Hoa Phat Group (HPG VN)

Transcription

1 Vietnam Research This research report is a product of (Vietnam) Initiating coverage Vietnam / Steel 21 September 2016 BUY Target price Last price (20 Sept. 2016) VND50,000 VND45,450 Upside/downside (%) 10.0 VN-Index Mkt. cap (VND bn/usd bn) 38,303/ week range (VND) 20,782 45,950 Avg. trading value daily (VND bn) 183 Foreign ownership (%) 37.0 Source: Bloomberg Forecast earnings & valuation Fiscal year ending Dec-15 Dec-16E Dec-17 E Dec-18 E Revenue (VND bn) 27,453 30,267 33,888 37,277 EBIT (VND bn) 4,409 6,701 7,630 7,059 Net profit (VND bn) 3,485 5,461 6,339 5,995 Net profit (underlying) 3,485 5,461 6,339 5,995 EPS (VND) 4,755 6,479 7,520 7,113 EPS growth (%) (5) P/E (x) EV/EBITDA (x) Dividend yield (%) P/B (x) ROE (%) Net debt/equity (%) 12.0 (5.3) (12.8) (19.7) Performance (VND) (LHS) Rel. to VN-Index (RHS) (%) 45,000 40,000 35,000 30,000 25,000 20, Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Performance 1M 3M 12M Absolute (%) Absolute (USD, %) Relative to VN Index (%) Source: Bloomberg Duong Nguyen, Analyst * duong.nguyen@miraeasset.com * () Low costs, steady profits () is Vietnam s biggest maker of construction steel, with a highly efficient production chain. We think Hoa Phat is attractive, in light of its: 1) low production costs; and 2) stable profits. We initiate Hoa Phat with a BUY rating and target price of VND50,000. Sector-leading profitability, thanks to low costs Hoa Phat began construction of an integrated steel mill in 2007, with the mill becoming operational in From 2010 until early 2016, Hoa Phat supplied its own iron ore to produce steel, and has imported soft coal and hard coal for coke outsourcing, which account for an estimated 40% of the cost of production of finished steel. Thanks to current low global iron ore prices, the cost of outsourcing iron ore is below what it would be for Hoa Phat to produce its own. In addition, iron ore and coke prices costs show less volatility than that of scrap iron. As scrap iron accounts for 90% of the production costs of scrap-iron-derived steel, the input costs of steel produced from iron ore and coke are below that made from scrap iron. This key competitive advantage has helped Hoa Phat to achieve growth above the industry average, even amid the steel sector s stagnant growth period of Strong cost control has enabled Hoa Phat to increase its market share gradually and become Vietnam s largest construction steelmaker. Stable profits Fluctuations in the input prices of materials for steel production, such as iron ore, coking coal, and scrap, have a significant impact on the selling price of the finished product. Investors tend to view steelmakers as unattractive investments, due to their earnings fluctuations. However, even during the Vietnamese steel industry s crisis of , amid a stagnant real estate market, Hoa Phat enjoyed stable net profits, while many other steel producers went bankrupt. We expect Hoa Phat to continue to enjoy high net profit growth and stable operational cash flow going forward. Preview of 3Q16 earnings We forecast 3Q16 revenue of VND7.5tn (+8.9% YoY) for Hoa Phat. Revenue should increase on increased sales volume of construction steel (+23% YoY), thanks to completion of Phase 3 of the integrated mill operation. However, we expect ASP to continue to decline (-15% YoY) in 3Q16, as the third quarter is a low season for steel consumption, due to heavy rainfall in Vietnam. We forecast gross margin and operating margin of 25.8% and 22%, respectively (3Q15: 23% and 19%, respectively). Initiating with BUY and target price of VND50,000 We initiate coverage of Hoa Phat with a BUY recommendation and target price of VND50,000 (+10% upside) by using economic value added (EVA) model. We believe the company, with its strong market position and stable operational cash flow, is undervalued. Moreover, the company s shares are currently trading at a 2016 P/B ratio of 2.0x, while the fair P/B ratio of 2.4x (2016 ROE of 32.3% and COE of 13.5%). Our target price is based on a 2016E P/E of 7.7x and P/B of 2.2x, while the company is currently trading at a 2016E P/E of 7.0x and P/B of 2.0x. See the last page of this report for important disclosures

