Vietnam natural rubber sector pptx

28 March 2011 Vietnam natural rubber sector Table of Contents ...supported by limited supply of natural rubber 2 Higher demand from China thanks to inventory build-up and recovery Vietn

Vietnam natural rubber sector

Global natural rubber market Vietnam rubber sector

Stock recommendation

28 March 2011  Vietnam natural rubber sector

Table of Contents

supported by limited supply of natural rubber 2 Higher demand from China thanks to inventory build-up and recovery

Vietnam is one of the leading natural rubber producers in the world 6

… with 85-90% of the production is for export 8 Vietnam has little impact on global rubber price 9 Simple operation model and recurring earnings of domestic companies 10 Vietnam’s rubber companies have limited organic growth but can

benefit from high rubber price and depreciation of VND 11

Vietnam is one of the biggest rubber suppliers around the world Vietnam currently ranks fifth among

top world rubber producers and third among top world rubber exporters High growth rate combined with high production yield will be supportive factors to Vietnam’s natural rubber sector

Average natural rubber price is around 3,000 USD/ton in 2010 and still have positive supports to maintain this price level in 2011 thanks to (1) strong rubber demand from impressive recovery of world

automobile production industry - controlling 68% of total natural rubber demand (2) shortage of natural rubber supply due to drought and decline in international rubber plantations (3) oil price may pick up as world economic recovery strengthened However, natural rubber supply may increase significantly since

2012 as newly planted areas during 2005-2008 start production

The Vietnam Rubber Group – the state-owned enterprise – has significant influence over the Vietnam rubber sector as (1) its subsidiaries controlling around 40% of the total rubber production in

Vietnam (2) exerting controls over most biggest rubber companies, maintaining more than 60% stake in equitised rubber companies (3) fixing labor cost – the highest proportion in cost of goods sold – at around 40-42% of revenue, a mechanism to smooth earnings when rubber prices increase but also ensure margin and operational profits when rubber prices fall

Vietnam’s natural rubber sector has little organic growth in the next few years Most listed rubber

companies are facing declining plantations as they can be too old or replanted areas are not ready for yielding The revenue growth can only come from increasing rubber prices, which Vietnam has no impact

or influence on

Investment recommendation:

TRC and DPR are our two stock picks in natural rubber sector We appreciate TRC and DPR’s

capability in maintaining outputs over the next two years thanks to their younger age profiles among peers, considering limited supply is the catalyst of higher rubber prices and improved margin

Current price (VND) 56,500 60,000 36,800 62,500Target price (VND) 68,000 69,000 40,600 51,500

Capitalization (VND bn) 1,702 2,688 2,951 1,079

2010 Consumption volume (ton) 12,800 16,470 31,006 6,518

2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0

Extending the favourable condition of high rubber price

Hoang Thi Hoa, Manager

28 March 2011  Vietnam natural rubber sector

Global natural rubber market

Impressive recovery of natural rubber price

As the global economy recovered after the financial crisis in late 2008 and early 2009, rubber sector began to see signs of recovery since the second quarter of 2009 Natural rubber demand started to pick

up thanks to positive moves in the tyre production industry which captures 68% of total natural rubber demand

Moreover, it was in 2009 that the three largest natural rubber producers (Thailand, Indonesia and Malaysia), accounting for 72% of total global rubber production cut down about 4.3% of their volume to stabilize the global rubber price Consequently, the supply and demand gap has pushed up rubber price, especially from Q3/2009

Supported by high rubber demand and due to seasonal effect as Q1 and Q2 was off-peak season of rubber supply, rubber price in late April 2010 had exceeded the peak established in July 2008 Although the price trend paused from June to August due to the supply improvement as rubber producers begin harvesting season, rubber price continued to rise again and has seen the best performance in the rubber history to-date Rubber companies enjoyed a good year when average selling price for 2010 was above USD3,000/ton, much higher than the pre-crisis level of 2008 of approximately USD2,600/ton Of note, world rubber bounced back strongly after the earthquake in Japan in March 2011 and currently stands high at USD5,500/ton

Figure 1: Movement of Vietnam’s rubber export price Figure 2: 6 Asian countries account for 94% of total world

production

0 1,000 2,000 3,000 4,000 5,000 6,000

Source: Vietnam Rubber Association (VRA), Association of Natural Rubber Producing Countries (ANRPC)

supported by limited supply of natural rubber

According to preliminary forecasts of the Association of Natural Rubber Producing Countries (ANRPC), the world rubber volume might get a maximum increase by 6.3% in 2010 However, by October 2010, ANRPC adjusted downward the 2010 natural rubber growth to 5.3% due to bad weather and declining output in major natural rubber producing countries, especially Thailand and Indonesia – the two largest natural rubber producers Latest report shows a 5.7% increase in global rubber volume in 2010, ANRPC also forecasts a 5.3% increase in 2011

