Vietnam Rubber Group (VRG)

Transcription

1 Vietnam Rubber Group (VRG) IPO REPORT Nga Nguyen ext January 2018 MATERIALS - VIETNAM A natural rubber leader with young tree profile IPO information: VRG auction date: Feb 2nd, 2018 Number of offered shares: 475,123,760 shares Key figures Market cap (USD mn) 2,261 Market cap (VND bn) 52,000 Outstanding shares (mn) 4,000 Foreign ownership (%) State ownership (%)-post equitization Strategic ownership (%)-post equitization Performance N.a 75% 11.88% Source: SSI Research VND bn 2015A 2016A Revenue 15,084 15,576 Gross profit 3,120 3,372 Gross Margin (%) 20.7% 21.7% Net Margin (%) 13.4% 18.0% ROA (%) 3.1% 4.1% ROE (%) 4.7% 6.3% Total equity 43,297 45,202 Total assets 66,668 69,803 Source: Company, SSI Research Starting price: VND 13,000/ share Deadline for registration & deposit: 25 January 2018 Listing schedule: VRG intends to be listed on the HOSE after the IPO Company background VRG is the leader in domestic natural rubber production, accounting for 1/3 natural rubber production area of Vietnam, while the remaining 2/3 comprises of numerous small-sized NR producers or households. VRG s sales volume represents 32% of total rubber sales volume of Vietnam in According to the group, the new tapping area will be higher for the period because the group had planted many new rubber trees during VRG also owns sizeble industrial land bank. Most of the land used for forming industrial parks at VRG was originally converted from land for planting rubber trees. Currently, the group manages 13 industrial parks with a total rent area of 6K ha, of which roughly 1400 ha has been leased. Currently, VRG manages and contributes capital to 123 member companies, which consists of 20 one-member limited liability companies planting natural rubber, 4 non-profit units, 47 rubber joint stock companies, 5 companies producing rubber industrial products, 11 wood processing companies, 13 industrial park companies, and 23 companies operating in other industries revenue is estimated at VND tn, rocketing by 37% YoY thanks to the upbeat surge of 25% YoY in natural rubber ASP and a 10% rise in sales volume. Pretax profit is expected at VND tn, surging by 26% YoY. Page 1

2 consolidated business plan Sales volume (1,000 ton) Revenue (VND bn) YoY growth 18% 18% Pretax profit (VND bn) YoY growth 19% 25% Net income (VND bn) YoY growth 18% 24% Dividend (% on par value) 6% 8% 10% 2018 net income is estimated to surge at a CAGR of 30% on core activities from VND 5.3 tn in 2018 to VND tn in 2020, equivalent to a slight expansion in net profit margin from 21% to 22% for the period thanks to the improvement in rubber yields and expected marginal rise in ASP. VRG s rubber yield is lower than that of the whole Vietnam (1.49 ton/ha vs 1.7 ton/ha). However, roughly 60% of VRG rubber trees are turning to productive stage in the coming time, helping VRG to catch up with the average yield. In addition, rubber production cost and SG&A expenses are expected to remain flat even if rubber ASP increases, hence helping to expand profit margin. This net profit margin level is much better than the average net profit margin of 15.7 % in the period when the NR prices and rubber sales volume were shallow. Valuation & investment opinion Assuming VRG achieves its 2018 and 2019 targets, and the bonus & welfare fund is at 15%, 2018 and 2019 EPS arrives at VND 1,292 and VND 1,530. At a starting IPO price of VND 13,000 per share, 2018 and 2019 PER would be 10x and 8.5x respectively. Regional rubber companies are traded at PER of 15.3x and local rubber companies are traded at PER of 7.5x (excluding outlier). VRG s 2017 ROE is 7.8%, lower than the average ROE of local peers of 11.4%. We like VRG thanks to (1) its leading position in the domestic market, (2) expected significant increase in rubber sales volume as its rubber field matures into the productive stage (15.8% for vs 1.9% in F), (3) potential unexpected income from land compensation. Upside catalysts: Increase in global natural rubber price Improvement in natural rubber yield Faster than expected land handover to local government One-off profit from the divestment of VRG stakes in non-core businesses Downside risks: Decline in global natural rubber price Complicated corporate structure Page 2

