DPM VN Company Update a Beneficiary of Low Oil Price 05-10-2015

SSI – RESEARCH INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

SSI.COM.VN Visit SSI Research on Bloomberg at SSIV <GO>

Kien Tran Nguyen

[email protected]

+84 4 3936 6321 ext. 679

05 October 2015

MATERIALS - VIETNAM

Key figures

Market cap (USD mn) 534

Market cap (VND bn) 12,006

Outstanding shares (mn) 380

52W high/low (VND 1,000) 33.8/28.5

Average 3M volume (share) 740,152

Average 3M value (USD mn) 1.03

Average 3M value (VND bn) 23.25

Foreign ownership (%) 26.61

State ownership (%) 61.38

Management ownership (%) n.a

Stock performance

Source: Bloomberg

Company Snapshot

DPM was established on 28 March 2003 and is currently one of Vietnam's largest domestic fertilizer manufacturers. As of today, the current charter capital is VND 3800 bn ($180 mn). The plant costs $ 397 mn with a design capacity of 800 thousand tones urea per year. Besides urea fertilizer manufacturing, DPM also participates in electricity production, importing fertilizer and others. However, these activities only contribute a small percentage toward net profit and fertilizer manufacturing remains the largest contributor to net profit.

A beneficiary of low oil price

2Q15’s earnings results

In 2Q15, DPM posted VND 2,804bn (+13% YoY) in revenue and VND 372bn

(+16% YoY) in pretax profit. The increase in net sales was mainly contributed

by the increase of 57% YoY in imported products (accounted for approx. 36%

of total net sales) while net sales of domestic produced products declined by 2%

YoY. In regards to DPM’s Urea product, 2Q15’s Urea sales volume declined

approx. 5.3% YoY due to 26-day maintenance in May and June 2015 while

average selling price increased roughly 5.1% YoY given the shortage supply

during this period.

Figure 1: Quarterly revenue contribution by segments, unit – VND mn

Source: DPM

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Domestic produced products

Imported products

Total

HOLD – 1Y Target Price: VND 36,900 Current price: VND 31,600

Petrovietnam Fertilizer and Chemicals Corporation (DPM: HOSE)

mailto:[email protected]



Figure 2: Urea and imported fertilizers’ sales volume by quarter, unit – tons

Source: DPM

Prolonged decline in oil prices supported DPM’s 2Q15 gross profit margin. 2Q15’s gross

profit margin reached 24% compare to 23% in 2Q14. In 2Q15, imported fertilizers contributed

36% to total revenue compared with 18% in 1Q15 which adversely affected 2Q15’s gross

margin. Urea contributed the most to DPM’s 2Q15 earnings, contributing 93% of total gross

profit.

DPM’s 1H15 revenue and pretax profit reached approx. VND 5.128 (+3% YoY), and VND 953bn

(+26% YoY) which were mainly contributed by low oil prices during 1H15. Average natural gas

price in 1Q15 and 2Q15 were approx. USD 4.5/MMTU and USD 5.07/MMBTU, a decline of 33%

YoY, and 32% YoY respectively.

In 2Q15, DPM recorded approx. VND 99bn loss resulted from associated companies which

negatively affected DPM’s 2Q15 pretax profit margin compared with a loss of approx. VND 48bn

in 2Q14 (2Q15’s pretax profit margin stood at 13.3% compared with 12.9% in 2Q14). In 1H15,

DPM incurred a loss of approx. VND 168bn from associated companies which is higher than

that in 1H14 of approx. VND 112bn. Petrovietnam Petrochemical and Textile Fiber JSC

(PVTEX) and Petrovietnam Urban Development JSC are the two associated companies of of

DPM in which DPM is holding 35.63% and 25.99% stake respectively (or VND 563bn and VND

100bn respectively). PVTEX just started operation in the last 3 years and still facing difficulties in

early stage of the business.

By the end of 2Q15, DPM’s total debt reached VND 142bn compared with VND 30bn by the end

of 1Q15. Current debt-to-equity ratio stands at 0.01x.

