vsh - 11.2010.en

EQUITY RESEARCH

TLS Vietn273 Kim

1

INH SON – SONG HINH HYDROPOWER JSC 17/11/2010

ur 2010 target price is estimated at VND 13,966, upside 29.3% of market price atovember 17, 2010. We recommend BUY with two key highlights : (i) huge growthotential of electricity sector, and (ii) profit improvement from both saving depreciationosts, and increasing capacity and output.

OMPANY PROFILEinh Son – Song Hinh HydroPower Joint Stock Company (VSH : HSX) was renamed since July 2000ith previous name being Vinh Son HydroPower under-controlled by Electric Corporation III. With 04perating generators, VSH supplies 600 million Kwh per year to EVN. Currently, the output andarket share of VSH account for 0.9% and 1.1% respectively.

SH has good growth track record during 2007 – 2009 period. The output recorded at 658.686 milwh in 2007, 859.167 mil Kwh in 2008 and 923.81 mil Kwh in 2009. In 2009, VSH reported revenuef VND 606.25 billion, increased by 118.63% versus the budget.

SH issued equity with 2:1 ratio to increase chartered capital of VND 2,062 billion by the end of 2009.ith investment in VinhSon reservoir C , VSH increased more output of 78 million Kwh. In addition,SH get approval in principle to invest in new Hydropower projects.

EW DEVELOPMENTS

Q2010 operation and financial performance: VSH’s output in 3Q2010 is 162.83 million Kwh,ringing to 9-months output of 610.15 million Kwh, decline of 10.7% comparing the same last period.ith this output, 9-months 2010 VSH’s accumulated revenue recorded at VND 300.04 billion,

ecreased by 11.37% year-on-year. But it is conservative with 90% of contract price.

ower reservoir-water level resulting in lower input. VSH announced that the reservoir-watervel is lower than normal operations. As the result, the output expected to record lower in 2010.

VinhSonSongHinh Update

Reservoir A Reservoir B Reservoir C

Normal level (m) 775.00 826.00 981.00 209.001/11/2010

Actual level (m) 774.04 820.3 975.35 207.77

Source: VSH

enew contract with Electricity of Vietnam (EVN) : Currently, VSH is negotiating contract withVN. With new retail selling price increased by 6.8% by EVN, we expect there is more chance for VSH

set higher price to EVN with VND 476/kwh for 3rd quarter and VND 580/kwh for the rest of theear.

nvestment updates: Thuong Kon Tum Hydropower project (220MW), and VinhSon Hydro Power 2nd 3 (96MW) are on first stage of development. Vinh Son 3 expected to complete on Q42011.huong Kon Tum Hydropower project will be expected to complete on 2014.

NVESTMENT HIGHLIGHTS

lectricity demand expected increase to 17.5% versus 11% supply in 2010. Electricityemand will be expected continue outpacing supply. We expect the demand for industry and retailonsumption increased to 17.5% in 2010 which is laying foundation for VSH’s 2010 revenue growth.

epreciation costs come to zero at 2011. Our estimate indicates that in early 2011, VSH canave depreciation cost of VND 34 billion per year when Vinh Son – Song Hinh power plant has full-epreciated year. As a result, we expect more gain to VSH

elling price to EVN may increase by 5%. With the shortfall of supply, we expect the VSH’srobability of increasing selling price to EVN is high.

ALUATION

e use the method of valuation based on market and scenario approach to arrive VSH’s target price.ur 2010 target price of VND 13,966 per share is derived from PE target of 8x and PB target of 1.4x.does appear cheaper than world industry-peers with PE of 12.4x and PB of 1.7x(Yahoo Finance).e compare it to world industry-peers as it is foreigners' “pick-up” stock

AIN RISKS

Email: Tu.

Ticker: VS

Analy

2010 Target

SPrice as of 11/17/2010Sector: Electric UtilitiesBusiness Models: Hydro PowerListed SinceOutstanding SharesFloating SharesMarket Cap (VND billion)52 Week High (VND)52 Week Low (VND)10 Day Average Volume% Price Change 1 Month% Price Change 3 month% Price Change 6 month% Price Change 12 month% Foreign Ownership% Foreign Ownership LimitBeta 52 WeekSource: TLS

Return of VSH, VNIndex

FINANCIAL HIGH2008

Assets 2,483Equity 2,142Net Revenue 483.7EBIT 295.87EAT 370.6EPS (VND) 2,696Dividend (VND) 600PE (x) 10.3PB (x) 1.8Sales Growth 30.7%EPS Growth 38.2%Gross Profit Margin 63.6%Net Profit Margin 76.5%Return on Total Asset 14.9%Return on Equity 17.3%Dividend Yield

Source : VSH, TLS

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Nguyen Manh TuEquity Analyst

[email protected]

