HOA SEN

GROUP (HSG)
September
19, 2014

INITIATING COVERAGE: HOLD

Current price (9/19/2014):
stock price index

60

VND

42,700

VN-INDEX
46,500 50

HSG Steel

Target price:
VND
Forecast price appreciation:8.9%
Short-term trading recommendation HOLD 40
Mid-term resistance level VND 47,000
Mid-term support level
VND 41,500 30
Bloomberg ticker: HSG VN Exchange:
Industry:
Beta

Steel
1.19

HSX

20

52w High / Low (VND)

57,745 35,626 10
Outstanding shares (mn) 96.3
0
Market cap (VNDbn)4,113
9/13
Free-float ratio (mn
10/13 11/13
shares)
28.5

2/143/14 4/14 5/14 6/14 7/14 8/14

12/13
1/14
236,414 -10

LTM Avg trading vol

Foreign43.5%
owned
Dividen
ratio (%)
d
EPS
yield
(VND)
Year
5.4%
3,952
FY2014 VPBS
Forecast
LTM
FY2013
FY2012

5.9%
7.0%
2.3%

3,358
5,941
3,761

FY2011

1.2%

in 8M2014.

We
initiate
coverage
of
Hoa Sen Group JSC (IJC)
with
a
long-term
HOLD recommendation
based on:
Strong
revenue
growth:
Largest
market
share:
HSG
occupies
1,622 galvanized

37%
market
share
of
steel sheet

HSG Peer VNI Exports to further drive

growth: Export revenue accounts for 41%
P/E
12.7 9.6 15.4 of HSGs revenues in 9MFY2014. Exports provide a good sale
P/B
1.8
0.7
2.0
channel during periods of
stagnant domestic demand but may be
1H14 Debt/Equity 2.3
1.8 1.1subject to antidumping actions in various countries.
Ratio

1H14 Net margin

2.6%
1.2% 9.0%
FY2013 ROE
27.5%
13.0%
14.9%
FY2013 ROA 9.3%
2.3%
3.4%
2010-13
2014E
2014-18F
CAGR
(VND

bn) CAGR
Revenues 34%
EBITDA
17%
997
Net Income

15,030 19%
23%
39% 381 36%

Company Description:
- Established in 2001, Hoa Sen
Group
(HSG)
specializes
in
manufacturing

galvanized
steel
sheet,
steel
pipes
and
other
construction
materials
to
serve
industrial
production
and
civil
construction.
The
Group
occupies 37%
market
share
in
the
galvanized
steel
sheet
segment
and
20%
market
share
in
the
steel
pipe
segment in 8M2014.
The completion
of
Phase 2 of Hoa Sen
Phu
My
Steel
Sheet
Plant
will
increase
its
cold
rolling
capacity
from
580K
tons
to
980K
tons,
galvanized
capacity
from
820K
tons to 1.22 million
tons per year.
-9M-FY2014 results:
Net
revenues: VND10,966
billion
(USD517
million),
Net
income: VND281.5 billion
(USD13
million),
Equity:
VND2,348
billion
(USD111 million) .

Strong profitability:
Gross margins will
rebound from FY2015: In
2013, HSG wrongly
speculated on higher
HRC prices, which will
drag down FY2014
margins. Margins
should improve in
FY2015 once it has sold
its
high-cost inventory.
Nationwide retail
network improves
customer service: HSGs
138
retail outlets allow it
to deliver its
products to endusers, adopt
flexible selling
policies and improve
margins.
CRC self-supply: Phase 2
of Hoa Sen Phu My Steel
Sheet plant will
provide 100% of HSGs
cold rolled coil (CRC),
which would be
subject to a 7% tax if
imported.
Good relative value:

HSGs FY2014 P/E ratio is

estimated at 10.8x, below its
regional
peer
group,
while
its
ROE,
ROA
and
gross
margin
are
significantly
higher.
High leverage:

Pursuing
aggressive
expansion
strategy
pushed
the
Groups
debt/equity
ratio
above
the
median
of
local
steel
companies.
Please see important
disclosure information
at the end of this
report.

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Page | 1

CONTENTS
INDUSTRY OVERVIEW ..................................................................... .3
HOA SEN GROUP (HSG) .................................................................. .5
HISTORY ................................................................................... ..5
ORGANIZATIONAL STRUCTURE AND MANAGEMENT ....................6
SHAREHOLDERS AND OWNERSHIP .............................................8
COMPANY OVERVIEW ..................................................................... .9
A LEADING STEEL SHEET AND STEEL PIPE PRODUCER ...............9
CAPACITY EXPANSION TO DRIVE GROWTH ................................11
NATIONWIDE RETAIL NETWORK TO DELIVER PRODUCTS TO END
USERS .......................................................................................... ..1 3
SALES GROWTH TO BE FURTHER DRIVEN BY EXPORTS ..............1 4
FINANCIAL PERFORMANCE ............................................................ ..1 5
COST ANALYSIS ....................................................................... ..1 5
GROWTH ................................................................................. ...1 6
EFFICIENCY AND PROFITABILITY ................................................18
LIQUIDITY AND SOLVENCY .........................................................2 0
FORECAST ASSUMPTIONS ............................................................ ...2 1
VALUATION ................................................................................... ..2 4
DISCOUNTED CASH FLOW ....................................................... ...2 4
COMPARABLE MULTIPLES ...........................................................2 5
SENSITIVITY ANALYSIS .................................................................. ...2 6
TECHNICAL ANALYSIS .................................................................... .27
CONCLUSION ................................................................................ ..2 8

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Page | 2

INDUSTRY OVERVIEW
During the period from 2008 to
2013,
the
sales
volumes
of
Vietnam
Steel
Association
(VSA)s members achieved the
compounded
annual
growth
rates
(CAGRs)
of
18.9%
in
steel
sheet
and
15.3%
in
steel
pipe,
higher
than
a
CAGR of 7.8% in construction
steel.
The
first
8
months
of
2014
(8M2014)
saw
consumption
volume
of
steel
sheet
increase
by
29%
y-o-y
thanks
to
exports while consumption of
steel pipe grew by 32% y-o-y
mainly
due
to
domestic
growth.
Galvanized steel sheet (thousand
tons)
Steel pipe
(thousand tons)
2.5
00
2.0
00
1.5
00

Consumption

Consumption
Production
2008-2013 CAGR
(consumption) = 18.9%

1.0
00

Production
2008-2013 CAGR
(consumption) = 15.3%

80
0
60
0

1.0
00

40
0

50
0

20
0

2008 2009 2010

2011 2012
2013 8M2014

0
2008 2009 2010
2011 20122013
8M2014
Source: Vietnam Steel Association Source:
Vietnam Steel Association

Steel

sheet

Steel
sheet
is
gradually
replacing asbestos-cement
for
roofing
and
wall
covering
due
to
major
health
concerns.
Steel
sheet
is
a
type
of
flat
steel
product,
produced

from raw material which is

cold rolled coil. Steel sheet
is
diverse
in
terms
of
color,
size,
and
thickness
and
has
many
applications,
but
it
is
used
mostly
in
roofing,
construction,
manufacturing
mechanical
products
such
as
automotive.
Its worth noting that the
gap
between
supply
and
demand
of
this
segment
further
widened
as
new
companies
entered
the
market
or
when
existing
companies
increased
capacity.
Steel
sheet
produced
by
Vietnamese
firms is of medium-grade,
which
is
used
mostly
in
roofing and general usage
such
as
home
furniture
and
parts
for
motorcycle
repair.
Other
flat
products
such as heavy plates used
for
shipbuilding
and
galvanized sheets used for
cars have to be imported.
The main growth driver of
sales
volume
of
this
segment
has
been
through
export
activities.
Countries
like
Myanmar,
Indonesia
and
Malaysia
have
significant
demand
for
steel
sheets
of
medium-quality
for
general
usage
and
civil
construction;
these
are
products
Vietnam
can
supply
at
attractive
prices.
Vietnams
steel
sheet
producers,
benefiting
from
relatively
lower
labor
cost,
have
a
competitive
edge
in
terms
of
product
pricing.
In
8M2014,
total
sales
volume
of
VSA
members reached 1.18 million
tons,

up

29.1%

y-o-y,

in

which

export
volumes
surged
by
51.9%
y-o-y
to
reach
520
thousand
tons,
accounting
for
44%
of
total
sales
volumes.
In
contrast,
domestic
sales
volumes reached 663 thousand
tons, increased by 15.6% y-o-y.
The
main
client
group
of
steel
sheets
is
individual
contractors,
especially
in
suburban
areas,
which
are
less
vulnerable
to
changes
in
prices
than
contracts
for
big

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Page | 3

construction
sites.
Moreover,
their bargaining
power is
low.
However,
as
steel
products
are
becoming
more
standardized,
individual
customers
have
the
power
of
switching
to
another
brand
without
much
switching
cost.
The
market,
therefore,
is
a
highly
competitive
one
as
there
are
several
FDI
firms
(Blue Scope Steel, Sun Steel,
and
most
recently
China
Steel Sumikin) operating in
this
segment.
These
firms
have
a
certain
advantage
in
terms
of
economy
of
scales
and
advanced
technology.
Despite
these,
the
steel
sheet
segment
still
holds
potential
for
domestic
companies
that
can
offer
high-quality
products
with
reasonable
prices
and
especially
have
good
relationships
with
local
contractors.

Steel pipes
The
steel
pipe
segment
witnessed
the
participation
of
many
companies specializing in
the
steel
sheet
segment
but
wanting
to
diversify
their product offerings, as
in
the
case
of
Hoa
Sen
Group
which
entered
the
steel
pipe
segment
in
2009
and
Nam
Kim
Group
which
entered
in
2012.
These
companies
are
more
capable
with
raw
material
sourcing
and
possess
advanced
technology,
which
poses
a

competitive challenge for

companies
that
only
manufacture steel pipe.
Steel
pipe
plays
an
important
role
in
engineering
construction
and
industrial production.
As
the
size
of
the
steel
pipe
segment
is
particularly
small
compared
to
the
steel
sheet
segment,
the
gap
between
supply
and
demand
is
not
prominent,
this
segment
can
absorb
the
extra
production
volume
even
when
existing
firms
expand
capacities or new
firms enter the market.
In 8M2014, sales volumes of VSA
members
reached
681
thousand
tons,
up
32%
y-o-y.
Specifically,
export
volumes
reached
103
thousand
tons,
down 20% y-o-y; in contrast,
domestic
sales
volumes
increased
sharply
by
49%
to
reach
577
thousand
tons,
accounting for 85% of total
sales
volume.
Part
of
the
reason
for
the
declining
growth
rate
in
export
volumes
is
rising
anti-dumping
lawsuits
in
export
markets
(the
United
States
and
Canada).
However, we do not believe
this
is
a
major
concern
for
steel
pipe
producers
as
their
export
volumes only account for a
small portion of their total
sales
volumes
(3.2%).
Moreover,
steel pipe producers target
export markets are mostly
within
the
South
East
Asia
region
due
to
Vietnams
geographic location.