2Q15’s earnings results

(bn VND) 2Q15 2Q14 YoY QoQ Completion

of 2015 target

Margin

2Q15 2Q14 1Q15 2014

Net sales 2,804 2,477 13% 21% 55%

Gross profit 673 570 18% -25%

24% 23% 38% 25%

Operating profit 388 269 44% -36%

14% 11% 26% 13%

EBIT 373 321 16% -36%

13% 13% 25% 13%

EBITDA 439 387 13% -32%

16% 16% 28% 16%

Pretax profit 372 321 16% -36% 74% 13% 13% 25% 13%

Net income 298 280 7% -39%

11% 11% 21% 12%

NI attributable to shareholders

290 269 8% -39%

10% 11% 21% 11%

Source: DPM

-

50,000

100,000

150,000

200,000

250,000

300,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Urea DPM Imported fertilizers



2H15 and beyond outlook

Natural gas – is the key driver of DPM’s profit margins, accounting for approx. 56% of total

production cost. If oil prices continue on a downward slope, DPM will invariably stand to benefit.

Average brent oil prices are expected to remain low for the rest of 2015. Given the pressure on

oil supply after the Iran Nuclear deal, we have revised down the base case of FO prices in DPM

valuation from USD 339/ton to USD 316/ton (-43% YoY) in 2015. In our estimate, if FO price

declines 10%, gross profit margin will expand 3%, equivalent to approx. VND 290bn.

Figure 3: Monthly average brent oil price, USD per barrel.

Source: Bloomberg

Urea production capacity of domestic producers reachs 2.66mn tons per year since June

2015 including 4 major producers PVFCCo (DPM – 800K tons), PVCFC (DCM – 800K tons),

Ninh Binh Urea (560K tons), and Ha Bac Urea (500K tons) which will exert pressure on Urea

prices given the total domestic demand of approx. 2.2mn tons per year.

We expect average selling price of Urea in 2015 to be 1% higher than the average of 2014

due to shortage in supply stemmed from maintenance of DPM’s plant in May and June, and the

upgrade of Ha Bac Urea plant was accomplished in June.

Earnings estimates & valuation

In 2015, DPM’s revenue and net profit are expected at VND 9,691 (+1.5% YoY), and VND

1,848bn (+63% YoY), translating to an EPS of VND 4,139. Our estimates are based on following

assumptions: (1) Sales volume of Urea will decline 3% YoY due to 1-month maintenance in May

2015, (2) Average selling price of Urea will increase 1% YoY, (3) Corporate income tax rate

applied for Urea fertilizer increases to 15% from 7.5% in the previous year due to tax exemption

period ended in 2014, and (4) Natural gas input price at USD 4.5/mmbtu (transportation cost

included), a decrease of 34% YoY. (Please note that since 1st April 2014, natural gas prices

offered to DPM is based on market prices instead of scheduled prices).

In 2016, although oil prices are expected to remain on downtrend, given the uncertainty in the

movement of oil prices, 2015 natural gas input price will be used as a based case plus an

increase of 2.2% in transportation cost of natural gas. In addition, Urea sales volume is

expected to increase by 3% YoY in 2016 while average selling price is expected to decline 1.5%

0

20

40

60

80

100

120



YoY. DPM’s 2016 revenue and net profit are projected at VND 10,065bn (+4 YoY) and VND

1,974 (+7% YoY), translating to an EPS of VND 4,421.

In addition, it should be noted that the original invested value in 2 associated companies of DPM

(Petrovietnam Petrochemical and Textile Fiber JSC (PVTEX) and Petrovietnam Urban

Development JSC) totaled approx. VND 663bn. However, DPM has recorded provision approx.

VND 627bn for the loss stemmed from those two associated companies. The remaining value of

the investment is approx. VND 36bn. According to Circular 202/2014/TT-BTC, if those two

associated companies continue to incur losses in 2H15 and the coming years, DPM has to

record losses from associated companies only at the remaining value of the investment which is

approx. VND 36bn. Therefore, from 4Q15 onwards, DPM will not incur any losses from

associated companies. In 2014 DPM incurred a loss of approx. 131bn from associated

companies, and in 2015 the loss is expected at approx. VND 203bn.