2 T a b l e o f c o n t e n t s I. Recommendation and valuation 3 II. Investment thesis 8 III. DuPont analysis 12 IV. Financial analysis 13 V. Earnings outlook 13 VI. Company background 16 2

3 Figure 1 Hoa Phat s EVA valuation I. Recommendation and valuation Initiate with BUY and target price of VND50,000 We initiate coverage of with a BUY recommendation and target price of VND50,000 (+10% upside) by using the economic value added (EVA) model to capture the long-term asset value of the steel manufacturer. We believe that the company, with its strong market position and stable operational cash flow, is undervalued. Moreover, the company s shares are currently trading at 2016 P/B ratio of 2.0x while the fair P/B ratio of 2.4x (2016 ROE of 32.3% and COE of 13.5%). Our target price is based on a 2016E P/E of 7.7x and P/B of 2.2x, while the company is currently trading at a 2016E P/E of 7.0x and P/B of 2.0x. (VND bn) 2016E 2017E 2018E 2019E 2020E IC average 24,626 28,987 33,173 36,628 40,131 NOPAT 5,693 6,503 6,017 5,651 5,933.2 Terminal EVA ROIC (%) Sustainable ROIC (%) 14.5 WACC (%) WACC (%) 12 EVA spread (%) Terminal growth (%) 0 EVA 2,744 3,032 2,045 1,265 1,127.7 CV of EVA 9,418 Period Period 4 Discount factor Discount factor 0.64 Discount EVA 2,708 1, Discount EVA 5,991 Invested capital 28,987 Present value of EVA 11,948 Enterprise value 40,935 Cash & equivalents 6,800 WACC Calculation Fair value of investment asset 51 Risk free rate (%) 6.4 Non-operating asset value 6,852 Expected market return (%) 13 Market risk premium 6.6 Short-term borrowings 5,317 Beta 1.07 Long-term borrowings 639 Cost of equity (%) 13.5 Total borrowings 5,956 Equity to capital (%) 70 Cost of debt (%) 10 Value of equity 41,831 Tax rate (%) 15 Shares outstanding (m) 843 After tax cost of debt (%) 9 Appraised share price (VND) Debt to capital (%) 30 Target share price (VND) 50,000 WACC 12 Figure 2 Hoa Phat s EVA valuation analysis (VND bn) 60,000 50,000 40,000 30,000 20,000 10,000 0 Invested Capital Curent value of EVA Non-operating asset value Total borrowings Value of equity Market Cap 3

4 Figure 3 Vietnam steel companies comparison table Company name Construction steel Ticker Market cap (VND bn) Share price (VND) Price Change (%) P/E (x) P/B (x) OPM (%) ROE (%) Debt ratio (%) Debt/EBITDA (%) Revenue growth (% YoY) OP growth (% YoY) YoY YTD FY15 FY15 FY15 2Q16 FY15 FY15 FY15 FY15/14 FY15/14 Thai Nguyen Iron And Steel TIS VN 1,562 6, Vietnam Steel Corp TVN VN 3,661 6, (32.3) 13.6 Thu Duc Steel JSC TDS VN , (14.9) Nha Be Steel JSC TNB VN 204 9, ,303 45, Pomina Steel Corp. POM VN 1,639 8, (9.2) 54.7 Vietnam-Italy Steel JSC VIS VN , (8.2) (17.6) (77.5) DANA-Y Steel JSC DNY VN 132 6, (7.9) (11.8) Steel pipe 0 Nam Kim Steel JSC NKG VN , (1.5) ,303 45, Vietnam Germany Steel Pipe JSC VGS VN , Huu Lien Asia Corp HLA VN (55.6) (42.9) (87.9) (86.8) (36.3) Hoa Sen Group HSG VN 8,451 43, Flat steel 0 Hoa Sen Group HSG VN 8,451 43, Dai Thien Loc Corp DTL VN , (8.1) (11.8) (43.0) Nam Kim Steel JSC NKG VN , (1.5) 64.1 Source: Bloomberg, Mirae Asset Research 4