3 Table of Contents I. Company background... 4 II. Equitization Plan... 5 III. Business model... 6 IV. Industry overview... 9 V. Historical performance VI company plan consolidated plan VII. Investment view and valuation Page 3

4 I. Company background Vietnam Rubber Group was originally formed as Vietnam Group Corporation, and was established in In Oct 2006, Vietnam Rubber Group was officially established under Decision No.248/2006/QD-TTg issued by the Prime Minister upon approving the pilot establishment plan of Vietnam Rubber Group (VNRG). Accordingly, VRG is the parent company that manages various state-owned rubber companies. In 2010, parent company Vietnam Rubber Group transformed into a 1 member Limited Company under 100% state ownership, known as Viet Nam Rubber Group Limited, as according to Decision No.981/QD-TTg. Similar to large-scale state-owned corporations and holding groups, Vietnam Rubber Industry Group had to be equitized, and it was chosen to proceed with equitization on 1/1/2016. VRG had a chartered capital of VND trillion at the time. Most recent additions of chartered capital brings the total to VND 38.8 trillion, as announced on 31/08/2017. Corporate Structure Currently, VRG manages and contributes capital to 123 member companies, which consists of 20 one-member limited liability companies planting natural rubber, 4 non-profit units, 47 rubber joint stock companies, 5 companies producing rubber industrial products, 11 wood processing companies, 13 industrial park companies, and 23 companies operating in other industries. In terms of direct and indirect ownership of the group, VRG has 75 tier-2 companies (66 subsidiaries and 9 associates) and 34 tier 3 companies (38 subsidiaries and 10 associates), 26 companies of which will have to reorganize ownership structure, as both the parent company (VNRG) and the subsidiary contributes capital to these companies (including 19 rubber companies and 7 companies in other industries). % ownership of VRG Number of companies Before equitization After equitization Change 100% stake % < stake < 100% > 20% stake Tier 2 companies % stake % < stake < 100% > 20% stake Tier 3 companies Total After equitization, the total number of subsidiaries and JVs of the group will drop to 99 companies (details in the table above). This will occur after VRG fully divests from 25 companies operating in fields other than the group s core business (such as hydropower, commercial business, service, tourism, and infrastructure). In addition, VRG established a new wood processing joint stock company in June 2016 named VRG Kien Giang MDF JSC. Page 4

5 II. Equitization Plan According to the VRG information disclosure, actual value of state capital in the group is VND 38.8 trillion, while charter capital after equitization is VND 40 trillion, equivalent to mn shares to be additionally issued through upcoming offers (IPO, employees & union, and strategic offers). In the event the company successfully offers all stock as planned, structure ownership might be as shown in the below table: No of share % Ownership Note State 3,000,000,000 75% IPO 475,123, % Starting price: VND 13,000/share Employees 48,921, % In which, 30.8mn shares offer at price of 60% of lowest successful bid, and the remaining shares offer at lowest successful bid on IPO Trade union 830, % Offer at price of 60% of lowest successful bid on IPO Strategic partner 475,123, % only domestic investors are accepted, 5 - year lock up Total 4,000,000, % VRG HOSE auction details, Feb 2 nd, 2018: Company name: Viet Nam Rubber Group Joint Stock Company Number of offered shares: 475,123,760 shares Starting price: VND 13,000/ share Deadline for registration & deposit: 25 January 2018 Listing schedule: VRG intends to be listed on the HOSE after the IPO Page 5