H- Exchange : HSX

st’s Opinion : BUYprice: VND 13,966

TOCK STATISTICSVND 10,800

07/18/2005206,241,387131,238,129

2,41344,90011,000

870,2207.14%12.9%

145.16%87.74%16.8%

49%0.84

and HNXIndex

LIGHTS (VND bn)2009 2010E2,524 2,6892,213 2,325

517.56 450.2317.84 248.1374.5 317.42,179 1,5392,400 1,0009.68 6.71.42 1.17

-3.7% -13%-30% -29%

64.3% 58.2%72.4% 70.5%14.8% 11.8%16.9% 13.7%

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Return HASTC

am: Level 6, Toserco BuildingMa, Ba Dinh, Hanoi, Vietnam

Web site: www.tls.vnBloomberg: TLSV <GO>

Sales & Trading - HanoiNguyen Viet Dzung

E: [email protected]

Sales & Trading - HCMCNathan Nguyen


VSH’ main risks are drought conditions, new power purchase agreement with EVN and exchange rate

mailto:[email protected]

EQUITY RESEARCH

TLS Vietnam: Level 6, Toserco Building273 Kim Ma, Ba Dinh, Hanoi, Vietnam






FINANCIAL SUMMARYUnit: In VND billion

Earning Model 2009 2010E 2011E 2012E Balance Sheet 2009 2010E 2011E 2012E

Net sales 517.6 450.3 472.8 588.6 Current Assets

Cost of sales -184.9 -188.1 -197.5 -245.9 Cash and cash equivalents 196.3 459.9 1,270.0 803.4

Gross profit 332.7 262.2 275.3 342.8 Financial investment 785.7 785.7 785.7 785.7

Gross profit margin 64.3% 58.2% 58.2% 58.2% Accounts receivable 99.7 88.4 93.7 115.2

Other operating income 0.1 0.0 0.0 0.0 Inventory 20.5 23.0 23.1 28.7

Selling expenses 0.0 0.0 0.0 0.0 Prepaid expenses, other CA 0.1 0.1 0.1 0.1General administrationexpenses -14.9 -14.0 -14.8 -18.4 Total current assets 1,102.3 1,357.0 2,172.5 1,733.1

Other operating expenses 0.0 0.0 0.0 0.0 Property and equipment

EBIT 317.8 248.1 260.6 324.4 At cost 2,905.6 2,910.6 2,910.6 3,660.6

Investment income 82.1 98.7 50.0 10.0 Less accumulated depreciation -1,626.3 -1,778.0 -1,929.7 -2,120.5

Net interest -19.3 -18.7 -66.0 -64.4 Net property and equipment 1,279.3 1,132.6 980.9 1,540.1

Net financial items 62.8 80.0 -16.0 -54.4 Other long - term assets 142.4 200.0 550.0 500.0

Earnings before tax 380.7 328.2 244.6 270.0 Total Assets 2,524.0 2,689.7 3,703.5 3,773.2

Income tax 12.6 10.7 12.2 13.5 Current LiabilitiesTax/Profit beforeamortization 3.3% 3.3% 5.0% 5.0% Financial debts 30.9 30.9 30.9 30.9

Profit after taxes 374.5 317.5 232.4 256.5 Trade payables 29.7 22.3 22.6 32.3Dividend paid (VND pershare) 0.0 0.0 0.0 0.0 Other liabilities 0.3 0.2 0.2 0.3

Retained earnings 65.2 111.2 67.4 91.5 Total Current Liabilities 61.0 53.3 53.7 63.5

Long-term debt 249.3 311.3 1,257.3 1,225.8Weighted average shares(m) 171.9 206.2 206.2 206.2 Stockholders' equity 2,213.8 2,325.1 2,392.5 2,484.0

Year end shares (m) 206.2 206.2 206.2 206.2 Common stock 2,062.4 2,062.4 2,062.4 2,062.4

Earnings per share (VND) 2,179 1,539 1,127 1,244Investment and developmentfunds 21.5 21.5 21.5 21.5

Common stock dividend(VND) 1,500 1,000 800 800 Retained earnings 112.0 223.3 290.7 382.2

Payout ratio (common stock) 68.8% 65.0% 71.0% 64.3%Budget sources and otherfunds 17.9 17.9 17.9 17.9

Minority interest

Cash flow Statements 2009 2010E 2011E 2012E Total liabilities and equity 2,524.0 2,689.7 3,703.5 3,773.2

Net profit 374.5 317.5 232.4 256.5

Adjustments for: 0.0 0.0 0.0 0.0 Growth and Margin (%)Depreciation andamortization 151.0 151.7 151.7 190.8 Sales Growth 7.0% -13.0% 5.0% 24.5%

Change in inventories 0.3 -2.5 -0.1 -5.6 EBITDA Growth

Change in trade receivables -0.4 11.4 -5.3 -21.5 EBIT Growth 7.4% -21.9% 5.0% 24.5%

