rating overweight long bet on industry catalysts … conclusion, despite of the mature status of...

Industry Coverage

10 Oct 2017

Industry Coverage

Bloomberg: KISVN <GO>

Rating OVERWEIGHT

Industry Fertilizer

Table of content

1. Fertilizer industry structure

2. Gloomy overall picture …

3. … But opportunities from

industry major shifts & policies

4. Sector financials & valuation

5. Stock pick

Mr. Hoang Ha Nguyen

Pharmaceutical, Consumer, Chemical

(+84-28) 3914 8585 - Ext: 1463

[email protected]

www.kisvn.vn

Long bet on industry catalysts amid gloomy output

Pros:

Despite its commodity characteristics, Vietnam fertilizer is a non-replaceable

industry because it contributes to 30%-50% crop productivity growth, which must

ensure food security of the whole Vietnamese population of 90 million people as

well as USD15.1bn agricultural foodstuff export annually.

We expect the current industry competitive positions will change little in the next

5 years, as the top largest producers have already gained strong competitive

advantages of exclusive input material sources and extensive distribution network.

Major long-term shifting from mono-nutrient fertilizers to complex fertilizers will

create huge opportunities for large & premium NPK producers. The NPK market is

projected to grow 7% annually until 2021.

Positive supporting policies from the government, including: (1) 0% VAT

imposed on fertilizer products (2) self-defense tariffs for DAP/MAP binary fertilizers

and (3) the forced equity sale of the State at major gas-based urea producers.

Most importantly, while dividend yield keeps increasing thanks to decreasing

stock price - thus creating limited downside risks, valuation from a Price-to-Book

ratio (P/B) standpoint looks highly attractive: fertilizer sector P/B is currently at 1.43

times, 40% lower than that of the VNIndex.

Cons:

We believe that the overall size of fertilizer consumption market is quite hard to

expand in the mid-term because of the mature penetration status, economic

restructure towards industrial/service and stagnation in agri-commodities price.

Thus, sales growth of each player mostly comes from cannibalizing market share

of ordinary small and low-end producers or diversifying their product mix.

Imported products, especially nitrogenous & binary DAP/SA, are getting stronger

and stronger thanks to their low price, currently making up 41% of local

consumption volume. Thus, we expect a price war to continue in the coming years.

Organic and clean agricultural production trend will gradually be a threatening

force to traditional chemical fertilizer manufacturers.

0% value-added tax law amendment for fertilizer is promising but will only be

effective in 2019 at the earliest.

High government ownership in each fertilizer company hinders flexibility and the

ability to make aggressive growth plans.

In conclusion, despite of the mature status of local fertilizer industry, the

consumption pattern changes coupled with favorable government policies and

especially cheap valuation provide attractive opportunities for investors. Therefore,

we issue an OVERWEIGHT with long-term vision on this sector.

Stock pick in this report: DPM

Industry Coverage – Fertilizer – OVERWEIGHT

Industry Coverage

KIS Vietnam Securities JSC


1. Vietnam Fertilizer Industry Structure

Product Mix

The product mix of both Vietnamese and global fertilizer industry is currently divided

into 03 major groups – each with distinguished use and ingredients:

- Straight fertilizers provide single inorganic nutrient (e.g., K, P, or N), including the

common urea (NH3 based), phosphate (P2O5 based) and potassium fertilizer (KNO3

based)

- Complex fertilizers provide two or more nutrients, including the most widely used

NPK (combination of N, P and K) and binary fertilizers (such as DAP, MAP with N &

P nutrients)

- Organic fertilizers provide organic nutrients from plants/animals-derived matter

Though diversified as it is, Vietnamese fertilizer consumption is mostly dominated by

complex fertilizer NPK (36%), mono-nutrient urea (21%), phosphate/superphosphate

(13%) and other binaries such as DAP, MAP, SA (each around 9% of total fertilizer

consumption volume). Less than 3% of total consumption is organic fertilizers

because of no local mass producer dominated.

Compared to the mix of global fertilizer industry, urea and DAP/MAP are mostly

used (52% volume) while NPK and premium fertilizer (<15% volume) are still low

because the fertilizer consumption in China – the largest agricultural country - is

highly concentrated on nitrogenous fertilizer. However, according to Argus, the

premium trend towards specialized fertilizer modes with higher nutrient density –

which is a signature characteristic of NPK – is inevitable in long term.

36%

21%

13%

9%

8%

8%5%

Vietnam Fertilizer Product Mix

NPK Urea

Phosphate DAP (binary N&P)

MAP (binary N&P) Potassium

Others (SA, organic, …)

2015 11 MT consumption

Source: MoIT, Vinachem

11%

35%

6%17%

14%

17%

Global Fertilizer Product Mix

NPK Urea

Phosphate DAP/MAP (binary N&P)

Potassium Others (SA, organic, …)

2015 181 MT consumption

Source: Yara International, IFA


Industry Coverage



Local Industry Value Chain

Lack of specific mineral ores, Vietnamese local manufacturers can only produce

NPK, urea, phosphate and DAP fertilizers while almost all potassium and sulfuric

fertilizers have to be imported.