Global economic

recovery and declining

supply of top 3 biggest

Figure 3: Rubber production forecast is 5.3% in 2011

is highest after 10 years of plantation) During the 2005 – 2010 period, a total area of 2,544 thousand hectare have been planted in ANRPC countries, in which 927 thousand hectare were planted in Thailand during that period in response to attractive prices and positive outlook of the rubber industry Especially, the annual new planted area increased significantly from 2005 – 2008 as prompted by the high prices of natural rubber at that time

Figure 4: Annual new and replanted areas in Thailand from 2003 to 2010 Figure 5: Total new and replanted areas of natural rubber in ANRPC members

Source: ANRPC

As a result, the net effect of replanting old-age with low yielding trees and new supply of higher yielding ones could lead to changes in the supply after 2011F In addition, as a result of the current high market prices of natural rubber, there could be another surge in new plantings for natural rubber, which could lead to higher than forecasted supply of natural rubber subsequently

Higher demand thanks to recovery in global automobile sales and China’s inventory build-up

Currently, rubber demand for tyre production accounts for around 68% of the total demand The recovery of global automobiles sales will have positive impact on the rubber industry In 2009, China surpassed US to become the largest automobile producer with sales of 13.6 million cars, up 50% from

The surge in new plant

areas during 2005 –

2008 as response to

high market prices for

natural rubber will lead

to changes in natural

rubber supply after

2012.

28 March 2011  Vietnam natural rubber sector

2008 Automobile sales in China are expected to increase by 15 million cars in 2010 thanks to stronger domestic consumption and export The incentive programs of the US and EU’s government in 2009 such as “cash for clunkers” did encourage a large number of vehicle owners to buy new cars by trading-

in their old vehicles In addition, the rise of higher income earners in Asian countries such as India, China – who used to own vehicles of only two tyres (mainly motorbikes) - now have a demand to own private cars which will double the demand for tyres These are strong market fundamentals that support the recent recovery in rubber price, rather than speculation as in 2008

Figure 6: Monthly passenger car sales in China is maintaining at high level for over a year (in units)

Figure 7: Monthly passenger car sales in India is also on increasing trend thanks to higher domestic demand (in units)

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000

Source: Bloomberg

Being the largest natural rubber producer, Asia is also the main consumer, accounting for two thirds of the world natural rubber consumption China is the largest consumer of natural rubber, accounting for more than 32% of the global demand in 2009

Figure 8: Tyres account for the largest demand for rubber

Figure 9: Asia accounts for two thirds of the world natural rubber consumption and China is the largest natural rubber consumer in the world

Source: ANRPC, International Rubber Study Group (IRSG)

In 2009, China, India and Malaysia captured 47% of total global rubber demand Import demand from China is anticipated to keep increasing when China is building up its natural rubber inventory as it anticipates the limited supply in Q1-Q2 of 2011 Closing stock of natural rubber in ANRPC countries also keeps increasing in recent years thanks to higher demand and better price trend during the first few months of the year

Current recovery in

rubber prices is based

on strong market

fundamentals, originated

from the recovery in

global automobile sales.

Rubber demand rising in

line with the recovery in

tyre production industry.

Figure 10: China is building up its natural rubber inventory

Figure 11: Closing stocks at year end in ANRPC countries

0 20 40 60 80 100 120 140 160

2007 2008 2008 2009 2009 2010 2010 2011 '000 tonnes

Source: ANRPC, Bloomberg

Demand for natural rubber in China and India may keep increasing as automobile industry in China is expected to grow at 8%/year in the period 2011 – 2015 Automobile sales in India are also on rising trend as more middle and high-income earners have higher demand for private cars Based on the International Rubber Study Group (IRSG)’s estimate, global demand for natural rubber may reach 12.4 million tons by 2015 and 14.2 million tons by 2020, but the worldwide natural rubber production can only reach 13.6 million tons/year in 2020, not taking into account new planting areas that may be stimulated from the current high market prices of natural rubber as last seen in the 2005-2008 period

