The Vietnam Daily

June 18
th
2014
Page 1
HO CHI MINH CITY SECURITIES CORPORATION
MARKET COMMENTARY Markets at a Glance HSX HNX
1 day chg (%) -0.39% -0.18%
Close 570.03 76.85
Volume (share) 99,955,525 55,197,322
Value (USDmn) 62.90 26.97
Gainers 110 98
Losers 105 92
Unchanged 62 171
Foreign Activity
Foreign Buy (USDmn) 12.44
Foreign Sell (USDmn) 7.47
Foreign Net (USDmn) 4.97
Foreign Turnover (%) 22.16%
Fiachra Mac Cana
Head of Research
+848 3823 3299
fachra.maccana@hsc.com.vn
Head Offce
Level 5 & 6, AB Tower
76 Le Lai St., District 1, HCMC
T: (+84 8) 3 823 3299
F: (+84 8) 3 823 3301
Hanoi Offce
Level 4 & 5, 66A Tran Hung Dao
Hoan Kiem District, Hanoi
T: (+84 4) 3 9334693
F: (+84 8) 3 9334822
http://www.hsc.com.vn
HCMS <GO>
Please read the important disclaimer at
the end of the document.
The markets lost a little ground today while turnover was a tad lower
than yesterday overall. Market breadth narrowed while we also see that
30 stocks went to the ceiling while 8 stocks went to the foor. Foreigners
were far more active today and net buyers overall to a moderate degree.
The put through market was fairly quiet although we did see a midsized
deal in VNM and then some smaller deals in PAC; EIB and FPT going
through. Amongst index heavyweights we saw losses in GAS; MSN and
BVH while we saw gains in VIC & VCF. Then amongst other actives we
saw gains in VCB; VNE and KSS while FLC; SSI and HQC fell back.
The markets traded in a fairly narrow range for a third consecutive day
with laggard stocks doing most of the running while the leading counters
marked time by and large. We seem to be in the fnal stage of a complete
market movement with the leading stocks having already hit some resis-
tance and attention shifting to those lagging stocks that have yet to break
above the 50 day MA. The broader market was also more mixed than
yesterday with some momentum stocks dropping back on proft taking.
We had a bright start for some of those momentum stocks and indeed
by mid morning leading momentum driven mid cap issues such as HCM
& FCM were showing further sharp gains. However sellers intervened
later and these stocks failed to hold onto early gains by the end of the
day. Trailing stocks had more luck however as investors still seem keen
to pick up counters that have moved little to date. The overall mood re-
mains fairly optimistic as seen by the continued strong turnover today.
While observable margin trading positions continue to increase in recent
days although still over 33% below the highs of late March.
We mentioned at the beginning of the week that as long as turnover on
the VN index was comfortably over VND1 trillion then the market could
hope to make further near term gains. And that seems to be holding
true, as least as far as the broader market is concerned although the VN
index itself has been treading water since. Hence our short term view
remains the same; we are still more likely than not to move up gradually
towards resistance of 580 over the coming days. While the HN index is
likely to test and possibly break through its 50 day MA line at the same
time. However if the HN index fails to do that by early next week then it
will clearly signal that this trading rally is over. And the proft takers will
take over.
In company specifc news, we see that Vietcombank (VCB - Outper-
form) rose today on its ex rights day once taking into account the price
adjustment. Today is the ex-right date for (1) a FY2013 cash dividend
VND1,200/share, or equivalent to a dividend yield of 4.00% at the clos-
ing price of 17
th
June and (2) bonus shares at a ratio of 15% (15 new
shares for 100 current shares) in order to increase their charter capital
from VND23,174 billion to VND26,650 billion. The payment date for the
cash dividend will be on 18
th
July 2014. The stock has risen by 16.6%
YTD and it is note-worthy that VCB with its decent fundamentals - has
outperformed the VN index by 30.7% since the markets correction in
early May.
(Continued overleaf)
Industry Movers
(composite)
1D chg Weight
Basic Materials +0.24% 6.61%
Consumer staples -0.50% 22.00%
Consumer discretionary +0.21% 1.88%
Financials -0.08% 34.59%
Health Care -0.66% 1.30%
Industrials -0.43% 6.44%
Energy -0.32% 3.10%
Technology -0.67% 1.49%
Telecommunications -0.47% 1.53%
Utilities -0.92% 22.56%
The Vietnam Daily
June 18
th
2014
Page 2
HO CHI MINH CITY SECURITIES CORPORATION
MARKET COMMENTARY
DPM key gas input costs to rise 14.4%. Higher than expected. Prospects look dim as far as the
eye can see. Underperform.