Urea Natural gas (CH4) -

PVGas

Coal (CO2) - Vinacomin

or imported

Ammonia (NH3) - local

Chemicals - local

Gas-based urea production

Dam Phu My - DPM, Dam

Ca Mau - DCM

Coal-based urea production

Dam Ha Bac - DHB, Dam

Ninh Binh

Owned

subsidiaries

(DPM, DCM)

Major

distributors

(Vinacam,

Apromaco)

Level 1 agents

Level 2

retailers

End users:

Farmers,

cooperative

societies, and

export

Phosphate Local apatite rock -

Ca5(PO4)3

Local sulfuric acid

(H2SO4)

Other imported minerals

(serpentine, sandstone)

Fused magnesium

phosphate production

Ninh Binh Phosphate - NFC,

Van Dien Fused - VAF

Superphosphate production

Lam Thao Superphosphate

- LAS

Potassium Potassium minerals (K)

Sulfur minerals (SA)

Wholly imported – mostly

from China - due to lack of

minerals

Binary Local ammonia (NH3)

Local apatite rock (P)

Imported sulfur rock (S)

Diammonium phosphates

DAP production

DAP Lao Cai, DAP Dinh Vu

– DDV

NPK Local nitrogen fertilizer

(N)

Local phosphate fertilizer

(P)

Imported potassium

fertilizer (K)

Blending straight

fertilizer/other granulation

“NPK” production

LAS, BFC, SFG, DPM,

NFC, VAF, Nam Sao Group

Organic Animal manure

Plants compost

Bone meal, ashes

Granulating process

Local farmers & imports

As the market has been matured and most of manufacturers have secured their

positions in this industry value chain, we expect the current industry structure will

maintain in the foreseeable future, which is difficult for new entrants to find even a

niche market.

92%

30%

95%

80%

8%

70%

100%

5%

20%

0% 50% 100%

NPK

BinaryDAP/MAP

Potassium (K)

Phosphate(P)

Urea (N)

Vietnam fertilizer local supply capability 2016

Local Demand Met Import

Product Input Materials Production Distribution

Source: MARD, KISVN research


Industry Coverage



Consumption Output & Distribution

- Fertilizer consumption is mostly distributed in Eastern South and Mekong Delta

regions, accounting for approximately 59% of consumption volume nationwide.

Thanks to favorable weather, geologic condition and demographics, this region will

continue playing a key role in the fertilizer market of Vietnam in our opinion.

- Rice is the most straight-fertilizer consuming plant with 65% of total demand, of

which 49% is for the winter-spring crop. The remaining 35% is from industrial plants

such as corn, rubber, coffee and sugar cane. However, the downtrend of commodity

markets since 2011-2012 have dragged down the fertilizer demand of these

industrial plants. Cyclically, we expect this industrial segment will gradually gain

back its consumption volume in the next five years.

- Together with the downtrend in commodity price, global fertilizer price index has

decreased 12% per annum since the peak of 2011 – according to FAO organization.

As of Q3/2017, NPK was sold at the highest selling price of between VND9,000-

13,000 per kg, phosphate products at the lowest of VND2,000-3,600 per kg while

urea fertilizers often fluctuated around VND6,000 per kg. In the recent years, the

prices of all types of fertilizer have dropped 8%-10% annually due to lower demand,

increasing production capacity and local bad weather condition. We believe this

negative price trend is the main obstacle for Vietnamese local manufacturers from

pushing their export channels.

- Regarding selling channel, we expect companies with long history like DPM, LAS,

BFC, SFG will maintain their strong competitiveness in the long term thanks to their

extensive distribution systems:

Co. Year of

establishment Distribution channel Market

LAS 54 years

brand 100 wholesalers

Retailers in 63

provinces

North & Central

regions focus

Export to Japan,

Taiwan, South Korea

SFG 40 years

brand 400 wholesalers

10,000

retailers

South & Mekong

Delta focus

Export to Cambodia,

Japan, Myanmar

BFC 25 years

brand 200 wholesalers 2,500 retailers

South & Central

Highlands focus

Export to Cambodia,

Myanmar, Laos, Thai

DPM 13 years

brand 80 wholesalers 3,000 retailers South focus n.a

Entrance Barriers & Alternative products

- Despite of the large threats from both international and domestic large-scale

projects such as Kaltim V, Indonesia (1.5mil tons of urea per year) or PVFCCo. (250

thousand tons of NPK per year) which are under construction, the advantages of

local existing companies from resources accessibility (ex: gas, ores, chemicals) or

extensive distribution channels are big entrance barriers to new companies.

59%17%

24%

Vietnam fertilizer consumption by regions, 2014

Southern Vietnam

Central Vietnam

Northern Vietnam


65%9%

8%

5%

3%

3%

7%

Vietnam straight-fertilizer consumption by plants, 2015

Rice

Corn

Rubber

Coffee

Sugarcane

Cashew

Others


1,500,000

907,500

1,500,000

330,000

250,000

0 800,000 1,600,000

Urea Kaltim V -Indonesia

Urea B Pusri II -Indonesia

Potassium Garlyk -Turkmenistan

DAP Lao Cai - VN

NPK Phu My - VN

Asia & Vietnam fertilizer expansion projects 2015 - 2017

(tons capacity)

Source: KISVN research


Industry Coverage



- Meanwhile, premium alternative products like water soluble NPK and organic

fertilizers are gradually becoming the major threats for replacing traditional single-

nutrient products to meet environmental and health standards by GlobalGAP.