Higher crude oil prices support NR

Rubber price is believed to have a close relationship with oil price This is often explained by the presumption of a replacement between natural rubber and synthetic rubber Based on historical data of crude oil price and natural rubber price (Thai RSS3) from 2002 to 2010, the correlation coefficient between oil price and natural rubber price is quite significant at 83% As a result, natural rubber prices normally changes in the same direction with oil price and vice versa

Figure 12: Natural rubber accounts for around 43% of total rubber demand

Figure 13: Rubber price changes in the same direction with oil price

0 20 40 60 80 100 120 140 160

‐ 1,000  2,000  3,000  4,000  5,000  6,000 

2002 2003 2004 2005 2006 2007 2008 2009 2010

Thai RSS3 WTI crushing

U S D /t

/b ar re l

Source: IRSG, Reuters

Synthetic rubber consumption accounts for around 55% of total global rubber demand Synthetic rubber

is synthesized from oil and requires different technology, which explains a close correlation between natural rubber price and crude oil price Currently, there is a gap between natural rubber price and crude oil price, which partly comes from a higher increase in natural rubber price in comparison with oil price Therefore, natural rubber price is under some pressures to adjust downward to close to gap However, as the world economy recovery strengthens, crude oil price is expected to pick up gradually, closing the current gap between natural rubber price and crude oil price Based on recent forecast of

Correlation coefficient

between oil price and

natural rubber price is

83%.

Demand for natural

rubber may reach 12.4

million tons by 2015 and

14.2 million tons by

2020

Crude oil price is on

recovery trend, driven by

bullish sentiment about

the global economic

outlook.

28 March 2011  Vietnam natural rubber sector

Goldman Sachs, the medium term outlook for oil prices is quite positive, supported by global oil stockpiles shrink and oil production tightens On a long run, we believe that rubber prices and oil prices will both benefit from price appreciation in key commodities, maintaining the close relationship between them

Vietnam rubber sector

Vietnam is one of the leading natural rubber producers in the world

In 2009, Vietnam’s natural rubber volume ranked fifth worldwide with total production volume of 724 thousand tons Total export volume increased 10% to 731.4 thousand tons in 2009, 800 thousand tons

in 2010, and total export turnover of natural rubber reached USD2.35bn in 2010

With impressive increase in export volume, Vietnam has surpassed Malaysia to become the third biggest natural rubber exporter in the world In 2010, Vietnam’s total rubber area is about 715 thousand

ha in which 445 ha are ready for harvesting

Figure 14: Vietnam is the world fifth largest producer and third largest exporter of natural rubber

Figure 15: Rubber area and productivity of main producing countries in 2009

Source: ANRPC

Thanks to government’s incentive measures to develop rubber plantations, Vietnam has the fastest growth rate among leading NR producing countries During the period from 2003-2009, the annual growth rate of total rubber area and total rubber harvesting area was 7.5% and 7.9% respectively Plantation productivity has improved remarkably during the past six years Vietnam’s harvesting to reach in 2009 1.72 ton/ha, similar to that of Thailand

Figure 16: Vietnam export volume and value increase dramatically over the past 10 years

Figure 17: and production yield of Vietnam natural rubber improved largely within the past 5 years

0 500 1,000 1,500 2,000 2,500

0 100 200 300 400 500 600 700 800 900

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Export volume ('000 tonnes) Rubber export (USD mn)

'000 ton USD mn

Source: ANRPC

Vietnam records the

fastest growth rate in

leading countries in term

of productivity

The government outlined a plan to develop Vietnam rubber plantations until 2020 With new plantation area of 30,000-40,000 ha/year, Vietnam’s rubber area may reach 1 million ha and 1.2 million tons of volume by the end of 2020

Figure 18: Development plan of Vietnam rubber industry to 2020

Figure 19: Production and sales volume of VRA members in 2009

Company/Region 2009 Production (tons) 2009 Sales volume (tons)

5 Phuoc Hoa rubber company (*) 24,092 32,393

6 Dong Phu rubber company (*) 16,802 19,593

8 Tay Ninh rubber company (*) 13,211 13,095

There is large potential

in the natural rubber

industry

VRA controls around

40% of the total rubber

production and 85% of

rubber export in

Vietnam.