Price increase to be effective from April 1
st
this year. So backdated a few months. Replaces original schedule which
would have led to a 2% price increase. As MOF moves to market pricing for most customers of natural gas as we men-
tioned in a recent report. Will lead to an estimated increase of 11.3% for natural gas inputs this year to US$7.3/MMBTU
assuming no further move in the Singapore regional benchmark price which is calculated at 46% of FO. As a result
we have revised our numbers for FY2014 and now forecast DPM will record sales of VND8.85 trillion (-15.0% y/y) and
NPATMI of VND1,238 billion (-44.1% y/y). Which is 7.3% lower than our base case for NPATMI previously. With fat de-
mand; both domestic and global oversupply the outlook for prices remains weak. Indeed the price of urea has dropped
3.7% YTD and looks set to fall further. Our outlook for FY2015 isnt any better actually. DPM proposed NH3-NPK project
might help out but frankly we are still unsure as to the exact economics of this project. Still a decent dividend capture
story and of course fairly liquid as a stock. However its growth days have been gone for some time. At current prices
and give a our FY2014 EPS estimate of VND2,797 we get a forward PE of 11.7x. Not that cheap for a fat growth stock.
Reiterate Underperform.
Phu My Fertiliser (DPM - Underperform) natural gas input prices will increase this year by far more than the 2% which was in the
original price schedule. Which is exactly what we have been fearing since last year. And what has caused the share price to be
very volatile YTD. Now we see that DPM will have to pay 14.4% more for natural gas inputs in the new contract with GAS which
will be backdated to April 1
st
2014. As we had anticipated in our recent GAS (Outperform) report, DPM and GAS reached a price
agreement last week. Whereby the natural gas input price for DPM will now be benchmarked to 46% of the monthly average fuel
oil (FO) prices in the Singapore market plus US$0.63/MMBTU for transportation fee and distribution fee. This means that DPMs
input cost is now fully benchmarked to the regional wholesale price and no longer contains any hidden subsidies.
According to our calculations the new price will come to around US$7.5/MMBTU or marking a 14.4% increase from what DPM
paid as recently as Q1 2014. And then assuming that the FO prices in Singapore market remains fat for the rest of the year, we
estimate that DPMs average natural gas input prices for 2014 will come to US$7.3/MMBTU (+11.3% y/y). This is a little bit higher
than our base-case scenario of US$7.21/MMBTU (+10% y/y) we set back in April 2014. FYI, the gain in terms of the higher in
natural gas price charged to DPM will go directly to MOF. And GAS will not beneft from the price changes.
In our earning model we have revised our numbers for FY2014 and now forecast DPM will record sales of VND8.85 trillion
(-15.0% y/y) and NPATMI of VND1,238 billion (-44.1% y/y). Our other key assumptions include (1) sales volume of 800,000
ton of in-house urea (-4.2% y/y); (2) a 8% y/y decline in DPMs ASP for its in-house urea and (3) average bank deposit rates of
5.5% (-20% y/y). We then estimate that FY2014 EPS comes to VND3,250 implying a forward PE of 10.1x, rather expensive in
our view.
This is a 7.3% lower than our earlier base case forecast of VND1,335 billion (-40% y/y) for FY2014 NPATMI which we made back
in April. In that forecast we had assumed DPMs FY2014 average natural gas input price at US$7.21/MMBTU, or just 9.9% higher
than that of FY2013, while the other key assumption are all unchanged: (1) sales volume of 800,000 ton of in-house urea (-4.2%
y/y); (2) a 8% y/y decline in DPMs ASP for its in-house urea and (3) average bank deposit rates of 5.5% (-20% y/y).
