HOA PHAT GROUP (HPG)
April 3, 2015
COMPANY UPDATE: HOLD
Current price
4/3/2015
(VND)
44,900
Target price
(VND)
50,300
Short-term trading recommendation
BUY
Resistance level
(VND)
50,000
Support level
(VND)
40,000
Bloomberg ticker: HPG VN
Exchange: HSX
Industry:
Steel
Beta
1.11
52w High
(VND)
9/4/2014
62,000
52w Low
(VND)
5/9/2014
43,200
Outstanding shares
(mn shares)
489
Market capitalization
(VNDbn)
21,940
Free-float
(mn shares)
229
6M avg trading volume
(shares)
560,935
Foreign-owned ratio
41.37%
Div.Yield
2015 VPBS Forecast
2014
2013
2012
2011
Net revenues
EBITDA
Net income
LTM:
P/E
P/B
EV/EBITDA
ROA
ROE
2009-14
CAGR
25.7%
23.5%
19.8%
HPG
7.0
1.9
4.9
14.4%
29.5%
2.2%
3.3%
2.2%
2.2%
0.0%
2015F
(VNDbn)
22,139
4,565
2,469
Local peer
(median)
9.2
0.6
8.0
1.7%
4.3%
EPS(VND)
3,369
6,435
4,663
2,386
3,573
2015-19F
CAGR
8.1%
3.7%
7.2%
VN-Index
12.3
1.8
8.5
2.7%
14.5%
Company description:
Established in 1992, Hoa Phat Group (HPG) is one of the
leading private industrial manufacturers in Vietnam.
HPG listed its shares on HSX in 2007.
HPG currently has the largest market shares in
construction steel (19.1 percent in 2014), steel pipe (19.8
percent), and furniture.
2014 results: Net revenues: VND25.5 trillion (USD1.2
billion); Net Income: VND3,144 billion (USD146 million);
Equity: VND11,796 billion (USD549 million).
40%
% 1Y growth
20%
0%
-20%
Local peer index
-40%
Apr-14
Jun-14
Aug-14
VN-Index
Oct-14
Dec-14
HPG
Feb-15
Apr-15
We change our 1-year recommendation to HOLD and have adjusted
our target price for Hoa Phat Group (HPG) stock down to VND50,300
per share based on the following:
Market share gains increase sales volume, but falling prices
hurt margins: HPG’s market shares in both construction steel and
steel pipe continued to increase in 2014 and the company expects
sales volumes to increase significantly for both segments in 2015.
However, lower steel prices will push profit margins down and are
the main driver for lowering our target price.
 Capacity will be significantly improved from 2016: Phase 3
of the Hoa Phat Integrated Steel Complex is on schedule, which
should lead to HPG reporting a huge expansion in capacity and
production from 2016 onwards.
 Investment in agriculture is questionable: Management has
announced its intention to invest in an animal feed business. This is
a highly competitive sector which has no synergies with HPG’s core
competencies. However, it will be a small investment this year and
is still in the planning stage, so does not affect much our valuation.
 Market multiples indicate stock is fully valued: HPG is trading
at a 2015 P/E of 8.9x, not much lower than the median LTM P/E of
its local peers (9.2x). At our target price, the P/E will increase to
10.0x. The record date for dividend and bonus share issuance is
expected to be in Q2/2015, so the forward P/E of HPG could be
higher this year.

Please see important disclosure information at the end of this report.
www.VPBS.com.vn
Page | 1
CONTENTS
2014 PERFORMANCE REVIEW................................................................................................................................................. 3
Selling volume of over one million tonnes of construction steel in 2014 ....................................................................... 3
Bottom line conforms to VPBS projections ........................................................................................................................ 3
2015 OUTLOOK ......................................................................................................................................................................... 4
Improving capacity in the Hoa Phat Integrated Steel Complex ........................................................................................ 4
Gross margin is expected to be down from its peak in 2014 ........................................................................................... 5
New business line in agriculture sector .............................................................................................................................. 5
New real estate project ......................................................................................................................................................... 6
ESOP and dividends ............................................................................................................................................................. 6
VALUATION ............................................................................................................................................................................... 7
Assumptions.......................................................................................................................................................................... 7
Discounted cash flow (DCF) ................................................................................................................................................. 7
Comparable multiples .......................................................................................................................................................... 8
Sensitivity analysis ............................................................................................................................................................... 9
TECHNICAL ANALYSIS .......................................................................................................................................................... 10
Appendix 1 – VPBS projection ........................................................................................................................................... 11
Appendix 2 – Historical LTM P/E and EV/EBITDA of HPG ............................................................................................... 14
Appendix 3 – Recent stock performance .......................................................................................................................... 14
Appendix 4 – Ownership structure as of February 26, 2015 ........................................................................................... 15
www.VPBS.com.vn
Page | 2
2014 PERFORMANCE REVIEW
Selling volume of over one million tonnes of construction steel in 2014
HPG’s
sales
volume
reached a record high in
2014 with one million tons
of construction steel and
228 thousand tons of steel
pipe. The group also sold
around 100,000 tonnes of
billet during the year.