28 March 2011  Vietnam natural rubber sector

Source: VRA (*) Listed rubber companies

The natural conditions in the Southeast region are very suitable for rubber development Total rubber area in the Southeast region is estimated to account for 67% of total plantation in the whole country Thanks to high productivity in the region of about 1.9 ton/ha, annual harvesting volume is almost 79% of total productivity in Vietnam

Figure 20: Allocation of rubber area by zones Figure 21: Allocation of rubber volume by zones

Source: VRA

With 85-90% of the production is for export

Annually, 85-90% of Vietnam natural rubber is consumed in foreign markets In 2009, Vietnam exported natural rubber to 71 countries, in which China was the largest importer with the annual growth rate of 6.6%, reaching 494.6 thousand tons or USD 789 million Total export turnover of natural rubber in 2009 was USD1.2 bn and the turnover in 2010 is USD2.35bn thanks to good rubber prices in the year

Rubber plantation is

mainly focused in the

Southeast region.

Tyre production industry

in the region is the key

source of demand for

NR products of Vietnam.

Figure 22: Export products structure of Vietnamese rubber

Figure 23: China is the main consumer of Vietnam rubber – 68% of Vietnam export

Source: VRA

Domestic consumption volume in 2009 was about 120 thousand tons of rubber, corresponding to 14.1%

of total consumption volume, up 20% from 2008 This growth was a great progress of natural rubber sector, particularly when the tyre production factory of Kumho was established in Binh Duong province

At present, tyre production factories use about 80-90 thousand tons of natural rubber per year to produce an estimated number of 150 thousand small tyres and 1.65 million truck tyres of all kind

Figure 24: Vietnam tyre market

Vietnam has little impact on global rubber price

In spite of being the world fifth largest producer and third largest exporter of natural rubber, Vietnam only contribute approximately 7% of rubber volume into total global natural rubber supply compared to roughly 20% of the largest exporter – Thailand In addition, as two third of Vietnam rubber is exporting

to a sole consumer - China, Vietnam is fully impacted by fluctuations in international rubber price as well

as changes in global rubber production and global rubber demand

In addition, as the brand name of Vietnam rubber has not been set up, Vietnam’s rubber selling prices are usually cheaper than those of Thailand or Indonesia Moreover, due to having heavy dependence

on China market (accounting for 70% of Vietnam’s export volume), Vietnam has limited bargaining power in the global markets

Domestic consumption

market is quite small,

only accounting for

10-15% of total quantity.

Vietnam’s rubber prices

are normally cheaper

and have no impact on

the world rubber price.

28 March 2011  Vietnam natural rubber sector

Simple operation models and recurring earnings of domestic companies

By applying simple technology, the initial investment costs for rubber plantations are mainly focused on planting and taking care of the plantations, about VND70 million/ha in the Southeast region and VND100 million/ha in the Central Highland In addition, liquidation value of the plantations is sufficient for investment in planting new trees in the same area As a result, rubber companies use little leverage

in their capital structure

As directed by VRA, labor cost, which captures around 40% of revenue, will be determined based on rubber prices and the annual revenue of each company This mechanism prevents rubber companies from enjoying enormous earnings when rubber prices increase However, being subsidiaries of VRA, rubber companies are also protected from incurring losses especially when rubber prices fall dramatically For this reason, rubber companies are able to control cost of goods sold and keep their gross profit margin of over 20% even when rubber prices fell remarkably as in 2008

Vietnam’s government considers rubber trees as one of the strategic plants for export and poverty reduction Therefore, Vietnam rubber sector receive many supports from the government In addition to cheap land renting cost, rubber companies are also supported in terms of selling price In the end of

2008 and beginning of 2009, when rubber price dropped deeply, the Government permitted Vietnam Rubber Association to buy all domestic rubber in order to stabilize rubber price and ensure a minimum profit for rubber companies

We analyse two scenarios when rubber price is at the 2010 lowest level of USD2,100 per ton and at USD3,300/ton – a conservative 10% increase from 2010 average price

Scenario 1: Rubber price is at USD2,100 per ton or VND44.1 million/ton With the productivity of 1.7

ton/ha (the average productivity of the sector), revenue per hecta is about VND 75.0 million Cost of goods sold is about VND 50 million in which labor cost is a variable cost accounting for 42% of revenue and fixed costs of VND18.5 million/ha Thus, gross profit might is VND 25 million/ha, corresponding to

a 33% gross profit margin

Scenario 2: Rubber price reaches USD3,300 per ton or VND69.3 million/ton (10% increase from the

average rubber price in 2010) The gross profit per hecta is VND 49.8 million and gross profit margin is 42%

Figure 25: Profit model of rubber companies at USD2,100 per ton

Figure 26: Profit model of rubber companies at USD 3,300 per ton

Initial  investment : VND 70  mil/ha + Selling price: 

