COMPANY UPDATE. Ha Tien 1 Cement JSC (HT1: HOSE): Passing the bottleneck. 1. Company background. 13 March Kien Tran Nguyen.

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1 COMPANY UPDATE 13 March 2015 Kien Tran Nguyen Ha Tien 1 Cement JSC (HT1: HOSE): Passing the bottleneck 1. Company background Founded in 1964, Ha Tien 1 was formerly known as Ha Tien Cement Factory in Southern Vietnam with designed capacity of 240,000 tons of clinker in Kien Luong An Giang Province, and 280,000 tons of cement in Thu Duc Ho Chi Minh City. In 1993, Ha Tien Cement Factory was divided into two companies, including Ha Tien 1 (with designed capacity of 0.8mn tons of cement per year in Thu Duc), and Ha Tien 2 (HT2, with designed capacity of 1.1mn tons clinker and 0.5mn tons cement per year). HT1 was listed on the Ho Chi Minh City Stock Exchange (HOSE) in 2007 with a chartered capital of VND 870bn. In 2010, HT1 merged with HT2 to form the biggest cement producer in Vietnam. Shareholders: State-owned Vietnam Cement Industry Corporation (VICEM) is the biggest shareholder, holding 79.7% stake at HT1. Foreign ownership at HT1 is currently only 7.2%. Products and Capacity: PCB40 (Portland Cement Blended 40) is the major product of HT1, contributing approx. 94% to the company revenue. Apart from cement, HT1 has diversified to other products such as: mortar, brick and standard sand. After a period of upgrading and expansion, Clinker and cement production capacity of the company is currently approx. 4mn tons and 8mn tons per year respectively. The two cement plants are located in Kien Luong An Giang Province, and Binh Phuoc Province. Clinker production is currently at maximum capacity, and HT1 s grinding capacity has exceeded its clinker supply capacity of approx. 33%. Market share and markets: HT1 is the leader in the Southern market with a current market share of roughly 28%, followed by Holcim (18%) and Nghi Son (11.5%) according to HT1. HT1 s domestic and export markets account for 95% and 5% of its total cement sales volume. HT1 focuses on domestic market as it offers higher profit margin. HT1 s domestic markets are concentrated in the highlands & southern coastal central area, Mekong Delta area, and Southeast area, accounting for 12%, 30% and 58% of total domestic cement sales volume. 1

2 In addition, approx. 85% of HT1 s cement is sold to householder customers, and the rest 15% belongs to industrial customers. Normally, profits margin of household customers is much higher than that of industrial projects, as it is difficult to approach projects owners and the company has to sell via middlemen. High pricing power derived from strong customers brand awareness and high quality products with 50 years of development and continuous improvements quality and customer services, HT1 is recognized and respected as the supplier of high quality cement, and customers awareness of the Enterprise s products in the market place is strong. These factors have enabled HT1 to sell its products at a premium compared with other producers. 2. Recent development 2014 earnings impressive earnings mainly attributed to core business HT1 achieved VND 6,758bn (+ 6% YoY) in revenue and VND 396bn in pretax profit compared with VND 5.4bn in HT1 s 2014 cement sales volume increased by 8.5% YoY, contributed by 60% and 4% increases in bagged and bulk cement respectively which accounted for 20% and 80% of domestic cement sales volume. It should be noted that in 2013, the company incurred approx. 285bn of FX loss in which VND 108bn derived from the amortization of FX loss during construction period, and the remaining VND 177bn resulted from the appreciation of EUR in In 2014, HT1 s net FX gain totaled approx. VND 52bn (gain of VND 263bn and loss of VND 211bn). If subtracting FX gain and loss effects in both 2013 and 2014, HT1 s 2014 pretax profit growth have would reach approx. 19% YoY. HT1 s gross profit margin stood at 20% in 2014 compared with 22% in It is worth noting that in 2Q14, HT1 s Binh Phuoc clinker kiln was forced to shut down for 3 months for maintenance due to kiln tire crack. This unexpected event provoked (1) a decline in clinker and cement production and sales; (2) an increase in production cost per unit, and decline in profit margins as a consequence. FX loss during construction period was fully allocated by the end of 2014 the remaining VND 208bn was completely allocated in