Hoa Phat Group (HPG)’s steel has enjoyed brisk but steady growth in all regions of
Vietnam in 2014. Sales volume surged 43 percent y-o-y to 1,001,017 tonnes of
construction steel after completion of the second phase of the Hoa Phat Integrated
Steel Complex, outperforming the industry which grew 14.2 percent. The Northern
region accounted for 78 percent of sales volume (up 32 percent y-o-y), the Southern
region accounted for 11 percent (up 110 percent y-o-y) and the Central region
accounted for 11 percent (up 97 percent y-o-y).
HPG successfully sought and secured additional export markets in 2014, and was
able to penetrate the Australian market with wire rod steel for the first time. The
Group exported 60,000 tonnes of billet to Thailand and the Philippines, and over
6,300 tonnes of wire rod and rebar to Australia and Laos.
Growth of sales volume is due to stable product quality and competitive prices which
continue to affirm HPG’s position in the steel industry. Among members of the
Vietnam Steel Association (VSA), HPG’s market shares in 2014 ranked first in both
construction steel (19.1 percent) and steel pipe (19.8 percent), increasing by 2M2015
to 22.1 percent and 22.2 percent respectively.
Monthly market share of HPG
6,000
Construction steel
x000 tonnes
Steel pipe
External revenue from steel segment
360
5,000
300
4,000
240
3,000
180
19%
2,000
120
17%
1,000
60
15%
0
13%
23%
Source: VSA and HPG
2014 results saw a strong
performance with excellent
profit margins.
2/15
1/15
12/14
11/14
10/14
9/14
8/14
7/14
6/14
5/14
4/14
21%
3/14
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2013 2013 2013 2013 2014 2014 2014 2014
Steel pipe
25%
2/14
0
Construction steel
Thousands
VNDbn
1/14
Quarterly sales volume of HPG
Source: VSA
Bottom line conforms to VPBS projections
HPG’s 2014 audited net revenues were VND25,525 billion (USD1,187 million) up 35
percent y-o-y, exceeding its target by 11 percent. The steel segment contributed 77
percent to 2014 consolidated revenues. HPG also booked VND2,566 billion (USD119
million) in apartment sales at the Mandarin Garden, accounting for 9.9 percent of
2014 revenues.
The group earned VND3,144 billion (USD146 million) in 2014 net income, up 61
percent y-o-y, surpassing its own target by 49 percent and fractionally exceeding our
coverage initiation report forecast (August 8, 2014) by 3 percent. Most profit margins
increased by 2.0 to 3.2 percent in 2014, thanks to ongoing improvements in
production management techniques with a consequent reduction in fuel and raw
material consumption during the production process. We also note that allowance for
inventory was VND179 billion (USD8 million) in 2014.
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Page | 3
2014 breakdown
10.4%
Summary of 2014 results and VPBS forecast
22.0%
12.2%
9.6%
77.4%
Revenues
68.4%
Profits after tax
Real estate
Other industrial production
Steel
VNDbn
2014 results
(audited)
Revenues
Gross profits
% margin
EBIT
% margin
EBITDA
% margin
Pretax profits
Profits after tax
% margin
Minority interest
Net income
% margin
Source: HPG
25,525
5,187
20.3%
4,214
16.5%
5,320
20.8%
3,770
3,250
12.7%
106
3,144
12.3%
% y-o-y
34.8%
58.0%
Management
% of target
target
23,000
111.0%
61.2%
59.6%
57.4%
61.7%
2,200
147.7%
60.9%
2,104
149.4%
VPBS
Forecast
(8/8/2014)
25,194
5,046
20.0%
4,164
16.5%
5,328
21.1%
3,774
3,170
12.6%
102
3,068
12.2%
% of VPBS
forecast
101.3%
102.8%
101.2%
99.9%
99.9%
102.5%
103.5%
102.5%
Source: HPG, VPBS
2015 OUTLOOK
Improving capacity in the Hoa Phat Integrated Steel Complex
In 2015, HPG expects sales
volumes to increase by 20
percent for construction
steel and 30 percent for
steel pipe.
HPG performed major maintenance at its blast furnace No.1 last year (working
volume 350m3 to 380m3, overhaul period August to November 2014). We expect it to
run at optimum capacity in 2015, increasing actual billet refining capacity by 20
percent. Other production processes have also been optimized. According to HPG,
the output of the Hoa Phat Integrated Steel Complex currently reaches an average of
90,000 tonnes/month with a maximum of 105,000 tonnes/month.
HPG expects that sales volumes will increase by 20 percent for construction steel,
and 30 percent for steel pipe, in 2015. The group continues to improve its distribution
network and market share in the Central – Tay Nguyen region, and expand its
existing foreign markets. HPG also plans to spend around VND300 billion (USD14
million) to increase capacity in steel pipe by 30 percent (current level of 300,000
tonnes/year), according to management.
HPG aims to complete Phase 3 (refining and rolling capacity of 750,000 and 600,000
tonnes/year respectively) of the Hoa Phat Integrated Steel Complex by early 2016.
Then the total annual designed capacity of HPG will reach two million tonnes of billet
and 1.75 million tonnes of construction steel, supporting the drive to increase sales
volume in the near future. The investment capital for this project is expected to be
VND3,800 billion (USD177 million), higher than the previous announcement of
VND3,000 billion (USD140 million) due to an additional investment in rolling lines.
