FPT Retail (FRT) [BUY +43.7%]
Industry:
Report Date:
Retailing
April 23, 2018
Listing Price:
Target Price
Upside to TP:
Dividend Yield:
TSR:
Market Cap:
Foreign Room:
ADTV30D:
State Ownership:
Outstanding Shares:
Fully Diluted Shares:
3-yr PEG
Dao Nguyen
Senior Analyst
dao.nguyen@vcsc.com.vn
+848 3914 3588 ext. 185
Phap Dang
Senior Manager
phap.dang@vcsc.com.vn
+848 3914 3588 ext. 143
VND125,000
VND177,700
+42.1%
+1.6%
+43.7%
$220.3mn
$38.8mn
NA
0.0%
40.0 mn
40.0 mn
0.7
Initiation
Rev Growth
EPS Growth
GPM
NPM
EV/EBITDA
P/Op CF
P/E
2017
21.1%
39.7%
13.8%
2.2%
12.4x
28.0x
17.2x
2018F
17.1%
32.6%
14.2%
2.5%
9.9x
94.4x
13.0x
2019F
22.5%
26.8%
14.5%
2.6%
8.0x
28.1x
10.3x
P/E (ttm)
P/B (curr)
Net D/E
ROE
ROA
FRT
17.2x
7.6x
40.5%
44.2%
6.8%
Peers*
18.0x
2.3x
22.8%
15.6%
3.3%
VNI
19.4x
3.0x
N/A
15.1%
2.3%
2020F
19.4%
24.7%
14.8%
2.7%
6.6x
18.2x
8.2x
Company Overview
Established in 2012, FPT Retail has quickly
become the second-largest mobile phone retailer
in Vietnam with nearly 15% market share in 2017.
To sustain long-term growth, the company has
entered the pharmacy market.
* Domestic and foreign peers using adjusted market multiples.
A proven retailer with a bright growth outlook
•
•
•
•
•
•
We initiate on FRT with a BUY rating, total return of 44%. Attractive 3-yr PEG of 0.7.
FRT is a proven retailer. Backed by its creative initiatives, FRT’s legacy mobile
segment still boasts a robust outlook, while its entry into pharmacy looks promising.
NPAT CAGR of 21% for the mobile segment during 2017-2022F driven by resilient
SSSG, expansion in both traditional format and Apple stores and margin improvement.
We project FRT’s pharmacy will reach a total store count of 208 by YE2022 vs eight at
YE2017, contributing to a total NPAT CAGR of 25% for FRT during 2017-2022F.
Upside catalysts: (1) mobile SSSG outperforms our expectation on FRT’s consumer
financing and price subsidy programs, (2) pharmacy roll-out outpaces our projections.
Downside catalysts: (1) excessive bad debt from financing and price subsidy programs,
(2) price competition from e-commerce and (3) stricter drug prescription enforcement.
Why FRT even though we already recommend MWG? Because these two companies
boast distinct growth drivers despite some overlap. Our current thesis on MWG is premised
on its minimart foray and the still fast-growing consumer electronics segment. On the other
hand, we like FRT due to the bright outlook of its mobile segment and pharmacy foray.
While FRT’s continuing expansion will likely undercut MWG’s market share in the mobile
phone segment, the impact should be manageable for MWG.
FRT’s pioneer consumer financing (F.Friends) and price subsidy programs underpin
its mobile segment. F.Friends allows qualified customers to pay in installments at zero
interest. Meanwhile, in the price subsidy program, FRT partners with mobile telcos to
reduce the total price a customer pays for their phone and data. These programs will enable
FRT to acquire market share while improving its margins due to minimal marginal operating
expenses. The downside is that FRT bears risks on receivables.
FPT to accelerate roll-out of Apple Premium Reseller (APR) stores to take up a larger
portion of the Apple pie. FRT owns 12/15 APR stores in Vietnam. This format will benefit
from Apple’s new warranty policy in Vietnam, which disregards unauthorized hand-carry
products. To open APR stores, one must meet Apple’s many rigorous requirements and
FRT has the advantage of having worked with Apple (32% of FRT’s sales) for a long time.
Acquisition of Long Chau an early win for FRT in pharmacy. In January 2017, FRT
acquired Long Chau, which is a prestigious pharmacy brand in HCMC and boasts much
higher sales/store than competitors (an average of USD136,000/store/month or 4x the
second highest competitor). After acquiring know-how from the previous owner, FRT is
building up retail capabilities for the chain and will speed up its roll-out from 2018.
See important disclosure at the end of this document
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April 23, 2018| 1
Contents
A proven retailer with a bright growth outlook .............................................................................. 1
Why FRT despite MWG? .................................................................................................................. 3
FRT’s growth = mobile phone + pharmacy ......................................................................... 3
MWG’s growth = consumer electronics + minimart ............................................................. 3
Company overview........................................................................................................................... 5
Established as an FPT Corp subsidiary, it inherits the brand equity of Vietnam’s largest IT
company ............................................................................................................................. 5
Strong management team: entrepreneurial, pragmatic, execution-focused and detailoriented ............................................................................................................................... 6
There is no shame in being a follower ................................................................................ 7
A focus on big-ticket and premium products, especially Apple, is how FRT differentiates
itself .................................................................................................................................... 9
Pharmacy: promising business off to a good start ............................................................ 10
Historical business performance .................................................................................................. 11
Strong top-line growth on the back of aggressive store openings ..................................... 11
Margins are expanding in conjunction with scale .............................................................. 12
F.Friends: FRT’s self-created consumer financing program ............................................. 13
Telco price subsidy: a potential game changer ................................................................. 14
Mobile phone business outlook .................................................................................................... 16
FPT Shop: resilient SSSG and selective store openings .................................................. 16
F.Studio: store expansion to speed up .............................................................................. 17
Online sales should continue to take off ........................................................................... 17
Margins to expand on the back of larger scale and higher contribution from F.Friends and
telco subsidy programs ..................................................................................................... 18
Long Chau pharmacy outlook ....................................................................................................... 19
We opt to be more conservative than management in terms of future store openings at this
early stage ........................................................................................................................ 20
Summary of P&L projections ........................................................................................................ 22
Key investment risks ..................................................................................................................... 24
Bad debt from F.Friends and price subsidy programs ...................................................... 24
Price war from pure e-commerce players ......................................................................... 25
Long Chau – stricter enforcement on drug prescription .................................................... 25
Valuation ......................................................................................................................................... 26
Discounted Cash Flows – Mobile (FPTShop and F.Studio) .............................................. 26
Discounted Cash Flows – Long Chau ............................................................................... 27
Peer comparison ............................................................................................................... 28
Financial Statements ..................................................................................................................... 29
Rating and Valuation Methodology .............................................................................................. 31
Disclaimer ....................................................................................................................................... 32
Contacts .......................................................................................................................................... 33
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 2
Why FRT despite MWG?
This is a question that naturally comes up when we make an investment case for FRT given
our bullish stance on MWG. Our view is that FRT and MWG do not have to be mutually
exclusive from an investment perspective because while both companies have made their
names by retailing mobile phones, their future growth will come from different avenues. In
addition, while MWG still undeniably possesses the best management team in Vietnam’s
retailing sector, we believe FRT’s management team should be appreciated more given
the company’s proven track record since its establishment in 2012.
FRT’s growth = mobile phone + pharmacy
In our current projections, mobile phone will be responsible for 78% of FRT’s NPAT
growth between 2017-2022 with the remaining 22% contributed by pharmacy.
In our view, given that MWG (45% market share in 2017) has stopped store expansion for
its mobile chain, FRT (13% market share in 2017) is best positioned to spearhead growth
in this industry on the back of further footprint expansion of its flagship chain (FPT Shop),
the roll-out of APR stores to obtain market share in Apple products and its self-initiated
consumer financing and price subsidy programs to buoy SSSG.
On the other hand, FRT is off to a good start with its pharmacy foray thanks to the
acquisition of Long Chau, a prestigious pharmacy brand in HCMC. Besides the brand, FRT
also attained valuable know-how. FRT has been constructing back-end capabilities for
Long Chau over the last year and as this shapes up, Long Chau’s pace of store expansion
will gradually pick up in the coming years.
