CORPORATE FINANCE REPORT FINANCE EVALUATION OF HOA SEN GROUP Báo cáo cuối kỳ môn TÀI CHÍNH DOANH NGHIỆP: ĐÁNH GIÁ TÌNH HÌNH TÀI CHÍNH TẬP ĐOÀN TÔN HOA SEN VÀ QUYẾT ĐỊNH ĐẦU TƯ CỔ PHIẾU Vietnamese steel industry currently focuses on producing long steel rather than flat steel due to the low capital investment, short time to build plants and high investment efficiency. To flat steel products, in order to ensure the efficiency, the capacity of factories must be large, big capital investment but the long recovery period. As a result, many large corporations are investing in construction of largescale steel mill. In the future, the structure of long steel and flat steel production in Vietnam will not be as unbalanced as it is now.
BACHKHOA UNIVERSITY INDUSTRIAL MANAGEMENT CORPORATE FINANCE -o0o - REPORT FINANCE EVALUATION OF THE HOA SEN GROUP STEEL INDUSTRY NHÓM HCMC, December 21, 2018 TABLE OF CONTENT Introduction to Steel Industry Vietnamese steel industry is very young, established in the 60s of the 20th century In the period from 1975 to 1990, the steel industry of Vietnam developed slowly, mostly using the source of steel from Eastern European countries and Soviet Union, the output at this period is maintained at 40,000 – 80,000 tons/ year Nowadays, Vietnamese steel industry has many innovations and strong growth The establishment of the Vietnam Steel Corporation in 1990 has contributed significantly to the stability and development of the industry From 2002 to 2005, many private enterprises were established, Vietnamese steel industry considerably developed with the total capacity of over million tons per year Currently, there are over 60 steel manufacturing companies, three of them are large steel producers in the market: Southern Steel Company with capacity of 910,000 tons per year; Pomina Steel Corporation with the capacity of 600,000 tons/ year; and Thai Nguyen Iron and Steel Company with the capacity of 550,000 tons/ year Basically, the steel products consist of two types: long steel and flat steel At present, Vietnam is unbalanced in production of two types of these steel Long steels are used in the construction industry such as bar or coil steel Most steel manufacturers in Vietnam produce only common products such as rebar D10- D41, rolled steel coil f6- f10 and some types of small and medium size steel Large long steel (larger than D41) is used for construction of large projects which are not able to produce by themselves but have to be imported from foreign suppliers The current capability of Vietnam’s long steel is over million tons, nearly double the demand Flat steel is used in industry such as shipbuilding, manufacturing machinery industry In 2007, steel plate manufacturers operated: Phu My Steel Factory with the capacity of 0.25 million tons, Sunsco company with 0.2 million tons, Hoa Sen Group with 0.18 million tons and Vinashin with 0.5 million tons Thus, the country’s total flat steel production capability is 1.1 million tons Whereas, the current demand is about 4-5 million tons, if we operate at full capacity, our country still has to import about 80% of flat steel Vietnamese steel industry currently focuses on producing long steel rather than flat steel due to the low capital investment, short time to build plants and high investment efficiency To flat steel products, in order to ensure the efficiency, the capacity of factories must be large, big capital investment but the long recovery period As a result, many large corporations are investing in construction of large-scale steel mill In the future, the structure of long steel and flat steel production in Vietnam will not be as unbalanced as it is now (According to Dao Thi Thu Hang (2009) Bao cao nganh thep Available at: https://www.shs.com.vn/Handlers/DownloadReport.ashx?ReportID=797) Company Activities Hoa sen group Principal activities: Manufacturing roofing sheets by galvanized steel, zinc alloy, paint galvanized