In addition to the existing difficulties of over-supply, and unpredictable raw material
prices, the Vietnamese steel industry continues to be challenged by the entrance of
Formosa, which has large scale and enjoys many attractive incentives, the slow
consumption growth of the biggest market China, and market participation by
ASEAN countries through signed trade agreements. However, this year we expect
that new laws for supporting the real estate sector will positively impact on the
construction industry, driving demand for steel products. The investment in Phase 3
of HPG once again confirms the group's strong position within the industry.
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Gross margin is expected to be down from its peak in 2014
The
downtrend
and
unpredictable movements
of steel prices negatively
impact steel companies’
profit margins.
Steel price trend is a key driver of steel companies’ profitability. Selling prices of
HPG’s construction steel by the end of 2014 fell by 9 percent y-o-y, most of the
decline coming towards the latter part of the year, and continue to be down 7 percent
YTD at the beginning of March 2015.
The negative impact of lower steel prices has a greater impact than cost savings from
lower raw material prices. The steady downtrend of steel prices has narrowed HPG’s
profit margin, but it remains above those of its local peers.
Management set 2015 targets of VND22.5 trillion (USD1,047 million) for consolidated
revenues (down 12 percent compared with 2014 results) and VND2,300 billion
(USD107 million) for profits after tax (down 29 percent). The predicted fall in earnings
is mainly due to a decrease in income from the real estate segment. According to
management, the group booked VND700 billion (USD33 million) profit after tax from
apartment sales at the Mandarin Garden project during 2014, and expects to book the
remaining VND100 billion (USD4.7 million) this year. However, we note that HPG’s
actual profits have surpassed management targets in each of the last three years.
At the annual general meeting on March 31, 2015, management reported the
estimated results of Q1/2015: sales volumes of around 300,000 tonnes of construction
steel and 70,000-80,000 tonnes of steel pipe; revenues of VND5,500 billion (USD256
million); and profits after tax of VND600 billion (USD28 million). We realize that HPG
still maintains its selling capacity although Q1 is the low construction season and has
a long break for the Tet holiday. The profit result is a decrease of 34% y-o-y but is
down only 8% y-o-y when excluding income from real estate projects in Q1/2014.
With these estimated results, we believe that 2015 management targets will be
achievable.
New business line in agriculture sector
HPG just announced an
investment in agriculture,
but the investment is small
and the project is at an
early stage.
At the end of February 2015, HPG set up the 100 percent subsidiary Hoa Phat Trading
and Animal Feed Production Limited Company with a charter capital of VND300
billion (USD14 million). The company will trade products from June 2015, and start
construction of its factory in Pho Noi A Industrial Park, Hung Yen Province. This will
be the first animal feed factory in the chain, have an annual capacity of 300,000
tonnes, and is expected to be opened in early 2016.
HPG’s long-term strategy includes industrial production in the agriculture sector, in
addition to the core steel industry business. HPG acknowledges the competitive
pressures in trade and production of animal feed, which are even greater than the
steel industry, but strongly believe in the potential growth of this sector. The new
subsidiary aims to create VND3,000 billion (USD140 million) in revenue within the
next three years, which would be approximately ten percent of our projected revenue
for the group over the same period.
This project is at an early stage and needs time to demonstrate feasibility;
consequently we have not included this segment in forecasts or valuation models at
this time. We believe this strategy is also very challenging. The domestic animal feed
market is growing at a double-digit rate, but fifty-nine foreign-invested firms and joint
ventures dominate half of the market while 180 domestic firms share 20 percent
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Page | 5
market share, with the remainder accounted for by imported products. Some large
companies in the sector include CP Group, Proconco, New Hope, and GreenFeed.
New real estate project
This project is half the size
of Mandarin Garden.
By the end of 2014, HPG had completed preparations and started construction of the
apartment, commerce, and services complex at 493 Truong Dinh Street, Hoang Mai
District, Hanoi. This project was planned four years ago but delayed for infrastructure
(Tan Mai road) completion.
The complex will include four 26-to-30-storey tower blocks (excluding two
basements) located on an area of 13,728 m2. The 640 apartments will average less
than 100 m2 per unit to ensure liquidity. Total investment in this project is estimated
at VND1.5 trillion (USD70 million) and will be primarily drawn from the firm’s equity
capital. Expected completion is within three years, with an estimated profit of
VND300 billion to VND400 billion (USD14 million to USD19 million), the group’s
Deputy CEO Mr. Nguyen Viet Thang shared in October 2014.
In this update report we have not included revenue or profit from this project into our
valuation model, until we have more detailed information about its construction and
sales progress. We expect HPG to start selling the project in 2H2016 and to book
revenue from 2018. However, the project may contribute less than 10 percent of
HPG’s total net income.
ESOP and dividends
HPG’s total shares will
increase by 50 percent,
leading to a 33 percent
dilution in EPS in 2015.
In January 2015, HPG issued 6,735,000 shares (1.4 percent of total outstanding
shares) to 299 employees as part of the employee stock ownership plan (ESOP). This
was lower than the 9,638,163 shares (2 percent of total outstanding shares)
previously planned. These newly issued shares were listed on February 25, 2015, and
will be officially traded from February 26, 2018. HPG’s total outstanding shares
currently total 488.6 million.