Change in trade payables 18.4 -7.6 0.4 9.7 Net Income Growth 1.1% -15.2% -26.8% 10.4%

Cash flow from operations 543.9 470.4 379.1 429.9 EPS Growth -19.2% -29.4% -26.8% 10.4%

Gross Margin 64.3% 58.2% 58.2% 58.2%Change in tangible fixedassets -79.9 -5.0 0.0 -750.0 EBITDA MarginChange in intangible fixedassets 40.0 0.0 0.0 0.0 EBIT Margin 38.6% 44.9% 44.9% 44.9%Change in long terminvestments -3.6 -57.6 -350.0 50.0Cash flow frominvestments -43.5 -62.6 -350.0 -700.0 Ratios

ROE 16.9% 13.7% 9.7% 10.3%

Equity issued 266.8 0.0 0.0 0.0 ROA 14.8% 11.8% 6.3% 6.8%

Change in other funds 2.2 0.0 0.0 0.0 Inventory days 41 45 43 43

Change in financial debts -73.3 0.0 0.0 0.0 Receivable days 42 71 71 70Change in long termliabilities 24.3 62.0 946.0 -31.5 Payable days

Dividends to shareholders -572.1 -206.2 -165.0 -165.0 Net debt/equity 14.0% 15.7% 54.8% 51.9%

Cash flow from financing -352.1 -144.2 781.0 -196.5 Interest cover - EBIT(x)

Net cash flow 148.3 263.6 810.1 -466.6 Valuation (Multiples)

Opening cash 48.0 196.3 459.9 1,270.0 PE (x) 9.68 6.7

Closing cash 196.3 459.9 1,270.0 803.4 PB (x) 1.42 1.17

Dividend Yield (%) 15% 8.5%

Projected Cash Flow 2009 2010E 2011E 2012E

Profit after Taxes 374.5 317.5 232.4 256.5

Add back depreciation 151.0 151.7 151.7 190.8(-) increase in CA, exceptcash -0.1 8.9 -5.4 -27.2

(+) increase in CL -54.9 -7.6 0.4 9.7

(-) increase in PEaC -8.4 -5.0 0.0 -750.0Notes: CA = current assets; CL = current liabilities; PEaC = Property and Equipment atCost

Free Cash Flow 462.2 465.4 379.1 -320.1 Source: Thang Long Securities

EQUITY RESEARCH







INVESTMENT HIGHLIGHTS

Supply does not meet demand, and Vietnam is still on power shortage.

The electricity demand for industry and consumption increased rapidly by 16-17% per year. In 2010, electricity demand isforecasted to increase 17.5% yoy, causing power shortages in the dry season.

On the other hand, the power output increased with a lower rate, during 2004 – 2008 period, the output increased 17% peryear, and that number is estimated about 11% in 2010 and 9.5% in 2020

Graph : Electricity consumption in the period 2006 - 2012:

Source: EIU

Table : Electricity output plan 2007 – 2020

Unit 2007 2010E 2020E

Output bn Kwh 57.5 88.5 - 93 210 - 250

Growth % 16 11 9.5

Source: GSO Vietnam

The Government encourages investment in local power plants to address the shortages

According to the plan of national electricity development 2006 – 2015 period which was approved by the Prime Minister(referred to Planning Electric VI), during 2006-2010 period, 61 power projects were expected to be operated with a totalcapacity of 14,581 MW. In fact, there are about 30 big power plants and dozens of small power generators are involvedwith total capacity around 12,000 MW. Thus, the total capacity is still not below the target. This is the upside potential ofcompanies in the electricity sector like Vinh Son – Song Hinh.

Plan of capacity and output in 2006 – 2015 period

Source: Planning Electric VI

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EQUITY RESEARCH







According to the plan, there are 74 projects will be operated with total capacity up to 34,163 MW in the 2011 – 2015period. VSH’s project Thuong Kon Tum is one of these projects planned to operate in 2014.

Profits improvement from reduced depreciation costs.

Our estimation indicates that VSH can save depreciation cost of VND 34 billion per year when all machinery have fulldepreciated year from 2011 onward. As a result, we expect more gain to VSH

Table : 2010 depreciation cost breakdown

Tangible fixed assets (VND mn) Workshop Equipments TransportationManagementequipments

Total

Beginning gross value 2,048,486 827,854 23,342 7,093 2,906,775

Depreciation 2010E 68,188 82,947 1,229 236 152,600

Closing gross value 2010E 1,069,381 48,012 4,142 5,566 1,127,101

Depreciation 2011E 68,188 48,012 1,229 236 117,666

Increase (Decrease) (34,934) (34,934)

Source: VSH’ financial statements and TLS research

New power purchase agreement with EVN (PPA)

The new PPA negotiation is still in process and the outcome is not yet clear. Increasing selling price makes revenue andprofit growth. The current price of VSH is near the bottom of the Power purchase price brackets promulgated by the State(VND580/kwh in dry season and VND476/kwh in rainy season). EVN has increased the retail price of electricity 6.8%starting from 1/3/2010. With imbalance between supply and demand, we expect the VSH’s probability of increasing sellingprice to EVN is high

