AAA VN Company Visit Note a Turnaround Story of the Largest Plastic Bag Exporter in Vietnam...

7/24/2019 AAA VN Company Visit Note a Turnaround Story of the Largest Plastic Bag Exporter in Vietnam 06-11-2015

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SSI RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

SSI.COM.VN Visit SSI Research on Bloomberg atSSIV Page 1

Kien Trung Nguyen, CFA

[email protected]

84 4 3936 6321 ext. 510

06 November 2015

NDUSTRIALS - VIETNAM

ey figures

arket cap (USD mn) 24

arket cap (VND bn) 540

utstanding shares (mn) 49

2W high/low (VND 1,000) 14.7/8.8

verage 3M volume (share) 250,588

verage 3M value (USD mn) 0.12

verage 3M value (VND bn) 2.62

oreign ownership (%) 18.42

tate ownership (%) n.aanagement ownership (%) n.a

tock performance

Source: Bloomberg

ompany Snapshot

AAA, the biggest PE plastic bag exporter inVietnam, currently has 5 plastic bagmanufacturing factories in Hai DuongProvince. Core business comprises ofmanufacturing plastic bags, including food-overed bags, garbage bags, and shoppingags. Total capacity reached 3,500/months the fifth factory are running at 80% of itsapacity and will increase to,700tons/month in 2016.

A turn-around story of the largest plastic bag

exporter in Vietnam

Background

AAA, the biggest PE plastic bag exporter in Vietnam, currently has 5 plastic bag

manufacturing factories in Hai Duong Province. Core business comprises of

manufacturing plastic bags, including food-covered bags, garbage bags, and

shopping bags. Total capacity reached 3,500/month as the fifth factory are running at

80% of its capacity and will increase to 3,700tons/month in 2016.

Capacity and products

Factories Main products Capacity Markets Construction

1 Garbage bags 7-800 tons/month EU 2005

2 & 4 (2

expansion)

20% garbage bags,80% shopping

bags, bags on roll

1,200-1,300tons/month

EUFeb 2008 and Sept

2009

3 Bags on roll 7-800 tons/month EU Aug 2011

5 Bags on roll 800 tons/month Japan Jul 2014

6Bags on roll, food

bag2,000 tons/month Japan Under construction

7 CaCO3 10,000 tons/ year50% sold to AAA as

an ingredient for bagmanufacturing.

Source: AAA

2014 and 9M5 review

In 9M14, sales and net profit remained quite stable at VND 380bn/quarter and VND

15bn/quarter. However, a sharp fall of oil price in the fourth quarter last year during avery short stretch resulted in an inventory loss. In addition, by the end of 2014, AAA

still failed to access the Japanese market although it completed the 5th factory (the

one that specializes in the Japanese market) in mid-2014. Demand in the EU market

at the time was quite low and AAA had to share losses with its customers. Since

4Q14 to 1Q15, AAAs gross profit margin declined by 4% to only 8.7%. In 2Q15,

when resin price increased to a new level and AAAs products prices were stabilized,

gross profit margin recovered to 12.4% and increased to 12.7% in 3Q15. In 1H15, the

5thfactory only operated at 50% of its capacity and increased to 70% of its capacity in

3Q15. Accordingly, gross profit margin will continue to improve in 4Q15 and 2016.

Learning from the lesson in 4Q14, AAA and its customers have agreed to a new term

called risk sharing in which AAA and its customers will share the loss/profit from

significant changes in input price (+-5%). The new scheme will help reduce losses

should a sharp decline in input prices abruptly occur.

