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Group – Investment Analysist Expert Manufactoring Sector, Textile Industry Date : 30/10/2015 Ticker – HOSE : STK Current Price : VND 35,200 (09/10) Recommendation : SELL 37,000 590 36,000 585 580 34,000 575 33,000 570 32,000 565 31,000 30,000 560 30/9/15 2/10/15 4/10/15 STK 6/10/15 8/10/15 VN-Index STK COMPANY PROFILE Average IPO Price VND 24,124 Share Outstanding 42,305,336 Market Cap VND 1,020b Dividend Yield 4.26% Foreign Holdings 9.45% Revenue (2014) VND 1,458b P/E 13.87 EARNING PER SHARE 3,500 50% 3,000 40% 2,500 30% 2,000 20% 1,500 10% 1,000 0% 500 -10% - -20% 2012A 2013A EPS 2014A Net Income Growth CENTURY SYNTHETIC FIBER CORPORATION Target Price : VND 26,800 Downside : -23.9% HIGHLIGHTS STK PRICE MOVEMENT 35,000 Ho Chi Minh Stock Exchange With a target price of VND 26,800, we give a SELL recommendation for STK’s shares They are overvalued at present, which is an unavoidable situation after any IPO However, STK is considered as a remarkable enterprise in the textile industry with : Merits  Promising development outlook in a textile industry which is benefiting by many advantages The exporting value of the industry is forecasted to grow steadily over years  Expanding production capacity in response to the increasing and diversifying demand of the international market  Experienced Directors in development orientation and management Average years of experiences in the industry is about 18 years per members When STK can take advantage of these opportunities and strengths, our assumptions in valuation models will change in a positive direction And the negative changes will come from : Concerns  The volatility of input and selling price makes sales of a company that does not have a diversified pool of products as STK will be unstable over years  The potential competitors from outside with outstanding level of capital and technology are available for investment in the textile value chain  High financial leverage with many foreign transactions force STK to pay attention to financial expenses in their operation BUSINESS DESCRIPTION Revenue  Century Synthetic JSC (STK) was founded in 2000 as the first domestic company producing polyeste filament, a kind of chemical yarns  STK has experienced a rapid and sound growth over 15 years and is expanding customer network not only domestically but also over the world  STK officially becomes the first yarn producer to list on HOSE in Q3/2015 1,600 1,400 1,200 1,000 800 600 400 200 2010A 2011A 2012A 2013A 2014A 2015P PRODUCTS Source : STK In textile industry, there are many types of yarns to be used for weaving process In terms of origin, we have natural yarns, synthetic yarns and chemical yarns In terms of structure, yarns include short or long structure Net Income 150 125 100 Long yarns have firm structures than short yarns so they are strong and good at color retention Therefore, the current trend of textile manufacturers are turning to the use of synthetic and chemical yarns instead of cotton over years because of their valuable properties 75 50 25 2010A 2011A 2012A 2013A 2014A 2015P STK’s outputs are mainly Polyester Filament (long chemical yarns) including DTY (Draw Textured Yarn : strong, tough, used in highquality products such as sports shoes, clothes, ) and FDY (Fully Drawn Yarn: used in intermediate-quality products such as curtains, canvas, ) Source : STK Revenue 2014 Breakdown by Products 12% DTY FDY SUPPLY CHAIN Source : STK 88% Raw Materials POY Spinning PFY Spinning Polyeste Chip POY PFY (Imported from Taiwan, South Korea and Germany) (90% self-suppled, 10% imported) (85% DTY, 15% FDY) Crude Oil Price (USD/barrel) 160 140 120 100 80 60 40 20 2008 STK operates in “Yarn” process, particularly chemical yarns, in total value chain of textile industry Their products will be used in produce fiber next in “Fiber” process which most of Vietnam textile company operate in at present 2009 2010 2011 2012 2013 Source : Bloomberg 2014 2015 Direct Customer Domestic : Thanh Cong, Thai Tuan, Formosa, Decotex, Foreign : YRC, Tongsiang, Golden Empire, Huge Rock, Universal, Pinewood Final Customer Nike, Adidas, Decathlon, Puma, Reebok  Input : Polyeste Chip (PET chip) currently accounts for 70-75% of the cost of goods sold of STK PET chips are the derivatives of oil production industry so the fluctuation in the current oil prices definitely affects PET chip prices The oil price is on the downward trend to below 50USD/barrel which would benefits the STK to lower the cost of goods sold However, because the yarn prices must be adjusted to the PET Chip price so, in general, the gross profit margin would not be improved much Average Selling Price and PET Chip Price (USD/kg) In addition, USD exchange rate is getting higher with the depreciation of other currencies would make the input materials (mostly from import) fluctuate beside effects