Vietnam urea usage 2010-2015
million ha 2009 2010 2011 2012 2013E 2014F 2015F
Arable land (million ha) 6.30 6.44 6.50 6.52 6.52 6.52 6.52
Total urea consumption (thousand ton) 2,175 2,190 2,200 2,190 2,185 2,184 2,184
Average urea consumption (kg/ha) 345 340 338 336 335 335 335
y/y % change
Arable land (million ha) 2.2% 1.0% 0.2% 0.1% 0.0% 0.0%
Total urea consumption (million ton) 0.7% 0.5% -0.5% -0.2% 0.0% 0.0%
Average urea consumption (kg/ha) -1.5% -0.5% -0.7% -0.3% 0.0% 0.0%
Sources: FAO, MARD, HSC calculation
(Continued overleaf)
The Vietnam Daily
June 18
th
2014
Page 3
HO CHI MINH CITY SECURITIES CORPORATION
MARKET COMMENTARY
In other words the input price increase pretty much ruins prospects for DPM in FY2014 given that demand is fat; prices have
been weakening and there is a supply overhand. In fact prospects for FY2015 dont look too bright either given the various struc-
tural issues the whole industry is facing. As follows; domestic demand for urea has been maxed out at 2.2 million ton per year.
The main users of urea fertilizer are rice farmers who account for about 80%-85% of urea demand. The balance being consumed
by rubber, coffee, other annual crops, and vegetables.
The domestic market for urea is fully mature. We believe the fertilizer demand will not move higher for the foreseeable future for
3 reasons:
(1) Urea consumption per hectare of Vietnam has hit a peak - Any further increase will either destroy farmers income or
increase fertilizer residues over the accepted standards or both. According to FAO, Vietnams average urea fertilizer consump-
tion has reached its peak of 345 kg/ha in 2009 and has since gradually declined to 335kg/ha at the moment. Still double that
of Thailand, a country with a similar crop structure in the region. Because of this; the production cost of Vietnams agricultural
products per ha is high. And fertilizer residues in Vietnam agricultural products including rice, coffee and fruits are always on the
edge of the international maximum standard limits.
(2) Vietnam has run out of arable land - The problem here is a shortage of arable land. According to FAO, Vietnams arable
land area came at about 6.5 million ha in 2011 and didnt increase since then. 58% if this is under rice production. Hence, do-
mestic urea need for rice has been stable at around 1.8-1.9 million ton per year while total demand for urea was stable at around
2.2 million ton per year since then.
(3) Slight tilt towards more organic farming methods wont help demand much - Currently agriculture practices are tilt-
ing more towards organic and sustainable farming using less chemical fertilizer and more microbial fertilizer consumption. This
would spell bad news for urea demand even if the other two issues werent also there.
By the way under FAO (Food and Agriculture Organization) defnitions; arable land is defned as that land used for annual crops
(land that produces two crops per year are counted only once), temporary meadows for mowing or for pasture, land used for
market or kitchen gardens, and land temporarily left fallow. Land abandoned as a result of shifting cultivation is excluded. Then
the planted area is defned as the total area used for all crops in one year (areas that produce two or three annual crops are
counted twice/three times).
Despite this dubious backdrop for demand domestic players have been busy adding capacity. In fact, the domestic supply of
urea has been rising at a CAGR of 21.3% since 2009. And now amounts to 2.36 million ton. And will rise further to 2.66 million
ton (+12.7% y/y) when the expansion of the Ha Bac Fertilizer project (operated by Vinachem) is completed by FY2014 year-end.
Meanwhile, the global urea market is also seen as over-supplied while new factories utilizing low cost natural gas are coming
into operation in both the Middle East And Africa. Therefore, the prospects for urea prices dont look good either in the global or
domestic markets. And the two are closely connected by imports.