At the price of VND 31,700/share, the stock is being traded at 2015 P/E of 7.7x and 2016 P/E of

7.2x compared with market P/E of 12.6x and 11.38x in 2015 and 2016 respectively. At target

P/E of 8.5x, DPM’s 1-year target price is adjusted to VND 36,900/share, (+16.5% compared with

the price of 31,700), equivalent to a HOLD recommendation.

DPM is a value stock with high dividend. 2015’s cash dividend is planned at 25% on par,

equivalent to 8.1% dividend yield. DPM typically pays cash dividend in 2 occasions in May and

Sep of the year.

Potential change in industry policy: In 2014 the Ministry of Finance issued Regulation

17709/BTC-TCT, which categorizes fertilizer products under non-VAT bearing goods, and was

effective on 1st Jan 2015. Under the new regulation, fertilizer producers could no longer claim

VAT return from input materials for their production.

Nevertheless, fertilizers products have been considered for re-inclusion in the VAT taxable items

such as the previous regulations in 2014 and backwards. If fertilizers are regulated as taxable

items, production costs of fertilizer producers will decline since VAT of production inputs will be

deducted from total production costs.

In July 2015, The Prime Minister has agreed with the proposal by the Ministry of Finance (MoF)

relating to VAT applied on rice, fertilizers, and animal feed products. In regards to fertilizers, the

MoF will incorporate with the Ministry of Agriculture and Rural Development, the Ministry of

Trade and Industry, and related entities to review and assess the impact of new regulation on

VAT and report the findings to the Prime Minister. Based on the assessment, changes and/or

supplement in VAT regulations on fertilizers might be proposed to the National Assembly in the

coming time.

It is noted that, total cost increase in DPM’s production cost stemmed from VAT regulation

changes is approx. 400bn.