from oil price 2.5 1.5 0.5 2008 2009 2010 2011 Average Selling Price 2012 2013 2014 PET Chip Pricces Source : VCBS Revenue 2014 Breakdown by Customers 23% Domestic Asia 50% Europe Source : STK 27%  Output : STK’s output includes DTY, FDY and POY (used for spinning out DTY internally) STK targets to high- or intermediate-quality products segment and thus, their revenue primarily comes from DTY (over 90% of total revenue) In addition to revenue, in term of customers, exporting sales, mainly to Asia and Europe, account for 77% of their total revenue The remaining in total revenue was contributed by the domestic market, which majority of the customers are exporting FDI textile firms Compared to other domestic yarns firms, the production scale of STK is still small (37,000 Tons / year) and meet only 0.09% demand of long chemical yarn over the world while this demand is rapidly increasing about 42% yoy (Source: The fiber consulting year 2015) Therefore, the growth “room” for STK is promisingly large, which can uptake all STK’s high-quality output It can be said that expanding customer network is not a barrier to STK at the moment CAPACITY They have recently plants including one in Northwest Cu Chi Industrial Zone and two in Trang Bang Industrial Zone, Tay Ninh with a total capacity of 44,500 tons yarns per year STK is extending two more plants also in Trang Bang: Total capacity (thousands tons) 60 50 • Plant 3rd with a designed capacity of 15,000 tons of DTY per year, conducted in 2015 and 2016 In July of 2015, TB3 puts machines into operation which produced half of fully capacity TB3 has total capital of approximately VND 730 billions 40 30 20 10 - 2010A 2011A 2012A 2013A 2014A 2015P 2016P Source : STK & team estimation 2017P • Plant 4nd will be started after TB3 operates at full capacity Designed capacity is 3,000 tons of DTY and 4,000 tons of FDY per year COMPANY’S STRATEGY Total produced & sold output (thounsands tons) 35 30 25 20 15 10 2012A 2013A Produced Sold Source : team estimation 2014A • Expand investing in the production of DTY and FDY and customer network, esspecially foreign clients to reduce the risk from concentration of customers • Well-monitor the input price volatility to promptly make appropriate adjustments to sale prices • Research and develop new products to produce distinctive products from competitors • Expand over textile industry’s value chain to take more surplus in production through the establish of Yarn – Fiber – Textile Unitex Co Ltd Shareholders Structure 2014 CORPORATE GOVERNANCE SHAREHOLDERS STRUCTURE Because STK is a newly listed company, the inside shareholders, including the company's founders, still hold majority of shares (about 31.98%) Foreign entities only hold 9.56% shares 18.96% 41.59% BOARD OF DIRECTORS 31.33% 8.12% Huong Viet Investment Consultant Corporation Board of Directors Vietnam Holding Limited Others Source : STK Board of Directors’ Members Members The present chairman of the BoD is Mr Dang Trieu Hoa, the CEO founder, which helps him in strategic planning processes and corporate governance by his experiences In addition, two members of the BoD, Ms Dang My Linh and Dang Huong Cuong are also the members of STK in the first days With other experienced members, they will make STK develop strongly and steadily However, the most notable member is Mr Thai Tuan Chi, CEO founder of Thai Tuan Textile, the STK’s longtime partner With Mr Chi, STK will get the right directions in the investment and the production to keep pace with the development of the textile industry in Vietnam and over the world Independence Position (from) Experiences Mr.Dang Trieu Hoa No Chairman (2005) CEO Founder, 20 years experienced Mrs.Dang My Linh No Member (2005) Co-Founder, 20 years experienced Mr.Dang Huong Cuong No Member (2005) Co-Founder, Manager of Asia Pan Co LTD Mr.Thai Tuan Chi No Member (2007) CEO Founder of Thai Tuan® Mr.Lee Chien Kuan Yes Member (2008) Taiwanese Textile Expert Mrs.Cao Thi Que Anh Yes Member (2015) Ex-Chairman & CFO of VISecurities JSC Source : Team analysis R&D ACTIVITIES The R&D activities of STK are not flagged by the lack of investment capital and the technology transfers from foreign partners, especially German partners to develop specialized products for the different requirements from customers SWOT ANALYSIS STRENGHTS •Competitive skills with much experiences •Having economics of scale •Marketing effectiveness •Brand awareness •Good corporate governance OPPORTUNITIES •Demand for the product is on the rise •Potential markets following agreements like AEC, TPP, •Benefits from import and export tax policies WEAKNESS •Having a strong reliance on imported raw material •The scale of production is relatively small •Not having a distinctive product from the lack of investment in R&D activities THREATS •Potential competitors •Exchange rate and input prices fluctuations •Unexpected