june 23, 2015 - vps2015 vpbs forecast 4.0% 4,165 2014 6.0% 3,907 2013 4.0% 4,158 2012 4.0% 4,926...
TRANSCRIPT
www.VPBS.com.vn Page | 1
INITIATING COVERAGE: HOLD
Current price (6/19/2015) VND 49,700
Intrinsic Value:
VND 48,600
Short Term Trading Recommendation SELL
Resistance Level
VND 55,500
Support Level
VND 45,000
Bloomberg ticker: DRC VN Exchange: HSX
Industry: Rubber, Tires
Beta (1Y)
0.86
52w high / low (VND) 57,120/ 37,301
Outstanding shares
91,381,230
Market Cap (VNDbn)
4,542
Free Float (shares)
33,754,780
LTM Avg Trading Vol
133,597
Foreign-owned Ratio (%)
38.11%
Div.Yield EPS (VND)
2015 VPBS forecast 4.0% 4,165
2014
6.0% 3,907
2013
4.0% 4,158
2012
4.0% 4,926
2010-14 2015F 2014-19
CAGR VNDbn CAGR
Revenues 10.8% 3,937 11.2%
EBITDA 19.8% 840 7.1%
Net income 15.7% 414 7.0%
Ratio DRC Peer VNI
P/E 13.95 9.09 12.56
P/B 2.80 1.19 1.78
EV/EBITDA 7.95 5.59 8.66
Debt/ Equity 0.75 0.70 0.99
Profit margin 10.6% 8.7% 10.4%
ROA 10.9% 10.7% 2.7%
ROE 22.9% 20.8% 15.0%
Company Description:
- DRC is a state-owned enterprise, a member of Vietnam
National Chemical Group (Vinachem) established in 1975.
In 2006 the company was listed on the HSX.
- Business activities: specialized in producing many kinds
of tires and tubes including light truck tires, heavy truck
tires, off-the-road tires, retreaded tires, bicycle tires, and
motorcycle tires. Other products include technical rubber
products for traffic construction work, ports, and
automobile rubber parts.
- 2014 results: total assets of VND3,138 billion (USD145
million), total equity of VND1,536 billion (USD71 million),
net revenues of VND3,251 billion (USD150 million), and
net profit of VND353 billion (USD16.3 million)
We initiate coverage of Da Nang Rubber JSC (DRC) with a long
term HOLD recommendation. Investors should wait and
reconsider purchasing these shares at their technical support level
of VND45,000.
Radial project will be key driver for growth: The capacity
utilization for most traditional products is already high, so future
growth depends highly on the success of the radial tires project.
The second phase of this project is expected to enter operation
from 2017. This phase has the same capacity but only about 40
percent of the investment expense of the first, so should boost
the company’s profit margin when put into operation.
Current high profitability is expected to decline slightly:
DRC has been achieving very impressive profitability ratios over
the last few years. However, the ratios are expected to decline in
the future due to:
- Lower profit margin of radial tires: Revenues growth should
mainly derive from radial tires, which have lower profit margin
than traditional products while bearing significant depreciation
expenses.
- Stable input prices: We expect that natural rubber prices will
slightly recover, reducing DRC’s profit margin.
Domestic tire market should grow strongly while export
market has big potential: Growth of the Vietnam automotive
market is expected to continue strongly due to new regulations
regarding vehicle load limits, and exemptions from automotive
import tax from 2018 due to ATIGA. Tire exports also have big
potential should TPP be approved.
High valuation compared with its regional peers: DRC’s
relative P/E is much higher than its regional peers. Some
premium is justified because DRC has higher growth potential
and better profit margins, but we believe the current premium
may be too high.