BUY 1Y Target Price: 15,100 VND

Current price: 10,900 VND

An Phat Plastic and Green Environment JSC (AAA: HNX)
mailto:[email protected]:[email protected]:[email protected]


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Access to the Japanese market

The Japanese market is very difficult to penetrate. Since mid-2015, hundreds of Japanese

customers have visited AAAs factories. Demand from Japan is symmetrical to that of the EU

market as one fourth of plastic product volume is exported to Japan. In the past, Japanese

imported its bags from China but currently Japanese customers are increasingly seeking

replacements in Vietnam as they prefer to diversify their suppliers. Labor cost and power

expenses are higher in China and the Chinese government is lifting incentives for plasticscompanies. The unique advantage of Chinese companies is slightly lower input costs thanks to

their large scale.

AAA recorded the highest export volume ever in Oct 2015 at 3,750 tons/month. Seeing

increasing opportunities and offers from Japanese customers after winning their trust, AAA is

constructing a new factory next to its existing factories (called 6th factory). Capex for the new

plant is approximately VND 500bn, including VND 200bn raised in 2014 for a factory in Laos

and VND 300bn to be raised in early 2016. AAA is going to raise VND 300bn bonds with

warrants at VND 11,000-11,500/share, locked up for 1 year since issuance. As the bond will be

funded for the new plant, its interest will be capitalized in 2016 and expensed since 2017.

In 2014, AAA issued stock right at 1:1 ratio for a factory in Laos, targeting the US market as the

US now imposes anti-dumping tax on most of plastic bags imported from Vietnam. Recently, the

US has lifted taxes for Chinese and Thailand products and will do the same for Vietnamese

products. AAA has discovered that the factory in Laos is no longer suitable and will refocus its

expertise to factories in Vietnam.

Outlook

Short term: 4Q15 and 2015

4Q is the busy season for AAA thanks to the holiday season in the EU. In addition, the number

of Japanese customers is increasing. We expect sales will peak in 4Q15 and gross profit marginwill remain at 13%. We expect that AAA will record approximately VND 500bn in sales and VND

20bn in net profit, resulting in total sales and net profit in 2015 of VND 1,655bn (+6.1% YoY) and

VND 39.7bn (-17% YoY). Net profit margin declined mostly due to that in 2014, the inventory

loss only happened since December 2014 to the end of 1Q15. Therefore, AAA still makes some

profit in 4Q14 but recorded loss in 1Q15. The depreciation expense of 5th factory (while 1

st

factory has not yet fully depreciated) is the other reason for lower margin in 2015.

Long term: 2016-2018

We expect that by the end of 2015, AAA will complete its construction for the 6th factory. In

1Q16, the company will import machines and transfer the 5th

factorys machines to the 6th

factory for centralized operation and the 5th factory will be the factory specialized in food bag

production (the current 5th

factory is 0.5km far away from the last 4 ones and the new 6th

factory). In 2Q and 3Q16, AAA will commence operation on the 6thfactory and start to generate

products in 4Q16. Early 2017, we expect that the factory will run at 50% and fully operate by the

end of 2017. AAA is assessing food bag production to export to Japan. Food bags margin is

double that of current bags but require specify techniques and are hard to produce on a large

scale. However, there is no supplier in Vietnam that has been able to achieve this and many

Japanese customers are willing to help AAA to produce this specific type of bag.

We expect that the EU market will grow at a steady rate of 7-10% in the next 3 years but Japan

market might double in the next 3 years. According to the plastic association, Japan is the

largest importer of plastic products from Vietnam. According to our research, the plastic bag size

of Japan market is 1bn USD/year, while Vietnamese suppliers only account for 4% of the market

size. In Vietnam, Hung Yen Plastic JSC is the largest exporter to Japan but its main task is to


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provide outsourcing service for a Japanese customer. Most of the plastic bags in Japan are now

imported from China. AAA targets to gain 5% of the market size in Japan market.

In 2018, when all of the factories are running at full capacity, AAA can export 5.3k tons/month ,

which is 60% higher than the current level and sales might reach VND 3,000bn (at the current

level of resin price).