3 Aggressive deleverage: Current debt-to-equity ratio stands at 1.94, down from 2.6x by the end of 2013, and 5.6x by the end of It is worth noting that in 4Q13, VICEM converted VND 1,200bn worth of debt into equity which raised VICEM stake in HT1 from 67% to 79.9% and increased chartered capital of HT1 to VND 3,180bn. By the end of 2014, EUR and USD debt totaled approx. 80mn and 35mn respectively, accounting for 39% and 15% of total long term debt. End of 2014 HT1 BCC HOM BTS Debt to Equity Outlook Increasing demand for cement domestic demand for cement is expected to grow at CAGR of 8.6% in Demand for cement is driven by construction activities in which residential and non-residential (R & nr), and infrastructure investment are the key drivers of cement demand. In 2014, invested value in R&nR and infrastructure are estimated to account for approx. 58% and 30% of total construction invested value. In regards to the residential segment, higher housing demand in the near term will be supported by favorable conditions in Vietnam, including (1) expected low interest and inflation rates, (2) increasing income per capita, and (3) urban population rate of 33%, and is expected to grow at 2.3% p.a. With Vietnam s poor infrastructure score against ASEAN peers (source: WEF report), the government needs to direct its focus onto upgrading Vietnam s infrastructure system in order to facilitate growth and attract FDI. It is estimated that Vietnam needs approximately USD 167 bn similar to Vietnam s current GDP - in the next ten years for infrastructure investments (source: ADB), and this leaves Vietnam with a dilemma; to stay competitively fit against its ASEAN peers, it needs to enhance and improve its infrastructure for long term growth. In the shorter term, 2015 is the last year in the 5-year plan ( ) before the Party Congress in 2016 and the government needs to salvage and implement some of the previous announced reforms. In order to facilitate faster SOEs restructuring and infrastructure development, the Ministry of Transportation announced that it will scale back public investment, while adopting measures to induce private investment. The Minister of Transportation announced that more priority should be given to the private sector 3

4 participation in infrastructure projects. This will have a positive effect on domestic cement demand as large quantities of cement are needed to build the large-scale infrastructure projects, comprising of roads, bridges, airports and seaports. Coal price remains stable - the main fuel in clinker production accounting for approx. 50% of total clinker production cost, is facing a supply glut. In 2014, average selling price of coal remained weak due to the oversupply situation in the domestic and global coal industry. Global coal prices steadily declined in 2014 in response to supply increase and weak demand in China the biggest consumer of coal. Weak coal prices are forecasted to persist in the next 3 years. In regards to coal importing source, it is worth noting that cement producers always consider the quality of importing coal, and it is a time consuming process to analyze type of coal, calorie, moisture level and others. In addition, quality consistence overtime is also an important factor in deciding coal purchases since it would negatively affect cement companies bottom line if coal quality is not consistent. Considering that coal 4a in Vietnam has approx. 6,600 cal/gram at the price of VND 2.7mn/ton (transportation cost included) while coal imported from Indonesia has approx. 6,300 cal/gram with the price of approx. 20% lower at the importer store (see table below). However, to produce 1 ton of clinker requires 825kcal (equivalent to ton of coal) at the price of VND 0.338mn. Applying this requirement for importing coal, the price for produce a ton of clinker would be VND 0.347mn (approx. 3% higher than the cost of using domestic coal). Volume Price Calories VN coal Standards 1 2,700 6,600 Requirements of Clinker production Indo coal Standards 1 2,647 6,300 Requirements of Clinker production Actual requirements Source: SSI Research Deleveraging: given that investment in production assets was mostly completed in 2014 which will ease the demand for long term debt of HT1. In addition, 2015 and 2016 will be dedicated to repaying long term debts. In 2015, approx. 15% of long term debt will be paid which will reduce outstanding long term debt by the end of 2015 given the negligible demand for long term debt in 2015 and the coming years. This will support HT1 s bottom line in 2015 &

5 4. Earnings estimates In 2015, HT1 s revenue and pretax profit are forecasted at VND 7,235bn (+ 7% YoY), and VND 632bn (+ 60% YoY) respectively, translating to an EPS of VND 1,551. It is worth noting that HT1 s FX loss was completely amortized by the end of 2014, therefore, in 2015 HT1 s will not incur amortization expense which is one of the factors contributing to the significant improvement in HT1 s 2015 earnings forecast. In addition, the significant improvement in earnings have not taken into account FX gain/loss, and based on the assumptions that (1) Binh Phuoc cement plant operates under normal conditions (its kiln tire was crack in 2014 and forced to stopped operation in 3 months), (2) cement sales volume growth is expected at 10% YoY in which domestic and export volume growth are expected to achieve 9.4% YoY and 21.7% YoY thanks to increasing demand deriving from housing demand and infrastructure investment, (3) clinker sales volume decreases 61% YoY, (4) average selling price increases 2% YoY, and (5) electricity price increases 9.5% YoY. If subtracting the effects of FX gain/loss in 2014, HT1 s 2015 pretax profit growth would reach 81% YoY. By the end of Feb 2015, sales volume growth of the company reached approx. 34% YoY. In regards to the possibility of FX gain and loss of HT1, slow economic recovery in the Euro zone and strong recovery of US economy forecasted by the IMF would put downward pressure on EUR dollar. Assuming that VND/EUR exchange rate by the end of 2015 stays at current level (by the end of Mar , EUR depreciated approx. 9.4% YTD) which would generate a FX gain for HT1 of approx. VND 193bn. HT1 s 2015 pretax profit would reach VND 804bn (+ 103% YoY). 1% depreciation of EUR will benefit HT1 approx. VND 20bn. 5. Valuation At the price of VND 20,400/share, the stock is being traded at 2015PE and EV/EBITDA of 13.3 and 7.7x respectively which is close to the overall market PE and lower than its regional peers. HT1 s stock 1-year target price is derived from an average of DCF, EV/EBITDA multiple, and PE multiple at VND 24,200/share, an 5