APPENDIX 1: ANNUAL FINANCIAL STATEMENTS

VND Billion 2013 2014 2015F 2016F

VND Billion 2013 2014 2015F 2016F

Balance Sheet

Income Statement

+ Cash 4,032 5,078 5,790 6,317

Net Sales 10,363 9,549 9,692 10,072

+ Short-term investments 1,735 76 76 76

COGS -7,011 -7,121 -6,349 -6,769

+ Account receivables 246 404 393 408

Gross Profit 3,352 2,428 3,343 3,303

+ Inventories 1,341 1,492 1,460 1,489

Financial Income 429 407 387 440

+ Other current assets 161 149 147 152

Financial Expense -8 -5 -5 -38

Total Current Assets 7,515 7,200 7,866 8,443

Selling Expense -635 -702 -743 -752

+ LT Receivables 0 0 0 0

Admin Expense -552 -571 -616 -640

+ Net Fixed Assets 2,368 2,295 2,522 3,682

Income from business operation 2,586 1,557 2,365 2,313

+ Investment properties 285 274 264 255

Net Other Income 13 7 9 9

+ LT Investments 541 232 210 210

Income from associates -131 -280 -200 0

+ Goodwill 0 0 0 0

Profit Before Tax 2,468 1,285 2,174 2,322

+ Other LT Assets 96 110 102 107

Net Income 2,179 1,134 1,848 1,974

Total Long-Term Assets 3,290 2,911 3,099 4,254

Minority interest 37 38 61 65

Total Assets 10,805 10,111 10,965 12,697

NI attributable to shareholders 2,142 1,096 1,787 1,909

+ Current Liabilities 1,240 1,099 940 1,002

In which: ST debt 65 94 76 81

Basic EPS (VND) 5,644 2,885 4,138 4,420

+ Non-current Liabilities 9 7 334 1,209

BVPS (VND) 24,595 23,127 24,771 26,691

In which: LT debt 3 1 328 1,203

Dividend (VND/share) 5,000 3,000 2,500 2,500

Total Liabilities 1,249 1,106 1,274 2,211

EBIT 2,471 1,288 2,177 2,358

+ Contributed capital 3,800 3,800 3,800 3,800

EBITDA 2,721 1,556 2,441 2,665

+ Share premium 21 21 21 21

+ Retained earnings 2,036 1,470 2,092 2,822

Growth

+ Other capital/fund 3,488 3,497 3,499 3,499

Sales -22.2% -7.9% 1.5% 3.9%

Owners' Equity 9,346 8,788 9,413 10,142

EBITDA -27.6% -42.8% 56.8% 9.2%

NCI 210 217 278 343

EBIT -30.3% -47.9% 69.1% 8.3%

Total Liabilities & Equity 10,805 10,111 10,965 12,697

NI -29.0% -47.9% 62.9% 6.8%

Equity 4.3% -6.0% 7.1% 7.8%

Cash Flow

Chartered Capital 0.0% 0.0% 0.0% 0.0%

CFO 1,529 608 1,809 2,055

Total assets 2.1% -6.4% 8.4% 15.8%

CFI -1,557 1,928 -459 -1,457

CFF -1,569 -1,490 -638 -71

Valuation

Net increase in cash -1,597 1,046 712 527

PER 7.4 10.7 7.7 7.2

Beginning cash 5,629 4,032 5,078 5,790

PBR 1.7 1.3 1.3 1.2

Ending cash 4,032 5,078 5,790 6,317

P/Sales n.a n.a 1.2 1.2

Dividend yield 12.0% 9.7% 7.9% 7.9%

Liquidity Ratios

EV/EBITDA 3.7 4.3 2.9 2.6

Current ratio 6.06 6.55 8.37 8.42

EV/Sales 1.0 0.7 0.7 0.7

Acid-test ratio 4.85 5.06 6.66 6.78

Cash ratio 4.65 4.69 6.24 6.38

Profitability Ratios

Net debt / EBITDA -1.76 -2.87 -2.12 -1.95

Gross Margin 32.3% 25.4% 34.5% 32.8%

Interest coverage 749.57 439.24 714.33 64.98

Operating Margin 20.9% 13.0% 20.5% 19.0%

Days of receivables 2.66 5.35 7.12 7.52

Net Margin 21.0% 11.9% 19.1% 19.6%

Days of payables 26.13 24.86 19.61 17.68

Selling exp./Net sales 6.1% 7.3% 7.7% 7.5%

Days of inventory 65.39 72.59 84.86 79.52

Admin exp./Net sales 5.3% 6.0% 6.4% 6.4%

ROE 23.8% 12.5% 20.3% 20.2%

Capital Structure

ROA 20.4% 10.8% 17.5% 16.7%

Equity/Total asset 0.86 0.87 0.86 0.80

ROIC 23.7% 12.4% 19.8% 18.9%

Liabilities/Total Assets 0.12 0.11 0.12 0.17

Liabilities/Equity 0.13 0.13 0.14 0.22

Debt/Equity 0.01 0.01 0.04 0.13

ST Debt/Equity 0.01 0.01 0.01 0.01



APPENDIX 2: QUARTERLY FINANCIAL STATEMENTS

VND Billion 3Q14 4Q14 1Q15 2Q15

VND Billion 3Q14 4Q14 1Q15 2Q15

Balance Sheet

Income Statement

+ Cash 4,959 5,078 5,824 5,327

Net Sales 2,120 2,450 2,324 2,804

+ Short-term investments 578 76 0 0

COGS -1,611 -1,848 -1,431 -2,131

+ Account receivables 550 404 482 613

Gross Profit 509 602 893 673

