RESEARCH & INVESTMENT ADVISORY

VIETNAM FERTILIZER SECTOR

SECTOR REPORT
20.12.2012

Thuy Nguyen
Analyst thuyntt@ssi.com.vn

Fertilizer Sector: Perserverance amid Oversupply

We initiate coverage on Vietnams Fertilizer sector, our analysis report consists of six key segments: (1) Fertilizer production in Vietnam, (2) Recent trends in international fertilizer market; (3) Domestic supply and demand; (4) Pricing Dynamics; (5) Sector Outlook and finally (6) Companies in focus. As a predominately agricultural driven country with 70% of the population working in agricultural related sectors, Vietnams appetite and need for fertilizer is irrefutable. Although the current difficult economic situation influences all economic sectors, fertilizer sector is one of the sectors less affected and unperturbed by the economic downturn. Thanks to the constant demand, fertilizer companies have realized profit amidst economic slowdown. The domestic fertilizer supply is highly concentrated as most of big companies belong to two SOE giants: Vinachem (Vietnam National Chemical Group) and PVN (PetroVietnam Group). Oversupply and downtrend risks in international prices have resulted in a squeeze in profit growth for the sector (urea, phosphate fertilizer and NPK). Growth in the long term might arrive from the investments in high-quality fertilizer. However, the investments in depth sometimes require huge investments, therefore, in our opinion, not able to boost the sector growth in the short term. Need more policy to limit poor quality fertilizer: The oversupply situation in the fertilizer market is highlighted by the existence of poor quality fertilizer as well as smuggled fertilizer. The fertilizer industry is currently regulated by two decrees: 113/2003/ND-CP and 191/2007ND CP. However, in these two decrees, fertilizer sector is not a business under condition, therefore, although many small establishments do not have to meet specific requirements, they continue to produce and trade fertilizer, which has led to a real higher supply as compared to the official figures. According to the Vietnamese Ministry of Agriculture and Rural Development, a new decree will soon be release which will require that fertilizer sector become a business under conditions: fertilizer production companies must meet 14 criteria such as production capacity, production condition,etc. Therefore, it is expected to somewhat reduce the oversupply conundrum once the degree is implemented. Companies in focus include two key listed players in the market, namely PetroVietnam fertilizers and chemical JSC (DPM HOSE) HOLD recommendation, 1Y target price of VND 37,000/share and Lam Thao fertilizer and chemical JSC (LAS HNX) HOLD recommendation, 1Y target price of VND 30,000/share. In addition, we also present a brief description of 3 key players in OTC market, namely Van Dien fused magnesium phosphate fertilizer, Southern fertilizer JSC and Binh Dien fertilizer JSC.

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TABLE OF CONTENT
SUMMARY .................................................................................................................................................................................. 2 FERTILIZER PRODUCTION IN VIETNAM ................................................................................................................................. 3 Nitrogen............................................................................................................................................................................. 3 Ammonium sulphate (SA) ........................................................................................................................................... 4 DAP ............................................................................................................................................................................... 4 Urea ............................................................................................................................................................................... 5 Phosphate ......................................................................................................................................................................... 7 Superphosphate ........................................................................................................................................................... 8 Fused magnesium phosphate ..................................................................................................................................... 8 Potash ............................................................................................................................................................................... 9 Complex fertilizer NPK .................................................................................................................................................. 9 INTERNATIONAL FERTILIZER MARKET: LATEST TREND .................................................................................................. 10 Oversupply situation persists ....................................................................................................................................... 10 China remains a big player in the fertilizer market ...................................................................................................... 12 DOMESTIC DEMAND & SUPPLY ............................................................................................................................................ 13 Domestic demand........................................................................................................................................................... 13 Domestic supply ............................................................................................................................................................. 15 PRICING DYNAMICS ................................................................................................................................................................ 19 International benchmark and interaction between domestic supply and demand: Urea example ......................... 19 Other factors ................................................................................................................................................................... 19 SECTOR OUTLOOK ................................................................................................................................................................. 20 COMPANY IN FOCUS .............................................................................................................................................................. 21 PetroVietnam fertilizers and chemical JSC .................................................................................................................. 21 Lam Thao fertilizer and chemical JSC .......................................................................................................................... 25 Van Dien fused magnesium phosphate fertilizer JSC ................................................................................................. 27 Southern fertilizer JSC ................................................................................................................................................... 29 Binh Dien fertilizer JSC .................................................................................................................................................. 29 LIST OF TABLES AND FIGURES ............................................................................................................................................ 31 RATING ..................................................................................................................................................................................... 32 DISCLAIMER ............................................................................................................................................................................ 32 CONTACT INFORMATION ....................................................................................................................................................... 32

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FERTILIZER PRODUCTION IN VIETNAM

In overall, fertilizer products can be divided into two groups: inorganic fertilizer which is made of inorganic chemicals or minerals and organic fertilizer which is compose of plant or animal decay. Most of commercial fertilizers in Vietnam are inorganic, which will be the focus of this report. Inorganic fertilizer product is distinguished based on the nutrients it provides. There are 13 mineral nutrients which are divided into 3 groups as follows: Macro-nutrients potassium (K) Secondary nutrients containing calcium (Ca), magnesium (Mg) and sulphur (S) Micro-nutrients containing boron (B), copper (Cu), iron (Fe), chloride (Cl), manganese (Mn), molybdenum (Mo) and zinc (Zn) Accordingly, fertilizers are divided into 4 main groups: nitrogen, phosphate, potash and NPK complex containing nitrogen (N), phosphorus (P) and

Nitrogen
While referring to nitrogen, we would like to present an overview, and then highlight 3 main types of fertilizers which are popular in Vietnam (Ammonium sulphate, Urea & DAP) and finally focus on the urea production, an important fertilizer in Vietnam.

Nitrogen fertilizer overview

Nitrogen (N), the main constituent of proteins, is essential for growth and development in plants. Supply of nitrogen determines a plants growth, vigour, colour and yield (Yara Fertilizer Industry Handbook, February 2012) Based on different forms of nitrogen, nitrogen fertilizers are divided into four groups as follows:

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Table 1: Different types of nitrogen fertilizers Form of nitrogen Nitrate Name of fertilizer Sodium nitrate Calcium nitrate Potassium nitrate Ammonium sulphate (SA) Ammonium chloride Ammonium Monoammonium phosphate (MAP) Diammonium phosphate (DAP) Ammonium solution Ammonium nitrate Ammonium & Nitrate Ammonium sulphate nitrate Calcium ammonium nitrate Amide Urea % of Nitrogen 16 15 13 25.5 25 11 18 20-25 33 25-26 25-26 46 Reaction Alkaline Alkaline Alkaline Acidic Acidic Acidic Acidic Acidic Acidic Acidic Neutral Acidic

20.5 Saline Calcium cynamide Source: Dr.K.T. Chandy, Fertilizers an introduction, Agricultural & Environmental Education.