Inflation INDUSTRY OVERVIEW International Textile Exports (billions USD) THE CHARACTERISTICS OF THE INTERNATIONAL TEXTILE INDUSTRY 500  Business cycle : On the trend of development after the bilateral and multilateral trade agreements between the nations and areas were signed  Industry concentration : low due to low barriers to entrance the industry  Macroeconomics sensitivity : The textile industry has the high proportion of export (about 70%) and that implies a vulnerable state of the industry toward the fluctuations of macroeconomic factors 2013  Value chain : The value chain of the textile industry bears the influence of the consumers There are many stages carried out in different countries in the process of making the final product In that value chain, the manufacturers with well-known brands, considerable wholesalers and retailers play a key role in Exporting establishing the production web and navigate the bulk consumption through the strong brands and the dependence on global processing strategies The value chain of the textile industry typically include five basic stages: 450 400 350 300 250 200 150 100 50 2009 2010 2011 Fiber 2012 Textile Source : WTO Textile Value Chain Textile Fiber Yarn Raw material R a w m at eri al Vietnam textile export (billion USD) 23 35% 30% 18 25% 14 20% 15% 10% 5% - 0% 2005 2006 2007 2008 2009 2010 Export 2011 2012 2013 2014 Growth rate Source : Bloomberg Textile Product Synthetic Yarn Cotton Fiber 1,000 2,000 2020 3,000 2015 Source : 36/2008/QD-TTg 4,000 VIETNAM TEXTILE INDUSTRY As cellphones and electric components, textile industry is the exportdriven industry of Vietnam in recent years In 2013, Vietnam textile products reached 180 nations with the total exporting value of 17.9 billion USD, accounted for more than 13.6% total trade value of Vietnam and 10.5% GDP The growth rate of the industry in the period 2008 – 2013 is 14.5%, which has brought Vietnam into the 1st position in the worlds having fastest textile industry growth rate and the 7th largest textile exporter THE DEMAND DRIVER OF TEXTILE INDUSTRY LEADS TO A HUGE PROMOTION TO YARNS PRODUCERS Proportion target in textile export Provide the raw materials including natural cotton, oil, etc, Manufacture the inputs; the outputs of this process is yarn and fiber, handled by weaving company Design the patterns for the products; produce the finished goods; handled by textile companies Export handled by commercial intermediaries Marketing and distribution channels 5,000 The fact that textile industry is currently on the new trend of development is not only true in the whole world but also in Vietnam The industry goes in line with the population growth as well as other human factors According to Statista.com, the fashion and clothing business will have the average growth rate about 5% annually in the period 2012-2015 and will reach the scale of 2,110 billions USD in 2025 This will be the driving force that will push the textile industry in general and the yarns producers in particular Vietnam export to USA (2014) 13% Textile & Garment 8.70% Joinery Seafood 11.30% Others 67% Vietnam textile export (billion USD) CAGR : 11.75% 45 40 35 30 25 20 15 10 2014 2015 2016 2017 Export 2018 2019 2020 Growth Rate Source : Vinatex Yarns demand (million tons) Firms in textile industry 4% 3% THE MARKET OF YARN FIRMS 17% 70% Yarn Fiber Textile Dyeing Supporting 1% 15% 84% Private Government  A TPP Beneficary : The most notable agreement in 2015 is the Trans - Pacific Partnerships with the participation of 12 countries in the Asia - Pacific arae, including the two largest textile markets in the world, USA and Japan With the TPP, the current import tariffs for textile products (about 17%) will be reduced to 0%, which 25% is the biggest opportunity ever for Vietnam's textiles industry Besides, The suppliers can be determined through the value chain 20% of the textile industry – yarn production firms In recent years, the 15% amount of yarn and fiber produced domestically is not enough to meet the need of the weaving and knitting enterprises so they 10% have to import a large amount of yarn and fiber from China and 5% India who not participate in the TPP This causes the legal 0% conflicts about the origin of the products according to the TPP That is, exporting clothing and fashion products into a TPP’s country requires them to have a minimum domesticalization (from other TPP’s countries) ratio Thus, weaving and knitting firms in Vietnam have to import the source of yarn and fiber from the TPP’s countries This will be the chance for the chemical fiber industry of our country However, the challenges are that the FDI firms, especially which are investing into China, will change the investment decision towards Vietnam, creating an intensive competition for market share with STK in particular and with all yarn production firms in general In addition, the trend