song hong garment joint stock company course name financial management

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

UNIVERSITY OF ECONOMICS AND LAW

FACULTY OF FINANCE AND BANKING

RKKKKAKAK

SONG HONG GARMENT JOINT

STOCK COMPANY

Course name: FINANCIAL MANAGEMENT

Lecturer: HO THI HONG MINH

Full name Student ID

1 Assets and caprtal structure changes over tÏĨ€ y€AfS - c1 nn SH HH H11 ờy 7

2 Song Hong Garments competitive advanifa6€ Lọ HH HH H010 1 11H HH1 HH ng 8

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

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

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

PART III: RISK ANALYSIS 22

bi Nuooni vn e 22 PART IV: CONCLUSION 23

+ Vision:

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

+ Mission:

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

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

2 History

Development journey

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

1993: Changing name as Song Hong Garment Company

2001: The company relocated headquarters to 105 Nguyen Duc Thuan, Nam Dinh, and expanded into three garment factories utilizing 1500 people

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

+ Increased the charter capital twice up to VND 226.8 billion

2017: Increased the charter capital up to VND 234.14 billion

2018: Increased the charter capital up to VND 476.28 billion

November 28th, 2018: Officially traded on Ho Chi Minh Stock Exchange (HOSE)

2021: Commencement of construction of Song Hong 10 factory in Nghia Phong commune, district Nghia Hung, Nam Dinh province in early 2021 Song Hong 10 factory completed by the end of December 2021

Product

Garment Export:

Song Hong Garment is a garment manufacturing company that primarily exports to major clothing brands around the world The two main export methods the company is implementing are CMT (processed goods) and FOB (exports by shipboard delivery

method) The FOB segment currently accounts for the majority of the company's revenue

and profit structure

Song Hong Garment has over 30 years of construction and development experience, producing a wide range of products from knitting to weaving, sports, fashion for men, women, and children, with rich categories such as skirts, pants, jackets, t-shirts, blue suits, sports clothes, felts, and so on The company is currently the production partner of fashion brands, manufacturers, and large retail chains such as Columbia Sportswear,

Haddad Brands (with Nike, Converse, and Levi's), GIII (with Calvin Klein brands,

Tommy Hilfiger, and DKNY), Walmart, Bugatti, SAE-A Trading, Target, and Express

Domestic production:

The main commodity of the domestic sector is the group of blankets - sheets - pillows

and cushions and is mainly distributed in the domestic market

4

Product group Buffer product Masks

Blankets - sheets - group

+ Blockholder:

No — IndividualsOrganizafions Share Holding (%)

1 Bui Duc Thinh 11.956.080 23,91%

Mr Bùi Việt Quang

Vice director Functional departments Vice director

Mr Tran Chi Ding

PART II: FINANCIALANALYSIS

1 Assets and capital structure changes over the years

Song Hong Garment is a manufacturing firm, so it is understandable to see net fixed assets and inventory account for a large proportion in total assets In the past net fixed assets had a higher

proportion in total assets than inventory, specifically, in 2017, net fixed assets made up 27.21%

of total assets while the figure for inventory is 22.41% However, during 2017 — 2021, the trend for net fixed assets had been downward whereas the trend for inventory had been upward and by

the end of 2021, their difference in proportion of total assets was nearly 15%, with 29.3% for inventory and only 15.6% for net fixed assets

Chart 1: Total asset components

@ Inventory @ Other current assets @ Net fixed assets

@ Non-current assets in process ™ Other non-current assets

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

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

2017, 60.2% of the firm’s capital was short-term liabilities while shareholder’s equity only

comprised 31.72% However, after 5 years, this has changed to 47.74% for short-term liabilities

and 46.7% for shareholder’s equity

@ Short-term debt @ Account payable Other current liability @ Non-current liability

@ Share capital @ Retained eamings @ Development fund # Other payables

The reduction in short-term liabilities proportion is due to the lowering level of short-term debt

from 722.915 billion VND in 2017 to 552,060 billion VND (a 23.63% reduction) in 2021, while

the increase in shareholder’s equity is due to the rise of share capital and retained earnings from