Nitrogen fertilizer in Vietnam

We will highlight 3 main types of fertilizers which are popular in Vietnam: Ammonium sulphate (25.5% N), Urea (46% N) & DAP (18% N) Ammonium sulphate (SA) Currently, Vietnam does not have any company producing ammonium sulphate; therefore, SA in Vietnam is completely imported. DAP The first plant to produce DAP in Vietnam is Vinachem DAP Dinh Vu (Hai Phong). With designed capacity of 330,000 tons/year, DAP Dinh Vu can satisfy 50% of domestic demand. Vinachem (Vietnam National Chemical Group) is currently implementing the second investment project of DAP in Lao Cai (origin of the apatite source) with same designed capacity. Nam Viet Corporation, (ANV:HOSE) hold 39% of the Vinachem DAP 2 JSC (charter capital of VND 100 bn) and this project has been started construction from Nov 2011 and expected to be operating from 2014, with annual revenue of VND 3.5 trillion. The Ministry of Industry and Trade has proposed to build a third plant, also in Lao Cai, but the Ministry of Agriculture and Rural Development showed disagreement as they fear the supply would easily surpass the demand. Urea is produced in-house by four main companies: PetroVietnam Fertilizer and Chemical JSC (DPM), Ca Mau Fertilizer (DCM), Ha Bac
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Fertilizer and Ninh Binh Fertilizer. Prior to 2012, there were only two domestic plants producing urea: DPM (designed capacity of 800,000 tons/year) and Ha Bac fertilizer plant (designed capacity of 190,000 tons/year). Therefore, before 2012, Vietnam depended on imported urea (which mostly arrived from China). However, starting in 2013, Vietnam will experience an oversupply with the operation commencement of two new plants: Ca Mau fertilizer plants (designed capacity 800,000 tons/year) and Ninh Binh fertilizer plant (designed capacity 560,000 tons/year), which will result in a sharp decrease in imported urea. (See graph 9 page 17 for more details) Urea 1. Urea produced by natural gas

Graph 1: Process of urea production by natural gas

In Vietnam, there are currently 2 plants producing urea by natural gas as the main input: Phu My fertilizer plants and Ca Mau fertilizer plant. Natural gas is supplied by PV Gas, and the gas price is approved by the Prime Minister (PV Gas sells approximately 84% of its dry gas capacity to electricity generators, 9% to fertilizers manufacturers and the rest to industrial users). According to DPM, each ton of urea requires 27 MMBTU of natural gas. In 2012, the input gas price was determined at $ 6.43/MMBTU (+40%

Source: http://www.mhi.co.jp/en/products/expand/kmcdr_application_03.html

YoY) and will increase 2%/year. Input gas price for DPM arrived from Cuu Long basin and Nam Con Son basin while input gas price for DCM arrived from Malay Tho Chu basin.

Graph 2: Vietnams gas value chain

Source: PV Gas
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2. Urea produced by coal Two plants in Vietnam that produce urea by coal are Ha Bac fertilizer plant and Ninh Binh fertilizer plant. Graph 3: Process of urea production by coal

Source: http://www.perdaman.com.au/our-operations/collie-urea-manufacturing/process-overview.aspx Coal price is determined by the Vietnam national coal mineral industries holding corporation (Vinacomin), approved by the Ministry of Finance. Urea produced by natural gas in Vietnam benefits from lower COGS than urea produced by coal In Vietnam, the price of natural gas sold to fertilizer plants is subsidized by the government (approximately 40% lower as compared to the price of natural gas sold to industrial users), therefore, fertilizer company that uses natural gas can benefit from a low COGS. In our estimates, the input cost of a fertilizer plant that uses coal is ~50% higher as compared to the input cost of a fertilizer plant that uses natural gas (SSI estimates, based on the price of the lump coal 5B of $185/ton)

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Phosphate
While referring to phosphate fertilizer, we would like to present an overview then focus on two subgroups of phosphate fertilizer in Vietnam, which are superphosphate and fused magnesium

phosphate (FMP)

Phosphate fertilizer overview

Phosphorus (P) is vital for adequate root development and helps the plant resist drought. Phosphorus is also important for plant growth and development, such as the ripening of seed and fruit. (Yara Fertilizer Industry Handbook, February 2012). Phosphate fertilizers can be distinguished by the nature of phosphate as follow: Table 2: Different types of phosphate fertilizers Nature of phosphate Fertilizer Single super phosphate Double super phosphate Water soluble Triple super phosphate Monoammonium phosphate Diammonium phosphate Basic slage Citrate or citric acid soluble Dicalcium phosphate Rhemania phosphate Fused magnesium phosphate Bone meal raw Insoluble phosphatic fertilizer Bone meal Steamed % of P 16 32 42 48 46-54 14-18 34 25 16-18 20-25 22 Reaction Neutral Acidic Acidic Acidic Acidic Alkaline Alkaline Alkaline Alkaline Alkaline Alkaline

20-40 Alkaline Rock phosphate Source: Dr.K.T. Chandy, Fertilizers an introduction, Agricultural & Environmental Education; SSI estimates

Phosphate fertilizer in Vietnam

In this section, we will focus on two subgroups of phosphate fertilizer, which are superphosphate (14-16% P2O5) & fused magnesium phosphate (FMP 16% P2O5). Currently in Vietnam, there are 2 main companies which produce superphosphate (Lam Thao Fertilizers & Chemicals JSC, Southern Fertilizer JSC) and 3 companies which produce melting phosphate (Van Dien Fused Magnesium Phosphate fertilizer, Ninh Binh Phosphate Fertilizer and Lam Thao Fertilizers & Chemicals JSC)
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Superphosphate
Graph 4: Superphosphate production process
H2SO4

Apatite

Heated Granulation

Chemorection

Mixed

Curation

Formulated

Superphosphate

Source: Prospectus of Lam Thao Fertilizer and Chemical JSC The largest cost component is Apatite and Sulphur. Apatite is a natural resource which can be found in the Lao Cai province and the selling price is negotiated by Vinachem. In addition, a recent ban on exporting apatite is an advantage for domestic fertilizer companies. Secondly, sulphur, which is imported and is heavily dependent on the fluctuation of international prices. Historically, there is high correlation between sulphur price and international oil price. Table 3: Details of core input price in the superphosphate production Core input Apatite Ca3(PO4)2 Sulfur Note: Purchase price Production ratio Purchase price Production ratio Total core input cost Unit mil VND per ton Apatite Apatite volume per ton Super phosphate Per ton Sulfur Sulfur volume per ton Super phosphate Mil VND per ton superphosphate 0.85 0.72 5.25 0.1 1.14

Source: Lam Thao Fertilizer and Chemical JSC data, SSI estimates

Fused magnesium phosphate

Fused magnesium phosphate (FMP) is suitable for industrial plants. The production of FMP is less intricate than the production of superphosphate (The main input of FMP production is apatite and coal; its production does not require sulphur like the production of superphosphate); therefore its average selling price (ASP) is lower than the ASP of superphosphate.