Rivals & Competitive Strategies

Cost leadership: in the context of 800 local producers, we observe that most

fertilizer producers have to follow the “cost-leadership” strategy by increasing

economies of scale and distribution coverage. Nevertheless, imported low-quality,

low-price fertilizer has dragged down the performance of many producers such as

DPM, LAS, DDV, NFC, VAF, e.g. in these recent years.

- Imported fertilizers, especially mono-nutrient or nitrogenous binary fertilizers (such

as urea or DAP/SA), have started a price war and been a major competitive force to

local manufacturers for many years. Imported products, of which 60% comes from

developed industrial countries like China and Russia, offers retail prices usually

10%-20% lower than local domestic ones.

- Thus, capacity expansion and promotion discount strategies of local companies in

order to keep reducing selling price may not be working in the mono-nutrient sub-

industry. However, NPK market (complex fertilizer) is showing a different and

positive picture, in which demand is growing thanks to changing consumption

pattern and many players such as DPM, LAS and BFC are hurrying the completion

of new plants to increase approximately 30% supply during 2017-2019.

- In our opinion, businesses that target segments other than the already foreign-

dominated ones like DAP/SA/Potassium will have stronger return on capital and

better growth prospect.

- Product differentiation: While DCM has continuously sought growth by high-

quality granular urea products, DPM & BFC have implemented the same premium

market strategy by expanding into premium NPK, supplement chemicals (NH3,

UFC85, CO2, H2O2) and organic fertilizers, respectively. Although the volume of

these products are still very low comparative to their current product mix, we highly

appreciate this strategy as it is the only way to grow amid the current trend of

switching from single-nutrient to complex fertilizer and growing demand for high-

quality fertilizers.

3.03 3.32 4.16 2.37

7.44 6.90 6.84

3.43

0

4

7

11

14

2008 2012 2016 1H2017

Vietnam fertilizer import/supply condition 2008 - 1H2017

Local Supply

Imported Fertilizers

34%

31%

11%

4%

19%

Phu My Urea(DPM)

Ca Mau Urea(DCM)

Ha Bac Urea(DHB)

Ninh Binh Urea

Other importedurea (China,Indonesia, e.g.)

2016Vietnam urea market share

19%

15%

9%6%6%

4%2%

39%

Lam Thao NPK(LAS)

Binh Dien NPK(BFC)

Vinacam NPK(trading)

Con O NPK(SFG)

Viet Nhat NPK

Baconco NPK

NPK Phu My(DPM)

Others localmanufacturers

2016Vietnam NPK market share

Source: KISVN estimated

Source: MARD annual report, KISVN research

Unit: million tons

46%

11%7%

6%

5%4%

22%

Vietnam imported fertilizers breakdown by countries 2016

China

Russia

Belarussia

South Korea

Indonesia

Canada

OthersSource: Vietnam Customs

Source: DPM, KISVN research


Industry Coverage



2. Gloomy Overall Picture …

Little Room Left For Penetration

<1> Exceptionally high consumption per hectare

- According to Trading Economics, Vietnam fertilizer consumption per hectare of

arable land is currently 397kg - which is more than 3 times higher than the average

of lower-middle income countries of 121kg, signifying a strongly mature status of

agricultural chemicals sector in Vietnam.

<2> Flat agricultural land expansion

- During the period 1995-2001, agricultural land of Vietnam grew sharply 5.0%

CAGR from around 7.0 million ha to 9.5 million ha. However, the growth decreased

significantly to 0.9% CAGR and is projected to remain so in the next 10 years,

according to World Bank data.

Modernization Dampens Output

<3> Economic sector switch

- In 1990, agriculture contributed 1.6% for 8.2% growth of GDP; agriculture

decreased its contribution to 0.7% over 6.3% GDP growth in 2008 and only 0.2%

over 6.2% GDP growth of last year, signifying a consistent trend of Vietnam

economy shifting into industrial & service sectors, which are now contributing

over 95% of GDP growth. The result of GDP components have also changed

markedly. In 1990, 38% of Vietnam total GDP was from agricultural sector; but in

2016, only 16% of Vietnam total GDP was accounted by agriculture.

7

8

10

11

13

1985 1990 1995 2000 2005 2010 2015 2020 2025

Vietnam agricultural land 1985 - 2014 to 2025F (millions hectare)

Vietnam Agricultural Era

565

397

239

212

165

152

30

20

16

121

165

130

126

138

0 150 300 450

China

Vietnam

Israel

Indonesia

India

Thailand

Cambodia

Myanmar

Russia

Low-mid income

European Union

OECD members

Latin America

World

Vietnam fertilizer consumption with comparables 2014 (kg/ha)

Source: World Bank Group Data

1.6% 1.0% 0.7% 0.2% 0.1%0%

2%

4%

6%

8%

1990 2000 2008 2016 2025F

Vietnam GDP growth contribution by sector

Taxes exclude subsidies Service

Industrial Agricultural

Source: Trading Economics

Source: GSO Vietnam, World Bank, KISVN Research

16.3%

32.7%40.9%

10.0%

Vietnam GDP structure by sector size - 2016

Agriculture

Industrial

Service

Taxes excludesubsidies

Source: GSO Vietnam


Industry Coverage



<4> Higher quality standard & environmental protection trend

- During the last two decades, poor supervision coupling with overuse of pesticides

and fertilizers are key problems to consumer food safety and land degradation.