Material

price

Global
HRC
significantly

trend

prices
fluctuated
during 2014
but

generally
trended
downward.
In
1Q2014,
in
China, the decline in iron ore
prices
dragged
down
HRC
price
despite
the
slight
improvement
in
demand
and
inventory
reduction,
in
particular,
HRC
price
declined
from
USD530-540/ton
FOB
in
January
to
USD520/ton
FOB in March. In the beginning
of 2Q2014, HRC price increased
in
the
first
two
weeks
of
the
quarter
to
reach
USD525530/ton
FOB.
However,
from
the
end
of
April,
slowing
domestic
prices
and
tightening
monetary
policy
coupled
with
weak
demand,
declining
ore
prices
still
put
the
market
in
a
downward trend as buyers
are
not
willing
to
pay
higher
prices.
Export
prices
fell
continuously
during
the
quarter
and
adjusted
to
reach
USD505-515/ton
FOB
by
the
end
of
2Q2014.
By
the
beginning
of
August,
HRC
prices
remained
stable
but
adjusted
downward
slightly
by
the
end
of
the
month
to reach USD500 to 508 per ton FOB.

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Page | 4

HOA SEN GROUP (HSG)

HISTORY
Formerly
a
steel
sheet
retail
outlet,
Hoa
Sen
JSC

the
precursor
of
Hoa
Sen
Group,
was founded in 2001 with an
initial
chartered
capital
of
VND30 billion, 22 employees,
and three retail branches.
The
Group
currently
specializes
in
producing
steel
sheets

steel
pipes
and
other
construction
materials
to
serve
industrial
production
and
civil construction.
The Groups main strategy
focuses on:
(1)
Advanced
technology
and
integrated
manufacturing
processes
to
produce
high
quality
products
at
competitive
prices.
(2) Expanding its nationwide
distribution network to sell
products to end-users.
(3) Building a friendly and
community-oriented brand.
Development

timeline

2001

FY2012

2006

FY2013

2007

FY2014
Source: HSG

2008

FY2009

FY201
0

FY201
1

 Hoa Sen JSC, the

precursor of Hoa
Sen Group, was
established with an
initial charter
capital of VND 30
billion
Established Hoa
Sen Steel Sheet JSC

Established
Hoa Sen Building
Materials JSC and
Hoa
Sen
Engineering
Construction
JSC.

the

first

agency

franchise
at

Dak

Nong.

Export

achieved

USD

sales
252

million
Implementing Phase 2 of Hoa
Sen Phu My Steel Sheet Plant
Inaugurated Phase 2 of Hoa
Sen Phu My Steel Sheet Plant

Hoa Sen JSC was

renamed as Hoa Sen
Group

Signed
an
agreement
with
Gemadept
JSC
to
establish Hoa
Sen
Gemadept
International
Port
&
Logistics JSC
Listed 57,038,500
shares on Ho Chi Minh
City Stock Exchange.
Started
construction of
Phase 1 of Hoa Sen
Phu My Steel Sheet
Plant

Increased
chartered capital
from VND570billion
to VND1,008billion

Inaugurat

ed
of

Phase
Hoa

Phu
Steel

Sen
My

Sheet

Plant.

Export

sales
achieved
USD

101

million
The export sales
achieved USD 180
million.
Inaugu
rated
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Page | 5

Chartered capital (VNDbn)

1.008
1.008
1.008
1.008
1.008
Listed on
HOSE
570

570

40
0
250
30

30

120
45

70

Source: HSG

ORGANIZATIONAL STRUCTURE AND

MANAGEMENT

Source: HSG

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Page |
6

The
Group
owns
a
retail
network
consisting
of
133
branches
and
six
base
depots and manages the Hoa
Sen Phu My Steel Sheet Plant.
The Group has five subsidiaries
in which it holds 100%
ownership:

Hoa Sen Steel Sheet One

Member Limited Liabilities
Company

Hoa Sen Building Material

One Member Limited Liabilities
Company

Hoa
Sen
Transportation
&
Engineering
One
Member
Limited
Liabilities
Company

Hoa Sen Nghe An Steel

Sheet
One
Member
Limited
Liabilities
Company

Hoa Sen Binh Dinh Steel

pipe
One
Member
Limited
Liabilities Company
Divestmen
t from
non-core
project to
focus
on
construct
ion
material
business.

Name
Title
Board of
Directors

In 2008,
the
Group
partnered
with
Gemadept
Corporation
to
build
Hoa
Sen
Gemadept
Logistics
&
International
Port
in
the
Cai
Mep Thi Vai port, in which
the
Group
contributed
45%
capital
and
Gemadept
contributed
51%.
The
revised
total
investment
capital
was
reduced
to
USD30
million
instead
of
USD63
million
per
initial
plan. By the end of FY2013,
the
access
road
leading
to
the
port
and
the
ports
design
had
been
completed.
The
Group
thus
far
has
disbursed
VND44.45
billion
and
is
now
seeking
partners
to
transfer its holding as the
Group decided to focus on
its
core
business.

Experi
ence/D
egree

Ownership

Mr. Le Phuoc Vu
Chairman
12
years building and developing the Group
16.47%
Mr. Tran Ngoc Chu
Vice Chairman
25
years of experience in finance, accounting, taxation,
governance
0.09%
Mr. Pham Gia Tuan
Member
10
years of experience in taxation, accounting
0.00%
Mr. Jean-Eric Jacquemin
Member
25 years of experience in
restructuring leading corporation in US, Europe
0.00%
Mr. Tran Quoc Tri
Member
Bachelor of Accounting and Auditing
0.00%
Board of Management
Mr. Tran Ngoc Chu
General Director
25
years of experience in finance, accounting, taxation,
governance
0.09%
Mr. Hoang Duc Huy
Deputy General Director
25
years of experience in organization control
0.01%
Mr. Tran Quoc Tri
Deputy General Director
Bachelor of Accounting and Auditing
0.00%
Mr. Vu Van Thanh
Deputy General Director
Master of Development Economics
0.02%
Mr. Nguyen Minh Khoa
Deputy General Director
Master of Business Administration
0.01%
Mr. Nguyen Van Quy Deputy General Director
Bachelor of Business Administration and
Electricity 0.00%
Mr. Ho Thanh Hieu
Deputy General Director
Bachelor of Accounting and Auditing
0.00%
Supervisory Board
Mr. Le Vu Nam
Head of Supervisory Board
Doctorate in Economics Law
0.01%
Mr. Ly Van Xuan
Member
Associated Professor and Doctor of Medicine
0.09%
Mr. Le Dinh Hanh
Member
Bachelor of Finance-Currency-Credit
0.00%
Source: HSG

The
Groups
management
team
is
well-experienced
and
has
worked
for
the
Group for many years. Mr.
Le
Phuoc
Vu,
Chairman,
has
contributed
significantly
to
the
leadership
and
strategic
development
of
the
Group.
In the early days, when HSG
first started out as a steel
sheet
retailer,
it
faced
challenges
from
many
competitors
who
were
more
financially
capable.
Accordingly,
Mr.
Vu
decided
to
set
his
own
strategic
development
for
the
Group.
As
someone who has ample
understanding
of
the
domestic
market,
he
realized
that
the
development
of
a
retail
network
to
distribute

products
directly
to
endusers
without
going
through
middle
channels
plays
a
key
role
in
the
success
of
the
Group
and
that
the
undertaking
was
necessary
in
spite
of
the
significant
investment
of
time and capital required.

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Page | 7

SHAREHOLDERS AND OWNERSHIP

Major
shareholders
(>1%)
Tam Hy One
Member Ltd
Red River
Holdings
Mr. Le Phuoc Vu
Deutsche Bank
AG London
Tam
Thien
Tam
One
Member Ltd
Deutsche
Bank
Aktiengesel
lschaf
Epsom
Limited
Source:
Company
data

Mr. Le Phuoc
Vu,
Chairm
an,
controls
nearly
40%
of
the voting
shares
of HSG.