Power purchase price bracket (VND/USD = 18,932)

Price for Hydropower plant with capacity > 30MW

USD VND VSH (VND)

Dry season 2.50 - 5.00 US cent/Kwh 473 – 947 VND/Kwh 580

Rainy season 2.00 - 4.70 US cent/Kwh 379 – 890 VND/Kwh 476

Price for Hydropower plant with capacity < 30MW

Dry season 2.70 - 5.20 US cent/Kwh 511 – 984 VND/Kwh

Rainy season 2.50 - 5.00 US cent/Kwh 473 – 947 VND/Kwh

Source: Decision No 2014/QĐ-BCN & VSH

Growth of capacity and output

Vinh Son – Song Hinh has operated at full capacity and the company is stepping up investment in new projects. Accordingto VSH’s projects plan, the total capacity and output start increasing from late 2011. Specifically, Vinh Son 3 project with a30MW capacity expected to be operated in 4Q2011, Vinh Son 2 project (100MW) in 2013, Thuong Kon Tum project – abiggest project with 220 MW capacity, will finished in 2014, bringing the total power output up to 2 billion Kwh.

Table : VSH’ project outline

Thuong Kon Tum Vinh Son 2 Vinh Son 3 Dong Cam

Capacity (mw) 220 100 30 120

Output (bn kwh) 963.6 438.0 131.4 525.6

Investment (VND bn) 5,744 2,300 660 2,118

Progress 2009 - 2014 2009 - 2012 2009 - 2011 2009 - 2013

Source: VSH

EQUITY RESEARCH







Total Capacity and Output of VSH in 2010 – 2015 period

Capacity (MW) 2010 2011 2012 2013 2014 2015

Existing 136 136 136 136 136 136

Vinh Son 3 30 30 30 30

Vinh Son 2 100 100 100

Thuong Kon Tum 220 220

Dong Cam 120 120

Total capacity 136 136 166 266 606 606

Growth 0% 22% 60% 128% 0%

Output (bnkwh)

2010 2011 2012 2013 2014 2015

Existing 565.7 565.7 565.7 565.7 565.7 565.7

Vinh Son 3 131.4 131.4 131.4 131.4

Vinh Son 2 438.0 438.0 438.0

Thuong KonTum

963.6 963.6

Dong Cam 525.6 525.6

Total output 565.7 565.7 697.1 1135.1 2624.3 2624.3

Growth 0% 23% 63% 131% 0%

Source: VSH & TLS research

VALUATION

Valuation Method

We use the method of valuation based on market to valuate VSH, which uses the P/E & P/B as the key indicators value. Webelieve this method is consistent with the emerging markets like Vietnam with the one – year investment time due to thevaluation habit of most domestic investors (over 90% of the trading market). We proceed in two steps: (1) forecasting EPSand BV toward the end of 2010 based on VSH’s business fundamentals, (2) using the average PE & PB sector (in the caseof large difference between maximum value and minimum value) as the target multiplier to calculate the price.

We forecast the performance of VSH base on 3 cases: base case (normal), best case and worst case. We believe the VSH’sintrinsic value is determined within the worst and the best case

THE BASE CASE

Base on our best understanding about Vinh Son – Song Hinh and the performance of VSH until now, we believe that thecase will best describe the VSH’s performance and has the highest probability of 70%.

Assumptions of the base case:

Assumption of Output

According to VSH, electricity output in the first nine months of 2010 reached 610.15 million kWh, and this number in 2009was 683.34 million kWh. Monthly average output in the first 9 months of this year decreased by 10.7% compared to 2009.The reason is drought conditions during the first 6 months that made the water level in VSH’s reservoirs lower. In 2009,favorable weather has caused water level in reservoirs higher so VSH can perform with maximum capacity.Observed water levels in the reservoirs of VSH in recent times, we see that water level is improving, despite stillsignificantly below the designed normal water level. The rainy season in the third quarter is time for VSH to improve waterlevel in reservoirs.