+ Inventories 1,509 1,492 1,285 1,250

Financial Income 194 67 46 84

+ Other current assets 227 149 142 140

Financial Expense -2 -1 -1 -2

Total Current Assets 7,824 7,200 7,734 7,330

Selling Expense -181 -175 -168 -176

+ LT Receivables 0 0 2 19

Admin Expense -106 -210 -123 -109

+ Net Fixed Assets 2,255 2,295 1,994 1,942

Income from business operation 414 282 648 471

+ Investment properties 277 274 272 269

Net Other Income 2 -2 1 1

+ LT Investments 326 231 151 51

Income from associates -73 -94 -69 -99

+ Goodwill 0 0 0 0

Profit Before Tax 343 185 580 372

+ Other LT Assets 84 110 96 73

Net Income 296 167 487 298

Total Long-Term Assets 2,941 2,911 2,513 2,355

Minority interest 8 9 9 8

Total Assets 10,765 10,110 10,247 9,685

NI attributable to shareholders 288 158 478 290

+ Current Liabilities 1,328 1,097 876 759

Basic EPS (VND) 757 415 1,259 573

In which: ST debt 28 94 29 41

BVPS (VND) 24,231 23,129 24,196 23,264

+ Non-current Liabilities 11 7 281 205

EBIT 344 186 581 373

In which: LT debt 5 1 1 101

EBITDA 417 252 647 439

Total Liabilities 1,339 1,104 1,157 964

+ Contributed capital 3,800 3,800 3,800 3,800

Growth (YoY)

+ Share premium 21 21 21 21

Sales 11.4% 3.7% -7.1% 13.2%

+ Retained earnings 1,897 1,471 1,875 1,521

EBITDA -26.9% -5.8% 29.0% 13.4%

+ Other capital/fund 3,489 3,497 3,498 3,498

EBIT -21.1% -8.5% 33.3% 16.1%

Owners' Equity 9,208 8,789 9,194 8,840

NI -20.3% -12.7% 24.2% 6.7%

NCI 218 217 0 0

Equity -8.2% -5.9% 5.2% -1.7%

Total Liabilities & Equity 10,765 10,110 10,351 9,804

Chartered Capital 0.0% 0.0% 0.0% 0.0%

Total assets -5.4% -6.4% -5.9% -6.4%

Cash Flow

CFO 135 789 0 0

Profitability Ratios

CFI 489 22 0 0

Gross Margin 24.0% 24.6% 38.4% 24.0%

CFF -505 -65 0 0

Operating Margin 14.3% 8.9% 26.0% 13.8%

Net increase in cash 119 746 0 0

Net Margin 14.0% 6.8% 21.0% 10.6%

Beginning cash 4,959 5,078 0 0

Selling exp./Net sales 8.5% 7.1% 7.2% 6.3%

Ending cash 5,078 5,824 0 0

Admin exp./Net sales 5.0% 8.6% 5.3% 3.9%

Liquidity Ratios

Capital Structure

Current ratio 5.89 6.56 8.83 9.66

Equity/Total asset 0.86 0.87 0.89 0.90

Acid-test ratio 4.58 5.07 7.20 7.83

Liabilities/Total Assets 0.12 0.11 0.11 0.10

Cash ratio 4.17 4.70 6.65 7.02

Liabilities/Equity 0.15 0.13 0.13 0.11

Net debt / EBITDA -11.80 -19.78 -8.96 -11.81

Debt/Equity 0.00 0.01 0.00 0.02

Interest coverage 547.70 176.19 789.76 601.31

ST Debt/Equity 0.00 0.01 0.00 0.00

Source: DPM, SSI Research


WWW.SSI.COM.VN SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission

HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) 3824 2897 Fax: (848) 3824 2997 Email: [email protected]

HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) 3936 6321 Fax: (844) 3936 6311 Email: [email protected]

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 stock’s 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 government bond yield and market risk premium derived from using

Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant 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.


WWW.SSI.COM.VN SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission

HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (848) 3824 2897 Fax: (848) 3824 2997 Email: [email protected]

HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (844) 3936 6321 Fax: (844) 3936 6311 Email: [email protected]

4. CONTACT INFORMATION

Institutional Research & Investment Advisory

Kien Tran Nguyen

Senior Analyst, Fertilizer

Tel: (844) 3936 6321 ext. 679

[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]





DPM VN Company Update a Beneficiary of Low Oil Price 05-10-2015

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