Nu
mb
er
of
sh
ar
es
22,000,
000
16,420,6
79
15,867,
152
6,691,9
23
5,650,00
0
4,822,1
23
2,920,6
00

Ow
ner
ship
22.84%
17.05%
16.47%
6.95%
5.87%
5.01%
3.03%

Ownership structure as of
August 22, 2014

Others
30,8%

Tam Thien Tam

One Member
River
Ltd

Tam Hy
One
Member
Ltd
22.8%

Red

Holdings
5.9%
17,1%
Deutsche Bank
AG London Mr.Le Phuoc
Vu
7,0%
16.5%
Source: Company data

Since
its
inception,
HSGs
shareholder
structure
has
been
concentrated
as
the
percentage
of
ownership
of
the
Board
of
Directors (mainly
Mr.
Le
Phuoc
Vu)
fluctuated
between
38%
and
44%.
However,
this
structure
saw
major
change
in
2014
when Mr. Le Phuoc Vu sold 24
million
shares
in
March
2014
and
another
3
million
shares in July 2014 through
agreement
transactions.
After the transaction, Mr. Vu
owns
16.5%
of
the
Groups
shares, down from 44.5%, and
becomes
the
third
largest
shareholder.
Meanwhile,
T
am Hy One Member Ltd.,
a
newly
established
company
where
Mr.
Vu
is
Chairman
and
Managing
Director,
successfully
bought
21
million
shares
in
April
and
one
million
shares
in
August
2014
and
is
currently
the
largest

sharehold
er. Mr. Vu,
therefore,
effectivel
y
controls
nearly
40%
of
the voting
shares.
The
Groups
shares
have
received
much
attention
from
many
domestic
and
foreign
institutio
nal
investor
s.
In
the
past,
the
sharehol
der
structur
e
included
the
participati
on
of
foreign
funds
such
as
STIC
Investmen
ts
from
South
Korea
and
SSF
Capital
from
Malaysia.
These
funds
have
contribut
ed
significan
tly
in
www.VPBS.com.vn

strategic
cooperation
with
HSG
since
2010,
which
was
a
difficult
year for steel producers. In
2010,
the
Group
successfully
issued
11.96
million shares for the three
financial
institutions
(including
STIC
Investments)
and
gained
VND538
billion,
which
provided
funding
to
expand
production
capacity
and
develop
new
products
including
hot
dipped
galvanized
steel
with NOF technology.
As of July 2014, major foreign
shareholders
(holdings
more
than
1%)
own
32%
of
the
Groups
shares.
One
of
the
most
prominent
shareholders
is
Red
River
Holding
(RRH),
well-known
for
their
active
and
influential
approach
to
investing
and
has
made
positive
contributions
to
the
performance
of
the
Group.
At
the
Annual
General
Meeting
of
FY2013,
Mr.
JeanEric
Jacquemin,
Chairman
of
the
Board
of
Directors
of
Red
River
Holding,
was
elected
as
a
member
of
the Board of Directors and
is
responsible for the Investor
Relations
Sub-board
and
Finance Sub-Board, further
contributing
to
the
strategic
development
of
the Group.

Page | 8

COMPANY OVERVIEW
A LEADING STEEL SHEET AND STEEL PIPE
PRODUCER
The
Group
offers
two
core
products:
galvanized
steel
sheet
and
steel
pipes.
Galvanized
steel
sheets
are
the
most
profitable
segment
and
contribute
the
most
to
the
Groups
net
revenues.
From FY2009 to FY2013, total
sales
volumes
grew
at
a
CAGR of 39.7%.
Total selling volumes (tons) Revenues
by product segments in 9M-FY14
700.000

Pla
sti
c
pr
od
uc
ts
2,7%
Steel
pipe
18,6%

600.000
500.000
400.000
300.000
200.000
100.000

Other
GL
products
25,4%
3,5%

Purlin
1,7%

GI
2,1%
Standar
d steel
shee
t
0,5%

HGI
19,1%
0
FY2009
FY2010
FY2011
Source: Annual
report, VPBS
analysis

FY2
012

FY2
013

9MFY14

Prepainted
GI

Pre-painted
Prepainted
CRC
GL
1,0%

11,2%

14,2%
Source: Annual
report, VPBS
analysis

Galvanized steel sheet

(current designed capacity: 1.2
million tons/year)
The Group
has been a
leader
in
the
galvaniz
ed
steel
sheet
segment
since
2008.
However,
its recent

market
share
saw
slight
decline
to fierce competition.

HSGs products

due

From
FY2008 to
FY2013,
sales
volume of
galvanized
steel
presented a
CAGR of
36.7%.
This
segment
includes
galvanize
d
steel
sheet
(GI),
galvalum
Cold
rolled

e
steel
sheets
(GL),
pre-painted
galvanized
steel
sheets
(pre-painted
GI),
prepainted
galvalume
steel
sheets
(pre-painted
GL)
and
pre-painted
CRC
and
hot
dipped
galvanized
steel
(HGI). From
FY2009 to FY2013,
this segment contributed from 78%
to
85%
to
the
Groups
net
revenues,
however,
this
segment
accounted
for
a
slightly
lower
portion
of net revenues of 74% in 9M-FY2014.
Aluminumcoil Zinc alloy
coated steel
sheet

Applying the
modern 6
high singlestand
reversing
cold rolling
technology
Standard: JIS
G3141
Source: HSG

Manufactured
by the NOF
technology
Highly antierosion,
effectively heatresistant and
flexibly
designed
Standard: JIS G3321

Hot dip
galvanized
steel

Apply the
advanced
NOF
technology
Meet
diversified
requiremen
ts in
industrial
and civil
constructio
n

HSG
maintains
its
leading
position
in
the
galvanized
steel
market,
its
market
share far exceeds those of
other
steel
producers
including
Nam
Kim,
Sun
Steel
and
T
on
Phuong
Nam. However, the Groups
market
share
has
declined
in the past two years due to
fierce
competition
in
the
marketplace.

www.VPBS.com.vn

Page | 9

Market share of galvanized

steel producers
thousand
Other
companies
tons
Nam Kim
1.600
1.400
1.200
1.000
800

29%

Ton Phuong Nam Sun

Steel
HSG
HSG market
share
48%
41%
39%
37%
37%
42%

34%

36%
30%
24%

21%

600

18%

400

12%

200

6%

0
2008

2009

2010

2011 2012

0%
2013 8M2014

Source: VSA. Note: Excluding sales

volume of Perstima Viet Nam as its
products do not serve
construction industry

capacity:
HSGs
galvanized
steel pipe
is
highly
regarde
d by the
market.
The
Group
gained
8M2014
market
share of
19.8% in
steel pipe.

Steel pipe (current designed

279,000 tons per year)
This product was launched in
2009 and contributed from 7%
to 13% of net revenues
from
FY2009
to
FY2013.
In
9MFY2014,
this
segment
accounted
for
18.6%
of
net
revenues.
Management
attributes
this
to
the
additional
capacity
of
steel
pipe
lines
from
the
first
quarter
of
this
financial
year.
This
may
explain
the
lower
portion
of
galvanized
steel
sheet
in
net revenues in 9M-FY2014
since additional steel sheet
production
lines
operated
later in the year than the
steel pipe lines.
This
product
segment
includes black steel pipe
and
galvanized
steel
pipe,
which
enjoys strong demand and is
a
highly
regarded
product.
From
FY2009
to
FY2013,
sales
volume
of
steel
pipes
achieved a remarkable CAGR

of
50.7%.
Despite
the
late
entry
into
this
competit
ive
segment
,
the
Groups
steel
pipe
compete
s
well
with
other
wellknown
producers
such
as
Hoa
Phat
and
Seah
VN.
Its
market
share
grew
rapidly
throughout
the year to
capture
19.8%
in
8M2014, up
from 14.5%
in
2013.
This
is
a
remarka
ble
achieve
ment
consideri
ng
that
the
steel
pipe
market
is
fragmen
ted
and
the
level
of
competit
ion
is
much
fiercer
than
the
galvaniz
www.VPBS.com.vn

ed

steel market.

Market share of steel pipe

producers
Other companies Viet Duc SeAH
VN
thousand tons Hoa Phat
HSG HSG
market share
900

25%
20%

720

20%
14%

540
10%
360

15%

11%

8%

10%

5%
180

5%

0
2009

2010

2011

2012

2013

0%
8M2014

Source: VSA

Page | 10

Others
The Group
will
continue to
focus on
core
segment.
Manage
ment
expects
revenue
from
other
products
segment
to
gradually
decline in
the
future.

products:

Other products include

plastic pipe and purlin
which contribute around
8% of the
revenue
structure
from
FY2009
to
FY2013.
According
to
management,
these
products
have
lower
margins
then
its
core
products
(galvanized
steel
and
steel
pipe),
moreover, the Group has
not
expanded
the
capacity
of
these
production
lines
since
FY2008.
Following
the
strategy
to
prioritize
manufacturing
core
products
which
are
more
profitable,
it
is
expected that the growth
rate
of
revenue
from
these
products
will
gradually
decline
in
the coming years.

CAPACITY EXPANSION TO DRIVE

GROWTH
Hoa
Sen
Group's
cold
rolling
line
gets
its
main
input
HSGs
materials
of
hot-rolled
coil
manufactu
(HRC)
ring
from Asian countries such as
process
Japan,
South
Korea
and
Taiwan.
HRC
that
goes
through
this line will in turn be used for
cold rolled coil (CRC).
CRC
is
the
input
material
for
galvanizing
lines
to
produce
steel
sheets,
or
it
could
go
through
an
annealing
furnace
and
slitting
line
and
transfer
to
steel
pipe
line
to
produce
steel
pipe
products.
HSG
products
international

meet
quality

standards
of
the
United
States,
Australia,
and Japan.
In
addition,
HSG is the
first
company

in
Vietnam
to
adopt
NOF
technology
to
produce
galvanized
steel
sheets,
which
can
create
durable
products
with
exceptional
quality
at
a
low cost.
Main
production
lines

Source: HSG

www.VPBS.com.vn

Page
11

Completion
of Phase 2
of Hoa
Sen
Phu
My
Steel
Sheet
plant
enables
the
Groups
to
source
its
own
CRC
materials.

The
Groups
CRC
production
line
is
the
second
largest
in
Vietnam.
The
Group
can
set
competi
tive
price
thanks
to
economies
of scale.