MWG’s growth = consumer electronics + minimart
In our current projections, consumer electronics will account for 49% of MWG’s
NPAT growth between 2017-2022 while minimarts will contribute 40%.
The footprint coverage of MWG’s mobile chain (TGDD) has been saturated with nearly
1,100 standalone stores in addition to the mobile phone sections built into every consumer
electronics store (642 of them as of YE2017). Therefore, future growth of this chain will
primarily be derived from organic industry growth.
Under our current projections, MWG’s mobile market share will slide from 45% currently to
40% in 2022 while FRT’s will swell from 13% to 23%. Nevertheless, this is not to say that
TGDD’s sales will decline, as we still project a 5% revenue CAGR during 2017-2022 for
this chain vs a 7%-8% CAGR for the overall mobile phone market, per GFK. In other words,
FRT is going to occupy a larger part of a growing pie thanks to its more aggressive store
expansion and sales initiatives now that TGDD has ceased expanding its store network.
We note that MWG also bought a pharmacy chain itself, namely An Khang (previously
known as Phuc An Khang). Nonetheless, unlike FRT, which has already come to grips with
how its pharmacy format is going to be, MWG will likely undergo two to three years of
experimentation with An Khang before it scales up the chain more aggressively. Therefore,
contribution from pharmacy to MWG will likely be insignificant in the next three to five years.
See important disclosure at the end of this document
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April 23, 2018| 3
Figure 1: 2017-2022 NPAT projections for FRT (VNDbn)
1,000
Figure 2: 2017-2022 NPAT projections for MWG (VNDbn)
7,000
800
5,000
600
3,000
400
1,000
200
0
-1,000
2017
2018
2019
Mobile
2020
2021
Pharmacy
2022
2017
2018
2019
Mobile
CE
2020
2021
2022
Grocery
Source: VCSC
See important disclosure at the end of this document
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April 23, 2018| 4
Company overview
Established as an FPT Corp subsidiary, it inherits the brand equity of
Vietnam’s largest IT company
FRT was founded in 2012 as a subsidiary of FPT Corp (HSX: FPT). FPT owned 85% of
FRT with the remaining stake held by individual investors (likely FPT insiders). FPT is the
leading IT company in Vietnam and the second leading player in fixed-line broadband with
a brand associated with prestige, quality and service. As such, since its inception, FRT,
with its flagship brand FPT Shop, has benefited from FPT’s brand equity.
Figure 3: FPT Shop format
Source: FRT
In December 2017, FPT completed a partial sell-down in FRT. This was in accordance
with FPT’s strategy to focus on its core businesses of Software and Telecom. FPT sold
30% of FRT to Dragon Capital and VinaCapital in August 2017 and followed that with
another 8% stake sale to retail investors in December 2017 to facilitate the listing of FRT
on the Ho Chi Minh Stock Exchange.
Figure 4: FRT’s shareholder structure as of April 6, 2018
Others,
13%
Insiders,
8%
FPT, 47%
Foreign
investors,
31%
Source: FRT’s prospectus
See important disclosure at the end of this document
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April 23, 2018| 5
Strong management team: entrepreneurial, pragmatic, executionfocused and detail-oriented
It is easy to think of FRT as a “copycat” of MWG given the company’s strategy of “follow
the leader” since its inception. It is common to see an FPT Shop located nearby MWG’s
stores while FRT has also imitated many of MWG’s pioneer customer services. However,
credit should be given when due. This strategy has proven to be successful, enabling FRT
to shortcut its learning process in a sophisticated sector. FRT quickly became the second
largest mobile phone retailer, surpassing other players with longer tenures, such as Vien
Thong A and Viettel Store.
And FRT has shown itself to be more than just a copycat by pioneering in creative financing
and price subsidy packages to acquire customers, which we will detail later on page 14. In
addition, FRT made a valuable acquisition to enter the fragmented pharmacy market, which
took place about one year earlier than MWG’s own transaction in this space.
FRT is led by CEO Ms. Nguyen Bach Diep and Deputy CEO Ms. Trinh Hoa Giang, who
have been with the company since its establishment. In 2016, FRT welcomed Mr. Nguyen
Viet Anh, who heads the company’s business development strategies.
Figure 5: FRT’s key personnel
Name/Title
Background
- 07/2013 - now: CEO of FPT Retail.
- 05/2012 - 06/2013: Deputy CEO of FPT Retail.
- 05/2010 - 12/2010: Project Manager of Alfa Mart parnership – FPT Trading.
Ms. Nguyen Bach
Diep
- 10/2008 - 04/2010: Head of FPT Telecom, Southern branch.
Chairwoman cum
CEO
- 09/2003 - 09/2005: Deputy Head of FPT Mobile Technology Company
Limited, HCMC.
- 05/2003 - 08/2003: Director of FIS BANK HCM Center.
- 05/1995: Joined FPT as a Sales Officer at FPT HCMC Branch.
Ms. Trinh
Giang
- 2012-present: Deputy CEO cum Board member of FPT Retail.
Hoa
- 2007-2011: Head of Sales cum Deputy CEO of FPT Retail.
BOD
member
cum Deputy CEO
- Joined FPT in 2003, in charge of FPT Mobile showroom network.
- 2001-2003: Head of HR, VKO Shopping Center.
- Joined FRT in March 2016, in charge of merchandizing, marketing and
business development strategies.
- 2014-2015: Head of Sales – Apple South Asia Pte Ltd.
Mr. Nguyen Viet
Anh
- 2010-2011: Head of Finance and Head of Sales – Nokia.
Deputy CEO
- 2009-2010: Head of Supply Chain – L’OREAL Group.
- 2004-2008: P&G Vietnam, undertook various roles including Finance
Director, Business Development Director, Director of Financial Analysis (Asia).
Source: FPT, FRT
See important disclosure at the end of this document
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April 23, 2018| 6
There is no shame in being a follower
FRT is the youngest company among the leading mobile phone retailers in Vietnam,
which include Vien Thong A (established in 1997), MWG (2004) and Viettel Store (2006).
Recognizing MWG’s undefeatable power but knowing the market had room for more than
one player, FRT has pursued a strategy of mirroring MWG, particularly in terms of customer
services and store locations. At the same time, it has concentrated on building up backend capabilities, including IT, internal management systems and human resources.
Second largest store network in Vietnam... FRT operated 473 stores as of YE2017. This
trails MWG’s 1,072 standalone mobile stores and 642 consumer electronics stores (each
of which contains a separate section for selling mobile phones), but is well ahead of other
competitors such as Viettel and Vien Thong A. Furthermore, our observation suggests that
FRT’s store traffic only trails that of MWG and is far superior than the other two retailers.
…which doubles up as delivery hubs for online sales. In 2017, FRT’s online sales
surged by 120% to USD89mn, representing 15% of total sales. This is compared to
USD250mn and 9% at MWG. Similar to MWG, by using physical stores as shipping points,
FRT can offer one-hour delivery for customers located within 10 km of its stores across
Vietnam. Meanwhile, Viettel and Vien Thong A can only commit to one-hour delivery in
HCMC and Hanoi.
Figure 6: Standalone store count of leading mobile phone retailers in Vietnam
1,072
473
336
209
Thegioididong
FRT
Viettel
Vien Thong A
Source: VCSC compilations (store count as of YE2017)
See important disclosure at the end of this document
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April 23, 2018| 7
Figure 7: Market share structure of mobile phone retail market in 2013 vs 2017
2013
2017
MWG,
19%
FRT, 6%
Momand-pop,
50%
Other
retail
chains,
26%
Momandpop,
10%
Other
retail
chains,
32%
MWG,
45%
FRT, 13%
Source: VCSC estimates
Customer centric. From H2 2015 to 2016, FRT launched an employee training program
called ““We” love FPT Shop”, carried out directly by the CEO and the training director
across its store network with the purpose of standardizing and upgrading its customer
services. As part of this program, the company incorporated customer satisfaction as a
critical KPI for the sales force in addition to revenue. Sales staff were trained in skills such
as how to greet customers and serve them while they are in the store. In addition, FRT
introduced a 30-day product return policy in which customers can exchange a faulty product
for a new one within 30 days of their purchase, while also extending warranty periods. As
a result of this program, FRT’s brand awareness, customer satisfaction and loyalty all
displayed marked improvement.
