HPG 28092016 Mirae (Ta)

Vietnam Research
This research report is a product of Mirae Asset Securities (Vietnam)
Initiating coverage
Vietnam / Steel
Hoa Phat Group (HPG VN)
21 September 2016 BUY Low costs, steady profits
Hoa Phat Group (HPG VN) is Vietnam’s biggest maker of construction steel,
Target price VND50,000 with a highly efficient production chain. We think Hoa Phat is attractive, in
Last price (20 Sept. 2016) VND45,450 light of its: 1) low production costs; and 2) stable profits. We initiate Hoa
Phat with a BUY rating and target price of VND50,000.
Upside/downside (%) 10.0
VN-Index 659.7
Mkt. cap (VND bn/USD bn) 38,303/1.72 Sector-leading profitability, thanks to low costs
52 week range (VND) 20,782 – 45,950 Hoa Phat began construction of an integrated steel mill in 2007, with the
Avg. trading value daily (VND bn) 183 mill becoming operational in 2010. From 2010 until early 2016, Hoa Phat
Foreign ownership (%) 37.0 supplied its own iron ore to produce steel, and has imported soft coal and
Source: Bloomberg hard coal for coke outsourcing, which account for an estimated 40% of the
cost of production of finished steel. Thanks to current low global iron ore
Forecast earnings & valuation
prices, the cost of outsourcing iron ore is below what it would be for Hoa
Fiscal year ending Dec-15 Dec-16E Dec-17 E Dec-18 E
Revenue (VND bn) 27,453 30,267 33,888 37,277
Phat to produce its own. In addition, iron ore and coke prices costs show
EBIT (VND bn) 4,409 6,701 7,630 7,059 less volatility than that of scrap iron. As scrap iron accounts for 90% of the
Net profit (VND bn) 3,485 5,461 6,339 5,995 production costs of scrap-iron-derived steel, the input costs of steel
Net profit (underlying) 3,485 5,461 6,339 5,995
produced from iron ore and coke are below that made from scrap iron. This
EPS (VND) 4,755 6,479 7,520 7,113
EPS growth (%) 11 36 16 (5)
key competitive advantage has helped Hoa Phat to achieve growth above
P/E (x) 9.6 7.0 6.0 6.4 the industry average, even amid the steel sector’s stagnant growth period
EV/EBITDA (x) 7.0 5.1 4.5 4.8 of 2011-2013. Strong cost control has enabled Hoa Phat to increase its
Dividend yield (%) 2.2 3.3 3.3 4.4
market share gradually and become Vietnam’s largest construction
P/B (x) 2.3 2.0 1.6 1.3
ROE (%) 26.4 32.3 28.9 22.5 steelmaker.
Net debt/equity (%) 12.0 (5.3) (12.8) (19.7)
Stable profits
Performance
HPG VN (LHS) Rel. to VN-Index (RHS)
Fluctuations in the input prices of materials for steel production, such as
(VND) (%)
45,000 iron ore, coking coal, and scrap, have a significant impact on the selling
170
40,000
price of the finished product. Investors tend to view steelmakers as
150 unattractive investments, due to their earnings fluctuations. However, even
35,000
130 during the Vietnamese steel industry’s crisis of 2011-2013, amid a stagnant
30,000 real estate market, Hoa Phat enjoyed stable net profits, while many other
110
steel producers went bankrupt. We expect Hoa Phat to continue to enjoy
25,000 90
high net profit growth and stable operational cash flow going forward.
20,000 70
Preview of 3Q16 earnings

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
Performance 1M 3M 12M We forecast 3Q16 revenue of VND7.5tn (+8.9% YoY) for Hoa Phat. Revenue
Absolute (%) 12.0 36.1 74.6 should increase on increased sales volume of construction steel (+23% YoY),
Absolute (USD, %) - - -
thanks to completion of Phase 3 of the integrated mill operation. However,
Relative to VN Index (%) 11.9 30.5 57.6
we expect ASP to continue to decline (-15% YoY) in 3Q16, as the third
Source: Bloomberg
quarter is a low season for steel consumption, due to heavy rainfall in
Duong Nguyen, Analyst *
Vietnam. We forecast gross margin and operating margin of 25.8% and
84 8 3911 0636 duong.nguyen@miraeasset.com
22%, respectively (3Q15: 23% and 19%, respectively).
Initiating with BUY and target price of VND50,000

We initiate coverage of Hoa Phat with a BUY recommendation and target
price of VND50,000 (+10% upside) by using economic value added (EVA)
model. We believe the company, with its strong market position and stable
operational cash flow, is undervalued. Moreover, the company’s shares are
currently trading at a 2016 P/B ratio of 2.0x, while the fair P/B ratio of 2.4x
* Mirae Asset Securities
(2016 ROE of 32.3% and COE of 13.5%). Our target price is based on a 2016E
P/E of 7.7x and P/B of 2.2x, while the company is currently trading at a
2016E P/E of 7.0x and P/B of 2.0x.
See the last page of this report for important disclosures

Duong Nguyen, Analyst, 84 8 3911 0636, duong.nguyen@miraeasset.com Hoa Phat Group
HPG VN
T a b l e o f c o n t e n t s
I. Recommendation and valuation 3
II. Investment thesis 8
III. DuPont analysis 12
IV. Financial analysis 13
V. Earnings outlook 13
VI. Company background 16
Mirae Asset Securities 2