- Ever since the growth of modern retail channels leading to good agricultural

processing standards (such as GlobalGAP and VietGAP), we notice a strong

movement in both the suppliers and consumers on higher quality requirements for

food safety, which will likely to reduce the demand for fertilizers, pesticides as well

as antibiotics and other chemicals to stimulate productivity.

Agricultural Commodities Yet To Recover

<5> Stagnation in agricultural commodities price

- The slowdown of China economy, the deflation threat of developed countries like

Japan and Europe and the disorder of global climate have been a long-term

negative force to worldwide agriculture commodity sector. In particular, food crops

price such as rice, corn have dropped 25%-50% while industrial crops such as

rubber, coffee, sugar price have been lowered at least 30% compared to 2012.

- According to Yara International, with commercial fertilizer accounting for average

25%-35% food crop production cost structure and 30%-50% crop yield growth, the

current stagnation in agricultural commodity output will keep fertilizer price from

increasing any time soon.

- Amid such trend, Vietnamese commodities price are also facing short-term impact

of low inflation and oversupply condition in certain segments (like export rice due to

competition from Thailand & Indonesia) so we believe there hardly is any room for

significant price recover yet.

21.6 26.1 29.7 33.839.8

8.5 10.2

14.7

23.2

27.2

0.7 1.0

1.2

1.6

2.3

0

25

50

75

2011 2012 2013 2014 2015

Vietnam groceries sales by modern retail channels

(trillion VND)

Supermarket Hypermarket

Convenience stores

Source: Euromonitor International

Source: Bloomberg, KISVN research

Source: Yara International

41.6%

29.0%

16.3%

9.6%2.2%1.3%

Typical rice production cost structure (%)

Farmers, machineries Fertilizers

Plant Protection Chems Seeds

Energy Depreciation

76.29

69.13

92.76 89.79

66.88 62.96

77.84

47.5547.74362525

40

50

60

70

80

90

100

110

120

Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17

Global typical agricultural commodities price index 2012 - 2017 (%)

Rice 5% broken Thai

Corn maize

Rubber Singapore

Coffee Robusta

Sugar US



Industry Coverage



3. … But Opportunities From Major Sub-Industry Shifts & Policy

Catalysts

In conclusion of the above analysis, we believe that the big picture of fertilizer

consumption market is quite hard to expand now because (1) the highly mature

penetration, (2) the economic shift towards modernized industrial & service and the

stagnation of agricultural commodity price. Nonetheless, the only way that some

local fertilizer producers can increase their top line is by cannibalizing the market

share of small producers.

Industry Shifts & Trends

<1> Major switching trend from mono-nutrient fertilizers to complex fertilizers

- Having the agricultural advantages of high nutrient density, slow solubility and

specialized modes for each type of plant, multi-nutrients (or so called complex)

fertilizers are becoming a better option for farmers and major agricultural producers.

- Particularly, the most popular complex fertilizer product in Vietnam - NPK - has

consistently increased its market share from less than 30% in the beginning of

2000s to more than 36% of total consumption volume now. Agromonitor projected

that Vietnam NPK market will grow 7% CAGR til’ 2020; meanwhile, other straight

fertilizer products such as urea will only grow 1.5% CAGR during the same period.

- Because of the higher productivity of NPK complex fertilizer compared to the

combination of three separate N, P and K straight-fertilizers as well as the wide

application of agricultural standards such as VietGAP and GlobalGAP which limits

the use of inorganic fertilizer, this trend is inevitable in our opinion. We expect that

large manufacturers that focus on premium product instead of normal blending NPK

will benefit from this shift in the long term, such as DPM (chemical process), BFC &

SFG (pipe reactor granulation).

<2> High-cost producers are on the verge of extinction

- We notice that high-cost fertilizer producers, such as coal-based urea producers

Dam Ha Bac (DHB)/Dam Ninh Binh or apatite-based DAP producers DAP-Vinachem

(DDV), are consistently losing money and market share due to heavy input

expenses and low selling volume. Accordingly, DAP Dinh Vu, Dam Ha Bac and Dam

Ninh Binh have suffered an accumulated loss of VND507bn, VND1,900bn and

VND3,000bn, respectively.

- Although different ministries of Vietnam government are finding solutions to

recover these factories, we believe that the three pressures of (1) shortage of coal &

apatite ores in long-term (2) increasing logistics cost (3) gloomy fertilizer

consumption outlook will drive these companies to the verge of extinction. Our belief

is based on the underlying fact that their business models hugely lack competitive

advantage when comparing to more efficient gas-based urea or the higher-quality

NPK products. Most importantly, according to their management, these producers

can not cover their variable cost – which is currently around 6,700VND per kg –

while urea market price is only around 6,000VND per kg.