www.
VPBS.
com.
vn

The Group has two production

plants; one in Binh Duong and
one in Ba Ria - Vung
Tau. The plant in Binh Duong
has
operated
since
2004,
with
galvanized
capacity
of
150,000
tons
per
year;
and
color coating capacity of 90,000
tons per year.
The
large
scale
production
plant in Ba Ria - Vung Tau was
constructed
in
2010
under
the name of Hoa Sen Phu My
Steel
Sheet
Plant.
The
plant
has
a
total
investment
of
VND3,071 billion, with a total area
of 16.7 ha, including 87,542 sqm
for
its
workshop
and 690 sqm for its office, an
110KV
transformer
station
and water recycling system.
Phase 1 of the Hoa Sen Phu
My
Steel
Sheet
Plant
includes
the
following
production
lines:
cold
rolling
lines
of
400,000
tons
per
year;
hot
galvanized line of 450,000 tons
per
year;
galvanized
lines
of
220,000
tons
per
year;
and
color coating line of 180,000
tons per year.
After
the
completion
of
Phase 1 in 2011, the total
capacity
of
galvanized
steel
products
reached 820,000
tons/year.
However,
its
cold
rolling
lines
only
had
combined capacity of 580,000
tons/year.
In 2013, the Groups started
the construction of phase 2
with a total investment of
VND1,344
billion,
which
is
financed
by
long-term
debt
and retained earnings. The
project
was
completed
in
August
2014.
By
then,
HSG's
production
capacity
had

increased
significant
ly
as
cold
rolling
capacity
reached
980,000
tons/year;
galvanize
d
capacity
reached
1,220,000
tons/year;
color
coating
capacity
reached
420,000
tons/year
.
The
Groups
vertical
investme
nt
to
integrate
the
value
chain has
essentiall
y
been
comple
ted.
Its
worth
noting
that
Phase 2 of
the
project
will
enable
HSG
to
source
100%
of
its
CRC
needs,
therefore,
it will only
need
to
import
HRC.
Being
able
to
fully
selfsupply
CRC
is
a

major
advantage
when
compared to its peers, who
still
depend
on
imports
of CRC. The import tax rate of CRC
is
7%,
while
that
of
HRC
is
0%
(according
to
CEPT
commitments
Common
Effective
Preferential
T
ariff).
In
addition,
with
designed
capacity
of
980,000
tons/year,
HSGs cold rolling lines will be
the
second
largest
after
Posco (1.2 million tons/year)
and
about
five
times
the
capacity of Nam Kim Group
(200,000 tons/year) and Dai Thien Loc
(200,000 tons/year).
When
the
new
cold
rolling
lines
are
put
into
operation
in FY2014, it will take some
time
for
the
testing
period
before
the
production
lines
can
reach their fully designed
capacity. If we assume that
the
utilization
rate
of
the
cold rolling lines is 75% in
FY2015, then the amount of
import
duty
that
the
Group
can save from being able to
self-produce CRC is: 980,000 (designed
capacity) * 75% * USD655 (CRC price) *
7%
(import tariffs) = USD33.7
million. This allows the Group
to set more competitive
prices both thanks to
economies of scale and
preferential tax rates.
According to its development
strategy with a vision to
FY2018, when its sale
volumes
reached one million
tons, the Group expects
to implement a hotrolled strip mill
project
to
further
integrate
its
value
chain.
However,
after
discussions
with
management, we
learned that the Group
chose not to implement

the
project
due to
the
substant
ial
investm
ent
capital
require
ments.
Meanwhi
le, the
Group
could
still
buy raw
material
s from
its
tradition
al
channels
at good
prices. In
addition,
when the

3.3 million tons of hotrolled steel, providing the

Group with
another source of raw
materials.

Formosa
Ha Tinh
project
goes into
operation
in late
2015, the
demand
for
imports of
raw
material
s will be
significa
ntly
reduced
as this
project
can
provide
the
domesti
c
market
with
about

Pa
ge
|
12

NATIONWIDE RETAIL NETWORK TO

DELIVER PRODUCTS TO END USERS
Retail networking expansion (HSGs
target)
Revenues
breakdown by channels in FY2013
Subsidiaries
6,0%
Wholes
ale
16,0%

314
27
4
234
199
159
106

82

93

Export
45,0%

115

108

Source:
Annual
report

Retail
branches
to deliver
products
to endusers
enables
the
Group
to
capture
the
fullest
margin
and
adapt
to
changin
g
market
conditio
ns.

Retail
networ
k
33,0%

Source:
Annual
report

The Groups strategy is to

directly sell its products to
end-users through its own
retail
network,
which
is
widespread
throughout
the
country.
With
centralized management
establishing
general
policies,
the
Group
imposes
strict
quality
control
over
the
products
it
provides
to
their
final
consumers.
This
is
an
important
competitive
advantage
of
the
Group
as
most
steel
producers
do
not
have
their
own
distribution
network
and
rely
mostly
on
independent
distributors.
This
strategy,
however,
does
not
add
value
for
the
company
as
it
needs
to
offer
discount
and

promotio
n
program
s
to
the
retail
outlets
to
encoura
ge
them
to
increase
sales
volume.
Through
its
own
retail
network,
HSG
can
actively
adjust
its
selling
price
to
adapt
to
market
conditio
ns.
Specifica
lly,
in
the
context
of
plummet
ing
raw
material
s
price
as
occurred
in
2009,
steel
producer
s
had
to
reduce
the
selling
prices
of
their
finished
products
while
using
high cost
raw
materials
,
which
www.VPBS.com.vn

eroded
their
profits.
T
o
counter
this
problem,
HSG
rapidly
sold
its
products
through
its
own
retail
network
while
adopting
flexible
selling
prices,
then
use
the
proceeds
to
purchase
the
currently
cheaper
raw
materials.
Whereas
other
steel
producers
were
stuck
with
mounting
inventories
as
they
relied
on other retail outlets.
The
retail
network
accounts
for
around
33%
of
total
revenues. The Group targets
to
have a total of 188 branches
by
the
end
of
FY2018
and
aims
to
build
15
branches
each
year.
The
six
base
depots play an important
role
in
reducing
inventories
that
need
to
be
maintained
at
the
retail
branch
and
reducing
the
pressure
to
borrow
shortterm loans to finance the
inventory.
After
meeting
with
management,
we
learned
that
when
the
Group
opens
a
new
retail
branch,
it
mainly
rents
land
instead
of
buying
in
order
to
take
advantage
of
existing
infrastructure.
Thus
the
cost
of
opening
a
new
branch
is
estimated at VND4 billion.

Page | 13

SALES GROWTH TO BE FURTHER DRIVEN

BY EXPORTS
Galvanized
steel
production
technology
is
not
overly
complex,
the
main
factors
that
differentiate
a
product
of
a
company
are
the
input
costs
such
as
labor
and
electricity
in
which
HSG
has
a
competitive
edge
on
the
export
markets
as
it
benefits
significantly
from
low labor costs.
Domestic and export volumes Export
revenues (USDmn)
th
ou
sa
nd
tons
700

300

Domestic
volumes

252
250

Export
volumes

200

600

342

500

180

150

101

100

400

354

300

253

299

200

50

30

281

100

234
160

212

280
180

101
30
6
FY2009
FY2010
FY2011
FY2010
FY2011

Source: Annual reports

0
FY2012
FY2012

FY2013 9M-FY14 FY2009

FY2013
9M-FY14

Source: Annual reports

HSG
has
built
a
strong
reputation
in
the
export
markets
as
the
last
two
years
have
witnessed
significant
increases
in
both
export
volume
and
value.
From FY2009 to FY 2013, the
export
revenues
and
export
volume
grew
at
CAGR
of
161%
and
158%,
respectively.
The
proportion
of
export
revenue as a percentage
of
total
revenue
increased
from 3.4% in FY2009 to 41.1% in 9M-

FY2014.
Export is
good sales
channel in
times of
slowdown
in
domestic
consumpti
on. The
main
drawback
is antidumping
lawsuit in
export
markets.

The Group is seeking to

diversify its export markets
to reduce reliance on some
markets.
HSG
exports
most
of
its
products
to
ASEAN
countries
to
serve
the
construction
industry.
The
Group
expects
to
reap
benefits
from
the
lowering
of
intraregional
tariffs
through
the
Common Effective Preferential
Tariff
(CEPT)
Scheme
for
Asean
Free
Trade
Area.
However,
it
is
difficult
to
quantify
these
benefits
as
HSGs
products will be up against
its counterparts from other
Asean
countries.
Moreover,
ASEAN
countries
could
still
initiate
anti-dumping
investigations
should
a
large
quantity
of
products
with
cheap
prices
flood
into
their country.
HSG also plans to boost more
exports to major markets in
other regions such as the
U.S.,
Australia
and
Europe.
These
markets
are
highly
demanding
in
terms
of
product
quality,
moreover,
high
transportation costs and
prolonged
transit
time
are
also
challenging
factors
that
the Group needs to take
into
account
when
choosing
to
export to these markets.

www.
VPBS.
com.
vn

Maintaining
high
sales
volume
is
the
Groups
priority
and
boosting
exports
will
be
the
main
growth
driver
to
keep
sales
volumes
going.
Exports
yield
lower
profit
margins
due
to
high
transport
costs,
however,
help HSG to maintain their
high
sales

volume
during
the
offseason
construct
ion
period,
particular
ly
the
first
quarter
(Lunar
New Year)
and
third
quarter
(rainy
season).
In
addition,
the Group
will
gain
revenue
in
foreign
currency,
which
helps
reduce
its
exposure
to
exchang
e
rate
risks.

Pa
ge
|
14

HSG
can
compete
directly
with
big
companies
in
the
region
as
its
products
are
internationally
certified
and
price
competitive.
Further,
Vietnam's
geographic
location
in
the
region
can
help
the
Group
ship
large
orders
quickly
to
other
ASEAN
countries.
However, The Group may face
two major challenges:
Fluctuations
rate.

in

exchange

The
Group
needs
to
heavily
borrow
in
USD
to
import
raw
material,
thus
any unfavorable movements
in
VND/USD
exchange
rate
will have a major impact on
the Groups bottom line.
However,
the
Group
will
also
benefit
from
this
currency depreciation as it
receives
export
revenues
in dollars.
The
Groups
USD-denominated
loan accounts for 70 - 80% of
total outstanding loans and the
interest
rate
differentials
between
the
USD
and
VND
loans
are
about
4%
-6%
per
year.
Therefore,
even
if
the
VND
depreciates,
the
Groups
interest
expense
is
still
lower
compared
to
borrowing entirely in VND.
Trade disputes in
export market.

the

Trade dispute is a concern for

steel companies exporting to
ASEAN countries. Many steel
associations
in
other
countries,
such
as
Thailand
and
Malaysia,
filed
letters
of
complaint
regarding
the
mounting

steel
imports
from
Vietnam.
Although
these
filings
only
convey
concerns
regarding
possible
damage
to
their
domestic steel industries,
it
does
reflect
the
high
level of protection of their
steel industries.
As
Vietnams
steel
products
are
offered
at
attractive
prices,
they
have
certain
competitive
advantages
in
the
export
market,
which
means
that
a
large
quantity
of
products
with
cheap
prices
flooding
into
the
country
could
spark
anti-dumping
investigations.