Vietnamese urea market during 2010-2015
thousand ton 2009 2010 2011 2012 2013E 2014F 2015F
Domestic consumption 2,175 2,190 2,200 2,190 2,185 2,184 2,184
Domestic production 946 996 998 1,745 2,094 2,175 2,485
Import 1,426 1,001 1,236 519 798 50 -
Inventory (at the end of previous year) 170 367 174 208 282 n/a n/a
Retail prices as of year end (VNDmil/ton) 6.50 8.80 9.30 9.10 8.10 7.6 7.6
y/y % change
Domestic consumption 0.7% 0.5% -0.5% -0.2% 0.0% 0.0%
Domestic production 5.3% 0.2% 74.9% 20.0% 3.9% 14.3%
Import -29.8% 23.5% -58.0% 53.8% -93.7% -100.0%
Inventory (at the end of previous year) 115.9% -52.6% 19.5% 35.7% n/a n/a
Retail prices as of year end 35.4% 5.7% -2.2% -11.0% -6.2% 0.0%
Sources: MARD, MOIT, HSC forecasts
(Continued overleaf)
The Vietnam Daily
June 18
th
2014
Page 4
HO CHI MINH CITY SECURITIES CORPORATION
MARKET COMMENTARY
According to Vietnam General Custom Offce, in the frst 5 month of 2014 Vietnam imported 27,000 ton of urea (-71.7%
y/y). Together with domestic production of about 939,000 ton (+10.3% y/y) and domestic inventory of about 280,000 ton
(35% y/y), the total supply for urea in the frst 5 month of 2014 came to around 1.25 million ton. Or about 7% - 8% higher
than domestic demand for urea over the same period. In FY2013, domestic urea prices fell 10.9% to VND8.1 million/ton
by December 2013. While YTD domestic urea prices have fallen another 3.7%. Things look no better in the global market,
urea price has been very volatile over the last fve years, driven by natural gas cost and grain prices. Urea prices surged
to a peak of around US$760/ton in mid-2008 then fell to a bottom of just US$225.5/ton in early 2009. Before recovering
somewhat. However since 2013 with new capacity having access to low-cost natural gas, prices have fallen to between
US$330 370/ton. And it may not be over yet.
So for FY2015, we forecast that DPM will post sales of VND8.76 trillion (-1.1% y/y) and a NPATMI of VND1,062 billion
(-14.2% y/y). Our key assumptions include (1) input gas prices of US$7.5/MMBTU, i.e. unchanged from DPMs gas prices
effective from 1
st
April 2014. But up 2.8% y/y from DPMs average input gas price in FY2014; (2) sales volume of 800,000
ton of in-house urea, same as FY2014; (3) fat average selling price for DPM in-house urea; (4) average bank deposit rates
of 5.5%, same as FY2014. We then estimate that FY2014 EPS comes to VND2,797 implying a forward PE of 11.7x.
Regarding DPMs NH3-NPK project, we keep our view that the proftability of the project is low. DPM fore-casts that once
it comes into operation by early 2017 the project can generate an average PBT of VND565 billion per year. DPM also
forecasts an IRR of 15.2%. However the company hasnt provided the key assumptions underlying their forecast however.
HSC is rather pessimistic about the proftability of the project based on our knowledge of competitors in this industry. Ac-
cording to our earning model, with rough assumptions including DPMs input natural gas of US$7.5/MMBTU, NKP output
prices of US$455/ton, and NH3 output prices at US$600/ton we forecast that DPM will make a pre-tax proft of VND330
billion on this project. This would yield a pre-tax margin of 9.4% and an ROA of only 6.6% from the NH3-NPK project.
DPM then appears to be in a bit of a bind in terms of expanding their business whilst maintaining current levels of proft-
ability. With growth prospects for their core business looking limited an expansion into other areas does make sense. How-
ever, while from a strategic standpoint the move into NPK appears logical, the economics of this particular project dont
convince us at this point. Perhaps DPM might also look more to the regional; export markets such as Laos and Cambodia
and export urea fertiliser in order to ease pricing pressure in their domestic market. Otherwise they will be seen purely as
a dividend capture given the current dividend of VND2,500 per share for 7.6% yield. With an absolute payout of VND950
billion planned this year. However with capex for the NPK project at around VND5 trillion and the most recent number for
cash on hand at VND4.1 trillion, this generous payout cannot be guaranteed in future. Reiterate Underperform.

MSN continues to restructure debt load to lower interest burden. Savings look slight to us
however. Reiterate Hold
5 year bond issuance totaling VND6,800 billion by a Masan Group subsidiary will be used to repay some due long term
debt. There will also be a slight interest rate savings amounting to about VND22 billion this year according to our estimates.
We forecast in FY2014 the mine will generate total sales of VND5,329 billion; net sales of VND5,013 billion; EBITDA of
VND2,400 billion and net proft of VND926 billion. Our assumptions include a more conservative view on recovery rates
than the companys own current targets suggest. We also assume that the mine will produce and sell 4,758 tons of tung-
sten products which would generate 61% of total Nui Phao sales. We also assume a gross margin of 43.2%, EBITDA
margin of 45% and a net margin of 17.4%.
