Business analysis and evaluation of Vingroup. The financial and organzational analysis as well as forecast of this company are included in the report. Also, this report is prepared according to CFA style
BUSINESS DISCRIPTION VIC (Vingroup) is one of the leading names in real estate industry in Vietnam In difficult years for Vietnam economy in general and for the real estate sector in particular; VIC’s unique, large-scale mix-used development projects are spotlights in the market with high quality products As of February 2012, VIC is the largest listed real estate company in Vietnamese stock market with charter capital of approximately VND 5,500 billion After Vinpearl JSC was merged into the company in January 2012, Vincom JSC was renamed as Vingroup JSC (Vingroup) and became one of the largest private listed corporations with international standard, repositioning itself as a competitive player of other multinational companies in many large-scale projects Vinpearl: Leader of hospitality industry From 2001, Vinpearl has become Vietnam’s leading hospitality firm, specializes in resorts, tourism, recreational businesses and other supporting services Vinpearl has been successful in identifying and developing hospitality projects acquiring a portfolio of prime land sites in key tourist and business destinations in Vietnam For Vinpearl Resort Nha Trang, the property features 485 five star rooms, meeting facilities, one of the world’s longest sea cross cable car system and one of the largest resort swimming pool in Southeast Asia Besides the two main business sectors, VIC also joins into two new businesses: Vinmec and Vincharm The main strategy of Vinmec is to manage and operate a portfolio of high-end hospitals and high-quality healthcare services Vincharm, in the other hand, focuses on managing and operating a series of beauty salon, gymnasiums and spas New launch into international financial market In the international capital market, VIC is known as the very first enterprise succeed in stabling international convertible bond in Singapore stock market At the end of 2012, Vingroup succeed in mobilizing capital of USD 300 million Huge development properties projects with good construction Although real estate market in recent years has been in “frozen” situation, Vingroup still established new huge projects and it was able to complete the projects on time Royal City, Times City and Vincom Villas are spotlights in market’s dark scenario In 2012, the group operated Vincom Center A HCMC and Vincom Center Long Bien while other developers stopped or cancelled most of their projects Sourse: Vingroup’s annual report 2012 INDUSTRY ANALYSIS Figure Net Revenue and Gross Profit by Sector of Vingroup in 2012 House and Apartments: Grey scenario The number of apartments in new projects available for sale in 2012 fell sharply compared to the previous year when the number of completed Figure 5: Total office supply for Ha Noi Market Figure 2: The Number of Apartments Offered Over year Source: CBRE.com Figure 3: The number of Completed Apartments Over Years apartments to rise This implied the amount of inventory in the market increased, the market became less attractive The causes are still from the credit policies of the bank, the country's economy has not recovered from the recession Trading in real estate market will slow down and reach dip in mid 2014 (Savills, Q1/2013), as customers’ demand will decrease Customers still remain “wait and see” attitude, they will be interested in projects with lower prices compared to peers and good construction In current time, the government also have recommend for policies allowing foreigners and oversea Vietnamese owning house, villas and high-end apartments, first pilot in Ho Chi Minh City Office market: Potential Market The market for office leasing is the relatively brighter than the market for buying and selling real estate According to CBRE, at the end of 2012, the rents of Grade A and B office had a slight increase and the vacancy rate of the office leasing market also increased In Ho Chi Minh City, the supply continues to increase slightly while the demand remains at low level, mainly from grade A buildings In 2013, supply for new office will increase for nearly 190,000m 2, 64% locate in District In Hanoi, the CornerStone was finished in Q1/2013 providing nearly 260,000m2 squares for office market and expected to increase for 350,000m more in 2013 Vacancy continues to decrease due to a fall in rent and strong demand Commercial Centers: Bring the investors huge amount of money In the Retail Market, the demand for space of supermarket and commercial center segments accounts for the major proportion At the end of 2012 and early 2013, the supply for leasing in retail market increased compared with quarter 3/2012 along with the decrease in vacancy rate Although the asking rent price decrease, expecting a down trend in 2013, it is still in high price However, this market is potential for investors, especially for foreign investors in M&A activities Five forces of