Song hong garment joint stock company course name financial management

Assets and capital structure changes over the years Song Hong Garment is a manufacturing firm, so it is understandable to see net fixed assets andinventory account for a large proportion

UNIVERSITY OF ECONOMICS AND LAW FACULTY OF FINANCE AND BANKING

Phan Anh Tuấn K204041284

TABLE OF CONTENTS

PART I: COMPANY INTRODUCTION 3

1 Overview 3

2 History 3

3 Product 4

4 Industry 5

5 Shareholders 5

6 Organizational model 6

PART II: FINANCIAL ANALYSIS 7

1 Assets and capital structure changes over the years 7

2 Song Hong Garment’s competitive advantage 8

3 Song Hong Garment’s operational performance during 2017 - 2021 11

4 The firm maintained high liquidity position and financial strength in the last 5 years 16

5 ROE was volatile due to decreasing financial leverage and fluctuating profit margins 20

PART III: RISK ANALYSIS 22

Beta coefficient 22

PART IV: CONCLUSION 23

References 24

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PART I: COMPANY INTRODUCTION

1 Overview

Song Hong Garment Joint Stock Company is one of the leading garment and beddingmanufacturers in Vietnam Song Hong Garment primarily exports to major apparelbrands in the United States, Europe, and Japan The production area of this enterprise ismainly concentrated in Nam Dinh Province, with seven production areas Song HongGarment constantly invests in expanding production over time, with factories applyingadvanced technology

+ Vision:

In the global textile supply chain, Song Hong aspires to strive to be a significant andrenowned supplier of clothing and textiles

+ Mission:

In order to keep up with the global trend of fashion textile and apparel supply, Song Hong

is constantly searching for strategic development orientations and implementing flexibleinvestments to accomplish this

2 History

Development journey

1988: Garment Factory 1/7 was founded directly under the State with 100 workers

1993: Changing name as Song Hong Garment Company

2001: The company relocated headquarters to 105 Nguyen Duc Thuan, Nam Dinh, and

expanded into three garment factories utilizing 1500 people

+ Constructed 4 clothing manufacturers in the Xuan Truong district, a sum of workers is

+ Increased the charter capital twice up to VND 226.8 billion

2017: Increased the charter capital up to VND 234.14 billion.

2018: Increased the charter capital up to VND 476.28 billion.

November 28th, 2018: Officially traded on Ho Chi Minh Stock Exchange (HOSE) 2021: Commencement of construction of Song Hong 10 factory in Nghia Phong

commune, district Nghia Hung, Nam Dinh province in early 2021 Song Hong 10 factorycompleted by the end of December 2021

3 Product

Garment Export:

Song Hong Garment is a garment manufacturing company that primarily exports to majorclothing brands around the world The two main export methods the company isimplementing are CMT (processed goods) and FOB (exports by shipboard deliverymethod) The FOB segment currently accounts for the majority of the company's revenueand profit structure

Song Hong Garment has over 30 years of construction and development experience,producing a wide range of products from knitting to weaving, sports, fashion for men,women, and children, with rich categories such as skirts, pants, jackets, t-shirts, bluesuits, sports clothes, felts, and so on The company is currently the production partner offashion brands, manufacturers, and large retail chains such as Columbia Sportswear,Haddad Brands (with Nike, Converse, and Levi's), GIII (with Calvin Klein brands,Tommy Hilfiger, and DKNY), Walmart, Bugatti, SAE-A Trading, Target, and Express

Domestic production:

The main commodity of the domestic sector is the group of blankets - sheets - pillowsand cushions and is mainly distributed in the domestic market

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+ Blockholder:

No Individuals/Organizations Share Holding (%)

2 FPT Securities Joint Stock

Others

PART II: FINANCIAL ANALYSIS

1 Assets and capital structure changes over the years

Song Hong Garment is a manufacturing firm, so it is understandable to see net fixed assets andinventory account for a large proportion in total assets In the past net fixed assets had a higherproportion in total assets than inventory, specifically, in 2017, net fixed assets made up 27.21%

of total assets while the figure for inventory is 22.41% However, during 2017 – 2021, the trendfor net fixed assets had been downward whereas the trend for inventory had been upward and bythe end of 2021, their difference in proportion of total assets was nearly 15%, with 29.3% forinventory and only 15.6% for net fixed assets

We believe this convergence is due to the fact that ever since the operation of Nghia Hungfactory in 2016, the firm had not expanded its production capacity by investing in new factories,but instead purchase more inventory and exploit its existing production complex comprising 18factories with 155 sewing lines as the main source for revenue growth The operation of NghiaHung factory in 2016 also explains the high proportion of net fixed assets in the company’sbalance sheet in 2017