5 Share price analysis Hoa Phat s share price has increased gradually from its January 2016 bottom of VND21,200 to the current level of VND42,000, following a downtrend from end-2014 to 2015, due to: 1) the impact of the temporary safeguard tariff in March and official safeguard tariff from August 2016; and 2) low raw-material (iron ore) input prices, which helped the company increase its revenue by 6.5% YoY and net profit by a whopping 65% YoY in 2Q16. Thanks to favorable conditions in Vietnam s real estate market and the government s protectionist policies for the steel industry, - Vietnam s largest producer of construction steel - achieved the company s highest-ever gross margin (32%) and a healthy net profit in 2Q16. As a result, between January and August 2016, Hoa Phat s share price increased by 104%, from VND20,900 to VND42,600 (versus +27% for the VN Index). The company s shares are currently trading at 2.0x 2016E P/B, versus an average of 1.5x for its global peers, a level that reflects the company s strong market position, stable operational cash flow, and solid earnings, amid a difficult environment for the steel sector, both in Vietnam and globally. Figure 4 Hoa Phat s historical EV/EBITDA band chart (VNDbn) 4.5x EV 27,000 22, x 2.9x Figure 5 Hoa Phat s 12-month forward EV/EBITDA (x) std +1 std 17, x 5 5 yr avg. 4 12, x 3-1 std 7, std 2, Figure 6 Hoa Phat s historical P/E band chart Figure 7 Hoa Phat s 12-month forward P/E (VND) 50,000 Share price 7.0x (x) 8 40,000 30, x 4.5x std +1 std 20,000 10, x 2.0x yr avg. -1 std std 5

6 Figure 8 Hoa Phat s historical P/B band chart Figure 9 Hoa Phat s 12-month forward P/B (VND) 53,000 43,000 33,000 23,000 Share price 2.0x 1.6x 1.3x 0.9x (x) std +1 std 5 yr avg. 13, x std 3, std Figure 10 Hoa Phat s event chart (VND) 50,000 45,000 40,000 35,000 1H14 net revenue and profit up +58% YoY and +85% YoY Bank Invest fund divests all of its stake of 3.5% Temporary safeguard tariff in March and official safeguard tariff from August 30,000 25,000 HPG surpasses 34% of full-year plan in 7 months 20,000 15,000 VinaCapital announces sale of 4.2m HPG shares Strong 1Q09 earnings results and increase in dividend VN Index declining amid stagnant real estate market YoY drop in net profit, due to low steel demand VinaCapital announces purchase of 4m HPG shares 10,000 5,000 Market share of construction steel increases from 10-14%, and gross margin improves, thanks to low prices of input materials 0 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Source: Bloomberg, Mirae Asset Research 6

7 Figure 11 Hoa Phat s peer comparison Company Hoa Sen Group Tata Steel Maanshan Iron JSW Steel Code Equity HSG VN Equity TATA IN EQUITY 323 HK EQUITY JSTL IN EQUITY Trading currency VND VND INR HKD INR Share price (local currency) 45,450 43, ,847 Market cap (local currency) 38,303 8, Free float % Average volume (30 days) Shares 4,689,237 2,522,760 7,326,714 12,031, ,589 Average trading value (3 months) USD m EPS , ,476.2 (31.4) (0.6) (33.2) 2016E 6, , E 7, , (0.0) E 7, , EPS YoY growth (%) NA 21.3 (2,237.9) (60.9) 2016E E 16.1 (3.9) 87.3 (119.0) E (5.4) , Sales (bn) , , , E 30, , , E 33, , , E 37, , , Operating profit (bn) , , (4.4) E 6, , E 7, , E 7,059.4 NA Net profit (bn) , (30.5) (4.8) (8.0) 2016E 5, , E 6, , (0.1) E 5, , Net profit margin (%) (2.6) (10.7) (1.9) 2016E E (0.2) E P/B (x) E E E P/E (x) (12.5) (3.0) (55.6) 2016E E (467.5) E EV/EBITDA (x) E 4.9 NA E 4.3 NA E 4.6 NA ROE (%) (10.2) (15.2) (3.7) 2016E (0.5) E (2.6) E (2.8) 14.6 Source: Bloomberg, Mirae Asset Research 7

