CFA Institute Research Challenge
hosted by
CFA Society Vietnam
RMIT University Saigon South Campus
The CFA Institute Research Challenge is a global competition that tests the equity research and valuation,
investment report writing, and presentation skills of university students. The following report was prepared in
compliance with the Official Rules of the CFA Institute Research Challenge, is submitted by a team of university
students as part of this annual educational initiative and should not be considered a professional report.
Disclosures:
Ownership and material conflicts of interest
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that
might bias the content or publication of this report.
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Disclaimer
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to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness.
The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not
constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered
to be a recommendation by any individual affiliated with CFA Vietnam, CFA Institute, or the CFA Institute Research Challenge with
regard to this company’s stock.
Sector: Materials – Industry: Industrial Metals
Ho Chi Minh Stock Exchange (HOSE)
HOA PHAT GROUP (Ticker: HPG.HM)
Closing price: 32,250 VND
USD/VND: 23,145
Date: 15th November 2020
Target price: 40,610 VND
Recommendation: BUY (+25.92% Upside)
EXECUTIVE SUMMARY
HPG: Rise To A New Stature
Figure 1. HPG’s Historical Share Price
vs VN-Index
We issue a BUY recommendation on Hoa Phat Group JSC (HPG) with a 12-month target price
of 40,610 VND/share, presenting an upside of 25.92% from its closing price of VND 32,250
th
30,000
1,200 on 15 November 2020. Although HPG is currently traded at P/E (LTM) of 10.8x, we expect forward P/E
2021F to stand attractively at 6.8x (Figure 2) thanks to the below investment thesis:
25,000
1,000
Dung Quat Super Project To Solidify No.1 Steel Producer Position In Vietnam
20,000
800 The company dominates the construction steel and steel pipe market with 26.2% and 31.5% market
share, respectively, thanks to large production capacity, competitive pricing strategy, superior product
15,000
600
quality. We expect HPG steel revenue will continue to grow strongly (2020F-2024F CAGR of 16.77%)
10,000
400 through DQSC Project with 2 key drivers: Expansion to the Central and South of Vietnam & International
markets with Construction Steel and High sales from commercialized Hot Rolled Coil (HRC).
5,000
200
Double-Digit Growth Fueled By Favorable Industry Outlook
HPG is well-poised to capture the construction steel consumption growth that is primarily fueled by (1)
0
0
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
fast-tracked government spending on infrastructure of VND 470 trillions (trn), (2) bright outlook of real
estate industry and (3) growing export opportunities from accelerated global infrastructure investment
HPG's Closing Price (LHS)
VNIndex (RHS)
and China’s supply-side control. The long-term growth is backed by the (1) abundant room for growth
Source: Reuters
given Vietnam’s low steel consumption per capita and (2) strong macroeconomic fundamentals leading
to consistent FDI inflows to the manufacturing sector that sustains the momentum for steel pipe demand.
Figure 2. HPG's Historical P/E (Ltm)
Due to oversupply situation in the market in recent years, the consolidation trend will benefits HPG as a
dominant players to seize more market share from small EAF producers.
11.00
HRC – Strategic Product Portfolio Expansion To Bolster Future Growth
10.00
With DQSC, HPG has been able to produce HRC for both internal and external use from Q3/2020. Aside
9.00
from HPG, Formosa can only produce up to 5 mn tons per annum (mpta), while demand was 12 mn tons
in 2019. The competitive pricing strategy will allow HPG’s HRC to be entirely absorbed by the heavily
8.00
undersupplied domestic market. Given the large DQSC’s HRC production capacity of 2.5-3mtpa, this
7.00
7.3x product is envisioned to become the new revenue growth turbine for HPG moving forward.
6.00
Superior Margins Enabled By Best-in-class Cost Structure
While other competitors have to import HRC to produce flat steel products, the ability to produce in-house
5.00
HRC allows HPG to become the only Vietnamese steel producer to own a fully integrated production
4.00
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Oct chain and cut up to 10% total COGS. Moreover, (1) the efficient cost-control from BF-BOF technology,
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020
HPG's Historical P/E
6Y Average (2) self-supplied electricity, (3) DQSC’s deep-water seaport to reduce logistic cost, and (4) strong market
power to raise selling prices will allow HPG to enjoy high margins (gross margin: 23.33% in 2019A to
Source: Reuters
35.69% 2024F) despite the expected increase in raw material prices.
Operational Excellence – Solid Financial Position Stands Strongly Under Grey Sky
HPG’s Chairman and Board of Directors have a far-sighted vision for HPG’s growth strategy. As
Figure 3. Market Snapshot
experienced people in the industry, they have developed a great expansion strategy to meet the demand
Stock data, as of 15 November 2020
needs regardless of steel industry’s high cyclicality. Moreover, while the leverage ratio of HPG is quite
Price (VND)
32,250
low compared to industry peers, the BOD of HPG has strategically used the leverage efficiently (2019A
32,750 /
net D/E of 0.7x) to expand the production scales with DQSC. Thanks to this, HPG will enjoy high revenue
52-week high/low (VND)
13,253
growth, excellence profitability and strong cash flow generation which will provide HPG the flexibility to
13.7 / 59.1 /
Px. Perf (3/6/12 months) (%)
64.0 maximize shareholder returns. (ROE: 17.03% in 2019A to 28.00% in 2024F).
Noteworthy Environmental, Social, And Governance
Shares outstanding (mn)
3,313
Despite efforts to mitigate the adverse environmental impact of BOF technology, scandals related to
Free float shares (mn)
1,988
harmful exhaust and environmental degradation still occasionally occur, posing an investment risk for
HPG. Although HPG’s executive management team has played an excellent role in securing high growth
Market Cap (VND bn)
106,853
and earnings, large number of shares owned by internal members (44.22%) can pose the drawbacks in
Foreign owned ratio
34%
which other shareholders would have no control in the company decisions.
Foreign ownership limit
49%
Sum-of-the-Parts Valuation To Confirm Attractive Upside Potential
As the company’s segments have different business models and risk profiles, we conduct Sum-of-theEV/EBITDA (LTM)
7.2x
Parts Valuation using the Discounted Free Cash Flow to Firm to value the Steel segment, Relative
Source: Reuters
Valuation methodology using Relative P/E for Agriculture and Other Industries, and P/B to value the
Real Estate segment. Our target price of VND 40,610 per share for HPG implies a 25.92%
upside, reflecting an attractive value for the company’s solid growth profile.
Key Risks Factors Well-Hedged By Unrivalled Cost Advantage And Diversification Strategy
Raw materials price volatility and global trade protectionisms are identified as the key risks faced by
HPG. Hence, we have incorporated the former into scenario and sensitivity analysis to reflect its impact
on our target price. With unrivalled cost advantage, HPG’s steel products can withstand the short-term
effect of raw material price volatility. The company is also strategically diversifying its export markets to
mitigate the negative impact of rising global trade protectionisms.
35,000
1,400
Key Metrics & Ratios
2017A
2018A
2019A
2020F
2021F
2022F
2023F
2024F
Net Revenue (VND bn)
Gross Profit
Gross Profit Margin(%)
Net Profits
Net Margin (%)
EPS (VND/share)
ROE (%)
46,161.69
12,542.48
27.17%
8,014.76
17.36%
4,074
30.65%
55,836.46
13,840.31
24.79%
8,600.55
15.40%
3,015
23.48%
63,658.19
13,647.05
21.44%
7,578.25
11.90%
2,726
17.03%
90,994.81
22,962.25
25.23%
11,189.50
12.30%
3,355
21.22%
112,281.32
32,305.30
28.77%
16,939.35
15.09%
5,085
27.74%
119,316.79
37,162.89
31.15%
20,678.62
17.33%
6,212
29.42%
126,641.79
40,432.42
31.93%
23,015.29
18.17%
6,916
27.94%
132,516.35
43,547.99
27.17%
25,359.27
19.14%
7,622
28.00%
1
CAGR
2020-24
15.79%
26.12%
9.82%
27.32%
9.96%
22.83%
10.46%
BUSINESS DESCRIPTION
Figure 4. HPG’s Revenue Breakdown
(VND trn)
70,000
Established in 1992, HPG started as a construction machine and equipment trading company. Since
then, it has expanded its business to trading and production in different areas of steel, agriculture, real
estate, and other industrial production with 11 subsidiaries. The company is also a steel exporter to
14 different countries. In 2019, the enterprise’s revenue is VND 63,658 billions (bn) with the 2015A2019A CAGR of 20.05% (Figure 4) and net profit after tax (NPAT) is VND 7,578.2 bn with the CAGR
of 18.4%.
Dominant Players In Diversified Segments
60,000
50,000
40,000
30,000
20,000
10,000
0
2015A
Steel
2016A
Agriculture
2017A
2018A
Real Estate
2019A
Other Industries
Source: Company data, Team estimate
Figure 5. HPG’s 2019 Net Profit After Tax
Breakdown
5%
5%
7%
83%
Steel
Agriculture
Real Estate
Other Industries
Source: Company data
Figure 6. HPG’s Ownership Structure (2019A)
36%
38%
18%
8%
BOM,BOD
Related people
Other domestic shareholders
Foreign shareholders
Source: Company data
Figure 7. Infrastructure Spending,
Construction, Real Estate and Construction
Steel Consumption Growth Rate (%)
12
10
8
6
4
2
0
30
25
20
15
10
5
0
-5
-10
-15
2012A 2013A 2014A 2015A 2016A 2017A 2018A 2019A
Construction
Real estate
Infrastructure spending (RHS)
Construction steel
consumption (RHS)
Source: GSO, VSA, BMI Research
Figure 8. Condominium Supply And Absoption Rate
112%
25,000
20,000
85%
95% 92% 99% 95%
104%
96% 96%
85%
120%
100%
64%
80%
15,000
Iron and Steel: (2019: 81% total revenue, 83% total NPAT) HPG’s principle activities in the steel
industry range from mining iron ore for internal use to trading various steel products (Appendix B1).
HPG is the market leader in the Construction Steel and Steel Pipe with respective market share of
26.2% and 31.5% and 5 manufacturing factories throughout the country (Appendix B3). Except for
HPG Hung Yen with Electric Arc Furnace (EAF) technology, all other HPG factories use Basic Oxygen
Furnace (BOF) for steel production. HPG’s steel products are mainly used in the construction,
automotive, engineering & metal goods and distributed via a nationwide network of 50 tier-1 agents.
Agriculture: (2019: 12% total revenue, 7% total NPAT) HPG expanded to the Agriculture field in 2015
with a focus on the animal feed, hog raising, beef raising, chicken eggs and hens raising (Appendix
B1). It has 2 main factories for cattle feeding and many farms across the country (Appendix B3). Until
now, HPG is the biggest egg manufacturer in the North and also Vietnam’s largest supplier of
Australian Beef with ~ 50% market share. This segment has experienced a strong revenue growth
with 2015A-2019A CAGR of 43% and become the 2nd largest revenue contributor in 2019.
Real Estate: (2019: 3% total revenue, 5% total NPAT) Focuses on the urban housing and industrial
park (IP) development. The company owns 2,429.5 ha of IPs for lease in Hung Yen and Ha Nam
province with high occupancy rates. In the residential property, HPG has 3 residential projects with a
total area of 263.6 ha in Hanoi and Hung Yen IPs (Appendix B4).
Other Industrial Production: (2019: 4% total revenue, 5% total NPAT) Includes include producing
and trading construction equipment, furniture and refrigerant equipment. In the Furniture segment,
HPG specializes in manufacturing furniture for offices, home, schools and public facilities. In the
Refrigeration Engineering segment, the company invested in home appliance production line for
refrigeration, electric household products under the Funiki brand. HPG holds a leading market position
in office furniture and a well-known air conditioner brand in Vietnamese market (Appendix B1).
Ownership Structure
The majority of HPG ownership (44%) is under the control of the HPG Board of Management and
Directors, in which Mr. Tran Dinh Long – the Chairman and his wife – Mrs. Vu Thi Hien own 25.35%
and 7.34%, respectively. Foreign shareholders also take a large percentage in the ownership
structure, ~ 38% out of 49% maximum foreign ownership, indicating that HPG is highly attractive to
international investors (Figure 6). The rest is adequately allocated for domestic investors and related
individuals.
INDUSTRY OVERVIEW
60%
10,000
40%
5,000
20%
0
0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020
New condominium launch supply
Sold units
Absoprtion rate
Source: CBRE
Figure 9. Vietnam GDP per Capita vs Average
Housing Price
2,715
1,217 1,318
1,525
1,150 1,015 1,013
1,735
881
2,085 2,192
1,887 2,030
880
952
969
2,366
2,567
1,300 1,442
1,100 1,200
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
GDP per capita (USD)
Average housing price in HCM & HN (USD/m2)
Source: CBRE, Worldbank
DEMAND OUTLOOK:
Real Estate and Government Spending To Bolster Demand For Construction Steel
The Vietnamese government aims to increase the infrastructure spending from 5.7% (highest in
ASEAN) to 7.3% of GDP on average from 2021F-2023F to revitalize the economy over post-pandemic
period. In 11M2020, the public investment disbursement rate recorded a 34% YoY increase, highest
since 2010. The construction of infrastructure will not only propel the demand for construction steel
itself, but also enhance transport connectivity to facilitate real estate projects which consume the
majority of HPG’s high quality construction steel. That said, construction steel consumption will be
propelled by the increasing residential real estate projects reflected through (1) high condominium
absorption rate of around 95% in the past 2 years, reaching 104% in Q3/2020 (Figure 8) and (2)
increasing urbanization trend (2009A-2019A: from 29.7% to 36.6%, 2030F: 43.0%) supported by the
growing house purchasing power of Vietnamese people (Figure 9).
Consistent FDI Inflows Into Manufacturing To Stimulate Demand For Steel Pipe
Vietnam has consistently received growing FDI inflows, especially to the manufacturing sector (2019A:
71.1%). Currently, the country has been the most preferred destination for production base shift due
to the US – China trade war, and its potential to be a manufacturing hub in ASEAN thanks to: (1)
dedicated industrial and economic zones, (2) strategic location, (3) cheap labor cost, (4) robust
2
infrastructure spending, and (5) investment and land rental incentives. Therefore, although COVID-19
has temporarily slowed down FDI in 10M2020 (realized FDI capital dropped by 2.5% YoY), we believe
Singapore
60,000
the FDI growth momentum would soon recover. Demand growth for steel pipe is thus expected to
50,000
gradually recover from -6.8% in 1H2020 to their 2015-2018 CAGR of 15.6%, and for galvanized steel
40,000
sheet from 6.5% to 20.8% since these products are widely used in the construction of factories,
30,000
warehouses, and machinery manufacturing, etc.
20,000
Low Per Capita Consumption And Robust Demand Expected To Propel Long-Term Demand
Philippines
Malaysia
10,000
Thailand
Indonesia
Vietnam’s apparent steel consumption per capita is the 3r lowest in ASEAN and is growing at the 2 nd
Vietnam
0
0
100
200
300
400
500
600 fastest rate in the region with a 2010A-2018A CAGR of 9% (Figure 10). This presents huge room for
Source: SEAISI
medium-to-long term growth for steel demand in Vietnam (2021F-2024F CAGR of 9-10%) supported
by resilient GDP growth (2020F-2024F CAGR of 6.2%) (Appendix C1) and favorable catalysts.
Figure 11. Vietnam Demand for HRC
Undersupply Of HRC In Domestic Market To Present Abundant Potentials For DQSC
While domestic steel producers consumed around 12 millions (mn) tons of HRC in 2019, only 34%
(4.1 Million Tonnes Per Annum (mtpa) was domestically supplied and Formosa (FHS) was the only
8.6
producer (maximum capacity of 5.2 mtpa) (Figure 11). Such excessive demand bodes very well for
8
HPG as the Phase 2 of DQSC commences HRC production in 3Q2020 with a maximum capacity of
11.8
9
9.2
2.5–3.0 mpta. With a cost-effective production chain, HRC products of HPG would have competitive
prices against FHS and imported products, thereby are expected to be entirely consumed in the
4.2
3.7
domestic market.
0.9
2015A
2016A
2017A
2018A
2019A Export Potential Spurred By Worldwide Accelerating Infrastructure Investment
Formosa
HRC Import
In June 2020, ASEAN-6 countries announced a total of USD 332 bn stimulus package, especially for
Source: FiinPro
infrastructure. Thus, ASEAN-6’s steel consumption growth rate would recover from -2.1% in 2020F to
5.1% in 2021F. The Chinese’s government also decided on a USD 84 bn package, yet the supply
Figure 12. Production and Consumption of
control enforced in 2015 due to oversupply and environmental concerns would continue to restrict
Construction Steel
9.8
domestic steel production. This bodes well for Vietnam’s billet export, especially for HPG, who is
9.2
8
expected to export 1.8 mn tons of billets in 2020F (2019A: 0.2 mn ton).
10.0
7
9.6
6.7
5.8
5.2
8.2
SUPPLY OUTLOOK
4.4
7.1
6.6
6
5
Consolidation Trend To Offset Current Oversupply Situation
4.7
With a wide gap in production technology and economies of scale between leading firms and the rest,
the over-supply construction steel industry has seen a sharp consolidation (Figure 12), with the top
six biggest players holding 66.7% market share in 2019 – up from 55.4% in 2015 (the year before
Production
Consumption (domestic + export)
launching safeguard taxes scheme). Therefore, given the additional years of protection, these biggest
Source: FiinPro,VSA
local producers can have time to further solidify their competitive capabilities and improve their
positions in global markets. The COVID-19 has also posed tremendous challenges for small,
Figure 13. Vietnam Steel Demand and Supply
financially insecure steel firms, leading to their contracting market share.Consequenrly, the current
(Million Tons)
25.40
24.32
oversupply situation in Vietnam’s steel industry (Figure 13) will be offset and bodes well for a steel
22.31
21.00
26.96 producer with advanced technology, efficient cost management, and nationwide distribution networks
25.20
24.20
15.30
22.00
like HPG to effectively capture more market share with capacity expansion strategy (Figure 14).
12.36
17.50
15.17
Extended Tariff Barriers To Shield Domestic Players
Thanks to the implementation of safeguard taxes in 2016, Vietnamese billet prices dropped from a
huge premium (30-32%) to discount (5-7%) against Chinese billet prices (Figure 15) and import
2015
2016
2017
2018
2019
2020
decreased with a 2015-2019 CAGR of 49.7%. Vietnam’s rebar prices also witnessed the same pattern,
Demand
Supply
dropping from a 29.9% premium to 7.9% discount to Chinese prices in March 2020. Thus, three
Source: VSA
additional years of self-defense duties on billet (15.3%) and construction steel (9.4%), reducing 2%
Figure 14. Construction Steel Market Share
and 1.5% every year respectively until March 2023, would further enhance the competitiveness of
in Vietnam
8M2020
Vietnamese steel against imports from China (Appendix C5).
31.7%
Raw Materials: Iron Ore and Hard Coking Coal Price Expected To Moderately Increase
HPG
2019
VNSteel group Iron ore prices has recently reached above US 140/ton, driven by China’s strong demand and supply
26.20%
concerns fuelled by disappointing forecasts by Brazilian miner Vale S.A. Meanwhile, HCC price is
Vinakyoei
decreasing due to the Australia-China tension. However, we expect HCC will recover as global
Pomina
16.00%
demand improves after the black swan event of COVID-19 thanks to the accelerating worldwide
7.60%
PoscoSS
government spending. We expected iron ore and HCC’s average price in 2021F would slightly
2.6%
8.60%
increase from 2020F’s average given the recovering global demand after the black swan of COVIDFormosa
16.7%
8.7%
19 and supply fluctuation due to the pandemic’s impact (Figure 16).
Source: FiinPro
Other Businesses To Present Steady Growth Potentials
Figure 15. Billet and Rebar Steel Premium
Agriculture: Vietnam’s meat consumption has increased from 33kg to 40kg per capita within the past
Prices of Vietnam vs China
60%
10 years and pork consumption ranked 8th in the world. With the consistent population growth and
40%
rising middle income class, the demand for beef and meat from cattle is expected to continue rising
20%
significantly (2019-2023F CAGR: Poultry – 6.8%, Pig – 0.8%, Cow – 4.6%). Thus, this sector would
maintain both its short-term catalysts supported by long-term growth potentials.
0%
Real Estate: Vietnam’s Industrial park sector is enjoying a high growth thanks to: (1) the megatrend
-20%
of relocation of production base from China to Vietnam that will accelerate over the post-pandemic
-40%
period; (2) the recent implementation of EVFTA and EVIPA; (3) FDI investment incentives for projects
led by Vietnam and Japan’s governments to facilitate some Japanese firms to expand their production
Billet (USD/ton)
Rebar (USD/ton)
to Vietnam, many of which have already had production base in the North; (4) Low land rental price
Source: Bloomberg, VSA, Team estimate
(~30-40% lower than Indonesia & Thailand), with the expected increase of 5-6% in the North and 7Figure 16. Iron Ore and Hard Coking Coal
8% in the South in 2021F; (5) low labor cost; and (6) Vietnamese Government’s new Industrial Park
(2017A-2022F)
250
200
(IP) plan for 2021F-2025F to encourage the expansion of IP area in the future.