of using chemical yarns replacing for cotton and natural yarns is followed by the textile company worldwide due to their valuable properties of the chemical structures Therefore, the price of chemical fibers is increasing with the used quantity compared to cotton Source : The Fiber Year 2014 6% Many bilateral and multilateral trade agreements nowadays are promoting enterprises to reduce the reliance on the domestic human and other factors and to seek for many other potential markets outside the borders FDI Source : Ministry of Foreign affairs As analyzed above, with the yarn market, we can consider this market as a monopoly competitive market for all the firms in the industry The yarn products of companies have some differences in quality and they are only the world-price receiver meanwhile the demand is steadily getting higher The firm with a larger scale of production will get the higher economic profit Demand of the yarn industry comes from the next stage in the value chain of the textile industry- the weaving the textile stage As analyzed above, the demand of the textile industry is increasing sharply and steadily which also represents the growth in the output of yarn production subsectors COMPARATIVE ADVANTAGES OF STK Compared with other domestic yarn firms, the scale of production of STK is still relatively small (37.000 tons of yarns annually) and can only meet 0.09% the need for chemical yarn over the world Meanwhile, the need for chemical yarn is rising intensively and this year has witnessed a surge of 42% in demand compared to 2014 (Source: fiber year consulting 2015) Thus, the potential development of STK is still promising and straightforward, and output products with high quality could nearly be absorbed by the domestic as well as international markets For that reason, the competition between yarns producers is not an uncertainty at this point Yarn production firms Formosa Selling Price PVTEX STK DTH In the fiber industry of Vietnam, there are five main competitors but the one with the same market segment as well as production scale with STK is Hung Nghiep Formosa Ltd Petrochemical, Textile and Fiber JSC (PVTEC) is the affiliate of Petrolimex Corp They constructioned Dinh Vu Polyeste Yarn factory to produce PET Chip from oil for themselves The designed capacity of this factory is about 150.000 tons of yarns annually but it has yet put into use for years after fully constructed Hualon Quality Source : Team calculation Porter Five’s Force Analysis (0 -> : No to High Threat to STK) Barriers to entrance Intensity of Competitive Rivalry STK also has to consider the potential competitors in the future from FDI area These competitors can invest into fiber production and also weaving and knitting to take all of value added in every stages of the supply chain Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers Source : Team analysis 2012A Growth Rates (%) Revenue EBIT EAT Profitability Net Profit Margin EBIT Margin Return on Asset (ROA) Return on Equity (ROE) Solvency D/E Ratio Financial Leverage Liquidity Current Ratio Quick Ratio Coverage EBIT/Interest Expense CFO/Interest-bearing Debt Activity Receivable Turnover Days Receivable Outstanding Inventory Turnover Days Inventory Outstanding Payable Turnover Days Payable Outstanding Cash Conversion Cycle Asset Turnover FINANCIAL ANALYSIS 2013A 2014A 2015F 2016F 2017F 2018F 2019F 32.19% -2.34% -11.64% 0.31% 34.21% 42.62% 1.66% 31.93% 23.18% 19.64% 19.64% 25.27% 14.87% 14.87% 16.95% 3.89% 3.89% 5.43% 4.00% 4.00% 6.79% 7.66% 10.17% 8.28% 17.94% 5.12% 7.52% 7.26% 14.79% 7.28% 10.06% 8.52% 15.72% 8.82% 13.05% 7.39% 17.44% 9.24% 13.05% 8.06% 19.43% 9.40% 13.05% 9.34% 19.87% 9.54% 13.05% 9.92% 18.44% 9.80% 13.05% 10.65% 17.72% 67.48% 2.17 57.07% 2.04 34.53% 1.84 91.52% 2.36 93.68% 2.41 64.98% 2.13 42.28% 1.86 25.56% 1.66 1.33 0.48 1.42 0.65 2.62 1.53 3.71 2.43 3.29 2.01 3.39 2.11 3.64 2.36 3.85 2.57 6.22 0.16 7.88 0.43 19.33 0.74 8.25 0.36 10.44 0.40 12.59 0.56 16.49 0.77 23.22 1.18 12.98 28.11 4.75 76.87 5.78 63.19 41.79 1.08 14.16 25.78 6.07 60.17 6.38 57.24 28.70 1.42 13.05 27.98 6.78 53.81 6.19 59.01 22.78 1.17 13.04 28.00 6.80 53.68 6.66 54.84 26.84 0.84 13.04 28.00 6.80 53.68 7.59 48.11 33.57 0.87 13.04 28.00 6.80 53.68 7.41 49.26 32.41 0.99 13.04 28.00 6.80 53.68 6.97 52.38 29.29 1.04 13.04 28.00 6.80 53.68 6.97 52.35 29.33 1.09 REVENUE & PROFIT 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% 2010 800 700 600 500 400 300 200 100  From 2010 to 2013, o Revenue : STK had a very good growth with 30% CAGR thanks to continuously expanding production (Plant 1st, 2nd) In particular, the lack of natural cotton in 2010 and 2011 caused Revenue Net Income EBIT Margin huge demand for alternative materials such as synthetic and chemical yarns, which makes STK’s sales and reputation improved significantly o Net Income : However, net income was not promisingly with 3% CAGR