8 II. Investment thesis Sector-leading profitability, thanks to low costs Figure 12 Cost of steel production in Vietnam (2Q16) (thousand tonnes) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 (% YoY) 70% 60% 50% 40% 30% 20% 10% 0% -10% VSA's selling volume HPG's selling volume HPG's market share -20% VSA's selling volume growth HPG's selling volume growth Source: Vietnam Steel Association (VSA), Mirae Asset Research As a developing country, Vietnam s steel industry is in the early stages of development, with most steel companies being small-scale mills that manufacture low-value rebar steel (concrete-reinforcing bars). Vietnam s steel industry still uses small smelting chambers and heavy input of scrap metal (83%), which results in high costs and inefficient use of energy. As a result, Vietnam s steelmakers are faced with difficulties, especially in terms of production costs, compared with developed nations, which have large-scale production from integrated mills. Currently, there are only three steel producers in Vietnam that operate integrated mills with blast furnaces: (), Thai Nguyen Iron and Steel JSC (TIS VN), and Viet Trung Metallurgy and Mineral Co. Ltd (Viet Trung). Of the three, Hoa Phat has the largest total capacity for construction steel, at over 2m tonnes per year, versus 1m tonnes for Thai Nguyen Iron and Steel JSC and 500,000 tonnes for Viet Trung. Hoa Phat is the largest producer of construction steel in Vietnam, in terms of both capacity and market share (22%, as of June 2016). Unlike other steel producers in Vietnam, Hoa Phat operates an integrated mill (capacity of 1.7m tonnes) that produces steel bar from the first stage of the value chain, iron ore. Thanks to low costs, the company enjoys the highest profitability in Vietnam s steel sector. We estimate the average cost of steel production of Hoa Phat s complex at approximately VND7.9m/tonne in 2016, based on: 1) operation of the integrated mill at % of capacity; and 2) the currently low global prices of raw materials (coal, iron ore, scrap, billet). The average cost of steel from the company s complex is equivalent to 85% of the cost of steel produced from scrap (VND9.0m/tonne) and 81% of the cost of steel produced from purchased billets (VND9.2m/tonne). 8

9 As a result, at the current selling price of around VND10m/tonne, Hoa Phat s gross margin 1 for steel made from iron ore, steel scrap, and purchased billet is 22%, 10%, and 8%, respectively. This shows that steel made from iron ore provides a higher margin than steel made from other materials. The current selling price provides the company with a significant competitive advantage, based on our estimation. Figure 13 Cost of steel production in Vietnam at 2Q16 VNDmn/tonne Cost of steel from iron ore using Blast Furnace Cost of steel produced from scrap Cost of steel produced from purchased billets Figure 14 Construction steelmaker comparison Company Name Steel from iron ore Ticker Market cap (VND bn) Share price (VND) Change (%) P/E (x) P/B (x) OPM (%) ROE (%) YoY YTD FY15 FY15 FY15 2Q16 FY15 38,303 45, Thai Nguyen Iron And Steel TIS VN 1,562 6, Steel produced from scrap Thu Duc Steel JSC TDS VN , Nha Be Steel JSC TNB VN 204 9, Pomina Steel Corp. POM VN 1,639 8, Vietnam-Italy Steel JSC VIS VN , DANA-Y Steel JSC DNY VN 132 6, Source: Bloomberg, Mirae Asset Research Hoa Phat began construction of an integrated steel mill in 2007, with the mill becoming operational in From 2010 until the beginning of 2016, excluding soft coal (imports) and hard coal for coke (which account for an estimated 40% of the production costs for finished steel), raw materials, such as iron ore, were provided by Hoa Phat s subsidiaries. Although the company currently outsources its iron ore, the cost is below what it would be for Hoa Phat to produce its own, thanks to low global iron ore prices. In addition, iron ore and coke prices costs show less volatility than that of scrap iron. As scrap iron account for 90% of production costs, the input costs of steel produced from iron ore and coke are below that made from scrap iron. This key competitive advantage 1 Our estimates are based on the average market prices of global coke, pig iron, and steel billet (the price of hard coking coal price is around USD90/tonne; anthracite coal at USD80/tonne; steel scrap ~USD210/tonne; and steel billet ~USD330/tonne) 9