-20
0
20
40
60
80
06/14 08/14 10/14 12/14 01/15 03/15 05/15
% p
rice c
ha
ng
e
DRC VN Peer Index VNINDEX
DA NANG RUBBER JOINT
STOCK COMPANY (DRC) June 23, 2015
Please see important disclosure information at the end of this report
www.VPBS.com.vn Page | 2
CONTENTS
TIRE INDUSTRY OVERVIEW .................................................................................................................................................... 3
GLOBAL TIRE INDUSTRY .................................................................................................................................................. 3 VIETNAM TIRE INDUSTRY ................................................................................................................................................ 5
COMPANY OVERVIEW ............................................................................................................................................................. 8
HISTORY .............................................................................................................................................................................. 8 SHARESHOLDERS AND OWNERSHIP.............................................................................................................................. 8 MANAGEMENT .................................................................................................................................................................. 9
BUSINESS ACTIVITIES ............................................................................................................................................................. 9
PRODUCTS .......................................................................................................................................................................... 9 PRODUCTION ................................................................................................................................................................... 10 MARKET ............................................................................................................................................................................ 12 PROJECT IN PROGRESS: DRIVING FUTURE GROWTH ............................................................................................... 13
FINANCIAL PERFORMANCE .................................................................................................................................................. 13
GROWTH AND PROFITABILITY ....................................................................................................................................... 13 LIQUIDITY AND SOLVENCY ............................................................................................................................................ 16
FORECAST ASSUMPTIONS ................................................................................................................................................... 17
VALUATION ............................................................................................................................................................................. 19
DISCOUNTED CASH FLOW ............................................................................................................................................. 19 COMPARABLE MULTIPLES ............................................................................................................................................. 19
SENSITIVITY ANALYSIS ......................................................................................................................................................... 20
TECHNICAL ANALYSIS .......................................................................................................................................................... 21
CONCLUSION .......................................................................................................................................................................... 22
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TIRE INDUSTRY OVERVIEW
GLOBAL TIRE INDUSTRY
Majority of tires are produced for replacement purposes
The tire industry is divided into two end-use markets: the original equipment tire
market (OEM) and the replacement tire market. The replacement market is much
more important and accounts for 70 to 75 percent of the total number of tires sold.
Demand of tires
Note: LV: Light vehicle: passenger car and light truck; MHCV: medium and heavy commercial
vehicle Source: LMC International 2013, VPBS
Tire production depends on vehicle market
World production is highly concentrated by brand, with the top five companies
making up about half of total world tire production annually.
Tires revenues of five biggest tire makers in 2013 Tire production by company (by sales value)
Source: Tire Business: 29th Global Tire Report Source: Tire Business, data based on 2013’s sales
0
5
10
15
20
25
30
US
D b
illi
on
Bridgestone
, 14.6%
Michelin,
13.7%
Goodyear,
9.4%
Continental
A.G, 6.0%
Pirelli, 4.3%
Sumitomo,
3.7%Hankook,
3.7%
Yokohama,
2.6%
Maxxis/Che
ngshin,
2.5%
Others,
39.5%
Current vehicles in
use (vehicle parc)
New vehicle
production
OE tire demand
LV: 28%
MHCV: 21%
No. of tires
per vehicle
Total tire demand
Replacement tire demand
LV: 72%
MHCV: 79%
Total tire production
Replacement
ratio
Trade in tires
The replacement market
accounts for 70 to 75 percent
of the total number of tires
sold.
www.VPBS.com.vn Page | 4
China is the largest tire producer in the world, with output of 541 million tires in 2014
(including light/ medium/ heavy vehicle tires), accounting for 31 percent of global
output. China’s tire output was about three times higher than the second largest tire
maker, the United States.
Tire output breakdown by country in 2014
Source: Vietnam Rubber Association – Newsletter in May 2015
Tire production depends highly on vehicle sales. From 2007 to 2014, vehicle sales
grew with CAGR of 3.71 percent while CAGR of OEM tire production was 3.2 percent.
China is the biggest tire maker for OEM tire demand, followed by North America and
Europe.
OEM tire production vs. vehicle sales OEM tire production volume by country
Source: just-auto, Bloomberg Source: just-auto, Bloomberg
Recent growth in tire demand comes mainly from emerging countries
The number of vehicles has been increasing strongly in emerging countries in recent
years, especially in China and India, in contrast to low growth in developed countries
such as members of the North American Free Trade Agreement (NAFTA) and
Western Europe.