2.2 2.8 3.0 3.8 4.0

0

2

4

6

8

10

12

2004 2007 2010 2013 2016

Vietnam top 5 fertilizer consumption trend 2004-

2016 (million tons)

NPK Urea Phosphate Potash DAP

(1,900)

(3,000)

(507)(312)

(600)

(41)

Dam Ha Bac Dam Ninh Binh DAP Dinh Vu

Fertilizer high-cost producers performance (VND bn)

Accumulated loss 1H2017 loss 1H2016 loss




Industry Coverage



<3> Organic emphasis and “clean” agricultural start-up trend in Vietnam

- Thanks to consumer pattern now focusing on food safety by preference of organic

products (such as milk, vegetables, rice, meat), there are a huge startup trend in

“clean agriculture” as well as “high-tech agriculture” both from large corporates like

VinEco, Pan Salad, Loc Troi and small & young entrepreneurs (Department of

Agriculture & Development in HCMC forecasted that its’ businesses in agriculture

field will reach 1,500 enterprises in 2020, more than tripling that of the last 10 years)

- In our opinion, flexible producers who have strategic plan to develop organic

fertilizers or low-chemical-component fertilizers will be likely to profit and survive

from this gradual trend.

Governmental Stimulation Policies

<1> VAT 0% imposed on fertilizer product line

- August 16th of 2017, Ministry of Finance sent to the National Congress for the

amendment of Value-added Tax law; in which fertilizer products will be categorized

into 0% VAT taxable goods instead of non-VAT taxable one (without tax refund).

- Simply speaking, non-VAT category will consider fertilizer producers as end-

consumers while 0%-VAT one will put them back as producers and thus they can

claim the refund of input VAT. In other words, if this law amendment is approved,

fertilizer producers will be able to gain huge input VAT tax refund from the

government, which is currently a large component of their cost structures.

- Particularly, we estimate that this policy to have a pretty positive impact on the

bottom line of the following fertilizer producer annually, especially those with high

percentage of raw materials in COGS:

Stock Input materials 2016 net income

(VNDbn)

Estimated 0% VAT

refund annual impact

Estimated

change in EPS

DPM Natural gas (58%) 1,140.9 +350 billion pretax +715VND

DCM Natural gas (26%)(*) 624.3 +80-100 billion pretax +135VND

LAS Apatite ores, sulfur,

potassium (90%) 138.2 +100-120 billion pretax +770VND

VAF Apatite ores, coal,

serpentine (73%) 44.4 +50-60 billion pretax +1,150VND

BFC

SFG

N,P,K finished

products as materials

(95%)

277.1

90.6

finished goods won’t

have tax refund n/a

Source: KISVN research, (*) DCM has input gas price supported by PVN

- This 0% VAT amendment has to be submitted to National Congress in the

beginning of 2018 at the earliest. If approved, it will take effect only in the beginning

of 2019.

Input

•Pay VAT 10% for input materials (natural gas, ores, sulfur, ...)

Output

•0% VAT for output

Tax refund

• Tax refund for input VAT 10%

• Lower COGS

0% VAT policy tax refund for fertilizers (expected)

Input

• Pay VAT 10% for input materials (natural gas, ores, sulfur, ...)

Output

• 0% VAT for output

Tax refund

• No tax refund

• Higher COGS

Ordinary non-VAT incurred for fertilizers (current)


Industry Coverage



- Thus, although the quick increase of the stock price of listed fertilizers has pretty

much reflected the expectation on the positive impact on these companies’ profit, we

believe this policy catalyst is a long-term factor instead (we can only see such an

impact in 2019 at the soonest). Therefore, most of beneficiaries like LAS, VAF and

DPM would record profit improvements only since 2019, if the above policy

approved.

<2> Self-defense tariff for imported DAP/MAP fertilizers

- August 19th 2017, Ministry of Industry & Trade officially issued Decision No.3044

on application of self-defense tariffs for imported DAP/MAP fertilizer products,

making up for VND1,855,790 per ton, or approximately 20% increase compared to

current price according to our estimation.

- Particularly, this tariff will last only 200 days until March 03rd 2018 and it will

exclude products with low nitrogen components (<7%), low phosphate (<30%) and

high potassium (>3%). Moreover, it will also exclude products imported from

countries having less than 3% market share of local Vietnamese DAP/MAP

consumption.

- We think that this self-defense tariff on fertilizer cannot have significant impact like

what we saw in the steel industry in 2016 because: (1) it will only last for 200 days

(2) the recent sharp increase in imported DAP/MAP is only short-term volatility and

(3) distributors can avoid this tariff by switching into excluded countries’ source..

<3> Equity divestments by government shareholders

- August 17th 2017, Deputy Prime Minister Vuong Dinh Hue approved numerous

divestments related to Petro Vietnam Group (PVN). In these divestments,

noticeably, PVN must lower their equity ownership by the end of 2018 in two

gas-based major urea producers DPM & DCM to at least below 51%.

- Although there may be non-controllable stake of 9%-25% to be sold, we argue that

this trend is positive in long-term because a decentralized ownership structure will

partially reduce growth stagnation and improve cost management in a typical state-

owned company.

- Regarding Vinachem’s subsidiaries, there are no sign of any equity sale decisions,

except for resolutions of “in the red” factories like Dam Ninh Binh, Dam Ha Bac, DAP

Vinachem. Hence, we expect Vinachem Group to maintain controlling interests in

profitable NPK fertilizer producers (such as BFC, LAS and SFG) although there are

possibilities that Vinachem parent company is planning for IPO up to 49% stake.


