bav report hsg (final)

2013

Phạm Duy Mẫn

Nguyễn Trần Khánh An

Trần Hồng Hạnh

Nguyễn Kim Ngân

Phạm Thị Hạnh

[BUSINESS ANALYSIS AND VALUATION REPORT – HOA SEN GROUP]

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY

INTERNATIONAL UNIVERSITY

Business Analysis and Valuation Course

[BUSINESS ANALYSIS AND VALUATION REPORT – HOA SEN GROUP] May 20, 2013

STUDENT RESEARCH [STEEL INDUSTRY]

HOA SEN GROUP (HSG)

DATE: MAY 3RD

, 2013 STOCK INFORMATION:

Description: The largest galvanized steel sheet producer in Vietnam market

HOLD (From BUY)

Price: VND 39,800

Target Price: 41,983

Major Shareholders: Phuoc Vu Le (51%), Red River Holding Fund (16.6%), Hoa Sen Group

(4%)…

Key indicators:

ROE 19.37%

ROA 6.55%

Net cash in hands 67,431,992,847

Interest Coverage 2.21

Basic 43.80

52-Week Range 14.55 - 43.80

Average Volume (10 days) 288,643

Shares Outstanding 96.93 mil

P/E 10.61x

Impressive growth rate in 2012 and over the 1Q2013: In the fiscal year of

2011 – 2012, HSG achieved an unexpected growth rate in sales and net income of 24%

and 130%, respectively. Moreover, in 1Q2013, HSG revenue recently rose by 6.7% y-

o-y to over VND 2,500 billion which is due to the 31% increase in sales volume to

140,726 tons (mostly exporting). 1Q2013 earnings of HSG were approximately VND

125 billion which rose up by about 26% y-o-y.

Potential growth rate in near future: In 2012, after the completion of phase 1

of Hoa Sen – Phu My Factory, HSG has begun to finalize the phase 2 and it is

expected to be completed and be operational in 2015. This factory can expand the

company’s cold-rolled-coil (CRC) capacity by 69% to 980,000 tons p.a. and NOF hot

Ticker HSG VN

Shared issued 96,931,578 shares

Market capital (USD million) 157.8

3-month average daily return (USD million) 0.6

VN-index 475.24

Free float (%) 28.31


galvanizing capacity by 89% to 850,000 tons p.a. Furthermore, HSG also plans to

construct a hot-rolled-coiled (HRC) factory from 2015 to 2018 which may help HSG

to boost it margins and reinforce the cost leadership strategy. On March 30th, 2013,

HSG has implemented the galvanized steel sheet production line with the capacity of

120,000 tons p.a. which boosts the aggregate capacity of HSG by 14.6%.

Distribution Channel expansion: Up to 2017, HSG plans to open totally 170 outlets

and distribution branches in both domestic and foreign regions in order to help it easily

dominant its market share and make its products be more available to customers.

Expansion of oversea business: At its Annual General Meeting 2013, the board of

directors of HSG presented to shareholders the plan to establish a joint venture in

Thailand market which may support HSG in winning the market share in Thailand.

This joint venture is expected to build an NOF galvanized and pre-painted galvanized

sheets-making factory.

Aggressive five-year-projected business plan: We have estimated over five years

from 2013 – 2017, HSG growth rate in sales would be in range of 10%-20% with the

peak may be in 2017 (after 2 years of expected completion of Hoa Sen – Phu My

Factory in 2015) and in this year, revenue and net income will reach VND 19.4 trillion

and VND 511billion orderly. It is possible: in 2018, the growth rate of sales of HSG

would be higher due to the accomplishment of cost reduction when HRC factory is

finished.

BUSINESS DESCRIPTION

- Hoa Sen Group is one of the biggest and most prestigious companies in producing

galvanized steel sheets in Vietnam market; it is also the largest exporters in ASEAN,

especially to Thailand and Malaysia…Its primary products include cold rolled coil,

zinc-aluminum alloy coated steel sheet, galvanized steel sheet, pre-painted galvanized

steel sheet, steel pipes, purlin, and plastic pipes…

- On August 8th 2001, Hoa Sen Group was established with the headquarter is located at

09 Thong Nhat Venue, Song Than 2 Industrial Zone, Binh Duong Province.

- Until now, Hoa Sen Group consists of three subsidiaries, 2 factories under the control

of parent company and 108 distribution and selling branches in most domestic regions:

Hoa Sen Steel Sheet One Member Co. Ltd

Hoa Sen Building Materials One Member Co. Ltd

Hoa Sen Transportation and Mechanical Engineering One Member Co. Ltd

Producing Factory in Binh Duong Province


Hoa Sen – Phu My Factory in Ba Ria – Vung Tau province.

Main products/services of HSG and its market share:

- Sales of Galvanized steel sheets comprises of 65% total revenue of HSG and 40%

of the market, with many kind of galvanized steel products (pre-painted, NOF…)

to meet specific needs of customers. After the completion of phase 1 of HS – PM

factory, the total capacity of producing cold-rolled-coil (CRC) was raised up to

580,000 tons and galvanized steel sheets to 970,000 tons p.a.

- Steel pipe comprises of 29% total revenues and HSG contributes about 11% to the

total market (4th ranked): HSG has 17 production lines to product steel pipe

products with total capacity of 165,000 tons p.a. and is one of the largest steel pipe

makers in Vietnam.

- Real Estate investments: Due to the failure of real estate market in two recent

years, the real estate investments of HSG since 2009 such as Pho Dong – Hoa Sen,

Hoa Sen Phuoc Long B Apartment… were under depression; therefore, HSG has

decided to divest from these investments, but until now divestments are still in

process.

INDUSTRY AND COMPETITIVE ANALYSIS

PORTER 5 ANALYSIS

Rivalry among existing firms

At the end of 2012, the steel industry in Vietnam totally increased approximately 3%

(lower than 10% compared to 2011) with the total consumption of about 4.5 tons; the

growth rate of galvanized steel, cold rolled coil…has been around 20%-40% and this

pushed up the total growth rate of steel industry. This growth rate was predictable

because last years, many steel companies got losses due to the frozen of real estate

market. The price of steel input decreased; however, inventories have not decreased as

expected and steel makers and traders are struggling to survive in the face of uncertain

economic situations in the country and in the world.

Hoa Sen group is in contrast, it still achieved an impressed business results in

comparison with not only the same size companies and even the larger companies

Steel pipe market share of HSG


Trade barriers

Thailand threatened to propose the Thai government to conduct anti-dumping

investigations against galvanized iron sheets sourced from Vietnam, if Vietnam could

not control its export volume to the country.

Prior to that, in August 2012, the Malaysian Steel Association also gave a similar

warning. It said that steel products and PPGI exports to Malaysia soared recently, thus

badly affecting the local production, and if Vietnam does not make timely adjustment,

it would raise a lawsuit against Vietnamese products.

These trade barriers above will make Hoa Sen group come up against difficulties when

they try to export their products to foreign market.

Concentration & balance of competitions: There are more than 70 companies joined

in manufacturing the steel products. The three companies has the largest capacity in the

construction steel products in Vietnam market, they are southern steel companies with

the capacity of 910,000 tons/year. Hoa Sen Group is a medium company with capacity

of under 120.000 tons/year. With the numerous companies in the same industry like

this, and in this stagnant industry, they lead to the intensity of competition between

existing players; especially price competition is likely to be severe. But in order to

avoid the price competition and the threat from other companies, HSG continuously

invests to upgrade the production lines and makes its products more qualified and as a

result, HSG is currently the company which takes the greatest market share compared

to other companies.