China
31%
USA
9%Japan
9%S. Korea
6%Thailand
4%
India
3%
Brazil
3%
Russia
2%
Others
33%
0
150,000
300,000
450,000
600,000
750,000
0
20,000
40,000
60,000
80,000
100,000
2007 2008 2009 2010 2011 2012 2013 2014
Tir
e u
nit
Veh
icle
un
it
Vehicle production Vehicle sales OEM tire production
China,
26.6%
North
America
, 18.8%Europe,
18.6%
Japan ,
10.0%
Korea,
5.5%
India,
5.3%
Others,
15.2%
Emerging countries have
driven demand growth in the
global tire market recently.
www.VPBS.com.vn Page | 5
Vehicle parc growth by country Light vehicle replacement tire sales
Source: LMC International , 2013; VPBS Source: LMC International , 2013; VPBS
VIETNAM TIRE INDUSTRY
Most tires in Vietnam are produced by FDI companies
At the end of 2012, there were 830 companies operating in the tire industry in
Vietnam, of which 30 were tire manufacturers, and the remainder trading companies.
Domestic companies have much smaller capacity than FDI companies. Three major
domestic tire companies are Southern Rubber Industry JSC (HSX: CSM), Da Nang
Rubber JSC (HSX: DRC), and Saovang Rubber JSC (HSX: SRC).
Some of the major automotive tire makers in Vietnam, domestic and otherwise
Company Automotive tire capacity
Southern Rubber Industry JSC
(Casumina)
350,000 automotive radial tires per year and 34,950 tonnes of
material per year for other tires
Da Nang Rubber JSC 1.08 million units per year
Sao Vang Rubber JSC 500,000 units per year
Bridgestone Tire Manufacturing
Vietnam
25,000 units per day (about 9 million units per year)
Cheng Shin Rubber (Vietnam) 64,720 units per day (about 23 million units per year) - automotive
and motorcycle tires
Kumho Tire (Vietnam) 3 million units per year
Sailun (Vietnam) 7.8 million units per year
Yokohama Tyre Vietnam 800,000 automotive tires per year and 180 tonnes of material per
year for automotive and motorcycle tires
Source: Tire Business: 29th Global Tire Report, VPBS
FDI tire companies in Vietnam focus on exports and have little direct competition
with domestic companies for whom the main market is local.
Tire exports surpassed imports
Tire export value surpassed imports for the first time in 2010 and this trend has
continued. In 2014, total tire export value was USD529 million, while the value of
imports was USD338 million. Most export value was contributed by FDI companies,
of which Kumho Tire (Vietnam) made up the biggest contribution with 26 percent of
total export value.
0% 5% 10% 15% 20%
Western Europe
South America
Oceania
NAFTA
Middle East
India
Eastern Europe
East Asia
China
Central Europe
Asean
World
5 year annual average
MHCV LV
0
100
200
300
400
500
600
700
2000 2002 2004 2006 2008 2010 2012
Mil
lio
n u
nit
s
Emerging markets Developed markets
Most tires in Vietnam are
produced by FDI companies,
but the competition between
FDI and domestic companies
is low.
www.VPBS.com.vn Page | 6
Vietnam tire import and export over time Top tire exporters in 2014
Source: Vietnam Rubber Association Source: Vietnam Rubber Association
Over half of export sales were passenger car tires. Japan and USA are the two
biggest tire export markets for Vietnam. Truck tires made up the largest portion of
imports, about 62 percent of total value. Thailand and China are the two main import
sources for Vietnam, accounting for over half of total import value in 2014.