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EQUITY RESEARCH







Water levelVinh Son

Song HinhDay

UpdateReservoirA

ReservoirB

Reservoir C

Normal level by design (m) 775 826 981 209

Actual level (m)

774.43 824.08 976.29 206.97 1/4/2010

772.84 821.58 972.96 203.56 1/5/2010

772.76 819.5 974.69 199.59 1/10/2010

774.04 820.3 975.35 207.77 1/11/2010


We estimate that the output in 4Q2010 is 203.38 million Kwh. Monthly average output in Q4 is 67.79 million Kwh, equal tothe monthly average in first nine months 2010

Output (mn Kwh) Q1 Q2 Q3 Q4 Total Growth

Output 2009 244.69 274.61 164.04 243.57 926.91

Output 2010 191.17 256.15 162.83 203.38 813.53 -12.2%


The 2010 power output of VSH is expected to reach 813.53 million kWh, down 12.2% compared to 2009

Assumption of new selling price to EVNCurrently, VSH is conducting negotiations with EVN on new power purchase agreement (PPA). Old contract price withVND476/kWh in the rainy season (July to September) and VND580/kWh in the dry season (the rest of year) has expiredsince 2009. A lower price would hardly be accepted by the VSH’ shareholders while EVN has increased retail electricityprices by 6.8% from 03.01.2010. However, Vietnam’s power-generation, transmission and distribution sector are controlledby EVN, so we predict that the ability to increase selling price to EVN in the new contract is not high. We assume the newprice will remain unchanged

Assumption of Revenue

Output (mn Kwh) Q1 Q2 Q3 Q4 2010E

Electricity output production 191.17 256.15 162.83 203.38 813.53

Electricity output commercial (99%) 189.26 253.59 161.20 201.35 805.40

Selling price 2010 (VND/Kwh) 580 580 476 580

Revenue (VND bn) 109.77 147.08 76.73 116.78 450.37

Source: TLS researchAssumption of Production CostsIn production costs breakdown, depreciation cost accounts about 75%. In 2010, depreciation cost remain stable at VND152billion. Total production costs reach VND202 billion

Production Costs (VND bn) 3Q2010 2010E

Depreciation expenses 114.22 152.00

Natural Resources Tax - 14.00

Labor costs 9.00 12.00

Material costs 1.67 2.00

Outsourcing service cost 1.67 2.00

Administration expenses 7.40 14.00

Other expenses 10.92 6.00

Total 144.88 202.00

Source: TLS research

Assumption of Investment IncomeIn 2010, VSH still has big short-term investment such as VND200 billion deposits in short-period; VND500 billion-loan toEVN with interest 8% per annual and around VND300 billion cash from operating profit undistributed. So Investmentincome mainly comes from interest of short-term loan and deposits

Fiscal year 2007 2008 2009 3Q2010 2010E

Investment Income (VND bn) 75.8 100.5 82.1 73.8 98.6


EQUITY RESEARCH







Assumption of Investment Expense

Investment expense in 2010 comes from 2 parts: interest expense and exchange rate provision. In this base case, weassume that exchange rate will be kept unchanged. So the provision will be VND11.9 billion

Investment Expenses (VND bn) 2007 2008 2009 2010E

Interest Expense 15.39 10.62 6.52 6.8

Exchange rate gain/loss provision 0.59 15.13 12.76 11.94

Total 15.98 26.55 19.28 18.74


Earning Model

Income Statement (VND bn) 2007 2008 2009 2010E

Sales 370.16 483.68 517.56 450.28

Cost of good sales (168.04) (177.68) (184.90) (188.08)

Gross profit 202.12 306.00 332.66 262.20

Operating expense - - - -

Administration expense (7.61) (10.17) (14.92) (14.05)

Investment income 75.84 100.55 82.11 98.69

Investment expense (15.98) (26.55) (19.28) (18.65)

Profit before Tax 254.38 369.88 380.67 328.18

Tax (0.56) (0.74) 12.62 10.70

Profit after Tax 254.94 370.62 374.52 317.48

EPS (VND) 1,950 2,696 2,179 1,539


Valuation

Sector P/E and P/B in Vietnam are 8x and 1.4x. With PAT 2010E of VND317.48 billion, EPS of VND1,539, BV of VND11,274,we arrive to the target price as below table:

Method Price (VND) Weight

P/E 12,312 50%

P/B 15,783 50%

Valuation Price (VND/cp) 14,048

The valuation price of VSH in the Base Case is VND14,048 /cp.

Financial ratios of companies in Electricity Sector

TickerMarket Cap(VND bn)

ROA ROE EPS P/E BV P/BPrice

('000VND)

BTP 731.88 1.98% 5.12% 675 17.9 13,195 0.92 12.1

KHP 577.56 5.65% 18.59% 1,159 12.0 6,234 2.23 13.9

PPC 5709.11 7.60% 20.65% 2,734 6.4 13,241 1.32 17.5

SJD 627.89 10.48% 24.44% 3,733 5.6 15,276 1.37 21

TBC 1073.15 15.02% 16.52% 2,043 8.3 12,365 1.37 16.9

TMP 1176.00 11.57% 20.27% 2,461 6.8 12,141 1.38 16.8

VSH 3134.87 12.83% 14.62% 1,570 9.7 10,734 1.42 15.2

HJS 114.00 2.68% 13.64% 1,893 10.0 13,877 1.37 19

NBP 331.93 21.84% 29.97% 4,398 5.9 14,676 1.76 25.8

NLC 142.00 23.29% 28.58% 5,783 4.9 20,234 1.40 28.4

RHC 75.52 10.95% 18.54% 4,179 5.6 22,543 1.05 23.6

Average 8.0 1.40


EQUITY RESEARCH







We use the world industry-peers as reference because VSH is foreigners' “pick-up” stock. PE and PB of this sector in theworld are higher than Vietnam with around 12.4x and 1.74x respectively.