Shareholders at the recent AGM also approved plans for 2014 dividends of 30
percent on par (including 10 percent cash, consistent with prior years and equivalent
to a 2.2 percent cash dividend yield at the current market price), and a bonus share
issuance of 30 percent under which each shareholder who owns 10 shares will
receive three new shares. Under these plans, HPG’s total shares will increase by 50
percent, leading to a 33 percent dilution in EPS in 2015. The record date is expected
to be in Q2/2015, with 2015 dividends then expected to be 20 percent on par.
www.VPBS.com.vn
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VALUATION
Based on the discounted cash flow (DCF) and multiples approaches (P/E) we derive a
fair value of HPG at VND50,300 per share.
Valuation method
Fair price
Weight
(VND/share)
DCF
56,200
70%
39,300
P/E
36,500
30%
11,000
Target price
50,300
Assumptions
We forecast revenue growth for each segment separately based on our assessment
of each segment’s outlook, and discussions with management. We update some key
assumptions as follows:
 Sales volumes of construction steel will increase by 20 percent and steel pipe by
30 percent y-o-y in 2015. From 2016, sales volume of steel will grow 5 percent per
year.
 The average selling price of construction steel will stay at VND10.8 million
(USD502) per tonne while gross margin is assumed to be 18 percent during the
forecast period.
 Revenue in the office furniture and refrigeration segments will grow by 10
percent annually.
We update the following key assumptions with regard to the consolidated balance
sheet:
 Day sales outstanding: 18 days (equal to 2014 level) during the forecast period
 Day inventory outstanding: 133 days (equal to 2014 level) during the forecast period
 Day payables outstanding: 35 days (equal to 2014 level) during the forecast period
 Capex: in addition to VND500 billion (USD23 million) per year, HPG will spend
VND2,000 billion (USD93 million) on Phase 3 of the Hoa Phat Integrated Steel
Complex, VND300 billion (USD14 million) on expanding steel pipe capacity,
VND300 billion (USD14 million) for the new real estate project, and VND360
billion (USD17 million) for the first animal feed factory during 2015.
 Borrowings: short term borrowings will account for 21 percent to 24 percent of
revenues; long-term borrowings will be paid off gradually.
Discounted cash flow (DCF)
Our DCF model suggests a target price of VND56,200 per share, a 7 percent decline
from our initial valuation in August 2014. The equity value of the firm fell 5.3 percent;
this is in spite of an improvement in the WACC from 14.2 percent to 13.2 percent
caused by the falling risk-free rate. The remaining 1.4 percent fall in the target price is
due to a change in the number of shares.
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Our inputs for the DCF model are as follows:
 The risk-free rate is taken from the five-year local currency Government bond
yield, equal to 5.47 percent.
 The market risk premium is expected to be 8.76 percent.
 HPG’s beta is estimated to be 1.11.
 Cost of equity is estimated to be 15.19 percent using the capital asset pricing
model (CAPM).
 Weighted average cost of capital (WACC) is calculated to be 13.24 percent.
 Terminal growth rate is assessed to be three percent.
Comparable multiples
In this update report, we only use the P/E ratio for multiples method as the relative
EV/EBITDA has changed little during recent months and so is not suitable for
evaluating target price. Based on its regional peers, we derived HPG’s targeted P/E of
7.23x (= VN-Index’s LTM P/E of 12.30x * median relative P/E of 0.59), which would
imply a target price of VND36,500 per share (equal to 2015 basic EPS of VND5,054 *
7.23x).
Peer-group analysis
Regional peer
Market
Capital
Country
TEV
USDmn
USDmn
Gross
Net
margin margin
ROA
ROE
TEV / EBITDA
LTM
Rel.
P/E
LTM
P/B
Rel.
LTM
Rel.
Nippon Steel & Sumitomo Metal Corp
Japan
23,448
43,748
13.7%
4.4%
2.9%
7.4%
8.01
0.76
13.25
0.74
0.93
POSCO
South Korea
19,164
43,014
11.2%
1.0%
0.7%
1.4%
7.28
0.78
31.83
0.63
0.46
0.45