6 upside of 19% compared with the current price, equivalent to a BUY recommendation. It is noted that the company revalues its outstanding long term debt in foreign currencies in quarterly manner. Therefore, current weak EUR currency can generate an upside effect on HT1 s earnings in 1Q15 and hence, stock price performance. If we were to add FX gain and loss from EUR depreciation and USD appreciation at the current exchange rate, HT1 s 2015PE and EV/EBITDA would be 10x and 7x respectively. According to decision 1013/TTg in 2013 on the restructuring of Vietnam Cement Industry Corporation (VICEM), Vicem will transform into to joint stock company by the end of 2015 or beginning of In addition, Ministry of Construction will consider the plan for Vicem to partially divest from its subsidiaries after the IPO of Vicem. Table: Regional peers comparison Name Mkt Cap (USD mn) Sales PE EV/EBITDA PE EV/EBITDA growth (%) Pretax profit growth (%) XINJIANG TIANSHAN CEMENT-A 1, n.a n.a HOLCIM INDONESIA TBK PT 1, n.a n.a LAFARGE MALAYSIA BHD 2, n.a n.a LUCKY CEMENT 1, n.a n.a HA TIEN BIM SON Source: Bloomberg, SSI Research Risks - FX loss and coal price recovery are regarded as the major risks for the company in the coming years. HT1 s profitability would be negatively affected in the cases of (1) the depreciation of VND against EUR, and (2) increases in coal prices. In others words, these issues are highly corrosive to HT1 s earnings. Nevertheless, we see a low probability for these issues to materialize in the next 3 years given the increases in supply of coal in China and Australia, and slow economic recovery in the Euro zone forecasted by the IMF. In addition, importing taxes of cement products reduced to 5% during period according to Asean Trade in Goods Agreement which can boost the competition derived from importing cement products. Nevertheless, transportation and storage costs would limit the increase the competition from Asean members. 6

7 6. Appendix: Annually/Quarterly financial statements VND Billion F 2016F VND Billion F 2016F Balance Sheet Income Statement + Cash Net Sales 6,369 6,758 7,298 7,799 + Short-term investments COGS -4,939-5,424-5,644-5,948 + Account receivables Gross Profit 1,430 1,334 1,654 1,852 + Inventories ,051 Financial Income Other current assets Financial Expense -1, Total Current Assets 1,673 1,726 1,792 2,030 Selling Expense LT Receivables Admin Expense Net Fixed Assets 11,163 10,699 10,155 9,607 Income from business operation Investment properties Net Other Income LT Investments Income from associates Goodwill Profit Before Tax Other LT Assets Net Income Total Long-Term Assets 11,447 10,936 10,391 9,852 Minority interest Total Assets 13,120 12,662 12,183 11,883 NI attributable to shareholders Current Liabilities 4,197 3,847 3,505 3,337 In which: ST debt 2,498 2,110 1,750 1,487 Basic EPS (VND) ,552 2,100 + Non-current Liabilities 5,726 5,097 4,467 3,667 BVPS (VND) 10,053 11,691 13,244 15,344 In which: LT debt 5,726 5,097 4,467 3,667 Dividend (VND/share) Total Liabilities 9,923 8,944 7,972 7,004 EBIT ,105 1,264 + Contributed capital 3,180 3,180 3,180 3,180 EBITDA 1,396 1,558 1,749 1,913 + Share premium Retained earnings ,480 Growth + Other capital/fund Sales 9.4% 6.1% 8.0% 6.9% Owners' Equity 3,197 3,718 4,211 4,879 EBITDA 6.6% 11.6% 12.3% 9.4% NCI EBIT -5.4% 17.9% 20.3% 14.4% Total Liabilities & Equity 13,120 12,662 12,183 11,883 NI -72.6% % 59.8% 35.4% Equity 69.5% 16.3% 13.3% 15.9% Cash Flow Chartered Capital 60.6% 0.0% 0.0% 0.0% CFO 1, ,099 1,233 Total assets -1.5% -3.5% -3.8% -2.5% CFI CFF ,063 Valuation Net increase in cash PER Beginning cash PBR Ending cash P/Sales n.a n.a Dividend yield 0.0% 0.0% 0.0% 0.0% Liquidity Ratios EV/EBITDA Current ratio EV/Sales Acid-test ratio Cash ratio Profitability Ratios Net debt / EBITDA Gross Margin 22.4% 19.7% 22.7% 23.7% Interest coverage Operating Margin 12.0% 13.5% 15.0% 16.0% Days of receivables Net Margin 0.0% 4.6% 6.8% 8.6% Days of payables Selling exp./net sales 4.7% 4.8% 5.0% 5.0% Days of inventory Admin exp./net sales 1.8% 2.4% 2.7% 2.7% ROE 0.1% 8.9% 12.4% 14.7% Capital Structure ROA 0.0% 2.4% 4.0% 5.5% Equity/Total asset ROIC 3.1% 6.4% 8.1% 9.9% Liabilities/Total Assets Liabilities/Equity Debt/Equity ST Debt/Equity