6 III. Business model The group has four main business activities: planting and exploiting natural rubber (latex and raw rubber wood), processing rubber wood products (draft wood, refined wood, MDF wood, and finished furniture), manufacturing industrial products (latex mattress, gloves, yarns, and others), and developing industrial parks. In addition, VRG has recently moved into the fray of high-tech agriculture based on the strength of a huge agricultural land fund. Revenue contribution Profit before tax contribution 4.88% 2.32% 2.56% 2.53% 0.01% 7.02% Rubber sector Rubber sector 19.14% Wood processing sector 17.67% Wood processing sector Rubber industry sector Rubber industry sector Industrial zone sector Industrial zone sector 71.10% Other 72.78% Other In the four main business segments, the rubber segment made the largest contribution to total sales (71.1% in 2016) and PBT (72.7% in 2016). Although wood processing accounted for 19.1% in total sales, the segment only constituted 17.7% of PBT. Meanwhile, the remaining segments contributed a small portion of sales and PBT (both are less than 10%). Natural rubber The rubber tree field area possessed by the group was 415.5K ha at the end of 2015, of which 152.7K ha was exploited with an average capacity of 1.7 tons/ha. VRG is the leader in domestic NR production, accounting for 1/3 NR production area of Vietnam, while the remaining 2/3 comprises of numerous small-sized NR producers or households. More specifically, VRG owns 244K ha, with responsibility delegated to its 100%-owned subsidiary. Apart from that, 275K ha is owned by another VRG subsidiary (50%-100% ownership), as well as a joint venture and associate partner (20%-50% ownership). VRG s sales volume represents 32% of total rubber sales volume of Vietnam in According to the group, the new tapping area will be higher for the period because the group had planted many new rubber trees during We should note that the rubber tree can be tapped for latex after a 6 to 7 year period from initial planting. 2,015 2, F 2018F 2019F 2020F Tapping area (1,000 ha) 152, , , , , ,000 Page 6

7 VRG's rubber field by country Laos 7% Vietnam 71% Cambodia 22% Main products consist of many types of rubber latex, such as technically specified rubber (TSR), centrifugal rubber latex, and ribbed smoke sheet rubber (RSS) with different technical standards. Currently, the group has 40 manufacturing plants and factories processing rubber latex, with a total designed capacity of 354.5K tons/year. In 2017, total exploited output of VRG subsidiaries was 273K tons, while additional purchases of latex came to 93K tons. Top 5 largest out of 67 rubber companies Productive area (ha) Output (tons) Dong Nai Rubber One-member Ltd 33,733 26,350 Binh Long Rubber One-member Ltd 14,136 20,500 Loc Ninh Rubber One-member Ltd 11,405 11,200 Dau Tieng Rubber One-member Ltd 27,349 25,000 Phu Rieng Rubber One-member Ltd 19,197 34,500 The group 179, ,000, 2017F data Those 5 subsidiaries constitute 59% to the total productive area and 43% to the total output of the Group Wood processing After the economic life of the rubber tree (about years), latex production ceases to be economically viable, and should be replanted at this time. When this occurs, the rubber planters cut down the rubber trees and plant new ones. Materials are utilized across associate companies of the Group, such as when raw rubberwood from some of VRG s rubber companies become the input for wood processing companies. Currently, the group owns 9 subsidiaries and 2 associates which have core businesses related to wood processing. Products of the segment include raw hardwood, plywood, refined wood, MDF wood and rubberwood furniture. In line with the expectation of a 12-15% CAGR demand until 2020, the group continues to focus on increasing the capacity of MDF wood products. Currently, total designed capacities for MDF wood amounts to roughly Page 7

8 720K m3/year, accounting for more than 57% of Vietnam market total capacity. The largest factories are located in Quang Tri (capacity of 180K m3/year), Binh Phuoc (300K m3/year), and Kien Giang province (75K m3/ year). Wood product sales volume Raw hard wood (cube) 278, , , ,014 Ply wood (cube) 13,879 15,770 17,579 18,298 Refined wood (cube) 10,898 12,082 9,408 8,798 MDF wood (cube) 346, , , ,877 Industrial rubber products Industrial rubber products for the group include rubber mattresses, rubber pillows, rubber gloves, rubber elastic, and others. At present, VRG has 5 factories producing industrial products, including the sport ball factory, mattresses and pillow factory, medical gloves factory, rubber conveyor belt factory, and rubber elastic factory. Industrial park Most of the land used for forming industrial parks at VRG were originally converted from land for planting rubber trees. All of the industrial parks located in Dong Nai, Binh Duong, and Tay Ninh provinces are located in the most active regions of Vietnam, hence attracting most foreign direct investors to these regions. This segment possesses a good margin and cash flow, and is generally expected to achieve effective growth rates across multiple metrics in the coming years ahead. Currently, the group manages 13 industrial parks with a total area of 6K ha, of which roughly 1400 ha has been leased. Some industrial parks with high occupancy rates are known as Ho Nai, Bau Xeo, and Nam Tan Uyen industrial park IP incremental rent area Page 8