Threat of new entrants

The threat of new entrants is considerable due to the attraction of steel industry to

large-cap companies, especially to foreign ones. However, there are still some barriers

exist to protect existing firms from new players

Economies of Scale:

Iron and steel industry requires large capital investments in fixed assets such as

machinery, equipment, factories for producing process and especially in new

producing technology. For some companies who do not have enough available capital

but still ambitiously choose to enter into the market, it is almost impossible for them to

compete with existing competitors on the economies of scale. Moreover, these


companies may get into trouble in figuring out the “exit door” of the industry and

sooner or later they may go to bankruptcy at the worst case.

First mover advantages:

The most considerable advantage must be discussed is the advantage of producing

technology

In 2006, Hoa Sen Group is the first non-state company in Vietnam Steel Industry who

has invested large capital into Cold rolled coil production lines. At until now, this kind

of product just can be manufactured by 2 steel factories in Vietnam. After that in later

years, HSG continued to invest money in order to improve its producing technology

and became the pioneer for NOF technology in Vietnam and Asian.

Distribution channel network:

Because the products of this industry have much greater demand than other industries

so any new entrants surely face with big problem on developing widespread

distribution channel network to meet the demand from customer.

Hoa Sen Group recently has over 108 branches throughout almost regions of Vietnam

and many other branches in foreign countries such as United States, Australia, Japan ...

COMPETITIVE STRATEGIES: COST LEADERSHIP

STRATEGY

Five core competitive advantages of HSG

1. Closed Production Line: The closed production line, especially with cold

rolled coil self-production, helps HSG actively and stringently control costs in

each stage; thus, HSG is able to minimize the costs and achieve the economic

efficiency. This is a strong platform for HSG to execute the cost leadership

strategy in Vietnamese Steel Industry

2. Widespread Distribution Channel Network: With 108 distribution channels

and branches throughout Vietnam and other countries, HSG has the completely

strong advantage over other competitors in meeting the demand of buyers.

3. Prestigious Brand name and social orientation: Besides the manufacturing

activities, HSG has already participated into many social events and sponsored for

many charitable programs in order to enhance its reputation inside and outside of

Vietnam.


4. Management System and Organizational Cultures:

10 T in Vietnamese: Trung thực (Honest) – Trung thành (Loyal) – Tận Tụy

(Dedicated) – Trí tuệ (Talented) – Thân thiện (Friendly).

5. Pioneer in developing new production technologies:

- 2006: Col Rolled Coil production line

- 2007 and 2009: Galvanized Steel Production line (NOF technology)

- 2010: Plastic pipe Battenfeld-Cincinnati production line

- 2011: HSG continues to invest large amount of capital to develop two other

modernized production line for cold rolled coil and inaugurated the completeness

of first period of Phu My Hoa Sen Galvanized Steel Factory which will have the

greatest size and capability in ASEAN

INVESTMENT SUMMARY

HSG would still pursue high growth rate in the future:

In 2012, the aggressive growth rates in revenue and net income of HSG mostly come

from the improvements in capacity after the completion of Hoa Sen – Phu My

factory’s phase 1. After 5 months of operation in the fiscal year of 2012 – 2013, HSG

has achieved 40% of estimated revenues and 62% of estimated net income.

- With future plans of constructing HRC factory from 2015 – 2018 and the

completion of phase 2, HSG is forecasted to grow at a higher rate after that. In

next two years, we forecasted than HSG sales growth rate to be around 10% due

to the downward trend in domestic steel market. Although the market would fall

down rapidly in 2013, HSG is still forecasted to grow because of its revenues

which come from the exports to ASEAN countries.

- The ROE of HSG is now approximately 19.3% - one of highest rate in the overall

industry compared to other competitors such as HPG (14.74%), POM

(1.03%),…Additionally, Gross profit margin is also higher than the overall

market at 13.9% which means that HSG has effectively control its production

costs and price level to compete with other companies in the market.

Capital structure and risk of HSG:

From the historical data of 5 fiscal years, it may easily to be observed that HSG rely

primarily by borrowing short-term and long-term debts in order to finance its

operations and its investment. Over 5 fiscal years, only in 2010, HSG issued more


shares to raise more capital and finance its fixed asset investments which pushed up its

total charter capital to over VND 1,000 billion. For that reason, debt-to-equity ratio and

financial leverage had increased significantly since 2009 which showed that HSG

borrowed much more and might engage into default risks in those years. Fortunately,

in 2012, these ratios have begun to decline to 1.31 and 2.64, respectively as shown in

the table of ratios in appendix. The reason is that since 2012, HSG has been able to

produce more and the revenues came from exports generated would be enough for it to

finance its investments and operations. Thus, the borrowing amounts declined.

We forecasted during the next 5 years, in order for HSG to finance its investments such

as HRC factory or phase 2 of Hoa Sen – Phu My Factory,...HSG will mainly raise

more capital by issuing more shares and secondarily by borrowing long-term debt,

especially by 2015 – the expected beginning year of HRC factory. This is because until

now HSG is avoiding using too much debt which may cause it fall into the default risk.

Improvement in liquidity ratios:

Over recent years, the current ratio of HSG was falling down and it had become lower

compared to other competitors in the same market. However, in 2012, the current ratio

of HSG showed a positive sign when it increased from 0.88 to 0.96. Moreover, the

quick ratio was also improved from 0.3 (2011) to 0.4 (2012).

Efficiency ratio:

In 2012, most of the efficiency ratios were positively changed. For instances, the

account receivable turnover increased from 13.7 to 14.54, the inventory turnover rose

up from 4.11 to 4.88…Especially, days inventories held declined significantly from 89

days to only 74 days (15 days) which shows that in this year, the demand of HSG

products was augmented and HSG effectively used its working capital to generate

more sales.

The fixed assets turnover and the assets turnover also expressed positive signs by

increasing to over 3 and 1.8 orderly in 2012. This means that despite huge investments

in fixed assets, HSG could pursue high growth in sales: each Dong invested in fixed

assets, HSG may generate over 3 Dong in sales.

56% 58% 55% 46% 48%

34%

17% 16% 14%

20% 18%

24%

28% 26% 31% 34% 34% 41%

Capital structure of HSG over years

Short-term borrowings Long-term borrowing

Shareholders' Capital


Profitability ratios rose up significantly:

In recent fiscal year, the profitability ratios of HSG pursued a high jump especially to

ROE and Gross profit margin. During 2010 – 2011, the ROE of HSG fell down from

16.2% to 9.2% because in this year, HSG kept investing in fixed assets for Hoa Sen –

Phu My Factory but the sales generated were not match correspondingly to the

investments due to the downturn trend in the market. In contrast, in 2012, thanks to the

sales grew faster and higher than expected plus the reduction of investments in fixed

assets, ROE of HSG was over-doubled from 9.2% to 19.3%. And this is the highest

level of ROE in the steel industry of only 6% (May 3rd, 2013). Furthermore, the net

operating profit margin also rose up from 1.4% to 3% and the gross profit margin also

jumped from 12.9% to 13.9%. These increases come from the impressive growth in

sales and the reduction in financial expenses in 2012.

FORECASTING AND VALUATION:

1. Method of discounting cash flow FCFF:

Assumption:

- The sales growth rate in the next two years would keep at 10%/ year and start to

increase from 2015 to 2017 (12%, 18% and 20% respectively). The growth rate is

estimated based on the sustainable growth rate oh HSG over last 3 years which may

be calculated by the formula:

Additionally, although the sustainable growth rate in 2012 based on this formula

was 14% but in 2013, it is expected that the steel market will be much more in down

trend. Therefore, the growth rate of HSG would not be the same or higher than 14%.