150
Figure 10. Apparent Steel Consumption
per Capita (Kg), 2018
Jan-20
Jul-19
Oct-19
Apr-19
Jan-19
Jul-18
Oct-18
Apr-18
Jan-18
Jul-17
Oct-17
Apr-17
Jan-17
Jul-16
Oct-16
Apr-16
Jan-16
GDP per capita (USD)
70,000
100
50
0
Iron ore (USD/ton)
Source: VSA, Bloomberg
Ave. 2022F
Nov-20
Aug-20
Feb-20
May-20
Nov-19
Aug-19
Feb-19
May-19
Nov-18
Aug-18
Feb-18
May-18
Nov-17
Apr-17
Aug-17
Jan-17
COMPETITIVE POSITIONING
Hard coking coal (USD/ton)
3
Figure 17. Porter’s Five Forces Analysis
SUPPLIERS'
BARGANING
POWER
5
4
3
2
1
0
THREAT OF
SUBSTITUTES
RIVALRY
AMONG
EXISTING…
BUYERS'
BARGAINING
POWER
THREAT OF NEW
ENTRANTS
Source: Team evaluation
Figure 18. HPG’s Competitive
Construction Steel Price (VND/kg)
12,850
12,350
11,145
Oct-20
Sep-20
Jul-20
Aug-20
Jun-20
Apr-20
May-20
Mar-20
Jan-20
HPG
Feb-20
Dec-19
Oct-19
Nov-19
Jul-19
Sep-19
Jun-19
Aug-19
Apr-19
May-19
Mar-19
Jan-19
Feb-19
10,700
Industry Average
Source: Fiinpro
Figure 19. Competitive Positioning Map
Source: Team evaluation
Figure 20. Average Production Cost from
Raw Materials per Ton of Steel (VND)
7,965,781
CORPORATE STRATEGY
1,220,967
6,744,814
Leverage On HRC Production To Cement Market Leader Position
The ability to manufacture HRC allows HPG to fully self-supply the input for steel pipes and galvanized
steel, which will significantly enhance the profit margin in the flat steel segments. This feature plays a
key role in creating an upstream integrated value chain for steel production (Appendix B6), further
improving the already superior gross margin in the domestic market. Moreover, HPG will also sell 60%
of its HRC to the heavily under-supplied domestic HRC market, which is expected to be entirely
consumed thanks to its competitive pricing against the imported HRC.
HPG
Others
Source: VSA, FiinPro, Team estimate
Figure 21. HPG’s Construction Steel Market
Share in Domestic Regions
54%
50%
31%
31%
34%
21%
24%
28%
15%
2017A
2018A
2019A
Jan
2020
Feb
2020
North
Mar
2020
Apr
2020
Central
May
2020
Sep
2020
South
Source: Company data
Figure 22. HPG’s 2019A Exports Breakdown
40%
55%
1% 4%
Construction Steel
Galvanized Steel Sheet
Steel Pipe
Billets
Source: Company data
Figure 23. Steel Rebar Price of HPG vs
Chinese Producers
VND mn/ton
18
16
14
12
10
Jun-20
Aug-20
Apr-20
Feb-20
Dec-19
Oct-19
Jun-19
Aug-19
Apr-19
Feb-19
Oct-18
Dec-18
Aug-18
Jun-18
Apr-18
Feb-18
Dec-17
Oct-17
Aug-17
8
Jun-17
Thanks to the competitive pricing, close relationships with tier-1 agents, huge economies of scale,
and superior product quality enhanced by deployment of world-leading technologies, HPG manages
to have (1) high bargaining power with buyers, (2) low threat of new entrants; and (3) low threat of
substitutes. Yet due to the highly competitive market and huge dependence on overseas suppliers,
HPG has (4) relatively low bargaining power with suppliers and (5) moderate rivalry (Figure 17).
Fully Integrated Production Chain To Create Huge Gap With Domestic Players
HPG is one of the two steelmakers in Vietnam apart from Formosa to have an upstream integrated
value chain from raw materials processing to finished products, including HRC production (Appendix
B6). This creates a huge competitive advantage for HPG because with control over the production
process, HPG can (1) enhance cost control and profit margins thanks to lower logistic cost and selfsupplied HRC; (2) secure quality consistency and supply chain continuity; (3) improve demand
forecast accuracy; and (4) remain resilient against raw materials and HRC price volatility.
Lowest Production Cost Led By BF-BOF Technology And Self-Supplied Electricity
HPG is one of the 3 steelmakers (with Formosa & Tisco) to deploy the BF-BOF Technology for making
billets (BF-BOF: 95%, EAF: 5% of 2020F’s total capacity).The BF-BOF with cheaper material costs
(iron ore, HCC and other) and advanced technology helps save 10-15% production cost per unit
compared to all other domestic producers using the EAF technology (steel scrap – 80% of total cost)
(Figure 20). Such diversified raw materials of BF-BOF partly shields HPG from commodity price risk.
Notably, BF-BOF’s higher initial outlay, operation and maintenance cost as well as low feedstock
flexibility compared with EAF act as huge barriers for other domestic producers to adopt BF-BOF
technology. The heat generated during HCC processing with BF-BOF technology is also used for
thermal power production, which helps self-supply ~80% of Hai Duong plant’s electricity demand and
expected 60% of DQSC’s electricity demand. This further cements HPG’s cost advantage compared
with domestic players and the primary reason why HPG is able to price its products the lowest among
its peers (Figure 18).
Unique Advantage Against Southern Peers Thanks To DQSC’s Deep-Water Seaport
The deep-water seaport is strategically located in Dung Quat, Quang Ngai province – in the Central
of Vietnam, having 11 docks and can accommodate up-to 200,000-ton ships. The port alleviates the
HPG’s biggest hindrance to establish its dominance in the Southern market – logistic cost and
geographical proximity to customers. Specifically, the port would facilitate importing input materials,
exporting finished products from the complex to domestic (both Northern & Southern) and foreign
markets. The production cost is also reduced by ~ VND 70,000 – 115,000 per ton, which poses a
great cost advantage given that the firm must import millions of tons every year. The cost and
geographical advantages of the deep-water seaport will pave the way for HPG to penetrate into this
highly attractive market, which accounts for 50% of total domestic steel demand.
Expand The Central, Southern Market Share Through DQSC And Competitive Pricing Strategy
While HPG is dominating the Northern Market with 32% market share, the company will penetrate
further into Central and Southern markets through the DQSC with the enormous, designed capacity
of 4 mtpa (Figure 21). Favorably, The HPG’s upstream integrated value chain in the steel production
significantly reduces the manufacturing cost, allowing it to implement a competitive pricing strategy to
gain an upper hand over the competitors. Moreover, HPG also demonstrates their aggressive sales
strategy in these markets through a series of customer conferences for its distributors and the
investment in Dong Nai and Can Tho ports to ensure the stability of its distribution stream.
Enlarge International Footprint Through Diversified Export Markets
Thanks to the high-quality standards products, HPG has imprinted its presence in the export markets
of construction steel, steel pipe, steel sheets, and billets (Figure 22). For future plans, HPG aims to
gain more international purchases with its competitive price compared to Chinese steel producers in
construction steel (Figure 23), which will be fueled by the strong production capacity from DQSC and
the low production cost. Moreover, as an attempt to reduce dependency on any specific market, HPG
also diversifies its export destinations (Appendix B5).
Reap Stable Revenues From Other Segments To Create A Sustainable Ecosystem
HPG has expanded to other areas to essentially reduce the dependence on steel and form an
ecosystem where steel products will efficiently complement agriculture and real estate segments,
which furthers enhance cost optimization, reduces initial investment for HPG’s projects (Appendix B7).
Agriculture: HPG plans to supply 450,000 commercial pigs, 75,000 cattle and 300 million eggs per
year by 2022. Also, the company will invest in the processing and distribution of safe and high-quality
food to the market, completing a farm-to-fork chain.
Real Estate: HPG focuses on expanding its industrial parks to capture high occupancy rate fueled by
supply chain shift from China to Vietnam. Regarding the residential area, the company aims to sell
the Pho Noi-Hung Yen Urban Area by the end of 2020.
Other Industrial Production: HPG sets target to continue its leading position in the furniture market
with the recent impressive office furniture and plastic-reducing projects. Moreover, the company aims
to maintain stable revenues from the white goods segment (freezers, refrigerators, air conditioners).
HPG's steel rebar price
China domestic steel rebar price
Source: Bloomberg, VSA
4
INVESTMENT SUMMARY
We issue a BUY recommendation on Hoa Phat Group JSC (HPG) with a 12-month target price
of 40,610 VND/share, presenting an upside of 25.92% from its closing price of VND 32,250
th
on 15 November 2020 using Sum of the Parts valuation approach. HPG is currently traded at forward
P/E 2020F of 8.5x. However, we expect forward P/E 2021F to stand attractively at 7.0x given its
remarkable performance outlook given the investment thesis below:
Figure 24. HPG’s EPS and EPS Growth
45.60%
7,000
Dung Quat Super Project To Solidify No.1 Steel Producer Position In Vietnam
The company dominates the construction steel and steel pipe market with 26.2% and 31.5% market
share respectively thanks to large production capacity, competitive pricing strategy, superior product
quality. We expect HPG steel revenue will continue to grow strongly (2020F-2024F CAGR of 16.77%)
through DQSC Project with 2 key drivers: Expansion to the Central and South of Vietnam &
International markets with Construction Steel and High sales from commercialized Hot Rolled Coil.
Double-Digit Growth Fueled By Favourable Industry Outlook
HPG will indirectly enjoy high growth driven by its bright industry position. Short-term growth
dimensions are: (1) Fast track Government Spending of VND 470 trn on Infrastructure will stimulate
the recovery for real estate and construction industry after Covid-19 thus boosting the steel
consumption demand (growth rate: 0-3% 2020F & 10-15% 2021F-2023F), (2) beneficial short-term
export opportunities from global infrastructure investment in which the ASEAN steel consumption
growth is expected to be 5.1% in 2021. As for Long-term dimensions: the consistent FDI inflows in
manufacturing will be the momentum for steel pipe demand and the real consumption growth rate of
steel can register 9% - 10% over the medium-to-long term as domestic apparent steel consumption
per capita in Vietnam is still the 3rd lowest in ASEAN and have room for exponential growth. Due to
oversupply capacity in the market in recent years, the consolidation trend will benefits HPG as a
dominant players to seize more market share from small EAF producers.
50.00%
40.00%
6,000
26.27%
5,000
30.00%
20.00%
10.50%
4,000
5.86% 4.81%
3,000
0.00%
-9.59%
2,000
10.00%
-14.68%
-10.00%
-25.99%
1,000
-20.00%
4,074
3,015
2,726
3,442
5,012
5,538
5,863
6,145
2017A
2018A
2019A
2020F
2021F
2022F
2023F
2024F
-
-30.00%
EPS
EPS growth
Source: Company data, Team estimate
Figure 25. HPG’s ROE and Net Margin
35.00%
30.00%
17.34%
17.25%
15.35%
25.00%
18.09%
25.00%
19.06%
20.00%
15.01%
HRC – Strategic Product Mix Expansion To Bolster Future Growth
With DQSC, HPG has been able to produce HRC for both internal and external channels from
Q3/2020. This marks the official presence of HPG in the HRC market of Vietnam, which has only two
domestic suppliers. Aside from HPG, Formosa can only produce up to 5 mn tons, while demand was
12 mn tons in 2019. The competitive pricing strategy will allow HPG’s HRC to be entirely absorbed by
the heavily undersupplied domestic market. Given the large DQSC’s HRC production capacity of 2.53mtpa, this product is envisioned to become the new revenue growth turbine for HPG moving forward.
Superior Margins Enabled By Best-in-class Cost Structure
While other competitors can only import HRC to produce flat steel products, the ability to produce inhouse HRC allows HPG to become the only Vietnamese steel producer to own fully integrated
production chain and cut down up to 10% total COGS. Moreover, (1) the efficient cost-control from
BOF technology, (2) the self-supplied electricity, (3) DQSC’s deep-water seaport to reduce logistic
cost, and (4) the strong market power to raise affordable selling prices will allow HPG enjoy high
margins (from 23.33% 2019A gross margin to 35.69% 2024F) despite the expected increase in raw
material prices. Lastly, high barriers to entry on investment, maintenance cost together with tariff
barrier on imported steel products, will assist the company lower production cost to compete with China
Steel in global market.
Operational Excellence – Solid Financial Position Stands Strongly Under Grey Sky
HPG’s Chairman and Board of Directors have a strong vision for HPG growth strategy. As experienced
people in the industry, they have developed a great expansion strategy to match with the demand
needs regardless of steel industry’s high cyclicity. All of HPG products ecosystem complement each
other efficiently which optimizing the cost from initial investment for the company. Moreover, while the
leverage ratio of HPG historically compared to industry peers is quite low, the BOD of HPG has
strategically used the leverage efficiently (2019A net D/E of 0.7x) to expand the production scales with
DQSC. Thanks to this, HPG in the future will enjoy high revenue growth, excellence profitability and
strong cash flow generation which will provide HPG the flexibility to maximize shareholder returns.
(ROE: 17.03% in 2019A to 28.00% in 2024F).
Sustainable Ecosystem On The Back Of Other Segments’ Steady Growth
The Agriculture segment is expected to have a steady revenue growth 2020F-2024F CAGR of 12%,
accounting for 10-11% of total revenue during the next 5 years, due to the increasing demand for pork
consumption and the firms’ expansion strategy to achieve the farm-to-fork product line and
capacity. The Real Estate segment’s revenue is projected to have a 2020F-2024F CAGR of
10% thanks to the megatrend of production base relocation from China to Vietnam that will foster the
demand for Industrial Park industry. Therefore, it will accelerate the potential value and occupancy
rate in HPG Industrial Park with favorable location. Other Industrial Production segment is also
expected to grow steadily given the current market leading position in office furniture and application
of advanced technologies for product line extension from office furniture to home furniture.
Sum-of-the-Parts Valuation Confirms Attractive Investment Rating
As the company’s segments have different business models and risk profiles, we conduct Sum-of-theParts Valuation using the Discounted Free Cash Flow to value the Steel segment, Relative Valuation
methodology using Relative P/E for Agriculture and Other Industrial Production, and P/B to value the
Real Estate segment. The target price of VND 40,610 per share for HPG implies a 25.92%
upside, reflecting attractive value for the company’s solid growth profile.
Key Risks To Be Well-Hedged By Unrivalled Cost Advantage And Diversification Strategy
Our research identifies raw materials price volatility and global trade protectionisms as the key risks
faced by HPG. As such, we have incorporated the former risk into our scenario and sensitivity analysis
to reflect its impact on our target price. HPG has the resources to mitigate these risks through the cost
minimizing strategy and diversifying the export markets.
15.00%
11.82% 12.22%
20.00%
15.00%
10.00%
10.00%
5.00%
5.00%
30.65% 23.48% 17.03% 21.22% 27.74% 29.42% 27.94% 28.00%
0.00%
0.00%
2017A
2018A
2019A
2020F
2021F
ROE
2022F
2023F
2024F
Net margin
Source: Company data, Team estimate
Figure 26. HPG’s Revenue Breakdown
(VND Trn)
126.64 132.52
0.00
112.28
119.32
0.00
90.99
0.00
00.00
55.84
00.00
63.66
46.16
00.00
00.00
-
2017A
2018A
Steel
2019A
2020F
Agriculture
2021F
Real Estate
2022F
2023F
2024F
Other Industrials
Source: Company data, Team estimate
5
FINANCIAL ANALYSIS
Net Revenue (VND bn)
Net Revenue growth (%)
2015A
27,452.9
7.55%
2016A
33,283.2
21.24%
2017A
46,161.7
38.69%
Gross margin (%)
Operating margin (%)
Net margin (%)
Asset Turnover (times)
Financial Leverage (times)
Return on Asset (%)
Return on Equity (%)
24.9%
14.53%
12.70%
1.15
1.80
14.65%
26.37%
31.1%
23.14%
19.84%
1.13
1.71
22.48%
38.48%
27.2%
20.12%
17.34%
1.07
1.65
18.57%
30.65%
Debt to Equity (times)
Debt to Asset (times)
ssssDebt to EBITDA (times)
0.31
0.18
0.75
0.10
0.06
0.20
0.27
0.16
0.75
Current ratio (times)
Quick ratio (times)
1.19
0.50
1.52
0.66
1.79
1.15
Days Receivables (days)
Days Inventories (days)
Days Payables (days)
Cash Cycle (days)
22.15
126.73
41.30
107.57
21.95
136.82
44.33
114.44
35.38
119.40
41.36
113.43
EPS (VND)
Dividend Payout Ratio (%)
3,928
20.00%
4,775
26.08%
4,074
27.78%
0
Key Financial Metrics
2018A
2019A
55,836.5
63,658.2
20.96%
14.01%
Dupont Analysis
24.8%
21.4%
18.04%
14.29%
15.35%
11.82%
0.85
0.71
1.80
2.04
13.06%
8.36%
23.48%
17.03%
Leverage Metrics
0.54
0.67
0.28
0.32
1.70
2.61
Liquidity Metrics
1.12
1.13
0.49
0.41
Efficiency Metrics
31.92
19.41
112.40
122.35
53.21
53.50
91.11
88.26
Shareholders Ratio
3,015
2,726
28.57%
23.08%
0.70
0.60
25.0 0
0.50
20.0 0
0.40
15.0 0
0.30
10.0 0
0.20
5.00
0.10
0.00
2021F
112,281.3
23.39%
2022F
119,316.8
6.27%
2023F
126,641.8
6.14%
2024F
132,516.3
4.64%
25.23%
15.20%
12.22%
0.81
2.14
9.90%
21.22%
28.77%
18.69%
15.01%
0.89
2.09
13.29%
27.74%
31.15%
21.50%
17.25%
0.90
1.90
15.52%
29.42%
31.93%
22.55%
18.09%
0.93
1.67
16.77%
27.94%
32.86%
23.75%
19.06%
0.93
1.58
17.72%
28.00%
0.79
0.37
2.14
0.59
0.29
1.28
0.42
0.24
0.92
0.30
0.19
0.71
0.22
0.16
0.56
1.12
0.54
1.20
0.51
1.45
0.61
2.05
0.91
2.71
1.31
19.76
128.07
41.37
106.46
19.76
128.07
41.37
106.46
19.76
128.07
41.37
106.46
19.76
128.07
41.37
106.46
19.76
128.07
41.37
106.46
3,355
20.48%
5,085
20.00%
6,212
20.00%
6,916
20.00%
7,622
20.00%
No.1 Steel Producer In Vietnam To Maintain Superior ROE
With unique competitive advantages, HPG has been able to secure a consistently higher ROE than
27.74% 29.42% 27.94% 28.00%
its peers (~ 1.5 to 2 times – Figure 27). Although the investment in DQSC has slightly slowed down
22.60% 23.48%
21.22%
the growth rate in ROE, we believe that with the commencement of the third blast furnace and fourth
17.03%
BF-BOF in Q3/2020, ROE would be able to achieve an upward trend with 17.03% in 2019 to 28.00%
10.70%
in 2024. This impressive performance is primarily fueled by the following factors:
3.20%
Exponential Growth Platform And Wise Investment To Fuel Sustainable Revenue Growth
Between 2015A-2019A, HPG’s revenue escalated exponentially from VND 27,000 bn to VND 63,000
2017A 2018A 2019A 2020F 2021F 2022F 2023F 2024F
bn with a CAGR of 20.05%. By 3Q2020, its revenue witnessed a 40% YoY increase amidst market
HPG
Peers average
downturn caused by the COVID-19. Such excellent performance is driven by the Steel sector (80%)
and Agriculture sector (12%).
Source: Company data, Team estimate, Reuters
Steel: HPG possesses enormous production capacity, reaching 4.2M tons of finished steel products
Figure 28. HPG’s Profitability and
Peers’ Average
32.86% in 2019A and 5.6M in 2020F, far outweighing its peers (Pomina: 1M, Nam Kim Group: 0.7M ton). The
remarkable revenue growth of 39% was attributed to the completion of Phase 3 of Hai Duong Steel
27.17%
21.44%
Integrated Complex (HDSC) on 2017. Thus, revenue from steel sector is expected to continue its
17.36%
16.86% impressive growth with a 2020F-2024F CAGR of 16.77% on the back of:
11.90%
(1) Continuous capacity addition (total capacity: 8 mtpa in 2021F) with DQSC in full operation.
11.80%
(2) advanced technological application with sticky customer relationships.
5.65%
5.40%
(3) rapid export market diversification to expand global footprint.
0.85%
2017A 2018A 2019A 2020F 2021F 2022F 2023F 2024F Agriculture: Revenue from the agriculture sector has impressively brought about 73.74% increase in
Gross margin
Net margin
2019A, with a 2015A-2019A CAGR of 43.07%. After 5 years since its establishment, the farsighted
Gross margin (Peers average)
Net margin (Peers average)
investment in agriculture has placed HPG at the leading position in:
Source: Team estimate, Reuters
(1) the Australian beef import market in Vietnam with 50% market share,
Figure 29. HPG’s Leverage Ratio
(2) egg in the North with 550,000 eggs/day. In 2020, the African Swine fever and COVID-19 pandemic
1.6
1.6
1.4
has led to a hike in pork price, boosting the agriculture’s revenue and thereby helping to partly offset
the current volatility in raw material prices. Given favorable demographic factors, this sector is
0.7
0.7
forecasted to grow at a 2020F-2024F CAGR of 11.93%.