HPG VN
I. Recommendation and valuation

Initiate with BUY and target price of VND50,000
We initiate coverage of Hoa Phat Group with a BUY recommendation and target price of
VND50,000 (+10% upside) by using the economic value added (EVA) model to capture the
long-term asset value of the steel manufacturer. We believe that the company, with its
strong market position and stable operational cash flow, is undervalued. Moreover, the
company’s shares are currently trading at 2016 P/B ratio of 2.0x while the fair P/B ratio of
2.4x (2016 ROE of 32.3% and COE of 13.5%). Our target price is based on a 2016E P/E of
7.7x and P/B of 2.2x, while the company is currently trading at a 2016E P/E of 7.0x and
P/B of 2.0x.
Figure 1 Hoa Phat’s EVA valuation

(VND bn) 2016E 2017E 2018E 2019E 2020E
IC average 24,626 28,987 33,173 36,628 40,131
NOPAT 5,693 6,503 6,017 5,651 5,933.2 Terminal EVA
ROIC (%) 19.9 20.1 16.8 14.7 14.5 Sustainable ROIC (%) 14.5
WACC (%) 12.0 12.0 12.0 12.0 12.0 WACC (%) 12
EVA spread (%) 7.9 8.1 4.8 2.8 2.5 Terminal growth (%) 0
EVA 2,744 3,032 2,045 1,265 1,127.7 CV of EVA 9,418
Period 1.0 2.0 3.0 4.0 Period 4
Discount factor 0.9 0.8 0.7 0.6 Discount factor 0.64
Discount EVA 2,708 1,630 901 717 Discount EVA 5,991
Invested capital 28,987

Present value of EVA 11,948
Enterprise value 40,935
Cash & equivalents 6,800 WACC Calculation

Fair value of investment asset 51 Risk free rate (%) 6.4
Non-operating asset value 6,852 Expected market return (%) 13
Market risk premium 6.6
Short-term borrowings 5,317 Beta 1.07
Long-term borrowings 639 Cost of equity (%) 13.5
Total borrowings 5,956 Equity to capital (%) 70
Cost of debt (%) 10
Value of equity 41,831 Tax rate (%) 15
Shares outstanding (m) 843 After tax cost of debt (%) 9
Appraised share price (VND) 49.627 Debt to capital (%) 30
Target share price (VND) 50,000 WACC 12
Source: Hoa Phat, Mirae Asset Research
Figure 2 Hoa Phat’s EVA valuation analysis

(VND bn)
60,000
50,000
40,000
30,000
20,000
10,000
0
Invested Capital Curent value Non-operating Total Value of equity Market Cap
of EVA asset value borrowings

HPG VN
Figure 3 Vietnam steel companies’ comparison table

Revenue OP
Market Share Price Change Debt ratio Debt/EBITDA
Company name Ticker P/E (x) P/B (x) OPM (%) ROE (%) growth growth
cap price (%) (%) (%)
(% YoY) (% YoY)
(VND bn) (VND)
YoY YTD FY15 FY15 FY15 2Q16 FY15 FY15 FY15 FY15/14 FY15/14
Construction steel
Thai Nguyen Iron And Steel TIS VN 1,562 6,000 15.4 9.1 15.6 0.6 4.1 4.1 262.1 13.2 15.3 50.2
Vietnam Steel Corp TVN VN 3,661 6,300 2.7 2.1 65.9 5.2 (32.3) 13.6
Thu Duc Steel JSC TDS VN 178 14,600 102.8 40.4 3.4 0.6 4.1 20.0 68.7 1.7 (14.9) 101.6
Nha Be Steel JSC TNB VN 204 9,300 17.7 16.3 3.6 0.9 6.0 28.3 5.6 0.1 6.3 623.0
Hoa Phat Group HPG VN 38,303 45,450 71.0 76.8 5.8 1.5 16.1 29.8 25.2 47.4 1.2 7.6 1.1
Pomina Steel Corp. POM VN 1,639 8,500 30.8 23.2 46.6 0.5 4.6 6.6 1.2 184.3 5.7 (9.2) 54.7
Vietnam-Italy Steel JSC VIS VN 733 15,100 125.4 96.1 0.6 0.9 2.0 (8.2) 167.4 8.0 (17.6) (77.5)
DANA-Y Steel JSC DNY VN 132 6,800 15.3 38.8 16.0 0.4 3.7 5.7 2.3 400.8 7.5 (7.9) (11.8)
Steel pipe 0
Nam Kim Steel JSC NKG VN 553 40,700 277.2 268.2 4.2 0.9 5.4 14.4 22.0 309.2 4.6 (1.5) 64.1
Hoa Phat Group HPG VN 38,303 45,450 71.0 76.8 5.8 1.5 16.1 29.8 25.2 47.4 1.2 7.6 1.1
Vietnam Germany Steel Pipe JSC VGS VN 191 11,500 134.7 117.0 4.7 0.4 1.8 2.6 7.9 71.0 4.0 26.2 63.8
Huu Lien Asia Corp HLA VN 28 400 (55.6) (42.9) (87.9) (86.8) (36.3)
Hoa Sen Group HSG VN 8,451 43,000 110.8 109.5 6.0 1.4 6.9 13.4 24.7 188.7 3.3 16.4 75.6
Flat steel 0
Hoa Sen Group HSG VN 8,451 43,000 110.8 109.5 6.0 1.4 6.9 13.4 24.7 188.7 3.3 16.4 75.6
Dai Thien Loc Corp DTL VN 477 16,500 81.3 101.2 0.6 2.9 13.2 (8.1) 138.3 8.6 (11.8) (43.0)
Nam Kim Steel JSC NKG VN 553 40,700 277.2 268.2 4.2 0.9 5.4 14.4 22.0 309.2 4.6 (1.5) 64.1
Source: Bloomberg, Mirae Asset Research
4
HPG VN
Share price analysis