9 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 USD/kg SSI RESEARCH IV. Industry overview Natural rubber price trend: After reaching a peak of $7,492 USD/ton in 2011, the natural rubber price decreased significantly, owing to oversupply which peaked in 2013 at 851k tons. The steep decline in the global oil price coupled with shallow demand from China further exerted downward pressure on the natural rubber price in 2014 and The natural rubber price entered a cyclical downtrend from 2011 to January 2016 when it bottomed out at $1,234 USD/ton following the recovery of the oil price. The natural rubber price continued to rally in 2017, reaching $1,652 USD/ton as of the year-end. 300 Crude oil Generic 1st rubber, TSR Source: Bloomberg, SSI Research Natural rubber economic life cycle: Although rubber trees can live for hundred years, its economic lifespan normally lasts for roughly years, after which rubber tree becomes less efficient in terms of latex yield. During the first 7 years, the rubber tree does not produce any economic value. This is considered the immature stage, which is followed thereafter by the productive stage (year 8 to 30). Once the productive stage has finished, a decline in latex yield makes it no more economically viable to tap further. As a result, the rubber tree can be chopped down for wood sales and replaced with new seedlings. Rubberwood is considered to be environmentally friendly, as it makes full use of rubber trees that have already finished its latex-producing function. Seasonal impacts on tapping activities: From January to March, the rubber tree enters the dry season, during which its leaves are falling off and the tree cannot be tapped. The rubber tapping period hence falls in the last 9 months of the year. Southeast Asia the largest natural rubber exporter: Although originating from Brazil, the rubber tree is mostly planted in Southeast Asia countries, hence explaining the region being responsible for such a high proportion of world natural rubber exports (82%). The largest exporter is Thailand, followed by Indonesia, constituting 36.8% and 28.1% of total global exports in Vietnam ranks third with 7.5%, followed closely by Malaysia with 7.3%. Page 9

10 Natural rubber export by countries in % 1.0% 1.3% 1.6% 9.2% Thailand Indonesia 7.3% 6.1% 7.5% 36.8% Vietnam Malaysia Cote d'ivoire Myanmar Germany Belgium Guatemala 28.1% Other Source: Worldstopexport, 2016FY Synthetic rubber a close substitute: Synthetic rubber was introduced to partially replace natural rubber. Natural rubber and synthetic rubber account for 45% and 55% of the total rubber production in the world. Synthetic rubber is produced from petroleum, so its price directly correlates with the global oil price. As it is a close substitute to natural rubber, the global oil price movements will be an influential factor upon the natural rubber price. Natural rubber price outlook As per the World Bank forecast, the global oil price is expected to rally to an average of $56 USD/bbl in 2018 (+ 6% YoY) and $59 USD/bbl (+5% YoY) in 2019, which drives up the synthetic rubber price and hence the natural rubber (NR) price. The International Tripartite Rubber Council (ITRC) consisting of Thailand, Indonesia, and Malaysia, has agreed to restrict exports of NR to support its price. In particular, ITRC agreed to curb their NR exports by 350K tons in the first three months of 2018 (Thailand 230K tons, Indonesia 95K tons and Malaysia 20K tons), which is equivalent to 11% of Q1 global NR production. We believe this action will stimulate the NR price and spark a rally * Production 12,282 12,142 12,271 12,401 13,282 Consumption 11,430 12,181 12,140 12,589 12,904 Surplus/deficit Source: World Bank, * - ANRPC We believe that NR consumption from China will continue to grow steadily. Growth in this area is supported by the continuing expansion in its manufacturing sector, which spurs demand for industrial machinery and transportation of goods. In addition, an upbeat rise in income levels is likely to create incremental demand for traveling, and hence boost tire demand, which constitutes 70% of global natural rubber consumption. Page 10