Export value by product type in 2014 Import value by product type in 2014
Source: Vietnam Rubber Association – Newsletter in May 2015 Source: Vietnam Rubber Association – Newsletter in May 2015
Export value by country in 2014 Import value by country in 2014
Note: EPZ: Export Processing Zone
Source: Vietnam Rubber Association – Newsletter in May 2015
Note: EPZ: Export Processing Zone
Source: Vietnam Rubber Association – Newsletter in May 2015
0
100
200
300
400
500
600
2006 2007 2008 2009 2010 2011 2012 2013 2014
US
D m
illio
n
Export Import
Kumho Tire
(Vietnam)
26%
Bridgestone
Vietnam
13%
Cheng Shin
(Vietname)
10%
Sailun
Vietnam
9%
Kenda
(Vietnam)
9%
Casumina
7%
Others - 198
companies
26%
Passenger
car tires
55.5%
Truck tires
18.6%
Motorcycle
tires
15.7%Bicycle
tires
4.5%
Industrial
tires
3.2%
OTR tires
1.4%Agricultural
tires
0.7%
Others
0.4%
Passenger
car tires
31.9%
Truck tires
61.6%
Motorcycle
tires
1.9%
Bicycle
tires
0.9%
Industrial
tires
2.2%
Aircraft
tires
1.0%
Others
0.5%
Japan
14.9%
USA
13.4%
Malaysia
7.6%
S.Korea
5.8%
China
5.6%
Brazil
4.7%
Saudi
Arabia
3.9%
Others
44.1%Thailand
41.8%China
15.8%
Hong Kong
14.5%
Japan
8.7%Vietnam -
EPZ
5.4%
Indonesia
4.0%
Korea
2.9%
Others
6.9%
www.VPBS.com.vn Page | 7
Vietnam tire market has great potential
The Vietnam tire market has great potential due to strong growth in the country’s
automotive market. The automotive market in Vietnam is still small compared to
other regional countries, but demand is increasing due to significant growth in the
economy, and developing infrastructure. Over the last three years, the market has
shown a dramatic growth in sales.
Automotive sales in Vietnam Comparison with other regional countries
Source: ASEAN Automotive Federation Source: ASEAN Automotive Federation, World Bank, VPBS
In the next few years, the Vietnam tire market is expected to benefit from the
following changes:
- Import tax for vehicles imported from ASEAN will reduce to nil from 2018
according to the ASEAN Trade In Goods Agreement (ATIGA) (currently the
import tax for passenger cars is 50 percent, and for trucks is five percent).
Automotive demand in Vietnam is expected to increase significantly from 2018.
- Actual load capacity of vehicles was reduced when Official Dispatch No.
3703/BGTVT-VT came into effect on April 1, 2014, tightening transport regulations
and increasing future demand for commercial vehicles.
- If approved, the Trans-Pacific Partnership (TPP) will boost the export business of
Vietnamese tire companies. We believe that competition in the Vietnam tire
market will be little affected by TPP as Vietnam imports tires mostly from Asian
countries such as Thailand and China, which are not TPP members. Among TPP
members, the USA is the biggest tire market, but the current tire import tax rate
is low at four percent, thus Vietnam tire producers should only marginally benefit
from TPP.
- China is the biggest tire exporter to the USA, but currently being investigated by
the USA under antidumping duty for passenger vehicle and light truck tires. On
January 21, 2015, the US Department of Commerce announced an affirmative
preliminary determination for antidumping duty, under which the tax rates
applied to Chinese tire companies would vary from 19.17 percent to 87.99
percent. If the antidumping duty is officially approved, there will be a big
opportunity for tire companies in other countries, including Vietnam.
0
20,000
40,000
60,000
80,000
100,000
2007 2008 2009 2010 2011 2012 2013 2014
Un
its
Passenger vehicles Commercial vehicles
41.2
3.5
19.8
0.9
6.6
6.1
0.9
2.2
1.3
2.6
1.5
2.2
7.0
0.6
0 10 20 30 40 50
Brunei
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Commercial vehicle sales (unit)/ 000 peoplePassenger vehicle sales (unit)/ 000 people
www.VPBS.com.vn Page | 8
COMPANY OVERVIEW
HISTORY
Da Nang Rubber JSC (DRC), a member of Vietnam National Chemical Group
(Vinachem), was established in December 1975. The company listed its shares on the
Ho Chi Minh Stock Exchange (HSX) on December 29, 2006.
DRC currently specializes in producing many kinds of tires and tubes including light
truck tires, heavy truck tires, Off-The-Road tires of various sizes for agricultural
tractors, mining industry, construction industry, retreaded tires, bicycle tires, and
motorcycle tires. The company also produces technical rubber products for traffic
construction work, ports, and automobile parts.