high- end real estate industry Figure 4: Vacancies and Average Leasing Price of Offices in Ho Chi Minh City Source: Jones Lang LaSalle 1Q, 2013 Weak Threat of New Entrance New entrances from foreign investors, after Vietnam’s join in WTO, causes threats to domestic real estate developers A high-required capital, mainly borrowed from banks, is also one of the barriers for new comers when government’s intervention to the market affecting to the risk ratio of lending has prevented banks from lending to the real estate enterprises Besides, high existing cost for maintaining operation, projects and good financial health is a requirement for new players In the difficult stage of Vietnam economy at this time, there are not many companies can those things Moreover, the process of administrative procedure during the period of conducting projects in Vietnam is complex This prevents foreign as well as new domestic companies from “jumping” in this market The last thing is the “frozen” situation of the market makes everyone not want to enter In conclusion, the threat of new entrance for the high- end real estate industry is not high Source: cafef.vn Figure 6: The Demand of Retail Market of Vietnam in 2012 Strong Power of Buyers Due to the crisis in Vietnam economy in 2008, the real estate industry is also affected, especially the high-end real estate industry is the most affected because of the high prices The customers are more sensitive to the high prices of the high-end real estate industry, they prefer cheaper prices and want to buy essential good rather than properties Strong substitute product In the recession of Vietnam economy, customers want to buy cheaper product from real estate industry Therefore, the real estate companies that follow the low price segment will attract more customers and get higher profit Weak existing rivalries: The real estate industry is on the downturn trend, more and more enterprises get trouble in raising capital and have to quit the industry There are not many enterprises, which can have enough fixed asset and capital to join in the high-end real estate industry Moreover, they cannot be able to take the existing cost Therefore, the existing rivalries are not a big problem in high-end real estate industry COMPANY ANALYSIS Figure 7: The Supply and Vacancy rate of Retail market in Vietnam Source: Bloomberg Figure 8: Market cap of listed real estate companies ( Million VND) Real Estate leader Vingroup is the largest listed company in Vietnam by market capitalization in Real Estate sector Currently, Vingroup has an attractive performance in this industry with 31 property developments situated in prime urban locations and areas throughout Vietnam Furthermore, the group’s investment portfolio is experiencing a rapid growth Compared with other competitors in the same industry, the group is successful as the developer of high quality, commercial, residential, hospitality, and mixed-used property In recent years, it has also operated high-end hospitals (Vinmec) and serried of beauty salons, gymnasiums and spa (Vincharm) Effective business model in Vietnam with differentiation strategy In recent years, Vingroup follows differentiation strategy It pursues high quality, large-scale and mixed-use developments in prime locations throughout Vietnam with main target from mid to high-end customers Vingroup mainly focuses on real estate and hospitality It also enhances in developing and growing a substantial portfolio of prime commercial and tourism investment properties for stable recurring income Moreover, Vingroup tries to utilize pre-sale from residential project for funding developments of immediate projects, customer’s deposit is usually from For future development, the group continues to acquire prime sites management capabilities To maintain good growth rate, the group expand to business in the upper mid-end segment through affordable units as well as uniting the targeted high value customers though unique Vingroup membership platform Figure 9: Royal City’s GFA breakdown (total GFA: 1,205,484sqm) Light vision for Vingroup’s megaprojects Most development projects are in prime location attracting investors and customers’ interest Especially Vincom Center A and B HCMC are two of 20 golden sites in Ho Chi Minh City In 2010 and 2011, the group started two mega projects including Royal City (finished in 2013) and Time City (finished in 2014) The Royal City started to put in construction in January 2010 and its estimated effective interest is up to 98.366% The Times City was put into construction in February 2011, and its effective interest is 80.39% In Q1/2013, the two projects was reported to pre-sold for about 2600 over 4500 apartments in Royal City and 3500 over 13000 apartments in Times City The average price for Vincom’s apartment is from 28 million to 39 million per square meter VND compared to 30 million per square meter of market price for high quality apartment However, with good service and convenience those projects bring to customers, the Vincom’s price is not too