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Potash
Table 4: Different types of potash fertilizers Fertilizer Potassium sulphate Muriate of potash %K2O 50% 60%

Potassium (K) is central to the translocation of photosynthesis within plants, and for high yielding crops. Potassium helps improve crop resistance to lodging, disease and drought. (Yara Fertilizer Industry Handbook, February 2012). Vietnam does not have any plant that produces potash, therefore, all potash are imported.

Source: Dr.K.T. Chandy, Fertilizers an introduction, Agricultural & Environmental Education

Complex fertilizer NPK

Farmers can apply complex fertilizers such as NPK instead of single fertilizer, and then meet the requirement by adding nutrition as a whole. NPK fertilizer combines nitrogen (N), phosphorus (P) and potassium (K). Ingredients is the highest cost component, while N can be purchase domestically, P can be produced in house (for the companies producing phosphate fertilizers as mentioned above) or bought domestically, K has to be imported because Vietnam lacks the production capacity of K. The number in NPK fertilizer (eg NPK 5-10-13) is the percentage composition of each element. The average selling price as well as the cost of goods sold of each type of NPK varies according to this percentage and other nutrients added. For example, the NPK price of Lam Thao fertilizer and Chemical JSC is only ~ VND 4,500/kg while NPK price of Binh Dien fertilizer JSC is much higher, at ~ VND 14,600/kg.

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INTERNATIONAL FERTILIZER MARKET: LATEST TREND

The international demand and supply is described by two main characters: firstly, the oversupply situation persists as the increase rate of total N, P, K supply is higher than the increase rate of total demand; secondly, China remains a big player in the fertilizer market; therefore a fluctuation in Chinese fertilizer market can influence balance of supply and demand of the entire fertilizer market.

Oversupply situation persists

As mentioned above, there is a high correlation between the fertilizer sector and the agricultural sector, Therefore, the N, P, K international demand is increasing due to the constant growth of the agricultural sector. Graph 5: Utilization and production of cereal in the world

Source: FAO - CBS However, the increase rate of total N, P, K supply is higher than the increase rate of total demand, which will result in to a continuous surplus in the future (The potential balance the gap between total supply and total demand- is increasing since 2012 onwards). This oversupply is explained by the increase in capacity of current plants as well as the emergence of new plants. For example, from 2011 to 2016, 60 new urea units would commence operation, massive phosphoric acid capacity in China, Morocco and Brazil, etc. (Source: IFA, June 2012) Table 5: World Nitrogen; Phosphoric; Potash Supply/Demand Balance (million metric tons) 2012 Total supply Total demand Nitrogen Fertilizer demand Non fertilizer demand Distribution losses
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2013 146.4 139.6 110.8 25.3 2.4

2014 149.7 141.9 112.1 26.3 2.4

2015 158.4 143.8 113.2 27 2.5

2016 162.2 145.6 114.4 27.6 2.5

10

140.8 137.3 109.5 24.4 2.3

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Table 5: World Nitrogen; Phosphoric; Potash Supply/Demand Balance (million metric tons) 2012 Unspecified demand Potential balance Total supply Total demand Phosphoric Fertilizer demand Non fertilizer demand Distribution losses Potential balance Total supply Total demand Potash Fertilizer demand Non fertilizer demand Distribution losses Potential balance 1.1 3.5 44.3 42.5 36.7 5 0.8 1.8 40.2 32 28.4 2.7 0.9 8.2 2013 1.1 6.8 45.9 43.8 37.6 5.3 0.9 2.1 43.5 33.8 30 2.8 1 9.7 2014 1.1 7.8 47.4 44.7 38.3 5.5 0.9 2.7 45.7 34.8 31 2.8 1 10.9 2015 1.1 14.6 48.8 45.5 39 5.6 0.9 3.3 48.6 35.7 31.7 2.9 1 12.9 2016 1.1 16.6 49.8 46.2 39.7 5.6 0.9 3.6 52.8 36.6 32.6 3 1.1 16.2

Source: Prud'homme, IFA, June 2012 Urea, a sub - group of nitrogen fertilizer would also experience a continuous oversupply. Table 6: World Urea Supply/Demand Balance (million metric tons urea) Year Total supply Total demand Fertilizer demand Non fertilizer demand Potential balance 2012 165.9 162.3 143.3 19 3.6 2013 173.7 165.9 146.2 19.7 7.8 2014 180.3 170 149.4 20.7 10.3 2015 189.7 173.8 152.7 21.1 15.9 2016 195 176.1 154.4 21.7 18.9

Source: Prud'homme, IFA, June 2012

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China remains a big player in the fertilizer market

China is the worlds largest manufacturer and consumer of fertilizer (See table 7 below for more details). In 2005, Chinese fertilizer accounted for 33% of total world output and 35% of total world consumption (Source: China National Agricultural Means of Production circulation Association). Therefore, a fluctuation in Chinese fertilizer market can influence balance of supply and demand of the entire fertilizer market. Table 7: Concentration of world fertilizer production capacity, 200809 Fertilizer Top 5 countries (% of world in parentheses) China (33.1), India (13.1), Indonesia (5.4), Russia (4.2) and United States (4.1) China (23.3), United States (21.2), India (11.4), Russia (6.0) and Morocco (4.0) United States (20.9), China (19.3), Morocco (9.6), Russia (6.2) and India (5.3) Canada (37.6), Russia (13.2), Belarus (9.9), Germany (8.2) and China (7.7) China (29.3), (8.2), Russia France (4.0) Turkey (3.0 India (6.0), and Top 5 Capacity (000MT) 95802 Top 5 share (% of world) 59.9

Urea

DAP/MAP

22896

65.9

Phosphoric acid

28274

61.3

Potash

39687

76.7

NPK

47186

50.4

Source: IFDC (International Fertilizer Development Center) 2009

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DOMESTIC DEMAND & SUPPLY

As a predominately agricultural driven country with 70% of the population working in agricultural related sectors, Vietnams appetite and need for fertilizer is irrefutable. There are many external factors affecting agricultural activities as well as the fertilizer sector such as weather, percentage of total cultivation area, rice demand, ect. The domestic fertilizer supply is highly concentrated as most of big companies belong to two SOE giants: Vinachem (Vietnam National Chemical Group) and PVN (PetroVietnam Group). In addition, while referring to the domestic supply, it should also be noted that even though the market confronts with a domestic oversupply of urea, phosphate and NPK, Vietnam still has to import other types of fertilizer (SA, DAP). We focus on the supply of three main types of fertilizer in Vietnam: urea, phosphate and NPK.