Hoa Phat’s share price has increased gradually from its January 2016 bottom of
VND21,200 to the current level of VND42,000, following a downtrend from end-2014 to
2015, due to: 1) the impact of the temporary safeguard tariff in March and official
safeguard tariff from August 2016; and 2) low raw-material (iron ore) input prices, which
helped the company increase its revenue by 6.5% YoY and net profit by a whopping 65%
YoY in 2Q16.
Thanks to favorable conditions in Vietnam’s real estate market and the government’s
protectionist policies for the steel industry, Hoa Phat Group - Vietnam’s largest producer
of construction steel - achieved the company’s highest-ever gross margin (32%) and a
healthy net profit in 2Q16. As a result, between January and August 2016, Hoa Phat’s
share price increased by 104%, from VND20,900 to VND42,600 (versus +27% for the VN
Index).
The company’s shares are currently trading at 2.0x 2016E P/B, versus an average of 1.5x
for its global peers, a level that reflects the company’s strong market position, stable
operational cash flow, and solid earnings, amid a difficult environment for the steel
sector, both in Vietnam and globally.
Figure 4 Hoa Phat’s historical EV/EBITDA band chart Figure 5 Hoa Phat’s 12-month forward EV/EBITDA
(VNDbn) 4.5x
(x)
EV
9
3.7x +2 std
27,000 8
2.9x
7
+1 std
22,000
6
2.1x 5 5 yr avg.
17,000
4
12,000 3 -1 std
1.3x
2
7,000
1 -2 std
2,000 0
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Source: Hoa Phat, Mirae Asset Research Source: Hoa Phat, Mirae Asset Research
Figure 6 Hoa Phat’s historical P/E band chart Figure 7 Hoa Phat’s 12-month forward P/E
(VND)
(x)
50,000 7.0x
Share price 8
5.8x
40,000 7
+2 std
4.5x
6
30,000 +1 std
3.3x 5
20,000 5 yr avg.
4
2.0x
-1 std
10,000 3
-2 std
0 2
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016

HPG VN
Figure 8 Hoa Phat’s historical P/B band chart Figure 9 Hoa Phat’s 12-month forward P/B
(VND) (x)
2.0x
1.8 +2 std
53,000
1.6
Share price 1.6x
43,000 1.4
+1 std
1.3x 1.2
33,000
1.0 5 yr avg.
0.9x
23,000 0.8
0.6 -1 std
13,000 0.5x
0.4
3,000 0.2 -2 std
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Figure 10 Hoa Phat’s event chart

(VND)
50,000
Temporary safeguard
45,000 Bank Invest fund tariff in March and
divests all of its stake official safeguard tariff
of 3.5% from August
40,000
1H14 net revenue and profit

35,000 up +58% YoY and +85% YoY
VinaCapital announces
30,000 sale of 4.2m HPG shares VinaCapital announces
VN Index declining amid purchase of 4m HPG
stagnant real estate market shares
25,000 HPG surpasses
34% of full-year
plan in 7 months YoY drop in net profit,
Strong 1Q09 earnings due to low steel demand
20,000 results and increase in
dividend
15,000
Market share of construction steel

10,000
increases from 10-14%, and gross
margin improves, thanks to low
prices of input materials
5,000
0
Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15

HPG VN
Figure 11 Hoa Phat’s peer comparison
Company Hoa Phat Group Hoa Sen Group Tata Steel Maanshan Iron JSW Steel
Code HPG VN Equity HSG VN Equity TATA IN EQUITY 323 HK EQUITY JSTL IN EQUITY
Trading currency VND VND INR HKD INR
Share price (local currency) 45,450 43,000 392 2 1,847
Market cap (local currency) 38,303 8,451 381 23 447
Free float % 47 34 55 100 49
Average volume (30 days) Shares 4,689,237 2,522,760 7,326,714 12,031,580 677,589
Average trading value (3 months) USD m 8.20 4.69 39.91 3.14 16.26
EPS 2015 4,755.4 3,476.2 (31.4) (0.6) (33.2)
2016E 6,479.3 6,666.7 19.1 0.0 140.8
2017E 7,520.1 6,406.3 35.8 (0.0) 161.6
2018E 7,112.7 7,673.0 45.0 0.0 180.6
EPS YoY growth (%) 2015 10.9 NA 21.3 (2,237.9) (60.9)
2016E 36.3 101.2 157.5 103.4 393.5
2017E 16.1 (3.9) 87.3 (119.0) 14.7
2018E (5.4) 19.8 25.8 1,075.0 11.8
Sales (bn) 2015 27,452.9 17,446.9 1,171.5 44.9 418.8
2016E 30,266.8 17,367.7 1,203.3 43.8 536.8
2017E 33,888.0 20,832.0 1,216.2 43.7 589.4
2018E 37,276.8 23,835.0 1,086.8 45.4 615.5
Operating profit (bn) 2015 4,409.0 1,201.5 25.0 (4.4) 29.1
2016E 6,701.0 1,677.5 84.7 1.5 85.7
2017E 7,630.2 1,705.6 101.5 1.3 95.3
2018E 7,059.4 NA 72.1 1.8 93.6
Net profit (bn) 2015 3,485.5 652.9 (30.5) (4.8) (8.0)
2016E 5,461.3 1,213.3 16.3 0.3 34.7
2017E 6,338.7 1,320.2 32.8 (0.1) 39.9
2018E 5,995.2 1,508.0 49.3 0.0 45.1
Net profit margin (%) 2015 12.7 3.7 (2.6) (10.7) (1.9)
2016E 18.0 7.0 1.4 0.6 6.5
2017E 18.7 6.3 2.7 (0.2) 6.8
2018E 16.1 6.3 4.5 0.0 7.3
P/B (x) 2015 2.2 2.9 1.3 0.7 2.1
2016E 1.9 2.3 1.3 0.8 1.9
2017E 1.5 1.9 1.2 0.8 1.7
2018E 1.3 1.4 1.0 0.8 1.4
P/E (x) 2015 9.1 12.4 (12.5) (3.0) (55.6)
2016E 6.7 6.4 20.5 89.0 13.1
2017E 5.8 6.7 10.9 (467.5) 11.4
2018E 6.1 5.6 8.7 47.9 10.2
EV/EBITDA (x) 2015 6.7 5.3 14.5 68.5 11.7
2016E 4.9 NA 8.7 8.9 7.1
2017E 4.3 NA 7.2 9.0 6.3
2018E 4.6 NA 6.9 7.6 5.9
ROE (%) 2015 26.4 38.3 (10.2) (15.2) (3.7)
2016E 32.3 37.8 6.4 (0.5) 14.9
2017E 28.9 32.9 10.5 (2.6) 15.0
2018E 22.5 27.7 16.2 (2.8) 14.6