expensive Raising reputation by providing high quality projects and service Differentiation strategy allows Vingroup to provide the best quality to its customers and maintain the leading position in the market Recently, Vingroup has achieved the “Best developer” and “Best Villa Development” for Vincom Village at “Asia Real Estate 2012” in Singapore as the proof for the commitment of providing products and services that meet international standards Figure 10: Timesl City’s GFA breakdown (total GFA: 2,179,163sqm) Vingroup has also become the first company in Vietnam successfully issued $300 million international convertible bonds (6/2012) despite the difficult situation of the Vietnamese and regional economies financial markets in 2012 This event helps Vingroup not only keep ability to raise capital 100% as planed but also to be honored by major international financial media firms as “The Triple A country Award – Best Deal, Vietnam” (The Asset); “Best Vietnam Deal” (Finance Asia) and Vietnam Capital Markets Deal 2012 (International Financing Review ,Thompson Reuters) Those awards give Vingroup a strong competitive position and barrier-to-entry against other competitors and new players Figure 13: Figure 11: Figure 12: FINANCIAL ANALYSIS Huge gain in revenue in 2010 and 2012 In 2012, Vingroup recorded a huge gain in revenue in 2010 and 2012 In 2010, the revenue mainly came from 2600 billion VND of sale of apartments at Vincom Center B HCMC as well as from transferring 31,000 m2 of Vincom Financial Tower in Q4/2012 In 2012, there was a significant increase in sale of inventory In 2012, VinGroup gained a strong increase in the group’s revenue, compared to 2011, mainly from leasing, mostly resulted from operation of new Vincom Center A HCMC and Vincom Center Long Bien shopping centers as well as from $64 million (1300 billion VND) by selling office component at Vincom Center Hanoi – Tower B to Techcombank In this year, sale of inventory properties increased up to VND 3,914 billion Another factor contribute to this rapid growth came from operation of two new business lines: Rendering of hospitality and beauty care services; rendering of health care services decrease over the period, Vingroup still affirmed its leading position in the highend real estate market in Vietnam when showing a double Profit margin ratio relative to rivals’ ratio in the same industry (26.39%) Liquidity of Vingroup was quite low relative to competitors in Real Estate industry The current ratio was larger than whereas quick ratio was smaller than 1, which indicated that Vingroup had a large amount of inventories However, liquidation did not reflect correctly the financial health of Vingroup because the deposit and down payment of customers made up the majority of total liabilities, around 35% of total liability in 2012 Put in other way, if this account was subtracted out of total liabilities, the liquidity ratio of Vingroup would be safety Both long-term debt to equity and equity to assets moved the same trend as interest coverage ratio year over years and all ratios were higher than industry ratio in 2012 However, reliance on debt of Vingroup did not pose a problem because a high interest coverage ratio ensured that Vingroup’s earning could completely meet its interest payment Huge amount of inventories in 2011 and 2012: The huge inventory of Vingroup is one of the advantages as well as competitive advantage when competing with other real estate corporations In another hand, having huge inventory is also a challenge when the real estate market of Vietnam is in “frozen” situation Operating management: Differentiation strategy creates high gross profit margin The change in Gross Profit margin was due to the steady increase in cost of sales, which lead to the growth rate of gross profit lower than revenue However, because of differentiation strategy, decreasing the gross profit margin temporarily may be beneficial in the long run As the feature of this strategy, company must provide higher quality product to customers, and thus more expensive, materials to make the goods The benefit of this strategy is that Vingroup could maintain its customer loyalty, which also can raise profit margins in the future Furthermore, Vingroup always try to expand its business year by year, which also acquire a larger expense on labor, R&D and other costs which support for constructing large project Although recording a dramatic Table 1: Vingroup’s Financial Ratios Center Long Bien, Vincom A had completed, therefore there are a rapid increase in inventories Moreover, the M&A between Vingroup and Vinpearl helps Vingroup indirectly own 100% Vinpearl’s project, the inventories, as a result, increased Vingroup is the leader in the high end real estate market, the projects constructed by Vingroup always have the big size, Vingroup has to divided them into many phrases to construct in order to raise the capital and finance its operation, therefore, the inventories fluctuate a lot and the forecasting inventories will be based on the average of the