11 On the supply side, we expect NR oversupply to still maintain at current levels, owing to large scale plantation activities during the NR uptrend in As explained earlier, these planted rubber trees enter the productive stage 7 years later, thus exerting a downward pressure on NR prices. Nonetheless, the uptrend in global oil prices would likely raise production costs for synthetic rubber and hence its market price. The rise in the synthetic rubber price together with ITRC export restrictions may help to offset downward pressure from the oversupply F 2018F 2019F 2020F Rubber, RSS3, USD/kg YoY growth -19% 3% 27% 1% 1% 1% Source: World Bank Vietnam natural rubber industry and VRG s market position In 2017, the total value of Vietnamese natural rubber exports reached $2.25 bn USD (+35% YoY). Total exported volume was 1.38 mn ton (+10% YoY), translating to an average export price of $1,629 USD/ton (+22% YoY). Vietnam natural rubber export destination country 15% China 2% 3% 4% 3% 4% 5% 64% Malaysia India German Korea USA Taiwan Other Source: General Department of Vietnam Customs, 2017FY China has always ranked first in terms of export destination for Vietnamese natural rubber, accounting for 64% of export value in This was significantly more than the next two export markets, Malaysia and India, with only 5% and 4% share respectively. Natural rubber volume exported to China has surged at a CAGR of 13% in the last 5 years, much higher than the growth pace from other countries. Meanwhile, although the US constituted only 3% of export value in 2017, natural rubber export volume to the US rallied considerably at a CAGR of 9% in the last 5 years. Page 11

12 Rubber plantation area in Vietnam (1,000 ha) % % 15% 14% 12% % 10% 600 7% 7% 8% 6% 400 4% 4% % 2% 1% 0% 0% -1% -2% Rubber plantation area YoY growth Source: GSO, SSI Research Since the time when the global NR oversupply peaked in 2013 at 851K tons, Vietnam NR plantation figures remained at around 980K ha, with strong growth despite enjoying a CAGR of 10% in the period. Concurrently, dry latex production volume increased steadily at a CAGR of 6% for period, yet the growth rate was much lower in the period as compared with Dry latex production volume (1,000 ton) % 12% 10% 9% 800 8% 8% 8% % 5% 5% 6% 5% 4% 200 2% 2% 2% % Dry latex volume YoY growth Source: GSO, SSI Research Accounting for roughly 1/3rd of total Vietnamese rubber plantation area, VRG is the leader in domestic NR production, while the remaining 2/3 comprises of numerous small-sized NR producers or households. More specifically, VRG owns 244K ha, with responsibility delegated to its 100%-owned subsidiary. Apart from that, Page 12

13 275K ha is owned by another VRG subsidiary (50%-100% ownership), as well as a joint venture and associate partner (20%-50% ownership). Medium-density fiberboard wood (MDF) According to VRG, the demand for MDF wood in Vietnam is roughly 1.38 mn cubic meters in It is expected to reach above 2 mn cubic meters in 2020, equivalent to a CAGR of 10%. The current domestic supply is abundant, at approx mn cubic meters, and in which VRG s MDF wood design production capacity is at 720k cubic meters. The domestic supply is projected to increase to 1.8 mn cubic meters by 2020, at a CAGR of 10%. Meanwhile, the threat from imported MDF wood is worth paying attention to. In 2015, import volume surpassed 450k cubic meters, creating more competition for domestic MDF wood producers in the process. Page 13

14 VND bn SSI RESEARCH V. Historical performance Income Statement earnings review For the period, VRG experienced a revenue decline at a CAGR of -10%, in line with the global downtrend in natural rubber prices. The rubber ASP was roughly VND 42 mn/ton in 2013, down to VND 31 mn/ton in Meanwhile, rubber sales volume remained fairly flat, with a CAGR of 1.9%. The gross profit margin contracted from 25.2% in 2013 to 21.7% in 2016 on the back of a declining rubber ASP. Gross profit decreased at a CAGR of -14.5% from VND 5.39 tn in 2013 to VND tn in , % 20, % 25.0% 15, % 20.7% 21.6% 20.0% 15.0% 10, % 5, % Sales Gross profit GPM 0.0% Financial income dropped at a CAGR of -15.5%, mainly due to the decline in interest income, and brought on by a receding cash balance. Concurrently, interest expense fluctuated significantly during Interest expenses were exceptionally high in 2015, owing to the disposal of investments and consolidation of a subsidiary (Vietnam Rubber Finance One Member Ltd). Yet in 2016, interest expenses normalized to VND 520 bn (vs VND 565 bn in 2013). Overall, net financial income tumbled from VND bn in 2013 to VND 19.4 bn in Page 14