10 has helped Hoa Phat to achieve growth above the industry average, even amid the steel sector s stagnant growth period of Strong cost control has enabled Hoa Phat to increase its market share gradually and become the largest construction steelmaker in Vietnam. Moreover, it enables Hoa Phat to offer high commissions for sales agencies, to compete with domestic and Chinese competitors. Figure 15 Hoa Phat s spread between COGS of construction steel and ASP (VND/tonne) 3,500,000 3,000,000 Very high ASP, thanks to safeguard tariff 2,500,000 2,000,000 1,500,000 1,000, , Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F Financial strength Figure 16 Construction steel market size in Vietnam (thousand tonnes) Production 8,000 Production growth 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Selling Selling growth (% YoY) (5) 0 Source: VSA, Mirae Asset Research (10) In 2011 and 2012, both the production and consumption of construction steel among members of the Vietnam Steel Association, or VSA (which represents 90% of total steel production in Vietnam) saw negative growth, due to weak demand. Construction steel makes up the largest portion (40%) of total steel demand in Vietnam. From 2011 to 2013, sales of construction steel remained at around 4.6 to 4.7m tonnes (CAGR of -1.5%), with Hoa Phat the only steel producer to see consistent earnings results during this period (see Figure 17). We compared cash flow from operating activities (CFO) between Hoa Phat and other steel producers in Vietnam. Fluctuations in the input prices of materials for steel production, such as iron ore, coking coal, and scrap, have a significant impact on the selling price of the finished product. Investors tend to view steelmakers as unattractive investments, due to their earnings fluctuations. However, even during the Vietnamese 10

11 steel industry s crisis of , amid a stagnant real estate market, Hoa Phat enjoyed stable net profits, while many of Vietnam s steel producers went bankrupt. We expect the company to continue to enjoy high net profit growth and stable operational cash flow going forward. Unlike other steelmakers, which have suffered from unstable, or even negative, cash flow over the past five years, Hoa Phat has enjoyed steady growth in operational cash flow during the same period. Figure 17 Hoa Phat s CFO (VND bn) 7,000 6,205 6,222 6,000 5,396 5,674 5,000 4,543 4,111 4,000 3,000 2,144 2,959 2,682 2,000 1, F F 2017F 2018F 2019F 2020F Source: Bloomberg, Mirae Asset Research Figure 18 Comparison of steelmakers CFO (VND bn) ,000 4,000 3,000 2,000 1,000 - (1,000) (2,000) HPG HSG DNY TIS POM NKG Source: Bloomberg, Mirae Asset Research Figure 19 CFO comparison: (HPG) vs. Hoa Sen Group (HSG) (VND bn) 5,000 HPG HSG 4,000 3,000 2,000 1,000 - (1,000) Source: Bloomberg, Mirae Asset Research 11

12 III. DuPont analysis In order to carry out a DuPont analysis for Hoa Phat, we broke down its ROE into three parts: 1) net profit margin (net profit/sales); 2) asset turnover (sales/total assets); and 3) financial leverage (total assets/shareholders' equity). By employing a DuPont analysis, we can assess how well the company is leveraging its assets, compared with global peers. In 2015, the company indeed outperformed global peers, in terms of net margin, asset turnover (0.15x vs. 0.92x global average), and even financial leverage (1.81x versus a 4.04x global average). In terms of net margin, we believe the high levels of 2016 and 2017 will be difficult to maintain, as we do not expect the favorable trend of raw material prices to continue long term. Figure 20 Hoa Phat s DuPont analysis , E 2016E 2017E 2018E 2019E ROE (%) Net margin (%) Asset turnover (x) Financial leverage (x) Figure 21 Hoa Phat vs. global peers: DuPont analysis (2015) HSG VN TATA IN 323 HK JSTL IN ROE (%) Net margin (%) Asset turnover (x) Financial leverage (x)