0.5
0.5
0.3
0.3
Upstream Integrated Value Chain To Enhance Margins
0.2
0.1
HPG’s superior revenue stream also goes with the impressive gross profit growth at 2015A-2019A
2017A
2018A
2019A
2020F
2021F
2022F
2023F
2024F CAGR of 17.75%. The Group’s gross margin consistently far outperform its peers (21.44% vs 9.2% in
2019A) (Figure 28), which is supported by the lowest steel production cost enabled by efficient
Debt to Equity
Peers average
utilization of BF-BOF and self-supplied electricity to save 10-15% production cost (vs EAF), and 20%
Source: Team estimate
self-produced iron ore in HDSC thanks to An Thong mine. During 2020F-2024F, HPG’s gross profit
Figure 30. HPG’s Operating Cash flow
and net profit are forecasted to further enhance, registering CAGR of 26.12% and 27.39%
0.63
0.62
0.60
0.60
0.58
respectively, mainly driven by:
0.55
0.55
0.52
(1) Upstream integrated value chain zwith in-house HRC production.
(2) lower logistic cost to Southern market thanks to DQSC’s deep-water seaport.
(3) market power to raise selling prices, securing margins despite the expected increase in raw
material prices.
Healthy Leverage And Strong Cash Flow Generation To Finance Capacity Expansion
Although HPG’s D/E ratio increased from 0.31 (2015A) to 0.67 (2019A), the ratio has consistently
16.37
20.16
6.06
7.64
7.72
11.53
22.65
25.11
been under 1 and is lower than its peers’ average (1.37), indicating the strategic use of underleveraged
2017A 2018A 2019A 2020F 2021F 2022F 2023F 2024F
capital structure that can readily support its continuous capacity expansion (Figure 29). In addition,
the HPG’s impressive cashflow generation ability (ave. 2017A-2024F CFO/EBITDA of 0.58) makes it
CFO (trillion VND)
CFO/EBITDA
Source: Team estimate, Reuters
well-equipped to pursue future growth ventures with minimal risks of capital raising. With the
commencement of DQSC, we believe that the total CFO should maintain its strong momentum,
growing at 2020F-2024F CAGR of 26.63% given the positive outlook in revenue and gross profit
margin (Figure 30). In line with forecast, HPG should maintain a safe net D/E ratio of 0.4.
Enhanced Utilization Rate Thanks To DQSC’s Full Operation To Propel High Asset Turnover
Figure 27. HPG’s ROE and Peers Average
(2017A – 2024F)
30.65%
30.0 0
2020F
90,994.8
42.94%
0.00
6
The long-term assets in-progress have increased exponentially from VND 4,342 bn to VND 37,435 bn
between 2015 and 2019. The ongoing construction of DQSC during this period has hindered HPG
from fully utilizing these assets to generate revenue, leading to a decreasing asset turnover rate from
1,230.85 1.15 (2015A) to 0.71 (2019A), lower than its rivals (Appendix D1). However, the historical data during
HDSC’s Phase 1 & 2 prove that once fully operate, utilization rate can reach up to 120%. Therefore,
20.00 we confidently propose that HPG’s Return on Asset (ROA) would increase from 8.36% (2019A) to
17.72% (2024F) with the full operation of all four blast furnaces in DQSC.
Figure 31. HPG Dividend Payment
26.08
28.57
27.78
23.08
1,131.59
20.00
1,146.94
20.48
1,245.48
946.74
861.43
785.57
629.07
20.00
1,057.41
699.97
Profitable Investment Pool Reflected Through Brightening Shareholders’ Return
EPS has shown a gradual downward trend after DQSC’s kick-start due to the increasing share
issuance followed the increasing number of subsidiaries. Therefore, the roadmap to increase its share
capital by VND 10,000 –15,000 bn (from 2017 onwards) and issuance of additional shares would not
pose a dilution threat. Furthermore, from 6/2020 to 8/2020, HPG has distributed dividends through
20% bonus share and 5% in cash. The company has issued 552 mn shares to pay dividend and been
back to the traditional dividend payment by cash since 2017(Figure 31). Such dividend payment
signals HPG’s confidence in its future cashflow generation after the completion of DQSC.
2015A 2016A 2017A 2018A 2019A 2020F 2021F 2022F 2023F 2024F
Dividend per share (VND)
Dividend payout ratio (%)
Source: Team estimate, Reuters
Figure 32. Sum-of-the-Parts Valuation Results
(Attributable Equity Value in VND bn)
0,003.00
0,003.00
120,476.62
8,597.44
3,045.30
2,433.13
134,552.49
0,003.00
VALUATION
0,003.00
0,003.00
0,003.00
0,003.00
3.00
7.4
6.4
Our methodology stems from the rationale that since each segment carries different risk profile and
growth drivers, valuing HPG as a whole will lead to a skewed result. Specifically, we value the Steel
segment by the Discounted Cash Flow (DCF) model, the Agriculture and Other industrial production
Source: Team estimate
segments by the relative P/E (LTM) multiple, and the Real estate segment by the P/B (FY19)
multiple. Ultimately, we arrive at the 12-month target price of 40,610 VND per share, presenting
25.92% upside from its closing price of VND 32,250 on 15th November 2020.
Figure 33. Valuation Summary
1. DCF Steel
HPG'S VALUATION SUMMARY (VND BN)
We apply the Discounted Free Cash Flow to Firm (FCFF) method to value the Steel sector. This
Total Attributable Equity Value
134,552.49
method estimates the equity value of steel from the steel enterprise value and the net debt of steel.
Number of outstanding shares
Particularly, the DCF analysis concentrates on the steel-related operation such as key drivers of
3,313
(VND mn)
revenue and gross margin (Appendix E). In the 2020’s Annual general shareholder meeting, the Board
Target Price (VND)
40,610
of HPG has disclosed the information about DQSC phase 3, and most shareholders have accepted
to increase the investment capital of DQSC (adding VND 60,000 bn of PP&E). However, we stand
Current Price (VND)
32,250
conservative regarding this expansion phase of DQSC owing to the pending approval from the
Upside
25.92%
government. Therefore, our valuation does not incorporate this project in the forecasted timeline.
Source: Team estimate
a. Revenue Projection
To forecast steel revenue, we focus on all five steel product lines and their historical performance.
Figure 34. Steel Revenue Breakdown (VND trn)
The projected revenue breakdown (2019A – 2024F) is indicated in Figure 34.
Construction steel: Accumulated 8M2020, sales volume has reached 2.1mn tons (20.3% YoY),
111.34
107.39
especially 101.7% YoY sales growth from the South and 87.5% from export (Figure 35). Therefore,
9%
101.81
96.37
10%
we believe that DQSC’s large capacity and high utilization rate will continue to drive construction steel
11%
17%
12%
15%
15%
76.53
revenue at 2020F- 2024F CAGR of 11.54% given the historical 99% consumption rate (Figure 36).
8%
15%
7%
7%
20%
Steel pipe: The segment revenue was continuously recorded at 2% growth YoY in sales, nearly
7%
17%
51.29
17%
4%
17%
7%
17%
500,000 tons steel pipe within 8M2020. We expect HPG to extend designed capacity of steel pipe
4%
4%
20%
from 0.8 mn tons (2019A) to 1.0 mn tons (2022F) due to an internal supplying of HRC (Figure 37).
30%
Thus, the revenue of steel pipe is forecasted to slightly increase at 2020F-2024F CAGR of 4.82%.
49%
50%
51%
49%
49%
62%
HRC: The production of HRC has been commercially launched since Q3/2020, in which HPG can
self-supply 40% to manufacture steel pipe and galvanized products. Another 60% of HRC will be sold
2019A
2020F
2021F
2022F
2023F
2024F
to the under-supplied market which means more rooms for HPG to increase the capacity to 3mn tons.
Construction steel
Steel pipe Galvanized products HRC Billet
Source: Team estimate
Therefore, we predict revenue of HRC to grow at 2020F- 2024F CAGR of 57.12%.
Galvanized product: Since 2018, HPG has extended its product line for galvanized sheet to preFigure 35. Steel Consumption in 8M2020
painted hot dipped galvanized sheet coil products, fueling the revenue growth by 5 times YoY in 2019
HPG
Industry
for this specific product. Moreover, HPG has also recorded the impressive 150% YoY growth of the
YoY
YoY
Construction
total sales of galvanized product in 9M/2020. Thanks to the production of in-house HRC as inputs,
steel
20.3%
-4.3%
HPG can set a competitive price to gain more market share of galvanized products. Thus, the revenue
The North
-6.4%
-4.5%
of galvanized product is expected to grow at 2020F - 2024F CAGR of 32.98%.
The South
101.7%
-6.2%
Billet: With the large production capacity from DQSC, 1.25 mn tons of billet has been sold in 9M2020
Central
10.2%
-7.8%
to domestic and export markets, so we expect sales volume to reach 1.8mn tons by the end of 2020F.
Export
87.5%
-5.4%
However, the production of billet is forecasted to decrease significantly from 2021F–2024F because
Source: Fiinpro, VSA
Figure 36. Utilization Rate of Construction Steel HPG will prioritize to produce other value-added steel products. Therefore, we forecast revenue of
100%
billets to reach VND 15,210 bn in 2020, but it then decreases to VND 8,900 bn in 2024.
110%
107%
99%
100%
97%
Despite the impact of the COVID-19, steel revenue of HPG in 9M/2020 robustly grew 27.50% YoY.
93%
90%
91%
Therefore, we strongly believe that steel sector can be continuously considered as the main driver of
78%
78%
HPG steel revenue in the next 5 years with 2020F – 2024F CAGR 16.77 %.
4.4
4.4
b. Gross Margin Improvement
4.4
4.4
3.0
2.4
4.4
Gross profit margin of steel is forecasted to improve significantly based on the following factors:
2.0
2.0
(1) Significant lower cost structure of BF-BOF technology than EAF technology (Figure 38, 39 & 40).
1.3
1.3
2014A 2015A 2016A 2017A 2018A 2019A 2020F 2021F 2022F 2023F 2024F (2) The operation of DQSC creates the upstream integrated value chain which cuts imported HRC
costs for HPG since Q3/2020. Furthermore, the deep-water seaport which can reduce logistic cost is
Designed Capacity (mn tons)
Utilization rate
Source: Company data, Team estimate
also reflected detailly to the valuation in Appendix E2.
Figure 37. Utilization Rate of HPG’s Steel Pipe (3) After having acquired superior market share in Vietnam, HPG has started to increase the selling
(2016A-2024F)
price of construction steel from November 2020. Thereby, we forecast HPG to gradually bring the
109%
108%
average price of its products back to the historical level by 2024F with such strong market power.
100%
105%
99%
95%
(4) From 2021F to 2024F, HPG will prioritize the production of high value-added products to earn
90%
91%
89%
higher profits.
That said, we expect HPG to minimize 5% average cost per one ton of steel (excluded D&A expense
1.0
1.0
1.0
0.8
0.8
of COGS) in the next 5 years (Figure 41) and the gross profit margin of steel is poised to increase
0.8
0.8
0.6
from 23.33% (2019A) to 35.69% (2024F) (Figure 42).
0.6
Steel
Agriculture
Other
Industrial
Product
Real
Estate
Total
120%
100%
5.4
80%
4.4
3.4
2.4
60%
40%
1.4
20%
0.4
(0.6)
2.2
0%
120%
100%
1.7
80%
1.2
60%
0.7
40%
0.2
20%
2016A
2017A 2018A
2019A
2020F
2021F
2022F
2023F
2024F
(0.3)
0%
Designed Capacity (mn tons)
Source: Company data, Team estimate
Utilization rate
7
Figure 38. Cost Structure Between BF-BOF & EAF
Figure 39. HPG’s electricity cost (VND mn/ton) between
BF-BOF and EAF technology (2019A-2024F)
0.54
6.11%
2.32%
0.54
0.48
0.48
Figure 40. HPG’s raw material costs (VND mn/ton) between
BF-BOF and EAF technology (2019A-2024F)
9.00
0.36
0.36
7.08
8.23
6.54
8.00
7.11
6.75
7.34
6.75
7.34
6.75
7.34
6.75
7.34
7.00
0.17
14.07%
0.15
6.00
0.11
0.11
0.09
0.09
5.00
4.00
3.00
2.00
1.00
42.33%
2019A
93.89%
Iron ore
Scrap steel
Electricity cost
Scrap steel
Figure 41. HPG’s Raw Material Costs (VND
Bn/Ton) (2019A-2024F)
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Imported HRC
2019A
BOF
2020F
EAF
2021F
2022F
2022F
2023F
2024F
Electricity cost by EAF
Average
2023F
2024F
Source: Team estimate
Figure 42. Improvement of Steel Gross Margin
(2019A-2024F)
23%
26%
31%
32%
32%
36%
77%
74%
69%
68%
68%
64%
-
2019A
2020F
2021F
2022F
2023F
BOF (iron ore, hard coking coke, scrap steel)
2024F
EAF (scrap steel)
Source: Team estimate
Source: Team estimate
Source: Team estimate
14.00
2021F
Electricity cost by BOF
41.28%
Electricity cost
Hard coking coal
2020F
c. Capital Expenditure And Depreciation
Due to the full capacity of the five existing steel construction plants, HPG began investing in the new
DQSC (from 2017A) and began operating phase 1 since mid-2019A. The Phase 2 of DQSC started
producing HRCin Q3/2020 and will fully operate in Q1/2021. Moreover, HPG has also planned to
expand phase 3 of DQSC in 2023. However, as the company is still waiting for authorization from the
government for this project, we exclude the CAPEX of DQSC’s Phase 3 expansion and conservatively
forecast the CAPEX of steel to remain 6% of steel revenue from 2021F to 2024F on average to
maintain facility and equipment similarly to the case when Hai Duong plant finished Phase 2 (10/2013)
and Phase 3 (2/2016). Accordingly, we expect the depreciation expense of steel to decrease gradually
from 11% YoY growth in 2021F to 7% YoY growth in the next 5 years due to no newly incurred CAPEX.
d. Terminal Growth
As HPG’s steel segment operates mainly in the Asia-Pacific (95% of total output), we decide to
consider the long-term steel consumption growth in this region as the terminal growth rate for our
valuation with the rationale that HPG will eventually converge at this stable growth rate in the future
when it expands to a specific size. To calculate the long-term growth in steel consumption in AsiaPacific, we quantify the proportion between steel consumption and GDP growth rate from 2017A to
2023F of this region and apply this disparity into the long-term GDP growth of Asia-Pacific to arrive at
the target terminal growth rate of 1.8%.
The Asia-Pacific
Average GDP growth
Average steel consumption growth
Proportional growth (Steel Consumption/GDP)
Terminal growth rate
2017A-2023F
5.15%
3.09%
60.00%
2023F-2050F
3.00%
1.80%
Source: OECD, EIU, MRFR
2019A
2020F
2021F
2022F
COGS/Revenue
2023F
2024F
Gross Margin
Source: Team estimate
Figure 43. HPG’s Steel Segment Valuation
Summary
HPG'S STEEL SEGMENT VALUATION (VND BN)
Enterprise Value of Steel Segment
from DCF
152,914.53
Less Net Debt of Steel Segment
32,434.29
Implied Equity Value
120,480.24
HPG Ownership %
120,476.62
Source: Team estimate
Figure 44. HPG’s Agriculture Segment
Valuation Summary
WACC
HPG'S AGRICULTURE SEGMENT VALUATION (VND
BN)
Earnings (LTM)
1,212.6
P/E (LTM)
7.0x
Implied Equity Value
8,597.5
HPG Ownership %
99.999%
Attributable Equity Value
8,597.4
Source: Team estimate
Figure 45. HPG’s Other Industrial Production
Segment Valuation Summary
HPG'S OTHER INDUSTRIAL PRODUCTION
SEGMENT VALUATION (VND BN)
Earnings (LTM)
P/E (LTM)
Implied Equity Value
HPG Ownership %
Attributable Equity Value
R² = 0.5428
10%
20%
30%
40%
ROE
Source: Team estimate
50%
60%
COMPARABLE PEERS
Shandong Minhe Animal
Husbandry Co Ltd
Nichiwa Sangyo Co Ltd
Dabaco Group
Woorison F&G Co Ltd
Hokuryo Co Ltd
Average
HPG’s Agriculture
Target P/E (LTM)
Source: Team estimate
Figure 46. Regression Analysis Between
P/B and ROE (FY19)
of Vietnamese Real Estate Companies
0%
2. Relative Valuation
a. Agriculture Valuation
We value the agriculture segment of HPG using the relative valuation method. A set of comparable
companies was generated based on the same business models and revenue level in the last fiscal
year (Appendix F1). We use P/E (LTM) for this valuation part since it can better reflect the triumph of
HPG’s agriculture segment in Q1 and Q2/2020. As different markets (exchanges) carry different level
of P/E on average, we use relative P/E by dividing company P/E by market P/E to adjust for this
disparity between the exchanges and arrive at target P/E (LTM) at 7.0x for HPG’s agriculture segment.
Companies
247.7
9.8x
2,442.5
99.618%
2,433.1
5.0
4.5
4.0
3.5
3.0
2.5
P/B 2.0
1.5
1.0
0.5
0.0
WACC’s COMPONENTS
Vietnam’s 10-year government bond yield (3Y Average)
Arithmetic averages of the VN-Index’s annual return from 2015 to 2020
Damodaran (2020) based on the Moody’s Rating of Ba3 for Vietnam
Using regional peers to arrive at unlevered and re-levered beta
CAPM is used with the incorporation of the country risk premium
Calculated using synthetic rating of BBB based on interest coverage ratio
Calculated by adding risk-free rate to HPG’s synthetic default spread
Corporate income tax decreed by the government of Vietnam
Calculated using the market value of debt and equity of HPG’s steel
segment
Calculated using adjusted after-tax cost of debt, cost of equity, and debt12.98%
equity ratio at 40.3%
Risk-free rate
3.95%
Market return
11.01%
Country risk premium
5.29%
Beta
1.02
Cost of equity
16.42%
Company’s default spread 1.56%
Pre-tax cost of debt
5.51%
Tax rate
20.00%
HPG’s steel segment D/E
40.30%
99.997%
Attributable Equity Value
e. Weighted Average Cost Of Capital
We calculate the Weighted Average Cost of Capital (WACC) using the cost of debt, cost of equity, and
the market value of debt to equity of HPG’s steel segment. Specifically, the cost of debt is computed
by adding the default spread for HPG to the risk-free rate to reflect the premium required by creditors
(Appendix E5). For the cost of equity, we use the pure-play method to arrive at the target beta for
HPG’s steel segment at 1.02 (Appendix E4), and the country risk premium is also included to capture
the risks inherent in the volatile equity environment of Vietnam.
70%
Exchange
Market
P/E (LTM)
Company
P/E (LTM)
Relative
P/E (LTM)
Shenzhen Stock Exchange
Tokyo Stock Exchange
Ho Chi Minh Stock Exchange
Korea Exchange
Tokyo Stock Exchange
29.0x
5.7x
0.20
17.6x
14.4x
28.6x
17.6x
13.2x
4.6x
12.1x
13.6x
0.75
0.32
0.42
0.77
0.49
Ho Chi Minh Stock Exchange
14.4x
7.0x
b. Other Industrial Production Valuation
As for the other industrial production segment of HPG, our valuation is based on the relative valuation
method with the relative P/E (LTM) multiple. Since HPG engages in two distinctive lines of product,
furniture and refrigerant equipment, we set up two sets of comparable companies for each sector
based on business model and revenue level and compute a blended target P/E (LTM) with a 60%
weight for furniture and 40% weight for refrigerant equipment according to their average revenue
contribution in this other industrial production segment. Our target P/E (LTM) for this segment is 9.8x.
8
COMPARABLE PEERS
Korea Exchange
Bombay Stock Exchange
Thailand Stock Exchange
Market
P/E (LTM)
28.6x
23.7x
15.7x
Company
P/E (LTM)
10.9x
12.0x
9.9x
Hanoi Stock Exchange
Colombo Stock Exchange
Taipei Exchange
10.3x
10.1x
18.1x
6.6x
16.6x
10.4x
Ho Chi Minh Stock Exchange
14.4x
Companies
Figure 47. HPG’s Real Estate Segment
Valuation Summary
HPG'S REAL ESTATE SEGMENT VALUATION (VND
BN)
(P/B)/ROE (Median)
8.08
ROE (FY19)
17.20%
Target P/B (FY19)
1.3x
Equity Book Value (FY19)
2195.1
Implied Equity Value
3,050.0
HPG Ownership %
99.846%
Attributable Equity Value
3,045.3
Source: Team estimate
48,485
47,193
45,660
44,084
42,465
-0.96%
Figure 48. Sensitivity Analysis Between Main
Steel Raw Materials And Target Price
Exchange
Hankook Furniture Co Ltd
WIM Plast Ltd
Modernform Group PCL
Furniture Average
Nagakawa Group JSC
Regnis Lanka PLC
Up Young Cornerstone Corp
Refrigerant Equipment Average
Blended Relative P/E (LTM)
HPG’s Other Industrial Production
Target P/E (LTM)
Relative P/E
(LTM)
0.38
0.51
0.63
0.51
0.64
1.64
0.57
0.95
0.68
9.8x
c. Real Estate Valuation
We also value the Real estate segment by Relative valuation method. For this segment, we utilize the
book-to-price multiple (P/B) because the key value of this sector lies essentially in the owned lands,
which is captured in the book value of equity. Moreover, as the return on equity ROE is the
fundamental driver of the P/B, we can see the tight positive correlation between these variables in the
Vietnam’s real estate market (Figure 46). Bearing this in mind, we divide the P/B by the ROE of the
peers to arrive at a more accurate result. Out target P/B (FY19) for HPG’s real estate segment is 1.3x
(Figure 47). Please refer to Appendix F3 for a full list of 50 peers we pick for this valuation.