DescriptionMarket

CapNet Profit

MarginROE %

Div. Yield%

P/E P/B

Sector: Utilities 648.1B 8.36 11.85 4.09 12.5 1.82

Industry: Electric Utilities 342.6B 7.4 11 3.88 12.4 1.74

Companies

Allegheny Energy Inc. (AYE) 4.1B 12.71 12.43 2.5 10.36 1.23

American Electric Power Co., I (AEP) 17.5B 4.05 8.93 4.7 15.04 1.32

Cleco Corporation (CNL) 1.8B 12.75 21.98 3.5 6.91 1.39

Companhia Paranaense de Energi (ELP) 6.1B 9.43 9.26 0.7 12.72 1.14

Dominion Resources, Inc. (D) 26.1B 52.84 22.98 4.2 10.47 2.15

DTE Energy Co. (DTE) 7.7B 4.8 9.23 4.9 12.99 1.18

Duke Energy Corporation (DUK) 23.7B -6.9 3.15 5.5 34.73 1.12

El Paso Electric Co. (EE) 1.0B 10.17 10.18 0 13.9 1.38

Empire District Electric Co. (EDE) 823.7M 6.44 6.59 6.5 19.38 1.27

Entergy Corporation (ETR) 14.3B 11.01 14.8 4.3 11.31 1.63

FirstEnergy Corp. (FE) 11.1B 8.75 10.03 5.9 12.46 1.26

Great Plains Energy Incorporat (GXP) 2.6B 11.65 6.31 4.5 14.5 0.91

Hawaiian Electric Industries I (HE) 2.1B 4.46 7.22 5.5 20.2 1.44

Huaneng Power International In (HNP) 7.7B 4.38 13.11 4.3 10.17 1.3

IdaCorp, Inc. (IDA) 1.7B 16.22 9.67 3.5 12.42 1.17

NextEra Energy, Inc. (NEE) 22.7B 11.61 14.39 3.7 12.04 1.68

NRG Energy, Inc. (NRG) 5.3B 9.89 7.09 0 9.49 0.66

NSTAR (NST) 4.1B 26.08 13.27 4.2 11.41 2.14

OGE Energy Corp. (OGE) 3.9B 8.71 13.5 3.7 14.59 1.88

Source: Yahoo Finance

THE BEST CASE

This case based on our optimistic assumptions about output and new selling price making VSH’s revenue growthsignificantly. We believe that the probability of this case is not high of only 15%.

Assumptions of the best case:

Assumption of outputIn this case, the output in 4Q2010 will reach 240 million kWh, equivalent to the output in 4Q2009


Output 2009 244.69 274.61 164.04 243.57 926.91

Output 2010 191.17 256.15 162.83 240 850.15 -8.3%


The output in 2010 expected to reach 850.15 million kWh, decreased by 8.3% compared to 2009

Assumption of new selling priceIn this case, we assume the new selling price to EVN will increase by 5% year-on-year. So the new price will be VND500/kwh in the rainy season in July – September and VND 609/kwh in dry season in the rest of year.




Electricity output commercial (99%) 189.26 253.59 161.20 240 850.15


Revenue (bn VND) 115.26 154.44 80.57 144.70 494.96


EQUITY RESEARCH







Assumption of Production costsThe same with base case




Labor cost 9.00 12.00





Total 144.88 202.00


Assumption of Investment IncomeThe same with base case

VND bn 2007 2008 2009 3Q2010 2010E

Investment Income 75.8 100.5 82.1 73.8 98.6


Assumption of Investment ExpenseThe same with base case

Investment expenses (VND bn) 2007 2008 2009 2010E


Exchange rate gain/loss provision 0.59 15.13 12.76 11.94

Total (15.98) (26.55) (19.28) 18.74

Source: VSH & TLS researchEarning Model:


Sales 370.16 483.68 517.56 494.96


Gross profit 202.12 306.00 332.66 306.88






Tax (0.56) (0.74) 12.62 10.70

Profit after Tax 254.94 370.62 374.52 362.16

EPS (VND) 1,950 2,696 2,179 1.756

Source: TLS researchValuation

P/E, P/B sector in Vietnam are 8x and 1.4x. With PAT 2010E of VND362.16 billion, EPS of VND1,756, BV of VND11,481, wearrive to VSH’s target price as below table

Method Price Weight

P/E 14.048 50%

P/B 16.073 50%


The valuation price of this case is VND15,060/cp

EQUITY RESEARCH







THE WORST CASE

In this case, we present the most pessimistic predictions affecting VSH’s operation. The probability of this case is 15%