13 IV. Financial analysis Short receivable period Steel is a key input material of capital goods industries; these industries do not consume input material within a single year, so steel manufacturers often have to provide credit in the form of receivables for their customers, in order to retain client's loyalty. However, Hoa Phat has a low receivable period figure, reflecting the high quality of the company s sales, as well as its customers. Moreover, the company s receivable period decreased to 22 days in FY15 from 32 days in FY13, and continues on a downtrend. It should be noted that the inventory turnover of Hoa Phat is quite low. We believe that this is the result of the company s raw material stocking policy, which aims to optimize profitability. This policy has enjoyed positive results, thanks to the company s solid brand name, high market share, and good bargain-sales policy. However, unexpected changes in raw material price trends could have a negative effect on Hoa Phat s earnings results. Figure 22 Hoa Phat s operating ratio P 2016E 2017E 2018E 2019E Receivables turnover (x) Average receivable period (days) Inventory turnover (x) Average inventory period (days) Payable turnover (x) Number of payable (days)

14 V. Earnings outlook For FY16, we forecast revenue at VND30.2tn (+10% YoY) and operating profit at VND7.2tn (+64% YoY), with growth coming mostly from the steel division. We expect sales volume of construction steel and steel billet of 1.64m tonnes (+19% YoY) and 280,000 tonnes, respectively, but we believe that ASP will fall to VND9.5m/tonne (-12.8% YoY), due to stiff competition from Chinese steelmakers. However, thanks to the low cost of raw materials, Hoa Phat s operating margin should increase to 23.9%, compared with 16% in FY15, leading to a 64% increase in operating profit in FY16. We forecast 3Q16 revenue of VND7.5tn (+8.9% YoY) for Hoa Phat, with the rise in revenue the result of an increase in the sales volume of construction steel (+23% YoY), due to the completion of Phase 3 of Hoa Phat s integrated mill operation. However, we expect a continued decline in ASP (-15% YoY), as the third quarter usually sees low sales volume, due to Vietnam s rainy season. Gross margin and operating margin will come at 25.8% and 22%, respectively (versus 23% and 19%, respectively, in 3Q15). Thanks to favorable trends in global commodities prices and a high export tax on iron ore in Vietnam (40%), the company should be able to maintain low steel production costs. Figure 23 Hoa Phat s revenue breakdown (VND bn) 40,000 Steel Others 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Figure 24 Hoa Phat s operating profit breakdown (VND bn) Steel Others 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, E 2017E 0 (500) H16 Source Hoa Phat, Mirae Asset Research Figure 25 Hoa Phat s 3Q16 earnings preview (VND bn, %, ppt) 3Q15 4Q15 1Q16 2Q16 3Q16P (YoY) (QoQ) Sales 6,845 7,122 7,142 8,048 7, (7.4) Operating profit 1, ,244 2,402 1, (30.8) Pre-tax profit 1, ,211 2,382 1, (34.7) NP (controlling interests) 1, ,022 2,026 1, (34.6) OPM (7.8) Pre-tax margin (5.7) Net margin (5.2) 14

15 Figure 26 Hoa Phat s quarterly earnings forecast (VND bn) 1Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16P 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E Sales 5,838 7,648 6,845 7,122 27,453 7,142 8,048 7,456 7,621 30,267 7,863 8,921 8,454 8,650 33,888 Steel 4,879 6,177 5,326 5,511 21,892 5,988 7,045 6,553 6,811 26,397 7,158 8,129 7,462 7,759 30,508 Others 959 1,471 1,519 1,611 5,561 1,154 1, , ,380 COGS 4,822 5,948 5,285 5,817 21,859 5,712 5,477 5,530 5,659 21,859 5,829 6,359 6,247 6,446 24,881 Gross profit 1,016 1,699 1,560 1,305 5,594 1,431 2,572 1,926 1,962 8,408 2,035 2,562 2,207 2,204 9,007 SG&A , , ,377 Operating profit 805 1,502 1, ,409 1,244 2,402 1,663 1,391 7,219 1,807 2,349 1,918 1,556 7,630 NP (controlling interests) 649 1,238 1, ,485 1,022 2,026 1,325 1,125 5,461 1,499 1,961 1,594 1,285 6,339 Growth (YoY, %) Sales Operating profit (2.2) Net profit (18.6) (3.2) Margin (%) GM (%) OPM (%) Net profit margin (%)