100.0%

100.0%

97.7%

75.6%

69.8%

65.1%

65.0%

64.0%

59.6%

0.0% 50.0% 100.0%

Dam Ninh Binh

Vigecam

Dam Ha Bac

DCM

LAS

SFG

BFC

DAP-Vinachem

DPM

Vietnam large fertilizer producers state-ownership percentage (%)


Industry Coverage



4. Sector Financial & Valuation

List of fertilizer producers for computations & comparisons (trailing 12m figures):

Ticker Market Cap

(VND bn)

Revenue T12M

(VND bn)

Sales growth (%)

Gross margin

(%)

Debt/Equity (%)

ROE (%)

DPM 8,962 7,850 (2.49) 26.3 7.1 9.7

DCM 7,332 5,640 32.54 31.2 85.4 13.5

BFC 2,333 6,136 0.67 16.0 161.1 31.8

DHB 1,851 2,157 22.51 7.86 1,108.0 (86.12)

LAS 1,783 4,015 (4.92) 18.1 44.6 10.9

DDV 1,023 1,640 58.57 3.31 34.6 (8.62)

SFG 690 2,257 (11.65) 11.0 70.1 16.7

VAF 426 968 15.80 23.9 - 9.7

NFC 252 567 2.38 17.3 0.4 9.3

- On the contrary to the period of 2006 - 2011, Vietnam fertilizer sector suffered the

most difficult downtrend during 2012 – 2016 when revenue dropped 80% and net

income dropped 84% due to gloomy agricultural consumption and competition from

imported products, thus resulting in a significant decrease in ROE from more than

25% to less than 5%.

- However, regarding cash flow, we observe that after the above gloomy period,

many producers have slowed down capex investment while maintaining good CFO

and cash dividend payout to shareholders. Meanwhile, after 2013, capital structure

of fertilizer sector has been quite stable and healthy. From the market perspective,

dividend yield has increased recently – also 5 times higher than the average

dividend yield of VNIndex, showing limited of downside risks.


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

8,000

16,000

24,000

32,000

40,000

2012 2013 2014 2015 2016

Fertilizer sector business performance

Revenue Net income

Net margin ROE

VND bn

(7,000)

(5,000)

(3,000)

(1,000)

1,000

3,000

5,000

7,000

2012A 2013A 2014A 2015A 2016A

Fertilizer sector cash flow performance

CFO CFF CFI

VND bn

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016

Fertilizer sector capital structure

Equity Short-term debt

Long-term debt Payables

0.0%

5.0%

10.0%

15.0%

20.0%

-

1,000

2,000

3,000

4,000

5,000

2012 2013 2014 2015 2016

Fertilizer sector cash dividend history

Cash dividend Dividend yield

VND bn

Source: Stoxplus, KISVN research


Industry Coverage



- As a cyclical sector, we noticed that the fertilizer industry’s P/E pattern goes

contradictorily with its business performance. To be more specific, in good years

such as 2011-2012, fertilizer sector P/E shrunk to around 5-6 times – indicating a

negative outlook for the outstandingly peaked earnings of many producers. While in

bad years such as 2016 – 2017, fertilizer sector P/E rose significantly to currently

around 9 times due to both sharp drop in earnings and higher market expectation on

the recovery of this sector.

- Thus, we have chosen P/B ratio as a more suitable measure to anticipate business

cycles of this industry because of: (1) high volatility in net earnings (2) capital-

intensive structure of these commodity manufacturers (3) lower intangible value than

consumer industry such as F&B, retail. At this contemporary point, the P/B ratio of

the whole industry is 1.4 times: 40% lower than the current rate of VNIndex and

around the bottom of previous period, which is quite undervalued with the current

bull market condition of Vietnam.

- In conclusion, we recommend OVERWEIGHT in long-term vision for fertilizer

industry because of attractive valuation, positive internal shifts plus some

government policy catalysts while having downside protection with dividends.

1.43

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 Historical P/B Fertilizer Sector vs VNIndex VNIndex P/B

Fertilizer Sector P/B

8.91

-

5

10

15

20

25

Historical P/E Fertilizer Sector vs VNIndex VNIndex P/E

Fertilizer Sector P/E




Industry Coverage



5. Stock Pick

No. Stock Company Product P/E P/B EV/EBITDA Dividend Recommend

1 DPM Dam Phu My Urea, NPK 11.82x 1.10x 6.29x 8.79% Overweight

2 DCM Dam Ca Mau Urea 9.00x 1.19x 3.77x 7.33% Neutral

3 BFC Binh Dien Fertilizer NPK 8.03x 2.38x 6.07x 4.91% Neutral

4 DHB Dam Ha Bac Urea - 1.78x - - Underweight

5 LAS Lam Thao Fertilizer NPK & Phosphate 11.10x 1.34x 6.56x 6.37% Neutral

6 DDV DAP Dinh Vu DAP - 1.10x - - Underweight

7 SFG Southern Fertilizer NPK & Phosphate 6.96x 1.13x 7.39x 4.27% Neutral

8 VAF Van Dien Fertilizer NPK & Phosphate 10.07x 0.98x 4.91x 8.44% Overweight

9 NFC Ninh Binh Fertilizer Phosphate 13.36x 1.33x 8.72x 6.25% Neutral

Source: KISVN , trailing 12 month number, updated 10-Oct-2017


Industry Coverage



Stock Pick DPM VN

OVERWEIGHT

Market price (VND) 22,750

Target price (VND) 30,100

Annualized price return (%) 32.3%

Expected dividend yield (%) 8.8%

Expected return (%)

41.1%

Stock performance (%)