years inventories turnover Figure 14 Vingroup’s Capital Structure Calculation of WACC: In 2012, Vingroup had successfully issued $300,000,000 convertible bonds to the foreign market which is Singapore, therefore the market value of debt is calculated by converting the $300,000,000 into Vietnam dong In order to raise the capital, Vingroup issued stocks in Vietnam securities market, the market value of equity is calculated by taking 508,089,837 (number of stock outstanding in 2012) multiply with 80,000 VND (stock price in 2012) Sales forecasting: Although Vingroup relied much on debt, its liquidity and solvency were quite fine to compare to average ratio However, in the future, Vingroup will construct many large projects, which requires of raising more capital; therefore, if Vingroup unable to improve its liquidity and solvency ratio, the investors should take more caution before making investment From 2012, Vingroup had two new business lines : rendering of hospitality and beauty care services and rendering of health care services which increase the total amount of business lines up to four with four strategic brand names: Vincom (Real Estate), Vinpear (Tourist and recreation), Vincham (Fitness and Beauty care), Vinmec (High quality health care services) Therefore, forecasting each business line is necessary for sales forcasting Source: CBRE.com Figure 15 Office Asking Rent and Office Vacancy in HCMC VALUATION Change in Working Capital: The Working Capital fluctuated a lot from 2008 to 2012 mainly due to the change in current assets which change in inventories account about 50% of the total From 2009 to 2010, the inventories decreased because the development of the real estate market and in that time, Vingroup still had many projects under construction, the number of completed projects was not much From 2011 to 2012, two big projects of Vingroup which are Vincom Source: CBRE.com Figure 16 Prime rent in some Asian countries’ cities City (operate in 2014) From 2015 to 2017, the market is expected to recover, which is a positive sign to the group’s property sales Therefore, Vingroup will speed up apartment sale in the two projects The average growth rate is about 11% Figure 17 Vingroup’s Financial Structure First of all, the rental income of Vingroup most stably comes from leasing office and retail shopping mall This account recorded an upward trend during last fiveyear period regardless the downturn economy in 2011 and 2012 From 2015 to 2017, as its strategy which claims that Vingroup will expand its business by focusing on developing Vinpearl and Vincharm and Vinmec Secondly, In years later, Vingroup’s revenue still based on sale of inventory, including apartments for sale and project transfers However, in this report, we just forecast for revenue from selling apartments because the group has just planed to transfer Vincom Center A HCMC, it have not public official any information about the potential transferees and the price as well as other plans of transferring building, real estate properties In following years, supply of development property will increase in apartment sale, office leasing and retail when many projects will be finished in 2013 and 2014 In the two years, the group’s revenue mainly comes from large number of sale and purchase contracts Royal City (operate in July, 2013), Times Thirdly, the demand for medical and health care in Vietnam is increasing Vietnam is one of countries that have a huge amount of people suffering the cancer in the world Rich people and people having incurable disease often go abroad to check their health because they not believe in the condition of the domestic hospitals High-quality-hospitality service is a potential industry It can bring a huge profit to the investors and peace of mind of customers Moreover, the GDP is expected to increase from 2013 to 2020 and CPI will maintain from 2013 to 2015 and it is possible to continue in 2017, this means the income from people will increase That makes the demand for a better condition life increase in general and in health care in particular Therefore, the rate for investing in health care will increase steadily 5% each year from 2013 to 2017 Finally, based on the condition of tourism industry and other factors, this area can increase in profit for Vingroup There is an increase in the number of foreign tourist visit Vietnam from 2009 to 2012 ( Appendix 3.1 ), which means that Vietnam tourism has good impress in other countries day by day Besides that, the domestic tourists also contribute for a large amount in tourism industry with 32.5 millions domestic tourists Therefore, the tourism industry can continue to develope more in the near future Moreover, the government has enacted some policies to support for Vietnam Tourism starting with the new slogan: “Vietnam the endless company has been successfully issued $300 million international convertible bonds on Singapore Stock Exchange, this structure was reversed By looking at the pros of convertible bonds as well as the attractive interest rate on