DRC has only one associate - Philips Carbon Black JSC. DRC currently owns a five
percent stake in this company with investment value of VND6.1 billion (USD300,000).
Milestones
1975 DRC’s factory was established at an American military retreading factory
2005 Transformation into a Joint Stock Company
2006 Listed on HCMC Stock Exchange
2013 Put new all-steel radial factory with capacity of 300,000 tires into operation
2014 Completed moving automotive tires factory to Lien Chieu industrial park
2015 Start to construct the second stage of radial tires factory from Q2/2015
Source: DRC
SHARESHOLDERS AND OWNERSHIP
Vietnam National Chemical Corporation (Vinachem) holds a controlling share
position with a 50.51 percent stake. Foreign investors account for 30 percent
ownership, of which two significant shareholders are Asia Value Invest Ltd and
Amersham Industries Ltd.
Type of ownership Major shareholders
Data as of June 12, 2015. Source: Bloomberg Data as of June 12, 2015. Source: Bloomberg
Governme
nt
68.4%Investmen
t Advisor
18.2%
Other
6.2%Corporati
on
4.3%
Hedge
Fund
Manager
1.6%
Individual
0.9%Holding
Company
0.5%
Vinachem
50.5%
Asia Value
Invest
3.3%
Amersha
m
Industries
2.9%
Vietnam
Holding
2.8%
Norges
Bank
2.4%
Others
38.2%
A member of Vietnam
National Chemical Group,
established in 1975.
www.VPBS.com.vn Page | 9
MANAGEMENT
With a controlling share, Vinachem takes the leading role in determining
development strategies as well as allocating key personnel in DRC, in line with
Vinachem’s development plan. DRC’s Board of Directors and management include
people with extensive experience in the tire and chemicals industries.
List of members of the board of director, board of management, and board of supervisory
Board of Directors Title Experience/Qualification Ownership
Nguyen Van Thieu Chairman Bachelor’s degree in economics. Appointed in April 2014. 0.01%
Nguyen Thanh Binh BOD member Masters in Technology. Joined DRC in 1983 and BOD member since 2006. Was appointed
as General Director in Jan 2014 0.28%
Nguyen Manh Son BOD member Bachelor of Economics, Chemical Engineer. Joined DRC in 1984 and appointed as BOD
member and Deputy General Director in 2006 0.03%
Ha Phuoc Loc BOD member Bachelor of Economics. Joined DRC in 1990 and appointed as BOD member and Deputy
General Director in 2005 0.07%
Pham Ngoc Phu BOD member Doctor of Economics. Appointed in March 2009 0.14%
Nguyen Huy Hieu BOD member Bachelor of Laws. Appointed in 2014 0.00%
Hoang Manh Thang BOD member Master of Economics. Appointed in 2010 0.06%
Board of Management
Nguyen Thanh Binh General Director As above. 0.28%
Ha Phuoc Loc Deputy GD As above. 0.07%
Nguyen Manh Son Deputy GD As above. 0.03%
Pham Quang Vinh Deputy GD Electric Engineer. Joined DRC in 1981 and appointed as Deputy GD in 2007 0.07%
Tran Thi My Le Chief Accountant Bachelor of Economics –Accounting major. Joined DRC in 2006 0.00%
Board of Supervisors
Nguyen Thi Van Hoa Head of
Supervisory Board Masters in Finance 0.01%
Chu Quang Tuan Member Bachelor of Economics 0.00%
Vo Thi Hong Member Bachelor of Language –English major 0.00%
Source: Annual report; Ownership from Management report as of January 26, 2015
BUSINESS ACTIVITIES
PRODUCTS
Automotive tires, tubes, and flaps make up the majority of revenues
DRC’s products are tires, tubes, and flaps which are categorized into the types of
vehicles that the products serve, including bicycle, motorcycle, automotive, and
technical rubber products. The company has numerous products, however revenues
are highly concentrated in automotive products (including bias tires, radial tires,
tubes, and automotive flaps) which contribute about 85 percent to revenues.