Hyundai Steel Co
South Korea
7,941
18,521
13.8%
4.6%
2.6%
5.7%
7.55
0.81
11.27
0.22
0.63
0.61
Angang Steel Co Ltd
China
7,226
10,573
NA
NA
1.0%
2.0%
10.67
0.36
0.98
0.20
Tata Steel Ltd
India
5,045
12,203
NA
2.4%
NA
NA
4.73
0.40
11.66
0.59
Steel Authority of India Ltd
India
4,653
8,489
NA
5.6%
2.9%
6.2%
11.97
1.02
10.93
0.55
Anyang Iron & Steel Inc
China
1,595
3,620
NA
NA
0.67
0.22
7.6%
0.1%
0.1%
0.4%
9.73
0.58
1.37
0.58
11.6%
3.0%
1.7%
3.9%
8.56
0.67
15.79
0.55
0.84
0.46
Median
12.4%
3.4%
1.8%
3.8%
8.01
0.76
11.66
0.59
0.80
0.51
20.3%
12.3%
14.4%
29.5%
4.95
0.58
6.98
0.57
1.86
1.06
Hoa Phat Group
Local peer
1,020
Market
Capital
1,224
NA
NA
Average
HPG
NA
NA
0.68
FY2014
Net sales
Gross profits
8.36
P/B
EV/
EBITDA
VNDbn
% y-o -y
%margin
3,429
14,990
27%
1,744
11.6%
410.2
-29%
2.7%
240%
4.7%
17.9%
POM
Pomina Steel Corp
1,397
10,805
9%
434
4.0%
-25.5
NM
NM
268%
NM
NM
NKG
Nam Kim Steel JSC
583
5,835
25%
317
5.4%
76.5
47%
1.3%
206%
2.9%
18.3%
7.62
TLH
Tien Len Steel Corp JSC
541
3,725
22%
205
5.5%
74.1
-35%
2.0%
82%
3.6%
7.2%
7.30
DTL
Dai Thien Loc Corp
536
2,062
1%
160
7.8%
4.4
-77%
0.2%
131%
0.2%
0.6%
VIS
Vietnam - Italy Steel JSC
379
3,763
10%
249
6.6%
22.4
NM
0.6%
228%
0.9%
3.5%
16.94
0.58
7.77
VGS
Vietnam Germany Steel Pipe JSC
216
2,716
24%
105
3.8%
21.4
70%
0.8%
134%
1.7%
4.3%
10.11
0.43
13.61
DNY
DANA-Y Steel JSC
138
1,871
-26%
109
5.8%
6.0
-58%
0.3%
388%
0.3%
1.6%
22.91
0.38
7.28
-14%
1.1%
210%
2.0%
7.6%
12.21
0.72
8.86
-32%
0.8%
217%
1.7%
4.3%
9.23
0.59
8.00
61%
12.3%
57%
14.4%
29.5%
6.98
1.86
4.95
Median
Hoa Phat Group
6.3%
16%
21,940
25,525
35%
VNDbn
P/E
VNDbn
12%
%margin
ROE
Hoa Sen Group
HPG
VNDbn
ROA
HSG
Average
% y-o -y
LTM
Debt to
Equity
Net income
5.7%
5,187
20.3%
3,144
NM
NM
1.44
0.59
1.15
9.17
NA
5.61
0.50
8.00
0.66
10.55
Data as of 4/3/2015. Source: Bloomberg, VPBS, Company’s consolidated financial statements
www.VPBS.com.vn
Page | 8
Sensitivity analysis
Terminal
growth rate
Sensitivity of WACC and terminal growth rate to a target stock price (DCF method)
#####
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
11.7%
59,500
62,300
65,400
68,900
72,800
77,200
82,200
12.2%
55,800
58,300
61,100
64,200
67,600
71,400
75,700
12.7%
52,500
54,800
57,200
59,900
63,000
66,300
70,100
WACC
13.2%
49,500
51,500
53,700
56,200
58,800
61,800
65,100
13.7%
46,800
48,600
50,600
52,700
55,100
57,700
60,600
14.2%
44,200
45,900
47,600
49,600
51,700
54,100
56,600
14.7%
41,900
43,400
45,000
46,700
48,700
50,700
53,000
Steel sales growth
from 2016
Sensitivity of assumptions of gross margin and sales growth to a target stock price
#####
-10%
-5%
0%
5%
10%
15%
20%
16.5%
36,500
39,100
41,900
44,900
48,200
47,700
46,700
Gross margin of construction steel
17.0%
17.5%
18.0%
18.5%
19.0%
37,700
39,000
40,300
41,600
42,800
40,500
41,900
43,300
44,700
46,100
43,400
45,000
46,600
48,200
49,800
46,700
48,500
50,300
52,100
53,800
50,300
52,200
54,300
56,300
58,300
50,100
52,300
54,600
56,900
59,200
49,300
51,800
54,400
57,000
59,600
19.5%
44,100
47,500
51,400
55,600
60,300
61,500
62,200
% weight of
multiples method
Sensitivity of targeted P/E and the percentage of multiple method to a target stock
price
www.VPBS.com.vn
#####
15%
20%
25%
30%
35%
40%
45%
5.7
52,100
50,800
49,400
48,000
46,700
45,300
44,000
6.2
52,500
51,300
50,000
48,800
47,600
46,300
45,100
6.7
52,900
51,800
50,700
49,500
48,400
47,300
46,200
P/E
7.2
53,200
52,300
51,300
50,300
49,300
48,300
47,300
7.7
53,600
52,800
51,900
51,100
50,200
49,400
48,500
8.2
54,000
53,300
52,600
51,800
51,100
50,400
49,600
8.7
54,400
53,800
53,200
52,600
52,000
51,400
50,800
Page | 9
TECHNICAL ANALYSIS
The technical chart showed a downtrend in HPG after peaking at VND61,000 on
August 27, 2014. After each unsuccessful attempt to pass the resistance level of the
MA50, HPG fell to a new low. HPG has stabilized around VND44,000 over the last 10
sessions.
The price of HPG has recently crossed its MA10 at 44,500 with good buying volume.
We expect HPG will go upward in short-term to test its MA50 at around VND48,000 to
50,000.
We therefore give a BUY recommendation for HPG at the time of this update report.