HPG VN
II. Investment thesis

Sector-leading profitability, thanks to low costs
Figure 12 Cost of steel production in Vietnam (2Q16)

(thousand tonnes) (% YoY)
7,000 70%
60%
6,000
50%
5,000
40%
4,000 30%
3,000 20%
10%
2,000
0%
1,000
-10%
- -20%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VSA's selling volume HPG's selling volume HPG's market share
VSA's selling volume growth HPG's selling volume growth
Source: Vietnam Steel Association (VSA), Mirae Asset Research
As a developing country, Vietnam’s steel industry is in the early stages of development,

with most steel companies being small-scale mills that manufacture low-value rebar
steel (concrete-reinforcing bars). Vietnam’s steel industry still uses small smelting
chambers and heavy input of scrap metal (83%), which results in high costs and
inefficient use of energy. As a result, Vietnam’s steelmakers are faced with difficulties,
especially in terms of production costs, compared with developed nations, which have
large-scale production from integrated mills.
Currently, there are only three steel producers in Vietnam that operate integrated mills
with blast furnaces: Hoa Phat Group (HPG VN), Thai Nguyen Iron and Steel JSC (TIS VN),
and Viet–Trung Metallurgy and Mineral Co. Ltd (Viet–Trung). Of the three, Hoa Phat has
the largest total capacity for construction steel, at over 2m tonnes per year, versus 1m
tonnes for Thai Nguyen Iron and Steel JSC and 500,000 tonnes for Viet–Trung.
Hoa Phat is the largest producer of construction steel in Vietnam, in terms of both
capacity and market share (22%, as of June 2016). Unlike other steel producers in
Vietnam, Hoa Phat operates an integrated mill (capacity of 1.7m tonnes) that produces
steel bar from the first stage of the value chain, iron ore. Thanks to low costs, the
company enjoys the highest profitability in Vietnam’s steel sector.
We estimate the average cost of steel production of Hoa Phat’s complex at

approximately VND7.9m/tonne in 2016, based on: 1) operation of the integrated mill at
90- 100% of capacity; and 2) the currently low global prices of raw materials (coal, iron
ore, scrap, billet). The average cost of steel from the company’s complex is equivalent to
85% of the cost of steel produced from scrap (VND9.0m/tonne) and 81% of the cost of
steel produced from purchased billets (VND9.2m/tonne).

HPG VN
As a result, at the current selling price of around VND10m/tonne, Hoa Phat’s gross
margin1 for steel made from iron ore, steel scrap, and purchased billet is 22%, 10%, and
8%, respectively. This shows that steel made from iron ore provides a higher margin
than steel made from other materials. The current selling price provides the company
with a significant competitive advantage, based on our estimation.
Figure 13 Cost of steel production in Vietnam at 2Q16

VNDmn/tonne
9.40
9.20
9.00
8.80
8.60
8.40
8.20
8.00
7.80
7.60
7.40
Cost of steel from iron ore Cost of steel produced from Cost of steel produced from
using Blast Furnace scrap purchased billets
Figure 14 Construction steelmaker comparison

Market Share Change (%) P/E (x) P/B (x) OPM (%) ROE (%)
Company Name Ticker cap price
(VND bn) (VND) YoY YTD FY15 FY15 FY15 2Q16 FY15
Steel from iron ore