- The sustainable growth rate of HSG is estimated to be around 8% closely to the

GDP growth rate of Vietnam forecasted by IFM.

- Estimated WACC is 15.41%

- Beta is 1.263

Target Price per share: VND 41,983/share

2. P/E method:

- P/E of overall steel industry on May 3rd, 2013 is 14.6x

- EPS of HSG at the end of FY 2011 – 2012 is 3.761


- Target price per share: VND 54,910/share

3. P/B method:

- P/B of overall steel industry on May 3rd, 2013 is 0.9x

- Book value per share at the end of FY 2011 – 2012 is VND 20,824/share.

- Target price per share: VND 18,741/share.

With the percentage of 7:2:1, we have the general target price of HSG is VND

42,244/share

PRO FOMA INCOME STATEMENT OF HSG IN THE NEXT 5 YEARS.

2013F 2014F 2015F 2016F 2017F

Sales 11,122,087,137,334 12,234,295,851,067 13,702,411,353,195 16,168,845,396,770 19,402,614,476,124

Growth rate 10% 10% 12% 18% 20%

Deduction 21,846,723,195 24,031,395,515 26,915,162,976 31,759,892,312 38,111,870,775

Net Sales 11,100,240,414,139 12,210,264,455,552 13,675,496,190,219 16,137,085,504,458 19,364,502,605,350

Cost of goods sold 9,609,513,290,788 10,570,464,619,867 11,838,920,374,251 13,969,926,041,616 16,763,911,249,939

Gross Profit 1,490,727,123,350 1,639,799,835,686 1,836,575,815,968 2,167,159,462,842 2,600,591,355,410

Financial Income 60,006,189,055 66,006,807,961 73,927,624,916 87,234,597,401 104,681,516,881

Financial expenses (536,450,091,203) (590,095,100,323) (660,906,512,362) (779,869,684,587) (935,843,621,505)

Selling expenses (383,072,573,558) (421,379,830,914) (471,945,410,623) (556,895,584,535) (668,274,701,443)

General and Administrative

expenses (272,175,107,887) (299,392,618,675) (335,319,732,916) (395,677,284,841) (474,812,741,809)

Included depreciation (21,191,879,054) (23,311,066,959) (26,108,394,994) (30,807,906,093) (36,969,487,312)

Operating profit 359,035,539,758 394,939,093,734 442,331,784,982 521,951,506,279 626,341,807,535

Other income 77,351,920,028 85,087,112,031 95,297,565,475 112,451,127,261 134,941,352,713

Other expenses (56,022,458,633) (61,624,704,496) (69,019,669,035) (81,443,209,462) (97,731,851,354)

Net other income 21,329,461,396 23,462,407,536 26,277,896,440 31,007,917,799 37,209,501,359

Net accounting profit

before tax 380,365,001,154 418,401,501,270 468,609,681,422 552,959,424,078 663,551,308,894

Business income tax 87,483,950,266 96,232,345,292 107,780,226,727 127,180,667,538 152,616,801,046

Net profit after tax 292,881,050,889 322,169,155,978 360,829,454,695 425,778,756,540 510,934,507,848

Dilluted Number of share

outstanding 97,872,861 97,872,861 97,872,861 97,872,861 97,872,861

EPS 2,992 3,292 3,687 4,350 5,220


FREE CASH FLOW

Cash flow from

operations

228,346,133,289

417,329,307,897

424,192,981,740

357,935,436,211

376,280,604,750

Add: Interest * (1-t)

282,860,904,266

332,727,381,615

404,844,816,235

477,657,365,952

527,398,437,494

Less: CAPEX

(799,800,929,136)

(621,466,955,777)

(758,088,508,138)

(1,099,294,647,907)

(1,395,593,655,255)

Free Cash Flows

(288,593,891,581)

128,589,733,734

70,949,289,838

(263,701,845,744)

(491,914,613,010)

Terminal Value

15,026,940,534,376

Cost of debt 9.367%

Cost of equity 24.90%

Beta 1.263155975

Risk-free rate (2013) 8.10%

Market premium

(2013) 13.30%

WACC 15.4%

Sustainable growth rate 8%

Present value

(250,051,802,170)

96,536,601,534

46,150,521,832

(148,622,508,524)

7,097,903,371,598

Enterprise value

6,841,916,184,270

less: Market value of

debt

2,772,437,608,264

Market value of equity

4,069,478,576,006

Share outstanding

96,931,578

Estimated share price

41,983


APPENDICES

OVERVIEW OF VIETNAMESE ECONOMY:

2012 is the fifth consecutive year in which Vietnam experienced with economy instability and macroeconomic issues; many monetary and fiscal

policies have been adopted since 2007 to deal with such problems but it seems that they were ineffective. And in fact, beginning at the fourth

quarter of 2011, Vietnamese banking system has been on the verge of collapse due to a liquidity crunch at a number of weak banks. Bad debt ratio

has risen rapidly because of the severe failure of real estate market. All aspects of the financial market have struggled to the world financial crisis.

The overall purchasing power has been falling, causing a vicious cycle: falling purchasing power – rising inventory – falling production – rising

bad debt – falling credit…

“…The global economy is currently in a fragile state. Latest predictions by financial organizations such as the International Monetary Fund show

that the economy in 2013 will be even worse than in 2012. Global economic growth will slow down and will adversely impact the Vietnamese

economy, given its deep integration into the world economy…”

(Cited from the article “Vietnamese economy: looking back and looking forward”, Feb 9, 2013, Nhan Dan news)

The primary orientation in 2013 of our country is to enhance the macroeconomic stability, lower inflation rate and higher economy growth;

therefore, it is necessary to update, analyze and implement the appropriate resolutions at the beginning of the year. Here are some statistics about

the Vietnamese Economy over recent years.

- Vietnam Gross Domestic Product (GDP) in 1st Quarter of 2013 achieved an estimated growth of 4.89 percent against the same period in 2012.

Agriculture, forestry and fishery rose 2.24%, contributed 0.31 point percent to the general growth rate and lower than the 2.81% pace in 1st

Quarter of 2012 (agriculture rose 2.03%; fishery rose 2.28%). Industry and construction rose 4.93%, contributed 1.98 points percent and lower

than the 5.15% pace in the same period in 2012 (industry rose 4.95 percent and construction rose 4.79); service rose 5.65%, contributed 2.60

points percent and higher than the growth rate of 4.99 % in last year’ same period.

- According to the historical data from the report of General Statistics Office, from 2000 to 2012, the average growth rates of the GDP

were around 5.00% to 8.50% reaching the peak in 2007 – the year in which Vietnam joined World Trade Organization (WTO). Looking

at the following chart, we may observe the downturn trends in GDP growth rates over last three or four years.

- March’s CPI reduced to 0.19% against the previous month. Among groups of goods and services, catering and related service had most

decreased rate of 0.53% (grain food 0.59%; foodstuff 0.95%); drinks and tobacco 0.08%; transport 0.25%; postal and communicational

service 0.05%. Remaining groups had light growth rates, of which culture, entertainment, tourist rose 0.25%; family appliances 0.23%;

garments, hats and footgear 0.18%; housing and construction material 0.09%; Medicine and medical service 0.07%; education 0.04%.

March’s CPI rose 2.39% from 12/2012 and 6.64% from the same period last year. Average CPI in this Quarter rose 6.91% compared to

that in 2012’ same period.