Assumptions of the worst case:

Assumption of OutputIn this case, electricity output will reach only 180 million kWh in Q4, decreased by 26.1% compared to correspondingperiod in 2009


Output 2009 244.69 274.61 164.04 243.57 926.91

Output 2010 191.17 256.15 162.83 180 790.15 14.8%


The 2010 output expected to reach 790.15 million kWh, decreased by 14.8% year-on-year

Assumption of new selling priceIn this case, we assume the new selling price to EVN will decrease by 10% compared to the old one. So the new price willbe VND428/kwh in the rainy season in July – September and VND522/kwh in dry season in the rest of year




Electricity output commercial (99%) 189.26 253.59 161.20 240 850.15


Revenue (bn VND) 98.79 132.37 69.06 93.02 393.25


Assumption of Production costsThe same with base case




Labor cost 9.00 12.00





Total 144.88 202.00


Assumption of Investment incomeThe same with base case

2007 2008 2009 3Q2010 2010E

Investment Income 75.8 100.5 82.1 73.8 98.6


EQUITY RESEARCH







Assumption of Investment expense

In this case, we assume that the Dong will be devaluated by 2% against US dollar, the provision for exchange rate differentis VND 16.5 billion in 2010

Investment Expenses (VND bn) 2007 2008 2009 2010E


Exchange rate gain/loss provision 0.59 15.13 12.76 16,5

Total 15.98 26.55 19.28 23,3


Earning Model


Sales 370.16 483.68 517.56 393.25


Gross profit 202.12 306.00 332.66 205.16






Tax (0.56) (0.74) 12.62 10.70

Profit after Tax 254.94 370.62 374.52 255.80

EPS (VND) 1,950 2,696 2,179 1.240


Valuation

P/E, P/B sector in Vietnam are 8x and 1.4x. With PAT 2010E of VND255.8 billion, EPS of VND1,240, BV of VND10,984, wearrive to VSH’s target price as below:

Method Price (VND) Weight

P/E 9,920 50%

P/B 15,377 50%


The valuation price of VSH in the worst case is VND12,648/cp

After calculating the average price for each case, we have the final price.

Case Price Weight

Base case 14,048 70%

Best case 14,916 15%

Worst case 12,648 15%

Final Price 13,966 100%

In conclusion, the target price of VSH is VND13,966 đ/cp

EQUITY RESEARCH







MAIN RISKS

Natural condition risks:

Natural conditions are the biggest risk factor for VSH. Output and efficiency of hydropower plants depend mainly on waterresources. The drought will decrease the water level at reservoirs of VSH, reducing electricity production. In the first 10months of 2010, actual water level in VSH’ reservoirs are lower than normal levels affecting the output and business plan

Water levelVinh Son Reservoir

Song HinhReservoir

DayUpdateReservoir

AReservoir

BReservoir

C

Normal level by design (m) 775 826 981 209

Actual level (m)

774.43 824.08 976.29 206.97 1/4/2010

772.84 821.58 972.96 203.56 1/5/2010

772.76 819.5 974.69 199.59 1/10/2010

774.04 820.3 975.35 207.77 1/11/2010


Risk from new PPA

VSH is currently negotiating new power purchase agreement with EVN. If the new price is lower than the old one, revenueswill decline. In recent years, almost BOT power projects which have foreign’s investment are bid at price 7.5 cents / kWh,and all of them do not have agreement with EVN about price even the actual cost is around 7 to 7.2 cents / kWh

Power purchase price bracket (VND/USD = 18,932)

Price for Hydropower plant with capacity > 30MW

USD VND VSH (VND)

Dry season 2.50 - 5.00 US cent/Kwh 473 – 947 VND/Kwh 580

Rainy season 2.00 - 4.70 US cent/Kwh 379 – 890 VND/Kwh 476

Price for Hydropower plant with capacity < 30MW

Dry season 2.70 - 5.20 US cent/Kwh 511 – 984 VND/Kwh

Rainy season 2.50 - 5.00 US cent/Kwh 473 – 947 VND/Kwh

Source: Decision No 2014/QĐ-BCN & VSH

Exchange rate risk

VSH has a US-denominated loan from the investment in the Song Hinh Hydropower Plant. If the exchange rate VND / USDincreases, VSH will have to make provisions for these loans. So the financial cost will increase. Specifically, in the last twomonths in 2010, if the Dong depreciated 1% against US dollar, equivalent to the exchange rate VND / USD = 19,121, theprovision cost would be VND14.9 billion in 2010. If the Dong depreciated 2% (equivalent to VND / USD = 19 ,310) the costwould be VND17.3 billion

Company Debt (USD)Debt value

(VND)Jan2010

Debt Value 2010E Provision(VND)

Jun2010

Provision 2010E (VND)