15 VND bn SSI RESEARCH 1, (500) (1,000) (1,500) Financial income Financial expenses Net financial income The SG&A to net sales ratio rose from 8.1% in 2013 to 10% in However, SG&A expenses as an absolute value reduced slightly, from VND 1,725 in 2013 to VND 1,551 in 2016 (a CAGR of -3.5%). Income from JV and associates rocketed at a CAGR of 37.5% to VND 378 bn in 2016, representing 11.6% of 2016 pretax profit. Most JV and associates were making positive profit in 2016, with a few loss making exemptions such as Visorutex Ltd, Ho Chi Minh City Rubber JSC, VRG Sa Do Rubber JSC, Chu Pah Industrial Service Rubber JSC, and Viet My Ha Tinh Agricultural Development JSC. Their total loss conversely constituted 12% of the total income gained from JV and associates. Pretax profit reeled back by a CAGR of -13%, reaching VND tn in 2016, while net profit declined at a slower CAGR of -9.6% to VND 2,797 in The CIT rate contracted considerably in 2016 to 14.5%, as compared with the historical average of 22.9%. 6, % 5,000 4, % 23.1% 21.6% 25.0% 20.0% 3, % 15.0% 2, % 1, % Pretax profit Net income CIT 0.0% From 2015, companies generating income from processing agricultural products in areas of difficult socioeconomic conditions have been entitled to receive a CIT rate of 10%, whereas those companies engaged in Page 15

16 rubber tree plantation, production, and processing primary rubber latex whether or not they domicile in areas of difficult socio-economic conditions are entitled to a reduction of 7% off the normal income tax (i.e. 15% CIT rate vs the normal rate of 22% for 2015). Nonetheless, pretax profit from the natural rubber segment which is entitled for tax relief was only VND 300 bn in 2015 (vs the total pretax profit of VND 2.57 tn), hence the effective CIT rate in 2015 being still high at 21.6% Preliminary result 2017 revenue is estimated at VND tn, rocketing by 37% YoY thanks to the upbeat surge of 25% YoY in natural rubber ASP and a 10% rise in sales volume. Pretax profit is expected at VND tn, surging by 26% YoY. Balance Sheet As of 1H 2017, VRG assets are primarily long term concentrated. Long term assets in progress and fixed assets constitute 40% and 28% respectively to total assets. Long term assets in progress is the value of VRG s immature rubber tree field holdings, which will serve as a driver for future rubber sales volume. The next largest asset is cash, accounting for 8% of the total assets. Inventory represents only 5% of total assets. VRG balance sheet was in a healthy liquidity position, with a current ratio and acid-test ratio of 1.67 and 1.24 respectively. The D/E ratio is quite low at VRG debt predominantly consists of long term maturities (80% of total debt), which had been raised to finance the rubber tree field. Page 16

17 VI company plan consolidated plan Tapping area (1,000 ha) Liquidation area (1,000 ha) Tapped volume (1,000 ton) Purchased volume (1,000 ton) Sales volume (1,000 ton) IP rent area (ha) Raw hard wood (1,000 cube) MDF wood (1,000 cube) Revenue (VND bn) 29,457 34,616 40,710 YoY growth 18% 18% Pretax profit (VND bn) 7,815 9,278 11,587 YoY growth 19% 25% Net income (VND bn) YoY growth 18% 24% Net profit margin 21% 21% 22% Charter capital (VND bn) 40,000 40,000 40,000 Dividend (% on par value) 6% 8% 10% parent company plan Revenue (VND bn) Growth 14% 21% Pretax profit (VND bn) % 23% Net income (VND bn) Growth 14% 23% Tapped volume: the company expects the total rubber tapping area to be 208K ha in 2018, increasing at a CAGR of 15.6% by Concurrently, rubber tapped volume is projected to be 301K tons in 2018, rallying at a slightly faster CAGR of 17.3%. This implies an improvement in rubber yield from 1.45 tons/ha to 1.49 tons/ha. Sales volume: VRG projects rubber sales volume to be 387K in 2018, increasing at a CAGR of 15.8% by The difference between rubber sales volume and tapped volume is equal to rubber purchased volume. ASP is assumed to be VND 37 mn/ton, VND 39 mn/ton, and VND 41 mn/ton for respectively. The current ASP is above VND 36 mn/ton, and it is expected to increase thanks to the oil price surge and the likelihood of International Tripartite Rubber Council (ITRC) restricting its NR exports Raw hardwood volume is projected to remain at 355k cubic meters, while MDF wood volume is expected to rise marginally from 850k to 920k cubic meters. In 2018, VRG plans to hand over 3,000 ha of land to local authorities out of the total projected 27k ha. These land plots are located in Dong Nai, Binh Duong, Binh Phuoc and other provinces. In return, VRG would receive a compensation ranging from VND 100 mn/ha to VND 1 bn/ha. The total land compensation is expected to be VND 1 trillion or more Page 17