46,463
44,179
-1.11%
39,421
41,832
44,971
42,687
-0.11%
37,929
40,340
43,438
40,610
0.89%
36,396
38,807
41,862
39,578
37,231
1.89%
2.89%
34,820
37,959
35,612
33,201
1.04%
3.04%
Iron Ore
Price
Average
YoY %
Change
20212024
2.04%
0.04%
40,243
SCENARIO AND SENSITIVITY ANALYSIS
Hard Coking Coal
Price Average YoY
% Change 20212024
Source: Team estimate
Our scenario analysis factors in two main variables for the steel segment: the average percentage
YoY change of total steel sales volume and average cost per tonne of steel from 2021F to 2024F.
Specifically, the bull case assumes an acceleration in government expenditure, a rapid resurgence of
the real estate industry, a powerful stride of HPG to capture market share in the galvanized steel
market, and a significant softening of raw materials price. On the other hand, the bear case depicts a
scenario of inefficient government spending, dismal real estate industry, HPG’s poor performance in
the galvanized steel market, and a sluggish downward movement of raw materials price. Regarding
the remaining segments, we utilize the historical movements of peers’ multiples to arrive at the bear
case spread and bull case spread (Appendix G). The analysis is summarized in the below table.
Total Steel Sales
Volume
(% change yoy
2021-2024)
Average cost per
tonne of
steel (% change yoy
2021-2024)
Agriculture P/E
Other
Industrial
Production
P/E
Real
Estate
P/B
Target Price
(VND)
Recommendation
BUY
BASE CASE
6.66%
0.49%
7.0x
9.8x
1.3x
40,610
BULL CASE
6.83%
-1.10%
9.7x
11.6x
1.9x
48,825
BUY
BEAR CASE
5.82%
2.51%
5.7x
7.9x
0.6x
28,684
SELL
Since iron ore and hard coking coal are the main raw materials of the BOF, we perform a sensitivity
analysis on the average YoY changes in these inputs price from 2021 to 2024 to assess their impact
on our target price. As such, our result shows that the hard coking coal price has to rise by 1.89% YoY
from 2021 to 2024 and the iron ore’s price drop rate has to slow down by 200 bps to turn our
recommendation to HOLD (Figure 48). We also run a sensitivity analysis on the changes in the WACC
and Terminal Growth Rate. Accordingly, to turn our recommendation to HOLD, the terminal growth
rate will have to drop by 50 bps to 1.30%, and the WACC will have to tick up by 75 bps to 13.73%.
Terminal Growth Rate (%)
1.05%
34,563
35,512
37,444
38,400
39,397
40,438
41,527
13.73%
13.48%
13.23%
12.98%
12.73%
12.48%
12.23%
WACC
(%)
1.30%
35,493
37,166
38,115
39,105
40,138
41,219
42,349
1.55%
36,892
37,833
38,815
39,841
40,913
42,034
43,209
1.80%
37,554
38,529
39,546
40,610
41,723
42,888
44,110
2.05%
38,244
39,254
40,310
41,414
42,571
43,783
45,056
2.30%
38,965
40,013
41,109
42,256
43,459
44,722
46,049
2.55%
39,718
40,805
41,945
43,139
44,392
45,708
47,094
INVESTMENT RISKS
Figure 49. Risk Matrix
Medium
High
Impact
IR1
MR1
MR2
RR3
RR2
MR3
RR1
Low
PR1
ER1
Low
Medium
Probability
Source: Team estimate
High
Market Risk ǀ Raw Material Price Volatility (MR1)
Since steel products contribute more than 80% of HPG revenue and 83% of NPAT, any changes in
prices of input materials (especially iron ore and hard coking coal) will impose a significant impact on
the COGS. However, HPG can self-supply 20% of iron ore thanks to An Thong mine and source 30%
of iron ore from domestic suppliers in Vietnam at a lower price than imported materials (due to
Vietnamese government’s export restrictions). Moreover, HPG has strategically utilized commodity
derivatives, specifically future and forward contracts, to hedge this risk.
Market Risk ǀ Interest Rate Risk (MR2)
HPG has incurred a vast amount of debt to invest in DQSC in which the company’s NPAT is under the
pressure of interest burden. However, by the end of Q2/2020, HPG signed an interest rate swap
contract with a value of VND 4,660 bn, to achieve a stable interest structure including fixed rate and
floating rate payment according to the company’s policy. Moreover, HPG is well-known as a good credit
rating company, allowing the company to make loan agreements at a favorable borrowing cost.
Market Risk ǀ Exchange Rate Risk (MR3)
90% of HPG materials are imported, which establishes the correlation between HPG’s gross profit and
the USD/VND exchange rate. Therefore, any fluctuation in the exchange rate would cause volatility in
the value of payment bills. To mitigate this risk, HPG has meticulously estimated the payment time of
import contract to benefit from the favourable exchange rate. Moreover, HPG can hedge the currency
risk by commodities derivative contracts or currency forward contracts.
Regulatory Risk ǀ Trade Protectionism Removal (RR1)
9
Figure 50. Risk Mitigating Methods
MITIGATING
METHODS
RISK
Market risk
Materials
Price
Volatility
(MR1)
Interest
Rate Risk
(MR2)
Exchange
Rate Risk
(MR3)
20% self-supply of iron ore
Take derivatives (signing future and
forward contracts)
Sign interest rate swap
Keep interest coverage ratio
high and above 2
Calculate the payment time for
import contract
Sign derivative or currency
forward contracts
Regulatory Risk
Trade
Protection
Removal
(RR1)
Global
Trade
Barriers
(RR2)
Tax Refund
for Chinese
Steel Export
(RR3)
Acquire similar manufacturing
technology to China
Ideal geographic location
Diversifying export destinations
Acquire similar manufacturing
technology to China
Ideal geographic location
Industry Risk
Cycle Effect
(IR1)
Diversifying business activities
Pandemic Risk
Covid-19
Outbreak
(PR1)
Comply with safety procedures
Seize opportunity from
government’s stimulus package
on infrastructure
Environmental Risk
Waste
Emission
(ER1)
Develop eco-friendly steel
making process
Source: Company data, Team analysis
HPG’s principal activities are significantly impacted by the Government’s regulations, particularly the
lowering tariffs on steel products during March 2020 to March 2023. When the tariffs are gradually
removed, HPG’s steel will have to face fiercer competition with imported steel products, especially from
China. Moreover, any tightening policy on the property market would directly impact HPG’s Real Estate
sector and Steel sector. However, HPG is the only one in the market that can compete with Chinese
steel thanks to the upstream integrated value chain, similar manufacturing technology, and ideal
geographical location that enable the company to set competitive prices.
Regulatory Risk ǀ Global Trade Protectionism (RR2)
The US, Thailand, Britain, Australia are among the nations that have initiated dumping probes against
Chinese steel products in the past years. Undoubtedly, the protectionism of the US towards Chinese
goods during the Trade war has ignited the wave of protectionism, anti-dumping tariff to be specific,
around the world. This global trend is poised to extend to any entity with export volume exceeding 5%
of that country’s total import turnover. Consequently, it raises a risk for HPG’s export market as its
products can be hit by anti-dumping tariff of its trading partners. Nevertheless, HPG has been proactive
to mitigate the risk by diversifying its export destinations and avoid focusing on any specific market,
hence minimizing the possible adverse effect of this risk.
Regulatory Risk ǀ Tax Refund For Chinese Steel Export (RR3)
The China’s Ministry of Finance has announced a higher tax refund rate on export, in which 9-10% is
the refund rate for steel pipe and steel bar export. As such, exported steel price from China could further
decrease, putting pressure on Vietnam’s domestic steel prices. However, as aforementioned, the cost
advantage from the full operation of DQSC and upstream integrated value chain would allow HPG to
price its products competitively against Chinese competitors.
Industry Risk ǀ Cycle Effect (IR1)
65% of steel consumption in Vietnam comes from the Real estate and Construction industry, reflecting
the dependence of Steel demand on these industries. However, these industries experience a high
cyclical effect since they closely link to the changes in the macro-economy. Moreover, the difficulty in
legal processing would also hamper the sales of real estate projects, affecting the construction industry
and thus demand for steel. However, the diversification in business activities of HPG is expected to
dampen negative cyclical effects on steel sales. Moreover, HPG aims to achieve an export revenue of
20% of total revenue, thereby mitigating the domestic macro-economic effects on its business.
Pandemic Risk ǀ Covid-19 Outbreak (PR1)
Due to the ongoing COVID-19 pandemic, the DQSC project and HPG business activities may face a
risk of postponement as the demand for steel may be impeded, negatively impacting HPG’s revenue,
profitability, and stock price. However, HPG has proactively implemented all the safety procedures for
its workers, which allows the firm to continue operation during this critical period. Moreover, the
government has been prompting the operation of construction industry to stimulate the economic
growth in the post-pandemic period, which will guarantee the high demand for steel products.
Environmental Risk ǀ Waste Emmission (ER1)
As a nature of a manufacturing company, the excessive waste from HPG steel production has caused
pollution to the environment as well as controversy with the nearby residents. These scandals raise the
concern to investors owing to the bad reputation on company’s sustainable image. Moreover, cost to
resolve these issues may add up to higher expenses and lower the net margin of HPG. However, the
company has attempted to shed light upon this enigma through investing up to 20% of total capital
investment to develop the eco-friendly steel making process for HDSC and DQSC.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Figure 51. Environment, Social and
Governance
Environment
4
3
2
1
0
Governance
Social
Source: Company data, Team estimate
Figure 52. Corporate Governance Summary
EXECUTIVE
COMMITTEE
4
3
2
1
SHAREHOLDER
RIGHTS’
PROTECTION
0
COMPENSATION
COMMITTEE
AUDIT
COMMITTEE
Environment
HPG’s operation as a heavy-industry company is inevitably linked with the formation of toxic gases and
chemicals. Notably, HPG mainly uses the BF-BOF technology which is found to generates CO2 25
times greater and SO2, NO2, CO 11 times greater than the EAF. That being said, HPG has put efforts
to soothen this adverse impact on the environment through initiatives to reduce toxic and greenhouse
emissions, reuse and save natural resources, properly treat waste, and reduce plastic consumption.
However, there still ocassionally occurs scandals of HPG related to harmful exhaust and environmental
degradation, which shows HPG’s lack of commitment. Based on MSCI’s ESG Framework, the
Environmental pillar of HPG is rated at 2.3/4.0 (industry average 1.9) (Appendix H2).
Social
HPG has made obvious efforts to mitigate the adverse effects of its manufacturing process onto the
surrounding residential areas with circular economic model to manage chemical waste more
effectively. The Board also carefully pays attention to employee trainings and investment into social
projects to help enhance living standards of the local community (Appendix H3).Although there are
health check-ups for employees and workers in the steel complexes, who face high health risks, The
company must take place more regularly and with more in-depth examination. Based on MSCI’s ESG
Framework, the Social pillar of HPG is rated at 2.4/4.0 (industry average 1.8) (Appendix H2).
Governance
HPG’s Chairman and CEO have been with the company since the early days when HPG was still a
small trading company in the steel industry. From our view, HPG’s Board of Directors with an average
tenure of 20+ years has demonstrated a far-sighted vision and effective strategies for the company to
achieve the scale expansion, ecosystem efficiency, and market leader position despite the cyclical
nature of the steel industry (Appendix H1). Decisions are made and proposed in the shareholders
meeting with the best interest of HPG’s shareholders in mind. Notwithstanding, the risk of biasedness
in HPG’s governance might be exposed through having up to 44.22% ownership belonged to Mr. Tran
Dinh Long family and Executive Board and the lack of independent BOD members (1/11). As large
number of shares owned by internal members can have incentive that they will work hard to maximise
shareholders return, the drawbacks will be others shareholders would have no control in the company
decisions. Based on CFA Corparate Governance Framework, the Governance pillar of HPG is rated
at 3.8/4.0 (industry average 2.6) (Appendix H2).
Source: Team estimate
10
TABLE OF CONTENT
APPENDIX A: FINANCIAL STATEMENTS
APPENDIX A1: BALANCE SHEET
APPENDIX A2: INCOME STATEMENT
APPENDIX A3: CASH FLOW STATEMENT
APPENDIX B: BUSINESS DESCRIPTION
APPENDIX B1: SEGMENT DESCRIPTION
APPENDIX B2: SUBSIDIARIES BREAKDOWN
APPENDIX B3: PLANTS AND CAPACITY
APPENDIX B4: REAL ESTATE PROJECTS DEPLOYED BY HPG
APPENDIX B5: EXPORT DISTRIBUTION NETWORK
APPENDIX B6: HPG VALUE CHAIN ANALYSIS
APPENDIX B7: HPG PRODUCT ECOSYSTEM
APPENDIX C: INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
APPENDIX C1: KEY VIETNAM’S MACROECONOMIC INDICATORS ASSUMPTIONS:
APPENDIX C2: EXCHANGE RATE AND CURRENT ACCOUNT SURPLUS:
APPENDIX C3: VIETNAM'S MAJOR INFRASTRUCTURE PROJECTS IN 2020F-2026F & STEEL USAGE IN VIETNAM
APPENDIX C4: VIETNAM’S REGISTERED FDI BY SECTORS (USD BN)
APPENDIX C5: VIETNAM’S ACTIVE TRADE PROTECTION MEASURES ON STEEL PRODUCTS:
APPENDIX C6: TARIFF REMOVAL SCHEDULE OF VIETNAM'S FTA REGARDING STEEL PRODUCTS
APPENDIX C7: END OF STIMULUS DECADE IN CHINA
APPENDIX C8: PORTER’S FIVE FORCES ANALYSIS:
APPENDIX C9: MARKET SHARES IN VIETNAM STEEL INDUSTRY
APPENDIX C10: SWOT ANALYSIS
APPENDIX D: FINANCIAL ANALYSIS
APPENDIX D1: PEERS RATIO COMPARED WITH HPG
APPENDIX D2: BEINEISH M-SCORE CALCULATION FOR HPG
APPENDIX D3: ALTMAN Z-SCORE CALCULATION FOR HPG
APPENDIX D4: HPG DIVIDEND DISTRIBUTION
APPENDIX E: DCF – STEEL
APPENDIX E1: NET REVENUE BY STEEL PRODUCT
APPENDIX E2: COGS & GROSS MARGIN
APPENDIX E3: CAPITAL EXPENDITURE AND DEPRECIATION FOR STEEL
APPENDIX E4: COST OF EQUITY
APPENDIX E5: COST OF DEBT
APPENDIX E6: FCFF MODEL & MULTIPLES COMPARISION
APPENDIX F: RELATIVE VALUATION
APPENDIX F1: PEERS SELECTION FOR AGRICULTURE
APPENDIX F2: PEERS SELECTION FOR OTHER INDUSTRIAL PRODUCTION SEGMENT
APPENDIX F3: P/B VALUATION FOR REAL ESTATE SEGMENT
APPENDIX G: SCENARIO ANALYSIS
APPENDIX H: ENVIROMENTAL, SOCIAL AND GOVERNANCE
APPENDIX H1: HPG’S BOARD OF DIRECTORS
APPENDIX H2: EVALUATION OF HPG’S ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE
APPENDIX H3: CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY PRACTICES
APPENDIX H4: CIRCULAR ECONOMIC MODEL OF HOA PHAT GROUP
Mtpa
BOD
BOF
BOM
CAGR
CAPEX
CFO
COGS
DCF
DQSC
EAF
EBITDA
EBIT
EBT
FCFF
GDP
HPG
HRC
NPAT
P/E
P/B
WACC
LIST OF ABBREVIATIONS
Million Tonnes per Annum
Board of Directors
Blast Oxygen Furnace
Board of Management
Compounded Annual Growth Rate
Capital Expenditure
Cash Flow from Operation
Cost of Goods Sold
Discounted Cash Flow
Dung Quat Steel Complex
Electric Arc Furnace
Earnings Before Interest, Tax, Depreciation & Amortization
Earnings Before Interest and Tax
Earnings Before Tax
Free Cash Flow to Firm
Gross Domestic Product
Hoa Phat Group
Hot Rolled Coil
Net Profit After Tax
Price to Earnings
Price to Book Value
Weighted Average Cost of Capital
11
12
12
12
12
13
13
14
14
15
15
16
16
16
16
17
17
17
17
18
18
18
19
20
20
20
21
21
22
22
22
23
24
24
24
25
25
25
25
26
26
27
27
28
30
30
APPENDIX A: FINANCIAL STATEMENTS
APPENDIX A1: BALANCE SHEET
VND bn
2017A
Current assets
33,068.06
Cash and cash
4,264.64
equivalents
Account receivables 6,555.42
short-term
Inventories
11,748.87
Other current assets
562.42
Non-current assets
19,954.12
Tangible fixed assets
13,012.26
Intangible fixed assets
185.54
Investment property
191.19
Long-term work in
5,468.75
progress
Other long-term assets
1,057.62
Total assets
53,022.18
Current liabilities
18,519.72
Accounts payable to
4,226.44
suppliers
Short-term borrowings
11,328.52
Bonus and Welfare fund
705.69
Non-current liabilities
2,104.88
Long-term borrowings
1,651.49
Total liabilities
20,624.60
Shareholder equity
32,397.58
Share capital
15,170.79
Capital surplus
3,202.20
Retained profits
13,397.03
Non-controlling interest
110.61
Total Resources
53,022.18
2018A
25,308.73
2019A
30,436.94
2020F
44,290.40
2021F
47,667.91
2022F
55,542.34
2023F
67,020.99
2024F
82,129.87
2,515.62
4,544.90
6,487.46
5,455.60
4,121.24
5,828.62
6,773.28
3,210.28
3,561.40
6,291.24
9,659.68
13,239.18
17,038.44
21,013.93
14,115.14
1,743.13
52,914.28
12,565.36
217.20
179.74
19,411.92
1,544.38
71,339.09
30,980.12
269.37
576.62
23,028.97
2,113.09
78,483.75
52,001.20
441.44
573.58
27,492.15
2,814.85
83,209.35
59,888.62
487.13
575.12
32,234.99
3,560.58
78,885.43
59,077.92
636.92
568.81
37,269.00
4,352.09
71,899.47
56,317.65
840.14
551.93
42,536.53
5,180.32
63,938.60
53,177.23
1,218.36
520.96
38,107.32
37,435.32
22,461.19
19,092.01
15,273.61
10,691.53
5,345.76
1,755.77
78,223.01
22,636.15
2,004.15
101,776.03
26,984.20
2,916.35
122,774.14
39,461.65
3,062.16
130,877.26
39,845.75
3,215.27
134,427.77
38,342.95
3,376.03
138,920.45
32,708.62
3,544.84
146,068.47
30,319.32
8,706.91
7,507.20
8,735.63
10,251.43
11,862.20
13,571.87
15,360.84
11,494.72
761.40
14,963.91
12,811.00
37,600.06
40,622.95
21,239.07
3,211.56
15,126.44
126.96
78,223.01
16,837.65
806.60
27,005.20
19,842.10
53,989.39
47,786.64
27,610.74
3,211.56
15,876.91
163.21
101,776.03
24,491.72
869.56
26,307.77
20,561.03
65,769.42
57,004.73
33,133.00
3,211.56
19,535.15
200.82
122,774.14
19,994.00
1,003.16
26,563.84
18,208.48
66,409.59
64,467.68
33,133.00
3,211.56
26,922.16
276.76
130,877.26
15,609.24
1,166.37
20,646.20
16,387.64
58,989.15
75,438.62
33,133.00
3,211.56
37,781.47
388.39
134,427.77
12,931.41
1,348.05
17,612.33
13,929.49
50,320.95
88,599.50
33,133.00
3,211.56
50,808.44
522.31
138,920.45
11,565.89
1,548.28
11,790.85
11,143.59
42,110.17
103,958.30
33,133.00
3,211.56
66,010.96
678.59
146,068.47
2018A
55,836.46
41,996.15
13,840.31
653.03
377.68
12,809.59
2019A
63,658.19
50,011.14
13,647.05
849.08
488.76
12,309.22
2020F
90,994.81
68,032.56
22,962.25
1,213.70
698.64
21,049.91
2021F
112,281.32
79,976.01
32,305.30
1,497.62
862.08
29,945.61
2022F
119,316.79
82,153.90
37,162.89
1,591.46
916.09
34,655.34
2023F
126,641.79
86,209.37
40,432.42
1,689.16
972.33
37,770.93
2024F
132,516.35
88,968.36
43,547.99
1,767.51
1,017.44
40,763.04
2,259.59
2,566.18
5,727.11
6,251.29
6,770.51
7,325.84
7,934.13
10,550.00
294.41
163.43
(772.32)
(539.86)
9,743.03
471.05
276.78
(1,181.68)
(936.71)
15,322.81
415.73
244.28
(1,995.19)
(1,396.64)
23,694.33
593.42
348.69
(3,434.30)
(2,404.01)
27,884.83
499.04
293.23
(2,876.43)
(2,013.50)
30,445.09
376.98
221.51
(2,414.72)
(1,690.31)
32,828.91
533.16
313.27
(2,041.52)
(1,429.06)
-
(1.43)
(2.05)
(2.52)
(2.68)
(2.85)
(2.98)
488.86
(489.87)
657.68
(592.00)
940.11
(846.22)
1,180.27
(1,044.18)
1,254.23
(1,109.60)
1,331.22
(1,177.72)
1,392.98
(1,232.35)
10,071.07
9,096.66
13,835.19
20,987.02
25,649.38
28,558.00
31,478.19
(1,506.32)
(1,603.31)
(2,767.04)
(4,197.40)
(5,129.88)
(5,711.60)
(6,295.64)
35.80
84.89
121.35
149.74
159.12
168.89
176.72
8,600.55
27.54
7,578.25
50.81
11,189.50
72.62
16,939.35
89.61
20,678.62
95.23
23,015.29
101.07
25,359.27
105.76
8,573.01
7,527.44
11,116.88
16,849.74
20,583.40
22,914.22
25,253.51
Source: Company data, Team estimate
APPENDIX A2: INCOME STATEMENT
VND bn
2017A
Net Revenue
46,161.69
COGS
33,619.21
Gross profit
12,542.48
Selling expenses
581.58
G&A expenses
355.05
EBITDA
11,605.86
Depreciation &
1,984.03
Amortization
Operating profit/EBIT
9,621.83
Financial income
186.22
Interest income
108.74
Financial expense
(555.76)
Interest expenses
(479.71)
Share of loss in
(0.16)
associates
Other income
432.79
Other expenses
(396.55)
Net profit before
9,288.37
tax/EBT
Current corporate
(1,317.63)
income tax expense
Deferred corporate
44.02
income tax expense
Net profit after tax
8,014.76
Non-controlling interest
8.08
Net income attributed
8,006.67
to shareholders
Source: Company data, Team estimate
APPENDIX A3: CASH FLOW STATEMENT
VND bn
Cash flow from
operating activities
Profit before tax
Depreciation &
Amortization
Profits from investing
activities
Interest expense
Cash flow before
change in working
capital
2017A
2018A
2019A
2020F
2021F
2022F
2023F
2024F
6,058.32
7,642.34
7,715.17
11,534.93
16,370.80
20,166.45
22,656.11
25,116.64
9,288.37
10,071.07
9,096.66
13,835.19
20,987.02
25,649.38
28,558.00
31,478.19
1,984.03
2,259.59
2,566.18
5,727.11
6,251.29
6,770.51
7,325.84
7,934.13
(100.14)
(112.99)
(286.19)
(244.28)
(348.69)
(293.23)
(221.51)
(313.27)
479.71
539.86
936.71
1,396.64
2,404.01
2,013.50
1,690.31
1,429.06
11,657.00
12,740.51
12,358.83
20,783.79
29,398.51
34,268.34
37,495.36
40,685.42
12
Change in A/R
Change in Inventories
Change in A/P and
other liabilities
Change in working
capital
Interest paid
Income tax paid
Other payments from
operating activities
Cash flow from
investing activities
Capital expenditure
Proceeds from Fixed
Assets Disposals
Change in LT-ST
Financial Investment
Receipts of interests on
term deposits and loans
Cash flow from
financing activities
Proceeds from equity
issued
Change in ST-LT Loans
Payment of dividends
NET CASH FLOW IN
YEAR
Cash - Beginning
Cash - Ending
(462.71)
(2,201.68)
(1,423.16)
(2,301.59)
(288.52)
(5,132.24)
(2,729.84)
(3,617.04)
(3,368.44)
(4,463.18)
(3,579.50)
(4,742.84)
(3,799.25)
(5,034.01)
(3,975.49)
(5,267.52)
(427.14)
1,459.71
3,556.65
1,228.43
1,515.80
1,610.78
1,709.66
1,788.97
(3,148.67)
(2,765.96)
(1,872.58)
(4,549.74)
(5,614.07)
(5,965.84)
(6,332.09)
(6,625.82)
(476.52)
(1,723.78)
(611.77)
(1,416.44)
(867.28)
(1,551.74)
(1,396.64)
(2,767.04)
(2,404.01)
(4,197.40)
(2,013.50)
(5,129.88)
(1,690.31)
(5,711.60)
(1,429.06)
(6,295.64)
(249.71)
(304.00)
(352.06)
(535.45)
(812.24)
(992.68)
(1,105.25)
(1,218.26)
(17,925.77)
(20,533.13)
(18,064.22)
(16,584.92)
(2,269.22)
(7,012.03)
(7,529.60)
(11,737.39)
(8,875.04)
(27,594.12)
(20,825.37)
(11,829.33)
(6,736.88)
(7,159.01)
(7,598.51)
(7,950.98)
6.99
64.82
26.94
15.30
8.71
9.26
9.83
10.28
(9,175.08)
6,212.33
2,391.61
(4,999.88)
4,118.97
(146.25)
(152.60)
(4,099.69)
164.53
947.00
369.55
244.28
348.69
293.23
221.51
313.27
11,573.69
11,142.51
12,377.94
6,992.55
(15,133.43)
(14,488.78)
(13,419.15)
(12,434.58)
5,057.29
11.42
0.09
0.09
0.09
0.09
0.09
0.09
6,520.16
(3.75)
11,137.01
(5.92)
12,390.50
(12.65)
8,373.00
(1,380.54)
(6,850.27)
(8,283.25)
(6,205.61)
(8,283.25)
(5,135.98)
(8,283.25)
(4,151.42)
(8,283.25)
(293.75)
(1,748.28)
2,028.89
1,942.56
(1,031.86)
(1,334.36)
1,707.37
944.66
4,558.66
4,264.64
4,264.64
2,515.62
2,515.62
4,544.90
4,544.90
6,487.46
6,487.46
5,455.60
5,455.60
4,121.24
4,121.24
5,828.62
5,828.62
6,773.28
Source: Company data, Team estimate
APPENDIX B: BUSINESS DESCRIPTION
APPENDIX B1: SEGMENT DESCRIPTION
Iron and Steel: HPG manufactures all types of construction steel, steel pipes and galvanized products. Its products are widely used in automotive,
infrastructure Construction, industrial Construction and Ship Building.