As of 2021, Song Hong Garment’s assets are mainly funded using short-term liabilities (47.74%)and shareholder’s equity (46.7%), the rest is long-term liabilities Observing the total capitalchart, we can see that there is also a convergence between the two main funding sources In

2017, 60.2% of the firm’s capital was short-term liabilities while shareholder’s equity onlycomprised 31.72% However, after 5 years, this has changed to 47.74% for short-term liabilitiesand 46.7% for shareholder’s equity

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The reduction in short-term liabilities proportion is due to the lowering level of short-term debtfrom 722.915 billion VND in 2017 to 552,060 billion VND (a 23.63% reduction) in 2021, whilethe increase in shareholder’s equity is due to the rise of share capital and retained earnings from238,140 billion VND and 391,315 billion VND in 2017 to 500,094 billion VND (an 210%increase) and 736,020 billion VND (an 188% increase) in 2021, respectively This convergenceshows that the company is relying less on short-term debt and makes use of its long-term fundingsource more It also improves Song Hong Garment’s liquidity since short-term debts are interestbearing and they mature within a year so having less of them will reduce short-term cashoutflows.

In the past, the proportion of long-term liabilities in total capital was larger (in 2015, it was17.75%) but it had decreased greatly over the years and by 2021 it accounted for only 5.57% oftotal capital This reduction is consistent with the strategy of exploiting existing factories andincreasing inventory, which does not require much long-term funding instead of building newfacilities during 2017 – 2021, which generally requires more long-term liabilities

2 Song Hong Garment’s competitive advantage

In Vietnam, the scale of the fiber industry and ancillary industry is not commensurate with thedevelopment of the textile industry, so the supply of raw materials cannot meet production needs

of textile firms For that reason, most raw materials used in production are still imported, withthe largest suppliers coming mainly from China The cost of goods sold of companies operating

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in a market where raw materials are mainly imported is usually high, the textile industry inVietnam is one such example, which explains why costs of goods sold account up to 80% of thefirm’s net revenue.

The main raw material used in textile firms is cotton, and since China is the main supplier, theprice of its cotton determines the cost of raw material for Vietnam firms Cost of goods sold for

2018 – 2019 are 79.92% and 78.95%, respectively, which is the result of decreasing cotton prices

in China during its trade war with the US The price reduction persisted until Covid struck in

2020, causing strains in the global supply chain and increasing the price of many commodities,including cotton Therefore, Song Hong Garment’s cost of goods sold in 2020 – 2021 increasedslightly to 80.31% and 80.4%

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We can see that the company managed to keep a stable gross profit margin of 19.6% in the last 2years, this figure is higher than gross profit margin in 2017 which is 17.18% despite the increase

in raw material cost This is due to the change in production strategy during the period focusingmore on the FOB sector than the CMT sector The revenue from the FOB sector accounts for71.43% of the firm’s total revenue in 2017 and in 2021, this figure is 83.55% Since the FOBsector has a higher profit margin (about 20% while the CMT sector only yields 16%), focusingmore on it offers Song Hong Garment a higher gross profit margin over the long run and this isalso one of the company’s competitive advantages

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3 Song Hong Garment’s operational performance during 2017 - 2021

The company’s operating performance in the last 5 years can be broken down into 2 periods Thefirst period is 2017 – 2019 and the second is 2020 – 2021 During the first period, the firm's mainoperating activities include purchasing raw materials, producing and selling finished goodswithout investing in fixed assets, which explains the convergence between inventory and netfixed assets Annualized revenue growth from 2017 – 2019 was +10.36% while annualizedearnings growth was an impressive +30.94%, especially in 2018, when earnings growth was+84.56% YoY

We believe the high growth in revenue and net profit was due to the 30% increase in inventory in

2017, the focus on the FOB sector with higher profit margin and the operation of Nghia Hungfactory in the prior year, which allowed the firm to increase production and sell a greater quantity

of finished goods It is also during this period that the main raw material for textile firms – cottonwitnessed a decrease in price, which improved Song Hong Garment’s gross profit margin andthus contributed to the high growth in net profit

The company’s operating cash flow during 2018 and 2019 were 373,941 billion VND and619,957 billion VND, which represents two whopping 158.6% and 65.8% increase, respectively.However, cash and cash equivalents underwent a fall in those 2 years from 344,148 billion VND

in 2017 to 237,680 billion VND in 2019, which means the excess cash had been used for otherpurposes As shown in chart 5, the cash and cash equivalent line goes down during 2017 – 2020

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while the inventory and short-term financial investment lines go up At the same time in chart 6,the company’s short-term debt line goes down while the retained earnings line goes up.