VND 44 mn/ton (~2,100  USD/ton) + Productivity: 1.7 ton/ha

Revenue  /ha: VND 

75 mn

+ Labor cost: VND 31.5 mn/ha + Raw material cost: VND 9  mn/ha + Depreciation: VND 4.5 mn/ha  + Other: VND 5 mn/ha

Annual  cost/ha: 

VND 50  mn

Gross  profit/ha: 

VND 25  mn/ha

Initial  investment : VND 70  mil/ha + Selling price: 

VND 69.3 mn/ton (~3,300  USD/ton) + Productivity: 1.7 ton/ha

Revenue  /ha: VND  117.8 mn

+ Labor cost: VND 49.5 mn/ha + Raw material cost: VND 9  mn/ha + Depreciation: VND 4.5 mn/ha  + Other: VND 5 mn/ha

Annual  cost/ha:  VND 68  mn

Gross  profit/ha:  VND  49.8mn/ha Source: VCSC

Liquidation value is

sufficient for replanting

Controlling labor costs at

40% of revenue and

price support from VRA

ensure a minimum profit

margin of over 20% for

rubber companies

Natural rubber sector is

supported by the

Government.

Vietnam’s rubber companies have limited organic growth but benefit from high rubber price and depreciation of VND

As global rubber prices are still in upward trend, Vietnam’s rubber export prices also move in line with the global prices Average rubber price for 2010 is USD3,000 per ton, or VND58.5 million/ton, the highest level in the rubber history Moving into 2011, the discrepancy between global demand and supply is still a supporting factor to rubber prices As of February 2011, rubber’s off-peak season, world rubber price reaches over USD5,000 per ton while domestic price also reaches around VND100mn Vietnam’s rubber companies also benefit from devaluation of VND against USD as the majority of their revenue is in US dollars VND has devalued nearly 10% year to date Thus, in addition to benefit from high rubber prices, rubber companies also earn better financial income thanks to currency conversion

As the majority of rubber plantation is either too old or not mature enough to start yielding, rubber companies have limited organic growth over the next few years, at least until 2013, when a large area of new rubber plantations planted in 2005 starting production

Figure 27: Annual new rubber plantation over years

Source: VRA

In addition, according to the development plan of the rubber industry set out by VRA, the expansion of new plantation areas may grow at an annual rate of around 4% from 2010 to 2020 Rubber production

is expected to increase at around 3% from 2010 – 2015 and 6% from 2015 – 2020

In normal conditions, harvested volume of rubber companies was the lowest in Q1 when rubber trees began falling leaves and increased gradually until peak season in Q4 The allocated volume ratio through quarters is 10%:20%:30%:40% in Q1, Q2, Q3 and Q4 respectively As such, revenue and profit

of rubber companies normally have cyclical growth at year-end In addition, rubber trees can only start yielding after 7 years and provide the highest yield from year 10th to year 26th Therefore, productivity of each company will be varied based on the structure of the plantations

Rubber price continues

to stay high thanks to

28 March 2011  Vietnam natural rubber sector

TRC and DPR are our top picks in the sector

Among listed natural rubber companies, we like TRC and DPR In addition to benefit from global rubber price, we appreciate TRC and DPR’s capability in maintaining output as their rubber plantations will be

in age of high productivity and volume in coming years Their 2010 profit is estimated to be 60-80%

higher than it was in 2009 while their 2010 PE are 7.4x and 6.9x– a quite attractive level for medium or long-term investment

Figure 28: Comparison between listed rubber companies

Current price (VND) 56,500 60,000 36,800 62,500Target price (VND) 68,000 69,000 40,600 51,500

Capitalization (VND bn) 1,702 2,688 2,951 1,079

2010 Consumption volume (ton) 12,800 16,470 31,006 6,518

2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0

28 March 2011

Giang Hoang, Analyst

Power of the youth

TRC is one of the few pure plays in the natural rubber in the market Other listed plantation companies in the region (such as IOI Corp., Kuala Lumpur Kepong and Genting Plantations) are hybrids between rubber and other crops TRC is also the largest manufacturer of latex in Vietnam As we believe that high NR price is likely

to hold, investors might want exposure on the stock

Undervalued Our NR price forecast is USD3,100/ton for 2011 (spot price

USD3,500/ton for latex concentration) and USD2,900/ton-USD3,200/ton for 2012F-2015F Our DCF-derived price target of VND68,000 suggests an upside of 20% against the current price On a price multiple basis, TRC is trading at attractive 6.3x 2010 earnings and 6.2x 2011F earnings, lower than the industry

average at P/E2010F 7.2x and P/E2011F 7.1x We initiate on TRC with an ADD

recommendation

81% EPS growth for 2010, driven by: (1) higher NR price at VND60mn/ton in

2010 from VND32.2mn/ton in 2009 and (2) gross margin improved to 42.8% in

2010 from 34.2% in 2009 We note that TRC expensed a total of VND26.6bn in goodwill in 2010