% OF
CATEGORY
END PRODUCTS
REVENUE
Deformed Bar, Wire Rod, Billet, Steel Bar, Roll Steel, Hot Rolled
Construction
Coil, Special Steel (Galvanized drawstring steel, Flanges, PC
60%
steel
5%
Bar, PC Strand)
Black welded pipe, hot dipped galvanized pipe, pre-galvanized
Steel pipe
30%
pipe, large-sized pipe, galvanized iron coil, other industrial steel
30%
Picked & oiled steel coils (PO), cold rolled steel coils, hot dipped
Galvanized
galvanizing steel coils, hot dipped galvanizing color coated steel
5%
60%
Products
coils, AL-ZN Alloy-coated steel coils, AL-ZN Alloy-coated color
coated steel coils
Source: Company data
Agriculture: HPG expand its Agriculture business in 2016, focusing on supplying high quality breeding
of pigs and poultry, processing animal feed, production of fertilisers and nitrogen compounds and
trading agricultural equipment.
CATEGORY
Construction steel
Steel sheet
% OF
REVENUE
2%
END PRODUCTS
Chicken
Chicken breed, Laying hen, Clean chicken eggs
Beef
Australian beef
60%
Pork
Animal Feed
Breeding pigs, commercial breeding pigs and finished pigs
24%
Feeds for cattle
14%
2%
14%
24%
Source: Company data
60%
Real Estate: HPG’s Real Estate segment focuses mainly on leasing industrial park to satisfy the
increasingly high demand for construction of new factories and expansion of existing factories of
other companies of HPG. Besides, HPG also trades more projects of offices for lease and apartment
buildings in Hanoi and develops urban housing to serve the demand for residences of employees
and workers of enterprises in industrial park
END PRODUCTS
% OF
REVENUE
Industrial Park
Pho Noi A Industrial area; Hoa Mac Industrial area; Yen My 2
44%
Urban Housing
Mandarin Garden 2; Nguyen Huu Canh Apartment, Pho Noi
Urban Area
56%
CATEGORY
Steel pipe
Pork
Beef
Chicken
Animal Feed
44%
56%
Source: Company data
Industrial Park
13
Urban Housing
Other Industrial Production: In the Furniture segment, HPG specializes in manufacturing furniture
for offices, home, schools, and public facilities. In the Refrigeration Engineering segment, the
company has invested in home appliances production line for refrigeration, electric household
products under Funiki brand.
% OF
CATEGORY
END PRODUCTS
REVENUE
Refrigeration
Air conditioner, Freezer, Refrigerator, Chiller Fridge
40%
Engineering
Chairs made from steel frames, desk chairs, tables and chairs,
Furniture
60%
seat bars, storage shelves
Source: Company data
40%
60%
Refrigeration Engineering
Furniture
APPENDIX B2: SUBSIDIARIES BREAKDOWN
SUBSIDIARIES
SECTOR
DESCRIPTION
1.Hoa Phat Hung Yen Steel Co., Ltd
Iron And Steel
Producing steel, iron, wholesaling metals and metal ores
2. Hoa Phat Hai Duong Steel JSC
Iron And Steel
Producing steel and cast iron, exploiting iron ores, exploiting, and
collecting lignite; wholesale of metals and metal ores; producing and
trading coke coal.
3. Hoa Phat Dung Quat Steel JSC
Iron And Steel
Producing steel and iron. Generating, transmitting, and distributing
electricity. Trading solid, liquid and gas fuel and related products.
Transporting goods by coastal, by sea and inland waterways
4. Hoa Phat Metal Producing Co., Ltd
Iron And Steel
Producing construction equipment, trading construction machinery
and equipment, exploiting small and medium-sized minerals.
5. An Thong Mineral Investment JSC
Iron And Steel
Exploring, exploiting, preparing, and making, processing, exporting,
and importing minerals, mainly iron ores.
6. Hoa Phat Steel Pipe Co., Ltd
Steel Pipe
Producing and trading steel pipes.
Pre-painted Hot
Dipped Galvanized
Steel Sheet
7. Hoa Phat Steel Sheet Co., Ltd
8. Hoa Phat Agriculture Development JSC
9. Hoa Phat Furniture JSC
10. Hoa Phat Refrigeration Engineering Co.,
Ltd
11. Hoa Phat Urban Development and
Construction JSC
Producing roof coverings of galvanized steel, galvanized aluminum
alloy, painting, and metal plating; producing iron, steel, cast iron.
Producing fertilizers and nitrogen compounds. Pig farming, poultry
breeding, and livestock services. Processing and preserving meat
and meat products. Production of animal feed, poultry, and fisheries.
Agriculture
Other Industrial
Production
Other Industrial
Production
Producing and trading various kind of furniture.
Producing and trading various kinds of refrigerant equipment
Civil and industrial construction, real estate business, investing in
and building technical infrastructure.
Real Estate
Source: Company data
APPENDIX B3: PLANTS AND CAPACITY
Iron and Steel (tons per annum):
FACTORY/
PRODUCT
Dung Quat
Hung Yen
Hai Duong
Da Nang
Binh
Duong
TOTAL
CAPACITY
CONSTRUCTION
STEEL
2,000,000
300,000
2,000,000
STEEL
PIPE
HRC
GALVANIZED
STEEL SHEET
2,000,000
BILLET
5,700,000
400,000
400,000
2,300,000
200,000
Hoa Phat Da Nang
Hoa Phat Dung Quat
200,000
CONSTRUCTION
STEEL
4,300,000
Hoa Phat Hai Duong
Hoa Phat Hung Yen
STEEL
PIPE
800,000
HRC
2,000,000
GALVANIZED
STEEL SHEET
400,000
BILLET
8,000,000
Hoa Phat Binh Duong
Source: Company data
Agriculture:
AGRICULTURE PRODUCTS
Cattle feeding
Pig breeding and pork
Beef
Chicken breeding, meat and eggs
Source: Company data
SCALE
2 factories in Hung Yen and Dong Nai with the total capacity of 600 thousands tons/year
Farming
Farms in Yen Bai, Hoa Binh, Bac Giang, Binh Phuoc, Hung Yen
Farms for CNC cows raising in Thai Binh, Dong Nai, Quang Binh with total Capacity
75,000 cows per years
01 parent chicken farm, 02 commercial hen farms in Phu Tho and Dong Nai
Chicken breed: 25 thousands pairs/year
Laying hens: 600 thousands hens/year
Eggs: 300 mn eggs/year
14
APPENDIX B4: REAL ESTATE PROJECTS DEPLOYED BY HPG
PROJECTS
LOCATION
SCALE
STATUS
NOTES
INDUSTRIAL REAL ESTATE
Pho Noi A
Industrial area
Pho Noi,
Hung Yen
Extension stage
1,416 ha
97% rent
92.5 ha
Expected to
lease at the
end of 2020
66% rent
Hoa Mac
Industrial area
Hoa Mac,
Ha Nam
439 ha
Yen My II
Industrial Area
Yen My II
Industrial Area
Project – Phase 1
Yen My II
Industrial Area
Project – Phase 2
Yen My,
Hung Yen
384 ha
98 ha
82% rent
70 ha
Expected to
lease in
2022
A multi-industrial park established by Vietnam 's government in 2014
- Accommodating > 100 enterprises from various countries, including wellknown multinational corporations of Korea & Japan
- 24km far from Hanoi Capital Center
- Next to National Road 5A that is the arterial road leading to Hai Phong
international seaport and Cai Lan deep-water port (Quang Ninh), convenient
for import-export activities.
- 203 ha: a multi-industrial park established by the Vietnamese government
since 2008
- Located on Highway 38 in the Hoa Mac town, Duy Tien district, Ha Nam
province, near Highway 1A that is easily connected to important transport
routes, seaports and airports
- Located in Ha Nam province - the gateway of Hanoi capital, in the Northern
key economic region, 45 km far to the south from the center of Hanoi.
- Synchronous and modern infrastructure, technical infrastructure system,
available utility services, ready-to-use ground for factory construction and
especially wastewater treatment plant using modern biotechnology.
- 230 ha: a multi-industrial park established by the Government of Vietnam
in 2009
- Have filled all its area with technical infrastructure
- Highway 39 in Yen My district, Hung Yen province, about 30 km from the
East of Hanoi and near Hanoi - Hai Phong highway
RESIDENTIAL REAL ESTATE
Mandarin
Garden 2
493 Truong
Dinh,
Hoang Mai,
Ha Noi
13,000 m2
Completed,
Handed
over
Nguyen Huu
Canh
Apartment
70 Nguyen
Duc Canh,
Tuong Mai,
Hoang Mai,
Ha Noi
3,461 m2
Completed,
Handed
over
262 ha
Under
construction,
product
launch
expected at
the end of
2020 or
early 2021
Pho Noi Urban
Area
Pho Noi,
Hung Yen
- Located in the ideal area in the South of Hanoi capital. Being right next to
the Ring road 2.5 with the section 40m and contiguous to the important
traffic routes such as Kim Dong, Giai Phong makes easily the way to the
downtown and connects to the West and the South of the city.
With favourable location, Mandarin Garden 2 enjoys all the availble and
complete social and technical infrastructure here.
- Nearly 4km far from Hoan Kiem Lake and about 450m far from Den Lu
Lake Park.
- Hoa Phat Nguyen Duc Canh Tower is placed in the area where social
infrastructure has been developed; hence it fully inherits the available utility
services and connecting to the main roads for convenient access to the
downtown.
The public welfare projects: cultural house, primary schools, kindergartens
are convenient location, has reasonable radius to serve all groups. Besides,
the park and sports at the two main areas create green space,
environmental protection, and urban landscape. The low-level work such as
villas, nursery, gardens are in the city core boxes create space for
communal activities, entertainment for the urban population.
Source: Company data
APPENDIX B5: EXPORT
DISTRIBUTION NETWORK
HPG’s export presence has
reached 14 different countries,
especially for the billets segment.
This is a map of its export network.
Source: Company data
15
APPENDIX B6: HPG VALUE CHAIN ANALYSIS
Illustrated below is the typical value chain of steel in the Vietnam. HPG imports 80% of its raw materials from major producers in Brazil and
Australia. While most of the steel producers in Vietnam must import HRC to produce flat steel products, the ability to have HRC in-house
production from DQSC plants allows HPG enjoys higher margins and become dominant players in value-added products.
Supply Sources
Raw Materials
Processing
Primary Products
Processing
Value Added
Products
Distributors
Markets
HPG
Iron Ore
Mining
Section Mill
Blast Furnace
Basic Oxygen
Furnace
Steel
Rail,
Shape, Bar,
Sheet Pile
Wire Rod Mill
Wire Rod
Plate Mill
Plate
Hot Strip Mill
HRC
Cold Rolling
CRC
Billets
Hard Coking
Coal
Construction
Automotive
Tier-1
Agents
Appliances
Slab
Import
Ship Building
Steel Scrap
Electric Arc
Furnace
Steel Pipe, Galvanized
Steel Sheet % other
flats steel products
UPSTREAM
DOWNSTREAM
Source: Company data, Vietnam Steel Association (VSA), World Steel Association (WSA), Team estimation
APPENDIX B7: HPG PRODUCT ECOSYSTEM
The products of each segment group closely support each other. HRC is the input material for the flat steel products. The Group’s steel products
are also supplied to apartment projects, industrial parks, and the construction of farms in the Agriculture segment. Some steel pipe and steel sheet
products are used in the manufacture of interior and refrigeration products. Plastic factory of Hoa Phat Refrigeration can produce product details
not only of Hoa Phat Refrigeration but also of Hoa Phat Furniture. In addition to sales in the market, the animal feed is also is supplied to the internal
livestock farm system across the country with a relatively large output.
Source: Company data
APPENDIX C: INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
APPENDIX C1: KEY VIETNAM’S MACROECONOMIC INDICATORS ASSUMPTIONS:
The Vietnamese economy grew by 7.02% in 2019, due to growing demand and export-oriented manufacturing and services sectors. Given the
COVID-19’s negative impacts, GDP growth is forecasted to only slow down to 2.5% in 2020 with the abundant stimulus packages to help offset the
impact on businesses. The Vietnamese economy is expected to rebound with a growth of 8.9% in 2021 and back to the growth rate of around 6.5%
the years afterwards. Inflation has been well below the target range of 4%, dropping from 3.5% in 2018 to 2.6% in 2019. However, pork and rice
prices are expected to continue rising due to tightening supply caused by the COVID-19 pandemic. Thus, inflation is forecast to increase to 3.5%
in 2020 and ease to around 3% afterwards.
GDP Growth rate (%)
GDP per capita
Inflation (%)
Unemployment (%)
Current account balance (% GDP)
General government balance (%GDP)
Exchange rate (USD.VND)
MACROECONOMIC INDICATOR FORECAST (%)
2019
2020E
2021F
2022F
7
2.5
8.9
6.7
2,743.1
2,821.6
3,022.6
3,221.8
2.6
3.5
3.0
3.1
2.0
2.3
2.4
2.3
4
0.7
1
1.3
-3.3
-5.2
-4.1
-3.9
22,866.7
23,112.7
23,473.1
23,847.1
Source: OECD, IMF, Market Line
16
2023F
6.5
3,400.0
3.1
2.3
1.5
-3.8
n/a
2024F
6.5
3,600.0
3.1
2.3
1.7
-3.8
n/a
APPENDIX C2: EXCHANGE RATE AND CURRENT ACCOUNT SURPLUS:
Vietnam’s current account surplus recorded 4% of GDP in 2019
30,000
compared to 1.9% in 2018. This was mainly attributed to increases
in overall exports, FDI investments, and remittances from abroad. In
20,000
2020, despite the weakening aggregate global demand due to
COVID-19, the wide range of FTAs, favorable business and labor
environment will help revitalize export. Thus, the positive goods trade
10,000
balance is expected to offset the sum of services trade deficit and
net primary income payments. The current account surplus is
expected to rebound significantly as global demand likely to pick up
0
after restrictive measures and lockdowns are gradually lifted. With
such consistent trade surplus, the State Bank of Vietnam is able to
maintain ample supply of dollars given a weakening US dollar. This
is a major factor that could keep a relatively stable USD/VND
exchange rate, or marginally depreciating VND in the coming time,
which bodes well for Vietnam as exports account for 95% of our GDP.
USD.VND RATE VS. CURRENT ACCOUNT AS % OF
GDP
10
5
0
-5
USD.VND rate (LHS)
Current account balance (% GDP)
Source: The World Bank data
APPENDIX C3: VIETNAM'S MAJOR INFRASTRUCTURE PROJECTS IN 2020F-2026F & STEEL USAGE IN VIETNAM
Although construction steel only accounts for around
CONSTRUCTION MATERIAL ESTIMATES
STEEL USAGE BREAKDOWN BY
30% of the raw materials used in infrastructure projects,
FOR VIETNAM'S EXPRESSWAY
SECTOR
PROJECTS
the accelerated construction of infrastructure projects
would connect and enhance transport efficiency,
Others
encouraging more investment in real estate projects,
thus boosting the construction industry as a whole. It is
Others, 20%
Construction
Residential
stone
the stimulated construction industry, which accounts for
construction,
Asphalt
33%
65% of total steel usage in Vietnam, that would be the
Shipbuilding,
Cement
main catalyst for the growing demand for steel.