YTD 1m 3m 12m Absolute 1.6% -2.1% -3.4% -19.6% Relative -19.8% -3.1% -8.5% -38.7%

Stock Statistics 05-Oct-17 52-week range (VND) 21.1k-26.2k Shares o/s (m) 391.33 Mkt cap (VNDbn) 8,903 Mkt cap ($m) 391.34 Foreign % owned 20.84% Est. free float (mshrs) 137.8 3m avg (shrs) 317k VND/USD 22.750 Index: VN-Index/HNX 805/107

Ownership 05-Oct-17 PetroVietnam Group 59.59% Dragon Capital Group 9.34% Deutsche Bank AG 4.60% Van Eck Vectors ETF 1.51% BlackRock Group 1.08%

Source: Bloomberg

Petro Vietnam Fertilizer & Chemical Co. (HOSE: DPM) –

Long term catalysts by new NPK product and 0% VAT

while having limited downside risks

Pros:

The largest urea fertilizer company with 800,000 tons volume produced annually.

Moreover, DPM also has great competitive advantages of the exclusive

accessibility to gas source from nearby Cuu Long basin and the extensive

distribution network wide over Vietnam

Amid the industry shift, we highly appreciate the potentials of new NPK product

plant with 250,000 tons capacity. BOM estimates that 80% capacity will be fulfilled

in 2018 based on better product quality, strong marketing plan (in the early years,

price will be discounted by 10%-20% to only VND8,000-11,000 per kg, compared

to the average market price of VND10k-11k per kg). This will lead to additional

VND2,000bn revenue and VND300bn gross profit for 2018 result.

A positive plan to diversify revenue sources as DPM is developing basic

chemical projects (NH3, H2O2, polystyrene, and polypropylene). Management

states that these chemicals sales will contribute 50% of revenue in 2020.

The government supporting policy of VAT 0% imposed on fertilizer product will

boost approximately VND350bn annually to DPM pretax profit (equal to around

VND700 increase in EPS) thanks to VAT tax refund on gas input

Forced divestment by Prime Minister to reduce PVN’s stake in DPM to below

51% will create some room for management improvement.

Healthy financial condition with little debt (<10% equity), large cash on hand and

sustainable cash dividend policy. With dividend yield of currently 8.8%, long-term

investment in DPM is reasonable as downside risks are limited.

P/B is currently at 1.1 times, which we believe does not reflect the huge

intangible value of input autonomy and wide distribution network of DPM.

Cons:

Gloomy urea consumption picture, which is projected to grow only 1.5% CAGR

in the years ahead. DPM is also faced incoming risks of the market cannibalization

of DCM and Chinese low-price imported urea

Aside from floor price imposed by PVGas, input gas cost to DPM, which is

determined by formula: 0.46*MFO+0.96USD/MMBTU, will depend heavily on

fluctuations of global fuel oil (FO) price

If approved by Congress, VAT 0% policy will be effective only in Jan-2019.

According to management, new NPK product needs one year to breakeven

PVTex Dinh Vu project resolution is still “in the dark” and is out of control of

DPM. In the worst case, DPM is obligated to pay VND1.4 trillion debt of PVTex.

Recent stock sale of many members in board of management has put downward

pressure on stock price.

