Essay final report Corporate finance Báo cáo cuối kỳ môn TÀI CHÍNH DOANH NGHIỆP: ĐÁNH GIÁ TÌNH HÌNH TÀI CHÍNH TẬP ĐOÀN TÔN HOA SEN VÀ QUYẾT ĐỊNH ĐẦU TƯ CỔ PHIẾU

CORPORATE FINANCE REPORT FINANCE EVALUATION OF HOA SEN GROUP Báo cáo cuối kỳ môn TÀI CHÍNH DOANH NGHIỆP: ĐÁNH GIÁ TÌNH HÌNH TÀI CHÍNH TẬP ĐOÀN TÔN HOA SEN VÀ QUYẾT ĐỊNH ĐẦU TƯ CỔ PHIẾU Vietnamese steel industry currently focuses on producing long steel rather than flat steel due to the low capital investment, short time to build plants and high investment efficiency. To flat steel products, in order to ensure the efficiency, the capacity of factories must be large, big capital investment but the long recovery period. As a result, many large corporations are investing in construction of largescale steel mill. In the future, the structure of long steel and flat steel production in Vietnam will not be as unbalanced as it is now.

STEEL INDUSTRY

NHÓM 1

HCMC, December 21, 2018 TABLE OF CONTENT



Introduction to Steel Industry 3

Company Activities 5

Trend Analysis 6

Du-Pond Analysis 13

Benchmark Analysis 16

WACC 24

Stock Valuation 27

Reference Resources: 29

Appendix A 30

Introduction to Steel Industry

Vietnamese steel industry is very young, established in the 60s of the 20th century In the period from 1975 to 1990, the steel industry of Vietnam developed slowly, mostly using the source of steel from Eastern European countries and Soviet Union, the output at this period is maintained

at 40,000 – 80,000 tons/ year

Nowadays, Vietnamese steel industry has many innovations and strong growth The

establishment of the Vietnam Steel Corporation in 1990 has contributed significantly to the stability and development of the industry From 2002 to 2005, many private enterprises were established, Vietnamese steel industry considerably developed with the total capacity of over 6 million tons per year

Currently, there are over 60 steel manufacturing companies, three of them are large steel

producers in the market: Southern Steel Company with capacity of 910,000 tons per year;

Pomina Steel Corporation with the capacity of 600,000 tons/ year; and Thai Nguyen Iron and Steel Company with the capacity of 550,000 tons/ year

Basically, the steel products consist of two types: long steel and flat steel At present, Vietnam is unbalanced in production of two types of these steel

Long steels are used in the construction industry such as bar or coil steel Most steel

manufacturers in Vietnam produce only common products such as rebar D10- D41, rolled steel coil f6- f10 and some types of small and medium size steel Large long steel (larger than D41) is used for construction of large projects which are not able to produce by themselves but have to

be imported from foreign suppliers The current capability of Vietnam’s long steel is over 6 million tons, nearly double the demand

Flat steel is used in industry such as shipbuilding, manufacturing machinery industry In 2007, 4 steel plate manufacturers operated: Phu My Steel Factory with the capacity of 0.25 million tons, Sunsco company with 0.2 million tons, Hoa Sen Group with 0.18 million tons and Vinashin with0.5 million tons Thus, the country’s total flat steel production capability is 1.1 million tons Whereas, the current demand is about 4-5 million tons, if we operate at full capacity, our countrystill has to import about 80% of flat steel

Vietnamese steel industry currently focuses on producing long steel rather than flat steel due to the low capital investment, short time to build plants and high investment efficiency To flat steelproducts, in order to ensure the efficiency, the capacity of factories must be large, big capital investment but the long recovery period As a result, many large corporations are investing in construction of large-scale steel mill In the future, the structure of long steel and flat steel

production in Vietnam will not be as unbalanced as it is now (According to Dao Thi Thu Hang

(2009) Bao cao nganh thep Available at:

https://www.shs.com.vn/Handlers/DownloadReport.ashx?ReportID=797)

 Producing steel purlins, galvanized purlins

 Manufacturing black steel pipes, galvanized steel pipes and other alloys

 Manufacturing steel mesh, galvanized steel wire, steel wire

 Producing PVC ceiling tiles

 Producing construction materials

 Buying and selling building materials, capital goods and consumer goods

 Renting warehouse and transporting goods

 Building industrial and civil constructions

 Producing cold rolled steel coils

 Leasing machinery and equipment and other tangible belongings

History and Achievement of HSG:

8/8/2001: Hoa Sen Joint Stock Company, precursor of Hoa Sen Group Joint Stock Company, was established

19/5/2016: Investing in the Hoa Sen Yen Bai Hotel and Residence Complex, marked ofcially the development strategy of Hoa Sen Group in the future 06/6/2016 Hoa Sen Nghe An Plant at Dong Hoi Industrial Park – Nghe An province put Galvanizing line with NOF technology with capacity of 400,000 tons/year into operation and produced successfully the rst nished steel coil 30/11/2016: Achieving "Vietnam Value" in 2016 for three major product groups: HOA SEN STEEL SHEET HOA SEN PLASTIC PIPE HOA SEN STEEL PIPE.