Domestic demand
Differences in weather conditions equate to 3 main crop types, which explains the fluctuation in the demand of fertilizer in the year
Table 8: Vietnams Area, Yield, and Production for Rough Rice Year 2010/2011 2011/2012 2012/2013

Vietnam boasts 3 main crops: Winter (Lua mua- October); WinterSpring (December January) and Summer-Autumn (May June), which partly explains the fluctuations in the fertilizer demand. The winter and summer-autumn yield is lower as compared to the winter-spring yield. As shown in the table below, the harvest area of the winter spring crop occupies 40% of total harvest area in the year. Increase in food demand leads to an incremental demand for fertilizer

Harvested Area (tha) Winter Winter - Spring Summer Autumn Total Yield (mt/ha) Winter Winter - Spring Summer Autumn AVERAGE Production (tmt) Winter Winter - Spring Summer Autumn Total 8,294 19,466 14,434 42,194 8,289 19,653 14,387 42,329 8,296 19,653 4.67 6.29 5.27 5.54 4.67 6.35 5.27 5.57 4.70 6.35 5.30 5.59 1,776 3,095 2,740 7,607 1,775 3,095 2,730 7,600 1,765 3,095 2,740 7,600

It should be noted that there is a direct correlation between the fertilizer business and the food demand. As Vietnam experiences population growth, food demand will become compulsory (Vietnams current population is roughly 80 million and is expected to reach 100 million in 2020). In addition, Vietnam relies heavily on exportation (In 2011, Vietnam ranks No 2 in the top ten rice exporter), which emphasizes the

14,522 42,471

food demand. See Graph 6: Increase trend in rice export result and Graph 7: Vietnam Paddy Rice Production for more details. The percentage of cultivated area remained identical, which

Source: The Ministry of Agriculture and Rural Development

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Graph 6: Increase trend in rice export results from 2008 to 2011

consequently led to a demand for high quality fertilizer to increase productivity and yield. We noticed that Vietnams cultivated area remained constant; therefore, we assumed that because of the fact, high yielding quality fertilizer is important to enhance the productivity in order to satisfy the ample demand. Southern Vietnam remains the dominant rice cultivation region

Source: Vietnam Food Association (VFA)

Boasting the largest percentage of total cultivation area, Southern

Graph 7: Vietnam Paddy Rice Production (from 1992 to 2012)

Vietnam is the largest fertilizer market in the country. In addition, as Southern fertilizer is also dedicated for export, farmers in the South have the incentive to focus more on fertilizers quality to ensure the enhancement of productivity as well as the quality of agricultural products. In contrast, in the North, farmers are less interested in effective agricultural production, so the price of fertilizer, and not quality is an important competitive factor. This is why high quality fertilizers concentrate in the south, additionally the average selling price of fertilizer in the south is also higher than in the north.

Source: USDA/FAO/OGA/IPA

Table 9: Cultivated area in Vietnam from 2000 to 2011 Rice Thousand ha 2000 7666.3 2001 7492.7 2002 7504.3 2003 7452.2 2004 7445.3 2005 7329.2 2006 7324.8 2007 7207.4 2008 7400.2 2009 7437.2 2010 7489.4 2011 7651.4 Corn 730.2 729.5 816.0 912.7 991.1 1052.6 1033.1 1096.1 1140.2 1089.2 1125.7 1117.2 Cane 302.3 290.7 320.0 313.2 286.1 266.3 288.1 293.4 270.7 265.6 269.1 281.3 Cotton 18.6 27.7 34.1 27.8 28.0 25.8 20.9 12.1 5.8 9.6 9.1 9.4 Peanut Soybean Total % growth YoY

244.9 124.1 9086.4 244.6 140.3 8925.5 -2% 246.7 158.6 9079.7 2% 243.8 165.6 9115.3 0% 263.7 183.8 9198.0 1% 269.6 204.1 9147.6 -1% 246.7 185.6 9099.2 -1% 254.5 187.4 9050.9 -1% 255.3 192.1 9264.3 2% 245.0 147.0 9193.6 -1% 231.4 197.8 9322.5 1% 223.7 181.5 9464.5 2% Source: GSO (The General Statistics Office)

Table 10: Percentage of total cultivation area in Vietnam Unit: thousand ha

% of total cultivation area W/country North % South % 2011A 7,655.4 2,390.2 31.22% 5,265.2 68.78% 2012E 7,300.0 2,336.0 32.00% 5,037.0 69.00% 2013E 7,300.0 2,336.0 32.00% 5,037.0 69.00%

Source: Ministry of Agriculture and Rural Development

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Domestic supply
The domestic fertilizer supply is highly concentrated with

manufacturing companies associated to two SOE giants: Vinachem and PVN. As shown in the table below, with 15 key players in the market, 10 companies belong to Vinachem and 2 companies belong to PVN. Table 11: Key domestic fertilizer companies in Vietnam Corporation No Companies name Vinachem 1 2 3 Ninh Binh phosphate fertilizer JSC Southern fertilizer company Lam Thao fertilizer and chemical JSC

Product FMP NPK Superphosphate NPK Superphosphate FMP NPK FMP NPK NPK NPK Urea Urea DAP Urea Urea NPK Fertilizer complex Specialized fertilizer NPK NPK NPK

4 5 6 7 8 9 10 11 12

Van Dien fused magnesium phosphate fertiliser company Binh Dien fertilizer company Can Tho fertilizers & Chemical JSC Ha Bac urea company (Ltd) Ninh Binh urea company DAP 1 Company PetroVietnam fertilizers and Chemical JSC Ca Mau fertilizer plant Five star international group

PVN

Designed capacity (tons/year) 300,000 150,000 200,000 300,000 750,000 140,000 700,000 270000 150000 500,000 More than 200,000 190,000 560,000 330,000 800,000 800,000 300,000 Na Na 200,000 360,000 350,000

Others

13 14 15

Baconco General Materials Biochemistry Fertillizer JSC Japan Vietnam Fertilizer Company (JVF)

Source: Vinachem, Company data Based on 2011 output and 2011 revenue, top 5 companies in the fertilizer sector is PetroVietnam fertilizers and Chemical JSC - DPM, Binh Dien fertilizer JSC, Lam Thao fertilizer and chemical JSC - LAS, Southern fertilizer JSC and Five stars international group (Source: VNR 500, SSI research)

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Graph 8: 2011 Vietnam fertilizer market supply & demand

Confronted with a domestic oversupply of urea, phosphate and NPK, Vietnam still has to import other types of fertilizer (DAP, SA, K) According to the Ministry of Agriculture and Rural Development, in 2012, Vietnam experiences an oversupply of NPK, superphosphate and urea due to the operation of new plants and the operation expansion of current plants (See graph 8 & graph 9 below for more details). However, 65% of DAP demand is still dependent on import, and would decrease in the next few years (after the operation of the second DAP plant). Two other key

Source: Ministry of Agriculture and Rural Development, Feb 2011

fertilizers (SA and potash) are completely imported as Vietnam does not produce them.