PORTER’S FIVE FORCES:

Power of Supplier:

Steel industry in Vietnam is still strongly depends on imported cold rolled coil and other raw materials to manufacture complete products. Price

of these imported materials is rather high and affected by the global price. HSG, on the other hand, can itself produce the cold rolled coil; thus, hot

rolled coil whose price is much lower than cold rolled coil due to tax free policy is its main imported material. This is one of advantages helps HSG

pursue cost leadership strategy.

- Concentration of suppliers:

Baosteel (China), Nippon Steel (Japan), Shang-shing (Taiwan) are three biggest suppliers of HSG. These corporations not only have the same

position in the global market but also have similar quality standards for their products. In addition, steel industry is the one that requires

standardized materials in manufacturing. Therefore, HSG can take advantages in choosing its suppliers among these three.

- Exchange rate exposure:

HSG has to face with the fluctuation of global steel price and exchange rate. However, in recent years, the expansion of export reduces the demand

on foreign currency of HSG; therefore, exchange rate exposure also decreases.

Power of Buyer:

HSG has the leading position in the steel products market in Vietnam in both scale of production and market share with its own strong

distribution channel. It sell major of products directly to individual contractors, especially in the countryside and suburban areas, which means they

have weak bargainning position. So the bargaining power of buyers is low.


However, with the characteristic of steel products, the switching costs to another brand is low. HSG is trying to provide the best service

and achieve higher market share by expanding its distribution network every year to become closer to its clients. At the present, HSG’s distribution

network has more than 108 branches over the country. The export share of the company in 2012 was increases significantly to 37,2% which reflects

company effort to balance the supply and demand for steel products.

In the future, in order to capture more market share while maintaining the same level of buyers’ power, HSG should try to diversify their

group of customers and aim more for the big construction.

Threat of Substitute:

Coated steel sheet is the basic building materials used in civil and industrial construction. It is widely used because of its longevity, no

health hazardous, and fire resistance. Two main substitutes of coated steel sheet are asbestos and tile roofing. However, asbestos is easily breakable,

heavier than coated steel sheet and has health effects. Tile roofing is favored because of its durability and heat reduction ability, but it is two times

more expensive than coated steel sheet. Thus, coated steel sheet is still the number one choices for construction based on its utility and price.

OVERVIEW OF HOA SEN GROUP:

Hoa Sen Group (HSG) was founded on 8/8/2001 which headquarters is located at No.09, Thong Nhat Boulevard, Song Than 2 Industrial Park, Di

An Dist. Binh Duong Province. HSG consists of 03 subsidiaries, 02 plants, 01 representative office and more than 100 branches which are located

all over the country.

HSG started with only VND 30 billion and 22 employees but now it has nearly VND 1,008 billion in charter capital and more than 3000 employers.

Hoa Sen Group has set and applied modern and synchronous production lines in its operation, includes: 2 pickling lines, 03 cold rolling lines, 1 hot

dip galvanized steel line using NOF technology, 2 NOF coating , 3 color coating lines, 1 acid recovery system, 1 steel pipe production, 1 plastic

pipe production line and other supporting facilities.

Hoa Sen Group has been one of the leading in its industry by building succesfully 5 core competitive advantages : Vertically integrated

manufacturing and sales structure ; More than 100 self-owned distribution and retailing branches all over the country; Corporate cultural values :

Integrity - Community – Development; Community-oriented brand; modern technology and advanced manufacturing equipments.

The successful competitive advantages help HSG achieve its leading position in the sheets sales and manufacturing position with nearly with nearly

38% market share (2011) and also achieve its leading exporter position in South East Asia with the CAGR of sale output and revenue more than

50% in three fiscal years (2008, 2008-2009, 2009-2010).

Hoa Sen Group awards including Certificate of Merit by VietNam Prime Minister in 2011; Vietnamese Gold Star Award in 2005, 2007, 2008, 2009,

2010, 2011 (Top 10 Vietnamese Gold Star 2009, Top 10 Coprorate Social Responsibility Companies 2011); Top 500 largest companies in Vietnam

(2007, 2008, 2009, 2010); and many more. With all of these achievements, HSG has created its solid position in the Vietnam steel industry and

taking closer step for its international level position.


STRATEGY ANALYSIS:

From the historical data, we may observe that although Hoa Sen Group is

also affected by the economic status. For instances, in 2008, during the

financial crisis, HSG’s inventories were unsalable; therefore, this account

in the balance sheet throughout this year increased by 71%. Moreover, in

2010 – 2011, due to the frozen of real estate market and the downturn trend

in whole economy, domestic steel market begun to be saturated and the

supply exceeded the demand of the market, HSG could not sell its products

smoothly so the inventories account grew again up to 94%. Besides that,

HSG faced with the problem of uncollectible sales from the customers, the

account receivable continued to grow by about 88%. How did HSG get out

of these problems? What are its strategies?

2008 – Global financial crisis: At the end of 2008, all industries were strongly affected and the GDP growth rate of Vietnam decreased sharply from

8.46% to 6.31%. Thus, the consumption of overall steel market had also fallen. At this point of time, HSG was in nearly-bankrupt status and sales

only grew by 2%. According to Mr. Phuoc Vu Le – the chairman of HSG board of directors, at that moment, he decided to make more sales on

credit and wrote off big amount of HSG’s inventories in order to survive and generated more sales. In fact, this decision saved HSG from the threat

of bankruptcy and pushed the sales of HSG in 2009 by 38%. This was the reason why it might get out of the trouble of financial crisis in 2008.

FY 2010 – 2011 Falling domestic market: At the end of 2010 and during 2011, Vietnam steel market was down, the demand of construction

materials reduced significantly due to the starting point of frozen real estate market. In these two years, Vietnam economy also engage into the

problem of bad debts in banking systems, many enterprises went bankruptcy just within 3 months. The Directors of HSG at that time realized that if

it just concentrated on the domestic market, its business would collapse sooner or later. Hence, since this FY, HSG has started to export its products

to other countries, especially to ASEAN countries in order to find an “exit” door.

So we have seen from the past what strategy of HSG to overcome its obstacles. However, the most important question here is that what if these

problems last long than HSG forecasted? And if that happens, what will HSG strategies be to “beat” them again?

In 2013, it is forecasted that although Vietnamese economy would recover slightly from 2012, the steel industry will not have any positive signs. In

fact, in the 1Q2013, according to the Ministry of Construction, the steel used for production decreased by 5% compared to the same period of 2012.

Moreover, the total steel consumption was over 1.1 million tons lower than 7% from 2012. For that reason, recently, HSG has changed its strategy

to primarily stay focus on exporting its products to foreign market with some new product lines such as uPVC plastic pipe, black-steel pipe, and

galvanized steel pipe… Simultaneously, HSG will continuously expand its distribution channel networks in order to gain more market shares and

make its products more available in the future. Along with these strategies, HSG always try to reduce its production costs to match with its cost

leadership strategy by non-stopped improvements in producing technology and investments in new factories.

Focusing on exports

Non-stopped improvements

and investments to reduce costs

Expand distribution

network


FINANCIAL ANALYSIS:

1. Accounting Analysis:

a. Balance sheet:

As being observed in the balance sheet of Hoa Sen Group over years, total

holding amount of cash was very low which only comprised of 1% - 2% to

the total assets of HSG. If this trend continues in the future, HSG may get

into the trouble of liquidity risk due to lack of cash in hands to finance its

operation, especially in recession period of Vietnam in recent years.

