Mobile World Investment Group (MWG: HOSE)

Mobile World Investment Group (MWG: HOSE) BUY - 1Y Target Price: VND 180,000 Current price: VND 143,000 Kien Trung Nguyen, CFA kiennt@ssi.com.vn +84 4 3936 6321 ext. 510 26 August 2016 CONSUMER - VIETNAM Key figures Market cap (USD mn) 927 Market cap (VND bn) 20,670 Outstanding shares (mn) 147 52W high/low (VND 1,000) 144/58.5 Average 3M volume (share) 222,132 Average 3M value (USD mn) 1.10 Average 3M value (VND bn) 24.48 Foreign ownership (%) 49 State ownership (%) 0 Management ownership (%) 40 Stock performance Company Snapshot Source: Bloomberg MWG- Mobile World Investment Corporation (previously known as Mobile World Ltd Co) was founded in March 2004 with a core focus on selling mobile phones and digital products. On Oct 2004, the first shop was inaugurated in HCMC and was named www.thegioididong.com. By the end of 2009, 38 shops were established in HCMC, Hanoi and larger metropolitan cities. In 2010-2011, the number of shops had reached 211 shops, a 6-fold increase from 2009 levels. To penetrate the electronics market, MWG opened an electronics retail chain under the name Dienmay.com in 2010. By the end of 2013, MWG had opened 217 thegioididong.com shops and 12 dienmay.com shops. CE Segment: key top-line growth driver in 2017 In 2Q16, MWG posted revenue of VND10,023bn (+87% YoY) and net profit of VND417bn (+88.4% YoY). Different from the last 2 years, where 2Q revenue had usually been slightly below 1Q as demand for phones and CE (consumer electronics) is high before the Tet holidays, revenue in 2Q16 rose 4.1% QoQ due to aggressive expansion in shop footprint. In 1H16, MWG recorded net sales of VND19,650bn (+81% YoY) and net profit and VND835bn (+83% YoY), achieving 58% and 60% of respective full-year targets for revenue and net profit. MWG: 1H16 revenue and earnings (VNDbn) 1H16 YoY % target Mobile phone shops (thegioididong.com) 14,063 55% CE stores (dienmayxanh.com) 5,587 216% Net profit 835 83% 60% Online sales 1,306 93% 40% Source: MWG In 1H16, MWG opened 263 mobile shops and 42 CE stores, increasing the total footprint to 827 shops and 111 stores, respectively. According to management, SSSG for mobile stores was about 10% in 1H16. Therefore, most of the top-line growth came from newly opened shops. After the strong 1H16 and our meeting with management, we raise our 2016-17E EPS by 20-34%. Our new 12-month TP of VND180,000 (from VND97,500) is now based on a PER of 13.3x (5% discount to market PER of 14x) on our average 2016-17E EPS (from 11x 2016E PER). Our higher target PER is due to our greater conviction level in MWG s long-term earnings growth from its expansion in the CE segment and fresh food chain. Risk: overhang from the 5% ESOP in December 2016. Page 1