In 2016-2018, we expect that sales CAGR will be 22%/year and GPM will improve slightly from

13% in 2016 to 14% in 2018 as the 1stfactory will be fully appreciated in 2015 and the 2ndone

will be fully appreciated in 2017. In addition, as the volume of AAA increases, its bargaining

power will increase, thus helping to boost ASP and reduce input costs. We are quite

conservative in estimating GPM as before 2013, gross profit margin of AAA was 20% on

average. We also have not yet taken into account the potential of food bag products.

In terms of profit, we expect that PBT will elevate by 43%/year to 2018, reaching VND 159bn in

2018, resulting in 2018 EPS of VND 2,563. Since 2019, not taking into account the impact from

the new product (food bag), we expect that sales and net profit will grow by 5% and 10%

respectively.

If AAA issued its bond with warrant at VND 11,000/share, we expect that since 2017, it will beexposed to dilution risk. However, if the warrant holders converted its warrants, AAA will not

incur interest expense and the net income will be much higher. We expect that warrant holders

will not convert its warrant before 2018 when the new factory fully contribute its revenue and

profit to AAA.

VND bn 2012 2013 2014 2015F 2016F 2017F 2018F

Net revenue 1,010 1,158 1,561 1,655 1,949 2,424 2,998

Gross profit 186 179 183 185 253 327 420

Operating profit 93 81 67 42 94 129 175

EBITDA 143 137 139 132 199 248 300EBIT 96 88 74 68 117 160 206

Pretax income 67 71 57 48 96 110 155

Net income 56 55 48 40 79 90 127

EPS (VND) 4,850 2,775 1,895 801 1,592 1,822 2,566

ROA 6.5% 5.4% 3.7% 2.7% 4.7% 4.7% 6.2%ROE 12.8% 10.4% 7.2% 5.1% 9.9% 10.8% 14.2%

Investment view and valuation

At the current price, AAA is trading at 2016 P/E and P/B of 6.8 and 0.65x, which are quite low as

compared to overall market. Although AAA historically trade at a low P/E (7x) and P/B (0.7x), we

believe the outlook of this company is improving:

In our opinion, low valuations in the past reflected two factors: (1) limited growth potential

due to a sluggish EU market growth and (2) risk from Laos factory.

AAA now possesses 5 large factories with total capacity of 3.7 K tons/month and will

continue to expand capacity twice in the next 2 years.

AAA is expanding its customer base from the EU to Japan and is targeting the US market.

AAA holds 32% of Vinh Plastic Bags JSC (VBC: HOSE- market price of VND 46,500/share)

at a cost of VND 40,000/share. VBC offers 80% cash dividend on par, and trading at PER of

5x. Therefore, we believe that the book value of VBC on AAAs balance sheet is

undervalued. In addition, the 1st and 2

nd factories are fully depreciated but still operating

and churning out quality products. Therefore, the book value of AAA is currentlyundervalued.


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Based on our valuation model, we expect 1Y target price of AAA might reach VND 15,100/share

(38.5% upside), equivalent to our 1Y target P/E of 9.5x and P/B of 0.95x. AAA might offer 7%

cash dividend in 2015 (yield of 6.4%) and 10% cash dividend on par in 2016, which is equivalent

to a dividend of 9.2%. We recommend BUY for this stock.

We provide below our DCF model for reference.

Consolidated (VND million) 2015F 2016F 2017F 2018F 2019F Terminal

EBIT 67,845 117,120 160,213 206,020 217,551 228,591

Abnormal adjustments 0 0 0 0 0 0

Adjusted EBIT 67,845 117,120 160,213 206,020 217,551 228,591Effective CIT rate (%) 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%