As of April 3, 2015
Horizon analytic
3-month highest price
3-month lowest price
Current 50-day MA
Current 100-day MA
Mid-term resistance level
Mid-term support level
Recommendation
www.VPBS.com.vn
HPG (VND/share)
3 to 6 months
54,000
44,000
48,000
44,500
50,000
40,000
BUY
Page | 10
Appendix 1 – VPBS projection
INCOME STATEMENT (VNDbn)
Steel
Real estate
Furniture and refrigerator
Others
2010A
2011A
2012A
2013A
2014A
2015F
2016F
2017F
2018F
2019F
2020F
10,924
14,706
13,209
14,645
19,796
18,883
22,301
24,918
26,204
26,712
27,245
158
151
447
1,425
2,699
647
67
67
67
67
67
1,782
1,697
1,736
1,900
1,996
2,196
2,416
2,657
2,923
3,215
3,537
1,403
1,298
1,434
964
1,034
413
347
289
257
257
257
14,267
17,852
16,827
18,934
25,525
22,139
25,130
27,930
29,451
30,250
31,105
76%
25%
-6%
13%
35%
-13%
14%
11%
5%
3%
3%
COGS (excl. Depreciation)
11,450
14,437
13,745
14,930
19,232
16,657
19,450
21,889
23,147
23,693
24,265
Gross profits
2,818
3,415
3,081
4,004
6,293
5,482
5,679
6,041
6,303
6,557
6,840
30%
21%
-10%
30%
57%
-13%
4%
6%
4%
4%
4%
Revenues
% y-o-y
% y-o-y
SG&A expenses
EBITDA
Depreciation & amortization
EBIT
% y-o-y
454
619
861
670
973
916
1,069
1,188
1,253
1,287
1,323
2,364
2,796
2,220
3,334
5,320
4,565
4,610
4,853
5,050
5,270
5,516
359
542
596
720
1,106
1,314
1,361
1,414
1,422
1,446
1,484
2,005
2,254
1,624
2,614
4,214
3,252
3,250
3,439
3,629
3,824
4,032
21%
12%
-28%
61%
61%
-23%
0%
6%
6%
5%
5%
Financial income
205
329
165
276
160
101
119
133
239
372
523
Financial expenses
694
1,070
585
528
564
470
459
459
436
395
347
2
(13)
15
33
(40)
–
–
–
–
–
–
46
(11)
(1)
(0)
(0)
–
–
–
–
–
–
1,564
1,489
1,218
2,394
3,770
2,883
2,910
3,113
3,432
3,801
4,208
4%
-5%
-18%
97%
57%
-24%
1%
7%
10%
11%
11%
Net other incomes / (expenses)
Income from associates
Pretax profits
% y-o-y
Tax expense
188
192
188
384
519
397
401
429
473
524
580
Effective tax rate
12%
13%
15%
16%
14%
14%
14%
14%
14%
14%
14%
Profits after tax
1,376
1,297
1,031
2,010
3,250
2,486
2,509
2,684
2,959
3,277
3,628
8%
-6%
-21%
95%
62%
-24%
1%
7%
10%
11%
11%
% y-o-y
Minority interest
Net income
27
60
36
56
106
16
1,349
1,236
994
1,954
3,144
2,469
% y-o-y
6%
-8%
-20%
97%
61%
-21%
% margin
9%
7%
6%
10%
12%
11%
Average number of shares (mn)
16
2,493
18
19
22
24
2,666
2,940
3,256
3,604
1%
7%
10%
11%
11%
10%
10%
10%
11%
12%
297
416
419
419
489
733
733
733
733
733
733
EPS (VND)
4,550
3,573
2,386
4,663
6,435
3,369
3,401
3,638
4,010
4,442
4,918
Cash dividend (VND/share)
2,000
0
1,000
1,000
1,500
1,000
1,000
1,000
1,000
1,000
1,000
www.VPBS.com.vn
Page | 11
BALANCE SHEET (VNDbn)
2010A
2011A
2012A
2013A
2014A
2015F
2016F
2017F
2018F
Cash & near cash items
1,047
1,064
1,294
2,125
2,026
1,974
2,268
4,331
Short term investments
290
0
220
388
507
405
395
454
Accounts receivables
1,504
1,526
1,151
1,259
1,247
1,082
1,228
Inventories
4,541
6,347
6,822
8,030
7,386
6,336
484
549
734
601
579
7,866
9,486
10,221
12,403
Other current assets
Current assets
Net fixed assets
2019F
2020F
6,569
9,144
12,019
866
1,314
1,829
1,365
1,439
1,478
1,520
7,538
8,443
8,903
9,110
9,331
642
773
888
965
1,022
1,082
11,746
10,438
12,202
15,480
18,742
22,067
25,781
8,875
4,604
5,920
7,007
9,249
9,355
11,502
12,441
11,727
10,805
9,859
Long-term investments
709
273
26
21
61
61
61
61
61
61
61
Other long-term assets
1,725
1,847
1,762
1,403
927
687
758
814
845
861
878
7,038
8,039
8,795
10,674
10,343
12,250
13,260
12,602
11,711
10,781
9,814
14,904
17,525
19,016
23,076
22,089
22,688
25,462
28,082
30,453
32,848
35,595
898
941
1,521
2,314
1,928
1,703
1,973
2,209
2,329
2,383
2,441
4,022
4,555
4,850
5,744
5,737
5,401
6,048
6,446
6,503
6,379
6,249
Long-term assets
Total assets
Accounts payable - trade
Short-term borrowings
Other short-term liabilities
1,217
1,151
991
3,085
1,352
1,259
1,443
1,577
1,633
1,648
1,663
6,136
6,647
7,362
11,143
9,017
8,364
9,464
10,231
10,466
10,409
10,353
1,545
1,869
1,456
1,832
1,011