Thousands MWG s 2Q16 business results (bn VND) 2Q16 2Q15 YoY 1Q16 QoQ % annual target Margin completed 2Q16 2Q15 1Q16 2015 Net sales 10,022.6 5,363.3 86.9% 9,627.0 4.1% 57.5% Gross profit 1,594.7 812.9 96.2% 1,589.2 0.3% 15.9% 15.2% 16.5% 15.5% Operating profit 543.0 290.2 87.2% 548.7-1.0% 5.4% 5.4% 5.7% 5.5% EBIT 550.9 295.6 86.4% 554.7-0.7% 5.5% 5.5% 5.8% 5.6% EBITDA 633.3 340.9 85.8% 624.8 1.4% 6.3% 6.4% 6.5% 6.4% Pretax profit 525.3 286.8 83.1% 524.9 0.1% 5.2% 5.3% 5.5% 5.5% Net income 416.9 222.6 87.2% 418.0-0.3% 60.1% 4.2% 4.2% 4.3% 4.3% NI attributable to shareholders 416.7 221.2 88.4% 417.8-0.3% 4.2% 4.1% 4.3% 4.2% 2H16 outlook Source: MWG Based on the pace of store expansion at MWG, we expect sales and net profit in 2H16 to be much stronger than that in 1H16. According to market research firm GFK, mobile phone and CE markets grew by 28% YoY and 25% YoY, respectively, in 1H16 and will likely continue to grow at the same rate in 2H. 2017 outlook According to GFK s forecasts, industry volume growth this year would be around 9% YoY and 7.7% YoY in 2017. However, in 1H16 GFK noted sales growth of 27% YoY, indicating that users are switching from low-value phones to higher-value phones. Thus, GFK expects the market to grow by 20% YoY in 2017 from both volume growth and ASP rises (as users switch from lowerpriced feature phones to higher-priced smart phones). Mobile segment 35,000 30,000 26,025 28,367 30,636 32,473 33,855 25,000 21,905 20,000 15,000 18,999 6,233 10,905 14,174 19,867 23,636 26,473 28,855 Smart Phone Feature Phone Total 10,000 5,000 12,766 11,001 11,851 8,500 7,000 6,000 5,000-2013 2014 2015 E2016 E2017 E2018 E2019 Source: GFK In 2015, MWG opened 184 new shops (+50% YoY, which resulted in 56% YoY sales growth from thegioididong.com, its mobile-phone shop division). In 1H16 alone, it opened 263 new shops (+47% YTD), leading to 55% YoY sales growth from this division in 1H16. As the market should continue to grow at a double-digit pace in 2017, we expect sales from MWG s mobilephone shop segment will increase by 28% YoY in the year. Page 2

Dien May Xanh- CE segment MWG targets to open up to 135 CE stores and 200 mini-stores (half the size of a Dien May Xanh store) by the end of 2017. Currently, the market size of the CE market is USD4bn, increasing 25% YoY in 2016, according to GFK. By the end of 2016, we assume that MWG s market share will be 12%. The company targets to achieve 30% market share in the next 2 years. In our view, this target is achievable as we see the mini-store model holding great potential due to the following reasons: Nationwide footprint: MWG has access to every rural area in the country. They understand customers demand and tastes. Therefore, they should gain market share from mom-and-pop stores in rural areas. Proven operator on a large scale: MWG is experienced in managing hundreds of stores, while older players like Nguyen Kim, Tran Anh, Pico or Media-mart have a much smaller footprint. In addition, MWG can optimize costs as they have a mobile phone team in the market and utilize the resource for Dien May Xanh. Currently, 60% of the market share is owned by mom-and-pop shops, according to management of MWG and our market research. Similar to the mobile market in 2014 when customers switched to more modern shops, we expect MWG to continue to gain market share from family shops. Based on its expansion plan, the market s potential and evolving trends, we expect the CE segment s revenue to grow at a ca. 98-150% YoY annual clip in 2016 and 2017 until revenue reaches ca. VND27,000bn in 2018. Bach Hoa Xanh Chain Currently, MWG is operating 16 Bach Hoa Xanh stores and targets to open up to 20 stores by the end of 2016. In 2017, MWG plans to launch approximately 400 fresh-food stores and another 1,000 stores/year until 2020 (for a total 4,000 shops at that time). Recently, MWG noted that monthly revenue of Bach Hoa Xanh is VND1.2bn/store/month, well ahead of the company s target of VND500m/store/month. Current gross-profit margin is 5% for the chain as they are not in position to access suppliers directly, only through distributors. They also sell their products at competitive prices compared to others supermarkets and convenient stores to test market demand and tastes. We estimate they are incurring around a 5% negative net margin this year (below VND10bn). In 2017, once MWG has opened 400 stores, we estimate gross margins can reach 10%, which would generate a minor loss of VND 40-50bn for the year. In 2018, we assume that MWG will have over 1,000 stores, which would imply meaningful profitability levels from this chain, with a gross margin of 15%. According to the Chairman, he sees the chain contributing 40-60% of MWG s revenue by 2021, which we believe is possible. By that time, net margin from the chain would be at least 2%, on our estimates. We believe that the Bach Hoa Xanh model will work as it differs from the current conveniencestore model and contains the following characteristics: Bach Hoa Xanh is located near traditional markets, from which it targets to steal market share and change the shopping attitudes of buyers in those areas Bach Hoa Xanh provides diversified products, including dried and fresh foods Page 3