FY 2008 – 2009: Ease of Credit sales

At the end of 2008, HSG faced to the problem of nearly bankruptcy due to

the financial crisis and the dramatic reduction in steel products’ demand;

the result was the enormous increase in inventories which was shown in

the common size of inventories in total assets (from 31% to 41% in 2008)

and the percentage change in inventories (rose 71% compared to 2007). At

that time, HSG had to change its sales policies and made more sales on

credit in order to struggle against these problems, even wrote off its

inventories. Thus, the inventories of HSG in 2009 decreased significantly

and the accounts receivable went in the opposite direction. Sales in 2009

were also improved compared to 2008. The provision for decline in value

for inventories also decreased because of this write-off. In this fiscal year,

accounts receivable in balance sheet highly jumped up by 72% from VND

174,219,737,489 to VND 298,978,339,425 and inventories decreased by

15%. However, in fact, the sales were just recorded whereas the cash

flows had not existed yet.

FY 2009 – 2010: Long-term investments

In 2010, due to the effect of loosening the sales in credit policies in 2009,

HSG still engaged into the problem of collecting money from customers.

Hence, the AR in 2010 rose up by 88%. Moreover, in 2010, the demand of

steel products declined, the supply of these products exceeded the demand

of the market and this made the inventories of HSG be stuck.

0%

20%

40%

60%

80%

100%

2012 2011 2010 2009 2008 2007

Cash & Cash equivalent Short-term investment

Account Receivables Inventories

Other Current Assets LONG-TERM ASSETS

Figure 2.1: Total assets in percentages

-

2,000,000,000,000

4,000,000,000,000

6,000,000,000,000

8,000,000,000,000

10,000,000,000,000

12,000,000,000,000

2012 2011 2010 2009 2008 2007

Account Receivables Inventories Sales

Figure 2.2: Sales, AR and Inventories over years

-

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

2,500,000,000,000

3,000,000,000,000

2012 2011 2010 2009 2008 2007

Fixed Assets Construction in progress expenses


At the end of 2009, HSG dealt with many issues but it still decided to

implement many big investment projects (not only in steel industry) such

as the beginning of first section of Hoa Sen – Phu My factory, Hoa Sen –

Gemadept Logistics and International Port Corp... because it might take

the advantage of lower costs of materials and the benefits from

government’s economic stimulus package. Thus, the fixed assets values in

this fiscal year pursued a high jump of 86% and the construction in

progress expenses also augmented. In this FY, it also activated the

production lines of galvanized steel sheets with NOF technology.

In 2010, the short-term debt and long-term debt rose up considerably in

purpose to finance its operations and for investments by 134% and 31%,

respectively. Additionally, HSG had issued more shares to get more

capital from the shareholders to support HSG’s investments in this year

and raised its number of outstanding shares to 96,931,578 shares which

increase the charter capital from VND 839.96 billion up to VND

1,007.907 billion. The increase in short-term borrowing is because of the

downturn trend in demand of the market; HSG could not sell its

inventories effectively. Inventories in this year jumped up by 94%.

FY 2010 – 2011: Focusing on Core business and the Saturation of

domestic market.

In 2011, Hoa Sen Group sold large amount of fixed assets and its projects

on other fields: transferring 45% total capital of Hoa Sen – Gemadept

Logistics and International Port Cor., sold Hoa Sen Phuoc Long B

Apartment,…For that reason, the cash flow from disposals of fixed assets

in 2011 increased up to over VND 62 billion (+1,570%). This action is in

order to help HSG focus on developing and improving its core business in

steel industry. For instances, in 2011, it successfully finished the first

phase of Hoa Sen – Phu My factory and opened 13 new distribution

branches in domestic regions. From FY 2010 – 2011, HSG has started to

export its products to foreign countries, especially in ASEAN and gained

the net sales of USD 101 million. Thus, the sales growth in 2011 was

significant compared to other years. This is the primary reason why HSG

-

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

2,500,000,000,000

2012 2011 2010 2009 2008 2007

Short-term, long-term borrowings and

Equity of HSG

Short-term borrowings Long-term borrowing



still achieved the high growth in sales whereas the market was down in

this year.

On the other hand, the short term borrowing and long term borrowing in

this FY was getting higher because in 2011, the domestic market was

stuck and the demand declined rapidly. HSG did not have enough

domestic currency cash-in-hand to finance its operations and its

investments. Besides that, because the completion of phase 1 of HS-PM

Factory, HSG must purchase more machinery for this factory and

postponed to repay its suppliers (the accounts payable also went up by

almost 149%).

FY 2011 – 2012: Speeding up

Since the completion of phase 1 of Hoa Sen – Phu My factory in 2011, the

productivity of HSG has increased much more than previous years. HSG

also implemented the additional NOF production line with total capacity

of 120,000 tons to meet customers’ demands. Furthermore, the revenue

from exporting to foreign countries was about USD 180 million which is

78% higher than 2011 and HSG got 40% of the galvanized steel market in

Vietnam.

In this FY we may observe a decrease in construction in progress expenses

due to the reason above. In 2012, HSG has focused on how to increase its

sales and reduce the fixed assets investments. As a result, the sales in this

year still grew whereas the amount of borrowings was reduced by 10%

and 6% compared to 2011.

In fact, HSG mostly finance its operation and investments by borrowing

debts; when it is necessary and HSG needs to avoid engaging into credit

risk, it will issue more shares and use equity to support its investment e.g.

in 2010.

Another considerable point during 2011 – 2012 is that in these two years,

HSG has bought back many shares from the market. For example, in 2012,

HSG bought back over 3 million shares and put them as Treasury shares.

There are three main reasons why a company might choose to buy back its

share: (1) this company is afraid of being acquired by the foreign

-

200,000,000,000

400,000,000,000

600,000,000,000

800,000,000,000

1,000,000,000,000

1,200,000,000,000

2012 2011 2010 2009 2008 2007

Trade Accounts Payable


(10,000,000,000,000)

(5,000,000,000,000)

-

5,000,000,000,000

10,000,000,000,000

15,000,000,000,000

2012 2011 2010 2009 2008 2007

Sales Cost of sales Gross Profit


organizations which have strong financial power; (2) the market price of

that share is on the downturn trend and the buy-back action aimed to limit

the declining state in price and (3) this company buy back shares to be

Treasury share in order to be the bonus or welfare for its senior managers

and high-executives. And the reasons of HSG here may be the first and

third ones because in fact, in 2012, the income and bonus of Mr. Phuoc Vu

Le was over VND 84 billion. Furthermore, in recent years, HSG has

become one of largest exporters in ASEAN market and so there are many

foreign organizations want to acquire this company.

b. Income Statement and Cash Flow Statement:

The cost of goods sold of HSG did not fluctuate too much in last 5 years

which means that HSG had successfully control its producing costs in

order to support the strategy of cost leadership. Therefore, its gross profit

has grown for years.

From the graph combining sales and cash flows from operation of HSG

over years, we may realize that in first 4 years, there were big gap between

them and these two variables seem to move in different direction. As

mentioned above, in the FY 2008 – 2009, HSG nearly went bankrupt and

it had to make sales on credit; thus, the cash flows from operation in 2010

in lower than the sales because HSG could not collect the money at that

moment. This gap is due to the difference between the cash accounting in

cash flows and accrual accounting in sales. Another reason leads to the

falling in cash flow in 2010 will be presented the cash flow analysis part.

In 2011, the net income fell down by 26% primarily due to the increase in

financial expenses (+23%), especially interest expenses because in this

year, Vietnam was in trouble of high inflation rate, the borrowing interest

rates from banks were also higher compared to previous years; specifically

to steel producer companies, the needs of importing materials from foreign

countries required them to borrow more from the banks. Finally, they bear

more financial expenses and the interest rate risks. HSG in this year was

also affected by this fact.