short-term and long-term loans policy, it is expected that Vingroup will remain the structure of high debt ratio Moreover, from the recent announcement to its shareholders (29th March, 2013), Vingroup would like to issue around 150 million stocks on SGX and non-convertible bonds to financing its operating activities As company plans to construct new projects for each next five years, both of these accounts are forecasted to increase rapidly in the future CAPEX: Projected to fluctuate due to unstable revenue growth and PPE Vingroup is famous for its strong commitment to customers by finishing all its projects as planed and as a prestige and leader in the real estate industry, company always set up many projects continuouslyto expand its business lines as well as build its strong position in Asian region Base on that belief, it is forecasted that in 2013, it will open the largest real estate project in Vietnam: Royal and Times City in Hanoi Then, from 2014 to 2017, it will develop constructing Vinpearl projects to expand to travelling industry; therefore, the number stemming this account will increase along with Only in 2015, this account is expected to decrease slightly because in that year only the Royal City phase two will be completed From what mentioned above, property and equipment of Vingroup is forecasted to increase with the last year ratio at 2.04 As revenue and PPE is expected to fluctuate, CAPEX will change as well RISKS beauty” From 2013 to 2017, Vingroup focus on developing Vinpearl which is hospitality and beauty care service, many completed projects With the good opportunity created by the government, the rendering of hospitality and beauty care services increases from 6% in 2013, 8% in 2014, 8% in 2015 and 10%, 12% in 2016 and 2017 Financial structure: Expected to remain the higher debt ratio for financing activities Before 2012, the financial structure of Vingroup was clearly higher equity ratio than debt ratio; however, since 2012, Macro Economic Risk Because all of the Group’s operations are strictly subjected to Vietnam’s political, legal and economic environment, any negative change occurred in the national economy creating a decrease in customer’s interest to the real estate products may become harmful factors to the Group’s revenue To reduce the risk, the group should have plan to adjust rental price based on CPI index or revenue having foreign exchange factors Liquidity risk To big corporation as Vingroups, buying or selling a stock with an enormous amount often takes at least one week after the group summit the request to the SSC That may lead to the mismatch between the due day of financial asset and maturity of financial liability, causing liquidity risk for the group Material and commodity price risk Recently, the construction material market has fluctuated significantly due to the economic downturn and real estate recession Therefore, the domestic material price has been changed dramatically in downtrend.The changes in the floating interest rate may lead to market risk relating to Vingroup’s long-term debt To control the risk, the group has to monitor related situation occurring in the whole market, especially in financial market to estimate and adjust to a suitable financial leverage and strategy Foreign exchange risk To reduce the risk, the group should have plan to adjust rental price based on CPI index or revenue having foreign exchange factors Liquidity risk To big corporation as Vingroups, buying or selling a stock with an enormous amount often takes at least one week after the group summit the request to the SSC That may lead to the mismatch between the due day of financial asset and maturity of financial liability, causing liquidity risk for the group Material and commodity price risk Recently, the construction material market has fluctuated significantly due to the economic downturn and real estate recession Therefore, the domestic material price has been changed dramatically in downtrend All the group’s projects are affected by the variability of certain material used for construction, both bought in domestic market and import from other countries The price for the material are related to the market changes, tariffs, etc Any change in the price may lead to a renegotiations in the construction contracts utilize fixed prices Market risk The changes in the floating interest rate may lead to market risk relating to Vingroup’s long-term debt To control the risk, the group has to monitor related situation occurring in the whole market, especially in financial market to estimate and adjust to a suitable financial leverage and strategy Foreign exchange risk ... construction in February 2011, and its effective interest is 80.39% In Q1/2013, the two projects was reported to pre-sold for about 2600 over 4500 apartments in Royal City and 3500 over 13000 apartments... based on sale of inventory, including apartments for sale and project transfers However, in this report, we just forecast for revenue from selling apartments because the group has just planed to