Hoa Phat Group HPG VN 38,303 45,450 71 77 5.8 1.5 16.1 29.8 25.2
Thai Nguyen Iron And Steel TIS VN 1,562 6,000 15 9 15.6 0.6 4.1 4.1
Steel produced from scrap
Thu Duc Steel JSC TDS VN 178 14,600 103 40 3.4 0.6 4.1 20
Nha Be Steel JSC TNB VN 204 9,300 18 16 3.6 0.9 6 28.3
Pomina Steel Corp. POM VN 1,639 8,500 31 23 46.6 0.5 4.6 6.6 1.2
Vietnam-Italy Steel JSC VIS VN 733 15,100 125 96 0.6 0.9 2 -8.2
DANA-Y Steel JSC DNY VN 132 6,800 15 39 16 0.4 3.7 5.7 2.3
Hoa Phat began construction of an integrated steel mill in 2007, with the mill becoming
operational in 2010. From 2010 until the beginning of 2016, excluding soft coal (imports)
and hard coal for coke (which account for an estimated 40% of the production costs for
finished steel), raw materials, such as iron ore, were provided by Hoa Phat’s subsidiaries.
Although the company currently outsources its iron ore, the cost is below what it would
be for Hoa Phat to produce its own, thanks to low global iron ore prices.
In addition, iron ore and coke prices costs show less volatility than that of scrap iron. As
scrap iron account for 90% of production costs, the input costs of steel produced from
iron ore and coke are below that made from scrap iron. This key competitive advantage
1
Our estimates are based on the average market prices of global coke, pig iron, and steel billet (the price
of hard coking coal price is around USD90/tonne; anthracite coal at USD80/tonne; steel scrap
~USD210/tonne; and steel billet ~USD330/tonne)
HPG VN
has helped Hoa Phat to achieve growth above the industry average, even amid the steel
sector’s stagnant growth period of 2011–2013. Strong cost control has enabled Hoa Phat
to increase its market share gradually and become the largest construction steelmaker
in Vietnam. Moreover, it enables Hoa Phat to offer high commissions for sales agencies,
to compete with domestic and Chinese competitors.
Figure 15 Hoa Phat’s spread between COGS of construction steel and ASP
(VND/tonne)
3,500,000
Very high ASP, thanks
to safeguard tariff
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F
Financial strength
Figure 16 Construction steel market size in Vietnam
(thousand tonnes) Production Selling (% YoY)
8,000 35
Production growth Selling growth
7,000 30
25
6,000
20
5,000
15
4,000
10
3,000
5
2,000
0
1,000 (5)
0 (10)
2011 2012 2013 2014 2015
Source: VSA, Mirae Asset Research
In 2011 and 2012, both the production and consumption of construction steel among
members of the Vietnam Steel Association, or VSA (which represents 90% of total steel
production in Vietnam) saw negative growth, due to weak demand. Construction steel
makes up the largest portion (40%) of total steel demand in Vietnam. From 2011 to 2013,
sales of construction steel remained at around 4.6 to 4.7m tonnes (CAGR of -1.5%), with
Hoa Phat the only steel producer to see consistent earnings results during this period
(see Figure 17).
We compared cash flow from operating activities (CFO) between Hoa Phat and other
steel producers in Vietnam. Fluctuations in the input prices of materials for steel
production, such as iron ore, coking coal, and scrap, have a significant impact on the
selling price of the finished product. Investors tend to view steelmakers as unattractive
investments, due to their earnings fluctuations. However, even during the Vietnamese
HPG VN
steel industry’s crisis of 2011-2013, amid a stagnant real estate market, Hoa Phat
enjoyed stable net profits, while many of Vietnam’s steel producers went bankrupt. We
expect the company to continue to enjoy high net profit growth and stable operational
cash flow going forward. Unlike other steelmakers, which have suffered from unstable,
or even negative, cash flow over the past five years, Hoa Phat has enjoyed steady growth
in operational cash flow during the same period.
Figure 17 Hoa Phat’s CFO

(VND bn)
7,000
6,205 6,222
6,000 5,674
5,396
5,000 4,543
4,111
4,000
2,959
3,000 2,682
2,144
2,000
1,000
304
0
2011 2012 2013 2014F 2015 2016F 2017F 2018F 2019F 2020F
Figure 18 Comparison of steelmakers’ CFO

(VND bn) 2011 2012 2013 2014 2015
5,000
4,000
3,000
2,000
1,000
(1,000)
(2,000)
HPG HSG DNY TIS POM NKG
Figure 19 CFO comparison: Hoa Phat Group (HPG) vs. Hoa Sen Group (HSG)
(VND bn)
5,000 HPG HSG
4,000
3,000
2,000
1,000
(1,000)
2011 2012 2013 2014 2015

HPG VN
III. DuPont analysis

In order to carry out a DuPont analysis for Hoa Phat, we broke down its ROE into three
parts: 1) net profit margin (net profit/sales); 2) asset turnover (sales/total assets); and 3)
financial leverage (total assets/shareholders' equity). By employing a DuPont analysis,
we can assess how well the company is leveraging its assets, compared with global
peers. In 2015, the company indeed outperformed global peers, in terms of net margin,
asset turnover (0.15x vs. 0.92x global average), and even financial leverage (1.81x versus
a 4.04x global average).
In terms of net margin, we believe the high levels of 2016 and 2017 will be difficult to
maintain, as we do not expect the favorable trend of raw material prices to continue
long term.
Figure 20 Hoa Phat’s DuPont analysis

2012 2013 2,14 2015E 2016E 2017E 2018E 2019E
ROE (%) 12.0 21.5 29.2 26.4 32.3 28.9 22.5 18.8
Net margin (%) 5.9 10.3 12.3 12.7 18.0 18.7 16.1 14.8
Asset turnover (x) 0.9 0.8 1.2 1.1 1.0 1.0 1.0 1.0
Financial leverage (x) 2.2 2.4 1.8 1.8 1.5 1.4 1.3 1.3
Figure 21 Hoa Phat vs. global peers: DuPont analysis (2015)

HPG VN HSG VN TATA IN 323 HK JSTL IN
ROE (%) 26.4 24.7 -10.2 -23.0 -3.7
Net margin (%) 12.7 3.7 -2.6 -10.7 -1.8
Asset turnover (x) 1.2 1.8 0.7 0.7 0.5
Financial leverage (x) 1.8 3.7 5.4 3.1 3.9

HPG VN
IV. Financial analysis

Short receivable period
Steel is a key input material of capital goods industries; these industries do not consume
input material within a single year, so steel manufacturers often have to provide credit in
the form of receivables for their customers, in order to retain client's loyalty. However,
Hoa Phat has a low receivable period figure, reflecting the high quality of the company’s
sales, as well as its customers. Moreover, the company’s receivable period decreased to
22 days in FY15 from 32 days in FY13, and continues on a downtrend.
It should be noted that the inventory turnover of Hoa Phat is quite low. We believe that
this is the result of the company’s raw material stocking policy, which aims to optimize
profitability. This policy has enjoyed positive results, thanks to the company’s solid brand
name, high market share, and good bargain-sales policy. However, unexpected changes
in raw material price trends could have a negative effect on Hoa Phat’s earnings results.
Figure 22 Hoa Phat’s operating ratio