FINANCIAL
PERFORMANCE
COST ANALYSIS
Total production costs by factors
(FY2013)
SG&A and financial
expenses (% net revenues)
Outso
urcing
Depreciati
on
8.7%
1,8%
Human
resourc
es
3,4%

Others
3,4%

16%
14%
12%
3,5%

Administrative
expense/Revenues
Selling
expense/
Revenue
s
FX
loss/Reven
ues
Interest
expense/Revenues
3,0%

10
%

Raw
materials
8%
82,7%
6%
4%
2%

4,3%
4,1%
3,0%
2,8%

2,3%
3,8%

2,6%

4,2%

3,8%
2,1%0,7%

3,4%

3,5%

3,4%

3,0%
4,2%
0,7%
1,4%

0%
FY2009
FY2010
FY2011
FY2012
FY2013
Source: Annual report, VPBS analysis Source: Annual report,
VPBS analysis

www.VPBS.com.vn

Page | 15

The
Groups
cost
structure
is relatively stable over the
years, in which, the cost of
raw
materials
(mainly
HRC)
has accounted for over 80%
of total production costs, so
fluctuations in the HRC price
have a major impact on the
Groups profitability.
Declines in net FX loss
interest expense

and

Financial
expenses
mainly
consist
of interest
expense
and
foreign
exchange
losses.
The
Group
experienced
a
surge
in
interest
expense
in
FY2010
as
interest
rates
started
trending
up
after
the
interest
rate
subsidy
program ended in 2009. In
addition,
in
2010,
the
State
Bank
of
Vietnam
devalued
the
exchange
rate USD/VND
three
times.
The
Group
has
to
heavily
borrow
foreign
currency
to
import raw material, HSG has
to
shoulder the additional costs
arising from the revaluation
of
its
loans.
From
FY2012,
net
FX
loss
experienced
major
declines
as
revenue
gained
from
export
helped
the
Group partly offset FX loss,
moreover,
interest
expense
also
declined
thanks
to
the
interest rate cuts.
Higher SG&A expenses than
industry averages
As
the
Group
has
its
retail
network
and
increasing
number
employees,
its
selling
administrative

own
an
of
and

expenses
of
total
revenue stay fairly high
above
the
average
of
the
steel
industry.
The
Groups
SG&A
accounted
for
6-7%
of
net
revenue
from FY2009 to FY2013, which
was
higher
than
industry
average
of
3-5%
of
net
revenue.
S,G&A
expenses
are
expected
to
remain
high as the Group expands
its
retail
network,
which
is
costly
to
operate
as
the
Group has to shoulder the
additional
staff
cost,
outsourcing
services cost. In addition,
the
Group
sponsors
for
many
television
programs
and
charitable
activities
as
part
of
the
marketing
effort
to
consolidate
its
brand
within
the
industry,
which
also
push up its SG&A expenses.

GROWTH
Steady growth of
revenues but unsteady
net profits
From FY2009 to FY2013, net
revenues exhibited remarkable
growth at CAGR of
42.8%,
while
sales
volume
during
this
period
achieved
CAGR of 39.7%, indicating that
growth
in
revenues
was
mainly
driven
by
growth
of
sales
volume.
However,
operating
profits
grew
at
slower
rate
with
a
CAGR
of
26.2% during the same period
as
the
Group
faced
certain
difficulties
regarding
cost
management.
FY2011
net
profit
declined
by
25.3%
y-o-y
due
to
soaring
raw
material
cost
and
exchange
rate
losses.
In
addition,
the
rising
interest
rates
environment
and
a

distressed
stock
market
made
it
impossible
for
the
bond
issuance
of
VND500
billion,
which forced the Group to
resort
to
borrowing
loans
and
further
pushed
up
interest
expense.
In 9M-FY2014, the Group recorded
net revenues of VND10,966 billion,
up
28.1%
y-o-y,
fulfilling
78.3%
of
the
managements
target.
The
first
nine
months
saw
the
sharp
increase
of
cost
of
goods
sold
and
selling
expenses.
Consequently,
net
profits
reached
VND281.5
billion,
down
sharply 47.7% y-o-y and fulfilling
46.9% of the target.

www.VPBS.com.vn

Page | 16

Net revenues (VNDbn)

Net profits (VNDbn)

14.000

700

12.000

600

10.000

500

8.000

400

6.000

300

4.000

200

2.000

100

0
FY2009
FY2010
FY2011
FY2010
FY2011

FY2012
FY2012

FY2013 9M-FY14 FY2009

FY2013 9M-FY14

Source: Annual report, VPBS analysis Source: Annual report, VPBS

analysis

Current assets will

account for greater
portion in the asset
structure
From
FY2009
to
FY2013,
equity
grew
at
a
CAGR
of
23.9%
with
primary
contribution
from
retained
earnings.
Total
assets
grew
at
a
CAGR
of
30.8%.
In
FY2012,
current
assets
dropped 15% y-o-y as the
Group proactively reduced
inventory to pay off shortterm loans.
In
the
assets
structure,
current assets accounts for a
stable
proportion
of
50%
of
total
assets.
However,
in
FY2013,
current
assets
accounted for 59% due to 96%
y-o-y
increase
in
inventory,
which
must
be
maintained
at
high
level
in
order
to
meet
the
demand
of
the
domestic
and
export
market.
In
the
past
few
years,
the
Groups
most
prominent
investment
was
the
Hoa
Sen Phu My project. Phase I
of
the
project
was
completed
in
2011
and
Phase
2
was
completed
in
2014.
The
Group
stated
that its vertical investment

process
(which
focuses
on
completing
the
value
chain
of
production)
will
essentially
be
completed
by the end of 2014.
Going
forward, the Group will focus
on the expansion of its retail
network,
and
possible
construction of its production
plant abroad.
From FY2015, we expect the
proportion
of
long-term
assets in the asset structure
to
decline
after
the
completion
of
phase
2,
while
the
proportion
of
short-term
assets
will
increase
due
to
the
increase
of
inventory
and accounts receivable
to
accommodate
the
expansion
of
its
domestic
and export market.
Shareholders equity Total assets
VN
Db
n
3.00
0

Other
equiti
es
Share
Capital

2.40
0

10.0
00

6.00
0

1.2
00

Current assets Noncurrent assets

8.00
0

1.8
00

600

Retained
Earnings
VN
Db
n

4.00
0
FY2009
FY2010
FY2011

2.0
00

FY2009 FY2010 FY2011 FY2012

FY2013 9M-FY14

0
FY2012 FY2013 9MFY14
Source: Annual report, VPBS analysis Source: Annual
report, VPBS analysis

www.VPBS.com.vn

Page | 17

EFFICIENCY AND PROFITABILITY

Flexible
structure
of
USD/VND
denominated
loans
to
optimize
borrowing demand
The
Group
uses
significant
short-term
debts
to
finance
its
working
capital
while
keeping cash balances at
minimum.
However,
the
Group
has
a
certain
advantage
over
its
peer
by
maximizing
the
use
of
debts with lower borrowing
costs.
In
the
short-term
debts
structure, USD denominated
loans accounted for 80.6% of
total
outstanding
loans
by
the
end
of
FY2013.
Management
will
actively
adjust
the
portion
of
USD
and VND denominated loans
to
take
advantage
of
favorable
interest
rates.
As
stated in the FY2013 annual
report,
interest
rates
for
short-term
interest
rates
of
USD loans fluctuate between
3% and 6% while that of VND
loans
are
between
9%
and
11%.
The
Group
heavily
borrows
USD
loans
to
purchase raw materials and
utilize
exports
revenues
to
pay off debts.
T
o
better
assess
management
efficiency
in
using
short-term
assets
and liabilities to
generate
cash,
we
use
the
cash
conversion
cycle
(CCC)
to
reflect
management
policies
related
to
accounts
payables,
account
receivables
and
inventory.
Cash conversion

cycle of HSG

240
days

Payable days
outstanding
Inventory
days
outstanding
Receivables
outstanding

Cash conversion
cycle of steel
companies

190
Cash
conversion cycle

200

140

150

90

97

117
68

66

79

FY2011 FY2012 FY2013

250

100
50

40

-10

HPG

-60
FY2009
FY2010
FY2011
FY2012
FY2013
Source: Annual report,
VPBS analysis

POM

NKG

VGS

DTL

TLH HSG

Source: Annual report, VPBS

analysis

The Group offers a 15-20 day

credit policy for its customers
and
major
partners,
the
receivables
days
outstanding
staying
relatively
stable
over
the
years
reasonably
reflects this policy.
CCC
surged
to
117
days
in
FY2010
as
inventory
days
outstanding
peaked
at
133
days,
which
was
due
to
the
mounting of raw material
inventories caused by the
rotational
power cut from 6 to 8 days
in
three
consecutive
months
amidst
construction
season.
CCC
was
shortened
significantly
in
FY2012
as
the
Group
started
to
boost
export
activities,
thereby
rapidly
reducing
inventories.
The
Group
can
also
utilize
its
good
relationship
management
with
supplier
to
extend
payable
days
to
accommodate
sufficient working capital.
In FY2013, CCC of listed steel
companies
in
Vietnam
averaged
around
98
days,
which
was
higher
than
that
of 79 days of the Group. We
believe this is a direct result
of
sustainable
and
high
sales volume, providing a
stable source of revenue,
therefore, the liquidity risk
of
the
Group
is
still
manageable.

www.VPBS.com.vn

Page | 18

ROE and ROA

ROE

Dupont analysis
Asset turnover

ROA

Asset/Equity

8x

30%

Net profit
margin

6,69%

25%
6x
20%

4,40
%

15%

4x

3,3

2,6

10%

4,94%

2,7

3,65%
2,6
1,96%

3,2

1,8
0%
FY2009
FY2010
FY2011
Source: Annual
report, VPBS
analysis

x
FY20
12

FY2013

1,2

1,4

4%

1,9

1,6

FY2009
FY2010
FY2011

6%

2%

2x

5%

8%

0%
FY2
012

FY2
013

Source:
Annual report,
VPBS analysis

ROE and ROA experienced steep

declines from FY2009 to FY2011
as equity and asset increased
significantly
following
the
implementation of the Hoa
Sen Phu My project
(Phase
1)
while
net
profits
did
not
keep
up
with
the
same
growth. ROE and ROA hit the
lowest
in
FY2011
due
to
deteriorating net margin in
the
context
of
the
economic
downturn.
However,
such
profit
margin
was
still
higher
than
the
average
of
the
steel
industry
in
such
a
difficult year as in FY2011.
Higher
gross
margins
than
galvanized
producers;
gross
worsened in 9M-FY2014

profit
other
steel
margin

The
Groups
gross
margin
dropped
to
its
lowest
in
FY2011,
reflecting
the
challenging
macro
environment
in
which
it
operated,
and
recovered
steadily
through
FY2013,
by
which
time
gross
margin
improved to 14.5%.