zinc plating and plating of other alloys Producing steel purlins, galvanized purlins Manufacturing black steel pipes, galvanized steel pipes and other alloys Manufacturing steel mesh, galvanized steel wire, steel wire Producing PVC ceiling tiles Producing construction materials Buying and selling building materials, capital goods and consumer goods Renting warehouse and transporting goods Building industrial and civil constructions Producing cold rolled steel coils Leasing machinery and equipment and other tangible belongings History and Achievement of HSG: 8/8/2001: Hoa Sen Joint Stock Company, precursor of Hoa Sen Group Joint Stock Company, was established 19/5/2016: Investing in the Hoa Sen Yen Bai Hotel and Residence Complex, marked ofcially the development strategy of Hoa Sen Group in the future 06/6/2016 Hoa Sen Nghe An Plant at Dong Hoi Industrial Park – Nghe An province put Galvanizing line with NOF technology with capacity of 400,000 tons/year into operation and produced successfully the rst nished steel coil 30/11/2016: Achieving "Vietnam Value" in 2016 for three major product groups: HOA SEN STEEL SHEET HOA SEN PLASTIC PIPE HOA SEN STEEL PIPE 01/3/2017: Hoa Sen Group started the construction of Hoa Sen Yen Bai Steel Pipe Plant Project the 11th plant of Hoa Sen Group and the 5th Plant in the North market 29/5/2017: Hoa Sen Group was honorably voted for “50 Best Vietnamese Listed Companies” by Forbes Vietnam (5 consecutive years) 6/2017: Hoa Sen Group was honorably awarded for “Top 50 Vietnam’s Best Performing Companies awarded by Business Review Magazine (4 consecutive years) 7/2017: Hoa Sen Group achieved “Top 30 Best Annual Reports 2017 9/2017: Hoa Sen Group was honorably awarded for “Typical South East Enterprise 2017” With the flexible and creative management of Mr Le Phuoc Vu and his associates, from a small company with initial charter capital of VND 30 billion and 22 employees, Hoa Sen Group has become one of the leading manufacturers and traders of steel sheet in Vietnam and a leading exporter in Southeast Asia with chartered capital of VND 3,500 billion, revenues reaching nearly VND 20,000 billion, and after-tax profits reaching over VND 1,500 billion Hoa Sen Group has also created jobs for about 10,000 employees At present, Hoa Sen Group holds a leading position in manufacturing and trading steel sheets in Viet Nam with 33.1% market share and 20.3% market share of steel pipe (According to Vietnam Steel Association 2016) (source: https://www.hoasengroup.vn/en/home) Trend Analysis Short-term solvency, liquidity ratios: Current ratio: It is clearly that the ability to pay debt of HSG in 2016 higher than other years (1.04) Because there was a big investment from owners to this company (116,396 million dong) compared to 64,722 in 2015 and 34,602 in 2017 The remarkable point is short-term liabilities in 2017 that is double than 2015 but the ratio is the same The reason for that is the current asset in 2017 is also double than in 2015, especially in inventories Quick ratio: In the first look from the theory , if quick ratio is less than the company will suffer with many trouble in dealing with debt But in the particular industry like Hoa Sen , the situation where having more inventories is normal or even better For example, in 2016, Hoa Sen had a big profit thank to inventories they store (https://infonet.vn/hoa-sen-group-trung-lon-nho-hang-ton-khopost205564.info) Cash ratio: Cash ratio had an increase from 2015 to 2016, but experienced a significant decrease in 2017 Addition, the cash ratio for 2016 hold the highest position with 0,085 among the other years, which indicates that the Hoa Sen firm had enough cash and cash equivalent to pay off 8,5 percent of its current liabilities There was a decline by 0.063 between 2016 and 2017, resulting from current liabilities in 2017 (6,757,387 million dong) was twofold in 2016 (13,427,904 million dong) Leverage Ratios: Total debt