topic hoa phat group joint stock company risk analysis

Certificate of Business | 09 0018 9284 Registration No Charter capital 44,729,227,060,000 VND Head office address Pho Noi A Industrial Park, Giai Pham Commune, Yen My District, Hung Yen

VIETNAM NATIONAL UNIVERSITY INTERNATIONAL SCHOOL

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MIDTERM EXAMINATION Course Title: Risk and Risk Analysis Topic: Hoa Phat Group Joint Stock Company Risk Analysis

3.1 Solution for Operational risk

3.2 Solution for economic risk

3.3 Solution for financial risk

Certificate of Business | 09 0018 9284

Registration No

Charter capital 44,729,227,060,000 VND

Head office address Pho Noi A Industrial Park, Giai Pham Commune, Yen My

District, Hung Yen Province, Vietnam

Vision “To become an industrial production group with leading quality,

in which Steel is the core field”

Mission “Providing leading products, contributing to improving the

quality of life, gaining the trust of customers.”

Locate Hoa Phat Group - Vietnamese brand - Global class

Core values

The core value of Hoa Phat Group is the philosophy of Harmony

and Development This is reflected in the relationship between officials and employees, between the Group and its partners,

agents, shareholders and the social community, ensuring the

harmony of interests of stakeholders on the same boat, towards sustainable development

Core values Hoa Phat has accumulated over the past 30 years:

SOLID FOUNDATION, STABLE FINANCE AND

PRESTIGIOUS BRAND which is the three-legged stool that helps Hoa Phat firmly weather all market storms

Source: https://www.hoaphat.com.vn/gioi-thieu

Hoa Phat is a leading industrial conglomerate in Vietnam Starting as a company specializing in trading various construction machinery in August 1992, Hoa Phat gradually expanded into other sectors such as furniture, steel pipes, construction steel, refrigeration, real estate, and agriculture On November 15, 2007, Hoa Phat officially listed its stocks on the Vietnam stock market with the stock code HPG

Currently, the Group operates in five main areas: Steel industry (construction steel, hot-rolled coil steel) - Steel products (including steel pipes, galvanized steel sheets, drawn steel, prestressed steel) - Agriculture - Real estate - Household appliances Steel production is the core area, accounting for 90% of the Group's total revenue and profit With a capacity of 8.5 million tons of crude steel per year, Hoa Phat is the largest steel producer in the Southeast Asia region

Hoa Phat Group holds the number | market share in Vietnam for construction steel, steel pipes; Top 5 for galvanized steel Currently, Hoa Phat is among the Top 5 largest private enterprises in Vietnam, Top 50 most efficient listed companies, Top 30 largest contributors to the state budget in Vietnam, Top 3 companies with the largest charter capital in the stock market, Top 10 stocks with the largest market capitalization in the Vietnam stock market

With the business philosophy of "Harmony in Development,” Hoa Phat allocates a budget

of hundreds of billion Vietnamese dong each year to fulfill the corporate social responsibility towards the community

1.2 Business sector

- Trading and importing/exporting iron and steel, refining materials, and rolling

- Manufacturing steel wire drawing, producing roofing sheets;

- Manufacturing non-galvanized and galvanized steel pipes, stainless steel pipes;

- Manufacturing and trading various types of metal, non-ferrous metal scrap;

- Smelting iron, steel, casting iron, steel;

- Metal ore extraction; Buying and selling metal, metal ore, steel scrap;

- Manufacturing and trading various types of construction machinery and mining equipment;

- Producing and trading furniture for offices, households, schools;

- Investing in and constructing infrastructure, industrial zone technical facilities, and urban areas;

- Real estate business (excluding price consulting activities);

- Manufacturing, trading, assembling, installing, repairing, and guaranteeing electronic, refrigeration, household electrical, and air conditioning products;

- Manufacturing cement and trading construction materials

1.3 Customer portfolio

- For the domestic market, where the steel demand continues to rise, Hoa Phat has increased its production capacity, operating at full capacity in its two plants located in Hai Duong and Quang Ngai to meet market demand In terms of the export market, Hoa Phat maintains a high level of steel exports by tapping into new markets such as Sgapore and Hong Kong Orders from traditional markets like Canada, Japan, Cambodia, Thailand, etc., continue to occur regularly (Gidi Thiéu - tap đoàn Hòa Phái 2023)