Moreover, we saw that gross

margin
of
HSG
was
higher
than
other
galvanized
steel
and
steel
pipe
producers
like NKG and VGS. The past
two
years
saw
the
industry
landscape
become
increasingly
competitive,
most
steel
companies
gross
margin
declined
as
they
had to lower selling prices
to maintain market share.
HSG
follows
the
just
in
time
inventory
management
technique
closely,
meaning
that
it
only
buys
just
enough
raw
material
inventory
for
their
production
plan.
However,
it
still
monitors
closely
the
movement
of
HRC
prices
and
will
actively
speculate on raw material
if
the
price
movement
is
favorable.
The
Group
imported
substantial
amount
of
HRC
in
the
last
few
months
of
2013
in
anticipation
of
bounce
back
in
HRC
price
once
global
economy
outlook
improves.
However,
HRC
price
still
proceeded
on
a
downtrend,
consequently,
the
use
of
high
cost
raw
material
inventories
coupled
with
lower
selling
prices
depressed
gross
margins
in
9M-FY2014
to 11.4% from 15.9% in 9M-FY2013.

www.VPBS.com.vn

Page | 19

Gross margin of galvanized steel & steel

pipe producers
HSGs profit
margins
HSG

VGS
25
%

NKG
25%

Gross
margin
Operat
ing
margin

EBITDA
margin
PBT margin

20
%

20%

1
5
%

15%
10%

1
0
%

5%
0%
FY2009
FY2010
FY2011

5
%

FY2009 FY2010
FY2011

FY2012 FY2013 9MFY14

0
%
FY2012 FY2013
Source: Annual report, VPBS analysis Source: Annual report, VPBS
analysis

LIQUIDITY AND SOLVENCY

Liquidity ratios
Cash ratio

FY2009 FY2010 FY2011 FY2012 FY2013

0.04x
0.02x
0.04x
0.03x
0.04x

Current ratio

1.04x

0.96x

0.88x

0.97x

0.97x

Quick ratio

0.40x

0.36x

0.30x

0.40x

0.28x

Total debt/Equity

1.17x

1.29x

1.63x

1.31x

1.54x

Total debt/Total assets

0.48x

0.45x

0.49x

0.49x

0.50x

Debt/EBITDA

2.42x

3.05x

3.78x

2.57x

2.94x

Debt/EBIT

3.21x

3.87x

5.19x

3.49x

3.93x

EBITDA/Int. Exp.

5.63x

4.36x

2.66x

3.03x

6.89x

EBIT/Int. Exp.

4.24x

3.45x

1.94x

2.23x

5.16x

Source: Annual report, VPBS analysis

Despite its strong growth

in
revenues,
the
Group
keeps
its
cash
at
minimum
to
accommodate
on-going
business
operations,
therefore,
the
cash
ratio
stays low from
0.2x
to
0.4x.
Current
ratio
and
quick
ratio
worsened
slightly
as
a
result
of

increasing
short-term
borrowing
to
finance
its
working
capital,
mainly
inventories.
T
otal
debt
to
equity
and
other
solvency
ratios
deteriorated
especially
in
FY2011
due
to
substantial
borrowing that was used to
finance its Hoa Sen Phu My
Steel
Sheet
Plant
project
amidst rapidly rising interest
rates. These ratios improved
in
FY2012
as
the
Group
increased
its
export
revenues
to
partially
finance
for
its
operations.
From
FY2013,
the
Group
implemented
Phase
2
of
Hoa
Sen
Phu
My
Steel
Sheet
project,
as
the
project
was
mostly
financed
with
long-term
borrowings,
we
expect
the
Groups
interest expenses to surge
in the next two years.

www.VPBS.com.vn

Page | 20

FORECAST ASSUMPTIONS
Selling

volumes

Projected
Thousand tons

sales volume

FY2013
FY2016E

FY2014E
FY2017E

FY2015E
FY2018E

529
Galvanized steel sheet
1,239

608

729

15%

20%

20%

20%

186

205

225

248

273

88%
10%
Growth (% y-o-y)
Source: VSA, VPBSs projection

10%

10%

10%

Growth (% y-o-y)
Steel pipe

99

875

1,050
18%

Galvanized steel sheet:

For
FY2014,
we
project
the
y-o-y
growth
rate
of
galvanized and color coated
steel
sheet
of
HSG
at
1%
to
reach
608 thousand tons. In FY2015,
higher
volume
growth
could
be
achieved
in
tandem
with
demand
recovery.
Possible
concerns
regarding
growth
rate
include
new
entrances
or
capacity
expansion
of
HSGs
competitors
and
anti-dumping
lawsuits
in
HSGs
export
markets.
T
o
reflect
the
impacts
of
these
factors, we assume that the
growth rate of sales volume
will slow down to reach 18%
in FY2018.
Steel pipes:
For FY2014, we project the yo-y growth rate of steel pipe at
88%
to
reach
186
thousand
tons.
It
will
be
difficult for HSG to maintain
this
high
volume
growth
rate
in
FY2015 unless it has plans to
expand
its
production
capacity.
By
FY2018,
we
expect
its steel pipe lines to work

at
nearly
full
capacity
and
it
sell
all
its outputs.

designed
is
able
to
of

Average selling price (ASP)

Selling
price
depends
on
supply and demand in the
market
and
raw
material
prices
(mainly
hot
rolled
coil).
Raw
material
prices
are
sensitive
to
changes
in
global
and
domestic
demand,
which
are
affected
by
economic
conditions.
Despite
significant fluctuations in
the
short
term,
steel
prices
tend
to
rise
over
the
long
term
to
reflect
the
prospects
of
the
global
economy
and
stronger demand.
In 9M-FY2014, ASP of steel sheet
segment
reached
VND18.4
million/ton, and that of the steel
pipe
segment
was
VND15.2
million/ton.
From
FY2015,
we
assume that ASP will
recover
by
1%-2%
each
year
as
commodity prices including
hot-rolled
and
coldrolled
steel
are
expected
to
recover gradually due to
better
global
economic
outlook
after
three
years
of downturn.

www.VPBS.com.vn

Page | 21

Gross profit margin

HRC price and quarterly gross
margin
HRC price
USD/ton
margin (exc. Depreciation)
1.000

Gross marginGross
40%

800

30%

600

20%

400

10%

200

0%

-10%

Source: Quarterly reports,

Bloomberg, Note: arrows
indicate the timing of
speculation

HSGs
gross
margin
was
significantly
influenced
by
major
movements
in
HRC
price
since
it
is
fully
dependent on imports
of
this
product.
Should
the
price
movement
become
favorable,
the
Group
will
see
major
improvements
in
its
gross
margin.
The
Group
publicly
disclosed
that
it
imported
large
amounts of HRC in April 2009
when HRC price reached an
all-time
low,
which
should
be
able
to
satisfy
nearly
two
quarters
of
production.
The
cheap
source
of
raw
material
boosted
gross
margin
as
high as 35% in 4Q-FY2009.
From FY2010 to FY2012, we
believe the Group remained
cautious
and
followed
closely
the
just
in
time
model
or
had
minor
speculative
activities
as

this
period
saw
wild
fluctuations
in
HRC
prices.
Gross
margins
plummeted
to
stay
around
10-14%.
In
general, it was difficult for
most
steel
producers
to
achieve
gross
margins
as
high
as
the period before 2009. This
is
attributable
to
the
fact
that
the
operating
environment
of
the
steel
industry
took
a
worse
turn:
high-cost
raw
materials
coupled
with
significant
lower
selling
prices
to
stay
competitive
in
the
context
of
plummeting
domestic
demand
and
mounting
inventories.
This
has
become
a
longstanding
issue
of the industry.
In
the
Annual
General
Meeting
held
in
January
2014,
the
Group
stated
that
it
imported
substantial
amount
of
HRC
to
satisfy
two quarters of production,
however,
wrong
timing
of
speculation
depressed
the
Groups
gross
margin in 9M-FY2014 from
15.9% to 11.4% in 9M-FY2013.
The
Group
actively
pushed
sales
through
its
retail
channel to provide a way
out
for
this
high
cost
inventory.
For
the
final
quarter
of
FY2014,
to
be
on
the
conservative
side,
we
anticipate
gross
margin
to
stay
unchanged
at
11.4%
as
average
selling
prices are expected to stay
unchanged
or
may
decrease
in
order
to
stimulate
sales
of
substantial
finished
inventory.
Steelfirst,
a
leading
metal
industry
trade publication, expects

the major HRC price trend

in
the
remaining
quarter
of
2014
to
stay
flat
or
even decline slightly amid
concerns
that
Chinese
steel
producers
are
ramping
up
production
in
spite
of
sluggish
demand
due
to
the
Governments
tightening measures.

www.VPBS.com.vn

Page | 22

We
recognize
the
difficulty
in
forecasting
the
Groups
gross
margin
for
FY2015
onwards as this is highly
dependent
on
the
movement
of
HRC
price
and
most
importantly
the
Groups
decision
on
whether
or
not
to speculate
and the
timing
of
the
speculation.
For
the
forecast
period,
we
expect the Groups gross
margin
to
recover and increase by 1% per
year
in
FY2015
and
FY2016,
due
to:
(1)
the
Group
is
capable
of
fully
self-supplying
its own source of CRC; (2)
exits
of incompetent
galvanized
steel
producers,
who
are
still
dependent
on
imports
of
CRC;
(3)
improvements
in
domestic
steel
demand,
which
should
tip
the
favor
in
the
supply
side
and
lead
to
favorable
movements
of
steel
prices.

Selling, general and

administrative expenses
(SG&A expenses)
SG&A
expenses
primarily
include
staff
costs,
office
supplies
and
outsourcing
services,
among
others.
In
the
forecast
period,
we
expect that SG&A expenses
will
remain
stable
at
7%
of
revenue
as
the
Group
pursues
an
aggressive
expansion
strategy
in
both
domestic
and
international markets.