See important disclosure at the end of this document
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April 23, 2018| 8
A focus on big-ticket and premium products, especially Apple, is how
FRT differentiates itself
Figure 8: FRT’s sales by product ASP in comparison to others (2017)
< USD440
> USD440
60%
38%
FRT
Others
Source: FRT
Apple accounts for 32% of FRT’s revenue vs ~15% for MWG. Besides FPT Shop, FRT
has obtained authorization for all three levels of Apple concepts: AAR (Apple Authorized
Reseller), APR (Apple Premium Reseller) and iCorner. AAR and APR stores only sell Apple
products and strictly follow Apple’s standards in terms of design and staff training. As of
YE2017, FRT operates 12 Apple APR stores (under the F.Studio brand).
Figure 9: FRT’s different Apple concepts
APR
AAR
iCorner
Source: FRT
Laptops and tablets constitute 12% of FRT’s revenue vs 5% of MWG. According to
GFK, FRT’s average market share for laptops in H1 2017 was around 23% in terms of
value, well above the combined market share of MWG, Vien Thong A and Viettel of 18%.
While laptops and tablets bolster the average ticket size of FRT, the flip side is this category
is growing very sluggishly.
See important disclosure at the end of this document
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April 23, 2018| 9
Figure 10: FRT’s 2017 revenue by category
Accessories,
10%
Others, 3%
Laptops and
tablets excl
Ipad, 12%
Apple, 32%
Mobile
phones excl
iPhone, 43%
Source: FRT
Pharmacy: promising business off to a good start
In January 2017, on behalf of FRT, CEO Nguyen Bach Diep purchased 100% of Long
Chau, a renowned pharmacy brand in HCMC. FRT plans to consolidate Long Chau in
H2 2018 or 2019 once it finishes formalizing Long Chau’s back-end operations, such as
supply chain, paperwork, inventory management and IT infrastructure. So far, apart from
know-how transfer, FRT has focused on developing software for Long Chau to better
manage inventories, credit and sales commissions as well as tools to support the sales
staff. For example, FRT is building an app that its sales staff can use to search information
about various drugs so they can consult customers more effectively.
New stores are generating encouraging sales levels backed by Long Chau’s brand
name. At the time of FRT’s acquisition, Long Chau was running five stores, all of them
located on Hai Ba Trung Street, District 3, and generating around USD132,000 in monthly
sales/store. Since then, FRT has opened four new Long Chau stores in other districts,
which are displaying positive sales progress and approaching the level of the legacy stores.
Currently, 60% of Long Chau sales come from western drugs. The remaining 40% are
derived from vitamin supplements, beauty products and medical equipment.
Long Chau sources 60% of its products directly from the manufacturers and the rest
from wholesalers.
Figure 11: Long Chau Pharmacy
Source: FRT
See important disclosure at the end of this document
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April 23, 2018| 10
Historical business performance
Strong top-line growth on the back of aggressive store openings
From only 50 stores back in 2012, FRT reached 473 stores by YE2017, implying a pace of
85 new stores/year compared to 140 by MWG during the same period.
Figure 12: FRT’s historical store count
473
500
400
300
200
100
50
0
2012
2013
2014
2015
2016
2017
Source: FRT
Figure 13: FRT’s historical revenue (VND bn)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
2012
2013
2014
2015
2016
2017
Source: FRT
See important disclosure at the end of this document
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April 23, 2018| 11
Margins are expanding in conjunction with scale
FRT’s margins have been strengthening consistently since 2012 as a growing scale
bolsters its bargaining power with vendors. Margins have also been ratcheting up on the
back of better store efficiency and expense rationalization.
Figure 14: FRT’s historical NPAT (VND bn) and NPAT margin
2.2%
1.8%
1.9%
0.8%
290
-35
208
146
-32
41
-1.1%
-2.9%
2012
2013
2014
NPAT
2015
2016
2017
NPM
Source: FRT, VCSC
We see more room for margin expansion as FRT’s scale and store efficiency
continue to improve. Compared to MWG’s mobile chain, whose NPAT margin is around
4.5% currently, FRT’s NPAT margin is still far behind. We attribute this sizeable difference
to (1) product mix: Apple products, which account for a bigger part of FRT’s revenue,
typically yield a thinner GPM (10%-11%) than other brands; (2) MWG’s back-end costs are
shared by its mobile and CE chains; and (3) scale, i.e., bargaining power against vendors.
While the first and second factors are unlikely to change, we believe FRT can enhance its
same-store sales, which, coupled with new store openings, will bolster FRT’s scale and
enable it to negotiate for better terms with vendors.
See important disclosure at the end of this document
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April 23, 2018| 12
F.Friends: FRT’s self-created consumer financing program
FRT, MWG and other brands offer traditional consumer finance packages in their stores.
In addition, FRT has developed the F.Friends as a more cost-competitive option.
Figure 15: Comparison between F.Friends and other consumer financing options
Bank loan
Interest rates
Down payment
Applicable periods
9-11%
0
All year
Applicable products
All products
Eligible for use with other
promotions (except flash
sales, stock clearance)
Yes
Traditional consumer
finance
30%
40-60%
All year
Minimum value of
USD132
Credit cards
F.Friends
0-30%
0
Seasonally
Minimum value of
USD132
0%
0
All year
Minimum value of
USD44
Yes
No
Yes
Source: FRT
F.Friends contributed 4.5% to FRT’s revenue in 2017 and management targets to
nudge this up to 15% in the next five years. FRT started piloting F.Friends in October
2016 and officially launched the program in January 2017.
How F.Friends works
• FRT approaches Vietnamese companies and makes them members of the
F.Friends program.
• Current membership base: 2,000 companies with 650,000 members.
• Qualified employees (see more below) can buy products from FRT and pay in
monthly installments over six months at zero interest.
• Monthly installments are taken directly from the employees’ payroll bank account
via a platform developed between FRT and its partner banks.
How FRT controls credit risks
•
•
•
•
Only employees with (1) at least eight months of tenure and (2) a salary paid via
bank transfer qualify for the program.
Loan amounts range from 1.5x-2x the employee’s monthly salary, depending on
how long they have been with their company.
Because payments are deducted directly from an employee’s monthly salary
account, the employee can only default on the loan if he quits his job.
For Samsung phones (largest market share in Vietnam), if FRT does not receive
the payments in due course, the phones will be remotely shut down (rendering
them unusable) via a program (software) embedded inside the phone’s chip, which
is co-developed by FRT and Samsung. FRT expects to implement a similar
software with Oppo (third biggest market share in Vietnam behind Samsung and
Apple) later in 2018.
Figure 16: F.Friends process
Approach the
companies
Member
registration
Credit limit
approval
Money
collection via
debitting
employee's
monthly salary
account
Source: FRT
See important disclosure at the end of this document
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April 23, 2018| 13
The economics of F.Friends
Per FRT, major expenses (as a percentage of sales value) for F.Friends include:
• 2% for bad debt provisions. Up to now, actual bad debt has been <1%, per FRT;
• 3% for interest expenses, assuming the company will finance the loans with 100%
bank borrowings at 6% interest rate/year and will pay them back after six months;
• 1% for other expenses, e.g., expenses for acquiring members.
Given a GPM of around 14%, the EBIT margin of F.Friends could amount to approximately
8%. Since F.Friends transactions take place at FRT’s existing stores (qualified customers
will bring necessary documents to the stores), F.Friends will improve FRT’s EBIT margin
as it generates incremental traffic and sales without requiring additional store-related costs,
such as rent and staff expenses.
Telco price subsidy: a potential game changer
In November 2017, FRT began to roll out a new program where it sells phones at a discount
to customers who subscribe to telephone data packages.
How it works
• FRT partners up with telcos, who will subsidize phone prices for FRT customers.
In exchange, the phone buyers will subscribe to a 12-month data package provided
by the telcos.