8 VND Billion 1Q14 2Q14 2Q14 4Q14 VND Billion 1Q14 2Q14 2Q14 4Q14 Balance Sheet Income Statement + Cash Net Sales 1,578 1,727 1,727 1,853 + Short-term investments COGS -1,237-1,441-1,441-1,406 + Account receivables Gross Profit Inventories Financial Income Other current assets Financial Expense Total Current Assets 1,599 1,542 1,542 1,726 Selling Expense LT Receivables Admin Expense Net Fixed Assets 11,016 10,856 10,856 10,699 Income from business operation Investment properties Net Other Income LT Investments Income from associates Goodwill Profit Before Tax Other LT Assets Net Income Total Long-Term Assets 11,294 11,118 11,118 10,936 Minority interest Total Assets 12,894 12,660 12,660 12,662 NI attributable to shareholders Current Liabilities 3,590 3,699 3,699 3,847 Basic EPS (VND) In which: ST debt 2,107 1,835 1,835 2,110 BVPS (VND) 10,401 10,437 10,437 11,691 + Non-current Liabilities 5,996 5,642 5,642 5,097 EBIT In which: LT debt 5,996 5,642 5,642 5,097 EBITDA Total Liabilities 9,586 9,341 9,341 8,944 + Contributed capital 3,180 3,180 3,180 3,180 Growth (YoY) + Share premium Sales 37.1% -7.6% -7.6% 4.9% + Retained earnings EBITDA -20.4% -10.0% -10.0% 37.9% + Other capital/fund EBIT -34.0% -28.8% -28.8% 63.2% Owners' Equity 3,308 3,319 3,319 3,718 NI 196.2% % % 196.3% NCI Equity 72.9% 70.9% 70.9% 16.3% Total Liabilities & Equity 12,894 12,660 12,660 12,662 Chartered Capital 60.6% 60.6% 60.6% 0.0% Total assets -3.9% -5.0% -5.0% -3.5% Cash Flow CFO Profitability Ratios CFI Gross Margin 21.6% 16.6% 16.6% 24.1% CFF Operating Margin 9.2% 8.5% 8.5% 21.4% Net increase in cash Net Margin 0.1% 0.7% 0.7% 11.7% Beginning cash Selling exp./net sales 3.8% 4.4% 4.4% 5.6% Ending cash Admin exp./net sales 1.9% 2.9% 2.9% 2.3% Liquidity Ratios Capital Structure Current ratio Equity/Total asset Acid-test ratio Liabilities/Total Assets Cash ratio Liabilities/Equity Net debt / EBITDA Debt/Equity Interest coverage ST Debt/Equity Source: HT1, SSI Research 8

9 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 16% (*). A BUY rating is given when the security is expected to deliver absolute returns of 16% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to negative - 8%, while a HOLD rating implies returns between negative - 8% and 16%. 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 1-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. 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 is 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; 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; SSI and its affiliates and/or its officers, directors and employees may have positions and may effect 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. 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: (848) Fax: (848) info@ssi.com.vn HA NOI 1C Ngo Quyen Street Ha Noi City Tel: (844) Fax: (844)

10 CONTACT INFORMATION Institutional Research & Investment Advisory Kien Tran Nguyen Analyst, Cement Tel: (844) ext. 679 Phuong Hoang Hung Pham Giang Nguyen Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory Tel: (844) ext. 637 Tel: (844) ext. 430 Tel: (844) ext 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: (848) Fax: (848) info@ssi.com.vn HA NOI 1C Ngo Quyen Street Ha Noi City Tel: (844) Fax: (844)