Urea market
Prior to 2012, domestic demand far exceeded supply, so fertilizer companies experienced high growth and found it easier to market and sell their products. However, from 2013 onwards, with the full operation of two new plants (Ca Mau fertilizer plant & Ninh Binh fertilizer plant), the total urea supply will double; therefore the domestic market will experience oversupply. Graph 9: Vietnam domestic urea supply

Source: PetroVietnam fertilizer and chemical JSC

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Phosphate market
Phosphate fertilizers can be sold as commercial output or can be used as an input for NPK production. The Ministry of Agricultural and Rural Development estimated that 2011 demand for phosphate fertilizer will reach 1.8 million tons. Currently domestic production is sufficient to satisfy domestic demand. Biggest players are the subsidiaries of Vinachem, and cumulatively they produced approximately 1.5 million tons of

superphosphate in 2011. Table 12: Details of the phosphate producers in Vietnam Designed capacity (thousands tons/year) 750 200 300 2011 Production output (thousand tons/year) 830 181 199

Fertillizer Superphosphate

Companies Lam Thao Fertillizers & Chemicals., JSC Southern Fertillizer., JSC Van Dien Fused Magnesium Phosphate Fertillizer., JSC Ninh Binh Phosphate Fertillizer., JSC Lam Thao Fertillizers & Chemicals., JSC

Melting Phosphate

300 300

235 43

Source: Prospectus of Lam Thao Fertilizer and Chemical JSC

NPK market
The Ministry of Agriculture and Rural Development estimated that 2011 demand for NPK will be roughly 3 million tons, highest among other fertilizer segment. Currently Vietnam boasts many producers that have enough production capacity to satisfy demand. The most notable NPK manufacturers are the subsidiaries of Vietnam Chemical Group (Vinachem): LAS (700.000 tons), Binh Dien (500,000 tons) and Southern fertilizer JSC (350,000 tons).

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Fertilizers imports
For fertilizers that Vietnam is unable to produce (SA and K) or the domestic supply cannot satisfy demand (DAP), import activity is encouraged, for example: prioritization in foreign currency allocation to import; low import tax rate (at 5%). Graph 10: Imported fertilizer since 2005 until Nov 2012

Source: CEIC Most of Vietnams imported fertilizers arrived from China. While the government can control the official import volume, it is difficult for them to control the unofficial import volume. The competitive pressure mainly comes from NPK and urea as foreign companies cannot compete with Vietnamese phosphate fertilizer. (The price of superphosphate is roughly VND 3 mil/ton, while the transportation tariff from China to Vietnam is high at roughly VND 2mil/ton).

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PRICING DYNAMICS
The domestic price is determined by two main factors: international benchmark and the interaction between domestic supply and demand. In addition, it is also affected by other factors like Government policies and speculations.

International
Graph 11: World Bank urea price forecast
400 USD/ton 350 300 250 200 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 2017 256 342 332 317

benchmark

and

interaction

between

domestic supply and demand: Urea example

International urea price is one of the most important benchmark of

274 295

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domestic urea price. Urea price will likely experience a downtrend as in 2013; the urea market will experience an oversupply as mentioned above. The World Bank has also published a downward urea trend forecast. In addition, the domestic market will experience its own oversupply in 2013 and onwards, causing prices to contract (with the full operation of Ca Mau fertilizer plant and Ninh Binh fertilizer plant, see graph 9 above)

Source: World Bank, Commodity Price Forecast Update, Sept 2012

Other factors
Governmental policies: As the fertilizer business is important for an agricultural driven country like Vietnam, the fertilizer sector is heavily regulated with governmental policies such as: subsidization of material input (DPM and Ca Mau fertilizer plant profit from a low natural gas price, 40% lower as compared to the gas price to industrial users), allocation of material input (governments decision to ban the export of apatite, which is advantageous for companies producing phosphate fertilizers),

government control of production (as most of big players in fertilizer sector belong to two SOE giants: Vinachem and PVN). Therefore, changes in governments policies can affect profits of companies in the sector. Speculations: Speculations could lead to abnormal increases in volume and market prices. Normally, the speculation phenomenon occurs when the fertilizer demand increases depending on crop type or when the fertilizer price tends to increase. However, it can also harm fertilizer companies if market price drops significantly.

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RESEARCH AND INVESTMENT ADVISORY

SECTOR OUTLOOK
Sector weighting: Neutral
Earnings outlook is less affected by economic downturn but is difficult to grow as market has already been oversupplied As Vietnam continues to remain an agricultural driven country, therefore the fertilizer sector still plays a key role in the economy. Although the current difficult economic situation influences all economic sectors, fertilizer sector is one of the sectors less affected and unperturbed by the economic downturn. Thanks to the constant demand, fertilizer companies have realized profit amidst economic slowdown. However, along with market oversupply (urea, phosphate fertilizer and NPK) and the downtrend risk of international price, we expect a squeeze in the profit growth of the sector. Long term investments in depth to drive prospective growth As mentioned above, the oversupply is dominated in some specific fertilizers such as urea, NPK, phosphate. Then, the pure increase in capacity seems not profitable for fertilizers companies. Taking LAS as an example, in 3Q12, as economic difficulties cast its shadow over the fertilizer market, LAS decided to delay its production line expansion. Once the production line expansion is complete, it will boast a total production capacity of 850,000 tons (+21.4% as compared to the old line). Therefore, growth from 2013 onwards might arrive from the investments in depth. It should be noted that the niche market still exists for high quality fertilizer despite its higher price as compared to other fertilizer types (for example NPK Dau Trau, TE Agrotain of Binh Dien Fertilizer Company). However, the investments in depth sometimes require huge investments, therefore, in our opinion, not able to boost the sector growth in the short term. Additional policies needed to limit poor quality fertilizer The oversupply situation in the fertilizer market is highlighted by the existence of poor quality fertilizer as well as smuggled fertilizer. The fertilizer industry is currently regulated by two decrees: 113/2003/ND-CP and 191/2007ND CP. However, in these two decrees, fertilizer sector is not a business under condition, therefore, although many small establishments do not have to meet specific requirements, they continue to produce and trade fertilizer, which has led to a real higher supply as compared to the official figures mentioned above. According to the Vietnamese Ministry of Agriculture and Rural Development, a new decree will soon be released which will require that fertilizer sector become a business under conditions: fertilizer production companies must meet 14 criteria such as production capacity, production condition, etc. Therefore, it is expected to somewhat reduce the oversupply conundrum once the degree is implemented.