• In our observation, the subsidy amount ranges from 7%-58% of the phone price,
depending on the models and data packages. No data has been provided on the
actual average subsidy across all models up to now.
• For consumers, it means that they will get the phone and the data package for a
lower bundle price compared to buying each separately.
• For FRT, it will first receive the down payment. After that, every month, FRT will
receive the monthly payment from the telcos after the latter has received data
subscription payments from the customers. This will take place over 12 months.
Figure 17: Barriers and opportunities for telco subsidy program
Barriers
Opportunities
4G LTE was rolled out in October 2016
Low ARPU: USD5-6/month
Higher data consumption  higher demand for
buffet carrier packages
Prepaid subscribers: 95%
Mobile number portability  Intense competition
between telcos to retain customers
Vietnamese telcos do not own strong retail
networks and expertise
Mobile phones sold without carrier subsidy: 99%
No centralized system for personal credit
history
 Risk of bad debt
Source: FRT
See important disclosure at the end of this document
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April 23, 2018| 14
How FRT controls credit risks
•
•
Compared to F.Friends, in which only employees of member companies can
participate, this price subsidy program is open to everyone. As such, to manage
credit risks, only Samsung phones are eligible for this program at the moment. If a
customer does not pay in due course, FRT will remotely shut down his phone. As
FRT develops more embedded programs with other vendors, such as Oppo, more
products will become eligible for this program.
FRT buys trade receivables insurance. Per FRT, as of now, insurance covers 100%
of FRT’s receivables, unless in the case of late customer payments, FRT’s
embedded program does not function properly.
Figure 18: Illustration of the price subsidy package for Samsung Note 8
Insurance
company
Pays for
bad debt
Premium
FRT
USD33/month
Samsung
Upfront:
USD595, or
USD99/month over
six months
Customer
12-month package: FPT990
USD44/month
Telcos
Source: VCSC
In November 2017, FRT and Vietnamobile (No.4 mobile telco company in Vietnam)
started a pilot program with the Samsung Note 8 model. Vietnamobile subsidizes
VND9mn (USD396) of a total phone price of VND22.5mn (USD990). In return, the phone
buyers subscribe to a 12-month data package that costs USD44/month.
Mobifone (No.3 mobile telco) joined forces with FRT in early 2018. This is a positive
development given Mobifone’s much larger market share of 16% in 2016 vs Vietnamobile’s
2% in 2016, according to the Ministry of Information and Communication.
Currently, about a dozen Samsung models are available for this program, including
Galaxy S9 | S9+ | Galaxy Note 8 | Galaxy S8 | Galaxy S8+ | Galaxy A8 2018 | Galaxy A8
Plus 2018 | Galaxy J7 Pro | Galaxy J7+| Galaxy J3 Pro | Galaxy J2 Pro 2018, whose retail
prices range from USD150 to USD1,035.
With Apple unlikely to be keen on the software interference, this program will likely
only cover Android phones. Currently, outside of Samsung, FRT is working on this
See important disclosure at the end of this document
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April 23, 2018| 15
technology with Oppo. Apple will likely stay away due to its stringent security and privacy
control.
FRT has high expectations for this program. Management said that if the program
continues to yield positive results, i.e., a low default rate, the company will ramp this
program up to at least 15% of total revenue in the next five years compared to 5% since
the program was launched. In 2018, FRT will work on on-boarding the remaining telcos,
namely Viettel (58% market share) and Vinafone (24%).
The economics of the price subsidy program
Per FRT, major expenses (as a percentage of sales value) for this program include:
• 2-3% of bad debt expenses, inclusive of insurance premiums. So far, actual bad
debt has been around 1%, per FRT;
• 3% for interest expenses, assuming an average down-payment ratio of 50% and
FRT will finance the receivable amount with bank borrowings at a 6% interest
rate/year and pay them back after 12 months.
• 1% for other expenses.
As such, EBIT margin of this program should be similar to F.Friends and it can enhance
FRT’s EBIT margin the same way F.Friends does.
Mobile phone business outlook
FPT Shop: resilient SSSG and selective store openings
The mobile phone market in Vietnam is expected to grow 7%-8% per annum over the
next five years, driven mainly by ASP as Vietnam enters a replacement cycle. This is
slower than the 22% CAGR during 2013-2017, which was fueled by a surge in smartphone
penetration. According to Nielsen, smartphone penetration in key cities jumped to 84% in
2017 vs 30% in 2012 and 52% in 2014. Meanwhile, smartphone penetration in rural areas
currently stands at 68%.
We project a total store count of 555 by YE2020 for FPT Shop vs 473 as of YE2017
as FRT pursues a “piggyback” strategy. Specifically, we pencil in 50 new stores in 2018,
20 in 2019 and another 10 in 2020. FRT’s store count is less than half of MWG’s standalone
mobile stores. If we count MWG’s consumer electronic stores (642 of them as of YE2017),
which dedicate a separate section for selling mobile phones, then FRT’s store count is just
about one-fourth of MWG. As such, there is still room for FRT to widen its FPT Shop’s
footprint. Having said that, given the aforementioned decelerating growth of the overall
market, FRT will be selective in terms of location. The company will only open stores where
its competitors are generating around VND3bn (USD132,000) in sales/store/month.
F.Friends and price subsidy programs will buoy SSSG despite closer store proximity
and cannibalization from online sales. Thanks to F.Friends and the telco subsidy
program, we project 11% SSSG in 2018 for FPT Shop, which will taper down to 4%-5% in
2019-2022, compared to flat SSS without these programs in our projections. Our
assumptions are relatively conservative compared to management’s targets as we only
project a combined 16% revenue contribution from these two programs in 2022, up from
6%-7% in 2017, but well below management’s target of at least 30%.
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 16
F.Studio: store expansion to speed up
Hand-carried, unauthorized Apple products remain prominent in Vietnam. These
products are VAT-free and hence sold at a discount vs authorized products sold by retailers
such as MWG and FRT. Thus, we estimate that currently, MWG and FRT occupy only 44%
of the Apple category in Vietnam, compared to 65% in other brands.
Apple’s new warranty policy is a boon to authorized sellers. In January 2018, Apple
changed its guarantee allowance. Now, it only accepts authorized products with proof of
purchase, i.e., a receipt. Thus, unauthorized hand-carried products, which typically only
have one receipt for a whole batch, will not qualify. Apple did this to not only create a more
level playing field for the authorized retailers such as MWG and FRT, but also to project its
brand image and retail price stability.
FRT should be the top beneficiary from this shift given Apple’s substantial
contribution to its revenue. Apple accounted for 32% of FRT’s revenue in 2017.
Against this backdrop, FRT looks to speed up the roll-out of F.Studio. Management
is targeting to reach a total store count of 102 for F.Studio by YE2020 compared to 12 as
of YE2017. Our assumptions are slightly more conservative, as we currently pencil in 20
new stores in 2018 and 30 per annum in 2019 and 2020. Underpinned by F.Studio’s fasttrack expansion, we project FRT will increase its market share in Apple to over 30% in the
next five years from ~15% currently.
F.Studio’s same-store sales (SSS) typically start low and then pick up quickly.
According to FRT, FRT’s revenue/store tends to be low in the first year at around
USD88,000/month. Nonetheless, annual SSSG after the first year can range from 15%20%. This is because F.Studio customers tend to be very loyal and so they will not only
come back but also recommend the service to their friends and relatives.
Figure 19: Estimated market share in Apple products (2017 vs 2022)
2017
2022
44%
56%
MWG and FRT
45%
55%
Mom-and-pop and
other small chains
Source: VCSC
Online sales should continue to take off
We are projecting a 29% CAGR for FRT’s online sales in the next five years due to the
widening popularity of online shopping among Vietnamese consumers and FPT continuing
to utilize its physical store network to provide an omni-channel experience for customers.
In 2022, online sales will constitute 30% of FRT’s revenue based on our projections,
compared to 15% in 2017.