EBIT(1-T) 55,633 96,039 131,375 168,937 178,391 187,445

Add: Depreciation 63,989 81,951 87,939 93,927 99,914 105,902

Less: CAPEX 200,000 300,000 100,000 100,000 100,000 100,000

Less: Change in WC 11,396 29,386 46,752 56,513 14,691 15,426

Free cash flow to firm (91,775) (151,396) 72,562 106,351 163,614 177,921

Terminal growth Terminal value 1,502,644

Discount period 0.16 1.16 2.16 3.16 4.16

Discount factor 0.98 0.86 0.76 0.67 0.59

Present value (89,942) (130,637) 55,148 71,191 96,465Terminal PV 885,936

Free cash flow to firm

Terminal growth 2%Discount period

Discount factorPresent value

PV of FCFF - Operating 888,160Cash & cash equivalents 336,808

ST Investments 30,000

Total Firm Value 1,254,967

Debt 456,673Equity Value 798,294

No. of shares 49,500,000Value of a share (VND) 16,127


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APPENDIX: ANNUAL FINANCIAL STATEMENTS

VND Billion 2013 2014 2015F 2016F VND Billion 2013 2014 2015F 2016F

Balance Sheet Income Statement

+ Cash 130 337 224 359 Net Sales 1,158 1,561 1,655 1,949

+ Short-term investments 0 30 30 30 COGS -979 -1,378 -1,470 -1,695

+ Account receivables 147 154 166 195 Gross Profit 179 183 185 253

+ Inventories 200 138 147 169 Financial Income 7 8 17 11

+ Other current assets 18 36 38 45 Financial Expense -22 -26 -34 -38Total Current Assets 495 694 605 798 Selling Expense -63 -79 -88 -97

+ LT Receivables 0 0 0 0 Admin Expense -36 -36 -41 -45

+ Net Fixed Assets 605 680 816 1,034 Income from business operation 64 50 39 84

+ Investment properties 0 0 0 0 Net Other Income 2 1 0 0

+ LT Investments 39 39 39 39 Income from associates 5 6 9 12

+ Goodwill 0 0 0 0 Profit Before Tax 71 57 48 96

+ Other LT Assets 11 8 9 10 Net Income 55 48 40 79

Total Long-Term Assets 656 727 864 1,083 Minority interest 1 1 0 0

Total Assets 1,151 1,422 1,469 1,881 NI attributable to shareholders 55 47 40 79

+ Current Liabilities 515 507 541 624

In which: ST debt 334 329 351 405 Basic EPS (VND) 2,775 1,895 801 1,592

+ Non-current Liabilities 83 128 136 436 BVPS (VND) 27,447 19,620 15,814 16,406

In which: LT debt 83 128 136 436 Dividend (VND/share) 0 0 700 1,000Total Liabilities 598 634 677 1,060 EBIT 88 74 68 117