(600,000,000,000)

(400,000,000,000)

(200,000,000,000)

-

200,000,000,000

400,000,000,000

600,000,000,000

2012 2011 2010 2009 2008 2007VN

D

Year Net profit after tax

Net cash inflows from operating activities


2. Ratio Analysis:

a. Liquidity ratios: Current ratio and Quick ratio

As we may observed, from 2009 – 2011, both current ratio and quick ratio

got downward because in those years, HSG invested larger amount of

money for its projects and it had to struggle against the falling in domestic

demands; thus, it was lack of cash in hands and must borrow much more

money to do all these things. Consequently, the ability to cover its short-

term obligations dropped down from 1.046 to 0.881; the quick ratio also

pursued the same trend. In 2009, changes in these two ratios went on

opposite sites. The reason behind this was the declining of inventories in

2009 then the quick ratio was pushed up instead of going down as current

ratio. If this trend had continued, HSG would have got into default risk in

near future. Fortunately, in 2012, these two ratios shows positive signs

when they began to rise again due to the reduction in short-term debt.

b. Efficiency ratios: Turnover ratios

- Receivables turnover and Day receivable outstanding:

As being discussed above, due to write-off of inventories and loosening of

sales on credit policies, in 2010, the AR turnover was only 11.48 which is

lower than 2009 (11.99) and that means in this year, HSG could hardly

collect money from its customers. So it took about 32 days for HSG to

collect receivables in one sales cycle in this year. Although this number is

higher than 2008, it is the lowest compared to 2009, 2011 and 2012.

- Inventory turnover and Day inventories outstanding:

In 2008, the inventory turnover was decreasing dramatically from 3.21 in

2007 to 2.22 and the days inventories held increased to 165 days before

sales. These changes are the results of the global financial crisis in 2008

which greatly impact the steel industry at that time. Fortunately, thanks to

the decision of easing to make sales on credit, the inventory turnover has

been rising steadily again after that year and it shows that HSG has known

how to use its working capital efficiently and effectively although in 2010

and 2011, it could not smoothly sell its inventories.

.968 .881

.961 1.046 1.080

1.306

.396 .303

.357 .399

.228

.495

2012 2011 2010 2009 2008 2007

Liquidity ratios

Current ratio Quick ratio

.000

5.000

10.000

15.000

20.000

25.000

2012 2011 2010 2009 2008 2007

Turnover ratios

Account Receivable turnover

Inventories Turnover

Payables Turnover


- Payables turnover and days payables outstanding:

2009 – 2011: As many investment projects were implemented, HSG did

not have much money to pay its suppliers, especially in 2011; therefore,

the payables turnover ratio in these years fell down from 13.65 in 2008 to

9.24 in 2011. This is corresponding to the increases in trade accounts

payable mentioned in previous section of this report. The lowest level in

2011 made the days payables outstanding this year also rise up to 40 days.

In 2012, after completing many big projects and being able to generate

high net profit, HSG was capable of repaying these amounts.

- Fixed assets turnover and Assets turnover:

Fixed assets turnover indicates the amount of sales generated for each

Dong invested in fixed assets. Over 6 years, we can see that this ratio was

averagely greater than 2 which means that with 1 dong invested in fixed

assets, HSG was able to generate 2 dong in sales. Thus, HSG’s

investments in fixed assets are very profitable, and highly-effective. The

same conclusion may be drawn from the assets turnover ratio.

c. Profitability ratios: ROE, ROA, GPM,…

Return on equity (ROE) & Return on Assets (ROA): measures the

amount of net income returned as the percentage of shareholders’ equity.

It may be observed that in period of 2009 – 2011, the return on equity

decreased significantly whereas the financial leverage still grew which

means that HSG invested a huge amount of equity capital into fixed assets,

expansions of its distribution channels and infrastructures… but did not

generate equivalent revenues and net incomes in those years. Moving in

the same direction to ROE, ROA also showed decreasing trend in this

period. Why did this happen? From 2009 – 2011, HSG invested lots of its

money in order to expand its business (such as Ton Hoa Sen Phu My

Factory, NOF production lines…) and in hope that in the future, it would

be able to reduce its costs and improve its productivities appreciably. But

these investments had not been operational yet; in addition to that, the

frozen of real estate market also had considerable effect on the sales of

3.811 3.359

2.971 2.651

2.280 2.451

1.799 1.563 1.406 1.234 1.067 1.191

2012 2011 2010 2009 2008 2007

Assets and Fixed assets Turnover

Fixed assets Turnover Asset Turnover

0%

5%

10%

15%

20%

25%

30%

2012 2011 2010 2009 2008 2007

ROA & ROE

Return on assets (%) Return on equity (%)

0% 10% 20% 30%

2012

2011

2010

2009

2008

2007

Margin ratios

Net Operating profit margin(NOPAT/Sales)

Gross Profit margin (%)


HSG. Fortunately, in the fiscal year of 2011 – 2012, HSG has set up its

mission statement to generate a strong growth rate in revenues and net

incomes of about 10.126 billion VND (increased by 24% compared to

2010-2011) and 240 billion VND, respectively. At last, since 2012, HSG’s

investments has started to work, the revenue and net income were pushed

up again and both ROE and ROA increased considerably (ROE increased

by over 10% and ROA increased by over 4%).

Gross profit margin (GPM): measures the ability of a firm to control its

production costs and price level. From the chart above, we can see that in

2009 and 2011, there were big falls in gross profit margin orderly by

4.78% and 6% which means that in these two years, HSG had faced with

the problem of controlling its price level due to the price competition in

aggregate market. Why?

- In 2009, due to the remaining impacts of world’s financial crisis

in 2008, every industry was down and steel industry was not an

exception → higher pressure on world’s steel price.

- In 2011, real estate market and financial market in Vietnam

started to have many problems such as bad debts, the frozen...

Vietnam’s economy was also down accordingly, especially to

steel industries (construction materials) → harsh price

competition + price steel in 2011 decreased.

- In 2012, the GPM ratio began to rise up again .Because after the

phase 1 of Hoa Sen – Phu My Factory was completed, HSG is

now able to control its costs effectively than before.

Net Operating Profit margin: NOPAT/Sales

The ability to generate after-tax profit operating profit after paying for

variable costs of production such as SG&A, raw materials,…In other

words, it indicates the ability to control operating costs of a company.

In the period of 2008 – 2011, the net operating profit margin fell down;

this is the consequence of the high growth in selling and financial

expenses which implied that HSG had partially lost its ability to control


operating costs. Since 2012, it shows a positive sign when this margin

started to increase.

Financial Leverage Ratio:

This ratio shows a company’s total assets per VND of shareholders’

equity. The higher this ratio is, the more debt was used. According to the

historical data, the highest level of financial leverage was 3.32 in 2011

which means that in this year, HSG borrowed at the highest amount in

recent 5 years.

3. Cash flow analysis:

2007 – 2008: OCF and CFs from Investing are negative, but CFs from

Financing is positive

In this fiscal year, due to the downturn in economy by the impacts of

financial crisis, although the equity was raised more and the proceeds from

borrowings were also about 2,000 billion, these equity and borrowings

could not effectively generates adequate level of sales. Additionally, in

2008, HSG was not able to sell its inventories out of the market because at

that time, the demand for steel products fell down dramatically. This is

another reason explains why inventories account of HSG in 2008 rose by

207% in the cash flow statement. As a result, the CFO of HSG in this FY

also was negative.

Conclusion: FY 2007 – 2008, HSG did not effectively and efficiently

invest its capital in order to generate sales. Moreover, being affected by

the global financial crisis, its sales growth rate decreased dramatically to

only 2%.