2 Identify risk

2.1 Identify majors

2.1.1 Operational risk

“+ Risk of fuel and raw material price fluctuation

Steel is the flagship product in Hoa Phat’s business activities This industry has been developed both in depth and breadth The depth means upstream production and logistics chains The breadth means diversifying more types of products related to steel and products made from steel According to Hoa Phat Group annual report of 2022, the cost

of fuel and raw materials used to produce steel accounts for 70-75% of the production cost Therefore, only 1% fluctuation in the prices of input materials such as iron ore, coal, scrap, etc will greatly affect finished product’s price Due to the impact of the war between Russia and Ukraine at the end of February 2022, the price of coal was pushed up

to 5 to 6 times higher than normal The prices of iron ore have also fluctuated strongly and are still on the high side

The iron ore in recent years has been fluctuating due to causes such as:

e The global energy crisis leading to logistic price rising:

Energy markets began to tighten in 2021 because of a variety of factors, including the extraordinarily rapid economic rebound following the pandemic But the situation escalated dramatically into a full-blown global energy crisis following Russia’s invasion of Ukraine in February 2022

e The demand for iron ore in China:

China is the largest consumer of iron ore, and any changes in its economic growth

or industrial production can significantly affect iron ore prices.China has become the leading iron ore consuming nation, and, based on recent steel production capacity increases and plans for more, its consumption will almost certainly continue to grow China's iron ore industry, however, faces a number of problems China's iron ore is low-grade, expensive to process, and its mines are being depleted For many Chinese steelmakers, particularly in the coastal regions, the delivered cost of domestic iron ore is more than the delivered cost of foreign ore Thus China's iron ore imports are expected to increase (Kirk, 2004)

According to KBSV, Hoa Phat has been partially self-sufficient in domestic input iron ore sources through its subsidiary, An Thong Mineral Jomt Stock Company However, this

supply only meets about 20% of the current demand With the rest, Hoa Phat also has to import monthly from major suppliers in the world in Brazil Australia South Africa Another factor that also greatly affects the cost of steel production is coking coal In recent developments, the open coal mining industry is on a downward trend This type of material Hoa Phat also has to import from major suppliers abroad KBSV said

In 2018, HPG's net revenue was VND 55,836 billion (+21% yoy), and profit after tax was VND 8,600 billion (+7.3% yoy) Gross profit margin decreased to 20.9% from 23.1%, mainly due to the sharp drop in finished steel prices at the end of 2018

With the advantage of low production costs, FPTS believes that HPG can complete 100%

of the plan for output of 3.3 million tons of construction steel (+39% yoy) in 2019 and operate at full capacity in 2023 However, assuming that iron ore prices remain high (+23% yoy) and finished steel prices do not change much, HPG's profit margin is likely

to drop significantly in 2019

FPTS assumes that HPG's gross profit margin will decrease compared to the 2016-2018 period and gradually approach the world average - 15% The level of debt and interest expenses will increase in the period of 2019 - 2021 to finance the Dung Quat project and decrease gradually in the following period

2018 2019F 2020F 2021F 2022F 2023F

(triệu tan)

Tăng trưởng sản lượng 10% 36% 19% 30% 9% 6%

Tăng trưởng doanh thu 21% 28,9% 14,7% 36,9% 12,5% 7.4%

Nợ vay/Vốn chủ sở hữu 0,93 1,10 0,97 0,86 0,74 0.61

Ty suất LNG 20,9% 17,1% 16,3% 15,9% 15,4% 15,3%

Tỷ suất LNST 15,4% 10.7% 10,1% 10,5% 10,5% 10.8%

¢ Risk of international trade

Not only struggling because of the pandemic, steel exports also face a series of risks of trade remedy lawsuits on the world market, causing Vietnam’s steel industry to face double difficulties in 2022 In particular, cheap steel imported from China is having a great influence on domestic consumption The protectionism trend in the international market has not shown signs of cooling down, and the domestic real estate and construction markets have not shown signs of improvement But this is also a “test” for Hoa Phat to restructure, improve competitiveness and dominate the market

According to Seth in How China impacts the global steel industry, china has approximately 10 times the steelmaking capacity of the United States It has been accused

of dumping cheap steel on the global market to beat out competitors, and the Trump administration has encouraged Chinese leaders to cut production to improve the profitability of U.S steelmakers

China 1s the world's largest producer of steel, and it is also the world's largest consumer

of the material Given such a dominant market share, along with the large amounts of steel used across different sectors of tts economy, any slowdown 1n the Chinese economy will have a major impact on the global steel industry The graph below shows what happened to the VanEck Vectors Steel ETF (SLX) in 2015 when the Chinese economy slowed down