Financial
expense

income

and

Financial
income
consists
of
interest
income
and
foreign
exchange
gains
arising
from
cash
and
accounts
receivable
in
foreign
currencies that HSG gains
through
export
activities.
Financial expenses mainly
consist of interest expense
and foreign exchange
losses.
Interest
expenses
are
calculated
based
on
the
short-term
and
long-term
outstanding
loans.
Exchange
rate
loss
arises
from
the
revaluation
of
USD-denominated
loans
by
the
end
of
the
year.
The
Group
has
a
substantial
amount of USD-denominated
shortterm
loans.
T
o
reduce
the
exchange
rate
risk,
HSG
increased export activities
to
partially
generate
sources
of
foreign
currency.
However,
export
revenues
only
accounted
for
45%
of
net
revenue,
therefore,
the
Group
is
still
exposed
to
substantial
exchange
rate
risk.
For
the
forecast
period,
we
evaluate
the
exchange
rate
loss
arising
from
the
revaluation
of
foreign
currency
loans
by
assuming
that
VND
depreciates by 2% each
year
due
to
incentives
of
the
government
to
stimulate
exports.

Tax rates
The Group has an obligation
to
pay
income
tax
at
the
rate
of
25%
on
taxable
profit.

The
provisions
of
the
Investment
Incentive
Certificate
allow
HSG to be
exempt
from
business
income
tax
for
three
years
starting
from
the
first
year
it
generates
a
taxable
profit
(2004),
and
they
are
entitled
to
a
50%
reduction
in
business
income
tax
for
seven
years
thereafter.
This
means
that
the
Group
was
subject to a tax rate of 25%
in
1Q-FY2014,
and
22%
from
2QFY2014. The corporate tax rate is
set
to
be
lowered
further to 20% from FY2016.

www.VPBS.com.vn

Page | 23

Balance

sheet:

We make the following key

assumptions with regard to
HSGs consolidated balance
sheets:

Days sales outstanding:

remaining stable at 20 over
the forecast period.

Days inventory
outstanding: remaining
stable at 93 over the
forecast period.

Days payable
outstanding: remaining
stable at 42 days over the
forecast
period.

Current assets and

current liabilities:
remaining stables as
percentages of
related consolidated
revenues and expenses
over the forecast period.

Capex: After the completion

of Phase 2 of Hoa Sen Phu My
Steel Sheet plant
in FY2014, the Group will
have essentially finished
its vertical investment
process. We assume that
the Group will build 15
retail branches each year
from FY2015 with capex for
each branch of about VND4
billion. In addition,
HSG will spend around
VND30 billion for the
ongoing maintenance of its
machinery equipment.

Borrowings: short-term
borrowings remain over 20% of
revenues in FY2014,
and will gradually
decline from FY2015 as
the Groups liquidity
position
improves while long-term
borrowings will be

gradually paid off from

2014.
We expect HSG to
utilize its retained
earnings to finance
minor capital
expenditures in the
future.

VALUATION
Based
on
the
discounted
cash
flow
(DCF)
and
multiples
approaches,
we
derived
a
fair
value
of
HSG
at
VND46,500 per share.
Valuation method
Fair price
(VND/share)

Weight

DCF

40,300

40%

16,120

P/E at 15.5x

61,449

30%

18,435

39,833

30%

TEV/EBIDTA at 8.0x
11,950
Target price

46,500

DISCOUNTED CASH FLOW

Our
a

DCF

model

target

suggests

price

of

VND40,300 per share Our

inputs

for

the

DCF

model

are as follows:

The
risk-free
rate
is
taken
from
the
yield
of
five-year
local
currency
Government bond yields,
which is equivalent to 5.7%.

The
expected
market
return
is
expected
to
be
15.0%.

Beta
is
estimated to be 1.2.

Cost of equity is
estimated to be 16.7% by
using the capital asset
pricing
model (CAPM).

Weighted average cost

of
capital
(WACC)
is
calculated to be 11.3%.

Terminal
growth
rate
is
accessed to be 3%.

www.VPBS.com.vn

Page | 24

COMPARABLE MULTIPLES
Compared
to
its
regional
peers,
we
noted
that
HSG
delivered
superior
2013
ROE
and
ROA
and
gross
profit
margin. Accordingly, we derived
HSGs targeted P/E at 15.5x and
EV/EBITDA
at
8.0x
based
on
its
regional peers.
VNINDEX
2014E
14.6x
10.3x

Valuation
multiples
Relative
P/E
EV/EBITDA

Selected

HSG's fair
value
Target
(VND/share)
15.5x
61,449
8.0x
39,833

1.06
0.77

regional peer

Data as of 9/19/2014.

Source: Bloomberg, VPBS

Vietnams listed steel companies

Company
name

FY2013
Market
Capital ROA
ROE
Net sales
VNDbn

HPG
Hoa Phat
Group

VNDbn

6M - FY2014

% y-o-y

NM
0.8

%margin
VNDbn

26,987 9.6% 22.2%

13,197
59%
1,863 NM
2.3
NA

% y-o-y

%margin

VNDbn

Pomina Steel Corp

TLH

Tien Len Steel Corp

710 6.3%
2.9%
0.8

DTL

Dai Thien Loc Corp

541 0.9% 2.6% 950 -2% 81.8 16% 8.6%

0.7
448
2.0

NKG
14%

411 2.3%
1.2%
2.9

Nam Kim Steel JSC

NM
NA

SMC

SMC Investment Trading 301

0.2%

VGS

Vietnam Germany Steel Pipe

245%

TNA

Thien Nam Trading

224 5.2%
6.8 0.8

5,416

5%

13.2%
1,651
28.2 0.7

NM
0.7

1,787

4.5%
0.5

277 1.1%
1.3%
0.8
13.7%

232.8

13.7%

2%

0.6

0%

219%

-22%

47% 160.5

5,360

4.3%

9.6 2.5

-5%

8% 145.0
-10%

60.5 2%

-9.1 NM

6.7% 47.6-65%

11.2 41% 1.2%

118.5

2.6% 1,154
12.1 0.6
715

72%

13% 110.7

17.1%
2,997
8.9
1.1

1.0%
3.1 18.1

% y-o-y

2,822 85% 21.4%

1,814
87%

POM
NM

VIS Vietnam - Italy Steel

54%0.7%

Trailing
Trailing
Debt to
P/E
P/B
Equity

Gross profits
Net
income

1.2 24.6

6.6%

11.9 -

5.4%

34.5 -

11%

2.7% 9.4 -50%

53.9 5% 4.7% 14.5

8.5%

17.5 -9% 2.5% 1.8

HMC

Hochiminh City Metal Corp

10.1

DNY

DANA-Y Steel

HLA
NM

Huu Lien Asia Corp

KKC

Produce & Trading Metal 93

1.5 4.4

6.7%
1.1

SSM

Steel Structure Manufacture

62%

62
4.6%

BVG
NM

Bacviet Steel

197 2.0%
-2% 0.9%

159 0.8% 4.0%

19.7
0.4
NM
93
32.7NA

27
4.2

NM
3.6

NM
NA
3.9%
13.4 1.0

Median

2.3%
0.7

Hoa Sen Group

Bloomberg, VPBS

www.VPBS.com.vn

4,113
2.6% 2.3

1,061

13%

1,202

-43%

17.5%
6.7%
0.9 5.2

52.9

-35%

-11%

-194.9

48.2 -25% 4.3%

5.0% 4.1 -61% 0.4% 2.8

NM

NM

-277.8 NM

9.3% 12.5 137% 4.5%

13.0%
0.8

11.5 50% 13.4% 4.0

10.6%

86

17%

-21% 19.2%
10% 34%

13.0%

9.3% 27.5%
12.7 1.8

1,114
0.6

278 92% 25.8 99%

NM 69 -24%13.3
0.4

Average

HSG
52%

6.1%
1.7 9.6

6,641

5%

8%
25%

-12.5

NM

8.6%

26%

2.8% 4.0

6.7%

-5% 1.2% 1.8 9.6

792.7

-8% 12% 170.6 -

Data as of 9/19/2014. Source:

Page | 25

SENSITIVITY ANALYSIS
Sensitivity of WACC and
terminal growth rate to a
target stock price
WACC
####

10.7%11.0% 11.3% 11.6% 11.9%

1.0% 42,600

41,600

40,60039,70038,800

2.0%

45,700
41,100

44,400

43,200 42,100

3.0%

49,500

4.0%

54,500
47,500

52,500

50,700 49,000

5.0% 61,300
52,000

58,700

56,200 54,000

48,000 45,20043,900

Sensitivity of changes in assumptions of gross

margin and selling expense
to revenue ratio to a target stock price
% change in assumption of gross margin
#### -1.0% -0.5% 0.0%

0.5%

1.0%

-0.4% 23,800
85,600

39,200

54,700 70,100

-0.2% 19,700
81,500

35,100

50,600 66,100

0.0% 15,600
0.2%
0.4%

31,100 62,00077,500

11,500
73,400

27,000

7,400 22,900

42,400 57,900

38,400 53,80069,300

Sensitivity of % USD denominated loan over

short term loans and VND
devaluation against USD to a target stock
price
% USD denominated loan over short term
loans
####

