,451 billion (+31% YoY) and VN 806 billion (+39% YoY) respectively. After more than 17 years of globalization, foreign countries play increasing important roles in FPT cash streams as the company enjoys a high margin from the overseas. FPT is currently presenting in 20 countries with approximately 27,000 employees, including 1,134 foreigners. Globalization strategy is implemented in two ways: (i) by providing new technological trends in IT solutions for international major corporations and (ii) by implementing proven track record of successful solutions in Vietnam to other similar developing countries. In addition, in Dec-2016, FPT became solution provider for Daiwa Institute of Research BI (DIR BI) by collaborating to support cloud services for enterprises with Internet-of-Thing (IoT) related business. FPT will also develop entertainment systems for high-end car for Chinese, South Korean and Swedish carmakers.

3 3 Figure 2: Foreign markets vs. Domestic market Revenue Profit before tax 15% 84.8% Foreign markets Domestic market 69% 31% Foreign markets Domestic market Across all sub-sectors, Retail, Online Advertising and Software outsourcing had the biggest YoY growths that were 33%, 30% and 29% respectively. Distribution and Manufacturing sector, although being the strongest engine of FPT revenue by contributing 31.1% of 11M s revenue, suffered a negative YoY growth rate (-30.6%). Regarding PBT, Telecom services and Software outsource were the two sectors bringing biggest parts, 32.8% and 28.3% consecutively. System Solutions was the only sector which recorded a loss. IT service, in spite of suffering the most substantial backward in growth rate (-63%), still managed to recognized a positive result. Technology sector had an impressive growth thanks to an increase in software export. Software outsourcing won contracts in the US, Japan, EU, APAC while System solutions successfully gained revenue from ASEAN countries and Bangladesh. In addition, FPT software got into the TOP 20 of Software outsourcing companies in India regarding number of personnel. Telecom sector received most revenue from Internet broad-band service which generated VND3,894 billion (+17% YoY) thanks to increase of 21% in yearly subscribers. The other four services including (i) Data centers, (ii) IPTV, (iii) Leased lines and (iv) Voice jointly contributed VND1,743 billion (+36% YoY) revenue. FPT Telecom listing creates shortterm catalyst for FPT Corporation. FPT Telecom JSC (FPT Telecom) is to list its 137 million of share on the Unlisted Public Company Market (UpCOM) with the ticker FOX on 13 th Jan The first trading day s price will be VND 54,000 VND per share (trading range ±40%) which makes the capitalization of FPT Telecom larger than VND 7,400 billion. FPT Telecom is 45.65% owned by FPT and 50.16% owned by the State Capital Investment Corporation (SCIC). As SCIC will divest its entire stake at FPT Telecom in a Government s effort to withdraw capital from 10 major companies. FPT is regarded

4 4 as the front runner in a bid for SCIC s stake at FPT Telecom by using capital sources from the selling of FPT Trading and Retail. Figure 3: Quarterly Revenue and Net income of FPT Telecom (VND billion) 2,000 1,500 1, Revenue Net income 1,543 1,635 1,744 1,283 1,322 1, Q1/16 Q1/15 Q2/16 Q2/15 Q3/16 Q3/15 FPT Telecom provides 4 main services including Internet; FPT TV; Fshare; and FPT Play. Viettel, VNPT and FPT Telecom are the three biggest internet providers which has 1 million, 0.94 million and 0.9 million of subscribers respectively. Figure 4: Revenue and Net Income of FPT Telecom (VND billion) Revenue Net income 6,000 4,825 5,568 4,922 4,000 2, M2016 Source: FPT In 6M2016, FPT Telecom reported a revenue of VND 3,178 billion (+22% YoY) and net income VND 451 billion (-4% YoY). Earnings was improved in Q3 as the company reached VND 4,922 billion in net revenue (+21% YoY) and net income grew 3% YoY to VND 662 billion. FPT Telecom had completed phase 1 the optical fiber cable swap project in major cities in Q Cost allocation for this period ended in Q The firm began its phase 2 in Dong Nai, Binh Duong, Can Tho, Da Nang, Hai Phong and is expected to complete in Q As the scale of phase 2 is 40% smaller than that of phase 1, depreciation expenses would decrease accordingly.

5 5 Figure 5: FPT Telecom Margin Gross profit margin Net profit margin 60.0% 40.0% 20.0% 0.0% 46.2% 47.6% 45.2% 15.3% 14.9% 13.4% M2016 Source: FPT Telecom FPT retail aims to increase its stores to 400 by the end of Customer oriented culture and improving after-sales service helped FPT retail to exceed this year s revenue target by 7%. Another good news was that e-commerce s revenue increased 71% YoY, accounting for 9.5% of the company s revenue. Sale growth rate of e- commerce was two times faster than that of traditional shops. Website traffic also increased three folds and expected to reach 800,000 sessions (visits) per day by the end of FPT retail s goal is to bring online sales to 12% of 2017 revenue - equivalent to the proportion of Mobile World Group s online sale. Marketing and back-end operations will be further strengthened and allocated 1% of revenue each. Figure 6: E-Commerce revenue over years Revenue Revenue from e-commerce ,000 10,700 7, , A 2015A 2016F 2017F