2008 – 2009: OCF is positive, CFs from Investing and Financing are

negative

To get out of the risk of bankruptcy, HSG accepted to write off its

inventories and make more sales on credits to its customers in 2009. We

may clearly observe from the cash flow statement, the AR account

increased by over 300% and in contrast, the inventories account fell down

by over 450%. Due to these working capital accounts’ changes, CFO of


HSG in 2009 turned back to be positive again although it may bear the risk

of default risk and declining value of its inventories. Another point needs

to be concern is that in 2009, the CF from financing activities was

negative; the negative value was generated by the increase in repayment of

borrowings of HSG. In this year, after receiving the cash flows from big

write-off of its inventories, HSG mostly use this amount to pay back the

debt and reduce the burden amount of borrowing.

2009 – 2010: OCF and CFs from Investing are negative, but CFs from

Financing is positive

HSG had the strategy of constructing new plant in this year, thus, cash

flows from investing of 2010 is obviously negative. Due to this large

investment in fixed assets, HSG will have greater potential of growth in

the future as well as better competitive position than the others. However,

the firm had problem with OCF because of the increasing in account

receivables and inventories. These are the results of the impacts by

macroeconomics conditions and the remaining effects of financial crisis

from 2008: the interest rates were higher, the steel price of the world

decreased in May, June and July of 2010 which made the domestic steel

price fluctuated even more than the global market. Thus, 2010 seems to be

an undesirable year for steel producers. For that reason, in this year, we

may see a large amount of inventories was stuck in the cash flow

statement of HSG which was about VND 698 billion (+476% compared to

2009). Furthermore, in 2010, HSG continued to make more sales on

credits but it simultaneously engaged into the problem of uncollectible

receivables from 2009. Consequently, the AR accounts in CFS of HSG in

2010 rose up again from approximately VND 156 billion to VND 391

billion (151%). That explained why in 2010, the CFO of HSG was

negative and much more lower compared to 2009 although the sales

increased because this account was still recorded when the transactions

took place (accrual accounting). However, looking at the CF from

financing, it shows that in 2010, HSG focused on invest in fixed assets

such as real estate projects, factory projects…so it made more borrowing

from the creditors (the proceeds from borrowing rose up by 83%) and also

raised more capital by issuing more stocks.


2010 – 2011: OCF is positive, CFs from Investing is negative, CFs

from financing is positive.

In 2010, with the saturation in domestic steel market, HSG had realized

that if it still mainly relied on domestic market to generate its sales, it

would fail sooner or later. Therefore, in next FY of 2010 – 2011, it began

to export its products to ASEAN countries to gain more sales. Therefore,

sales growth rate in 2011 jumped up to 66%. However, in 2011, due to

still-high borrowing interest rate in domestic banking system, HSG had to

bear more costs to financial expenses, it shows in the CFS in 2011 the

interest paid was about VND 280 billion which is 72% higher than 2010.

In this FY, the accounts payable increased by over 107% because in 2011,

the phase 1 of Hoa Sen – Phu My Factory is completed, HSG had to

purchase more machinery and materials from other countries to support its

factory. Therefore, the unpaid amount to suppliers rose up highly. And the

proceeds from borrowing also increased by 32% due to the same reason.

Thanks to appropriate changes in strategy of exporting, the inventories

account in 2011 had been improved from 2010 (-19%) and another

positive sign was the decrease in accounts receivable of HSG in 2011 from

VND 391 billion down to VND 103 billion (-74%). Therefore, the CFO in

2011 pursued a positive value again from 2010.

2011 – 2012: OCF is positive, but CFs from Investing and Financing

are negative

It seems that in 2012, everything started to recover at HSG, the prior fixed

assets investments in previous years begun to show their effectiveness.

Although the sales growth rate in 2012 was not as high as 2011 and 2010

due to the impact of pessimistic frozen real estate market, the inventories

and accounts receivable accounts in CFS shows a very optimistic view:

Inventories decreased by 183% and the accounts receivable also fell down

by 28%. Until this year, HSG seems to be able to manage its working

capital more efficiently and smooth its operation after largely investments

years over years. On the other hand, HSG continued to borrow more

money in order to finance its investments for phase 2 of Hoa Sen – Phu


My factory which was clearly expressed by the increase in proceeds from

borrowings of 9%.

PROSPECTIVE ANALYSIS

1. Forecasting: on sales growth rate

Overall macroeconomic: In January 2013, World Bank has reduced the

global growth rate for 2013 from 3% to 2.4% and for 2014 from 3.3% to

3.1%. This is a negative sign for the world’s economy. Specifically in

Vietnam, the GDP growth rate in 2012 was only 5.03% which is lower

than 2011. According to JPMorgan, the GDP growth rate of Vietnam in

2013 may be still at low-growth level at 5.2%. Although this growth rate

seems to be higher than 2012, Vietnam economy is predicted to be in

downturn trend in next few years.

Steel industry:

Global steel market: Excess capacity remains the most significant issue in

the steel sector. The reduction in the demand of steel products is mainly

because of the falling of the world’s economy, especially in European

countries

Vietnam’s steel market: Over 2012, the growth rate of steel market in

Vietnam was just approximately 3%. Although steel for construction

consumption was totally 4.5 million tons which is lower than 10% to

2011, the consumption for usual steel products such as steel roll, cold

rolled steel, galvanized steel sheets… had grown up 20%-40%. The

supply was higher than the demand; therefore, the inventories for steel

companies were stuck → Domestic steel industry is forecasted to be more

challenging than 2012

The domestic steel market may face to harsh price competition from

foreign steel exporters, especially to China in the following years.

Real estate market in Vietnam has not been recovered yet in 2012 and

although the government has issued the bailout package of VND 30,000

billion for this market, real estate market in 2013 will not grow instantly.

6.800% 6.990% 7.100% 7.300% 7.800%

8.400% 8.230% 8.460%

6.310%

5.320%

6.780%

5.890%

5.030%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP Growth rate

GDP Growth rate


For those information, we forecasted that in 2013 and 2014, although the

growth rate of HSG just only 10% which is lower compared to 2012 but

from 2015, the growth rate would be higher because at that point, the

economy is predicted to recover and the real estate market will be able to

get out of the frozen status.

2. Forecasting: Financing Strategy in the future

Based on historical data, it seems to be that HSG mostly finances its operations and its investments by short-term and long-term borrowing. At the

end of 2012, the total amount of short-term borrowing was about 2,039 billion which is higher than the total equity of HSG. It shows that when

HSG needs large amount of capital to invest in urgent investments, it may raise its capital by issuing shares. Thus, it is expected in 2015, when it

finishes phase 2 of Hoa Sen – Phu My factory and starts its plan on HRC factory, both long-term borrowing and shareholders’ equity would rise in

order to finance this investment.