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RESEARCH AND INVESTMENT ADVISORY

COMPANY IN FOCUS
PetroVietnam fertilizers and chemical JSC
(Ticker: DPM HOSE) Company background:
th

Current price (VND)

35,400 37,000 HOLD NEUTRAL NEUTRAL

PetroVietnam Chemical and Fertilizers JSC was

Target Price (12M) Recommendation (12M): Short-term Rating (<3M): Sector Rating:

established on March 28 , 2003 and is currently one of Vietnams largest domestic fertilizer manufacturer. Today, the company boasts a charter capital of 3,800 billion VND. The main manufacturing plant is located in Phu My 1 Industrial Zone (Ba Ria Vung Tau). The plant costs USD370 million to build with Danish and Italian technologies with a design capacity of 800,000 tons urea per year. Besides manufacturing urea fertilizer, DPM also participates in electricity, importing fertilizers and others. However, these only contribute a small percentage toward net profit and manufacturing fertilizer remains the largest contributor to net profit. DPM currently holds roughly half of Vietnam urea market.

Key figures Market Cap. (USD mil): Market Cap. (VND bn): Outstanding shares 52-week high/low (000s, VND) Average 3-month volume Foreign ownership (%) State ownership (%) Management ownership (%) 636.4 13365 377,554,320 41.2/22.3 548,529 25.27% 61.77% Na

Strategy:

As a subsidiary of PetroVietnam, management team is appointed by

Stock performance

PetroVietnam. Management team members are experts with vast experience in the petrochemical industry. Besides serving the shareholders interests, management has to perform other political duties such as stabilizing the fertilizer market and supporting the domestic agricultural industry.

Strength
Strong distribution network and strong brand name among customers.
Source: Bloomberg

Lower cost thanks to discounted gas price translates to higher profit margins. Large market share thus exerts a big influence on the fertilizer market. Healthy financial status: abundant cash and no debt.

Weakness
Besides managing a profitable business, DPM is also responsible with fulfilling political duties of stabilizing the fertilizer market and support the domestic agricultural industry, and this is not always in the shareholders best interest
(

The management is under heavy influence of PetroVietnam.

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RESEARCH AND INVESTMENT ADVISORY

Financial summary table

Bln VND Net revenue NI to parent shareholder EPS (VND) ROE RA Dividend (VND) PE PB EV/EBITDA D/E 2009A 6,630 1,348 3557 26.4% 23.4% 2000 9.56 2.35 3.94 0.04 2010A 6,619 1,703 4499 29% 24.8% 2000 8.45 2.33 4.19 0.05 2011A 9,227 3,104 8288 43.2% 37.6% 3500 2.87 1.1 1.28 0 2012E 12,227 2,902 7637 31.6% 28.5% 2500 4.64 1.3 2.16 0 2013E 10,549 2,328 6217 22.1% 21.1% 2500 5.69 1.2 2.7 0

9M12 Review
9M12 boast good earnings results, exceeded 2012 net income plan by 42%: DPM announced its 9M12 results, which net revenue totalled VND 10,563 bn (+53% YoY) and net income to parent shareholders reached VND 2,495 bn (+11% YoY). These high earnings are mainly explained by the impressive earnings results in 1H12. 53% increase YoY in 9M12 revenue thanks to the distribution of Ca Mau fertilizer: Although Ca Mau fertilizer plant and DPM remain separate entities and did not enter into an M&A proposition, DPM was responsible for distributing both Phu My and Ca Mau brands fertilizer since 1Q12. Therefore, DPM accounted 100% of revenue from selling Ca Mau fertilizers into DPMs financial results in 9M12 results. 1H12 earnings results are impressive thanks to a high average selling price (ASP) and a sharp increase in net financial income. Firstly, the ASP in 1H12 remains high due to a high international urea price and a lack of domestic urea supply (it should be noted that Mau Plant and Ninh Binh plants production is behind schedule while in early 2012, due to several warnings about urea oversupply, importers have slashed urea imports by 46% YoY, which has led to a shortage of urea). Secondly, the sharp increase in net financial income is explained by an abundant cash reserve and a stable foreign exchange rate as compared to the foreign exchange rate in 1H11. In 3Q12, the scenario has reversed: 3Q12 net income is low (-30.6% YoY and -44.8% QoQ) mainly due to the decrease trend in international urea price. In addition, the shortage of urea scenario in 1H12 no longer exists with the increase in capacity of Ca Mau Plant, therefore the increase in urea supply contributed to the decrease in urea average selling price. Strong cash balance at 30 September 2012: At the end of September 2012, DPM cash balance remained comfortable at VND 5,669 bn, which makes DPM one of the top ten listed companies boasting a rich cash balance. As DPM do not have any CAPEX plan in 2012, the company maintains its low debt balance (Total debt balance at 30 Sept 2012 is VND 27 bn)

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RESEARCH AND INVESTMENT ADVISORY

Update on Ca Mau deal: According to Petro Vietnams restructuring plan, the Prime Minister has requested that Petro Vietnam Fertilizers (DPM) and Dam Ca Mau Company Ltd remains separate entities and not enter into an M&A proposition. Therefore, Ca Mau plant will become DPMs competitor thus resulting in loss of valuable market shares. However, it will help DPM to use its cash reserve to invest in other chemical projects and especially ensure its high dividend policy to investors.

2012 - 2013 outlook

Good performance in 2012: Even though 4Q12 earnings growth will be squeezed as the domestic downtrend urea price remains, we keep our opinion that DPM will experience a good performance year thanks to 1H12 impressive results: 2012 net income to parent shareholders is estimated at VND 2,901 bn, decrease 8% YoY compared to 2011 earnings results but excess 2012 target by 62%). According to this estimates, we assume that DPM could increase the 2012 dividend compared to its initial plan to at least 35% on par (DPM has already paid 25% on par). This high dividend yield along with a high cash reserve makes DPM an attractive value stock in the market Challenges in 2013: International urea price the important benchmark of domestic urea price is estimated to decrease in the following year. In addition, in 2013, the domestic oversupply due to the full operation of Ca Mau fertilizer plant and Ninh Binh fertilizer plant will add downward pressure to average selling price. In 2013, we estimate that DPM net income would start to saddle: net income to parent shareholders will reach VND 2 328 bn (-20% YoY) (based on the assumption that the urea ASP decrease by 7% and 2% increase in input gas price). CAPEX update: DPM has decided to cancel the NPK project. Therefore, in 2013, there will be no CAPEX plan, so DPMs cash reserve remains intact. For the long term, DPM plan on investing in: NH3 project and H2O2 project. However, the implementations of these projects remain uncertain, so we assume that they will not have influences in DPMs performance as well as the stock price in the short and medium term. DPM would lose the Ca Mau urea distribution contract in 2013: Ca Mau fertilizer plant would use many agents instead of only DPM like in 1H12 (In 1H12, DPM was the sole distributor of Ca Mau fertilizer; therefore increases its total market share). Since November 2012, DPM distributes Ca Mau fertilizer as a trading product with a low profit margin at approximately 3%. According to DPM, the estimated trading Ca Mau fertilizer is roughly 350,000 tons.