The main reason of opposite growth direction between revenue and net income was the difference between 2011 2012 2013 2014 2015 2016 2017 2018 2019 the volatility of input and output prices The upside magnitude Source : Team calculation and projection of raw material prices was higher than the downside one of the output selling prices, which caused gross profit margin Input and Output Prices decrease from 23% in 2010 to 12% in 2013  From 2013 to 2014, o Revenue : grew slowly because the capacity of existing plants has been reached to the maximum o Net Income : with an impressive growth of 43% yoy More stable output quality, suitable procurements and sales plans made gross profit margin improve to 15% in 2014 and thus, net profit margin increased from 5% to 7% in 2014 Source : Prospectus 2015  Target and actual performance in 2015, o Target : STK set up the target revenue of VND 1695 billions Revenue and Net Income of Q2 (billions) (+16% yoy) and net income 148.8 billions (+9% yoy) due to 6% downside of selling prices and the operation of Plant 3rd with 50% of capacity o Actual : However, the predictions of BoD seem to be relatively underestimated because in the first half of 2015, PET chip price fell nearly 20% (Prospectus 2015) and average selling price decreased 11% Revenue until Q2/2015, thus, seriously declines (-12.75% yoy) but net income increases slightly due to the lower of cost of goods sold STK’s Performance Q2/2011 Q2/2012 Q2/2013 Revenue Q2/2014 Q2/2015 Net Income Source : STK STK and peers group (TCM, GMC, GIL, TNG, EVE) Asset Turnover : STK Financial Leverage Current Ratio Source : STK and peers LIQUIDITY & SOLVENCY  Liquidity : current ratios and quick ratios have improved over years and are better than others in the textile industry (2.23 to 1.91) The reason comes not only from well management of funds and receivables but also from overdrafts from Eximbank to meet working capital needs, which can be used as a very useful source of funds in order to avoid interest expense  Solvency : capital structure has been improved by reducing interest-bearing debts This improvements are necessary to meet the requirements of Eximbank before STK continues to borrow more to finance the construction of Plant 3rd and 4th in the future With these loans, we suggest that the financial leverage in 20152017 period will increase ACTIVITY Capital Structure (billions) 2,500  Total asset turnover : In the period 2012-2014, STK gradually used more effectively firm’s total assets reflecting the economics of scale in an ongoing rapid development However, the turnover from firm’s asset is still lower than the average of peers In the future, because the total investments of the Plant rd and 4th are very high, the total assets will grow faster than the revenue This can make the asset turnover fall below unless they have no more effective customer expansion and price control policy  Other turnovers : o Receivables turnover : significantly higher than peers’ average (13.9 to 9.1) It indicates that STK has a tighter policy about receivables from customers, which can damage sales contracts 2019 from the partners who use a high operating leverage o Inventory turnover : significantly higher than peers’ average (6.3 to 4.2) It indicates that STK does not have enough stock in hand for sale, especially for large orders, which can damage their revenue and reputation 2,000 1,500 1,000 500 2012 2013 2014 2015 2016 Total Equity 2017 2018 Total Liabilities Source : team calculation and projection ROE DECOMPOSITION 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P EBIT Margin Interest Burden Tax Burden Asset Turnover Financial Leverage 10.1% 86.5% 87.0% 1.08 2.17 7.5% 87.2% 78.1% 1.42 2.04 10.0% 92.8% 77.9% 1.17 1.84 13.0% 86.7% 77.9% 0.84 2.36 13.0% 91.2% 79.0% 0.99 2.13 13.0% 93.7% 78.0% 1.04 1.86 13.0% 96.2% 78.0% 1.09 1.66 Return on Equity (ROE) 17.94% 14.79% 15.72% 17.44% 13.0% 89.5% 79.0% 0.87 2.41 19.43% 19.87% 18.44% 17.72% ROE & ROA of STK compared to peers 30% 25% 20% 15% 10% 5% 0% STK TCM GIL ROE GMC TNG ROA Source : Team calculation EVE  EBIT Margin : improved in 2014 due to the larger gap between input and selling prices It will be stable at 13% in the future with our assumptions (in Valuation)  Interest Burden : improved in 2013 and 2014 when interest pressure was reduced and will decrease when STK use long-term debt to finance the Plant 3rd and 4th  Tax Burden : from 2016 to 2019, STK will have a tax advantage from the operation of the Plant 3rd and 4th  Asset Turnover : as analized above, because the total capital expenditures are very high, the total assets will grow faster than the revenue so this ratio will decrease below until revenue reachs higher  Financial Leverage : STK finances their capital expenditures mainly by long-term debt Thus, the financial leverage from 2015 to 2017 will increase significantly All of ratio above