Flat earnings growth in 2011F Looking forward to 2011F, we project a flat

earnings growth given the following factors: (1) 9% decline in selling volume; (2) international NR latex price will remain at the same level with this year; (3) gross margin slightly down to 40%; and (4) removed the affect of expensing goodwill, administrative expenses going down to normal level

Healthy estates bringing material growth in subsequent years We like TRC in

light of its healthy estates with young trees, good yield and its strength in high margin NR latex concentrates Even though TRC’s expansion project pipeline is weaker than its listed peers, it should maintain its competitive advantage at least until 2016 as the company has the lowest attrition rate of its productive plantation

Low liquidity remains an issue As VRG holds 60.0% and foreign investor 32.9%

(the highest percentage of foreign ownership among the four listed peers), TRC’s floating shares for individual investors are roughly 7.1% The stock has consistently been trading with substantially lower liquidity than its peers

28 March 2011 Tay Ninh Rubber JSC (HSX: TRC) ADD

Company overview

TRC is the third largest listed rubber company by market cap and plantation acreage The company manages 7,205ha of planted land-bank, of which 5,552ha in productive stage which yielded approximately 12,000 tons in 2010

Revenue from rubber exploitation consisted of 95% of TRC’s revenue in 2009 The company’s main products are centrifuged latex concentration accounting for 72% of the company revenue, block rubber SVR 3L 10%, SVR 10-20 12%, and skim 6% Long-term export contracts accounts for 48% of TRC’s total revenue and contracts with domestic traditional partners making up 52%

Mature plantation, High yield, and Flat output

Among the listed rubber companies, TRC has the most evenly distributed plantation across maturity Immature trees (younger than 6 years) covers 23% total plantation area of TRC, young trees (7-16 year old) 30%, prime trees (17-23 year old) 30% and post-prime trees (over 24 years old) 17%, making the average lifetime age of TRC’s plantation 14.6, in line with its peer However, with 60% of the plantation are at young and prime age, the average productive age of TRC is the lowest among

the 4 peers at 12.1

Figure 1: TRC’s 2010 tree age profile and corresponding yield

Source: Company, VCSC Despite the fact that the plantation is in a relatively less fertile area, given the plantation’s young age profile, the topology and inland location, TRC had the second highest yield of 2.24 tons/ha (after DPR 2.25 tons/ha) within the Vietnam Rubber Group, above the industry average of 1.78 tons/ha in 2010

We expect TRC’s yields to continue to stay above 2.00tons/ha until 2015

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28 March 2011 Tay Ninh Rubber JSC (HSX: TRC) ADD

2010 results

TRC reported VND758bn in revenue (+72% YoY), and VND267bn in PAT (+74% YoY) in 2010

The company’s average selling price reached VND60mn per ton, up 78.3% from an average VND32.2mn per ton in 2009

Production output came at 12,400 tons (-6% YoY) Due to the seasonal nature of rubber crops, the vast majority of outputs falls into the second half of any given year with production volume allocation ratio of 10:20:30:40 each quarter,the results are close to VCSC’s last projection (61% of our whole-year production forecast of 12,000 tons (-10% YoY)) Unlike PHR and HRC, TRC’s purchasing volume remained insignificant at 80 tons, making total selling volume came in at 12,800 tons in 2010

The company already expensed VND26.6bn in goodwill in 2010 due to changes in Vietnamese

accounting rules that came into effect in 2010 Prior to 2010, goodwill was required to be amortized on

a straight line method over a period not exceeding 10 years The new rules require that goodwill from revaluations post-equalisation be completely expensed within 3 years Since 2010 is a good year for the company, TRC allocated the whole goodwill balance of VND26.6bn this year

Surging financial income helped improve bottom line Financial income doubled the same period,

to VND33bn in 2010 from VND14bn in 2009 thanks to higher interest income (VND20bn, +400% YoY) and exchange rate gain (VND11.6bn) Among the 4 peers, TRC appears to be the one most benefited from the depreciation of the VND

EPS 2010 is at VND9,154/share, up 79% YoY

The company intends to increase 2010 dividend to VND3,000/share from VND2,000/share,

providing a dividend yield of 5.5% at the current price of VND56,500 (Mar 24 2011) The company will request shareholders’ approval at the 2011 annual meeting