+ Contributed capital 198 396 495 495 EBITDA 137 139 132 199

+ Share premium 131 148 148 148

+ Retained earnings 178 188 94 123 Growth

+ Other capital/fund 37 46 46 46 Sales 14.6% 34.8% 6.1% 17.7%

Owners' Equity 544 778 783 812 EBITDA -4.0% 1.2% -4.9% 51.0%

NCI 9 9 9 9 EBIT -8.1% -15.7% -8.8% 72.6%

Total Liabilities & Equity 1,151 1,422 1,469 1,881 NI -1.3% -13.9% -17.0% 98.7%

Equity 4.1% 43.1% 0.6% 3.7%

Cash Flow Chartered Capital 0.0% 100.0% 25.0% 0.0%

CFO 84 99 92 130 Total assets 27.8% 23.6% 3.3% 28.1%

CFI -209 -128 -200 -300

CFF 152 234 -4 304 Valuation

Net increase in cash 27 206 -112 134 PER 6.4 7.3 13.6 6.8

Beginning cash 103 130 337 224 PBR 0.6 0.7 0.7 0.7

Ending cash 130 337 224 359 P/Sales 0.3 0.3 0.3 0.3

Dividend yield 0.0% 0.0% 6.4% 9.2%

Liquidity Ratios EV/EBITDA 4.7 4.6 6.2 4.1

Current ratio 0.96 1.37 1.12 1.28 EV/Sales 0.6 0.4 0.5 0.4

Acid-test ratio 0.54 1.03 0.78 0.94

Cash ratio 0.25 0.72 0.47 0.62 Profitability Ratios

Net debt / EBITDA 1.57 1.47 1.45 1.87 Gross Margin 15.4% 11.7% 11.2% 13.0%

Interest coverage 5.16 4.33 3.48 5.57 Operating Margin 7.0% 4.3% 2.5% 4.8%

Days of receivables 20.91 23.29 28.10 27.00 Net Margin 4.8% 3.1% 2.4% 4.0%

Days of payables 48.63 41.94 41.23 39.74 Selling exp./Net sales 5.5% 5.1% 5.3% 5.0%

Days of inventory 73.75 44.71 35.29 34.01 Admin exp./Net sales 3.1% 2.3% 2.5% 2.3%

ROE 10.4% 7.2% 5.1% 9.9%Capital Structure ROA 5.4% 3.7% 2.7% 4.7%

Equity/Total asset 0.47 0.55 0.53 0.43 ROIC 8.0% 5.7% 4.4% 6.6%

Liabilities/Total Assets 0.52 0.45 0.46 0.56

Liabilities/Equity 1.10 0.82 0.86 1.30

Debt/Equity 0.77 0.59 0.62 1.04

ST Debt/Equity 0.61 0.42 0.45 0.50

Source: AAA, SSI Research


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WWW.SSI.COM.VN SAIGON SECURITIES INC.Member of the Ho Chi Minh

Stock Exchange, Regulated

by the State Securities

Commission

HO CHI MINH CITY72 Nguyen Hue Street,

District 1

Ho Chi Minh City

Tel: (848) 3824 2897

Fax: (848) 3824 2997

Email: [email protected]

HANOI1C Ngo Quyen Street, Ha Noi City

Tel: (844) 3936 6321

Fax: (844) 3936 6311


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1. Analyst Certification

The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect

his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s)

compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this

research report.

2. RATING

Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stocks expected

return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to

deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or

equal to -9%, while a HOLD rating implies returns between -9% and 18%.

Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months

because of a stock catalyst or event. Short-term rating may be different from 12-month rating.

Industry Rating: We provide the analyst industry rating as follows:

Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the

relevant broad market

Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant

broad market

Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the

relevant broad market.

*The market required rate of return is calculated based on 5-year Vietnam gov ernment bond yield and market risk pr emium d erived from u sing

Relative Equity Market Standard Deviations m ethod. Our rating bands are subj ect to changes at the time of any signif ic ant changes in the above

two constituents.

3. DISCLAIMER

The information, statements, forecasts and projections contained herein, including any expression of opinion, are based

upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of

opinion herein were arrived at after due and careful consideration and they were based upon the best information then

known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time. Expressions of opinion

contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the

solicitation of an offer to buy or sell any securities. SSI and other companies in the SSI and/or their officers, directors and

employees may have positions and may affect transactions in securities of companies mentioned herein and may also

perform or seek to perform investment banking services for these companies.

This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability

whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any

information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user.


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WWW.SSI.COM.VN SAIGON SECURITIES INC.Member of the Ho Chi Minh

Stock Exchange, Regulated

by the State Securities

Commission

HO CHI MINH CITY72 Nguyen Hue Street,

District 1

Ho Chi Minh City

Tel: (848) 3824 2897

Fax: (848) 3824 2997


HANOI1C Ngo Quyen Street, Ha Noi City

Tel: (844) 3936 6321

Fax: (844) 3936 6311


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4. CONTACT INFORMATION

Institutional Research & Investment Advisory

Kien Trung Nguyen, CFA

Research Manager

Tel: (844) 3936 6321 ext. 510

[email protected]

Phuong Hoang Hung Pham Giang Nguyen

Deputy Managing Director, Associate Director Associate Director

Head of Institutional Research & Investment Advisory [email protected] [email protected]

[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

AAA VN Company Visit Note a Turnaround Story of the Largest Plastic Bag Exporter in Vietnam...

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