18 Accordingly, revenue is projected at VND tn in 2018, rising at a CAGR of 17.6% by Meanwhile, net income is estimated to surge at a CAGR of 30% on core activities from VND 5.3 tn in 2018 to VND tn in 2020, equivalent to a slight expansion in net profit margin from 21% to 22% for the period thanks to the improvement in rubber yields and expected marginal rise in ASP. VRG s rubber yield is lower than that of the whole Vietnam (1.49 ton/ha vs 1.7 ton/ha). However, roughly 60% of VRG rubber trees are turning to productive stage in the coming time, helping VRG to catch up with the average yield. In addition, rubber production cost and SG&A expenses are expected to remain flat even if rubber ASP increases, hence helping to expand profit margin. This net profit margin level is much better than the average net profit margin of 15.7 % in the period when the NR prices and rubber sales volume were shallow. Dividends after equitization is expected at 6% for 2018, 8% for 2019, and 10% for 2020, equivalent to a dividend yield of 4.6%, 6.2%, and 7.7% respectively, based on the IPO starting price of VND 13,000 per share. Page 18

19 VII. Investment view and valuation Assuming VRG achieves its 2018 and 2019 targets, and the bonus & welfare fund is at 15%, 2018 and 2019 EPS arrives at VND 1,292 and VND 1,530. At a starting IPO price of VND 13,000 per share, 2018 and 2019 PER would be 10x and 8.5x respectively. Regional rubber companies are traded at PER of 15.3x and local rubber companies are traded at PER of 7.5x (excluding outlier). VRG s 2017 ROE is 7.8%, lower than the average ROE of local peers of 11.4%. Ticker Company name Market capital (USD mn) PE PB ROE TRUBB TB Equity Thai Rubber Latex Corp Thailand PCL % RRE MK Equity Riverview Rubber Estates BHD % PHR VN equity Phuoc Hoa Rubber JSC % DPR vn equity Dong Phu Rubber JSC % BRC vn equity Ben Thanh Rubber JSC % RBRX MK Equity Rubberex Corp M Bhd % KRI MK Equity Kossan Rubber Industries % CPR TB Equity CPR Gomu Industrial PCL % Average % Source: Bloomberg, SSI Research We like VRG thanks to (1) its leading position in the domestic market, (2) expected significant increase in rubber sales volume as its rubber field matures into the productive stage (15.8% for vs 1.9% in F), (3) potential unexpected income from land compensation. Upside catalyst: Increase in global natural rubber price Improvement in natural rubber yield Faster than expected land handover to local government One-off profit from the divestment of VRG stakes in non-core subsidiaries Downside risks: Decline in natural rubber price Complicated corporate structure Page 19

20 1. ANALYST CERTIFICATION The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. 2. RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%, while a HOLD rating implies returns between -9% and 18%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. 3. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time, and no unpublished price sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. This report also does not recommend to U.S. recipients the use of SSI to effect trades in any security and is not supplied with any understanding that U.S. recipients will direct commission business to SSI. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. Page 20

21 4. CONTACT INFORMATION Institutional Research & Investment Advisory Nga Nguyen Analyst, Materials Tel: (84-28) ext Phuong Hoang Hung Pham Giang Nguyen, ACCA Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (84-28) Fax: (84-28) info@ssi.com.vn HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (84-24) Fax: (84-24) info@ssi.com.vn Page 21