Forecast revisions Following the 1H16 results, we mainly change our assumptions of same-store sales growth (SSSG) and number of shops opened, leading us to increase our sales by 20-34% in 2016-17E. After the release of the 1H16 figures, we raise our 2016E SSSG assumption to 10% (from 0%), but leave that for 2017 at 0%. Our store-count assumptions for mobile shops and CE shops in 2016 goes to 917 (from 850) and 140 (from 80), respectively; for 2017 we model for 1000 (from 900) and 240 (from 150), respectively. Excluding the impact of Bach Hoa Xanh, our forecasts call for MWG to grow its top line at 40% YoY and 20% YoY, respectively, in 2017 and 2018. MWG: Revenue and Margins (2016-17E) 2016E 2017E Mobile phone-shop sales (VNDbn) 30,431.68 38,295.50 Growth 46.5% 26% CE stores sales (VNDbn) 11,359.40 22,462.44 Growth 153% 98% Total (VNDbn) 41,791.08 60,757.94 Growth 65.5% 45.4% Net margin 4.1% 4.0% Net profit (VNDbn) 1,718 2,446 Growth 60.3% 42.4% Diluted EPS (*) 11,139 15,858 Growth 52.5% 42.4% EPS (if Bach Hoa Xanh expansion plan is on track) 11,139 15,544 (*) Note: we assume 5% ESOP in December 2016 and 3% in December 2017. Investment view In the past 3 months, the stock price is up by nearly 80%. We attribute the rerating to the following factors: (1) continued robust earnings growth in 2Q16; (2) management s announcement of an aggressive expansion plan of the company s mini-dienmayxanh model in 2H16 and 2017; and (3) solid results so far from the fresh-food chain. Based on our forecasts, shares of MWG are now trading at 2016E and 2017E PERs of 12.8x and 9.3x, which we believe have yet to reflect the company s long-term outlook. As we rollover our valuation basis to average 2016-17E EPS (from 2016E) and apply a new target PER of 13.3x (from 11x), set at a 5% discount to the market s forward PER of 14x, we derive a new 12- month target price for MWG of VND180,000 (from VND97,500). Our higher target PER is due to our greater conviction in the Bach Hoa Xanh expansion plan. With 26% upside potential to our new target price, we reaffirm our BUY rating. Risks to our recommendation 5% ESOP in December 2016 might create some pressure on the stock. Page 4