15%
Infrastructur
e
Industrial
construction,
construction,
17%
15%
Construction
steel, 30%
Source: General Statistics Office
TOTAL INVESTMENT
(VND BN)
START
COMPLETION
Metro 1 (Ben Thanh - Suoi Tien)
43,757
2012
4Q21
Metro 2 (Ben Thanh - Tham Luong)
47,800
2021
2026
HCM - Thu Dau Mot - Chon Thanh Highway
24,150
HCM - Moc Bai Highway
10,668
Parallel Road for 50 Route
3,816
2021-25
Belt Road 2
6,500
2021-25
Belt Road 3
19,871
2022-25
Soai Rap Dredging Project (Phrase 2)
8,977
2021-25
The water environment improvement Project (Phrase 2)
11,282
2015
2021
Long Thanh International Airport
114,451
2021
2025
11 sub-projects of the eastern section of the North-South expressway
101,218
2020
2021-25
PROJECT
2021-25
2021
2026
APPENDIX C4: VIETNAM’S REGISTERED FDI BY SECTORS (USD BN)
40
Manufacturing consistently accounts for the largest proportion in
FDI inflows, reaching 71.1% in 1H2020, followed by Real estate
activities.
30
20
10
Such enormous FDI in these sectors present huge growth
potentials for HPG – the largest steel producer in Vietnam,
especially for its steel pipe products.
0
2015
2016
2017
Other
Agriculture, forestry and fishing
Construction
2018
2019
Source: SEAISI, VSA
APPENDIX C5: VIETNAM’S ACTIVE TRADE PROTECTION
MEASURES ON STEEL PRODUCTS:
CONSTRUCTION STEEL
MOIT'S
DECISION
TRADE
PROTECTION
STATUS
No. 918/QD-BCT issued on March
20, 2020
Antidumping tariff
3-year extension
GALVANIZED
STEEL SHEET
No. 1105/QD-BC
issued on March
30, 2017
Antidumping
tariff
5-year final
17
PRE-PAINTED GALVANIZED STEEL SHEET
No. 1931/QD-BCT issued on May
31, 2017
No. 3198/QĐBCT Issued on
October 24, 2019
Quotas and out-of-quota tariff
Antidumping tariff
3-year final
5-year final
PRODUCTS
Steel billet and long steel
Galvanized steel
sheet (35 codes)
Pre-painted galvanized steel sheet
(eight codes)
Pre-painted
galvanized steel
sheet (13 codes)
IMPORTS'
ORIGIN
All countries
China (including
Hong Kong) and
South Korea
All countries
South Korea &
China
Steel
billet
RATE
March 22,
2020 to
March 21,
2021
March 22,
2021 to
March 21,
2022
March 22,
2022 to
March 21,
2023
March 22,
23 onward
VALID
PERIOD
Long
steel
15.3%
9.4%
13.3%
7.9%
11.3%
6.4%
0.0%
0.0%
3.17% - 38.34%
depends on
specific producer
March 22, 2020 to March 21, 2023
April 14, 2017 to
April 13, 2022
Jun 15,
2017 to
Jun 14,
2018
Jun 15,
2018 to
Jun 14,
2019
Jun 15,
2019 to
Jun 14,
2020
Jun 15,
2020
onward
Total
imported
quota
(tons)
Outofquota
rate
380,679
19%
418,747
19%
460,622
19%
0
0
Anti-dumping
2.53% - 34.27%
for Chinese
imports (depends
on specific
producer)
4.71% - 19.25%
for South Korea
imports (depends
on specific
producer)
October 24, 2019
to October 23,
2024
Jun 15, 2017 to Jun 14, 2020
Source: Ministry of Industry and Trade
APPENDIX C6: TARIFF REMOVAL SCHEDULE OF VIETNAM'S FTA REGARDING STEEL PRODUCTS
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
AIFTA
VCUFTA
AJCEP
WTO
AKFTA
VJEPA
ACFTA
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Source: Ministry of Industry and Trade
APPENDIX C7: END OF STIMULUS DECADE IN CHINA
High Debt Load – A Key Policy Constraint
Breakdown of Debt, % of GDP
Infrastructure Spending Shows Decelerating Trend
Real Estate & Infrastructure Fixed Asset Investments, % chg y-o-y
China’s high debt load is
causing diminished space for
fiscal & monetary policies,
exposing the economy to
more shocks.
Therefore, belt tightening is
expected to increase in the
coming decade, from not
only government but also
households.
Infrastructure fixed
asset investment had
already been slowing
since 2016 and the
same infrastructure
boom is unlikely to
return in the coming
decade, given the
decreased stimulus
spending
Source: Fitch Solution
APPENDIX C8: PORTER’S FIVE FORCES ANALYSIS:
SUPPLIERS’ BARGAINING POWER
Product differentiation
Raw materials are homogenous, so differentiation is almost non-existent.
Switching costs
Since input materials are not differentiated, it is not costly to change supplier.
The market of these raw materials is highly concentrated, with the top players that HPG source from capturing
Supplier size
nearly 7-% the global iron ore export.
HPG sources its inputs from a range of suppliers in various countries: iron ore - Brazil, South Africa, Australia,
Player independence
Ukraine, India and coking coal – China, Russia, Australia, New Zealand, ….
Domestic iron ore suppliers: highly dependent on HPG since export is prohibited, thus have very low bargaining
power against HPG (~ 20% lower than import price).
Player dispensability
Global suppliers: Top 15 countries already purchased 93.6% of all iron ore imported in 2019. so HPG does not
represent a significant portion of the suppliers’ business.
Oligopoly threat
Due to the high market concentration and huge market power of HPG’s suppliers, oligopoly threat is quite high.
No substitute inputs
Although BOF’s input cannot substituted with EAF’s and vice versa.
18
Importance of
quality/cost
Quality of raw materials is very crucial to steelmaking as different quality can result in distorted end-products,
yet at the same time, raw materials can highly affect the gross profit margin of the company.
Many suppliers are pure players and have no desire (and most of all, not the power and capability) to extend
its value chain towards steel production.
BUYERS’ BARGAINING POWER
Since HPG only deals with tier-1 agents, the limited number of these tier-1 agents proves their concentration.
Since HPG relies entirely on tier-1 agents to sell its products, they supply very high volumes to these agents.
Since HPG’s products account for the majority input for tier-1 agents, they are highly dependent on HGP’s
steel.
Since profit margin of selling steel is low, these agents are highly price sensitive.
HPG’s steel products meet strict requirements imposed by foreign countries such as the US, Canada, South
Korea, …, supporting by world-class technologies and supervision from highly experienced experts.
High because once becoming HPG’s tier-1 agents, they will be highly associated with HPG, thus when
switching to another distributor, they will bear high cost of rebuilding their reputation and credibility.
Low due to the long-term contract signed with HPG. They will have legal protection, authentic quality
guaranteed, stable supply, and attractive discounts.
Since HPG’s has only few tier-1 agents locating in different regions of the country, the possibility of their collision
is low.
Forward integration
Buyer concentration
Buyers’ volume
Product dispensability
Price sensitivity
Product differentiation
Switching cost
Tendency to switch
Oligopoly threat
Backward integration
Since extensive startup costs and specialist knowledge are required, backward integration of buyers is unlikely.
THREAT OF NEW ENTRANTS
Domestic players: due to the restructuring and consolidation trend of the market, thus permission from Ministry
of Industry & Trade is required and criteria regarding financial condition, minimum capacity, emission,
environmental impacts must be met.
Foreign players: Entry barriers are high for construction steel, steel pipe, billets, & steel sheet since the
government does not encourage investment in domestic steel production, especially these the products as their
production is exceeding demand. In recent years, there have been no new FDI companies granted the
investment certificate, except for Formosa Ha Tinh Steel Corp.
HPG has strong, close, and long-lasting relationships with its tier-1 agents through long-term contract and
attractive discounts, promotions. These tier-1 agents are highly dependent on HPG’s products.
Legal and regulatory
barriers
Distribution channels
Expertise requirement
HPG has 20-year experience in steelmaking with established relationship with world-class experts.
Switching costs
Customers’ switching cost is high in terms of quality and product integration because once the customers
choose HPG for their projects, it is hard to convince them otherwise.
Product differentiation
HPG’s products have a long-established history and highly recognized, trusted brand.
Capital requirement
Huge capital outlay is required to set up new steelmaking factory (estimated VND 8-10 tn to set up an integrated
complex with an annual capacity of 1 mtpa).
Incumbents’ defense of
market share
Top 5 market leaders comprise of 66% of construction steel, 64% of steel pipe, 70% of galvanized steel sheet,
thus the remaining market share for newcomers is very limited and highly competitive.
HPG has a cost advantage due to economies of scale, closed production chain of steelmaking and use of BOF
technology.
Economies of scale is of huge concern since it can increase the company’s bargaining power against raw
materials suppliers.
RIVALRY AMONG EXISTING COMPETITORS
Top 5 market players account for nearly 70% of the market, thus the number of players is not high.
Vietnam’s steel industry is the fastest growing in ASEAN and is emerging as one of the largest steel importing
country.
Steel products are highly similar, yet HPG’s products are.
HPG has long-standing with customers, especially with huge construction projects, thus customers are not very
willing to switch to other steel producers.
High fixed costs and high capital expenditure on equipment that cannot be used in other kind of business
increases the barriers to exit.
Since HPG’s products have higher quality than its peers, the switching costs of customers is high.
THREATS OF SUBSTITUTES
There has not yet exist a perfect substitute for steel products.
Cost advantage
Scale economies
Number of competitors
Industry growth
Quality differences
Brand loyalty
Barriers to exit
Switching costs
Source: WSA, Team evaluation
APPENDIX C9: MARKET SHARES IN VIETNAM STEEL INDUSTRY
HPG has consistntly gained market share
from SOEs since 2015
9% 8% 8%
33%
2019
17%
9% 10% 9%
31%
2018
34%
24%
18%
9% 11% 9%
29%
2017
34%
2016
22%
21%
9% 12% 7%
29%
2016
32%
2015
21%
22%
9%
2019
26%
2018
24%
2017
0%
16%
20%
40%
13%0%
60%
35%
80%
VNSteel group
Vinakyoei
Pomina
PoscoSS
30%
2015
100%
17%
17%
14%
13%
38%
0%
12%
20%
40%
16%
7%
15%
16%
15%
7%
8%
9%
14%
9%
60%
2019
30%
32%
Ohers
Hoa Sen Group
China&Nippon Steel
Dong A
Others
Source: VSA
19
15%
27%
2018
28%
28%
2017
26%
18%
2016
26%
20%
31%
27%
80%
2015
100%
23%
0%
Galvanised steel market share
Vietnam construction steel market share
HPG
HPG has a firm leading position in steel
pipe segment over the past four years
Galvanised steel sheet volume shares of
domestic producers
Nam Kim Group
HPG
17%
19%
20%
10% 8%
35%
8% 7%
40%
9% 6%
41%
12% 8%
10% 9%
34%
39%
40%
60%
80%
Steel pipe market share
Hoa Sen Group
Minh Ngoc
Viet Duc
100%
Others
APPENDIX C10: SWOT ANALYSIS
STRENGTHS
WEAKNESSES
● Strong domestic market position across various industries with high
product diversification.
● Large-scale manufacturing capabilities lead to economies of scale.
● Low production costs led by BOF technology and fully integrated value
chain with in-house HRC production.
● High quality products with world-class technologies.
● Deep-water seaport enables faster and lower-cost distribution.
● Close & long-standing relationship with customers (Tier-1 agents).
● High operational efficiency, high asset turnover thanks to maximized
capacity.
● Strongest operating cash flow in domestic market.
● Good relationships with local authority.
● 50% iron ore – the main raw material – sourced abroad.
● Limited international presence (90% steel production volume ●
consumed domestically, only 10% for export).
● Huge capital expenditure required for steel mills (DQSC).
● Short-term & long-term debts are on a slight upward trend, which
may put pressure on financial health.
● ROE witnesses a decreasing trend due to heavy investment to
DQSC.
OPPORTUNITIES
THREATS
● Strategic initiatives (mainly product diversification) to drive growth.
●Recovery of global steel demand as countries ease lockdown
measures.
● Positive outlook for the global construction industry thanks to stimulated
●Government spending on infrastructure.
●Export market diversification strategy enables sustainable export
growth.
● Market risk: raw material price, interest rate & exchange rate risk
● COVID-19 pandemic negative impacts.
● Regulatory Risk – Trade Protectionism Removal.
● Industry risk – Cycle effect.
● Operation risk – DQSC project postponement.
Source: Company data, Team evaluation
APPENDIX D: FINANCIAL ANALYSIS
APPENDIX D1: PEERS RATIO COMPARED WITH HPG
Peers selection process contains the screening through business models, industry, region, market capitalization of the firms:
- Firms must have the similar business models to avoid the differences in business activities that may result different revenue structure.
- Asian firms are prioritized to ensure the consistency in the regional economic factors as well as trends.
- The international firms are chosen based on their closely similar market capitalization to HPG and we allow 50% differences, ensuring that firms
have the similar size with HPG.
- At lease 3 Vietnamese firms must be in the list despite their relatively small market capitalization to HPG. This is to ensure that we address and
not to ignore the direct competitors within the country.
2015A
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
26.40%
22.00%
-11.00%
1.20%
24.70%
-9.80%
-10.10%
-4.80%
-23.20%
-1.40%
24.90%
7.80%
1.30%
5.80%
14.90%
-16.50%
2.70%
5.30%
11.90%
4.20%
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
12.70%
2.20%
-1.60%
0.30%
3.70%
-14.70%
-8.70%
-4.00%
-21.20%
-5.50%
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
0.7
3.9
N/A
6.9
3.1
2016A
2017A
ROE
38.50%
30.60%
46.70%
31.30%
20.40%
22.10%
12.00%
23.10%
42.70%
28.80%
0.20%
4.30%
3.70%
13.70%
1.70%
8.70%
101.10%
22.30%
3.30%
19.30%
Gross Margin
31.10%
27.20%
11.30%
10.80%
6.10%
7.10%
6.90%
9.70%
23.30%
16.90%
8.30%
15.40%
10.80%
14.00%
10.60%
12.80%
4.40%
17.60%
10.20%
13.00%
Net Margin
19.80%
17.30%
5.80%
5.60%
2.70%
2.90%
3.20%
6.10%
8.40%
5.10%
0.30%
3.80%
2.80%
7.20%
1.10%
5.20%
-61.90%
9.70%
-4.70%
5.70%
Debt to EBITDA
0.2
0.8
3.1
3.1
4.6
2.6
5.1
3
1.9
3
PEERS RATIOS
2018A
2019A
2015A
23.50%
1.90%
24.20%
12.10%
8.00%
6.50%
15.30%
9.30%
52.80%
16.30%
17.00%
1.60%
3.00%
-8.50%
6.80%
1.30%
3.40%
4.80%
17.00%
3.70%
1.2
1.8
2.1
1.2
1.8
1.8
0.6
0.4
0.2
1.2
24.80%
5.40%
6.90%
5.70%
11.50%
15.50%
16.30%
12.60%
27.50%
12.70%
21.40%
2.80%
1.80%
1.70%
11.40%
12.60%
8.50%
9.90%
19.60%
8.50%
14.50%
2.70%
-2.80%
0.40%
4.70%
-26.60%
-7.30%
-4.50%
-19.20%
-6.60%
15.40%
0.40%
2.60%
3.20%
1.20%
5.00%
7.60%
5.10%
20.90%
5.80%
11.80%
0.40%
0.30%
-2.60%
1.30%
1.40%
1.70%
2.50%
11.10%
2.00%
0.5
3.1
1.9
1.9
1.9
1.1
0.8
2.2
4.5
2.2
1.7
5.8
1.9
5.6
5.6
2.6
6
6.1
24.6
5.4
22.1
35.3
51.1
80
24.8
20
2016A
2017A
2018A
Asset Turnover
1.1
1.1
0.9
1.8
1.5
1.6
2.9
3
3.9
1.3
1.6
1.4
1.7
1.5
1.6
2.8
5.4
6.3
0.7
1
1.1
0.3
0.5
0.5
0.3
0.9
1.4
1.4
1.8
2.1
Operating Margin
23.10%
20.10%
18.00%
6.80%
6.00%
0.40%
2.20%
3.60%
3.30%
3.50%
6.70%
3.30%
10.70%
6.00%
1.50%
-1.40%
5.30%
6.30%
2.70%
6.90%
9.50%
1.30%
5.60%
4.80%
-60.20%
10.90%
19.50%
-4.30%
6.40%
6.10%
Debt to Equity
0.3
0.4
0.6
2.6
2.1
1.5
1.1
0.9
0.9
1.5
1.1
1.6
1.4
2.3
2.8
1
1.2
1.1
0.6
0.4
0.4
2.3
2.2
2.6
1.1
0.9
0.3
1.4
1.4
1.4
Days receivables
21.9
35.4
31.9
24.1
30.6
28.3
36.1
40.4
30.1
88
78.9
75.9
23.1
30.1
34.3
2019A
0.7
1.5
4.9
1.1
1.5
6.2
1.2
0.5
1.1
2.1
14.30%
-0.90%
0.30%
-2.40%
0.90%
2.20%
1.90%
2.90%
11.50%
2.10%
0.8
1
0.5
2.1
1.8
1
0.4
2.6
0.2
1.2
19.4
26.1
23.6
93.9
36
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
N/A
28.8
6.1
202.2
41.8
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
41.3
76.5
22.4
13.7
30.9
437.8
50.2
165.3
130.6
115.9
HPG.HM
NKG.HM
HMC.HM
POM.HM
HSG.HM
600010.SS
000898.SZ
000959.SZ
000629.SZ
Peers average
1.2
0.9
1.1
1
0.9
0.4
0.6
0.2
0.3
0.7
10.8
5.4
4.5
2
7.4
5.3
2.1
5.3
3.3
Days Payables
44.3
41.4
30.5
19.8
6.1
20.4
11.6
10.5
30
44.3
506.1
278
56.2
44.5
189.7
150.3
77.8
43.9
113.5
76.5
Current Ratio
1.5
1.8
1
1.1
1.5
1.4
1.1
1.2
1
1
0.4
0.5
0.7
0.8
0.3
0.3
0.7
0.8
0.8
0.9
5.4
1.3
5.2
0.4
3.9
7.1
2.7
6.4
8.3
205.3
69.2
11.1
94.3
71.4
53.2
17.3
13.9
11.4
28.2
172.7
34.8
148.5
25.1
56.5
53.5
36.6
4.6
21.7
18
164.2
24.8
140.4
20.7
53.9
126.7
71.4
69.2
115.3
102
215.4
67.3
53.8
51.4
96.9
1.1
1.1
1.7
1.1
0.9
0.6
0.8
0.3
1.6
1
1.1
1
1.4
1
0.8
0.6
0.8
0.4
2.3
1
0.5
0.4
0.5
0.5
0.3
0.3
0.4
0.1
0.3
0.3
129.8
67.7
63.7
49.1
23.1
38.6
82.8
68.1
58.8
50.4
Days Inventories
136.8
119.4
72.3
99.6
52.4
54.9
80.5
63.9
111.6
115.3
187.7
138.1
65.5
52.8
58.1
38.1
31.6
32.2
88.5
79.4
Quick ratio
0.7
1.2
0.4
0.4
0.7
0.7
0.7
0.8
0.3
0.3
0.2
0.3
0.4
0.5
0.2
0.3
0.6
0.7
0.4
0.5
58
42
49.5
51.6
46.2
59
27.5
53.6
43.4
45.4
112.4
85
47
67.5
93
129.6
52.8
32.5
30.9
72.3
122.3
77.5
38.1
90.1
82.2
134.3
43.4
41.1
32.1
73.5
0.5
0.4
0.7
0.6
0.3
0.3
0.4
0.2
1.3
0.5
0.4
0.4
0.6
0.6
0.3
0.3
0.5
0.2
2
0.6
Source: Company Data, Reuters
APPENDIX D2: BEINEISH M-SCORE CALCULATION FOR HPG
INPUT VARIABLES (VND bn)
2018
Revenue
55,836.50
Cost of Goods Sold
44,165.60
Selling, General, & Admin. Expense
1,030.70
Depreciation
90.10
Net Income from Continuing Operations
8,573.00
Accounts Receivables
3,210.30
Current Assets
25,308.70
Property, Plants, & Equipment
12,745.10
Securities (*)
66.60
Total Assets
78,223.00
Current Liabilities
22,636.10
Total Long-term Debt
12,811.00
Cash Flow from Operations
7,642.30
(*) Securities is also referred to as total long-term investments
2019
63,658.20
52,472.80
1,337.80
104.50
7,527.40
3,561.40
30,436.90
31,556.70
45.80
101,776.00
26,984.20
19,842.10
7,715.20
Beineish M-Score calculation functions as a statistical model to examine if the earnings of the company is likely to be manipulated or not. The input
datas for calculation M-Score are companies’ accounting datas and ratios. The M-Score is smaller than -2.22, it is not likely that the company
manipulates its earnings and vice versa
INPUTS USED TO CALCULATE
M-SCORE
Day Sales in Receivables Index (DSRI)
Gross Margin Index (GMI)
Asset Quality Index (AQI)
Sales Growth Index (SGI)
Depreciation Index (DEPI)
Selling, General, & Admin. Expenses Index
(SGAI)
Leverage Index (LVGI)
Total Accruals to Total Assets (TATA)
Beneish M Score
2018
2019
Index
Interpretation
20.99
0.21
-0.49
55,836.5
0.01
20.42
0.18
-0.61
63,658.2
0.00
0.97
0.84
1.25
1.14
0.47
0.02
0.45
0.01
0.02
0.46
1.14
1.02
0.00
-2.45
HPG is not likely to have manipulated their earnings.