ratio had a fall from 0.7 to 0.66 between 2015 and 2016 and peaked at 0.76 in 2017 This tells that the company’s liabilities are 76 percent of its total assets in 2017 Therefore, if the company pay all its debt by using its assets, it would put the company in a difficult position in the future Equity multiplier: In general, the company’s equity multiplier had a slight decrease between 2015 and 2016 but this ratio was still high (3.24 – 3.15) Furthermore, this ratio for 2016 was the lowest in 2016 This indicates that more assets were funding by debt than equity in 2015 and 2016 When a firm’s assets are primarly funded by debt, the firm is considered to be highly leveraged and more risky for investors and creditors This also means that current investors actually own less of the company assets than current creditors Debt equity ratio: In 2017, the debt equity ratio reached 3.14, which worried many shareholders leading to withdraw shares of many owners The reason for that is company borrowed money from 30 banks to open more branches and operating system were too high.( https://news.zing.vn/vi-saoton-hoa-sen-co-doanh-thu-ky-luc-nhung-loi-nhuan-cham-day-post877215.html) Efficient Ratios Inventory turnover ratio: As I mentioned, it is good to have a lot of inventory for HSG because they can meet a large number of orders in the shortest time when demand suddenly increases dramatically Evidence is that from 2015 to 2016 despite equal revenue but strong profit growth The main reason is that the company bought cheap inventories in this earlier year before prices rebounded (https://infonet.vn/hoa-sen-group-trung-lon-nho-hang-ton-kho-post205564.info) During the period form 2016-2017, the Inventory Turnover decreased by 11% This means that the Inventories increased but at that time inventories is a problem of galvanized steel and steel industry to cope with fluctuations of imported materials Hoa Sen representative said that HRC price (an input materials) has increased by 28% over the same period, but the group cannot increase the selling price due to getting the market share purpose (https://baomoi.com/hoa-senva-ap-luc-no/c/27461957.epi) Days’ sale in inventory The rising index in 2016 and 2017 is due to the expansion of the retail distribution branch system with 60 newly established branches (https://hoasengroup.vn/vi/bai-viet/du-an-mo-rong-hethong-phan-phoi-chi-nhanh-tap-doan-hoa-sen/2280) Therefore, the number of days for inventory to be sold out has increased And that is the normal number of days that a company in a largescale heavy industry like Ton Hoa Sen to be able to sell their products Receivables Turnover In general, the company's receivables are not worrying because with the high ratio and only 50% of that from Short-term trade accounts receivable Profitability Ratios: Gross profit margin: We can see that there is a big gap between Gross Profit Margin and Net Profit Margin The 2017 revenue increased by 46% compared to 2016 but the gross profit remains the same In addition, the operating costs and the costs of loans are part of the burden leading to very low net profit compared to the average level of companies (https://news.zing.vn/vi-sao-ton-hoa-sen-co-doanhthu-ky-luc-nhung-loi-nhuan-cham-day-post877215.html) Return on assets (ROA) and Return on equity (ROE) We can see the gap between the two indicators in 2017.The reason is that the total debt that the company has to pay is more than double compared to the beginning of the previous year while the equity is almost unchanged That makes the company's shareholders disturbed to withdraw capital, causing the share price to drop to the current level of 6200 VND/share (https://news.zing.vn/vi-sao-ton-hoa-sen-co-doanh-thu-ky-luc-nhung-loi-nhuan-cham-daypost877215.html) Market value ratio: Price-earnings ratio: If investors usually uses P / E, they tends to invest in businesses having P/E with less than / bank interest rates.