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 17
Figure 20: VCSC’s revenue forecasts for FRT’s mobile phone business
New stores
25,000
F.Studio
20,000
Online sales
15,000
F.Friends and
telco subsidy
10,000
Same store sales
(excl. F.Friends
and subsidy)
5,000
2017
2018
2019
2020
2021
2022
Source: VCSC forecasts
Margins to expand on the back of larger scale and higher contribution
from F.Friends and telco subsidy programs
GPM is boosted by a larger scale, but is partly reined in by a widening contribution
from F.Studio. Per FRT, iPhone sales only yield a GPM of 10%-11% compared to an
average of ~15% for other brands. Due to F.Studio’s rising contribution to revenue, the
upward trend in FRT’s GPM will start to phase out starting from 2022, per our projections.
Net margin to be further aided by increasing contributions from F.Friends and telco
subsidy programs. As we explained above, additional sales from these programs will prop
up margins of FRT’s mobile segment. We currently assume that the combined contribution
from F.Friends and telco subsidy programs will balloon to 15.6% of mobile revenue in the
next five years compared to 6%-7% in 2017. Again, this is more conservative than
management’s target of at least 30%.
Figure 21: VCSC’s margin projections for FRT’s mobile segment
15%
14.2%
14.4%
14.5%
14.5%
14.5%
13.8%
5%
14%
13%
2.8%
3.0%
3.2%
11%
3.3%
3.4%
3.4%
2.9%
3.0%
4%
3%
12%
2.2%
6%
2.5%
2.6%
2.8%
2%
1%
10%
0%
2017
2018
GPM (LHS)
2019
2020
EBIT margin (RHS)
2021
2022
NPM (RHS)
Source: VCSC
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 18
Long Chau pharmacy outlook
Extensive growth headroom as Vietnam’s pharmacy market remains dominated by
mom-and-pop stores. Vietnam’s pharma sector boasts a market size of USD4.7bn in
2017, according to BMI, in which pharmacies account for one-third of the market. There
are over 40,000 pharmacies in Vietnam, but only less than 250 are owned by modern
chains. The largest chain by store count, Pharmacity, only has 100 stores currently.
Long Chau boasts superior sales/store thanks to its prestigious brand and an
extensive range of SKUs. According to FRT, Long Chau’s average monthly sales per
store are USD136,000 currently, head and shoulders above other chains (see Figure 22).
This is owing to:
• Long Chau is a top-of-mind brand when it comes to prescription drugs.
• Long Chau’s extensive product assortment, which consists of more than 5,000
SKUs, 5x-6x larger than its closest competitor. This makes Long Chau a one-stop
shop for customers as most of the time, they can find everything they need for their
prescription at Long Chau instead of having to go to different stores.
• Experienced pharmacists (>10 years of experience on average), who will stay with
Long Chau post-FRT’s acquisition. These senior pharmacists will play an important
role in training new staff as FRT expands its store network.
Figure 22: Revenue/store of Long Chau vs other pharmacy chains (USD ’000/month)
136
11
Pharmacity
18
Phano
32
25
Eco Pharma
An Khang (MWG)
Long Chau
Source: FRT
New stores are surprisingly displaying similar sales progress as legacy stores. As
mentioned above, prior to FRT’s acquisition, all five of Long Chau’s stores were located on
the same Hai Ba Trung street in District 3. Since taking over Long Chau, FRT has opened
another four stores in District 7, District 3, Go Vap District and Tan Binh District. Per FRT,
sales at these stores ranged from USD66,000 to USD88,000/month/store in the first one to
two months and then gradually ramped up to USD154,000-USD198,000 after four to six
months, which is very impressive. When launching a new store, in its marketing and
promotion campaigns, FRT uses a headline of “Long Chau is now present in District X” to
leverage Long Chau’s brand name.
See important disclosure at the end of this document
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April 23, 2018| 19
Figure 23: Long Chau draws strong traffic thanks to its prestige and extensive SKUs
Source: VCSC
We opt to be more conservative than management in terms of future
store openings at this early stage
We project 25 new stores per annum for 2018-2019 and 50 stores per annum during
2020-2027. Before further accelerating the pace of store roll-outs, Long Chau will need to
fine tune its back-end capabilities, strengthen its understanding of locations, i.e., which
types of locations work best, as well as prepare human resources, i.e., the pharmacist pool.
Compared to mobile phones, pharmacies are a more challenging format due to (1) its
broader range of SKUs, (2) product expiry, (3) the need for capable pharmacists who can
reliably consult customers and also have good sales skills and (4) a wide variety of
suppliers.
Management’s aggressive plan. Management is targeting a total of 390 stores by
YE2021 compared to our projection of 158. As such, there is material upside to our
forecasts if FRT can deliver on its pharmacy game plan.
See important disclosure at the end of this document
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April 23, 2018| 20
Figure 24: Long Chau’s new store opening projections (FRT vs VCSC)
390
80
30
25
50
25
2018
2019
50
2020
FRT's guidance
158
150
120
2021
Total store count
as of YE2021F
VCSC's projection
Source: FRT, VCSC
We project Long Chau will contribute 18% and 15% to FRT’s revenue and NPAT,
respectively, in 2022. We assume that the chain will be consolidated in 2019. For new
stores, we pencil in VND2bn (USD88,000) in sales/month in the first year, which will grow
at an annual rate of 10%-15% in the following five years. In 2018-2019, we conservatively
pencil in an NPAT margin of 2% for Long Chau as we assume GPM improvement, which
will be driven by a larger scale, will be partly offset by FRT’s back-end investments as well
as spending on marketing and promotions. NPAT margin is then projected to step up
gradually to 2.4% in 2022 as a result of cost rationalization and continuing scale expansion.
Figure 25: Margin projections for Long Chau during 2018-2022
18.0%
17.0%
17.0%
16.5%
17.2%
5.0%
16.5%
4.0%
16.0%
15.0%
17.4%
2.5%
2.5%
2.0%
2.0%
2.7%
2.9%
3.0%
3.0%
14.0%
13.0%
12.0%
2.2%
2.3%
2.0%
2.4%
1.0%
11.0%
10.0%
0.0%
2018
2019
GPM (LHS)
2020
EBIT margin (RHS)
2021
2022
NPM (RHS)
Source: VCSC
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 21
Summary of P&L projections
Figure 26: VCSC’s base-case projections for FRT
VND bn
2018
2019
2020
2021
2022
15,397
17%
18,854
22%
22,507
19%
26,591
18%
30,543
15%
14,725
672
0
16,131
1,368
1,355
17,739
2,347
2,421
19,326
3,342
3,923
20,749
4,219
5,575
2,184
2,739
3,323
3,970
4,579
20%
25%
21%
19%
15%
2,110
74
0
2,365
150
224
2,653
258
412
2,928
368
675
3,145
464
970
EBIT
YoY
In which:
FPTShop
F.Studio
Long Chau
467
29%
595
27%
731
23%
888
21%
1,019
15%
462
6
0
562
0
34
659
7
65
747
28
114
791
60
167
NPAT
YoY
In which:
FPTShop
& F.Studio
Long Chau
384
33%
487
27%
608
25%
754
24%
890
18%
384
460
555
663
756
0
27
52
91
134
14.2%
2.5%
14.5%
2.6%
14.8%
2.7%
14.9%
2.8%
15.0%
2.9%
Revenue
YoY
In which:
FPTShop
F.Studio
Long Chau
Gross
profit
YoY
In which:
FPTShop
F.Studio
Long Chau
GPM
NPM
Source: VCSC
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
2017-2022
CAGR
18%
20%
23%
25%
April 23, 2018| 22
We provide below an alternative projection, in which we incorporate FRT’s
aforementioned guidance for Long Chau store expansion instead of using our own
assumptions. The number of new stores in 2022 is assumed to be 150, similar to FRT’s
2021 plan.