16 VI. Risk factors Hoa Phat has begun to invest in a new animal feed business. Animal feed is a highly competitive sector in Vietnam, with foreign producers, such as Charoen Pokphand Foods PLC (C.P.), Cargill, ANT, and De Heus, dominating the market. Thus, we are concerned that business diversification may exert a negative impact on the company. Moreover, the solid supply risk from China-made steel and Formosa Ha Tinh Steel, a subsidiary of Formosa Plastics Corp, could drag down Hoa Phat s ASP, as well as its earnings. 16

17 VII. Company background Established in 1992, () is one of Vietnam s leading private industrial manufacturing groups. The group is involved in steel production, refrigeration, furniture, machinery, and property development. The company has been investing in the agricultural segment, which comprises husbandry and feed production, since At present, construction steel is the group s core business, accounting for 79.4% of total revenue and 82.3% of total profit (at the end of 2015). Hoa Phat is recognized as one of the three largest manufacturers of construction steel in Vietnam, with a market share of over 22%, as of June Hoa Phat entered the agricultural sector in 2015 by establishing the Hoa Phat Feeds Production & Trading One Member Limited Liability Company, with charter capital of VND300bn and maximum capacity of 300,000 tonnes per year. Figure 27 history Date Event 2007 Restructuring as a group and listing on the Vietnam stock market 2009 Completion of the first stage of the Hoa Phat integrated steel complex 2011 Structuring the operating model of the parent company by separating the steel production and trading segments 2013 Completion of the second stage of the steel complex, raising total capacity to 1.15m tonnes/year 2014 Initiation of the third stage of the steel complex 2015 Launch of Hoa Phat Feeds Production & Trading One Member Ltd Hoa Phat Mining JSC officially renamed Hoa Phat Livestock Development JSC 2016 Establishment of Hoa Phat Agriculture Development JSC Completion of the third stage of the steel complex operation Management description Mr. Long Tran founded the in Currently, Long is chair of the group and orients business strategy for each subsidiary. Long plays an important role in Hoa Phat, as he makes all the major decisions of the company. Shareholding structure The largest shareholders are Mr. Long Tran and his wife, with a combined 32.44% stake. Foreign ownership stands at 37%, as of 20 September Figure 28 s shareholder structure Tran Dinh Long, Others, Vu Thi Hien, 7.28 Deutsche Bank AG & Deutsche Aset Management, 4.86 Dragon Capital,

18 Company structure As of end-2015, Hoa Phat owns 16 subsidiaries, which operate in four divisions: Real Estate, Agriculture, Other Industrial Production, and Steel, in which seven subsidiaries operate. Figure 29 Hoa Phat s company structure Hoa Phat Steel JSC Hoa Phat Steel One Member Co., Ltd Hoa Phat Steel Pipe Co., Ltd Steel Hoa Phat Energy JSC An Thong Mining Investment JSC Hoa Phat Mitraco Mineral JSC Nam Giang Mining One-Member Co., Ltd Hoa Phat Equipment Accessories Co., Ltd Hoa Phat Group Other Industrial Production Hoa Phat Furniture JSC Hoa Phat Refrigeration Engineering Co., Ltd Hoa Phat Trading Co., Ltd Real Estate Hoa Phat Urban Development and Construction JSC Golden Gain Vietnam JSC Hoa Phat Agriculture Development JSC Hoa Phat Live-Stock Development JSC Agriculture Hoa Phat Feeds Trading and Production One Member Co., Ltd Hoa Phat Dong Nai Feeds One Member Co., Ltd Hoa Phat Quang Binh Live-Stock Co., Ltd 18