—— Mar 2 “15 ott kit dun 115 vi hall he ba lat tt Ll Sep 1 '15 Dec1‘15

% Investopedia

2.1.2 Economic risk

+ Interest rate risk

According to the financial report reviewed for the first half of 2020, as of June 30, Hoa Phat Group has VND 9,736 billion of financial assets with a fixed interest rate, an increase of nearly VND 5,500 billion compared to the first day of 2020 Debt value financial liabilities subject to a fixed interest rate of VND 28,013 billion, down more than VND 4,000 billion

Meanwhile, the value of financial liabilities subject to floating interest rates was VND 14,653 billion, an increase of more than VND 10,000 billion compared to the first day of the year

Rai ro lai suat

At the end of the second quarter of 2020, Hoa Phat's total short-term and long-term debt was VND 42,666 billion, accounting for 71% of liabilities and an increase of nearly VND 6,000 billion compared to the first day of the year

Hoa Phat's interest expense in the first 6 months of 2020 was VND 1,004 billion, 2.5 times higher than the same period last year and higher than the interest expense of VND

937 billion for the whole of 2019

In a recent analysis report, Phu Hung Securities JSC (PHS) said that high debt is putting great pressure on Hoa Phat's profit

"Debt is used to serve steel production but gross profit margin is reduced Therefore, investors should consider the risk of high interest expense When the agricultural segment

cannot continue to maintain, With outstanding results due to fluctuations in pork prices, the profit of the whole company will be severely affected", commented Phu Hung Securities

Chi phi lai vay của Tập đoàn Hòa Phát

Nguồn: Đức Quyền tổng hợp từ báo cáo tài chính

Hoa Phat said that the group has signed interest rate swap contracts to achieve an appropriate structure including fixed and floating interest rates according to the group's policy

As of June 30, 2020, Hoa Phat had interest rate swap contracts with an estimated contract value of VND 4,660 billion, slightly higher than VND 4,640 billion on the first day of

2020

At the end of the second quarter, Hoa Phat also has commodity price swap contracts with

a number of domestic commercial banks to hedge against the risk of price fluctuations of raw materials (iron ore) in the future

The swap contracts mature when Hoa Phat purchases raw materials from the suppliers specified in the contract at the iron ore price determined at the time of purchase

If the price of raw materials purchased by Hoa Phat is higher than the price specified in the swap contracts, the banks will refund the difference to Hoa Phat

Conversely, if the actual purchase price is lower than the price specified in the swap, Hoa Phat will have to pay the difference to the bank

In addition to interest rate and material price msks, Hoa Phat also has to bear exchange rate risk, especially the VND-USD exchange rate pair because as of June 30, 2020, this group is taking long-term loans of 200 million USD, short-term loans term of $ 108 million and must pay the seller $ 370 million If VND depreciates against USD, Hoa Phat's foreign debt repayment costs will increase

“+ Exchange rate risk

According to analysis division FIDT (an investment consulting and financial planning unit), Hoa Phat's profit dropped sharply in the third quarter mainly due to the sharp decline in core business performance and the burden of financial expenses

Notably, the price of input materials such as coking coal and iron ore must be imported,

so they are subject to exchange rate risk and with the VND depreciating against the USD,

it may push up the cost of these materials when the price of these materials is increased out VND

Regarding the burden of financial expenses, in this period, HPG suffered a sudden increase in expenses mainly from exchange rate losses In the third quarter alone, the exchange rate loss HPG recorded was 1,413 billion dong, 6 times higher than the same period last year (the accumulated exchange rate loss in 9 months was 3,157 billion dong, 5.3 times higher than the same period)

Interest expense also increased significantly m the first 9 months of 2022 and put pressure on HPG's profit

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From the beginning of October until now, in just 1 month, VND has depreciated by 3.62%, so FIDT assesses that the risk of exchange rate loss in the fourth quarter of 2022

is quite large and needs to closely monitor exchange rate movements in the remaining 2 months again The fact that the Fed is likely to continue to raise interest rates until mid-2023 will also continue to increase pressure on the exchange rate

According to FIDT, HPG currently holds nearly 40,000 billion dong in cash, including 27 trillion in savings and nearly 12 trillion in "fresh" money Adding both short-term and long-term debt minus existing cash still gives a net debt of nearly 1.07 billion USD at current exchange rates (HPG borrows a lot of USD)

In the debt structure, the main focus is on short-term financial debt of nearly VND 53,000 billion (serving various types of working capital, importing raw materials ) Long-term debt is quite low

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