Figure 27: Projections for FRT if management’s plan for Long Chau is incorporated
VND bn
2018
2019
2020
2021
2022
15,397
17%
19,652
28%
24,951
27%
31,403
26%
38,356
22%
14,725
672
0
16,131
1,368
2,153
17,739
2,347
4,864
19,326
3,342
8,735
20,749
4,219
13,388
2,184
2,871
3,738
4,798
5,938
20%
31%
30%
28%
24%
2,110
74
0
2,365
150
355
2,653
258
827
2,928
368
1,502
3,145
464
2,330
EBIT
YoY
In which:
FPTShop
F.Studio
Long Chau
467
29%
615
32%
797
30%
1,028
29%
1,253
22%
462
6
0
562
0
54
659
7
131
747
28
253
791
60
402
NPAT
YoY
In which:
FPTShop
& F.Studio
Long Chau
384
33%
503
31%
662
31%
870
31%
1,089
25%
384
460
557
668
768
0
43
105
203
321
14.2%
2.5%
14.6%
2.6%
15.0%
2.7%
15.3%
2.8%
15.5%
2.8%
Revenue
YoY
In which:
FPTShop
F.Studio
Long Chau
Gross
profit
YoY
In which:
FPTShop
F.Studio
Long Chau
GPM
NPM
Source: VCSC
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
2017-2022
CAGR
24%
27%
28%
30%
April 23, 2018| 23
Key investment risks
Bad debt from F.Friends and price subsidy programs
The following situations could undermine FRT’s NPAT:
- Runaway bad debt in F.Friends.
- Increases in insurance fees in the price subsidy program if the default rate proves
higher than the expectations of insurance providers. Non-life insurance contracts
are typically renewed on a yearly basis.
We currently factor in 3% bad debt in 2018 for these two programs, which will gradually
increase to 4% in 2022 as FRT intensifies its roll-out. These assumptions are higher than
FRT’s 2% guidance.
However, we believe this risk will be under control and our bad-debt assumptions
are highly conservative. We understand that for traditional consumer finance players
such as FE Credit, Home Credit and HDSaison, NPLs in consumer durable loans are below
5%. Given FRT’s much stricter approval process and protection mechanism, we think it is
reasonable to expect that NPLs in F.Friends and price subsidy programs will be much lower
than 5%.
Figure 28: VCSC’s base-case projections for F.Friends and price subsidy programs
Base case
F.Friends + price subsidy as %
of FRT’s total revenue
Bad debt/revenue for F.Friends
and price subsidy
FRT’s total NPAT (VND bn)
Source: VCSC
2018
2019
2020
2021
2022
11.8%
13.5%
14.1%
15.0%
15.6%
3.0%
3.2%
3.5%
3.8%
4.0%
384
487
608
754
890
2021
2022
Figure 29: Scenario analysis
FRT’s assumptions
Bad debt/revenue for F.Friends
and price subsidy
FRT’s total NPAT (VND bn)
% vs base case
2018
2.0%
2.0%
2.0%
2.0%
399
104%
507
105%
632
106%
784
107%
925
108%
2020
2021
2022
See important disclosure at the end of this document
2019
5.0%
5.2%
5.5%
5.8%
6.0%
355
92%
448
92%
559
92%
693
92%
818
92%
2018
Bad debt/revenue for F.Friends
and price subsidy
FRT’s total NPAT (VND bn)
% vs base case
Source: VCSC
2020
2.0%
2018
Bad debt/revenue for F.Friends
and price subsidy
FRT’s total NPAT (VND bn)
% vs base case
2019
2019
2020
2021
2022
10.0%
10.2%
10.5%
10.8%
11.0%
281
73%
349
72%
436
72%
542
72%
638
72%
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April 23, 2018| 24
Price war from pure e-commerce players
E-commerce players have been aggressively undercutting on prices to chase GMV
(Gross Merchandize Value). Most notable are Lazada and Tiki, as demonstrated in Figure
30 below, whose offerings are very attractive to price-sensitive consumers.
Figure 30: Selling price (VND) comparison between Lazada, Tiki, MWG and FRT
Model
iPhone X (64GB)
Samsung Galaxy S9+
Samsung Galaxy A8+
Samsung Galaxy S8
Source: VCSC compilations
Lazada
25,790,000
23,490,000
11,528,000
15,800,000
Tiki
25,890,000
19,490,000
12,990,000
14,890,000
MWG and FRT
29,990,900
23,490,000
13,490,000
15,990,000
MWG and FRT hold the advantage in terms of customer trust, services and delivery.
As we mentioned above, MWG and FRT’s extensive store network allows them to provide
quick delivery even in rural areas and seamless omni-channel experiences for customers,
something that pure e-commerce players cannot offer.
Figure 31: MWG and FRT offer the most attractive after-sales policies
Return/Exchange
policy
Lazada
Tiki
Faulty products
Seven-day
exchange
Seven-day
exchange;
after seven-30 days,
send to warranty
service
Non-faulty
products
No exchange/return
30-day return, if the
product
remains
unused
MWG and FRT
* First month: free exchange
or 80% refund.
*Second month onward:
percentage
of
refund
declines five ppts after each
month past
e.g. Refund 75% in second
month, 70% in third month…
* First month: free exchange
or 80% refund
*Second month onward:
percentage
of
refund
declines five ppts after each
month past
e.g. Refund 75% in month
two, 70% in month three…
Source: VCSC compilations
Long Chau – stricter enforcement on drug prescription
A more stringent enforcement of prescription drug usage could hurt pharmacies. In
2016, the Ministry of Health issued Circular 05/2016/TT-BYT regulating drug prescription
in outpatient treatment. Under the Circular and its listed regulations, pharmaceutical
retailers are not allowed to sell medicines outside of the “non-prescription” drug list without
prescriptions from doctors. Having said that, up to now, enforcement has been rather loose
as it is challenging to manage all >40,000 POS across Vietnam, especially those in remote
areas. Consequently, it remains ubiquitous for pharmacies to sell drugs without
prescriptions in Vietnam. A tightening in enforcement, if it happens, will dampen pharmacy
sales.
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 25
Valuation
We adopt a Sum-of-the-Parts (SoTP) valuation for FRT, which includes a
combination of:
(1) An average of five-year DCF and adjusted-PER methods for the mobile segment; and
(2) A ten-year DCF for Long Chau with a 25% cost of equity given the high uncertainty of
our forecasts at this juncture. This will be phased out in the future as visibility of the progress
of the chain improves.
Adopting management’s store opening guidance for Long Chau, our TP would be
9% higher. If we incorporate management’s store expansion plan for Long Chau from 2018
to 2022 and keep the pace of new store openings at 100 stores per annum from 20232027, our Long Chau’s valuation would jump by 131% vs our base case, adding an
additional VND15,700/share to our TP for FRT.