will compose to ROE of STK business In conlusion, ROE will be better off from 2015 to 2017 when STK has tax advantages, higher financial leverage and stable EBIT Margin Beyond the period, ROE will decrease because most of long-term debt will have paid down in order to lower financial leverage VALUATION Target Price : VND 26,800 We derive the target price mainly from 5-year Discounted Cash Flow Model We also give a Price Multiples and a Monte Carlo stimulation to support for our recommendation Discounted Cash Flow Model (in millions except per share) DISCOUNTED CASH FLOW MODEL (DCF MODEL) FCFF Enterprise value Cash & marketable securities Investment in affiliates Total Debt Equity value No of shares outstanding Rounded Equity value per share Market premium / (discount) to fair value 1,821,527 61,160 7,688 (754,790) 1,135,585 42.305 26,800 (21.1%) Capital Expenditures Projections (in billions) Capex as % of revenue Capex for the Plant 3rd and 4th Total Capex 2015P 2016P 2017P 2018P 2019P 2.0% 2.0% 2.0% 3.0% 3.0% 525 336 27 0 554 371 67 63 66 Long-term Debt Schedule (in billions) 2015P 2016P 2017P 2018P 2019P 207 513 (34) 686 683 138 (34) 786 786 (161) 624 624 (161) 463 463 (150) 312 Beginning Additional borrowing (Pay down) Ending Cash Flow (in billion) 600 400 200 (200) (400) (600) (800) 2015P 2016P 2017P Net Change in Cash CFO Recommendation : SELL 2018P 2019P CFI CFF WACC Calculation Peers' average unlevered beta 0.9 Relevered Beta 1.29 Risk-Free Rate (Rf) (VN) 6.5% Equity Risk Premium 11.8% Cost of equity 21.7% Cost of debt after tax 7.8% WACC 16.8% A DCF Model was used to estimate the intrinsic value of STK’s share price due to the predictability of cash flows in the relationship of growth and profitability The primary model is projected for years because of STK’s strategies, which is heavily dependent on expanding production to meet the huge demand from inside and outside market This model is driven by Net Operating Profit After Tax (NOPAT) as a proxy to estimate Free Cash Flow to Firm (FCFF) We not use Free Cash Flow to Equity (FCFE) to discount because STK’s capital structure has a high level of debt We will describe some adjustments to estimate FCFF such as Capital Expenditures, Long-tern Debt Schedule and our assumptions  Capital Expenditures : We project STL’s capital expenditures from 2015 to 2019 included : o Fixed amounts as 2% from 2015 to 2017 and 3% from 2018 to 2019 for expanding production in high growth phase o Total investment for the Plant 3rd and 4th  Long-term Debt Schedule : We amortized existing debts and new debt for future expansion  Our assumptions : o Crude oil maintain around at the level of 50USD/barrel for years and thus average selling prices will be affected only by the demand driver o PET Chip depreciates 25% in 2015 and STK will maintain a proper selling margin for 8% and higher o SG&A expenses decrease due to the application of SAP ERP o Unitex Co LTD will not create any dividends until 2019 o STK will not purchase more software licenses o Because the capital structure for the Plant 4th is uncertain, we assume that it will be as same as the Plant rd (30% of Equity and 70% of debt) The DCF Model is the most sensitive to the following factors :  Weighted Average Cost of Capital (WACC) : 16.8% is a appropriate discount rate for future cash flow o Beta : Because STK is newly listed, we derive beta from PurePlay Method with a peers group o Risk-free rate : rate of 10-year Vietnam government Bond o Equity Risk Premium : rate from credit rating B1 of Vietnam (according to Damodaran) 38,000 36,000  Long-term growth rate : we applied CAGR of 5% for STK’s longrun development due to Vietnam GDP’s average historical growth rate and industry outlook of Statista.com (as mentioned above) HOLD 34,000 We also offer “HOLD” recommendation due to changes in our assumptions that in the best case, STK will reach the target revenue in 2015 and/or selling prices will increase much more 32,000 30,000 28,000 SELL 26,000 PRICE MULTIPLES 24,000 22,000 20,000 30/9/15 2/10/15 4/10/15 6/10/15 8/10/15 Price Multiples LTM EV/EBITDA Price LTM P/B Price LTM P/E Price Average Share Price 6.9x 22,252 1.7x 26,440 11.1x 28,162 25,600 (Discount) (27.3%) Monte Carlo Statistics Mean Median Standard Deviation Skewness Kurtosis Coeff of Variation Minimum Maximum Range Width 25th percentile 75th percentile 12% 10% 8% 6% 4% 2% 0% 25,293 25,538 3,874 -0.3880 3.19 0.1532 6,624 36,724 30,100 22,853 28,018 We construct a proper peers group in order to estimate the intrinsic value of STK share The group contains two Indian firms, one American firm and one Vietnamese firm that have the same or almost same business with STK The average of three multiples approaches including EV/EBITDA, P/B and P/E leads us to a target price of VND 25,600 with 27.3% discount to current trading price It supports for our recommendation MONTE CARLO STIMULATION