515
398
289
192
96
0
484
1,045
1,620
515
96
91
106
117
124
127
131
Long-term liabilities
2,029
2,914
3,076
2,347
1,107
606
504
406
316
223
131
Total liabilities
8,166
9,561
10,438
13,489
10,124
8,970
9,968
10,637
10,782
10,632
10,484
Share capital
3,178
3,178
4,191
4,191
4,819
7,330
7,330
7,330
7,330
7,330
7,330
Capital surplus
2,258
2,258
2,207
2,207
2,207
2,207
2,207
2,207
2,207
2,207
2,207
757
1,540
1,393
2,643
4,095
3,321
5,080
7,014
9,220
11,743
14,615
Current liabilities
Long-term borrowings
Other long-term liabilities
Retained earnings
Others
Equity
Minority interest
Total liabilities and equity
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205
438
295
459
675
675
675
675
675
675
675
6,398
7,414
8,085
9,500
11,796
13,532
15,292
17,226
19,432
21,955
24,827
340
550
492
87
169
186
202
220
239
261
285
14,904
17,525
19,016
23,076
22,089
22,688
25,462
28,082
30,453
32,848
35,595
Page | 12
CASH FLOW STATEMENT (VNDbn)
2010A
2011A
2012A
2013A
2014A
2015F
2016F
2017F
2018F
2019F
2020F
Cash from operation activities
398
304
2,269
3,234
2,682
4,729
2,770
3,250
3,902
4,455
4,825
Cash from investing activities
(1,421)
(937)
(1,660)
(3,252)
(1,170)
(3,233)
(2,290)
(759)
(913)
(948)
(1,015)
Cash from financing activities
586
649
(380)
850
(1,611)
(1,548)
(187)
(428)
(752)
(932)
(935)
Net changes in cash
(437)
16
230
831
(99)
(52)
294
2,063
2,238
2,575
2,875
Beginning cash balance
1,480
1,047
1,064
1,294
2,125
2,026
1,974
2,268
4,331
6,569
9,144
4
1
(0)
(0)
0
–
–
–
–
–
–
1,047
1,064
1,294
2,125
2,026
1,974
2,268
4,331
6,569
9,144
12,019
(218)
(753)
887
624
1,900
1,581
779
2,874
3,728
4,269
4,625
2010A
2011A
2012A
2013A
2014A
2015F
2016F
2017F
2018F
2019F
2020F
Exchange rate fluctuation
Ending cash balance
Free cash flow
RATIO ANALYSIS
Valuation ratios
d
Price to earnings (P/E)
d
7.0x
8.9x
8.8x
8.2x
7.5x
6.7x
6.1x
Price / earnings to growth (PEG)
d
0.1x
(0.4x)
9.4x
1.2x
0.7x
0.6x
0.6x
Current EV to EBIT
d
6.2x
8.0x
8.0x
7.6x
7.2x
6.8x
6.5x
Current EV to EBITDA
d
4.9x
5.7x
5.7x
5.4x
5.2x
5.0x
4.7x
Price to sales (P/S)
d
0.9x
1.5x
1.3x
1.2x
1.1x
1.1x
1.1x
d
Price to book (P/B)
1.8x
2.4x
2.2x
1.9x
1.7x
1.5x
1.3x
2.2%
2.2%
3.3%
2.2%
2.2%
2.2%
2.2%
2.2%
2.2%
16.1%
14.8%
17.3%
20.3%
18.8%
17.2%
16.6%
16.6%
16.9%
17.2%
19.1%
18.3%
21.1%
24.7%
24.8%
22.6%
21.6%
21.4%
21.7%
22.0%
16.6%
15.7%
13.2%
17.6%
20.8%
20.6%
18.3%
17.4%
17.1%
17.4%
17.7%
Operating margin
14.1%
12.6%
9.7%
13.8%
16.5%
14.7%
12.9%
12.3%
12.3%
12.6%
13.0%
Net profit margin
9.5%
6.9%
5.9%
10.3%
12.3%
11.2%
9.9%
9.5%
10.0%
10.8%
11.6%
Return on avg. assets
10.9%
8.0%
5.6%
9.6%
14.4%
11.1%
10.4%
10.0%
10.1%
10.4%
10.6%
Return on avg. equity
23.9%
17.9%
12.8%
22.2%
29.5%
19.5%
17.3%
16.4%
16.0%
15.7%
15.4%
Interest coverage ratio (EBIT/I)
4.9x
2.9x
3.1x
7.0x
12.0x
9.0x
9.1x
9.2x
9.6x
10.5x
11.6x
EBITDA / (I + capex)
1.7x
1.1x
0.9x
1.0x
3.7x
1.2x
1.7x
4.5x
5.8x
6.1x
6.5x
Total debt/capital
46.5%
46.4%
43.8%
44.4%
36.4%
30.4%
29.7%
28.1%
25.6%
22.8%
20.1%
Total debt/equity
87.0%
86.7%
78.0%
79.7%
57.2%
43.7%
42.2%
39.1%
34.5%
29.5%
25.2%
Dividend yield
4.5%
0.0%
Gross margin
17.2%
Gross margin (excl. Depreciation)
19.7%
EBITDA margin
Profitability ratios
Leverage ratios
Liquidity ratios
Asset turnover
1.0x
1.0x
0.9x
0.8x
1.2x
1.0x
1.0x
1.0x
1.0x
0.9x
0.9x
Accounts receivable turnover
9.5x
11.7x
14.6x
15.0x
20.5x
20.5x
20.5x
20.5x
20.5x
20.5x
20.5x
Accounts payable turnover
13.2x
15.9x
9.4x
6.8x
10.5x
10.5x
10.5x
10.5x
10.5x
10.5x
10.5x
Inventory turnover
2.6x
2.4x
2.1x
1.9x
2.8x
2.8x
2.8x
2.8x
2.8x
2.8x
2.8x
Current ratio
1.3x
1.4x
1.4x
1.1x
1.3x
1.2x
1.3x
1.5x
1.8x
2.1x
2.5x
Quick ratio
0.5x
0.5x
0.5x
0.4x
0.5x
0.5x
0.5x
0.7x
0.9x
1.2x
1.6x
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Page | 13
Appendix 2 – Historical LTM P/E and EV/EBITDA of HPG
P/E
18
15
10
12
8
9
6
6
4
3
VN-Index
EV/EBITDA
12
HPG
Local peer
2
0
VN-Index
HPG
Local peer