( 1/ 0.07= 14.28) (http://chungkhoanvn.vn/pe-la-gi-hieu-tu-a-den-z-ve-chi-sope-va-cach-dinh-gia-co-phieu/) So Hoa Sen is a safe and less risky company Although in 2015 the P/E is low, each earning per share is high, so it is a good time if the investor bought it last year Du-Pond Analysis 2017: HSG has a medium return on equity with 17% Breaking it down, HSG’s return on assets is not that great with only 4% There are many problems with operating cost make Profit Margin very low and the total asset turnover number of 0.82 could be higher What gives HSG not suffer with deeply crisis is their equity multiplier of 4.15 This number means that looking at the money that shareholders have invested into the company, HSG was able to gain more than times the amount of assets with that money But most of HSG assets is created by debt DuPont Analysis (2017) Return on Equity 0.17 Equity Multiplier 4.15 Return on Assets 0.04 Profit Magin 0.05 Net Income 1,331,649 Sales 26,149,045 Total Asset Turnover 0.82 Sales 26,149,045 Total assets 21,438,456 Shareholder’s Equity 5,169,802 Total Asset 21,438,456 2015 and 2016: In the first look, the problem with HSG in 2018 still happens in two past years This is very low Profit Margin (0.04 in 2015 and 0.08 in 2016) Operating cost through the year is still very high So the result of this problem is ROA (very low at 0.02 in 2015 and 0.055 in 2016) But the ability of using the resource of HSG is good with high TAT rate In 2015 and 2016 10 Net Income=1,331,649 6.2% Total assets=21,438,456 Net Income=1,331,649 25.8% Total Equity=5,169,802 V.Market Value Ratio Price per share 31/12/2017 =VND 21,074 5.74 times Earnings per share= VND 3,673 (*) HSG: 2016 Financial Ratios Ratios Calculation Values I.Liquidity Ratios CA=7,057,496 1.04 CL=6,757,387 CA=7,057,496 0.33 Inventory=4,835,669 CL=6,757,387 Cash and Cash equivalents=576,621 0.09 CL=6,757,387 198.064 % II.Levergae Ratios Total Debt=8,180,013 Total Equity=4,129,973 28 Total Assets=12,309,986 66.45% Total Equity=4,129,973 Total Assets=12,309,986 298.064 % Total Equity=4,129,973 III.Efficient Ratios COGS=13,717,394 3.28 Average Inventory= (*) Inventory Turnover=3.28 111days Sales= 17,893,715 36.6 Average Account Receivable Turnover=36.6 IV.Profitabilit y Ratios Gross Profit=4,176,322 10days 23.33% Net Sales=17,893,715 Net Income=1,504,190 7.01% Total Assets=21,438,456 Net Income=1,504,190 36.42% 29 Total Equity=4,129,973 V.Market Value Ratio Price per share (31/12/2016) =VND 24,551 3.3 times Earnings per share= VND 7,350 (*) HSG: 2015 Financial Ratios Ratios Calculation Values I Liquidity Ratios CA=5,169,208 93.1% CL=5,554,945 CA=5,169,208 29.3% Inventory=3,543,825 CL=5,554,945 Cash and Cash equivalents=276,693 4.98% CL=5,554,945 224.34% II.Levergae Ratios Total Debt=6,529,892 Total Equity=2,910,772 Total Assets=9,440,614 69.17% Total Equity=2,910,722 Total Assets=9,440,614 324.34% Total Equity=2,910,722 30 III.Efficient Ratios COGS=14,869,355 3.59 Average Inventory= (*) Inventory Turnover=3.59 101.7day s Sales= 17,446,872 31.62 Average Account Receivable Turnover=31.62 11.5 days Gross Profit=2,577,516 14.77% Net Sales=17,446,872 IV.Profitability Ratios Net Income=652,875 6.63% Total Assets=9,440,614 Net Income=652,875 22.4% Total Equity=2,910,722 V.Market Value Ratio Price per share 31/12/2015 =VND 9,647 1.85 times Earnings per share= VND 5,211 (*) 31 ... groups: HOA SEN STEEL SHEET HOA SEN PLASTIC PIPE HOA SEN STEEL PIPE 01/3/2017: Hoa Sen Group started the construction of Hoa Sen Yen Bai Steel Pipe Plant Project the 11th plant of Hoa Sen Group... 21% Hoa Sen 25.8% The ROE of Hoa Sen is higher than of Pomina, which indicates that Hoa Sen is using its investors’ funds effectively Summary: Although ROA of Hoa Sen is lower than of Pomina, Hoa. .. Pomina 5.13 Hoa Sen 31.5 Day’s sales in receivables 16 Year 2017 Pomina 71days Hoa Sen 12days The receivables turnover of Hoa Sen is higher than of Pomina This means that credit sales of Hoa Sen are