Beneish M Score < -2.22: Company is not likely to
have manipulated their earnings
Beneish M Score > -2.22: Company is likely to have
manipulated their earnings
M-Score (8 variables model) Formula:
M = -4.84 + .920 DSRI + .528 GMI + .404 AQI + .892
SGI + .115 DEPI - .172 SGAI + 4.679 ACCRUAL TO
TA - .327 LEVERAGE
Source: Company Data, Team Computation
APPENDIX D3: ALTMAN Z-SCORE CALCULATION FOR HPG
Altman Z-Score is calculated to predict the probability for the company to go bankruptcy. The company with Z-Score above 1.8, it is less likely to
go bankruptcy. Whereas, if the Z-Score is below 1.8, it poses threats of the company’s ability to pay debt and the high probability to bankrupt.
ALTMAN Z-SCORE FOR HPG
Income statement
Net sales
Operating income
Balance sheet
Current assets
Total assets
Z-Score Formula
(1.2*Z1) + (1.4*Z2) + (3.3*Z3) + (0.6*Z4) + (1.0*Z5)
2019
63,658.20
9,743.00
30,436.90
101,776.00
Interpretation
HPG is not likely to go bankruptcy since
firm's Z-Score is 2.15, which is above 1.81
*Z-Score below 1.81 means that company
has higher probability of bankruptcy.
21
Current liabilities
Total liabilities
Retained earnings
Public companies
Market value of equity
CALCUTIONS
Working capital/Total assets
Retained earning /Total
assets
EBIT/Total assets
Market value of equity/Total
liabilities
Net sales/Total assets
26,984.20
53,989.40
15,876.90
85,350
Z1
2019
0.03
Z-SCORE for Public Company
1.20
Z2
0.16
1.40
Z3
0.10
3.30
Z4
1.58
0.60
Z5
Z-Score
0.63
2.15
1.00
Source: Company data, Team Computation
28%
26%
1,400.00
APPENDIX D4: HPG DIVIDEND DISTRIBUTION
29%
30%
23%
1,200.00
20%
1,245.48
1,000.00
From 2015 to 2016, the dividend is distributed at the increasing rate with 10%
- 15% in cash. However, from 2017 to 2019, HPG had to temporarily halt its
cash dividend payment to divert its profitability into the highly fund-demanded
project – DQSC. However, the company still maintains distributing dividend
through shares (50% in 2016, 40% in 2017, 30% in 2018). Despite the
absence of dividend payment in cash, the highly promising returns generated
from DQSC would fuel the growth of shares value. In 2020, the company has
announced a dividend distribution of 5% in cash and 20% in bonus share
since DQSC approaching its final stage of construction.
20%
1,131.59
20%
800.00
600.00
861.43
785.57
15%
629.07
400.00
677.03
5%
-
0%
2015
2016
2017
Dividend per share (VND)
2018
2019
2020
Dividend payout ratio (%)
APPENDIX E: DCF – STEEL
APPENDIX E1: NET REVENUE BY STEEL PRODUCT
2019A
2020F
2021F
2022F
2023F
2024F
Construction Steel
31,913.26
37,523.07
47,231.84
51,753.85
53,686.86
55,103.81
Price (VND/ton)
11,500,000
11,000,000
12,000,000
12,200,000
12,400,000
12,600,000
Sales Volume (tons)
2,775,066
3,411,189
3,935,987
4,242,119
4,329,585
4,373,319
Production Volume (tons)
2,791,997
3,432,000
3,960,000
4,268,000
4,356,000
4,400,000
Maximum capacity (tons)
3,000,000
4,400,000
4,400,000
4,400,000
4,400,000
4,400,000
Utilization Rate
93.07%
78.00%
90.00%
97.00%
99.00%
100.00%
Sales/Production
99.39%
99.39%
99.39%
99.39%
99.39%
99.39%
Revenue (VND bn)
15,391.40
15,526.54
16,022.50
16,910.00
18,320.75
19,475.00
Price (VND/ton)
Steel Pipe
4.82%
20,500,000
18,800,000
18,850,000
20,000,000
20,300,000
20,500,000
Sales Volume (tons)
750,800
825,880
850,000
845,500
902,500
950,000
Production Volume (tons)
790,316
869,347
894,737
890,000
950,000
1,000,000
Maximum capacity (ton)
800,000
830,000
830,000
1,000,000
1,000,000
1,000,000
Utilization Rate
98.79%
104.74%
107.80%
89.00%
95.00%
100.00%
Sales/Production
95.00%
95.00%
95.00%
95.00%
95.00%
95.00%
Revenue (VND bn)
2,187.00
5,239.08
6,548.85
6,970.06
7,735.83
9,093.21
22,500,000
22,000,000
22,000,000
22,300,000
22,500,000
22,800,000
Sales Volume (tons)
97,200
238,140
297,675
312,559
343,815
398,825
Production Volume (tons)
97,200
238,140
297,675
312,559
343,815
398,825
Maximum capacity (ton)
400,000
400,000
400,000
400,000
400,000
400,000
Utilization Rate
24.30%
59.54%
74.42%
78.14%
85.95%
99.71%
3,030.00
14,865.40
15,138.88
16,603.95
18,464.49
Galvanized Product
32.98%
HRC
Revenue (VND bn)
Price (VND/ton)
CAGR
2020F-2024F
11.54%
Revenue (VND bn)
Price (VND/ton)
57.12%
10,100,000
10,200,000
10,300,000
10,500,000
10,800,000
Sales Volume (tons)
300,000
1,457,392
1,469,794
1,581,329
1,709,675
Internal Volume (tons)
200,000
1,192,412
1,202,559
1,293,815
1,398,825
Production Volume (tons)
500,000
2,649,804
2,672,353
2,875,144
3,108,500
22
10%
200.00
Source: Company data
Revenue Breakdown
25%
Maximum capacity (ton)
500,000
2,500,000
3,000,000
3,000,000
3,000,000
Utilization Rate
100.00%
105.99%
89.08%
95.84%
100.00%
Billet
38.58%
Revenue (VND bn)
1,800.00
15,210.00
11,700.00
11,040.00
11,040.00
9,200.00
Price (VND/ton)
9,000,000
8,450,000
9,000,000
9,200,000
9,200,000
9,200,000
200,000
1,800,000
1,300,000
1,200,000
1,200,000
1,000,000
51,291.66
76,528.70
96,368.60
101,812.79
107,387.39
111,336.51
Sales Volume (tons)
Total Revenue
16.77%
Source: VSA, FiinPro, Team computation
APPENDIX E2: COGS & GROSS MARGIN
Technology
Input
Standard general input materials
between BOF and EAF
for all steel manufacturers
BOF
1.50
0.78
0.14
200.0
Iron ore (62% Fe) (ton)
Coal (ton)
Scrap Steel (80:20) (ton)
Electricity (kwh)
EAF
0.0
0.0
1.13
639.0
Source: WSA
In application, HPG can (1) reduce input quantity of iron ore down from 1.5 to 1.35 ton thanks to An Thong mining subsidiary (around 0.5 – 0.7
mtpa), (2) self-generate electricity for HPG factories thanks to the dry coke stamping system, and (3) save logistic costs owing to the deep-water
seaport of DQSC. Therefore, our valuation of raw material cost will incorporate these advantages into the table below:
2019A
2020F
2021F
Self-generating 55% electricity
Self-generating 55% electricity
Self-generating 60% electricity
BOF and EAF
Launching deep water seaport
Launching deep water seaport
Launching deep water seaport
production costs
saving 70-115,000 VND/ton
saving 70-115,000 VND/ton
saving 70-115,000 VND/ton
of HPG from 2019A to
material
material
material
2020F
Unit
Factor
Unit
Factor
Unit
Factor
cost
cost
cost
BOF
EAF
BOF
EAF
BOF
EAF
(VND)
(VND)
(VND)
2,100,667
1.35
0
2,400,000
1.35
0
2,500,000
1.35
0
Iron ore (62% Fe) (ton)
Iron ore transport
171,350
1.35
0
125,000
1.35
0
102,000
1.35
0
(ton)
3,680,000
0.78
0
2,800,000
0.78
0
2,900,000
0.78
0
Hard coking coal (ton)
155,250
0.78
0
90,000
0.78
0
90,000
0.78
0
Coal transport (ton)
Scrap Steel (80:20)
7,192,292
0.14
1.13
6,199,938
0.14
1.13
6,400,000
0.14
1.13
(ton)
Scrap Steel transport
92,000
0.14
1.13
92,000
0.14
1.13
92,000
0.14
1.13
(ton)
1,864
90
287.6
1,864
80
287.6
1,864
60
255.6
Electricity (kwh)
Cost per ton of steel
7,246,278
8,767,242
6,692,941
7,645,882
6,856,620
7,812,398
produced (VND)
Total costs of each
19,384.27
2,630.17
34,878.18
2,293.76
51,774.01
2,343.72
technology (VND bn)
Total costs of external
9,702.35
8,827.09
HRC (VND bn)
Total COGS from raw
31,716.80
45,999.04
54,117.73
materials of steel
(VND bn)
BOF and EAF
production costs
of HPG from 2022F to
2024F
Iron ore (62% Fe) (ton)
Iron ore transport
(ton)
Hard coking coal (ton)
Coal transport (ton)
Scrap Steel (80:20)
(ton)
Scrap Steel transport
(ton)
Electricity (kwh)
Cost per ton of steel
produced (VND)
Total costs of each
technology (VND bn)
Total COGS from raw
materials of steel
(VND bn)
2022F
Self-generating 60% electricity
DQSC’s deep-water seaport
saving 70-115,000 VND/ton
material
Unit
Factor
cost
BOF
EAF
(VND)
2023F
Self-generating 70% electricity
DQSC’s deep water seaport
saving 70-115,000 VND/ton
material
Unit
Factor
cost
BOF
EAF
(VND)
2024F
Self-generating 70% electricity
DQSC’s deep water seaport
saving 70-115,000 VND/ton
material
Unit
Factor
cost
BOF
EAF
(VND)
2,500,000
1.35
0
2,500,000
1.35
0
2,500,000
1.35
0
102,000
1.35
0
102,000
1.35
0
102,000
1.35
0
2,900,000
0.78
0
2,900,000
0.78
0
2,900,000
0.78
0
90,000
0.78
0
90,000
0.78
0
90,000
0.78
0
6,400,000
0.14
1.13
6,400,000
0.14
1.13
6,400,000
0.14
1.13
92,000
0.14
1.13
92,000
0.14
1.13
92,000
0.14
1.13
1,864
60
255.6
1,864
50
191.7
1,864
50
191.7
6,865,620
7,812,398
6,846,980
7,693,289
6,846,980
7,693,289
52,572.89
2,343.72
54,730.75
2,307.99
55,686.44
2,307.99
54,916.61
57,038.74
Source: VSA, WSA, Bloomberg, Company data, Team computation
23
57,994.43
We estimated the cost of raw materials will account for 81% of steel COGS, and other costs is 19% (excluded D&A of COGS). We forecast that the
revenue of steel will increase, and its COGS is simultaneously minimized. Therefore, gross margin of steel will improve significantly as below:
2019A
2020F
2021F
2022F
2023F
2024F
Steel Revenue
51,291.66
76,528.70
96,368.60
101,812.79
107,387.39
111,336.51
Steel COGS
39,326.30
56,788.94
66,812.02
67,798.28
70,418.19
71,598.06
Raw/ COGS Steel
80.65%
81.00%
81.00%
81.00%
81.00%
81.00%
Others/COGS Steel
19.35%
19.00%
19.00%
19.00%
19.00%
19.00%
Gross Margin of Steel
25.79%
30.67%
33.41%
34.43%
35.69%
25.79%
Source Company data, Team computation
APPENDIX E3: CAPITAL EXPENDITURE AND DEPRECIATION FOR STEEL
2019A
2020F
2021F
Total capex
(11,829.33)
(6,736.88)
Steel Capital Expenditures
(19,993.46)
(9,948.73)
(5,782.12)
Beginning Net PP&E
34,965.81
40,120.76
(Depreciation Expense)
(4,793.78)
(5,336.57)
Ending Net PP&E
34,965.81
40,120.76
40,566.31
2022F
(7,159.01)
(6,108.77)
40,566.31
(5,746.87)
40,928.21
2023F
(7,598.51)
(6,443.24)
40,928.21
(6,179.97)
41,191.48
2024F
(7,950.98)
(6,680.19)
41,191.48
(6,632.80)
41,238.87
Source Company data, Team computation
The PP&E of steel depreciation will be calculated by straight-line method for each sectors of PP&E following its useful life.
PP&E (Break-up for 2019)
Total 2019
Steel 2019
Useful Life (year)
Machinery and Equipment
29,212.04
23,510.31
1-25
Furniture, office equipment
98.44
79.22
2-12
Buildings and Structures
13,113.47
10,553.93
1-30
Motor Vehicles
1,021.79
822.35
1-30
Source Company data, Team computation
APPENDIX E4: COST OF EQUITY
D/E
(MARKET VALUE)
BETA
TAX RATE
Tata Steel Ltd
JSW Steel Ltd
Xinyu Iron & Steel Co Ltd
Nanjing Iron & Steel Co
Liuzhou Iron & Steel Co
Hangzhou Iron & Steel Co
Lingyuan iron & steel co
Jiangsu Shagang Group Co Ltd
165.71%
70.55%
83.13%
59.48%
66.25%
10.63%
88.55%
4.76%
1.41
1.25
0.92
1.05
1.28
0.92
0.98
0.85
25%
25%
25%
25%
25%
25%
25%
25%
Regional Median
HPG's Steel Segment
40.30%
REGIONAL PEERS
UNLEVERED
BETA
0.63
0.82
0.57
0.73
0.86
0.85
0.59
0.82
0.77
20%
HPG's Steel Beta (Re-levered)
1.02
Since a regression between HPG’s
share price and the VN-Index will
generate a beta for the whole group, it
is not appropriate to apply this beta for
HPG’s steel segment standalone due to
different risk profiles of HPG’s
segments. Therefore, we decide to
estimate the beta for HPG’s steel
segment through the pure-play method.
A set of regional peers with comparable
product line and market cap were
picked to arrive at the unlevered
industry beta of 0.77, which indicates a
beta of 1.02 for HPG’s steel segment
with the target market D/E at 40.30%.
APPENDIX E5: COST OF DEBT
CREDIT
RATING
AND
DEFAULT
FOR FIRMS IN EMERGING MARKETS
SPREAD
HPG STEEL SEGMENT'S COST OF DEBT
Interest coverage ratio
Rating
Spread
Vietnam's 10-Year Government Yield (3Y Average)
3.95%
> 12.5
AAA
0.63%
Interest Coverage Ratio (2019A)
4.22
9.50 - 12.49
AA
0.78%
Credit Rating
BBB
7.50 - 9.49
A+
0.98%
Company Default Spread
1.56%
6.00 - 7.49
A
1.08%
Implied Pre-tax Cost of Debt
5.51%
4.50 - 5.99
A-
1.22%
4.00 - 4.49
BBB
1.56%
3.50 - 3.99
BB+
2.00%
3.00 - 3.49
BB
2.40%
2.50 - 2.99
B+
3.51%
2.00 - 2.49
B
4.21%
1.50 - 1.99
B-
5.15%
1.25 - 1.49
CCC
8.20%
0.80 - 1.249
CC
8.64%
0.50 - 0.79
C
11.34%
< 0.5
D
15.12%
As HPG’s only bond sale in 2010 had already been settled with full
principal payback in 2015, we decide to use the synthetic rating
approach to compute the company’s default spread and use this
spread to adjust for the risk-free rate to arrive at the cost of debt.
With the interest coverage ratio at 4.22 in 2019A, HPG’s steel
segment is rated BBB, which yields the company spread of 1.56%.
This spread when added to the Vietnam’s 10Y gov’t yield (3Y
average) result in an implied pre-tax cost of debt at 5.51%. This figure
is close to the historical interest rate incurred by HPG at 5.65%, which
confirms our methodology as appropriate.
Source: Damodaran (2020)
24
APPENDIX E6: FCFF MODEL & MULTIPLES COMPARISION
VND bn
2020F
2021F
2022F
2023F
Regional Peers
P/E
37,703.72
Tata Steel Ltd
12.0x
6.8x
0.9x
31,037.68
JSW Steel Ltd
14.5x
8.1x
2.0x
2024F
EBITDA
18,283.00
27,758.24
32,135.98
34,996.20
EBIT
13,466.37
22,392.90
26,358.72
28,784.17
EV/EBITDA
P/B
20%
20%
20%
20%
20%
Xinyu Iron & Steel Co Ltd
5.5x
5.5x
0.4x
EBIT (1-t)
10,773.10
17,914.32
21,086.97
23,027.34
24,830.15
Nanjing Iron & Steel Co
6.3x
4.9x
0.8x
D&A
4,816.63
5,365.34
5,777.26
6,212.03
6,666.04
Liuzhou Iron & Steel Co
6.4x
6.3x
1.0x
(5,566.83)
Hangzhou Iron & Steel Co
18.3x
9.2x
1.0x
(6,680.19)
Lingyuan iron & steel co
17.9x
7.2x
0.8x
19,249.17
Average
11.5x
6.8x
1.0x
Median
12.0x
6.8x
0.9x
Hoa Phat
9.8x
6.5x
1.8x
Tax rate (%)
NWC
Capital expenditures
Unlevered free cash flows (UFCF)
(3,826.43)
(9,948.73)
1,814.56
(4,818.43)
(5,782.12)
12,679.11
(5,090.64)
(6,108.77)
15,664.83
(5,369.37)
(6,443.24)
17,426.76
PV5
175,345.81
Discount Period
0.21
1.21
2.21
3.21
4.21
Discount Factor
0.97
0.86
0.76
0.68
0.60
1,769.04
10,941.39
11,965.35
11,782.36
116,456.38
Present Value of FCFF
Enterprise Value of Steel
152,914.53
Source: Team computation
APPENDIX F: RELATIVE VALUATION
APPENDIX F1: PEERS SELECTION FOR AGRICULTURE
PEERS SELECTION FOR HPG'S AGRICULTURE
Principle Business Activities
Revenue (LFY,
VND bn)
HPG's Agriculture Segment
HPG engages in the agriculture activities through pig and cattle farming, poultry
breeding, eggs producing, meat products processing, and livestock feed producing. The
company also takes part in fertilizers and nitrogen compounds production.
7,985.3
Shandong Minhe
Animal Husbandry Co Ltd
Shandong Minhe Animal Husbandry Co Ltd focuses mainly on the poultry breeding and
the distribution of chicks. The company also engages in the market of biological fertilizer
products.
11,200.0
Nichiwa Sangyo Co Ltd
Nichiwa Sangyo Co Ltd operates principally in the production and sale of livestock feed
as well as the breeding and selling of piglets and pigs.
9,240.5
Dabaco Group
Dabaco Group operates mainly in the provision of animal feed, fertilizers, pesticides, pig,
cattle, poultry farming, eggs producing, and meat processing.
7,186.8
Woorison F&G Co Ltd
Woorison F&G Co Ltd's principle activities are pig, cattle farming and distributing as well
as the meat processing.
4,503.3
Hokuryo Co Ltd
Hokuryo Co Ltd engages principally in producing and distributing chicken eggs. PG Egg,
Salad Kibun, Chick's Nest, Onsen Tamago, Hiragai Tamago, Sterilized Liquid Egg are
the key products of this company.
3,040.2
Agriculture Segment
Source: Reuters
APPENDIX F2: PEERS SELECTION FOR OTHER INDUSTRIAL PRODUCTION SEGMENT
PEERS SELECTION FOR HPG'S OTHER INDUSTRIAL PRODUCTION
Principle Business Activities
Revenue (LFY,
VND bn)
HPG's Refrigerant
Equipment
HPG engages in this area through the selling of freezers, refrigerators, air conditioners,
and coolers.
1,105.0
Nagakawa Group JSC
Nagakawa Group JSC's main operations are the manufacturing and selling of airconditioners, freezers, and washing machine.
1,021.0
Up Young Cornerstone Corp
Up Young Cornerstone Corp has two main operating areas, with the home appliance
business primarily focuses on selling air conditioners, refrigerators, washing machine,
and other products.
897.9
Regnis Lanka PLC
Regnis Lanka PLC principally produces and sells refrigerators, washing machine,
coolers, and components of refrigerators.
629.9
HPG's Furniture
HPG operates in this market by selling office furniture such as chairs and desks,
household furniture like dining tables and chairs, sofas, safes.
1,717.7
Hankook Furniture Co Ltd
Hankook Furniture Co Ltd mainly produces and sells household furniture and office
furniture. Its product line runs the gamut from sofas, dining chairs and tables, beds
dressers, etc.
1,305.8
Wim Plast Ltd
Wim Plast Ltd operates principally in the production and sale of household furniture
ranging from study desks, dining tables, chairs, stools, cabinets, and drawers.
1,010.0
Modernform Group PCL
Modernform Group PCL is mainly engaged in the market of office and house furniture.
Its product portfolio includes office desks, chairs, shelves, home sofas, bed sets, closets,
and dressers.