Investment view
Given the fact that DPM and Dam Ca Mau Company Ltd remains separate entities and have not entered into an M&A proposition along with the loss of the Ca Mau urea distribution, this has led to an alarming concern about DPM market position in the future. In the years ahead, the urea market will face many challenges as oversupply persist couple with the decrease trend in average selling price. It should be noted that it is not easy
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RESEARCH AND INVESTMENT ADVISORY

for DPM to expand into foreign markets. Therefore, in 2013, we estimate that DPM net income would start to decrease: net income to parent shareholders would reach VND 2 328 bn (-20% decrease YoY), translating to an EPS of VND 6,127. Even though earnings growth will most likely chart into negative territory, a strong balance sheet with high cash reserve and an expected high dividend yield would make DPM a value stock in the market. Short term upside might arrive from the news of dividend policy or rumours on a possible stock split/stock dividend. Although in terms of fundamentals, DPM is a good company, we do not see positive catalysts in the long run. Therefore, we recommend a HOLD on the stock at the current price.

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RESEARCH AND INVESTMENT ADVISORY

Lam Thao fertilizer and chemical JSC

(Ticker: LAS HNX) Company background: Established in 1962, LASs main product is NPK
with a high production capacity of 700,000 tons/year (tpy) making LAS the leader in NPK fertilizer segment; moreover, LAS is also the domestic leader in manufacturing superphosphate, providing about 80% of total domestic supply. LASs other main products include sulfuric acid with a production capacity of 250,000 tons/year and fused calcium magnesium phosphate (FMP) with a production capacity currently at 100,000 tpy and expandable to 300,000 tpy. LASs main market is Northern Vietnam. In 2010, LAS was equitized and in 3/2011, it began trading on HNX with initial charter capital of VND 540 bn.
Key figures Market Cap. (USD mil): Market Cap. (VND bn): Outstanding shares 52-week high/low (000s, VND) Average 3-month volume 84.01 1764 64,860,000 32.4/15.1 101741 Na 69.82% Na Current price (VND) Target Price (12M) Recommendation (12M): Short-term Rating (<3M): Sector Rating: 27,200 30,000 HOLD NEUTRAL NEUTRAL

Management and Strategy:

Investment and development in depth;

Foreign ownership (%) State ownership (%) Management ownership (%)

maintenance the big influence in the fertilizer market, especially in the North; intention to expand in the South and exportation market.

Strength
Stock performance

Belongs to a segment heavily supported by the government to maintain food security Ownership of a high-capacity and fully depreciated phosphate manufacturing chain. High market shares in the north of Vietnam

Weakness
The company operates at full capacity; there is no more room for growth without decreasing margin. The company relies on imported input (potash, SA, sulfur, etc.) and vulnerable to global price surges.
Source: Bloomberg

Financial summary table

Bln VND Net revenue NI to parent shareholder EPS (VND) (*) ROE ROA Dividend (VND) PE PB EV/EBITDA D/E 2009A 3,365 78 Na 13.5% 3.3% Na Na Na Na 2.22 2010A 3,609 288 6654 43.6% 14.1% Na Na Na Na 0.87 2011A 4,056 300 6519 35.7% 14.7% 2000 Na Na Na 0.82 2012E 4,708 384 5922 35.2% 16.8% 2000 4.6 1.4 3.27 0.38 2013E 4,810 384 6080 28% 15.7% 2000 4.5 1.2 3.29 0.35

(*): In July 2012, LAS paid 20% dividend in stocks for 2011, which leads to an increase of the share

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capital. Therefore, EPS after bonus stocks is lower for 2012 (not comparable for YoY comparison of EPS).

RESEARCH AND INVESTMENT ADVISORY

9M12 Review
Good performance earnings results thanks to 1H12 results: LAS has announced its 9M12 results in which revenue reached VND 3678 bn (+18% YoY) and net income totaled VND 312bn (+36% YoY). These high earnings are mainly explained by the impressive earnings in 1H12 (net income increased 51% YoY) thanks to a high increase in average selling price YoY and in commercial output volume. However, since 3Q12, the fertilizer market has experienced difficulties; LASs commercial output decreased, LAS has to increase the commission percentage to agents; which has led to a decrease of 8% of 3Q12 net income. Delay of the NPK expansion: In 2H12, the company expects to build a new NPK production line, which will bring total production capacity to 850.000 tons (+21.4%). However, as the fertilizer consumption in the market has slowed down since 3Q12, LAS has decided to delay this expansion to at least 2013.

2012 - 2013 Outlook

2012 good earnings results: Even though 4Q12 continues to be a difficult quarter for fertilizer companies, LAS could fulfill its 2012 target: 2012 net income to parent shareholders is estimated at VND 384 bn, an increase of 28% YoY. Based on this estimates, 2012 dividend would be at least 20% in stock and 15% in cash. Most likely to maintain a good earnings results in 2013, slight increase of 3% YoY in net income: If the economy continues its downturn trend, 2013 will continue to be a tough year for all sectors. However, thanks to the specific characteristic of LASs products (as a necessary product in an agricultural driven country) and its high market share, LAS will most likely maintain its good earnings results in 2013. In addition, LAS could somehow profit from the downtrend risk in fertilizer average selling price by reducing its COGS (LASs input price contains urea price, SA price and potash fertilizer price). In 2013, net income to parent shareholders is estimated at VND 394 bn, an increase of 3% YoY. Dividend policy in 2013 could remain at least in 20% in stock and 15% in cash.

Investment view
LAS possesses good fundamentals; however, investors must take into account the low liquidity of the stock as Vinachem own 69.82% stake in the company. Our investment view for 1 year horizon is HOLD with a target price of VND 30,000 (10% upside from the market price of VND 27,200- price at 18 Dec 2012). This estimate is based on estimated 2012 EPS of VND 5,922 and 2013 EPS of VND 6,080, translating to one year forward EPS of VND 6,072 and one year forward target PE at 5x.

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RESEARCH AND INVESTMENT ADVISORY

Van Dien fused magnesium phosphate fertilizer JSC

(VAFCO OTC) Company background: Established in 1960, Van Dien Fused Magnesium
phosphate fertilizer JSC (VAFCO) is the first company in Vietnam to produce fused magnesium phosphate (FMP). VAFCO has two main products: FMP and NPK. The main product is FMP with a production capacity of 270,000 tons/year, in which approximately 200,000 tons is sold as commercial output to farmers; the remaining FMP is used for its own process of NPK. The NPK production capacity is 150,000 tons/year; however the NPK production output is often lower than the production capacity. After the re-evaluation of asset in 2009 in the equitization process, total value of asset increased by VND 149bn.
Key figures

Outstanding shares Foreign ownership (%) State ownership (%) Institutions ownership (%) Employees ownership (%)

28,973,457 Na 67% 26.5% 3.3%

Strategy:

FMP margin is much higher than NPK margin as most of NPKs

ingredients are imported. It is the main reason why the company currently focuses in FMP products. In terms of operation expansion, VAFCO plans to build a new plant boasting a capacity of 300,000 tons FMP per year. In the long term, VAFCO intends to increase its total production capacity, up to 500,000 tons FMP/year and 200,000 tons NPK/year.