APPENDIX: ANNUAL FINANCIAL STATEMENTS VND Billion 2014 2015 2016F 2017F VND Billion 2014 2015 2016F 2017F Balance Sheet Income Statement + Cash 213 344 299 3,794 Net Sales 15,757 25,253 41,791 60,758 + Short-term investments 0 0 0 0 COGS -13,361-21,330-35,272-51,340 + Account receivables 297 636 1,053 1,531 Gross Profit 2,396 3,922 6,519 9,417 + Inventories 2,195 4,933 8,691 10,083 Financial Income 71 81 90 127 + Other current assets 133 264 436 634 Financial Expense -21-41 -68-99 Total Current Assets 2,838 6,176 10,478 16,042 Income from associates 0 0 0 0 + LT Receivables 0 112 186 271 Selling Expense -1,349-2,351-3,970-5,772 + Net Fixed Assets 434 849 1,132 1,293 Admin Expense -241-249 -418-608 + Investment properties 0 0 0 0 Income from business operation 856 1,362 2,154 3,067 + LT Assets in progress 0 43 43 43 Net Other Income 12 23 0 0 + LT Investments 0 0 0 0 Profit Before Tax 868 1,386 2,154 3,067 + Other LT Assets 113 85 120 174 Net Income 674 1,076 1,723 2,453 Total Long-Term Assets 570 1,089 1,481 1,781 NI attributable to shareholders 668 1,072 1,718 2,446 Total Assets 3,407 7,266 11,959 17,823 Minority interest 6 4 5 7 + Current Liabilities 1,923 4,782 7,908 11,510 In which: ST debt 619 2,053 3,395 4,941 Basic EPS (VND) 4,553 7,305 11,139 15,396 + Non-current Liabilities 0 0 0 0 BVPS (VND) 13,174 16,897 26,223 39,647 In which: LT debt 0 0 0 0 Dividend (VND/share) 0 1,500 1,500 1,500 Total Liabilities 1,923 4,782 7,908 11,510 EBIT 889 1,425 2,222 3,165 + Contributed capital 1,120 1,469 1,542 1,589 EBITDA 1,006 1,622 2,339 3,304 + Share premium 37 37 37 37 + Retained earnings 318 978 2,292 4,255 Growth + Other capital/fund 10 0 180 432 Sales 65.9% 60.3% 65.5% 45.4% Shareholders' Equity 1,484 2,484 4,051 6,312 EBITDA 144.4% 61.2% 44.2% 41.3% Total Liabilities & Equity 3,407 7,266 11,959 17,823 EBIT 135.7% 60.2% 56.0% 42.5% NI 160.7% 59.7% 60.2% 42.4% Cash Flow Equity 80.0% 67.4% 63.1% 55.8% CF from operating activities 100-641 -832 2,441 Chartered Capital 921.8% 31.2% 5.0% 3.0% CF from investing activities -308-658 -400-300 Total assets 52.7% 113.2% 64.6% 49.0% CF from financing activities 117 1,430 1,186 1,355 Net increase in cash -92 131-45 3,496 Valuation Beginning cash 305 213 344 299 P/E 23.9 10.7 12.7 9.2 Ending cash 213 344 299 3,794 P/B 8.3 4.6 5.4 3.6 P/Sales 0.4 0.4 0.5 0.4 Liquidity Ratios Dividend yield 0.0% 1.9% 1.1% 1.1% Current ratio 1.48 1.29 1.33 1.39 EV/EBITDA 12.5 8.2 10.0 7.1 Acid-test ratio 0.27 0.20 0.17 0.46 EV/Sales 0.8 0.5 0.6 0.4 Cash ratio 0.11 0.07 0.04 0.33 Net debt / EBITDA 0.31 0.65 1.03 0.64 Profitability Ratios Interest coverage 41.83 36.63 32.72 32.03 Gross Margin 15.2% 15.5% 15.6% 15.5% Days of receivables 1.1 0.9 0.9 0.9 Operating Margin 5.5% 5.5% 5.3% 5.2% Days of payables 22.9 25.3 27.1 28.5 Net Margin 4.3% 4.3% 4.1% 4.0% Days of inventory 47.6 61.0 70.5 66.7 Selling exp./net sales 8.6% 9.3% 9.5% 9.5% Admin exp./net sales 1.5% 1.0% 1.0% 1.0% Capital Structure ROE 58.4% 54.2% 52.7% 47.3% Equity/Total asset 0.44 0.34 0.34 0.35 ROA 23.9% 20.2% 17.9% 16.5% Liabilities/Total Assets 0.56 0.66 0.66 0.65 ROIC 40.1% 33.3% 29.7% 27.1% Liabilities/Equity 1.30 1.93 1.95 1.82 Debt/Equity 0.42 0.83 0.84 0.78 ST Debt/Equity 0.42 0.83 0.84 0.78 Source: Company, SSI forecasts Page 5

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. 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 6

4. CONTACT INFORMATION Institutional Research & Investment Advisory Kien Trung Nguyen, CFA Research Manager Tel: (844) 3936 6321 ext. 510 kiennt@ssi.com.vn Phuong Hoang Hung Pham Giang Nguyen Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory hungpl@ssi.com.vn giangntt@ssi.com.vn phuonghv@ssi.com.vn WWW.SSI.COM.VN 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) 3824 2897 Fax: (848) 3824 2997 Email: info@ssi.com.vn HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) 3936 6321 Fax: (844) 3936 6311 Email: info@ssi.com.vn Page 7