Revenue by product line Revenue breakdown in 2014
Source: DRC
0
400
800
1,200
1,600
2,000
2,400
Bycicle Motorcycle Automotive Radial tires Others
VN
D b
illi
on
2013 2014Bycicle
6.0%
Motorcycle
8.0%
Automotive
67.4%
Radial tires
18.3%
Others
0.3%
Automotive tires, tubes, and
flaps make up 85 percent of
revenues. All automotive
products are aimed at trucks
and off-road vehicles.
www.VPBS.com.vn Page | 10
Automotive tires: Only focus on trucks and off-road vehicles
All DRC’s automotive tires are used for trucks and off-the-road (OTR) vehicles
including agricultural tractors, mining, giant container cranes, reach stackers in ports,
motor graders, and excavators. At present, DRC do not produce tires for passenger
cars as these products require high technology and would face big competition from
foreign companies. Furthermore, the values of these vehicles are high, and
consumers value high quality and reputation over price.
PRODUCTION
Natural rubber makes up over 45 percent of total input material
Input materials include natural rubber, synthetic rubber, fabric, black carbon, steel
cord, and chemicals, which make up about 80 percent of total production cost.
Natural rubber is the main material that accounts for about 40-45 percent total value
of materials and is all provided locally. The other materials must be imported. As
truck and OTR tires require much more natural rubber than passenger car tires,
focusing on trucks and OTR tires offers DRC a big advantage compared with its local
and overseas competitors as DRC can exploit Vietnam’s natural rubber supply with
competitive prices.
Production cost structure Input materials
Material Supply Weighting
Natural rubber Local 40-45%
Synthetic rubber Import 12-17%
Fabric Import 14-18%
Black coal Import 7-10%
Steel cord Import 2-3%
Chemicals and
others Local & Import 14%
Source: DRC, VPBS estimate Source: DRC
Natural rubber price
Source: Bloomberg
Labor cost
8%
Materials
82%
Depreciation
5% Others 5%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 1/2012 1/2013 1/2014 1/2015
US
D/T
on
ne
RSS3 TOCOM
Focusing on truck and OTR
tires gives DRC a big
advantage.
www.VPBS.com.vn Page | 11
High capacity utilization rate constrains future growth of traditional products
Almost all traditional production lines are operating with capacity utilization of over
80 percent. Although actual production of some products such as tubes and flaps can
exceed designed capacity due to simple production lines and the application of
technology improvements in production, these products have low value compared to
tire products. Thus the current high capacity utilization rate should constrain DRC’s
future growth unless DRC makes additional investments to expand its business
activities.
Production capacity by product line
Source: DRC, VPBS
Radial tires create more opportunity for growth
Automotive tires are divided into bias tires and radial tires. Bias tires (general call
automotive tires in this report) are DRC’s traditional products while radial tires are a
new line that DRC started to produce at the end of 2013. Since radial tires were
introduced to the market, they have shown rapid growth in consumption. DRC
operated at about 38 percent of full capacity of its radial tires production line in 2014,
and the company expects to raise this rate to 80 percent in 2015. DRC also plans to
complete radial tires phase 2 project in Q4/2016 and increase capacity from 300,000
tires to 600,000 tires to meet high demand for radial tires and for exports.
Though radial tires should contribute a major portion to the growth of sales and
profits, the profit margin is much lower than automotive bias tires and will depress
DRC’s profit margin in the future. In 2014, gross profit margin (GPM) of bias
automotive tires was 29.6 percent while GPM of radial tires was just 6.1 percent.
Depreciation made up a big portion of the production cost of radial tires; we estimate
that the GPM of radial tires excluding depreciation was 19.7 percent, still lower than
that of bias tires. As radial tires are in an initial period of introduction to the market,
DRC must lower their selling price to penetrate local market dominated for many
years by import products, thus the GPM of such products remains low.