70.6%75.6% 80.6% 85.6% 90.6%

0.0% 54,300
54,300

54,300

54,300 54,300

1.0%

50,700
50,100

50,500

50,400 50,200

2.0%

47,100
45,900

46,800

46,500 46,200

3.0%

43,500
41,700

43,100

42,600 42,200

4.0%

40,000
37,600

39,400

38,800 38,200

www.VPBS.com.vn

Page | 26

TECHNICAL ANALYSIS
The
technical
chart
shows
HSG
has
been
fluctuating
around
the
MA50,
between
the
highest price at 47,000 and
the lowest price at 41,500.
HSG
is
now
trading
below
the
MA10
and
has
not
yet
generated
any
uptrend
signal. The trading volume
has
recently
been
decreasing;
indicating
HSG
is
still
in
an
accumulation phase.
Therefore, we recommend a
HOLD strategy for HSG at the
time of publishing report.
As of September 19, 2014 HSG
(VND/share)
Horizon analytic 3 to 6 months
3 months highest price 47,000
3 months lowest price 41,500
Current MA50 days 43,900
Current MA100 days43,900
Mid-term resistance level 47,000
Mid-term support level 41,500
Recommendation HOLD

www.VPBS.com.vn

Page | 27

CONCLUSION
We
believe
the
current
restructuring
of the
steel
industry
to
weed
out
incompetent
producers
provides
a
good
opportunity
for
companies
with
competitive
advantages
like
HSG
to
move
forward
and
seize
additional
market
share.
Moreover, Vietnam
is
in
the
process
of
industrialization
and
urbanization,
which
should boost the demand
for
HSGs products.
The Groups key advantage is
its ability to internally source
its CRC needs. FY2014 marks
a
new
milestone
for
the
Group
as
it
will
be
able
to
source
100%
of
its
CRC
requirements
thanks
to
the
completion
of
Phase
2
of
Hoa Sen-Phu My Steel Sheet
plant.
The
extensive
retail network is another
core
competitive
advantage,
which
allows
it to deliver its product to
end-users
and
adopt
a
flexible
sales
program
in
response
to
changing
market conditions.
We
duly
note
that
HSG
still
needs
to
import
100%
of
its
HRC
requirements,
therefore,
it is still exposed to the risk
of HRC price fluctuations as
well as exchange rate risks.
T
o
counter
these
adverse
effects,
the
Group
has
boosted
export
activities
to
gain
more
foreign
currency
sources.
Exports
provide
potential sales channels in

times
of
slowdown
in
demand
during
the
off-peak
construction
season.
Our
major
concern
is
directed
towards
possible
trade
disputes
with
the
Groups
major
export
markets.
We
acknowledge
the
Groups
leading
position
in
the
industry
and
its
competitive
advantage,
however,
the
Group
posted
disappointing
9M-FY2014 earnings results
due
to
wrong
timing
of
raw
material
speculation.
All
factors
considered,
we
recommend investors to HOLD
the stock with our target price
derived
at
VND46,500
per share.

www.VPBS.com.vn

Page | 28

INCOME STATEMENT (VNDbn)

2011A 2012A 2013A2014F 2015F 2016F
2017F 2018F
Revenues
% y-o-y
Cost of goods sold
Gross profits
% y-o-y
SG&A expenses
EBIT
% y-o-y

8,166 10,088
11,760
15,030
17,951
21,470
25,513
29,955
66.7% 23.5%16.6% 27.8%19.4% 19.6% 18.8% 17.4%
7,110 8,683 10,052
13,317
15,725 18,593
22,094
25,941
1,056 1,405 1,708 1,713 2,226 2,877 3,419 4,014
13.4% 33.1% 21.5% 0.3% 29.9% 29.2% 18.8% 17.4%
498
648
842
1,067 1,275 1,524 1,811 2,127
558
758
866
646
951 1,353 1,607 1,887
-2.6% 35.8% 14.3%
-25.3%
47.2% 42.2%
18.8%17.4%

Depreciation & amortization

208
274
374
EBITDA
766
1,031 1,156
Financial income
49
49
Financial expenses
458
409
Net other incomes / (expenses)
Income from associates 0
0
Pretax profits
168
412
% y-o-y
-33.1%
50.6%

291
997

40
48
247
247
19
15
0
0
679
493
144.3%
21.8%

350

356

362

368

1,308 1,715 1,975 2,261

55
65
92
125
260
295
331
389
20
45
--0
0
0
0
746
1,123 1,368 1,624
65.0% -27.4%
51.3%
18.7%

Tax expense
Effective tax rate
Profits after tax
% y-o-y

8
43
98
112
164
225
274
325
4.9% 10.6% 14.5% 22.8% 22.0% 20.0% 20.0% 20.0%
160
368
581
381
582
898 1,094 1,299
-25.6%
129.8%
57.8% -34.5%
52.8%
54.4% 21.8% 18.7%

Minority interest
Net income
% y-o-y

160
368
581
381
582
898 1,094 1,299
-25.6%
129.8%
57.8% -34.5%
52.8%
54.4% 21.8% 18.7%
2.0% 3.6% 4.9% 2.5% 3.2% 4.2% 4.3% 4.3%

% margin

Average number of shares (mn)

99
97
96
96
96
9696
96
EPS (VND)
1,622 3,761 5,941 3,952 6,039 9,325 11,361 13,488
Cash dividend (VND/share)
500
1,000 3,000 2,500 2,000 2,000 2,000
2,000

www.VPBS.com.vn

Page | 29

BALANCE SHEET (VNDbn)

2011A2012A2013A2014F 2015F 2016F 2017F
2018F
Cash & near cash items
128
67
177
124
137
642
1,261
2,522
Short term investments
14
14
14
14 14
Accounts receivables 464
607
548
820
979
1,171 1,392 1,634
Inventories
2,016 1,540 3,020 3,379 3,990 4,718 5,606 6,582
Other current assets
462
392
470
501
589
726
963
1,127
Current assets
3,071 2,606 4,215 4,838 5,710 7,272 9,23511,880
Net fixed assets
2,721 2,585 2,790 3,337 3,071 2,798 2,520 2,237
Long-term investments
58
59
59
59
59
59
59 59
Goodwill
Other long-term assets
66
72
78
69
81
75
69 62
Long-term assets
2,845 2,717 2,927 3,465 3,212 2,933 2,649 2,358
Total assets

5,916 5,323 7,142 8,304 8,92110,205

14,238

11,884

Accounts payable
1,098 484
1,318 1,515 1,789 2,115 2,514 2,951
Short-term borrowings
2,254 2,040 2,814 3,081 3,231 3,650 4,082
4,793
Other short-term liabilities
134
169
207
350
445
559
716
934
Current liabilities
3,486 2,693 4,339 4,946 5,466 6,324 7,312 8,678
Long-term borrowings 645
Other long-term liabilities
Long-term liabilities
647
Total liabilities
Share capital
Capital surplus
Retained earnings
Others
Equity
Minority interest

606
2
611

588
5
593

1,002
5
1,007

711
5
716

102
55
107

1,008 1,008 1,008 1,008 1,008 1,008 1,008 1,008

452
452
452
452
452
452
452
452
343
605
821
961
1,350 2,056 2,957 4,064
(20)
(46)
(71)
(71)
(71)
(71)
(71)
(71)
1,783 2,019 2,210 2,350 2,739 3,445 4,346 5,453

5,916
10,205

5,323
11,884

CASH FLOW STATEMENT (VNDb

2011A2012A2013A
2016F 2017F 2018F
Cash from operation activities
249
452
221
672
945
Cash from investing activities (775) (56)
(479) (903)
(83)
Cash from financing activities
606
(456) 373
30
400
Net changes in cash

81

(59)

Beginning cash balance

50
1,261
Exchange rate fluctuation
(2)

Free cash flow

221
5
226

4,133 3,304 4,932 5,953 6,182 6,760 7,538 8,785

Total liabilities and equity

8,921

Ending cash balance

431
5
436

128
(529)

67
392

115
128
(2)
177
(264)

(54)
67
(5)
124
(489)

7,142 8,304
14,238

2014F 2015F
409

449

(103)
440

(84)

644
(83)

(334) (55)

13

505

618

1,261

177

124

137

642

137
359

642
554

--

1,261 2,522
582

855

www.VPBS.com.vn

Page | 30

RATIO ANALYSIS

2011A
2016F

2012A
2017F

2013A
2018F

Valuation ratios
Price to earnings (P/E)
7.2x
Price / earnings to growth (PEG) 0.1x
Current EV to EBIT
9.5x
Current EV to EBITDA
7.1x
Price to sales (P/S)
0.3x
Price to book (P/B)
1.9x
Dividend yield
1.2% 2.3% 7.0%

10.8x 7.1x
(0.3x) 0.1x
12.7x 8.6x
8.2x 6.3x
0.3x
0.2x
1.8x 1.6x
5.4% 4.3%

2014F2015F

4.6x
3.8x
3.2x
0.1x
0.2x
0.2x
6.1x
5.1x 4.4x
4.8x
4.2x
3.6x
0.2x
0.2x
0.1x
1.2x
1.0x
0.8x
4.3% 4.3% 4.3%

Profitability ratios
Gross margin

12.9%
13.9%
14.5%
11.4%
12.4%
13.4%
13.4%
13.4%
EBITDA margin
9.4% 10.2% 9.8% 6.6% 7.3% 8.0% 7.7% 7.5%
Operating margin
6.8% 7.5% 7.4% 4.3% 5.3% 6.3% 6.3% 6.3%
Net profit margin
2.0% 3.6% 4.9% 2.5% 3.2% 4.2% 4.3% 4.3%
Return on avg. assets
3.1% 6.6% 9.3% 4.9% 6.8% 9.4% 9.9%
9.9%
Return on avg. equity
9.2% 19.4%
27.5%
16.7%
22.9%
29.0%
28.1%
26.5%

Leverage ratios
Interest coverage ratio (EBIT/I) 1.9x
2.2x
7.2x
7.2x
EBITDA / (I + capex)
0.7x
2.6x
1.8x
6.4x
Total debt/capital
61.9%
56.7%
59.0%
54.2%
Total debt/equity
162.6%
131.1%
143.9%
118.5%
Liquidity ratios
Asset turnover
1.4x
1.9x 1.6x
Accounts receivable turnover
17.6x
18.3x 18.3x
Accounts payable turnover
6.5x
8.8x 8.8x
Inventory turnover 3.5x 5.6x
3.3x
Current ratio
0.9x
1.0x
1.0x
Quick ratio
0.3x 0.4x
0.3x

5.2x

3.8x

5.4x

6.8x

0.9x

4.9x

5.9x

6.3x

60.6%
49.7%
153.9%
99.0%

63.5%
47.3%
173.7%
89.8%

1.8x
2.0x
2.1x
2.1x
2.1x
16.6x 21.4x 18.3x 18.3x 18.3x
17.9x 7.6x

8.8x

8.8x

8.8x

3.9x
1.0x
0.3x

3.9x
1.1x
0.4x

3.9x
1.3x
0.5x

3.9x
1.4x
0.6x

3.9x
1.0x
0.3x

www.VPBS.com.vn

Page | 31

GUIDE TO RATINGS DEFINITION

VPBank Securities (VPBS) uses the following
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next 12 months is below -10%.

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Page | 32

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