Ex increase 1% Ex increase 2%Ex increase

1%Ex increase

2%

VSH 12,647,692 226,912,240,536 241,840,564,249 244,235,025,282 7,626,558,221 14,928,323,714 17,322,784,746


EQUITY RESEARCH


Web site: www.tls.vnBloomberg: TLSV <GO>13

BUSINESS MODEL

Vinh Son-Song Hinh Hydropower Joint Stock Companyplant in the Central and Highlandmember of EVN, the entire company's commercial electricity

VSH currently managehydropower plant haveactivities of the Company. Output and efficiency of hydro

Business areas are electricconsultancy and supervision ofelectricity sector. The main business is el

Revenue breakdown

Shareholder structure

0%

20%

40%

60%

80%

100%

2006

Other revenue Investment Income



Hydropower Joint Stock Company, (VSH), is a member of EVNand Highland, addressing the demand for electricity and stabilizing the national electricity system. As a

member of EVN, the entire company's commercial electricity production is sold to EVN under a fixed price contract.

manages and operates two hydropower plants: Vinh Son hydropower planthave total capacity of 136 MW. Natural conditions are the biggest risk factor affecting the business

activities of the Company. Output and efficiency of hydropower plants depend mainly on

electricity production, management, operation and maintenance of power plants, project managementconsultancy and supervision of project’s construction to build hydropower plants, power

ectricity sector. The main business is electricity production.

breakdown Gross profit breakdown

Shareholder structure

2,007 2,008 2,009

Investment Income Electricity revenue

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006

Other profit Investment profit

EVN31%

SCIC24%

Bao VietInsurance

5%

SSI4%

Other36%



, (VSH), is a member of EVN Group, the first big hydropowerthe national electricity system. As a

sold to EVN under a fixed price contract.

hydropower plant and Song Hinhthe biggest risk factor affecting the businessplants depend mainly on water sources.

, management, operation and maintenance of power plants, project managementpower plants, power equipment commerce in the

Gross profit breakdown



2007 2008 2009

Investment profit Electricity gross profit

EQUITY RESEARCH







RESEARCH HISTORY

Issue dateType of report Recommendation Price at the issued date Target price in the end of 2010

04/15/2010 Update HOLD 15,000 15,059

05/15/2010 Update HOLD 15,000 15,059

17/11/2010 Full BUY 10,800 13,966

EQUITY RESEARCH







ANALYST DECLARATION

Conflicts of interest might exist as Thang Long Securities and its clients might have stakes in the target firm throughinvestments and/or advisory services in the past, at present or in the future.

PRODUCT

This product covers the latest developments on the target firm. Details on the firm can be obtained by contacting our

analyst(s) or the sales persons named above. We thank clients for comments and feedbacks on our product. Thang Long

Securities publishes this product, but all errors if any are the authors’.

Analyst’s opinion: BUY – expected to gain more than 15% compared to the price on report issue date; SELL – expected todrop more than 15% compared to the price on report issue date; HOLD – expected to change between -15% to 15%compared to the price on report issue date.

TLS RESEARCH TEAM

We offer economic and equity research. The Economic Research Team led by Pham The Anh (PhD, Manchester) offersperiodic reports on macroeconomics, monetary policies and fixed income markets. The Equity Research Team led by DoHiep Hoa (MBA, Hawaii; CFA Level III Candidate) offers reports on listed firms, private equities and sector reviews. TLSResearch Team also offers regular market commentaries - The Investor Daily.

THANG LONG SECURITIES (TLS)

Established in 2000, TLS was one of the first securities firms operating in Vietnam. TLS provides afull range of services including brokerage, research and investment advisory, investment bankingand capital markets underwriting. With over 600 employees located throughout an expansivenetwork of offices in Hanoi, Ho Chi Minh City, Haiphong, Danang and other strategic locations,TLS is one of the best known securities firms in Vietnam. Our client base consists of retail andinstitutional investors, financial institutions and corporations. As a member of the MB Group,

including MB Bank, MB Land, MB Asset Management and MB Capital, TLS is able to leverage substantial human, financialand technological resources to provide its clients with tailored products and services that few securities firms in Vietnam canmatch. Since its establishment, TLS has become widely regarded throughout Vietnam as:

A leading brokerage firm – ranked No.1 in terms of brokerage market share since 2009;

A renowned research firm with a team of experienced analysts that provides market-leading research products and

commentaries on equity markets and the economy

A trusted provider of investment banking services for middle market companies.

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The views expressed in this report are those of the authors and not necessarily related, by any sense, to those of TLS. Theexpressions of opinions in this report are subject to changes without notice. Authors have based this document oninformation from sources they believe to be reliable but which they have not independently verified. Any recommendationscontained in this report are intended for general/public investors to whom it is distributed. This report is not and should notbe construed as an offer or the solicitation of an offer to purchase or subscribe for any investment. This report may not befurther distributed in whole or in part for any purpose. No consideration has been given to the particular investmentobjectives, financial situation or particular needs of any recipient.

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