Capacity (unit/year)
% utilization % utilization % utilization
Bicycle tires 5,000,000 69.66% 5,000,000 74.10% 5,000,000 83.40%
Bicycle tubes 5,000,000 85.68% 5,000,000 86.84% 5,000,000 93.90%
Motorcycle tires 2,000,000 72.50% 2,000,000 56.80% 2,000,000 65.70%
Motorcycle tubes 5,000,000 66.00% 5,000,000 64.32% 5,000,000 80.70%
Automotive tires 700,000 100.43% 700,000 106.03% 780,000 99.62%
Automotive tubes 500,000 103.40% 500,000 122.96% 800,000 93.38%
Automotive flaps 400,000 99.50% 400,000 106.75% 400,000 128.50%
Automotive retreaded tires 40,000 97.50% 40,000 95.00%
Automotive radial tires 300,000 4.93% 300,000 38.33%
2012 2013 2014
High capacity utilization rate
constrains future growth
unless additional investment
is made to expand business
activities.
Since radial tires were
introduced to the market,
they have shown a rapid
growth in consumption.
Though they should
contribute a major portion of
the growth of sales and
profits, radial tires will lower
the profit margin of the
company as a whole.
www.VPBS.com.vn Page | 12
MARKET
Local market is still the largest
Most of DRC’s products are sold locally. The local market accounted for about 89
percent of total sales in 2014, unchanged from 2013, with the Central area making up
about 50 percent of the total, and the remainder divided nearly equally between the
Northern and Southern areas.
Local vs. export sales Local sales by location
Source: DRC Source: DRC
DRC sells its products in the local market through two distribution channels: agents
and directly to customers. Agents account for 75-80 percent of local sales. At the end
of 2014, DRC had 43 automotive tires agents and 53 bicycle & motorcycle tires
agents. The second channel includes selling tires to automakers, cement producers,
and companies belonging to the Vietnam Ministry of National Defense.
DRC’s distribution channel
Source: DRC
Export is marginal but has potential
The proportion of sales to the export market is still marginal at about 11 percent of
total sales in 2014. DRC’s products are exported to about 33 countries, mostly in Asia
where DRC can sell products with good prices. Local market demand is quite stable,
and DRC must operate at high capacity utilization, leading to only a small volume for
export. The new radial factory with current capacity of 300,000 tires per year,
increasing to 600,000 in Q4/2016, should create more volume for export in the future.
Indeed, this product achieved the highest growth in selling volume among export
product in 2014.
91% 89% 89%
9% 11% 11%
0%
20%
40%
60%
80%
100%
2012 2013 2014
Local Export
49% 51% 51%
26% 27% 25%
25% 22% 24%
0%
20%
40%
60%
80%
100%
2012 2013 2014
Central area Northern area Southern area
DRC sales market
Local sales: 89%
Agents: 75-80%
- Over 63 provinces
- 43 automotive tires agents.
- 53 bicyle and motocycle tires agents
Directly to customers: 20-25%Export: 11%
- To 33 countries
The local market accounted
for about 89 percent of total
sales in 2014, of which the
central area made up half.
www.VPBS.com.vn Page | 13
Products Export volume (unit)
Main market 2013 % product sales 2014 % product sales
Bicycle tires 245,500 6.6% 504,670 12.1% Argentina, Ghana
Bicycle tubes - 0.0% 1,520 0.0%
Motorcycle tires 22,610 2.0% 25,281 1.9% Morocco, Myanmar
Motorcycle tubes - 0.0% 2,600 0.1%
Automotive tires 93,070 12.5% 62,507 8.0% Malaysia, Laos, Cambodia, Pakistan,
Panama
Automotive radial tires 2,266 15.3% 33,160 28.8% Thailand, Brazil, Ghana, Iraq
Automotive tubes 55,385 9.0% 36,274 4.9% Laos, Pakistan, Myanmar
Automotive flaps 45,819 10.7% 32,300 6.3% Laos, Pakistan, Myanmar
Source: DRC, VPBS
PROJECT IN PROGRESS: DRIVING FUTURE GROWTH
Almost all production lines are operating with high capacity utilization except the
new radial tires factory with a current utilization ratio of 38 percent, which DRC
expects to increase to 80 percent in 2015. Thus increasing capacity is necessary for
future growth. DRC will begin to construct the second stage of the radial tires factory
from Q2/2015 and expects to finish in Q4/2016. The capacity of the second stage is
300,000 tires per year, equal to the first stage, however the expected investment
capital is only around 38% that of the first stage. This is because DRC has already
invested in the factory and most of the construction works, machinery, and
equipment. We expect the second stage to improve DRC’s profitability significantly.