Earnings Outlook

We foresee VND765bn in revenue (+1%) and VND265bn in PAT (+1%) for 2011 The following factors

will adversely impact revenue and earnings growth

(1) Average selling price stays at USD3,000/ton or VND65.1mn/ton (assuming exchange rate of USD:VND21,000)

(2) As tapping area is expected to shrink 5% to 5,304 hectares in 2011 from 5,552 hectares in 2010,

we estimate that tapping volume will decline by 724 tons (-6% YoY, which is the second lowest declining rate in tapping volume among the 4 peers) to 11,276 tons in 2011 from 12,000 tons in 2010

We note that the company has not drafted concrete earnings guidance for 2011 However, VRG has guided a selling price of VND50mn/ton for 2011 for companies under its umbrella

Financial Investments

Limited expansion plan Among the four listed rubber companies, TRC is the one that has least

invested in both related and unrelated projects with financial investment of VND143bn by the end of

2010

TRC currently has only two new plantation projects and both are limited to capital contribution Thus, TRC has a proportionate economic interest in 2,500ha (or 35% of TRC’s current land-bank) in these new plantations

• Viet Lao Rubber JSC: TRC participated in the project with a nominal 10% stakes (HRC also has 15% stakes in this JV) The JV cultivates 10,000ha with total capital of VND600bn TRC has completed its capital commitment of VND60bn in the JV The first 2,000ha planted in 2005 is tapped in Q42010 The block rubber processing factory with capacity of 15,000 tons/year will go into operation in Q2 2011 instead of late 2010 The company expects 3000 tons SVR 3L in 2012 the first year of operation Thus, TRC expects dividend from the JV starting 2012

• Dau Tieng-Lao Cai Rubber JSC: In October 2010, TRC has committed VND60bn in the JV Dau Tieng-Lao Cai JSC to cultivate 10,000ha in Vietnam’s mountainous northern province Lao Cai Dau Tieng Rubber JSC holds 60% stakes in the JV, TRC 15% and DPR 10% First 2,000ha will

Amount (VND bn) %

1 Dau Tieng-Lao Cai Rubber JSC 60.0 15% 60.0

4 Wood Processing & Export-Import Tay Ninh JSC 10.5 - 10.5

5 Trade and Tourism Rubber JSC 10.0 4% 10.0

6 Ninh Dien Mineral Water JSC 1.5 15% 1.5

• Revenue: TRC revenue comes from its rubber production activities

o Volume: We calculate exploitation volume based on TRC’s current plantation and planned liquidation and replacement for the period 2010-2015F Purchasing volume for 2011F-2015F is forecasted to remain nominal at 80tons/year

o Price: We adopt a cautious stance in terms of price and forecast 2011 average selling price at USD3,100, then a drop of 10% to USD2,945/ton in 2012 and a stable growth of 2% per annual from 2012F-2015F We also assume a 2% devaluation of the VND against the USD each year for the same period

• Cost Structure:

o Labour cost: As rubber exploitation is a labour intensive process, labour costs make up the majority of COGS For TRC, labour costs are paid at 40-42% of revenue according to VRA’s guidance, representing 67-68% COGS across our forecast period

o Depreciation: Depreciation makes up 4-6% COGS

o Other components of COGS: Other costs such as fertilizer, gas, exploiting materials, labour miscellaneous, export insurance account for 25-28% of the cost base

o Land tax: Like other rubber companies, TRC benefits from 50% discount of land use right tax, which accounts to 1mn/ha/year and totals to VND7bn/year for the company

• Taxes: TRC enjoys preferential tax treatment for operating and creating employment in the poor condition area of Go Dau, Tay Ninh The company is exempted from CIT during the first 3 years after requisition (2007-2009) and 50% tax rebate on a 15% tax rate for the following 7 years

28 March 2011 Tay Ninh Rubber JSC (HSX: TRC) ADD

Consequently, TRC is subject to preferential tax rate of 7.5% for 2010-2016 and 15% tax rate for rubber exploitation from 2017-2018 and 25% tax rate from 2019 onwards Tax rate of 25% applies

to financial and other income

Figure 5: WACC assumptions

2-stage DCF assumptions Growth Terminal

Fair Value per Share (VND) 68,049

Selling price (in USD) 3,050 3,100 2,945 3,004 3,064 3,125

Selling price (VND mn) 59.48 65.10 63.08 65.63 68.28 71.04 Revenue 757,982 762,031 713,916 730,280 765,644 781,381