2013 2014 2015P 2016E 2017E 2018E 2019E
Receivables turnover (x) 12 15 16 16 17 17 17
Average receivable period (days) 32 24 22 22 21 21 21
Inventory turnover (x) 2 3 3 3 3 3 3
Average inventory period (days) 173 138 120 146 146 146 146
Payable turnover (x) 8 10 10 11 12 12 12
Number of payable (days) 45 38 38 35 32 32 32

HPG VN
V. Earnings outlook
For FY16, we forecast revenue at VND30.2tn (+10% YoY) and operating profit at VND7.2tn
(+64% YoY), with growth coming mostly from the steel division. We expect sales volume
of construction steel and steel billet of 1.64m tonnes (+19% YoY) and 280,000 tonnes,
respectively, but we believe that ASP will fall to VND9.5m/tonne (-12.8% YoY), due to stiff
competition from Chinese steelmakers. However, thanks to the low cost of raw
materials, Hoa Phat’s operating margin should increase to 23.9%, compared with 16% in
FY15, leading to a 64% increase in operating profit in FY16.
We forecast 3Q16 revenue of VND7.5tn (+8.9% YoY) for Hoa Phat, with the rise in
revenue the result of an increase in the sales volume of construction steel (+23% YoY),
due to the completion of Phase 3 of Hoa Phat’s integrated mill operation. However, we
expect a continued decline in ASP (-15% YoY), as the third quarter usually sees low sales
volume, due to Vietnam’s rainy season. Gross margin and operating margin will come at
25.8% and 22%, respectively (versus 23% and 19%, respectively, in 3Q15). Thanks to
favorable trends in global commodities prices and a high export tax on iron ore in
Vietnam (40%), the company should be able to maintain low steel production costs.
Figure 23 Hoa Phat’s revenue breakdown Figure 24 Hoa Phat’s operating profit breakdown
(VND bn) (VND bn)
Steel Others Steel Others

40,000 5,000
35,000 4,500
4,000
30,000
3,500
25,000 3,000
20,000 2,500
2,000
15,000
1,500
10,000
1,000
5,000 500
0
-
2011 2012 2013 2014 2015 1H16
2011 2012 2013 2014 2015 2016E 2017E (500)
Source: Hoa Phat, Mirae Asset Research Source Hoa Phat, Mirae Asset Research
Figure 25 Hoa Phat’s 3Q16 earnings preview

(VND bn, %, ppt) 3Q15 4Q15 1Q16 2Q16 3Q16P (YoY) (QoQ)
Sales 6,845 7,122 7,142 8,048 7,456 8.9 (7.4)
Operating profit 1,319 772 1,244 2,402 1,663 26.1 (30.8)
Pre-tax profit 1,161 683 1,211 2,382 1,555 34.0 (34.7)
NP (controlling interests) 1,032 565 1,022 2,026 1,325 28.4 (34.6)
OPM 19.3 10.8 17.4 29.9 22.3 3.0 (7.8)
Pre-tax margin 17.0 9.6 17.0 29.6 20.9 3.9 (5.7)
Net margin 15.1 7.9 14.3 25.2 17.8 2.7 (5.2)

HPG VN
Figure 26 Hoa Phat’s quarterly earnings forecast

(VND bn) 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16P 4Q16E 2016E 1Q17E 2Q17E 3Q17E 4Q17E 2017E
Sales 5,838 7,648 6,845 7,122 27,453 7,142 8,048 7,456 7,621 30,267 7,863 8,921 8,454 8,650 33,888
Steel 4,879 6,177 5,326 5,511 21,892 5,988 7,045 6,553 6,811 26,397 7,158 8,129 7,462 7,759 30,508
Others 959 1,471 1,519 1,611 5,561 1,154 1,003 902 809 3,869 705 792 993 890 3,380
COGS 4,822 5,948 5,285 5,817 21,859 5,712 5,477 5,530 5,659 21,859 5,829 6,359 6,247 6,446 24,881
Gross profit 1,016 1,699 1,560 1,305 5,594 1,431 2,572 1,926 1,962 8,408 2,035 2,562 2,207 2,204 9,007
SG&A 211 197 241 533 1,185 187 169 263 570 1,189 227 213 288 647 1,377
Operating profit 805 1,502 1,319 772 4,409 1,244 2,402 1,663 1,391 7,219 1,807 2,349 1,918 1,556 7,630
NP (controlling interests) 649 1,238 1,032 565 3,485 1,022 2,026 1,325 1,125 5,461 1,499 1,961 1,594 1,285 6,339
Growth (YoY, %)
Sales 48.4 76.0 63.2 10.2 75.4 22.3 5.2 8.9 7.0 10.2 10.1 10.8 13.4 13.5 12.0
Operating profit 50.5 112.6 96.4 11.1 4.6 54.6 59.9 26.1 80.3 63.7 45.3 (2.2) 15.3 11.9 5.7
Net profit 21.3 75.2 53.7 (18.6) 10.85 57.5 63.7 28.4 99.0 56.7 46.7 (3.2) 20.3 14.2 16.1
Margin (%)
GM (%) 17.4 22.2 22.8 18.3 20.4 20.0 32.0 25.8 25.7 27.8 25.9 28.7 26.1 25.5 26.6
OPM (%) 13.8 19.6 19.3 10.8 16.1 17.4 29.9 22.3 18.3 23.9 23.0 26.3 22.7 18.0 22.5
Net profit margin (%) 11.1 16.2 15.1 7.9 12.7 14.3 25.2 17.8 14.8 18.0 19.1 22.0 18.9 14.9 18.7
15
HPG VN
VI. Risk factors

Hoa Phat has begun to invest in a new animal feed business. Animal feed is a highly
competitive sector in Vietnam, with foreign producers, such as Charoen Pokphand Foods
PLC (C.P.), Cargill, ANT, and De Heus, dominating the market. Thus, we are concerned that
business diversification may exert a negative impact on the company. Moreover, the solid
supply risk from China-made steel and Formosa Ha Tinh Steel, a subsidiary of Formosa
Plastics Corp, could drag down Hoa Phat’s ASP, as well as its earnings.