2,226.5
Other Industries Segment
Source: Reuters
25
APPENDIX F3: P/B VALUATION FOR REAL ESTATE SEGMENT
ROE - g
Relationship between ROE and P/B: 𝑃/𝐵 = k - g (ke: cost of equity; g: dividends terminal growth rate )
e
Ticker
KBC
VPI
HPX
CEO
DXG
DIG
ITA
HDG
SJS
FLC
SCR
QCG
LDG
D2D
NTL
ITC
LCG
TIX
IDV
FIR
TIG
FDC
VPH
DRH
CDC
ROE (FY19)
9.9%
21.5%
16.2%
18.4%
20.3%
11.1%
1.9%
43.7%
4.7%
3.3%
6.3%
1.5%
21.2%
58.4%
22.7%
7.2%
13.4%
14.8%
39.6%
34.1%
12.4%
11.4%
2.9%
7.0%
12.1%
50 REAL ESTATE COMPANIES IN VIETNAM FOR RELATIVE VALUATION
P/B (FY19)
(P/B)/ROE
Ticker
ROE (FY19)
P/B (FY19)
0.70
7.06
CCL
7.8%
0.74
2.66
12.40
SZB
19.0%
1.68
2.43
15.01
VRC
2.5%
0.37
0.63
3.43
API
5.0%
0.71
0.75
3.70
RCL
5.0%
0.76
1.19
10.77
D11
28.6%
1.17
0.40
20.62
SIP
42.5%
3.84
1.58
3.61
SDU
0.2%
0.35
1.21
25.58
PV2
5.6%
0.45
0.26
7.83
HU3
10.4%
0.49
0.50
7.97
DTA
3.4%
0.42
0.43
28.86
CIG
0.1%
0.27
0.53
2.50
DC2
32.2%
0.89
1.92
3.29
SJC
0.1%
0.10
1.02
4.50
IJC
15.9%
0.91
0.65
9.02
VHM
43.8%
4.52
0.70
5.23
AGG
31.2%
1.96
1.19
8.06
HDC
17.0%
1.64
3.18
8.02
TDH
8.0%
0.52
1.99
5.84
TIP
18.5%
1.48
0.59
4.76
HLD
16.8%
1.31
0.92
8.06
HAR
0.6%
0.37
0.41
14.14
KAC
5.7%
0.65
0.52
7.47
HU6
7.0%
0.48
1.41
11.68
NVL
16.6%
2.82
Industry (P/B)/ROE (Median)
8.08
(P/B)/ROE
9.48
8.83
14.62
14.12
15.08
4.10
9.03
145.83
8.09
4.70
12.35
385.71
2.77
142.86
5.71
10.33
6.27
9.67
6.48
7.98
7.78
57.45
11.47
6.78
16.95
Source: Reuters, Team computation
APPENDIX G: SCENARIO ANALYSIS
To analyze bear and bull scenarios for agriculture, other industrial production, and real estate, we decide to quantify historical multiples of each
segment of HPG based on analysis of comparable peers we use in the valuation part to arrive at the first quartile (Q1), median (Q2), and third quartile
(Q3) for each data set. Then, we compute the difference between Q 1 and Q2 as the bear spread, Q3 and Q2 as the bull spread. Ultimately, adding
bull spread to and subtracting bear spread from our target multiples result in the multiple for each scenario. This method stems from the rationale
that our target multiples would likely fluctuate in line with the historical variation. Our calculation generates the spreads as follow.
20.00
Historical HPG's Agriculture P/E (LTM) Multiple
From Peers Analysis
Historical HPG's Other Industrial Production P/E (LTM)
Multiple From Peers Analysis
14.00
15.00
12.00
10.00
10.00
8.00
6.00
5.00
4.00
Bear spread: 1.2x
Bull spread: 2.7x
Bear spread: 1.7x
Bull spread: 1.8x
2.00
0.00
0.00
2011
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
P/E (LTM)
Median
2012
2013
1st Quartile
3rd Quartile
2014
2015
12.00
1st Quartile
3rd Quartile
Bear spread: 0.6x
Bull spread: 0.6x
6.00
4.00
2.00
0.00
2011
2012
2013
2014
2015
P/B
Median
2016
2017
2018
1st Quartile
3rd Quartile
26
2018
Median
10.00
8.00
2017
P/E (LTM)
Historical HPG's Real Estate P/B Multiple From Peers
Analysis
14.00
2016
2019
2020
2019
2020
APPENDIX H: ENVIROMENTAL, SOCIAL AND GOVERNANCE
APPENDIX H1: HPG’S BOARD OF DIRECTORS
NAME
POSITION
Mr. Tran
Dinh Long
Mr. Tran
Tuan
Duong
Mr.
Nguyen
Viet
Thang
Mrs.
Nguyen
T.Thao
Nguyen
Mrs.
Pham
T.Kim
Oanh
Mr.
Nguyen
Manh
Tuan
Mr. Doan
Gia
Cuong
Mr.
Nguyen
Ngoc
Quang
Mr. Ta
Tuan
Quang
Mr.
Hoang
Quang
Viet
Mr. Hans
Christian
Chairman
Vice Chairman cum
General Director of
Hoa Phat Group
JSC
Deputy General
Director
Deputy General
Director
BOD
MEMBERS
EDUCATION
Senior
Management
Bachelor of
economics National
Economics
University
Executive
Board
Bachelor of
economics –
National
Economics
University
Executive
Board
Bachelor of
civil
engineering,
National
University of
Civil
Engineers.
Non
Executive
Board
Bachelor of
economics –
Hanoi
University of
Finance and
Accounting
CFO & Chief
Accountant
Senior
Management
Vice
ChairmanDirector
of Hoa Phat Steel
Pipe Co., Ltd
Senior
Management
Vice Chairman cum
Director of Hoa
Phat Furniture JSC
BOM member cum
Director of Hoa
Phat Equipment &
Accessories
Co.,Ltd.
BOM Member cum
Director of Hoa
Phat Refrigeration
Engineering Co.,
Ltd.
BOM Member cum
Director of Hoa
Phat Urban
Development &
Construction Jsc.
BOM Member
Source: Company data
Master of
economics,
National
Economics
University
Bachelor of
economics –
National
Economics
University
OWNERS
HIP
RATIO
YEARS
OF
AFFILIA
TION
25.35%
28
2.68%
28
0.32%
24
0.02%
22
- CFO & Chief Accountant of Hoa Phat Group
Joint Stock Company on April 28, 2016.
0.0006%
12
- Vice Director of Hoa Phat Steel Pipe Co., Ltd
cum Head of trading department in 2006.
- Director of Hoa Phat Steel Pipe Company since
10/2004.
2.63%
24
1.98%
21
EXPERIENCE
- Founder of Hoa Phat Corp in 1992.
- Founder of Hoa Phat Equipment & Accessories
Co.
- Oriented business strategy for each subsidiary
during the establishment and development of Hoa
Phat.
- Deputy Chairman of Management Board cum
CEO of Hoa Phat Group since January 2007.
- Director of Hoa Phat Furniture JSC from 1996 to
2004.
- Vice Director of Hoa Phat Furniture JSC from
1995 to 1996.
- Store Manager of Hoa Phat Equipment &
Accessories Co.from 1992 to 1994.
- Deputy Director of Hoa Phat Urban
Development and Construction JSC from 20032015.
- Director of Hoa Phat Hung Yen Feeds Co.,Ltd
Deputy General since 2015.
- Director of Hoa Phat Group Joint Stock
Company on 2012.
- Director of Hoa Phat Hai Duong Steel JSC since
March 2018.
- Chief Accountant of Hoa Phat Steel Pipe Co.,
Ltd from 1998 to 2006.
- Head of Supervisory and Legal Board of Hoa
Phat Group Joint Stock Company from 2007 to
2010.
- Deputy General Director of Hoa Phat Group
Joint Stock Company in 2010.
Senior
Management
MBA, National
Economics
University
- Vice Director before promoting as a Director of
Hoa Phat Furniture JSC in 2006.
- Deputy Chairman of Hoa Phat Group JSC since
2007.
Director of Hoa Phat Agricultural Development
Joint Stock Company, responsible for managing
the whole agricultural segment of Hoa Phat Group
in 2016.
Senior
Management
Vocational
training
- Director of Hoa Phat Equipment & Accessories
Co., Ltd from 1992 to 1996.
- Director of Hoa Phat Metal Producing Co.,Ltd
since 1997.
1.92%
28
Senior
Management
National
Economics
University
- Director of Hoa Phat Furniture JSC from 1995 to
2006.
- Director of Hoa Phat Refrigeration Engineering
Co., Ltd in 2006.
0.13%
25
Senior
Management
Graduated
from People’s
Security
University
- Director of Hoa Phat Urban Development and
Construction JSC since 2001.
0.32%
19
Master of
Business,
Denmark
- Industrialization Fund for Developing Countries
(IFU), Denmark from 1983 to 1989.
- Regional Director, Investment Fund for the
Europe Central and East, Denmark from 1989 to
1991.
- CEO of array of agriculture, the European Bank
for construction and development (EBRD),
London from 1991 to 2006.
- CEO of PENM I, PENM II, PENM IV since 2006.
0%
8
Senior
Management
27
APPENDIX H2: EVALUATION OF HPG’S ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE
To evaluate the company’s quality of corporate governance, each committee of the board is evaluated on a scale of 1 to 4 based on the roles that
they have to fulfill and criteria corresponding to these roles as enumerated in MSCI and CFA Institute Corporate Governance Manual for Investors.
The following table summarizes the analysis:
Marking Rubric:
1-The company did not follow the criteria at all,
2-The company did not fully follow the criteria,
3-The company followed the criteria,
4-The company has excellent policies on the criteria.
MSCI FRAMEWORK FOR ENVIRONMENTAL, SOCIAL RATING
Criteria
Description
Product Carbon
Footprint
How production activity of
company affects carbon
footprint
Carbon
Emissions
How company manages carbon
emissions
Financing impact
studies
How much company spend to
mitigate environmental impact
Water Stress
How company treats the water
ecosystem
Biodiversity &
Land Use Impact
How company relates to
environmental degradation
Raw Material
Sourcing
How does the company source
materials?
Toxic Emission
& Waste
How company manages toxic
emission and waste
Resources
Saving
How company uses natural
resources in operation
Packaging
Material & Waste
Does the company use plastic,
biodegradable materials?
Opportunity in to
use Clean Tech
Are there opportunity for
company to use
environmentally technology and
has it embraced this adoption?
Average score
ENVIRONMENTAL
Rating
Company Policies
HPG’s main technology in manufacturing steel is BOF, which emits CO2
25 times higher than EAF. Therefore, on average, HPG produces a higher
1.0
level of carbon footprint than the domestic peers who mostly acquire EAF
technology.
In Hai Duong and Dung Quat Complex, HPG has opted for the state-of-theart ultra-clean heat recovery coking technology that uses clean
2.0
development mechanism (CDM) as an attempt to minimize carbon
emissions under the Kyoto Protocol.
20-30% of total capital investment was spent to develop environmentally
3.0
friendly initiatives in 2019 by HPG.
HPG has cooperated with licensed wastewater treatment units to eliminate
aerobic, anoxic microorganisms to purify wastewater before discharge.
3.0
Also, wastewater is reused consistently in the circular economic model,
which helps Hoa Phat Furniture save 30% clean water in operation.
HPG has planted trees, flower gardens, and small landscapes around
factories as contributions to the biodiversity of the environment. Moreover,
the advanced wastewater treatment system that aligns with the government
standards such as QCVN 30: 2012 / BTNMT of the Ministry of Natural
2.0
Resources and Environment also helps to reduce soil contamination.
However, the company has not fully taken actions to protect the
environment as there are scandals relating to the gas emission from DQSC
that destroys surrounding plantation.
20% of iron ore for HDSC comes from An Thong mine, and the process of
mining iron ore is known for emitting nitrous oxide, carbon dioxide, and
1.0
fugitive dust to the environment. Also, oil erosion is another consequence
of this harmful process.
On average, the BOF technology generates NO2, SO2, CO, and dust 11
times higher than that of the EAF. To mitigate for this adverse impact, HPG
has utilized the CDM coking technology to eliminate toxic gases and
chemicals, the S95 granulated blast furnace slag to reuse solid waste and
2.0
the circular steel production model to reuse waste gas. Moreover,
electrostatic precipitator, cloth bag filter, wet dust filter, and wall systems
are also used to reduce the amount of lime dust emitted. However, as
mentioned above, gas emission scandals of HPG still exist, hence
illustrating HPG’s incompleteness in managing toxic emission
HPG has utilized the circular economic model, the S95 granulated blast
furnace slag, the self-generated electricity from coking process, and the
3.0
dust recovery process to effectively save the usage of natural resources
during operations.
Hoa Phat Furniture has taken initiatives to shift from plastic packaging to
carton box packaging as an attempt to cut the amount of plastic usage and
3.0
waste. Moreover, Hung Yen Steel Pipe also reuses plastic straps of
galvanized steel coils for steel sheets packaging, hence saving 50% of
plastic straps.
3.0
HPG has adopted the CDM-based coking technology to protect the
environment and consistently organized prizes for employees with the
green technology solution.
2.3
SOCIAL
Labour
Management
Human Capital
Development
Healthy & Safety
Product Safety &
Quality
Chemical Safety
Does the company work with its
staff? Is their staff
representation?
Is the company good at
developing its staff?
How well does the company
ensure the safety of its staff?
Is the product they produce of
the requisite standard? Do they
meet international standards?
If a primary manufacturer, do
they have effective controls to
3.0
3.0
2.0
4.0
2.0
Building good relationship with employees through offering attractive
welfare, remmuneration, working environment, bonding activities.
The company attempts to train highly knowledgeable and skilled employees
by cooperating with many colleges and universities for training sessions
Provide Occupational Safety training courses for employees, including firstaid training and fire prevention. However, there still exist few incidents of
malfunctions in the factories causing dangers for employees which need to
be better addressed.
HPG’s steel products are well-known for its top-notch quality that meet
international standards: JIS GS3505:2004, JIS G3112:2010 (Japan), BS
4449:2005 (UK), ASTM A615 (US)
Although the chemical waste from the manufacturing process inevitably
affects the surrounding environment, HPG’s mills are located far from
28
manage dangerous and
polluting substances?
Responsible
Investment
Privacy and Data
Security
Access to
Healthcare
Opportunities in
Nutrition &
Health
Mental Wellbeing
Does the company make an
effort to ensure responsible
investing?
Does the company have
suitable and extensive
safeguards to protect the data
of customers and suppliers?
Does the company provide
good quality healthcare etc.?
Does the company provide
health food options? Gym?
Sport Activities etc?
Does the company provide
suitable access to mental health
healthcare professionals?
Average score
2.0
residential areas to alleviate its direct adverse effect on residents. The
company has also taken initiatives to mitigate its chemical discharge to the
environment, especially its chain to reduce pollution.
Although the company does invest in social projects for good cause to
support underprivileged communities (Appendix H3), a huge manufacturing
company like HPG must make more efforts and greater social investment
to fulfil its social responsibility.
3.0
The company deploys V-Office by Viettel to digitally manage its paperwork
and SAP S/4Hana for enterprise resource planning, which has shown
effectiveness in accurate and coherent data management
2.0
There are health checkups for employees, yet the regularity and
thoroughness of such examinations should be enhanced.
2.0
There are internal cultural, sport activities for staff, and knowledge testing
of kitchen staff to ensure food safety.
1.0
Vacation and team building were implemented in all units to allow
employees to recharge and tighten the spirit of solidarity in the Group.
However, apart from that, the company has not specifically provided and
encouraged adequate access to mental health health care for employees.
2.4
CFA INSTITUTE FRAMEWORK CORPORATE GOVERNANCE
Criteria
Independence
Accountability
Responsiveness
Competence
Elections
Board
Attendance
Directorship
Elections
Related Party
Transactions
Board Members
Independent
Members
Role Delegation
Committees
Independent
Audit
Independent
Audit
Financial
Integrity
EXECUTIVE COMMITTEE
Description
Rating
Company Policies
Boards must be willing to and capable of
The board of directors has minority independent members (1/11)
scrutinizing management performance
2
and 1 non-executive member.
and setting reasonable compensation
Corporate practices must reflect the
The Board’s fiduciary duties, responsibilities, and accountabilities
4
Board’s answerability to its owners
are clearly stated.
Directors must be
responsive to shareholders’ wishes, which
All basic shareholders’ rights are guaranteed, especially regarding
can be expressed through elections or
4
information access, voting rights, financial
votes on shareholder
rights, and participation in important decision-making process.
proposals, and must act accordingly
Directors should add value to
The Board comprises members from quite a variety of fields with
the corporation with their specific skills or
3
diverse backgrounds and years of experiences.
expertise in a particular field
There is a careful screening and detailed electoral process during
Annually elect directors
4
annual shareholder meetings.
Adequate attendance at Board and
committee meetings
Reasonable number of board
directorships
Majority voting in director elections
No materialistic related party transactions
4
100% Board members attend all the meetings.
4
There are 4 directors in the Board in this year.
4
Directors are elected through majority voting.
Related party transactions are fully disclosed. The fair value for
transactions and leasing terms are evaluated objectively by
external property consultants.
3
Board of at least 5 but no more than 15
4
The Board consists of 11 members.
members
Board must have greater than 2
1 out of 11 members of the Board is independent, accounting for
independent directors or 20% independent
2
9.1%.
members of the board.
Roles of CEO and Chair should be sepera
Mr Tran Dinh Long holds the Chairman position and Mr. Tran
4
ted
Tuan Duong assumes the CEO position.
Established Executive, Audit,
HPG does have established Executive, Audit, Compensation,
Compensation, Nominating, and
4
Nominating, and Compliance Committee.
Compliance Committee
Average score
3.3
AUDIT COMMITTEE
The consolidated financial statements has given a true and fair
view in all crucial aspects upon the related documents and
Auditor’s opinion should be impartial
records, in accordance with the Accounting Standards,
and professional Independence is
Vietnamese Enterprises Accounting System and the legal
4
compromised when the author receives
provisions related to the preparation and presentation of financial
significant payment for non-audit activities.
statements.
The committee monitors the external auditor’s independence and
objectivity.
Board's Audit Committee should be
4
The auditor of the Company and the Group is KPMG Limited.
independent
Company’s financials should have
Statements are settled are publicly and fully disclosed with notes.
integrity (Items that raise concerns include
4
The committee also ensures that the external auditor has
auditor changes, inconsistency over
adequate quality control procedures.
years, material weaknesses in the
29
company’s controls, restatements, and
excessive fees paid for non-audit work).
Selection of
Auditor
Company should allow shareholders to
ratify the selection of auditor
4
The appointment, reappointment, or removal of the external
auditor is recommended by the audit committee, approved by the
Board, and ratified by shareholders.
Average score
Performance
Metrics
Performance
Metrics
Performance
Metrics
Election
Shareholder
Rights
4
COMPENSATION COMMITTEE
Performance metrics should encourage
Compensation is determined in annual general
executives to make decisions that benefit
4
meeting and offers attractive bonuses for completing and
exce
shareholders
eding the after-tax profit plan.
Performance Metrics should be
The Board Charter is publicly available and disclosed in the
4
communicated to shareholders
company annual report, and approved in annual general meeting.
A portion of executive compensations
The Boards did have shares payment policy as part of its current
4
should be in the form of equity
compensation for Directors and Officers.
Average score
4
SHAREHOLDER RIGHTS’ PROTECTION
One share, one vote
4
1 share – 1 vote is applied.
Shareholders are entitled to dividends subject to
Right to Dividend
4
the Board’s discretion.
Absence of supermajority vote
The company reserves the voting requirement prescribed in the
4
requirements
relevant laws, including those prescribing supermajorities.
Minority shareholders also have the rights to propose the holding
Right of shareholders to call special
4
of meetings and inclusion of items that relate directly to the
meetings
business corporation, recognized by the Board.
Information
Shareholders are entitled to access company materials without
4
restrictions. They also can exercise their right to dissent and
Appraisal rights
require payment in the fair value of their shares.
Average score
4
OVERALL RATING
3.8
Source: Company data, Team Evaluation
APPENDIX H3: CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY PRACTICES
Energy and raw materials saving
initiatives
ENVIRONMENT
HPG has devised hundreds of saving solutions such as cutting fan capacity through inverter control
circuits, reusing steel straps to avoid materials waste, etc.
Heartbeat for Love
HPG has also engaged in activities that protect the environment such as reducing emitting acid
vapor, changing from plastic to carton box in packaging for Furniture segment, etc.
PEOPLE
A free heart operation project for under-privileged children of HPG.
Hoa Phat a companion of students
A scholarship of HPG aimed at students with outstanding academic performance.
Hoa Phat follows children to
school
An activity organized by HPG to upgrade academic infrastructure and experience in many
Vietnamese provinces.
Charity rice - Kind heart
A charity project of HPG where poor patients at the hospitals are given free and nutritious lunch.
Spring of Love
An annual charity project organized by HPG to deliver New Year gifts to poor families across the
country.
Environmentally friendly initiatives
Bridge building
An activity of HPG that aims to improve life standard in the West and Mekong Delta provinces
through the bridge construction.
Source: Company data
APPENDIX H4: CIRCULAR ECONOMIC MODEL OF HOA
PHAT GROUP
The upstream integrated value chain involves the long
production process from iron ore to finished steel, in which
output of one stage is the input of the next stage. During the
process, any wasted gas, water, excess heat, and even solid
waste are recovered and reused in a circulation chain without
any effusion into the environment. Therefore, HPG has
complied with the CSR standard to protect the environment,
optimize production efficiency, and promote its sustainable
image.
Source: Company data
30