A Monte Carlo Stimulation was utilized in analyzing the potential outcomes of STK’s growth prospects This method stimulates a range of random outcomes for the multiple variables affecting the intrinsic value of STK’s share price We defined some key factors that are vital to the DCF Model given its sensitivity to each input by determining their probability distribution, mean and standard deviation 20,000 stimulations were run which accounted for each possibility of a feasible change in mentioned factors This stimulation leads to a mean target price of VND , and of overall outcomes fall between our range of derived target prices, which affirms our SELL recommendation INVESTMENT RISK MACROECONOMICS RISK (MR) Risk Matrix MEDIUM OR MR FINANCIAL RISK (FR) CR LOW Probability HIGH FR SR LOW MEDIUM Impact Vietnam is currently on the trend of globalization so the economic factors affecting STK’s business are not only from domestic but also from outside where the consumers and suppliers of STK are A rise in the import tariffs of raw material as well as technical barriers from exporting market will affect directly to STK’s inputs and outputs HIGH Source : Team analysis STK is using a high financial leverage (as other textile firms) with the loans in both VND and USD, which leads to financial risks not only from the fluctuation of interest rate but also from exchange rate State Bank of Vietnam has just lowered the interest rate on USD deposits, which, however, is not enough to mitigate the risk from Greenback This risk will cause the financial expense (especially the interest expense) to increase sharply and make net income worse SUPPLY CHAIN RISK (SR) Risk MR FR SR CR OR Mitigation factors Update and forecast economics changes Hedging interest and foreign exchange Negotiate short purchase contracts and long sale contracts Customer and reputation expansion, diversifying output Management labour security Nation and value of new textile projects in Vietnam (in millions USD) 1200 As analized before, PET Chip, a derivative from oil, accounts for more than 70% of COGS The recent fluctuations in crude oil will affect the input prices of STK impactfully if they are not be able to actively manage this risk Besides, the output prices, i.e the yarns prices, have to be adjusted to PET Chip and prices of other yarns and fibers but they should keep a proper profit margin for steady development COMPETITIVE RISK (CR) The competition status among yarns firms is not so intensive because the demand of the whole market is still large and each company has different market segments Unfortunately, some potential competitors of STK are the FDI enterprises in the situation that they are intending to invest for their own yarns and fibers supply to enhance the supply chain for themselves It will reduce the domestic market’s dependence on the products of STK, which indicates the decrease of yarns demand OPERATING RISK (OR) 1000 This risk which is seemed to be a feature risk of manufacturing firms comes from natural disasters (storm, flood, earthquake), the vandalism and accidents that can cause significant damages in the asset and labour It can also damage the reputation of STK In addition, the fact that some staffs and workers not comply to the production regulation can reduce the quality of the products and services 800 600 400 200 China Hong Kong Source : GSO Others APPENDIX INCOME STATEMENTS Fiscal year in millions VND 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P Fiscal year end date 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 Revenue 1,099,210 1,453,047 1,457,517 1,481,671 1,772,686 2,036,295 2,115,418 2,200,035 COGS (924,734) (1,275,820) (1,244,748) (1,207,562) (1,444,739) (1,659,581) (1,724,066) (1,793,029) Gross Profit 174,476 177,228 212,769 274,109 327,947 376,715 391,352 407,006 SG&A Expenses (62,203) (67,827) (66,935) (81,492) (97,498) (111,996) (116,348) (121,002) Other expenses (446) (185) 747 760 909 1,044 1,085 1,128 Operating profit (EBIT) 111,827 109,216 146,581 193,377 231,358 265,763 276,089 287,133 Interest income 3,632 7,091 2,126 2,741 3,022 2,700 4,433 6,578 Interest expense Other non-operating expense Pretax profit (17,965) (13,859) (7,584) (23,430) (22,162) (21,115) (16,740) (12,364) (733) (7,207) (4,959) (4,959) (4,959) (4,959) (4,959) (4,959) 96,761 95,241 136,164 167,730 207,259 242,389 258,824 276,388 Income Taxes (12,559) (20,840) (30,057) (37,025) (43,524) (50,902) (56,941) (60,805) Net income 84,202 74,400 106,107 130,705 163,734 191,487 201,883 215,583 No of shares 27.0 31.1 41.8 45 47 47 47 47 Basic EPS 3,118 2,396 2,538 2,926 3,482 4,072 4,293 4,584 REVENUE BY PRODUCTS in millions VND Fiscal year 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P Fiscal year end date 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 1,096,635 1,348,812 1,324,000 1,356,100 1,645,859 1,803,441 1,875,579 1,950,602 