01/3/2017: Hoa Sen Group started the construction of Hoa Sen Yen Bai Steel Pipe Plant Project - the 11th plant of Hoa Sen Group and the 5th Plant in the North market

29/5/2017: Hoa Sen Group was honorably voted for “50 Best Vietnamese Listed Companies” by Forbes Vietnam (5 consecutive years)

6/2017: Hoa Sen Group was honorably awarded for “Top 50 Vietnam’s Best Performing

Companies awarded by Business Review Magazine (4 consecutive years)

7/2017: Hoa Sen Group achieved “Top 30 Best Annual Reports 2017

9/2017: Hoa Sen Group was honorably awarded for “Typical South East Enterprise 2017”

With the flexible and creative management of Mr Le Phuoc Vu and his associates, from a smallcompany with initial charter capital of VND 30 billion and 22 employees, Hoa Sen Group hasbecome one of the leading manufacturers and traders of steel sheet in Vietnam and a leadingexporter in Southeast Asia with chartered capital of VND 3,500 billion, revenues reachingnearly VND 20,000 billion, and after-tax profits reaching over VND 1,500 billion Hoa SenGroup has also created jobs for about 10,000 employees At present, Hoa Sen Group holds aleading position in manufacturing and trading steel sheets in Viet Nam with 33.1% market shareand 20.3% market share of steel pipe (According to Vietnam Steel Association 2016)

(source: https://www.hoasengroup.vn/en/home)

Trend Analysis

Short-term solvency, liquidity ratios:

Current ratio:

Quick ratio:

In the first look from the theory , if quick ratio is less than 1 the company will suffer with many trouble in dealing with debt But in the particular industry like Hoa Sen , the situation where having more inventories is normal or even better For example, in 2016, Hoa Sen had a big profitthank to inventories they store (https://infonet.vn/hoa-sen-group-trung-lon-nho-hang-ton-kho-post205564.info)

of its current liabilities There was a decline by 0.063 between 2016 and 2017, resulting from current liabilities in 2017 (6,757,387 million dong) was twofold in 2016 (13,427,904 million dong)

In general, the company’s equity multiplier had a slight decrease between 2015 and 2016 but thisratio was still high (3.24 – 3.15) Furthermore, this ratio for 2016 was the lowest in 2016 This indicates that more assets were funding by debt than equity in 2015 and 2016 When a firm’s assets are primarly funded by debt, the firm is considered to be highly leveraged and more risky for investors and creditors This also means that current investors actually own less of the

company assets than current creditors

Debt equity ratio:

In 2017, the debt equity ratio reached 3.14, which worried many shareholders leading to

withdraw shares of many owners The reason for that is company borrowed money from 30 banks to open more branches and operating system were too high.( https://news.zing.vn/vi-sao-ton-hoa-sen-co-doanh-thu-ky-luc-nhung-loi-nhuan-cham-day-post877215.html )

Efficient Ratios

Inventory turnover ratio:

During the period form 2016-2017, the Inventory Turnover decreased by 11% This means that the Inventories increased but at that time inventories is a problem of galvanized steel and steel industry to cope with fluctuations of imported materials Hoa Sen representative said that HRC price (an input materials) has increased by 28% over the same period, but the group cannot increase the selling price due to getting the market share purpose (https://baomoi.com/hoa-sen-va-ap-luc-no/c/27461957.epi)

Days’ sale in inventory

The rising index in 2016 and 2017 is due to the expansion of the retail distribution branch systemwith 60 newly established branches (https://hoasengroup.vn/vi/bai-viet/du-an-mo-rong-he-thong-phan-phoi-chi-nhanh-tap-doan-hoa-sen/2280) Therefore, the number of days for

inventory to be sold out has increased And that is the normal number of days that a company in

a large-scale heavy industry like Ton Hoa Sen to be able to sell their products

In general, the company's receivables are not worrying because with the high ratio and only 50%

of that from Short-term trade accounts receivable

Profitability Ratios:

Gross profit margin:

Gross Profit Margin Net Profit Margin

We can see that there is a big gap between Gross Profit Margin and Net Profit Margin The 2017 revenue increased by 46% compared to 2016 but the gross profit remains the same In addition, the operating costs and the costs of loans are part of the burden leading to very low net profit compared to the average level of companies (https://news.zing.vn/vi-sao-ton-hoa-sen-co-doanh-thu-ky-luc-nhung-loi-nhuan-cham-day-post877215.html)

Return on assets (ROA) and Return on equity (ROE)

We can see the gap between the two indicators in 2017.The reason is that the total debt that the company has to pay is more than double compared to the beginning of the previous year while the equity is almost unchanged That makes the company's shareholders disturbed to withdraw capital, causing the share price to drop to the current level of 6200 VND/share

(post877215.html)

https://news.zing.vn/vi-sao-ton-hoa-sen-co-doanh-thu-ky-luc-nhung-loi-nhuan-cham-day-Market value ratio:

Du-Pond Analysis

2017: HSG has a medium return on equity with 17% Breaking it down, HSG’s return on assets

is not that great with only 4% There are many problems with operating cost make Profit Margin very low and the total asset turnover number of 0.82 could be higher What gives HSG not suffer with deeply crisis is their equity multiplier of 4.15 This number means that looking at the money that shareholders have invested into the company, HSG was able to gain more than 3 times the amount of assets with that money But most of HSG assets is created by debt

DuPont Analysis (2017)

2015 and 2016: In the first look, the problem with HSG in 2018 still happens in two past years

This is very low Profit Margin (0.04 in 2015 and 0.08 in 2016) Operating cost through the year

is still very high So the result of this problem is ROA (very low at 0.02 in 2015 and 0.055 in

2016) But the ability of using the resource of HSG is good with high TAT rate In 2015 and

2016 we also saw the considerable jump of HSG stock in the market thanks to Equity Multiplier

when the assets in the comfortable zone (it means the debt that HSG borrow turn to the asset in

the control) In that time despite the low profit, people was willing to invest in HSG for high

share in the market (high revenue) and debt in the control (lower risk)

Return on Equity0.17

Return on Assets0.04

Equity Multiplier4.15

Profit Magin

0.05

Total assets21,438,456

Shareholder’s Equity 5,169,802

Total Asset Turnover

0.82

Net Income

1,331,649

Sales26,149,045

Sales26,149,045

Total Asset 21,438,456

DuPont Analysis (2016) and (2015) (from top to bottom)

Return on Equity 0.16

Return on Assets 0.055

Equity Multiplier 2.98

Profit Magin

0.08

Total assets12,309,986

Shareholder’s Equity 4,129,973

Total Asset Turnover

0.69

Net Income

1,504,190

Sales 17,893,715

Sales 17,893,715

Total Asset 12,309,986

Return on Equity 0.065

Return on Assets 0.02

Equity Multiplier 3.24

Profit Magin

0.04

Total assets9,440,614

Shareholder’s Equity 2,910,722

Total Asset Turnover

0.54

Net Income

652,875

Sales 17,446,872

Sales 17,446,872

Total Asset 9,440,614

Benchmark Analysis

Liquidity Ratio:

The ability to pay bills in the short-run, usually for a period of one year Liquidity is a

prerequisite for the survival of the firm These ratios are used to assess the short-term financial position of the concern They indicate the firm’s ability to meet its current obligation out of the current resources The liquidity ratio can be further classified as follows:

Current Ratio

This ratio explains the relationship between the current assets and current liabilities of a

business Current asset includes those assets which can be converted into cash with in a year’s time Current liabilities include those liabilities which are repayable in a year’s tiem

Hoa Sen 0.29

The quick ration of Pomina is 0.77, which compared to the Hoa Sen of 0.29 indicates the Pomina

‘s ability to service short-term obligation is more favorable than Hoa Sen The inventory ‘s Hoa Sen Corporation (6,562,465) account for more than half its current asset (12,763,371) resulting

in that this firm had a sign of short-term trouble

equivalents to pay off 2% of its current liabilities while Pomina has 4% to pay off its current liabilities

Leverage Ratio

Leverage ratio measure the ability of the firm to meet the cost of interest and repayment capacity

of its long-term loans Following some of the ratios:

Debt equity ratio

This ratio measures the financial leverage of a company by indicating what proportion of debt and equity a company is using to finance it assets A lower number suggests there is both a lowerrisk involved for creditors and strong, financial security for a company.

Total Debt Ratio

This ratio measures what proportion of debt a company is carrying relative to its assets A ratio value greater than one indicates a company has more debt than assets Naturally, companies and creditors prefer a lower number

Equity Multiplier

The equity multiplier shows the percentage of assets that are financed or owed by the

shareholders Conversely, this ratio also shows the level of debt financing is used to acquire assets and maintain operations

Summary:

Efficiency Ratios:

How efficiently or intensively a firm use its assets to generate sales

Inventory Turnover Ratio

Inventory turnover is a measure of how efficiently a company can control its merchandise, so it

is important to have a high turn This shows the company does not overspend by buying too much inventory and wastes resources by storing non-salable inventory It also shows that the company can effectively sell the inventory it buys

As you can see, Hoa Sen’s Turnover is 3.17 times This tells you that Hoa Sen only depletes and replenishes its inventory 3.17 times per year to satisfy consumer demand for its products

Meanwhile, Pomina depletes and replenishes its inventory 5.73 times per year which has more

competitive advantage than Hoa Sen This is because COGS of Hoa Sen is too high

(21,730,791million dong) and that of Pomina is only 10,265,817 million dong

Day’s sale in inventory

The days sales in inventory calculation, also called days inventory outstanding or simply days in inventory, measures the number of days it will take a company to sell all of its inventory In other words, the days sales in inventory ratio shows how many days a company’s current stock

of inventory will last

We can easily see that day’s sale in inventory of Hoa Sen is larger than that of Pomina This means that Pomina can convert its inventory into cash sooner than Hoa Sen This is because Hoasen’s inventory is about eightfold Pomina