Figure 32: Valuation summary
Weighting
Equity
value
(VNDbn)
Target
price
(VND)
Contribution
(VND/sh)
DCF
50%
8,297
207,428
103,714
TTM PER @
18x*
50%
5,061
126,513
63,257
100%
428
10,704
10,704
Method
FPTShop and F.Studio
Long Chau
DCF
Target Price
177,700
2017 PER at TP
25.3x
2018F PER at TP
19.1x
Source: VCSC, *domestic and regional peer median
Discounted Cash Flows – Mobile (FPTShop and F.Studio)
Figure 33: DCF Valuation
Cost of Capital
FCFF (Five Year)
Beta
Market Risk Premium %
Risk Free Rate %
Cost of Equity %
Cost of Debt %
Debt %
Equity %
0.8
8.0
3.2
9.6
6.0
25.1
74.9
PV of Free Cash Flows
PV of Terminal Val (2.5% g)
PV of FCF and TV
+ Cash & ST investments
- Debt
- Minority Interest
Equity Value
Corporate Tax Rate %
20.0
Shares (mn)
WACC %
See important disclosure at the end of this document
8.4
Price per share, VND
www.vcsc.com.vn | VCSC<GO>
1,546
7,286
8,832
638
-1,173
0
8,297
40
207,428
April 23, 2018| 26
Figure 34: DCF
FY18
FY19
FY20
FY21
FY22
EBIT
- Tax
+ Depreciation
- Capex
- Working cap increase
Free Cash Flow
Present Value of FCF
539
-110
90
-73
-332
113
106
638
-130
88
-53
-220
322
280
761
-155
78
-43
-207
433
350
893
-182
55
-18
-220
528
395
993
-203
40
-13
-214
603
416
Cumulative PV of FCF
106
386
735
1,130
1,546
Source: VCSC
Discounted Cash Flows – Long Chau
Figure 35: DCF Valuation
Cost of Capital
FCFF (Five Year)
Beta
Market Risk Premium %
Risk Free Rate %
Cost of Equity %
Cost of Debt %
Debt %
Equity %
NA
NA
NA
25%*
NA
NA
100%
PV of Free Cash Flow
PV of Terminal Val (3.0% g)
PV of FCF and TV
+ Cash & ST investments
- Debt
- Minority Interest
Equity Value
Corporate Tax Rate %
20%
25%*
Shares (mn)
WACC %
Source: VCSC
69
359
428
0
0
0
428
40
Price per share, VND
10,704
*We apply a high cost of equity for Long Chau to reflect the high uncertainty of our long-term
assumptions given that the chain remains in its early stage
Figure 36: Cash flows
VND bn
FY18
FY19
EBIT
15
- Tax
-3
+ Depreciation
- Capex
- WC increase
Free Cash
Flow
PV of FCF
Cumulative
PV of FCF
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
34
65
114
167
225
290
331
373
452
-7
-13
-23
-33
-45
-58
-66
-75
-90
6
11
21
31
41
47
51
51
51
51
-30
-25
-50
-50
-50
-55
-50
-50
-50
-50
-123
-58
-151
-145
-162
-73
-127
-3
-91
-86
-135
-45
-127
-73
-37
99
106
263
208
277
-108
-28
-65
-30
-12
32
35
86
68
91
-108
-136
-201
-231
-244
-211
-176
-90
-22
69
Source: VCSC
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
April 23, 2018| 27
Peer comparison
Figure 37: Comparable peers
(USD
mn)
Ticker
MWG VN
Country
Mkt cap
TTM Net
Sales
Y-o-Y%
TTM
NPAT
Y-o-Y %
Debt/
Equity
ROE
TTM P/E
Adjusted
TTM P/E
LQ P/B
Vietnam
1,451.1
2,920.2
48.7
97.1
39.8
115.1
45.3
14.3
14.3
5.5
India
962.6
6,132.8
16.0
69.2
9.6
43.2
15.2
13.4
12.9
2.0
Thailand
730.0
664.5
31.5
18.0
49.7
72.8
28.4
36.8
46.3
9.9
China
393.6
78.7
(7.3)
9.8
(30.3)
25.4
4.3
37.3
27.2
1.6
Thailand
260.9
372.6
17.9
14.5
11.8
231.3
15.9
17.1
21.6
2.5
Indonesia
257.2
1,811.0
17.9
25.4
28.7
47.3
9.7
10.4
10.5
1.0
Median
561.8
1,237.8
17.9
21.7
20.3
60.1
15.6
15.7
18.0
2.3
Average
675.9
1,996.6
20.8
39.0
18.2
89.2
19.8
21.6
22.1
3.8
REDI IN
COM7
TB
002296
CH
JMART
TB
ERAA IJ
Source: Bloomberg
See important disclosure at the end of this document
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April 23, 2018| 28
Financial Statements
INCOME STATEMENT (VND bn)
2017A
2018F
2019F
BALANCE SHEET (VND bn)
Revenue
13,147
15,397
18,854
Cash & cash equivalents
-11,330
-13,213
-16,115
1,816
2,184
2,739
COGS
Gross Profit
Sales & Marketing exp.
-1,154
-1,365
-1,717
General & Admin exp.
-300
-352
-427
Operating Profit (EBIT)
362
467
595
Financial income
Short term investment
Accounts receivables
Inventories
Other current assets
Total Current assets
2017A
2018F
2019F
638
538
512
0
0
0
306
472
639
1,723
2,059
2,737
842
842
842
3,509
3,911
4,729
54
55
62
Fix assets, gross
46
46
106
-82
-70
-77
- Depreciation
-7
-9
-25
-79
-70
-77
Fix assets, net
39
38
82
0
0
0
LT investment
0
0
0
29
29
29
LT assets other
323
396
449
363
480
609
Total LT assets
-73
-96
-122
NPAT before MI
290
384
487
Minority Interest
0
0
0
NPAT less MI, reported
290
384
487
NPAT less MI, adjusted
290
384
487
Other ST liabilities
EBITDA
448
558
694
Total current liabilities
EPS basic reported, VND
7,247
9,607
12,179
EPS basic adjusted, VND
7,247
9,607
12,179
EPS fully diluted, VND
7,247
9,607
12,179
Total Liabilities
2017A
2018F
2019F
Preferred Equity
Financial expenses
In which, interest expense
Share profit/loss from associates
Net other income/(loss)
Profit before Tax
Income Tax
RATIOS
Growth
362
434
531
Total Assets
3,871
4,345
5,259
Accounts payable
1,499
1,668
2,069
Short-term debt
1,173
1,173
1,280
403
403
403
3,075
3,244
3,752
Long term debt
0
0
0
Other LT liabilities
0
0
0
3,075
3,244
3,752
Paid in capital/Issued capital
Revenue growth
21.1%
17.1%
22.5%
Add’l share capital/share premium
Operating profit (EBIT) growth %
57.3%
29.1%
27.4%
Retained earnings
PBT growth %
40.0%
32.3%
26.8%
EPS growth %, adjusted
39.7%
32.6%
26.8%
Gross Profit Margin %
0
400
0
0
0
701
1,108
Other equity
0
0
0
Minority interest
0
0
0
796
1,101
1,508
3,871
4,345
5,259
2017A
2018F
2019F
1,458
638
538
290
384
487
86
91
99
104
-332
-320
-301
-90
-88
179
53
178
Liabilities & equity
13.8%
14.2%
14.5%
Operating Profit, (EBIT) Margin %
2.8%
3.0%
3.2%
CASH FLOW (VND bn)
EBITDA Margin %
3.4%
3.6%
3.7%
Beginning Cash Balance
NPAT less MI Margin, adj. %
2.2%
2.5%
2.6%
Net Income
ROE %
44.2%
40.5%
37.4%
Dep. & amortization
ROA %
6.8%
9.4%
10.1%
Change in Working Capital
Other adjustments
Efficiency
0
400
396
Total equity
Profitability
0
400
Cash from Operations
Days Inventory On Hand
59.1
52.2
54.3
Days Accts. Receivable
5.9
9.2
10.8
Capital Expenditures, net
-52
-73
-85
Days Accts. Payable
47.1
43.7
42.3
Investments, net
315
0
-147
Cash Conversion Days
17.9
17.7
22.7
Cash from Investments
263
-73
-231
Dividends Paid
0
-80
-80
Current Ratio x
1.1
1.2
1.3
∆ in Share Capital
0
0
0
Quick Ratio x
0.6
0.6
0.5
∆ in LT debt
0
0
0
Cash Ratio x
0.2
0.2
0.1
∆ in ST debt
-1,262
0
107
Debt / Assets
30.3%
27.0%
24.3%
Other financing cash flows
Debt / Capital
59.6%
51.6%
45.9%
Cash from Financing
Net Debt / Equity
67.2%
57.7%
51.0%
4.6
6.6
7.8
Liquidity
Interest Coverage x
Net Change in Cash
Ending Cash Balance
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
0
0
0
-1,262
-80
27
-819
-100
-27
638
538
512
April 23, 2018| 29
Appendix
Figure 1: 2017-2022 NPAT projections for FRT (VNDbn) ................................................................. 4
Figure 2: 2017-2022 NPAT projections for MWG (VNDbn) ............................................................... 4
Figure 3: FPT Shop format ................................................................................................................ 5
Figure 4: FRT’s shareholder structure as of April 6, 2018 ................................................................. 5
Figure 5: FRT’s key personnel .......................................................................................................... 6
Figure 6: Standalone store count of leading mobile phone retailers in Vietnam ................................ 7
Figure 7: Market share structure of mobile phone retail market in 2013 vs 2017 .............................. 8
Figure 8: FRT’s sales by product ASP in comparison to others (2017) ............................................. 9
Figure 9: FRT’s different Apple concepts .......................................................................................... 9
Figure 10: FRT’s 2017 revenue by category ................................................................................... 10
Figure 11: Long Chau Pharmacy .................................................................................................... 10
Figure 12: FRT’s historical store count ............................................................................................ 11
Figure 13: FRT’s historical revenue (VND bn) ................................................................................. 11
Figure 14: FRT’s historical NPAT (VND bn) and NPAT margin ....................................................... 12
Figure 15: Comparison between F.Friends and other consumer financing options ......................... 13
Figure 16: F.Friends process .......................................................................................................... 13
Figure 17: Barriers and opportunities for telco subsidy program ..................................................... 14
Figure 18: Illustration of the price subsidy package for Samsung Note 8 ........................................ 15
Figure 19: Estimated market share in Apple products (2017 vs 2022) ............................................ 17
Figure 20: VCSC’s revenue forecasts for FRT’s mobile phone business ........................................ 18
Figure 21: VCSC’s margin projections for FRT’s mobile segment .................................................. 18
Figure 22: Revenue/store of Long Chau vs other pharmacy chains (USD ’000/month) .................. 19
Figure 23: Long Chau draws strong traffic thanks to its prestige and extensive SKUs ................... 20
Figure 24: Long Chau’s new store opening projections (FRT vs VCSC) ......................................... 21
Figure 25: Margin projections for Long Chau during 2018-2022 ..................................................... 21
Figure 26: VCSC’s base-case projections for FRT .......................................................................... 22
Figure 27: Projections for FRT if management’s plan for Long Chau is incorporated ..................... 23
Figure 28: VCSC’s base-case projections for F.Friends and price subsidy programs ..................... 24
Figure 29: Scenario analysis ........................................................................................................... 24
Figure 30: Selling price (VND) comparison between Lazada, Tiki, MWG and FRT ........................ 25
Figure 31: MWG and FRT offer the most attractive after-sales policies .......................................... 25
Figure 32: Valuation summary ........................................................................................................ 26
Figure 33: DCF Valuation ................................................................................................................ 26
Figure 34: DCF ................................................................................................................................ 27
Figure 35: DCF Valuation ................................................................................................................ 27
Figure 36: Cash flows...................................................................................................................... 27
Figure 37: Comparable peers .......................................................................................................... 28
See important disclosure at the end of this document
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April 23, 2018| 30
Rating and Valuation Methodology
Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock
defined as (target price – current price)/current price + dividend yield, and is not related to market performance.