Strength
As VAFCO focuses on FMP production, all input materials (Apatite, Serpentine, ect.) are available domestically. VAFCO operates in a segment supported by the government to maintain food security

Weakness
CAPEX plan to expand the operation seems not efficient

Financial summary table

Bn VND Net revenue NI EPS (VND) ROE RA Dividend (VND) D/E 2007 439 27 1,003 28% 11% Na 0.17 2008 611 55 2,028 37% 16% Na 0.89 2009 (equitization) Na na Na na Na na 2010 595,922 53 1,973 16% 11% 1250 0 2011 2012 plan Na 60 2,222 17% 12% 1500 0 805 60 2222

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RESEARCH AND INVESTMENT ADVISORY

9M12 Review
Slight increase YoY in 9M12 results: VAFCO announced its 9M12 results, which net revenue totalled VND 834 bn (+28% YoY) and net income reached VND 53 bn (+8% YoY). Therefore, it is expected that VAFCO could easily exceed its earnings target (mentioned in the table below). Like other fertilizer companies, this slight increase in net income mainly derived from 1H12 results, as since 3Q12, the fertilizer market faced additional difficulties. No use of leverage, maintain a safe balance sheet: At the end of 9M12, D/E ratio is 0, which imply that VAFCO does not use leverage in its business operation. Cash balance is quite high, at VND 302 bn (61% of total asset)

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RESEARCH AND INVESTMENT ADVISORY

Southern fertilizer JSC

(SFC OTC) Company background:
Established in 1976, SFC was equitized in 2010.
Key figures

SFCs main product is NPK with a production capacity of 300,000 tons/year (tpy) (NPK contributes to approximately 70% of total revenue); SFC is also one of Vietnams two superphosphate manufacturers with a production capacity of 200,000 tpy

Outstanding shares Foreign ownership (%) State ownership (%) Institutions ownership (%) Employees ownership (%)

41,470,000 Na 65% 6% 3.74%

(Superphosphate contributes to approximately 10% of total revenue). SFC possesses a H2SO4 chain with a production capacity of approximately 80,000 tpy. In 2011, SFC has decided to merge their Chanh Hung factory into Hiep Phuoc factory then currently, SFC has 5 subsidiaries factories: Long Thanh superphosphate factory, Hiep Phuoc, Cuu Long, Yogen, and a packaging factory.

Strategy:

Maintenance the high market share in the North and intention to

expand to exportation market

Strength
High market share in the South and Central of Vietnam (NPK market share is 40%, superphosphate market share is 80%) Large distribution network

Weakness:
The company relies on imported input (SA, potash, sulfur, etc.) and vulnerable to global price surges.

9M12 results
bn VND Net revenue Gross profit Gross margin NI Total asset Total equity ROA ROE D/E 2011 3,110 298 10% 97 1,220 478 9% 22% 1.6 1Q12 667 41 6% 21 1,621 496 5% 17% 1.3 2Q12 1,243 98 8% 30 1,672 489 7% 25% 1.5 3Q12 1,004 79 8% 24 1,871 522 5% 19% 1.5 9M12 2,915 218 7% 74 1,871 522 6% 20% 1.5 -4% 9M YoY -3% 12%

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RESEARCH AND INVESTMENT ADVISORY

Binh Dien fertilizer JSC

(BDFC OTC) Company background
Key figures Outstanding shares 39,700,000 Na 65% 15% 1.43%

Established in 1973 with the initial name of Thanh Tai Fertilizer Company (Thataco), BDFC has expanded and was formally converted into a state owned enterprise in 1976, renamed Binh Dien Fertilizer Factory II. In 2003, the company BDFC OTC) officially became a member of the Vietnam National Chemical Group Vinachem thanks to rising demand of fertilizer market. BDFC was equitized in 2011 with an initial charter capital of VND 397 bn. Fertilizer manufacturing and trading is the biggest segment of BDFC, which accounts for 98.8% of total revenue. Besides manufacturing fertilizer, BDFC also participates in importing/exporting fertilizer, fertilizer production equipment, trading of real estate; however, non-core manufacturing businesses only contribute a small percentage toward net profit. BDFC main product is NPK with total production capacity of 500,000 tons/year. Dau Trau Fertilizer is the main brand.

Foreign ownership (%) State ownership (%) Institutions ownership (%) Employees ownership (%)

Strategy:

BDFC focuses on enhancing products quality through R&D

activities. Brand awareness is promoted by social activities and promotional programs, publishing and sending fertilizer users books, guides, leaflets, flyers and The Binh Dien newsletters to farmers

Strength: Large distribution network; highest market share of NPK in the South Weakness:
The Company relies on imported input (SA, potash, etc.) and

vulnerable to fluctuations in global prices

9M12 results
bn VND 2011(*) 1Q12 2Q12 2,693 3Q12 1,785 9M12 5,858

Net revenue Gross profit Gross margin PBT NI Total asset Total equity ROA ROE

5,346 340 6.36% 87 68 2,422 472 2.81% 17.21%

1,379

46

57

111

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RESEARCH AND INVESTMENT ADVISORY

LIST OF TABLES AND FIGURES

List of tables
Table 1: Different types of nitrogen fertilizers Table 2: Different types of phosphate fertilizers Table 3: Details of core input price in the superphosphate production Table 4: Different types of potash fertilizers Table 5: World Nitrogen; Phosphoric; Potash Supply/Demand Balance (million metric tons) Table 6: World Urea Supply/Demand Balance (million metric tons urea) Table 7: Concentration of world fertilizer production capacity, 2008-09 Table 8: Vietnams Area, Yield, and Production for Rough Rice Table 9: Cultivated area in Vietnam from 2000 to 2011 Table 10: Percentage of total cultivation area in Vietnam Table 11: Key domestic fertilizer companies in Vietnam Table 12: Details of the phosphate producers in Vietnam

List of graphs
Graph 1: Process of urea production by natural gas Graph 2: Vietnams gas value chain Graph 3: Process of urea production by coal Graph 4: Superphosphate production process Graph 5: Utilization and production of cereal in the world Graph 6: Increase trend in rice export results from 2008 to 2011 Graph 7: Vietnam Paddy Rice Production (from 1992 to 2012) Graph 8: 2011 Vietnam fertilizer market supply & demand Graph 9: Vietnam domestic urea supply Graph 10: Imported fertilizer since 2005 until Nov 2012 Graph 11: World Bank urea price forecast
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RESEARCH AND INVESTMENT ADVISORY

RATING
Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stocks 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 negative 9%, while a HOLD rating implies returns between negative 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 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.

CONTACT INFORMATION
Phuong Hoang Thuy Nguyen Director, Institutional Research & Investment Advisory Research Analyst , Oil& gas, Fertilizer phuonghv@ssi.com.vn thuyntt@ssi.com.vn

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