0
Appendix 3 – Recent stock performance
VND/share
70,000
Volume
HPG
million shares
2.5
Target price (8/8/2014): 66,100
2.0
60,000
Target price (4/3/2015): 50,300
1.5
50,000
1.0
40,000
30,000
7/2014
0.5
0.0
8/2014
9/2014
10/2014
11/2014
12/2014
1/2015
2/2015
3/2015
In our coverage initiation report on August 8, 2014, we issued a BUY
recommendation for HPG stock with a target price of VND66,100 per share. On that
date the stock was trading at VND56,000 per share. HPG then gradually increased and
reached a peak of VND61,000 during the first week of September 2014. However, by
the end of 2014 HPG had started to fall amid cautious market sentiment caused by
the steady downtrend of steel prices.
In this report we suggest a new 1-year target price of VND50,300 per share, 12
percent above the market price of VND44,900 on April 3, 2015.
www.VPBS.com.vn
Page | 14
Appendix 4 – Ownership structure as of February 26, 2015
Ownership structure
Local
institutions
2.3%
10 largest institutional shareholders
Local
individuals
6.2%
Foreign
individuals
0.4%
Foreign
institutions
41.9%
Chairman &
spouse
31.1%
Dragon Capital
Number of
shares
43,105,102
%
ownership
8.82
VOF
31,711,182
6.49
Deutsche Bank + Deutsche Asset Mgt
29,969,749
6.13
Private Equity New Markets II K/S
Harding Loevner Funds Inc-Frontier
Emerging Markets Portfolio
Franklin Templeton Investment FundsTempleton Frontier Markets Fund
Wasatch Frontier Emerging Small
Countries Fund
Lionglobal Vietnam Fund
14,570,483
2.98
7,950,000
1.63
7,743,088
1.58
7,015,297
1.44
4,797,572
0.98
4,468,225
0.91
Other
Macquarie Bank Limited
internal
shareholders Vietnam Holding Limited
18.1%
Total
4,007,340
0.82
155,338,038
31.79
Source: Annual report
www.VPBS.com.vn
Page | 15
GUIDE TO RATINGS DEFINITION
VPBank Securities (VPBS) uses the following ratings system:
Buy: Expected return, including dividends, over the next 12 months is greater than 15 percent.
Hold: Expected return, including dividends, over the next 12 months is from -10 percent to +15 percent.
Sell: Expected return, including dividends, over the next 12 months is below -10 percent.
CONTACT INFORMATION
For further information regarding this report, please contact the following members of the
VPBS research department:
Barry David Weisblatt
Head of Research
barryw@vpbs.com.vn
Luu Bich Hong
Director - Fundamental Analysis
honglb@vpbs.com.vn
For any questions regarding your account, please contact the following:
Marc Djandji, CFA
Head of Institutional Sales and Brokerage
& Foreign Individuals
marcdjandji@vpbs.com.vn
+848 3823 8608 Ext: 158
Ly Dac Dung
Head of Retail Sales and Brokerage
dungld@vpbs.com.vn
+844 3974 3655 Ext: 335
Vo Van Phuong
Director of Retail Sales and Brokerage
Nguyen Chi Thanh 1 - Ho Chi Minh City
phuongvv@vpbs.com.vn
+848 6296 4210 Ext: 130
Domalux
Director of Retail Sales and Brokerage
Nguyen Chi Thanh 2 - Ho Chi Minh City
domalux@vpbs.com.vn
+848 6296 4210 Ext: 128
Tran Duc Vinh
Director of Retail Sales and Brokerage
Lang Ha - Ha Noi
vinhtd@vpbs.com.vn
+844 3835 6688 Ext: 369
Nguyen Danh Vinh
Associate Director of Retail Sales and Brokerage
Le Lai - Ho Chi Minh City
vinhnd@vpbs.com.vn
+848 3823 8608 Ext: 146
www.VPBS.com.vn
Page | 16
DISCLAIMER
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Each research analyst involved in the preparation of a research report is required to certify that the
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and all of the securities or issuers that are the subject matter of this research report, and no part of
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Any research report is provided, for information purposes only, to institutional investor and retail
clients of VPBS. A research report is not an offer to sell or the solicitation of an offer to buy any of
the securities discussed herein.
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