6 6 Figure 7: Sub-sectors performance Sectors Technology Sub-sectors 11M Revenue 11M % change YoY 11M Profit before tax 11M % change YoY Software outsourcing 3,628 4,667 29% % System solutions % 8-41 System integration 2,003 2,312 15% % IT service % % Telecom Distribution Telecom services 4,615 5,637 22% % Online advertising % % Distribution and Manufacturing of IT products and mobile handsets 16,095 11,167-31% % Retail Retail 7,105 9,482 33% % Education & Investments Education & Investments % %

7 7 FINANCIAL SUMMARY Earning Model (VNDbn) 2011A 2012A 2013A 2014A 2015A Balance Sheet (VNDbn) 2011A 2012A 2013A 2014A 2015A Net sales 25,370 24,594 27,028 32,645 37,960 Cash and equivalents 2,902 2,319 2,751 4,336 3,585 Cost of sales 20,412 19,902 21,489 26,456 30,466 Financial investment ,443 1,428 2,617 Gross profit 4,958 4,692 5,539 6,189 7,494 Accounts receivable 4,023 4,202 4,925 5,379 6,313 Selling expenses 2,396 2,461 3,203 3,854 4,559 Inventory 3,276 2,700 3,329 4,573 5,268 General administration expenses Prepaid expenses, other CA ,176 Other operating income/(expenses) Total current assets 11,373 10,229 12,908 16,709 18,959 EBITDA 2,935 2,597 2,913 2,894 3,664 Property and equipment Depreciation & Amortization At cost 3,139 3,938 4,672 5,891 7,632 EBIT 2,559 2,198 2,469 2,347 2,931 Less accumulated depreciation -1,257-1,590-1,869-2,355-2,966 Net interest income/(expenses) Net property and equipment 1,883 2,349 2,803 3,536 4,666 Net investment income Net intangibles Others (recurring) Total investments Pretax Profit 2,502 2,407 2,516 2,459 2,851 Other long - term assets ,374 Income tax Total Assets 14,943 14,209 17,571 22,658 26,046 Tax rate (%) Account Payables 1,339 1,809 2,200 3,019 2,815 Minorities ,045 1,344 1,601 Short-term debt ,608 8,033 Net Income 2,079 1,985 2,065 2,079 2,438 Other current liabilities 7,137 5,010 6,869 3,343 4,119 EPS (basic VND, reported) 4,375 3,941 3,544 3,237 3,814 Total Current Liabilities 8,475 6,820 9,069 12,970 14,968 Weighted shares outstanding (mn) Long-term debt Other long-term liabilities 946 1,186 1,238 1,633 1,883 Common dividends declared Total long-term liabilities 947 1,208 1,293 1,775 2,497 DPS (VND) 1,190 1,322 1,552 1,437 1,652 Dividend Payout ratio (%) 27% 34% 44% 44% 43% Stockholders' equity 5,521 6,182 7,209 7,913 8,581 Dividend cover (X) Common Equity 2,161 2,738 2,752 3,440 3,975 Treasury shares Growth and Margin (%) Capital surplus Sales Growth (%) 27% -3% 10% 21% 16% Retained earnings 3,173 3,181 4,207 4,268 4,395 EBITDA Growth (%) 26% -12% 12% -1% 27% Budget sources and other funds EBIT Growth (%) 28% -14% 12% -5% 25% Minority interest ,045 1,344 1,601 Net Income Growth (%) 23% -5% 4% 1% 17% Total liabilities and equity 14,943 14,209 17,571 22,658 26,046 EPS Growth (%) 19% -10% -10% -9% 18% Capitalized leases Gross Margin (%) 20% 19% 20% 19% 20% Capital employed 6,468 7,390 8,502 9,688 11,078 EBITDA Margin (%) 12% 11% 11% 9% 10% EBIT Margin (%) 10% 9% 9% 7% 8% Ratios (%) Net Income Margin (%) 7% 6% 6% 5% 5% ROE (%) ROA (%) Cash flow Statements (VNDbn) 2011A 2012A 2013A 2014A 2015A ROIC (%) Pre-tax Income 2,502 2,407 2,516 2,459 2,851 Inventory days Adjustments for: Receivable days Depreciation and amortization Payable days Change in inventories , Asset Turnover (x) 1.9x 1.7x 1.7x 1.6x 1.6x Change in trade receivables Net debt/equity (x) 0.3x 0.1x 0.1x 0.3x 0.5x Change in trade payables , Interest cover - EBIT(x) 0.1x 0.1x 0.0x 0.1x 0.1x Other operating cash flow ,267 Cash flow from operations 1,847 2,410 1,400 1,151 1,156 Valuation (Multiples) Net Capital expenditure ,441-2,090 EV / EBITDA (x) 3.7x 3.5x 4.2x 6.5x 6.4x Acquisition P/E (x) 5.5x 5.4x 8.0x 11.2x 11.0x Divestures Dividend Yield (%) Other investments, net P/B (x) 1.7x 1.4x 1.6x 2.1x 2.2x Cash flow from investing ,576-1,469-2,901 Equity issued Net borrowings 198-1,793 1,341 2,643 1,941 Dividends to shareholders Cash flow from financing , , Net cash flow 1, , Opening cash 1,436 2,902 2,319 2,751 4,336 Notes: CA = current assets; CL = current liabilities Closing cash 2,902 2,319 2,751 4,336 3,585 Source: Thomson Reuters data, Thien Viet Securities model

8 8 ANALYST CERTIFICATION I, Nguyen Thanh Son, 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 fall 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 2017 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.

9 9 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 Bach Nguyen (Mr.), Analyst Oil & Gas bachnkv@tvs.vn Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn