INVESTMENT STRATEGY. 6, Aug, Three years of consecutive losses, or

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1 INVESTMENT STRATEGY Risky stocks Companies generally delist when they want to expand or restructure, are acquired by others, or the promoters want to raise their stake. Delisting can be a voluntary decision where a company Steel sector removes its securities from the exchange or a forced delisting by stock exchanges for non-compliance with one of the following rules: 1. Three years of consecutive losses, or 2. Accumulated loss exceeding charter capital in the financial statements of the most recent year prior to the date of consideration, or 3. Violations of disclosure regulations Forced delisting by exchanges leaves investors in the lurch as they have no option but to sell at whatever price is needed, which makes stock price plunges as deep as nearly worthless. There are plenty of risks and plenty of duds involved in these stocks. But there are also sizable rewards to be gained on pinning hopes that these companies can survive after all. Market test shows that risky stocks can return as high as 80% (NVT), 70% (TSC), 55% (SJS), in just a matter of weeks. That's what makes penny stock investing so attractive to investors Here we sort list companies on the brink of compulsory delisting, but have a chance to survive should they avoid the above regulatory actions. Those are stocks on the verge of collapse with two years of consecutive losses (2012 and 2013), but show signs of turnaround (target profits in the third year and YTD earnings > 0). Although there are many stocks that fit the above criteria, we only choose those that have good liquidity (average 30 day trading volume >100,000 shares traded), market cap> VND100bn and cheap (PB<1.0x). Only VIS and LCG fit in our criteria. This report will give a quick analysis over VIS and LCG to identify if any of those firms can maintain profitable at year end. 6, Aug, 2014 VIS 2014 Revenue (VND bn) 3,450 Revenue growth 1% Net profit (VND bn) 6 Risk to forecast Gross margin < 6.3% Interest rate increase LCG 2014 Revenue (VND bn) 1,363 Revenue growth 378% Net profit (VND bn) 39 Risk to forecast Construction sales delay Gross margin < 9.0% Loss from affiliates (OBF) 1

2 RISKY PICKS? 1. BACKTESTING IN 2H2013 COMPANIES WITH 2 YEARS LOSS (2011,2012) THIRD YEAR PROFIT (2013) STOCK PRICE OF THOSE COMPANIES IN 2H OUR PICKS FOR 2H2014 : VIS & LCG 3. VIS 2014 OUTLOOK 4. LCG 2014 OUTLOOK 2

3 1. BACKTESTING 3

4 BACKTESTING RISKY STOCKS IN 2H2013? We reconstructed historical data using rules defined by our risky picks strategy to gauge the effectiveness of our trading strategy. The underlying theory is that any strategy that worked well in the past is likely to work well in the future, and conversely, any strategy that performed poorly in the past is likely to perform poorly in the future. We ran across market data back in 31/7/2013 to identify last year candidates, which bear the same characteristics with our risky picks strategy : good liquidity (average 30 day trading volume >100,000 shares traded), market cap > VND100bn, cheap (PB<1.0x), on the verge of collapse with two years of consecutive losses (2011 and 2012), but show signs of turnaround (target profits in the third year and earnings since the beginning of the year up to 31/7/2013 > 0) We found four tickers: Metrics >100 >100,000 <1 <0 <0 >0 >0 Tickers Market cap (VND bn) Liquidity (30 days traded shares) PB (x) 31/7/ Earnings VND bn 2012 Earnings VND bn Target 2013 Earnings VND bn 1H 2013 Earnings VND bn SJS 1, , x (91) (303) NVT , x (77) (70) 19 7 TSC , x (6) (56) 29 7 VIG 143 1,224, x (96) (63) 6 1 Source: TVS Research 4

5 BACKTESTING RESULTS IN 2H2013 The below table is the actual backtesting results report, of which 100% of our stock selection outperformed the market with prices increasing from 39% - 67% while VNI only rose by 2.5% during the same period. These companies also remained profitable at the end of 2013 (the third year) Tickers Price (VND) 31/7/2013 Price (VND) 31/12/ Earnings VND bn 2012 Earnings VND bn Actual 2013 Earnings VND bn Price change in 2H2013 SJS 11,900 18,500 (91) (303) % NVT 3,900 6,500 (77) (70) % TSC 5,500 9,000 (6) (56) 3 +64% VIG 2,300 3,200 (96) (63) 7 +39% VNINDEX % Source: TVS Research 5

6 BACKTESTING STOCKS IN FOCUS SJS NVT Revenue (VND bn) Revenue (VND bn) Gross margin (%) 20 (291) 41 Gross margin (%) Operating margin (%) (33) (524) 19 Operating margin (%) (34) (16) 4 Net profit (VND bn) (91) (303) 70 Net profit (VND bn) (77) (70) 21 Debt/Equity (%) Debt/Equity (%) PB (x) 1.2x 1.4x 1.1x PB (x) 0.2x 0.5x 0.5x Source: Bloomberg, TVS Source: Bloomberg, TVS SJS STOCK PRICE IN 2H % SJS VNINDEX 40% 20% 0% Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13-20% -40% Source: Bloomberg NVT STOCK PRICE IN 2H % 80% NVT VNINDEX 60% 40% 20% 0% Jul-13-20% Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Source: Bloomberg 6

7 BACKTESTING STOCKS IN FOCUS TSC VIG Revenue (VND bn) 415 2, Revenue (VND bn) Gross margin (%) Gross margin (%) NA NA NA Operating margin (%) Operating margin (%) NA NA NA Net profit (VND bn) (6) (56) 3 Net profit (VND bn) (96) (63) 7 Debt/Equity (%) Debt/Equity (%) PB (x) 0.5x 0.4 x 0.6x PB (x) 0.2 x 0.3 x 0.5 x Source: Bloomberg, TVS Source: Bloomberg, TVS TSC STOCK PRICE IN 2H % VIG STOCK PRICE IN 2H % 60% TSC VNINDEX 40% VIG VNINDEX 40% 20% 0% Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13-20% Source: Bloomberg 20% 0% Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13-20% Source: Bloomberg 7

8 2. OUR PICKS THIS YEAR 8

9 2014 RISKY PICKS We construct our portfolio beginning with market data as of 31/7/2014, similar to last year s portfolio stance. From that population, we filter out 2014 risky stocks bearing the same characteristics with our pre-defined criteria. We have only two results: LCG (HSX) and VIS (HSX). We believe that whether those companies can maintain profitable this year will deeply influence their share price. Our analysis only covers up to the end of this year s financial result, which does not extend over future performance. Therefore, we only recommend these risky stock picks strategy for daily, short-term traders, higher risk profile investors with a holding period between 1-3 months. Let s look at each company in focus Metrics >100 >100,000 <1 <0 <0 >0 >0 Tickers Market cap (VND bn) Liquidity (30 days traded shares) PB (x) 31/7/ Earnings VND bn 2013 Earnings VND bn Target 2014 Earnings VND bn 1H 2013 Earnings VND bn LCG 416 1,367, (37) (306) VIS , (17) (28) Source: Bloomberg, TVS 9

10 3. VIETNAM ITALY STEEL COMPANY HSX: VIS 10

11 VIETNAM ITALY STEEL COMPANY COMPANY OVERVIEW VIS imports steel scraps for billet production, then using steel billet to produce construction steel. The firm has a production capacity of 400,000 tons steel billet and 250,000tones construction steel, ~ 4.5% market share. VIS produces mainly high-grade steel which are suitable for high-rise buildings. Developers of construction, industrial projects are its major customers (80% sale) while residential market only accounts for 20% sale. VIS relies on a small number of distribution partners. 60% of its output is distributed through Thai Hung Trading JSC. The remaining output is distributed through other eight partners There is little growth ahead as the steel s rolling mill factory has been operated at full capacity since 2010 until further expansion PROFIT DRIVERS Stable core profit on stable sale. Interest expense savings from 1.5% reduction of interest rate and 22% reduction of short term debt from 2013 to We estimate that VIS can cut interest expense by 30% from VND163bn in 2013 to VND113bn in RISKS Reliance of imported raw materials, i.e 70% steel scrap may cause material cost to fluctuate more than our estimates Reliance on small numbers of distribution partners exposes VIS to payment risks if the distribution company no longer distributes VIS products STOCK PRICE 40% VIS VNINDEX 20% 0% 7/ /2013 1/2014 4/2014 7/ % -40% -60% Source: Bloomberg KEY METRICS 2014 OUTLOOK Current stock price (VND) 7,700 Market cap (VND bn) 379 Revenue (VND bn) 3,450 Operating margin (%) 3.5% Net margin (%) 0.17% ROE (%) 1.0% Debt/Equity (%) 218% PB (x) trailing at current price 0.6 Source: Company data as of 31/7/

12 VIS FINANCIAL METRICS (VND bn) Income statement F Revenue 3,915 3,874 3,416 3,450 Gross profit Operating profit Non-operating profit (93) (41) 10 (0) Interest expense (69) (146) (163) (113) Profit to shareholders 27 (17) (28) 6 Balance sheet F Cash & equivalent Accounts receivable Inventories Net fixed assets Total Assets 1,318 2,810 2,569 2,175 Short-term debt 704 1,678 1,587 1,187 Long-term debt Total Liabilities 795 2,150 1,937 1,538 Total Equity Ratio F Growth ratio Sales 27% -1% -12% 1% EPS -75% NA NA 100% Margin GM 7% 7% 7% 7% OM 5% 4% 4% 4% NM 1% -0% -1% 0.2% Profitability ratio ROA 2% -1% -1% 0% ROE 5% -3% -4% 1.0% Liquitity/solvency Current ratio 1.4 x 0.9 x 0.9 x 1.0 x Debt-to-asset 53% 71% 70% 64% Debt-to-equity 134% 303% 283% 218% Valuation metric EPS (VND) 907 (337) (565) 123 BVPS (VND) 17,454 13,394 12,829 12,952 Source: TVS, VIS Cash flow F Beginning cash Operating cash 48 (97) Investing cash 13 (19) 42 (17) Financing cash (207) (400) Ending cash

13 VIS PROFIT DRIVER FROM DEBT REDUCTION VIS BEAR HUGE DEBTS AFTER MERGING SDS VND bn 2,500 Debt Merge with SDS 2,000 Equity 1,500 1,000 BUT CONSISTENTLY REDUCING ITS DEBT BALANCE 300% 200% 100% D/E 500 0% F F Source: TVS, VIS Source: TVS, VIS, data as of 1Q 2014 VIS used to import steel billet as the main material for its steel production process. In order to self-supply raw materials, VIS and Song Da Corporation developed the Song Da billet plant by forming Song Da Steel JSC (SDS) in The operation of Song Da billet plant aimed to ensure sufficient supply for steel production while the excess amount can be sold to the market for additional profit. Although VIS now has raw material, i.e steel billet, for steel production, VIS still needs to import raw material, i.e steel scrap by 60%-70% for the production of billet plant. Therefore, VIS is still affected by fluctuations of imported material price. In May, 2012 VIS acquired SDS through the issuance of new shares to swap with SDS shares. After the acquisition, VIS bear the huge debt from SDS s billet plant, leading to a surge in interest expense in 2012 and 2013 VIS s debt balance was only VND704bn in 2011 but soared nearly three-fold to VND1,996bn in 2012 from the debt of SDS. Management has gradually paid back debts to alleviate interest expense pressure after the acquisition took place. At the end of 1Q 2014, VIS has reduced total debts from its peak of VND1,999bn in 2012 to VND1,389bn, thereby putting the company in the safe zone after 2 years of losses mostly from financial expense 13

14 VIS EARNINGS OUTLOOK F +/- 2014/2013 Explanation Revenue (VND bn) 3,874 3,416 3,450 1% Little growth since the company runs at full capacity - GM % 6.5% 6.7% 6.5% VIS has stable GM of % over the last 3 years Gross profit SG & A % 2.1% 3.0% 3.0% Operating profit Non operating gain/loss EBIT Interest expense (146) (163) (113) VIS has consistently reduced its total debts from ivnd1,999bn in 2012 to VND1,389bn in 1Q2014 EBT (16) (28) 8 NP (VND bn) (17) (28) 6 Mainly from lower interest expense on lower debt and lower interest rate 14

15 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 VIS RISKS TO FORECAST RAW MATERIAL SPECULATION Inve. VND bn 1,600 1,200 Inventory Steel scrap price Steel scrap USD CHANGES IN GM Steel scrap USD Steel scrap price GM 12% 10% % 6% 4% 2% Source: TVS, VIS Source: TVS, VIS, data as of 1Q 2014 Inventory turnover fluctuated wildly over quarters, indicating that the company did not import raw materials regularly but based on market assessment to make import decisions. This could bring huge profits to VIS if the company imports raw material at the right time of low price but it could also pose potential risks if the company makes the wrong move by importing high-priced materials amid falling steel price VIS maintains relatively stable gross margin of 6.6% over the last 3 years. Since VIS s customer base is mainly project developers, especially those belonging to Song Da Corporation s projects such as Cienco1, Cienco4 the company can secure steady operating profit amid a highly competitive industry If the company s operation in 2014 remains similar to previous 3 years, VIS will see positive bottom line due to reduction of financial costs. High chance is that VIS will avoid delisting from the stock market at the end of this year. Risk to our forecast : VIS s GM < 6.3%, then the firm may see another loss year if it can not pass through high-price raw material cost to customers amid falling selling price. 15

16 VIS COMPARABLES VIS has highest Debt/Asset ratio among peers which makes the company highly exposed to interest rate risks. However, it is also the first to see significant change in its bottom line should the interest rate environment remains subdued or relatively stable in the next 1-2 years. However, its core business still performs well with 12M s gross margin only inferior to market leaders Hoa Phat Group (HPG ) and Hoa Sen Group (HSG), probably thanks to stable customer base The company is trading at attractive PB of 0.6(x) ~ 50% discount to group s average Price as of 31/7/2014 Market cap (USD mn) PB (x) Gross margin % 12M Net margin % 12M ROE % ROA % Debt/Asset % Net profit (VND bn) 2012 Net profit (VND bn) 2013 VIS 7, x 5.6 (1.2) (6.3) (1.7) 69.6 (17) (28) HLA 2, x (3.5) (8.6) (112.0) (18.2) (236) HPG 55,500 1, x ,954 HSG 43, x POM 12, x 2.9 (2.1) (8.5) (2.6) (219) TLH 8, x DNY 6, x VGS 7, x Average 1.1 x (9.6) (0.4)

17 4. LICOGI 16 HSX : LCG 17

18 LICOGI 16 COMPANY OVERVIEW LCG, a subsidiary of Licogi Corporation, engages in installing and building civil, industrial, hydropower projects, construction material and real estate trading. LCG has 300ha cleared land at Long Thanh near Long Thanh - Dau Giay Highway, including 2 social housing projects namely Hiep Thanh Residential Area and Nam An Building, which will become its major advantage when the real estate market unthaws Sale grows by 378% in 2014 as LCG s major contract (Formosa project) will be booked in this period STOCK PRICE 60% LCG VNINDEX 40% 20% 0% 7/ /2013 1/2014 4/2014 7/ % 2014 PROFIT DRIVERS Reverse provision Proceed construction sales from Formosa projects Transfer Sky Park Residence (VND10bn profit) RISKS Construction sales delay Price competition hurts GM Unable to reverse provision -40% Source: Bloomberg KEY METRICS 2014 OUTLOOK Current (VND) 7,400 Market cap (VND bn) 416 Revenue (VND bn) 1,363 Operating margin (%) 7.0% Net margin (%) 2.9% ROE (%) 4.5% Debt/Equity (%) 55% PB (x) trailing at current price 0.5 Source: Company data as of 31/07/

19 LCG PREPARED FOR 2014 MAIN SOURCE OF 2014 REVENUE COMES FROM PROCEED OF FORMASA STEEL PROJECT Starting date Project 2013 s backlog (VND bn) 2014 target (VND bn) 9/2013 Formosa /2014 National road 1A of Quang Tri Province Lam Dong Hospital Cable Others 278 Revenue (VND bn) 1,363 LCG made VND306bn loss in 2013, mostly came from its aggressive provision booking policy, including: + Provision for loss from affiliates (VND114bn): Among LCG s affiliates, Phuong Dong Bio Fuel Co Ltd (OBF) was the most risky one where LCG booked VND98bn provision for OBF s loss at the end of LCG owns 22% stake of this company so far, with other two partners PVOil and Itochu. OBF made a loss of VND15bn and VND246bn in 2012 and 2013 as the plant has repeatedly delayed from its commercial operation. Under government direction, the E5 bio fuel can only be officially marketed at the end of Until the project starts to roll out, OBF may continue to make another loss this year. + Other provisions (VND 29.2bn) Allowance for VND19.5bn bad debts Provision for VND9.7bn inventories of Ban Chat Project + Unexpected expense (VND82.7bn) Tax arrears of VND18.5bn Tax late payment interest of VND82.7bn Heavy provisions in 2013 prepared for a fresh start in 2014 as LCG s profitability purely depends on the stage of completion on the proportion of contracts and associated service. If LCG has no further exposure to risks from affiliates, tax exposure, or other non-operating losses in 2014, we estimate that LCG has a high probability to make profit this year. 19

20 2014 Gross margin LCG RISKS TO PROFITABILITY RISKS: BELOW SALES & GM TARGET Sales VND bn 2,000 Sales Gross margin 1,500 1, F GM % 40% 30% 20% 10% 0% PROFITABILITY SENSITIVITY ANALYSIS 2014 Sales target 100% 90% 80% 70% 60% 50% 10.0% % % % % % % % % Source: TVS, LCG At 2014 AGM, LCG targets to reach VND1,363bn in sale and VND22bn in net profit. We are quite skeptical at the company s target due to the following reasons: (1) LCG only achieved 17% its sale target in 1Q (2) Recent riot at Formosa steel plant in May, 2014 may lengthen the construction process. (3) We also notice that LCG s GM has declined deeply over years due to aggressive price competition in the construction industry. To win contracts, LCG may lower its bidding price, therefore hurting its GM. Source: TVS, LCG We make a profitability sensitivity analysis based on the theory that (1) LCG can not meet its sale target from the AGM on a conservative basis taken into account the risk of prolonged construction process, (2) GM may decline further due to price competition, ceteris paribus. Our sensitivity analysis does not include other risks such as (1)Further loss from the subsidiary OBF, (2) Further provisions The table presented above shows that LCG has a high chance to be profitable as of 1Q2014, LCG has achieved 17% sale target (~70% full year) with 9.9% GM. If LCG maintains the same pace throughout the year, it will make about VND17bn profit in

21 LCG FINANCIAL METRICS (VND bn) AT 100% TARGET Income statement F Revenue 1, ,363 Gross profit Operating profit (47) 95 Non-operating profit 40 (7) (189) 11 Interest expense (93) (81) (59) (56) Profit to shareholders 170 (37) (306) 39 Balance sheet F Cash & equivalent Accounts receivable Inventories Net fixed assets Total Assets 2,201 2,018 1,936 2,094 Short-term debt Long-term debt Total Liabilities ,088 1,206 Total Equity 1,219 1, Ratio F Growth ratio Sales 52% -55% -59% 378% EPS -52% NA NA 100% Margin GM 19% 17% 9% 10% OM 17% 8% -16% 7.0% NM 11% -5% -108% 2.9% Profitability ratio ROA 8% -2% -16% 2% ROE 15% -3% -31% 4.5% Liquitity/solvency Current ratio 1.4 x 1.4 x 1.3 x 1.3 x Debt-to-asset 26% 22% 28% 23% Debt-to-equity 47% 39% 64% 55% Valuation metric EPS (VND) 3,023 (650) (5,441) 696 BVPS (VND) 20,629 19,475 14,113 14,809 Source: TVS, LCG Cash flow F Beginning cash Operating cash (58) 91 Investing cash (157) (72) (26) - Financing cash (16) (138) 91 (50) Ending cash

22 LCG COMPARABLES LCG has high Debt/Asset ratio among peers Gross margin among average Attractive PB of 0.5(x) ~ 50% discount to group s average Price as of 31/7/2014 Market cap (USD mn) Gross margin PB (x) % 12M Net margin % 12M ROE % ROA % Debt/Asset % Net profit (VND bn) 2012 Net profit (VND bn) 2013 LCG 7, x 8.6 (45.6) (23.9) (12.0) 28.0 (37) (306) HBC 17, x CTD 62, x FCN 23, x Average 1.0x

23 DISCLAIMER ANALYST CERTIFICATION We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any specific recommendations or views expressed in this report. by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (TVS). The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. 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 research.hcm@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn BROKERAGE DEPARTMENT Ho Chi Minh brokerage.hcm@tvs.vn Ha Noi brokerage.hn@tvs.vn 23