28 March 2011 Tay Ninh Rubber JSC (HSX: TRC) ADD

Figure 8: Sensitivity Analysis to Changes in Rubber prices

Rubber price assumption (USD/ton)

EPS (VND) P/E(x) @ VND56,500 Fair value Upside

• The upside is (1) higher than expected rubber prices versus our forecast (2) more than expected devaluation in the VND

Summary of Financials

Cost of Goods Sold 342.6 289.8 433.5 460.5 434.1 EBITDA growth -19.7% 98.3% -11.6% -5.8%

Selling Expenses 6.4 4.2 7.5 7.5 7.0 Net income growth 11.7% -22.7% 74.7% 1.0% -6.9%

Admin Expenses 25.9 21.1 56.1 34.3 32.1 EPS growth 11.7% -22.7% 74.7% 1.0% -6.9%

Financial Revenue 23.8 14.4 33.0 33.3 33.3 EBITDA/Revenue 39.6% 39.6% 45.6% 40.1% 40.3%

Financial Expenses 1.0 0.1 0.4 0.4 0.4 EBIT/Revenue 36.9% 37.4% 40.6% 39.8% 39.6%

Minority Interest - - - - - Quick Ratio 1.44 2.20 1.77 3.36 4.30

Accounts Receivable 22.9 10.0 34.7 34.9 32.7 Efficiency Ratios

Inventories 27.2 38.9 85.6 90.9 85.7 Days Receivables 0 3 11 11 11

Other Current Assets 0.9 1.4 6.2 6.6 6.3 Days Inventory 29 49 72 72 72

Fixed Assets (At Cost) 421.5 434.4 443.9 434.3 444.4 Leverage Ratios

Accumulated Depreciation (165.1) (174.6) (186.2) (188.5) (194.1) Debt/Equity 8% 7% 5% 2% 2%

LT Investments 102.0 129.4 143.3 143.3 143.3 Interest Coverage 46.82 69.34 115.06 109.94 119.38

Other LT assets 32.1 33.0 3.1 3.1 3.1

ST Debts 12.4 11.6 15.0 - -

Accounts Payables 114.7 109.0 263.8 154.2 145.4 Valuation 2008 2009 2010 2011F 2012F

LT Debts 26.9 34.8 19.7 17.8 16.3 P/E 8.5 11.0 6.3 6.2 6.7

LT Payables - 3.8 - - - P/B 3.3 2.7 2.2 1.9 1.6

Other LT Liabilities 2.2 3.4 4.0 4.0 4.0 EV/EBITDA 7.2 8.4 3.7 4.0 3.9

Charter Capital 300.0 300.0 300.0 300.0 300.0

Capital Surplus - - - - -

Treasury Stocks - - (23.9) (23.9) (23.9) At target price of 68,049 68,049 68,049 68,049 68,049

Retained Earnings 69.5 115.4 204.0 285.1 360.7 P/E 10.3 13.3 7.6 7.5 8.1

28 March 2011

Giang Hoang, Analyst

One of our top two pick in the sector As one of the leading natural rubber

companies with major competitive advantages in productivity, profitability, and size, DPR deserves value investors’ interest

Undervalued Our NR price forecast is USD3,100/ton for 2011F and

USD2,790/ton-USD3,000/ton for 2012F-2015F Our DCF-derived price target of VND69,000 implies an upside of 15% against the current price On a price multiple basis, DPR is trading at an attractive 6.5x FY10 earnings and 6.1x FY11F earnings, lower than the industry average at FY10 7.2x PE and FY11F 7.1x PE

We initiate on DPR with an ADD recommendation

74% EPS growth for 2010, driven by: (1) higher natural rubber prices at

VND61.8mn/ton in 2010 from VND30.4mn/ton in 2009 (2) improved gross margins

to 45% in 2010 from 36% in 2009 We note that DPR expensed a total of VND33.7bn in goodwill in 2010

Growth extended to 2011 We forecast growth of 12% in revenue and 6% in PAT

in 2011F, given: (1) 6% decline in selling volume; (2) NR rubber price to remain at USD3,100/ton; (3) gross margin slightly down to 43%; and (4) administrative expenses going down to normal level after removing the affect of expensing goodwill

Nominal growth onwards However, DPR has the same limiting factors as other

companies in the industry The company has already fully exploited its plantation area and improving productivity requires considerable time As there will be little volume expansion until new plantations mature in 2015-16, DPR will have to rely solely on price hike to ensure growth

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