HPG VN
VII. Company background

Established in 1992, Hoa Phat Group (HPG VN) is one of Vietnam’s leading private
industrial manufacturing groups. The group is involved in steel production, refrigeration,
furniture, machinery, and property development. The company has been investing in the
agricultural segment, which comprises husbandry and feed production, since 2015.
At present, construction steel is the group’s core business, accounting for 79.4% of total
revenue and 82.3% of total profit (at the end of 2015). Hoa Phat is recognized as one of
the three largest manufacturers of construction steel in Vietnam, with a market share of
over 22%, as of June 2016.
Hoa Phat entered the agricultural sector in 2015 by establishing the Hoa Phat Feeds
Production & Trading One Member Limited Liability Company, with charter capital of
VND300bn and maximum capacity of 300,000 tonnes per year.
Figure 27 Hoa Phat Group history

Date Event
2007 Restructuring as a group and listing on the Vietnam stock market
2009 Completion of the first stage of the Hoa Phat integrated steel complex
Structuring the operating model of the parent company by separating the steel production and
2011
trading segments
Completion of the second stage of the steel complex, raising total capacity to 1.15m
2013
tonnes/year
2014 Initiation of the third stage of the steel complex
2015 Launch of Hoa Phat Feeds Production & Trading One Member Ltd.
2015 Hoa Phat Mining JSC officially renamed Hoa Phat Livestock Development JSC
2016 Establishment of Hoa Phat Agriculture Development JSC.
2016 Completion of the third stage of the steel complex operation
Management description
Mr. Long Tran founded the Hoa Phat Group in 1992. Currently, Long is chair of the group
and orients business strategy for each subsidiary. Long plays an important role in Hoa
Phat, as he makes all the major decisions of the company.
Shareholding structure
The largest shareholders are Mr. Long Tran and his wife, with a combined 32.44% stake.
Foreign ownership stands at 37%, as of 20 September 2016.
Figure 28 Hoa Phat Group’s shareholder structure
Tran Dinh Long,

25.15
Others, 56.83
Vu Thi Hien, 7.28
Deutsche Bank AG &

Deutsche Aset
Management, 4.86
Dragon Capital, 5.88

HPG VN
Company structure
As of end-2015, Hoa Phat owns 16 subsidiaries, which operate in four divisions: Real
Estate, Agriculture, Other Industrial Production, and Steel, in which seven subsidiaries
operate.
Figure 29 Hoa Phat’s company structure
Hoa Phat Steel JSC
Hoa Phat Steel One Member Co., Ltd
Hoa Phat Steel Pipe Co., Ltd
Steel Hoa Phat Energy JSC
An Thong Mining Investment JSC
Hoa Phat Mitraco Mineral JSC
Nam Giang Mining One-Member Co., Ltd
Hoa Phat Equipment Accessories Co., Ltd
Hoa Phat Furniture JSC

Other Industrial
Production
Hoa Phat
Group Hoa Phat Refrigeration Engineering Co., Ltd
Hoa Phat Trading Co., Ltd
Hoa Phat Urban Development and Construction JSC

Real Estate
Golden Gain Vietnam JSC
Hoa Phat Agriculture Development JSC
Hoa Phat Live-Stock Development JSC
Agriculture Hoa Phat Feeds Trading and Production One Member Co., Ltd
Hoa Phat Dong Nai Feeds One Member Co., Ltd
Hoa Phat Quang Binh Live-Stock Co., Ltd

HPG VN
Summary financial statements
Profit & loss Balance sheet

Year end Dec 31 (VND bn) 2015 2016E 2017E 2018E Year end Dec 31 (VND bn) 2015 2016E 2017E 2018E
Revenue 27,453 30,267 33,888 37,277 Current assets 11,915 15,355 19,236 22,990
Cost of goods sold 21,859 22,377 24,881 28,703 Cash & equivalents 2,373 4,027 6,800 8,776
Gross profit 5,594 7,890 9,007 8,574 Short-term financial asset 758 758 758 758
SG&A 1,185 1,189 1,377 1,514 Accounts receivable 1,608 1,356 1,436 1,657
EBIT (Adj.) 4,409 6,701 7,630 7,059 Inventory 6,937 8,951 9,952 11,481
EBIT 4,409 6,701 7,630 7,059 Other current assets 239 263 289 318
Net interest income (loss) (131) (292) (193) (26) Non-current assets 13,592 13,690 14,501 14,781
Income (loss) from associates -- - - - Net fixed assets 8,211 10,326 11,137 11,417
Others (101) 23 - - Investments 295 295 295 295
Recurring profit 3,990 6,431 7,437 7,034 Other long-term assets 726 726 726 726
Income tax 517 967 1,098 1,039 Total assets 25,507 29,044 33,737 37,771
Net profit 3,504 5,464 6,339 5,995 Current liabilities 9,993 8,720 8,343 8,273
Net profit (Controlling Accounts payable 2,639 2,125 2,148 2,478
3,485 5,461 6,339 5,995
Interests) Short-term debt 6,117 5,717 5,317 4,917
EPS (Controlling Interests, VND) 4,755 6,479 7,520 7,113 Other current liabilities 1,237 878 878 878
Non-current liabilities 1,047 947 947 747
Growth & margins (%) 2015 2016E 2017E 2018E
Long-term debt 739 639 639 439
Revenue growth 13.5 14.8 27.1 28.9 Other long-term liabilities 308 308 308 308
Gross profit growth 9.5 16.8 26.7 26.1 Total liabilities 11,040 9,667 9,290 9,020
EBIT growth 1.1 28.4 26.0 34.9
Controlling Interests 14,467 19,378 24,446 28,750
Net profit growth 31.3 211.8 10.0 38.6
Non-Controlling Interests 23 - - -
EPS growth 29.5 211.8 10.0 38.6
Shareholder's equity 25,507 29,045 33,737 37,771
Gross margin 49.3 50.2 50.0 48.9
BVPS(VND) 19,738 22,989 29,003 34,109
EBIT margin 5.0 5.6 5.6 5.8
Net profit margin 1.6 4.4 3.8 4.0
Source: Hoa Phat Group, Mirae Asset Research estimates Source: Hoa Phat Group, Mirae Asset Research estimates
Cash flow Ratio analysis