Then for MSN, we forecast net sales comes to VND20,716 billion, up 73.5% y/y. While we project net proft before minor-
ity interest (VAS) of VND2,581 billion, up 97.4% y/y. And then expect net proft before minority interest (pro-forma) will be
higher at VND3,449 billion, up 58.6% y/y. At these forecasts, MSN is currently trading at FY2014 P/E of 32.2xs (on pro-
forma basis) and 53.2xs (on VAS basis). Reiterate HOLD.
Today the media reported that the Thai Nguyen Trading and Investment Company (TNTI), a subsidiary of Masan Group
(MSN-Hold) has just completed the bond issuance of VND6,800 billion with a 5 years term at an interest rate of 11% per
annum.
(Continued overleaf)
The Vietnam Daily
June 18
th
2014
Page 5
HO CHI MINH CITY SECURITIES CORPORATION
MARKET COMMENTARY
The proceeds will be used to increase TNTIs investment in Nui Phao Company Limited. And MSNs management confrms
that this will then be used to help refnance some existing debts at Nui Phao level in order to lower the average interest
rate. In addition, part of it will be used to repay due long term debts such as the 2-year US$80 million loan provided by
Standard Bank on 10
th
February 2012 and some short term debts. As of 31 December 2013, Nui Phaos long term debt
was VND6,172 billion based on following loans/loans commitments:
(1) A 2-year US$40 million loan in US$ provided by Standard Chartered Bank, disbursed on 25
th
June 2013 at an inter-
est rate of 10.15% for the frst year and LIBOR + 9.5% in the second year (which is equal to 10% at the current market
rate).
(2) An 8-year US$90 million equivalent loan in USD term & VND term loans provided by Vietcombank and Bao Viet, dis-
bursed on 28
th
March 2011. Interest rate for USD amount is LIBOR 6-month + 7% but not less than 8% (which translates
to an effective rate of 7.32% given current market rate) while the interest rate for the VND amount is 12 month deposit
rate + 4.5% (which is equal to a rate of 12% at the current market rate). As of 31 December 2013, on VND basis, the
VND amount dominated the loan with balance of VND1,413 billion while the USD amount was VND470 billion.
(3) An 8-year VND loan of VND2,377 billion (equivalent to US$115 million) in VND term loans provided by Vietnam
Development Bank at an average annual interest rate of 10%.
Now we note that FY2013 year end short term debt over at Nui Phao came at VND1,294 billion including.
- A VND 12 month loan of VND383 billion at an interest rate of around 12%-14%.
- An USD loan and an EUR loan of VND127 billion equivalent. Interest rate is unknown.
We estimate that the interest saving (consolidated) from this refnancing in FY2014 will be fairly modest at around VND22
billion. Also taking to account our house view that the VND will devalued by 1% over USD this year.
With capex of US$700 million, Nui Phao is fully fnanced with US$105 million in equity capital from MSN, US$150 million in
equity capital from Mount Kellet and other shareholders, a US$120 million loan from Standard Chartered Bank, a US$120
million from local commercial bank and a US$115 million loan from Vietnam Development Bank.
We forecast in FY2014 the mine will generate total sales of VND5,329 billion; net sales of VND5,013 billion; EBITDA of
VND2,400 billion and net proft of VND926 billion. Our assumptions include a more conservative view on recovery rates
than the companys own current targets suggest. We also assume that the mine will produce and sell 4,758 tons of tung-
sten products which would generate 61% of total Nui Phao sales. We also assume a gross margin of 43.2%, EBITDA
margin of 45% and a net margin of 17.4%.
For MSN, we forecast net sales comes to VND20,716 billion, up 73.5% y/y. While we project net proft before minority inter-
est (VAS) of VND2,581 billion, up 97.4% y/y. And then expect net proft before minority interest (pro-forma) will be higher at
VND3,449 billion, up 58.6% y/y. At these forecasts, MSN is currently trading at FY2014 P/E of 32.2xs (on pro-forma basis)
and 53.2xs (on VAS basis). Reiterate HOLD.
Fiachra Mac Cana