The data suggests that Song Hong Garment had used the excess cash created in its 2 successfulyears to replenish inventory and at the same time make short-term deposits in banks to earninterest It also used the cash to pay off some of its existing short-term debt, as shown in chart 10where cash outflow from borrowing increased 8.8% and 10.3% in 2018 and 2019, respectively

We believe the increase in deposits and reduction in short-term debt is consistent with the firmstrategy during the period, because the company did not plan to invest in fixed assets, so it would

be better to put the excess cash in banks and pay off debt It also explains the convergence ofshort-term debt and retained earnings, since Song Hong Garment recorded high net profit, itwould reinvest the earnings and use it as a long-term, sustainable fund and as a result rely less onshort-term debt The reduction in short-term debt reduced financial expenses from 49,046 billionVND in 2017 to 18,187 billion VND in 2020 (chart 7)

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We will now analyze the firm operating performance in the second period from 2020 – 2021 Theyear 2020 is when Covid first struck the world economy and caused disruptions to global supplychains As an exporter, therefore, Song Hong Garment was negatively affected by the reduction

in sales and net profit, which were -13.55% YoY and -48.47% YoY, respectively due to lack ofnew orders and high transportation expenses

The firm’s inventory had been relatively stable during 2018 – 2020 (chart 5) However, a closerlook into the components of inventory actually revealed managers confidence and future outlookabout the performance of the company In 2018, the company’s inventory increased 23.9%, thiswas mainly coming from the increase in raw materials (+43% YoY) and the increased in work inprocess (+37.4% YoY), finished goods only increased 12%, which means the company wasexpecting that it would receive more orders and produce more finished goods in the nextoperating year In 2020, the situation is quite different, and that is although inventory did notchange much, we can see that raw materials had been declining and by the end of the year, itsvalue was 163,800 billion VND, which was even lower than in 2017 At the same time, finishedgoods spiked 32.4% YoY because there was a lack of new orders, textile firms could not sell verywell so finished goods piled up, and since there were excess finished goods, there was no need toincrease production leading to the decline in raw materials

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The prospect for Song Hong Garment quickly changed in 2021, specifically in the fourth quarter.After the major lockdown in the third quarter and the suppressed demand from the market inalmost 2 years, the firm recorded an 54% increase in revenue and an 61.6% increase in net profit

in the final quarter Vietnam’s export growth for textile products in that last quarter was +22.28%YoY, higher demands prompted even higher growth in inventory, which was +52.6% YoY at theend of the year

During 2021, the company underwent many major changes in assets and capital One of them isthe growth of long-term assets in process (+1013.61% YoY, chart 5) which represents theconstruction of Song Hong 10 factory, indicating the need to expand production even more, this

is also expressed through the 154.7% YoY increase in capital expenditure (chart 9) The firmrealized the potential of higher demands in 2022 after 2 years of lockdown, so we can seeinventory and long-term work in process going up, funding these major assets growth during theyear were cash and debts (including both short-term and long-term debts)

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Observing chart 5, we can see that cash had increased 178.21% YoY while short-terminvestments had decreased 44.1% YoY At the same time, net cash flow for the year was 243,418billion VND, which was the highest figure since 2017 (chart 9), indicating that the high growth

in cash was due to the high net cash inflow during the year and also from withdrawals of cashfrom short-term investments The increase in cash is appropriate since the firm production scalehad increased and the firm itself had taken on more debts (chart 6, long-term debt increasedsignificantly after declining for 4 years to fund the construction of Song Hong 10)

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4 The firm maintained high liquidity position and financial strength in the last 5 years

Song Hong Garment did not suffer from liquidity problems during 2017 – 2021 as its currentratios were all higher than 1 in 5 years This is due to the excess cash received from the twosuccessful business years 2018 and 2019, and also due to the fact that the firm did not investmuch in new factories, so most of the cash goes to short-term investment and pays off short-termdebt, which increases current assets and at the same time reduces short-term liabilities As of

2021, the firm’s current ratio was 1.62, much higher than the industry average 1.34

Observing chart 11, we can see that the three liquidity ratios all increase from 2017 to 2021,indicating that the firm is sustaining enough liquid assets to cover short-term obligations In

2021, all three ratios fell as the firm took on more short-term liabilities and the amount wasenough to offset the substantial increase in account receivable and inventory that year However,the cash ratio experienced a sharper decline than that of the current ratio and the quick ratio This

is because both account receivable and inventory are not included in the calculation of the cashratio

As for the turnovers, both receivable turnover and payable turnover went up during 2017 – 2021while the inventory turnover was relatively stable (chart 13) A stable inventory turnover showsthat inventory was increasing at the same rate as cost of goods sold, which indicates that thefirm’s products sold well, and demands were strong At the end of 2021, the firm’s inventoryturnover was 4.91, a bit higher than the industry average, which was 4.75 Receivable turnoverincreased from 7.9 in 2018 to 9.48 in 2019 as revenue for Song Hong Garment that year rose11.65% whereas account receivable declined 18.32% The decrease in account receivable mainlycame from the collection of cash from Columbia Sportswear company

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