This structure applies from May 27, 2015.
RATING
BUY
OUTPERFORM (O-PF)
MARKET PERFORM (M-PF)
UNDERPERFORM (U-PF)
SELL
NOT RATED
RATING SUSPENDED
DEFINITION
Total stock return including dividends over next 12 months expected to exceed
20%
Total stock return including dividends over next 12 months expected to be
positive 10%-20%
Total stock return including dividends over next 12 months expected to be
between negative 10% and positive 10%
Total stock return including dividends over next 12 months expected to be
negative 10%-20%
Total stock return including dividends over next 12 months expected to be
below negative 20%
The company is or may be covered by the Research Department but no rating
or target price is assigned either voluntarily or to comply with applicable
regulation and/or firm policies in certain circumstances, including when VCSC
is acting in an advisory capacity in a merger or strategic transaction involving
the company.
A rating that happens when fundamental information is insufficient to
determine an investment rating or target. The previous investment rating and
target price, if any, are no longer in effect for this stock.
Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based
on market price and the formal recommendation, thus these performance parameters should be interpreted
flexibly.
Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may
adversely affect the value, price or income of any security or related instrument mentioned in this report. For
investment advice, trade execution or other enquiries, clients should contact their local sales representative.
See important disclosure at the end of this document
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April 23, 2018| 31
Disclaimer
Analyst Certification of Independence
I, Dao Nguyen, hereby certify that the views expressed in this report accurately reflect my personal views about the subject
securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report
receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive
factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment
Banking.
VCSC and its officers, directors and employees may have positions in any securities mentioned in this document (or in any
related investment) and may from time to time add to or dispose of any such securities (or investment).VCSC may have, within
the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary
market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12
months, significant advice or investment services in relation to the investment concerned or a related investment.
Copyright 2013 Viet Capital Securities Company “VCSC”. All rights reserved. This report has been prepared on the basis of
information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the
completeness and accuracy of such information. Opinions, estimates and projection expressed in this report represent the current
views of the author at the date of publication only. They do not necessarily reflect the opinions of VCSC and are subject to change
without notice. This report is provided, for information purposes only, to institutional investors and retail clients of VCSC in Vietnam
and overseas in accordance to relevant laws and regulations explicit to the country where this report is distributed, and does not
constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their
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the EEA by VCSC issued by VCSC has been prepared in accordance with VCSC’s policies for managing conflicts of interest
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third party or outside Australia without the prior written consent of VCSC. For the purposes of this paragraph the terms "wholesale
client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Hong Kong: The 1%
ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code
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securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India:
For private circulation only, not for sale.Pakistan: For private circulation only, not for sale.New Zealand: This material is issued
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course of and for the purposes of their business, habitually invest money. VCSC does not issue or distribute this material to
members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must
not distribute it to any third party or outside New Zealand without the prior written consent of VCSC. Canada: The information
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offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or
territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the
requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under
applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant
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to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To
the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws
of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in
Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon
these materials, the information contained herein or the merits of the securities described herein, and any representation to the
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registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). All responsibility for the
distribution of this report by Decker&Co, LLC in the US shall be borne by Decker&Co, LLC. All resulting transactions by a US
person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if VCSC Broker
or Decker&Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you.
You should satisfy yourself before reading it that Decker&Co, LLC and VCSC is permitted to provide research material concerning
investment to you under relevant legislation and regulations.
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April 23, 2018| 32
Contacts
Corporate
www.vcsc.com.vn
Head Office
Bitexco Financial Tower, 2 Hai Trieu Street
District 1, HCMC
+84 28 3914 3588
Hanoi Branch
109 Tran Hung Dao
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Transaction Office
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Transaction Office
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Research
Research Team
+84 28 3914 3588
research@vcsc.com.vn
Barry Weisblatt, Head of Research, ext 105
barry.weisblatt@vcsc.com.vn
Long Ngo, Senior Manager, ext 123
Banks, Securities, Insurance
- Cameron Joyce, Manager, ext 163
- Nghia Dien, Analyst, ext 138
- Son Tong, Analyst, ext 116
- Anh Dinh, Analyst, ext 139
Macro
- Luong Hoang, Senior Analyst, ext 364
- Nguyen Truong, Analyst, ext 132
Real Estate, Construction and Materials
Hong Luu, Senior Manager, ext 120
- Anh Nguyen, Senior Analyst, ext 174
- Vy Nguyen, Senior Analyst, ext 147
Consumer and Pharma
Phap Dang, Senior Manager, ext 143
- Dao Nguyen, Senior Analyst, ext 185
- Nghia Le, Analyst, ext 181
Industrials and Transportation
Lucy Huynh, Senior Manager, ext 130
- Phu Pham, Analyst, ext 124
- Trang Tran, Analyst, ext 149
Oil & Gas and Power
Duong Dinh, Manager, ext 140
- Tram Ngo, Senior Analyst, ext 135
- Thanh Nguyen, Analyst, ext 173
- Nam Hoang, Analyst, ext 196
Retail Client Research
Duc Vu, Senior Manager, ext 363
- Ha Dao, Analyst, ext 194
- Tra Vuong, Analyst, ext 365
- Ninh Chu, Analyst, ext 129
Institutional Sales and Brokerage
& Foreign Individuals
Head of Institutional Sales
Michel Tosto, M. Sc.
+84 28 3914 3588 ext 102
michel.tosto@vcsc.com.vn
Vietnamese Sales
Dung Nguyen
+84 28 3914 3588 ext 136
dung.nguyen@vcsc.com.vn
Retail & Corporate Brokerage
Ho Chi Minh City
Quynh Chau
+84 28 3914 3588 ext 222
quynh.chau@vcsc.com.vn
See important disclosure at the end of this document
Hanoi
Quang Nguyen
+84 24 6262 6999 ext 312
quang.nguyen@vcsc.com.vn
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April 23, 2018| 33