Valuation: Based on PBR multiple, we value DPM at VND30.1k per share in one

year ahead. Total return is 41.1%, including 8.8% dividend yield. OVERWEIGHT

0

1,000

2,000

3,000

4,000

5,000

20

23

26

29

32Price - VolumeVND '000 '000 shares


Industry Coverage



DPM financials model

Unit: VND bn 2015 2016 2017E 2018E

Net Revenue 9,765 7,925 7,743 9,922

Sales growth (%) 2.3% -18.8% -2.3% 28.1%

Urea sales 6,171 5,513 4,898 5,034

New NPK sales - - - 2,000

Chemical & other fertilizer trading sales

3,594 2,411 2,845 2,888

COGS 6,612 5,529 5,645 7,233

Gross margin (%) 32.3% 30.2% 27.1% 27.1%

SG&A 1,348 1,235 1,254 1,607

EBITDA 1,921 1,277 992 1,347

EBITDA margin (%) 19.7% 16.1% 12.8% 13.6%

Depr’n&Amort’n 117 116 149 266

Operating profit 1,804 1,161 844 1,081

Operating margin (%) 18.5% 14.7% 10.9% 10.9%

Net interest expense -249 -224 -191 -162

As % of avg net debt

(incl capitalized interest) 4.7% 4.6% 5.0% 4.7%

Other profit/loss -173 9 -108 -108

Tax 358 228 185 227

Effective tax rate (%) 19.0% 16.4% 20.0% 20.0%

Net profit 1,522 1,165 741 909

Net margin (%) 15.6% 14.7% 9.6% 9.2%

Minorities 34 24 29 27

Net attributable profit 1,488 1,141 712 882

Number of shares (m) 380 391 391 391

EPS

(VND, bonus-adjusted) 4,538 3,389 2,358 2,759

EPS growth (%) 57.3% -25.3% -30.4% 17.0%

DPS (VND) 4000 3500 2500 2000

Payout ratio (%) 88.1% 103.3% 106.0% 72.5%

- EBITDA = Net revenue – (COGs -Depr’n&Amort’n)– SG&A expenses

- EBIT = EBITDA – Depr’n&Amort’n

- Net interest expenses = interest expenses – interest income

- Other profit/loss consists of other financial income/expenses, profit share

from JVs/associates and other income/loss

- Payout ratio = Dividend paid / Net attributable profit

BS & CF items (VNDbn) 2015 2016 2017E 2018E

Receivable turnover (x) 15.9 11.9 14.6 13.4

Inventory turnover (x) 4.5 4.7 4.6 4.7

Payable turnover (x) 4.2 3.2 3.8 3.5

Increase in WC -841 131 -68 -30

Capex 960 1,289 600 600

Other cashflow items 473 -951 0 0

Free cash flow 1,048 813 358 604

Share issues 0 114 0 0

Dividends paid 570 2,312 979 783

Increase in net debt -478 1,385 621 178

Net debt, end of year -5,539 -4,154 -3,533 -3,354

Enterprise value 3,558 4,925 5,574 5,780

Total equity 8,548 8,229 8,203 8,527

Minority interests 192 174 203 230

Shareholder’s equity 8,356 8,055 8,000 8,297

BVPS (VND) 21,988 20,581 20,439 21,198

Net debt / equity (%) -65% -50% -43% -39%

Net debt / EBITDA (x) -2.9 -3.3 -3.6 -2.5

Total assets 10,919 9,569 9,332 9,457

- Net debt = debts – cash & equivalent

Key ratio & valuation 2015 2016 2017E 2018E

ROE (%) (excl minority interest)

17% 14% 9% 11%

ROA (%) 14% 12% 8% 10%

ROIC (%) 38% 28% 13% 16%

WACC (%) 15% 15% 15% 15%

PER (x) 5.0 6.7 9.6 8.2

PBR (x) 1.1 1.1 1.1 1.1

PSR (x) 0.9 1.1 1.1 0.9

EV/EBITDA (x) 1.9 3.9 5.6 4.3

EV/Sales (x) 0.4 0.6 0.7 0.6

Dividend yield (%)

(bonus-adjusted) 17.6% 15.4% 11.0% 8.8%


Industry Coverage



Contacts:

HCM City Head Office

Level 3, Maritime Bank Tower

180-192 Nguyen Cong Tru St., District 1, HCM City

Tel: (+84 8) 3914 8585

Fax: (+84 8) 3821 6898

Hanoi Branch

Level 6, CTM Tower

299 Cau Giay, Cau Giay District, Hanoi

Tel: (+84 4) 3974 4448

Fax: (+84 4) 3974 4501

Equity Research

Head of Equity Research

Mr. Huy Hoang, CFA

(+84 8) 3914 8585 (x1450)

[email protected]

Senior Associate –

Property, Agriculture,

Retailing

Mr. Trung Hoang, CPA

(+84 8) 3914 8585 (x1457)

[email protected]

Associate – Pharma,

Consumer, Chemical

Mr. Hoang Ha Nguyen

(+84 8) 3914 8585 (x1463)

[email protected]

Associate – Utilities,

Energy

Mr. Danh Nguyen

(+84 8) 3914 8585 (x1459)

[email protected]

Associate – Logistics,

Aviation, Automobile

Mr. Bao Vo

(+84 28)3914 8585 (x1460)

[email protected]

Macro Research

Head of Macro Research

Mr. Vien Bach

(+84 8) 3914 8585 (x1449)

[email protected]

Institutional Sales

Director, Sales

Ms. Uyen Lam

(+84 8) 3914 8585 (x1444)

[email protected]


Industry Coverage



Our Recommendation System

OVERWEIGHT: where we believe prospective 12 month VND total return (including dividends) will be 15% or more.

NEUTRAL: where we believe it will be -5% to 15%.

UNDERWEIGHT: where we believe it will be -5% or less.

Disclaimer

This report has been issued by the KIS VN Securities Corporation (“KIS”) with the instructional contributions of KIS VN

Securities Corporation whose employees are specified in the publication. This report is for information of its institutional and

professional customers.

This report is and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe for any

investment. No consideration has been given to the particular investment objectives, financial situation or particular needs of

any recipient. Investors are advised make their own financial decisions based on their independent financial advisors as they

believe necessary and based on their particular circumstances such as their financial situation, investment objectives and

other considerations.

In preparing this report, we have relied upon and assumed the accuracy and completeness of all information available from

public and other sources which we believe to be reliable, but which we have not independently verified. KIS makes no

express or implied guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or

completeness of such information.

Opinions, estimates, and projections expressed are current opinions of the authors as of the original publication date

appearing on this report only and the information, including the opinions contained herein, and are subject to change without

notice.

KIS and its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or

other business from, companies mentioned herein. Further, KIS and its affiliates, and/or their officers, directors and

employees involved in the preparation or issuance of this report may, from time to time, have long or short positions in, and

buy or sell, the securities, or derivatives (including options) thereof, of companies mentioned herein, or related securities or

derivatives in a manner that may be consistent or inconsistent with this report and opinions expressed therein. As a result,

investors should be aware that KIS and its affiliates and/or their officers, directors and employees may have a conflict of

interest that could affect this report.

This report shall not be copied, reproduced, distributed (in whole or in part) or disclosed by recipients to any other person

without the express permission of KIS in writing.

rating overweight long bet on industry catalysts … conclusion, despite of the mature status of...

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