19 Summary financial statements Profit & loss Year end Dec 31 (VND bn) E 2017E 2018E Revenue 27,453 30,267 33,888 37,277 Cost of goods sold 21,859 22,377 24,881 28,703 Gross profit 5,594 7,890 9,007 8,574 SG&A 1,185 1,189 1,377 1,514 EBIT (Adj.) 4,409 6,701 7,630 7,059 EBIT 4,409 6,701 7,630 7,059 Net interest income (loss) (131) (292) (193) (26) Income (loss) from associates Others (101) Recurring profit 3,990 6,431 7,437 7,034 Income tax ,098 1,039 Net profit 3,504 5,464 6,339 5,995 Net profit (Controlling Interests) 3,485 5,461 6,339 5,995 EPS (Controlling Interests, VND) 4,755 6,479 7,520 7,113 Growth & margins (%) E 2017E 2018E Revenue growth Gross profit growth EBIT growth Net profit growth EPS growth Gross margin EBIT margin Net profit margin Balance sheet Year end Dec 31 (VND bn) E 2017E 2018E Current assets 11,915 15,355 19,236 22,990 Cash & equivalents 2,373 4,027 6,800 8,776 Short-term financial asset Accounts receivable 1,608 1,356 1,436 1,657 Inventory 6,937 8,951 9,952 11,481 Other current assets Non-current assets 13,592 13,690 14,501 14,781 Net fixed assets 8,211 10,326 11,137 11,417 Investments Other long-term assets Total assets 25,507 29,044 33,737 37,771 Current liabilities 9,993 8,720 8,343 8,273 Accounts payable 2,639 2,125 2,148 2,478 Short-term debt 6,117 5,717 5,317 4,917 Other current liabilities 1, Non-current liabilities 1, Long-term debt Other long-term liabilities Total liabilities 11,040 9,667 9,290 9,020 Controlling Interests 14,467 19,378 24,446 28,750 Non-Controlling Interests Shareholder's equity 25,507 29,045 33,737 37,771 BVPS(VND) 19,738 22,989 29,003 34,109 Source:, Mirae Asset Research estimates Source:, Mirae Asset Research estimates Cash flow Year end Dec 31 (KRW bn) E 2017E 2018E Cash flow from operations 4,543 4,111 6,205 5,396 Net profit 3,473 5,464 6,339 5,995 Depr. & amortization 1,282 1,099 1,189 1,220 Others Change in working capital (1,268) (3,712) (2,614) (2,883) Cash flow from investing (3,764) (857) (1,768) (1,135) Capital expenditures (3,764) (1,027) (2,005) (1,505) Others Cash flow from financing (433) (1,599) (1,664) (2,286) Dividends (541) (1,099) (1,264) (1,686) Increase in equity Increase in debt 108 (500) (400) (600) Beginning cash 2,026 2,373 4,027 6,800 Ending cash 2,373 4,027 6,800 8,776 Source:, Mirae Asset Research estimates Ratio analysis Year end Dec E 2017E 2018E ROE (%) ROA (%) Inventory days Receivables days Payable days Net debt/equity (%) 12 (5) (13) (20) Interest cover (x) Source:, Mirae Asset Research estimates 19

20 Recommendations By stock (12 months) BUY: A target price + 10% or more above the current price, HOLD: Target price within - 10% to +10% of the current price REDUCE: A target price of 10% or less below the current price By industry OVERWEIGHT: over +10% of the current industry index NEUTRAL: -10% to +10% of the current industry index UNDERWEIGHT: -10% or less than the current industry index Distribution of Ratings BUY: 83.2% HOLD: 15.5% REDUCE: 1.3% TOTAL: 100% (All data are current as of 29 Apr. 2016) Important Compliance Disclaimer and Disclosures Neither the author(s) of this report nor their spouses have any financial interest in the company(ies) covered herein. is neither an issuer nor a distributor of ELWs that have been issued based on shares of the companies discussed in this report. This research report is distributed to our clients only, and none of the research report material may be copied or distributed to any other party. While Co., Ltd. has taken all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, Co., Ltd. shall not be liable for any results from the use of this research report. This research report has never been provided to any institutional investor or third party. This research report has been prepared without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein. No part of the compensation of the research analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report or in public appearances. The views expressed by the analyst in all public appearances during the calendar quarter accurately reflected the analyst s personal views at that time about any and all of the subject securities or issuers [Analyst: Duong Nguyen Stock Analyst Type Securities Held by the Analyst Number of Shares Purchase Price Purchase Date Holdings of share of over 1% Participation in Issuance of Securities Involvement with Affiliates Treasury Stock Held Note: The Korea securities in this research report are only covered by the analysts of Co., Ltd. Target Price and Recommendation Chart (VND) (LHS) 55,000 () Date Recommendation 12M target price (VND) BUY (Initiate) 50,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Source: Bloomberg, Mirae Asset Research 20

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