3. Forecasting: Pro Foma Balance Sheets and Cash flow Statement

PRO FOMA BALANCE SHEET

CURRENT ASSETS

3,240,396,292,011

3,771,740,579,730

5,980,991,642,414

6,589,725,124,142

6,960,304,026,363

Cash & Cash equivalent

(312,017,950,331)

(170,306,070,451)

1,525,490,953,783

1,522,666,976,736

1,031,521,817,904

Account Receivables

787,668,910,769

866,435,801,846

970,408,098,067

1,145,081,555,719

1,374,097,866,863

Inventories

2,473,808,323,168

2,721,189,155,484

3,047,731,854,143

3,596,323,587,888

4,315,588,305,466

Other Current Assets

290,937,008,406

354,421,692,850

437,360,736,422

325,653,003,799

239,096,036,129

LONG-TERM ASSETS

3,224,718,611,760

3,534,946,200,099

3,944,446,616,706

4,632,407,316,607

5,534,400,234,255

Fixed Assets

3,102,275,883,391

3,412,503,471,730

3,822,003,888,338

4,509,964,588,239

5,411,957,505,887

Long-term Investment

50,451,333,403

50,451,333,403

50,451,333,403

50,451,333,403

50,451,333,403

Other Long-term Investment

71,991,394,965

71,991,394,965

71,991,394,965

71,991,394,965

71,991,394,965

TOTAL ASSETS 6,465,114,903,771 7,306,686,779,828 9,925,438,259,121 11,222,132,440,749

12,494,704,260,618

LIABILITIES

4,210,597,785,786

4,832,934,643,120

5,734,339,614,609

6,708,189,176,952

7,572,760,626,226

CURRENT LIABILITIES

3,513,341,938,090

4,065,953,210,655

4,890,660,038,897

5,948,877,558,811

6,927,345,750,806

Short-term borrowings

2,243,918,325,075

2,692,701,990,090

3,365,877,487,612.20 4,207,346,859,515

4,838,448,888,442


1,100,685,078,747

1,210,753,586,622

1,356,044,017,017

1,600,131,940,080

1,920,158,328,096


Other payables

168,738,534,268

162,497,633,943

168,738,534,268

141,398,759,216

168,738,534,268

LONG-TERM LIABILITIES

697,255,847,696

766,981,432,465

843,679,575,712

759,311,618,141

645,414,875,420

Long-term borrowing

697,255,847,696

766,981,432,465 843,679,575,711

759,311,618,141

645,414,875,420

SHAREHOLDERS' EQUITY

2,254,517,117,985

2,473,752,136,708

4,191,098,644,512

4,513,943,263,798

4,921,943,634,392

CAPITAL & RESERVES


1,007,907,900,000

1,007,907,900,000

2,015,815,800,000

2,015,815,800,000

2,015,815,800,000

Share Premium

451,543,290,363

451,543,290,363

903,086,580,726

903,086,580,726

903,086,580,726

Undistributed Earnings

795,065,927,622

1,014,300,946,345

1,272,196,263,786

1,595,040,883,072

2,003,041,253,666

TOTAL LIABILITIES AND

EQUITY 6,465,114,903,771 7,306,686,779,828 9,925,438,259,121 11,222,132,440,749 12,494,704,260,618

PRO FOMA CASH FLOW STATEMENT

CASH FLOW FROM OPERATING

ACTIVITIES

Net Profit

292,881,050,889

322,169,155,978

360,829,454,695

425,778,756,540

510,934,507,848

Adjustment for:

Depreciation

282,944,879,489

311,239,367,438

348,588,091,530

411,333,948,006

493,600,737,607

Interest expense

367,351,823,722

432,113,482,616

525,772,488,617

620,334,241,496

684,933,035,707

Operating profit before changes in working

capital

943,177,754,100

1,065,522,006,032

1,235,190,034,843

1,457,446,946,042

1,689,468,281,162

Increase in receivables

(29,767,367,119)

(78,766,891,077)

(103,972,296,221)

(174,673,457,652)

(229,016,311,144)

Decrease/ (increase) in inventories

(933,986,215,297)

(247,380,832,317)

(326,542,698,658)

(548,591,733,746)

(719,264,717,578)

(Decrease)/ increase in payables

616,273,785,326

110,068,507,875

145,290,430,395

244,087,923,063

320,026,388,016

Interest expense

(367,351,823,722)

(432,113,482,616)

(525,772,488,617)

(620,334,241,496)

(684,933,035,707)

Net cash inflows from operating activities

228,346,133,289

417,329,307,897

424,192,981,740

357,935,436,211

376,280,604,750

CASH FLOWS FROM INVESTING

ACTIVITIES

Purchases of fixed assets

(799,800,929,136)

(621,466,955,777)

(758,088,508,138)

(1,099,294,647,907)

(1,395,593,655,255)

Net cash outflows from investing activities

(799,800,929,136)

(621,466,955,777)

(758,088,508,138)

(1,099,294,647,907)

(1,395,593,655,255)

CASH FLOWS FROM FINANCING

ACTIVITIES

Cash received from issuing stock, other

owners' equity

Purchase of Treasury shares 1,459,451,190,363

-

-

Net Proceeds from borrowings

294,938,989,924

448,783,665,015

673,175,497,522

841,469,371,903

631,102,028,927


Dividend paid

(102,934,137,254)

(102,934,137,254)

(102,934,137,254)

(102,934,137,254)

(102,934,137,254)

Net cash (outflows)/inflows from financing

activities

192,004,852,669

345,849,527,761

2,029,692,550,631

738,535,234,649

528,167,891,673

Net (decrease)/increase in cash and cash

equivalents

(379,449,943,178)

141,711,879,880

1,695,797,024,234

(2,823,977,047)

(491,145,158,832)

Cash and Cash equivalents at the beginning

of year

67,431,992,847

(312,017,950,331)

(170,306,070,451)

1,525,490,953,783

1,522,666,976,736

Effect of foreign exchange differences

Cash and cash equivalent at the end of year

(312,017,950,331)

(170,306,070,451)

1,525,490,953,783

1,522,666,976,736

1,031,521,817,904

4. Sensitivity analysis:

With the basis point equal to 50, we have constructed the sensitivity analysis to check whether that how sensitive the price is when there are changes

in WACC or sustainable growth rate. And we got the table as follow:

WACC

Growth rate

15.31% 15.36% 15.41% 15.46% 15.51%

7.90% 42,275 41,610 40,906 40,307 39,669

7.95% 42,827 42,153 41,441 40,834 40,189

8% 43,386 42,704 41,983 41,369 40,715

8.05% 43,953 43,262 42,532 41,910 41,249

8.10% 44,528 43,829 43,089 42,459 41,789

From the result of sensitivity analysis above, we may observe that the price of HSG stock fluctuate when there are changes in WACC and the

growth rate. Therefore, HSG’s share price is very sensitive to these variables’ changes


Bibliography

Stockbiz. (2013, May 3rd). Retrieved from http://en.stockbiz.vn/Stocks/HSG/Overview.aspx

BSB. (March 30th, 2012). Báo Cáo Phân Tích Doanh Nghiệp - Công ty cổ phần tập đoàn Hoa Sen. BSB.

Eng, M. K. (March 18, 2013). HSG - Strong growth prospect priced-in.

Group, H. S. (2008-2012). Annual Financial Statement . Hoa Sen Group.

Group, H. S. (2012). Báo Cáo thường niên 2011-2012. Hoa Sen Group.

Group, H. S. (2013). Hoa Sen Group. Retrieved from http://www.hoasengroup.vn/gioi-thieu/giới-thiệu-chung

Lộc, V. T. (2013, 1 28). Hoa Sen Group. Retrieved from Hoa Sen Group: http://www.hoasengroup.vn/tin-tuc/điều-chỉnh-chiến-lược-kinh-doanh-để-

phát-triển

Nhat, T. (2012, November 2nd). Diễn đàn Doanh nghiệp. Retrieved from http://dddn.com.vn/20121101102650292cat44/thep-lao-dao-sao-hoa-sen-

group-van-khoe.htm

Unknown. (2013, January 8th). CafeF. Retrieved from http://s.cafef.vn/HSG-99152/chu-tich-hoa-sen-group-nhan-gan-84-ty-dong-co-tuc-va-luong-

thuong.chn

bav report hsg (final)

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