23.0% (1.8%) 2.4% 21.4% 9.6% 4.0% 4.0% 103,235 133,517 125,571 126,827 232,854 239,840 249,433 3909.1% 29.3% (6.0%) 1.0% 83.6% 3.0% 4.0% 1,452,047 1,457,517 1,481,671 1,772,686 2,036,295 2,115,418 2,200,035 32.1% 0.4% 1.7% 19.6% 14.9% 3.9% 4.0% DTY % growth FDY 2,575 % growth Total % growth 1,099,210 APPENDIX BALANCE SHEET in millions VND Fiscal year 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 Cash & equivalents ST & LT market securities 24,099 75,562 148,164 224,542 198,500 247,668 306,397 362,440 Accounts receivable 84,653 102,610 111,723 113,662 135,987 156,209 162,279 168,770 Inventory 194,752 210,312 183,507 177,583 212,462 244,056 253,539 263,681 Other current assets 8,930 15,810 20,024 20,356 24,354 27,975 29,062 30,225 Deferred tax assets 867 1,058 1,899 1,930 2,310 2,653 2,756 2,866 Property, plant & equipment 651,191 568,677 737,645 1,185,013 1,414,566 1,327,888 1,238,443 1,153,112 Intangible assets 8,439 8,965 6,466 3,726 985 0 0 0 7,469 7,469 7,469 7,469 7,469 43,647 42,477 35,523 35,523 35,523 35,523 35,523 35,523 Total assets 1,016,578 1,025,471 1,244,951 1,769,804 2,032,155 2,049,441 2,035,469 2,024,085 Accounts payable 192,009 202,036 143,401 138,952 166,244 190,965 198,386 206,321 Other payables & deferred revenue 30,877 30,605 191,779 195,581 233,995 268,791 279,235 290,405 Fiscal year end date Investment in affiliates Other non current assets Short-term debt 36,751 71,091 25,927 0 0 Long term debt 279,916 216,007 207,106 685,870 789,322 626,143 462,964 310,947 7,778 2,669 1,921 0 0 Total liabilities 547,331 522,408 570,135 1,020,403 1,189,560 1,085,899 940,585 807,673 Common stock and APIC 315,060 315,426 463,080 458,593 458,593 458,593 458,593 458,593 Treasury stock (11,754) (11,827) (11,827) 0 0 Retained earnings 164,722 198,245 222,345 289,591 382,785 503,732 635,074 756,602 Bonus and Welfare fund Financial Reserve Fund Total equity Balance check 1,219 1,219 1,219 1,219 1,219 1,219 1,219 1,219 469,248 503,063 674,817 749,403 842,597 963,544 1,094,886 1,216,414 (0) (0) (0) (0) (0) (0) (0) [...]... affecting the intrinsic value of STK’s share price We defined some key factors that are vital to the DCF Model given its sensitivity to each input by determining their probability distribution, mean and standard deviation 20,000 stimulations were run which accounted for each possibility of a feasible change in mentioned factors This stimulation leads to a mean target price of VND , and of overall outcomes... overall outcomes fall between our range of derived target prices, which affirms our SELL recommendation INVESTMENT RISK MACROECONOMICS RISK (MR) Risk Matrix MEDIUM OR MR FINANCIAL RISK (FR) CR LOW Probability HIGH FR SR LOW MEDIUM Impact Vietnam is currently on the trend of globalization so the economic factors affecting STK’s business are not only from domestic but also from outside where the consumers... forecast economics changes Hedging interest and foreign exchange Negotiate short purchase contracts and long sale contracts Customer and reputation expansion, diversifying output Management labour security Nation and value of new textile projects in Vietnam (in millions USD) 1200 As analized before, PET Chip, a derivative from oil, accounts for more than 70% of COGS The recent fluctuations in crude oil... cause significant damages in the asset and labour It can also damage the reputation of STK In addition, the fact that some staffs and workers do not comply to the production regulation can reduce the quality of the products and services 800 600 400 200 0 China Hong Kong Source : GSO Others APPENDIX INCOME STATEMENTS Fiscal year in millions VND 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P Fiscal year... 103,235 133,517 125,571 126,827 232,854 239,840 249,433 3909.1% 29.3% (6.0%) 1.0% 83.6% 3.0% 4.0% 1,452,047 1,457,517 1,481,671 1,772,686 2,036,295 2,115,418 2,200,035 32.1% 0.4% 1.7% 19.6% 14.9% 3.9% 4.0% DTY % growth FDY 2,575 % growth Total % growth 1,099,210 APPENDIX BALANCE SHEET in millions VND Fiscal year 2012A 2013A 2014A 2015P 2016P 2017P 2018P 2019P 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016... 210,312 183,507 177,583 212,462 244,056 253,539 263,681 Other current assets 8,930 15,810 20,024 20,356 24,354 27,975 29,062 30,225 Deferred tax assets 867 1,058 1,899 1,930 2,310 2,653 2,756 2,866 Property, plant & equipment 651,191 568,677 737,645 1,185,013 1,414,566 1,327,888 1,238,443 1,153,112 Intangible assets 8,439 8,965 6,466 3,726 985 0 0 0 0 0 0 7,469 7,469 7,469 7,469 7,469 43,647 42,477 35,523... 458,593 458,593 Treasury stock (11,754) (11,827) (11,827) 0 0 0 0 0 Retained earnings 164,722 198,245 222,345 289,591 382,785 503,732 635,074 756,602 Bonus and Welfare fund Financial Reserve Fund Total equity Balance check 1,219 1,219 1,219 1,219 1,219 1,219 1,219 1,219 469,248 503,063 674,817 749,403 842,597 963,544 1,094,886 1,216,414 0 (0) (0) (0) (0) (0) (0) (0)