Year end Dec 31 (KRW bn) 2015 2016E 2017E 2018E Year end Dec 31 2015 2016E 2017E 2018E
Cash flow from operations 4,543 4,111 6,205 5,396 ROE (%) 26.4 32.3 28.9 22.5
Net profit 3,473 5,464 6,339 5,995 ROA (%) 14.6 20.0 20.2 16.8
Depr. & amortization 1,282 1,099 1,189 1,220 Inventory days 120 146 146 146
Others 540 292 193 26 Receivables days 22 22 21 21
Change in working capital (1,268) (3,712) (2,614) (2,883) Payable days 38 35 32 32
Cash flow from investing (3,764) (857) (1,768) (1,135) Net debt/equity (%) 12 (5) (13) (20)
Capital expenditures (3,764) (1,027) (2,005) (1,505) Interest cover (x) 17.5 14.5 17.7 17.8
Others - - - -
Cash flow from financing (433) (1,599) (1,664) (2,286)
Dividends (541) (1,099) (1,264) (1,686)
Increase in equity - - - -
Increase in debt 108 (500) (400) (600)
Beginning cash 2,026 2,373 4,027 6,800
Ending cash 2,373 4,027 6,800 8,776
Source: Hoa Phat Group, Mirae Asset Research estimates Source: Hoa Phat Group, Mirae Asset Research estimates

HPG VN
Recommendations Distribution of Ratings

By stock (12 months) BUY: 83.2%
BUY: A target price + 10% or more above the current price, HOLD: 15.5%
HOLD: Target price within - 10% to +10% of the current price REDUCE: 1.3%
REDUCE: A target price of –10% or less below the current price TOTAL: 100%
By industry (All data are current as of 29 Apr. 2016)
OVERWEIGHT: over +10% of the current industry index
NEUTRAL: -10% to +10% of the current industry index
UNDERWEIGHT: -10% or less than the current industry index
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Target Price and Recommendation Chart

Hoa Phat Group (HPG VN)
(VND)
HPG VN (LHS)
Date Recommendation 12M target price (VND)
55,000
2016-09-20 BUY (Initiate) 50,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16

HPG VN
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HPG VN
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HPG VN
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Vietnam Research

This research report is a product of Mirae Asset Securities (Vietnam)

Preview of 3Q16 earnings

Initiating with BUY and target price of VND50,000

See the last page of this report for important disclosures

I. Recommendation and valuation 3

II. Investment thesis 8

III. DuPont analysis 12

IV. Financial analysis 13

VI. Company background 16

Mirae Asset Securities 2

I. Recommendation and valuation

Figure 1 Hoa Phat’s EVA valuation

Invested capital 28,987

Cash & equivalents 6,800 WACC Calculation

Figure 2 Hoa Phat’s EVA valuation analysis

Source: Hoa Phat, Mirae Asset Research

Mirae Asset Securities 3

Figure 3 Vietnam steel companies’ comparison table

Share price analysis

Mirae Asset Securities 5

3,000 0.2 -2 std

Figure 10 Hoa Phat’s event chart

1H14 net revenue and profit

Market share of construction steel

Source: Bloomberg, Mirae Asset Research

Mirae Asset Securities 6

Figure 11 Hoa Phat’s peer comparison

Mirae Asset Securities 7

II. Investment thesis

Figure 12 Cost of steel production in Vietnam (2Q16)

VSA's selling volume growth HPG's selling volume growth

Source: Vietnam Steel Association (VSA), Mirae Asset Research

As a developing country, Vietnam’s steel industry is in the early stages of development,

We estimate the average cost of steel production of Hoa Phat’s complex at

Mirae Asset Securities 8

Figure 13 Cost of steel production in Vietnam at 2Q16

Source: Hoa Phat, Mirae Asset Research

Figure 14 Construction steelmaker comparison

Steel from iron ore

Source: Hoa Phat, Mirae Asset Research

Figure 17 Hoa Phat’s CFO

Source: Bloomberg, Mirae Asset Research

Figure 18 Comparison of steelmakers’ CFO

Mirae Asset Securities 11

III. DuPont analysis

Figure 20 Hoa Phat’s DuPont analysis

Figure 21 Hoa Phat vs. global peers: DuPont analysis (2015)

Mirae Asset Securities 12

IV. Financial analysis

Figure 22 Hoa Phat’s operating ratio

Mirae Asset Securities 13

Steel Others Steel Others

Figure 25 Hoa Phat’s 3Q16 earnings preview

Mirae Asset Securities 14

Figure 26 Hoa Phat’s quarterly earnings forecast

VI. Risk factors

Mirae Asset Securities 16

VII. Company background

Figure 27 Hoa Phat Group history

Figure 28 Hoa Phat Group’s shareholder structure

Tran Dinh Long,

Vu Thi Hien, 7.28