238,140 billion VND and 391,315 billion VND in 2017 to 500,094 billion VND (an 210%

increase) and 736,020 billion VND (an 188% increase) in 2021, respectively This convergence shows that the company is relying less on short-term debt and makes use of its long-term funding source more It also improves Song Hong Garment’s liquidity since short-term debts are interest bearing and they mature within a year so having less of them will reduce short-term cash outflows

In the past, the proportion of long-term liabilities in total capital was larger (in 2015, it was 17.75%) but it had decreased greatly over the years and by 2021 it accounted for only 5.57% of total capital This reduction is consistent with the strategy of exploiting existing factories and increasing inventory, which does not require much long-term funding instead of building new facilities during 2017 — 2021, which generally requires more long-term liabilities

2 Song Hong Garment’s competitive advantage

In Vietnam, the scale of the fiber industry and ancillary industry is not commensurate with the

development of the textile industry, so the supply of raw materials cannot meet production needs

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

8

in a market where raw materials are mainly imported is usually high, the textile industry in

Vietnam is one such example,

firm’s net revenue which explains why costs of goods sold account up to 80% of the

Chart 3: Cost of goods sold

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

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

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

3M 6M WY 3Y | sy | A From 2017-11 To 2022-11

We can see that the company managed to keep a stable gross profit margin of 19.6% in the last 2

years, this figure is higher than gross profit margin in 2017 which is 17.18% despite the increase

in raw material cost This is due to the change in production strategy during the period focusing

more on the FOB sector than the CMT sector The revenue from the FOB sector accounts for

71.43% of the firm’s total revenue in 2017 and in 2021, this figure is 83.55% Since the FOB

sector has a higher profit margin (about 20% while the CMT sector only yields 16%), focusing

more on it offers Song Hong Garment a higher gross profit margin over the long run and this is

also one of the company’s competitive advantages

Chart 4: FOB and CMT sector

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

The company’s operating performance in the last 5 years can be broken down into 2 periods The first period is 2017 — 2019 and the second is 2020 — 2021 During the first period, the firm's main operating activities include purchasing raw materials, producing and selling finished goods without investing in fixed assets, which explains the convergence between inventory and net fixed assets Annualized revenue growth from 2017 — 2019 was +10.36% while annualized earnings growth was an impressive +30.94%, especially in 2018, when earnings growth was +84.56% YoY

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

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

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

ome Net fixed assets em |_Orig-term assets in process The company’s operating cash flow during 2018 and 2019 were 373,941 billion VND and 619,957 billion VND, which represents two whopping 158.6% and 65.8% increase, respectively However, cash and cash equivalents underwent a fall in those 2 years from 344,148 billion VND

in 2017 to 237,680 billion VND in 2019, which means the excess cash had been used for other

purposes As shown in chart 5, the cash and cash equivalent line goes down during 2017 — 2020

——=°lort-term debt ===Account payabla Long-term debt ===Slhare capItal ===Retained earnings

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

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

be better to put the excess cash in banks and pay off debt It also explains the convergence of short-term debt and retained earnings, since Song Hong Garment recorded high net profit, it would reinvest the earnings and use it as a long-term, sustainable fund and as a result rely less on short-term debt The reduction in short-term debt reduced financial expenses from 49,046 billion

VND in 2017 to 18,187 billion VND in 2020 (chart 7)

in sales and net profit, which were -13.55% YoY and -48.47% YoY, respectively due to lack of

new orders and high transportation expenses

The firm’s inventory had been relatively stable during 2018 — 2020 (chart 5) However, a closer

look into the components of inventory actually revealed managers confidence and future outlook

about the performance of the company In 2018, the company’s inventory increased 23.9%, this was mainly coming from the increase in raw materials (+43% YoY) and the increased in work in process (+37.4% YoY), finished goods only increased 12%, which means the company was expecting that it would receive more orders and produce more finished goods in the next operating year In 2020, the situation is quite different, and that is although inventory did not

change much, we can see that raw materials had been declining and by the end of the year, its value was 163,800 billion VND, which was even lower than in 2017 At the same time, finished

goods spiked 32.4% YoY because there was a lack of new orders, textile firms could not sell very well so finished goods piled up, and since there were excess finished goods, there was no need to increase production leading to the decline in raw materials

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

end of the year

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

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