Radial tire project Phase 1 Phase 2 Total
Investment capital (VND billion) 1,859 705 2,564
Capacity (tires per year) 300,000 300,000 600,000
Construction period 5/2011 - 6/2013 Q2/2015 - Q4/2016
Investment capital per tire (VND) 6,196,667 2,350,000 4,273,333
IRR (VPBS estimates) 6.7% 20.6% 10.3%
Source: DRC, VPBS
FINANCIAL PERFORMANCE
GROWTH AND PROFITABILITY
Revenues growing significant due to contribution from radial tires
From 2010 to 2014, selling volume of automotive tires was quite stable at around
750,000 units, while the selling volume of motorcycle and bicycle tires fluctuated
more. Although the selling volume was lower than others, automotive tires made up
the majority of revenues (82 percent in 2013 and 67 percent in 2014), thus the
fluctuation in selling volume of bicycle and motorcycle tires had less impact on
revenues.
Net revenues experienced a considerable growth with a CAGR of 10.8 percent over
the period. Net revenues showed a significant increase in 2011 due mainly to an
increase in average selling prices, with a sluggish climb from 2011 to 2013 before
suddenly rising in 2014 due to a big contribution from new radial tires products. In
2014, DRC sold around 115,000 radial tires with revenue of VND595.6 billion
(USD27.5 million), accounting for 18.3 percent of total net revenues. As the current
capacity of the radial tires factory is 300,000 tires per year, and demand for them is
high both for the domestic and export markets, there is potential for DRC to increase
revenue from this segment in the near future.
From 2010 to 2014, net
revenues have grown with a
CAGR of 10.8 percent. Radial
tires are a key driver of growth
from 2014 onwards.
With low investment capital
but the same capacity as
phase one, the radial factory
phase two will improve DRC’s
profitability significantly.
www.VPBS.com.vn Page | 14
Net revenues Tires selling volume
Note: Left axis: motorcycle, automotive, radial tires; Right axis: bicycle tires
Source: DRC, VPBS Source: DRC, VPBS
Downtrend of natural rubber price improved profit margins
Over the period from 2010 to 2014, net profit saw dramatic growth with CAGR of 15.7
percent due mostly to falling prices of the natural rubber that is the main raw
material for DRC’s products. When the price of natural rubber reached its peak in
2011, DRC’s net profit was nearly unchanged compared to 2010 although net
revenues had achieved significant growth that year. Gross and net profit margins
stayed at their lowest levels in 2011 but improved dramatically afterwards.
In 2014, natural rubber prices continued to decrease sharply, and all the company’s
products except radial tires showed improvement in profit margins. As radial tires
had small profit margins due to high depreciation expenses at the start of production,
DRC’s gross profit margin and net profit margin went slightly down. DRC also
suffered considerable interest expenses in 2014 as the new factory was mostly
financed by loans, thus net profit slightly decreased in 2014.
Net profits Profit margins vs. natural rubber price
Source: DRC, VPBS Note: NR rubber price: Quarterly RSS3 average price at TOCOM
Source: DRC, VPBS
Total assets and equity on dramatic growth path
Total assets saw sharp growth with CAGR of 31.0 percent from 2010 to 2014. Most of
the increase in total assets came from fixed assets. By the end 2010, DRC’s assets
were nearly fully depreciated; the company has subsequently invested in projects
with high value leading to a sharp increase in fixed assets. Some projects that DRC
has invested in from 2010 to 2014 include:
3,000
3,500
4,000
4,500
5,000
0
500
1,000
1,500
2,000
2010 2011 2012 2013 2014
Th
ou
san
ds u
nit
s
Th
ou
san
ds u
nit
s
Motocycle tires Automotive tires
Radial tires Bicycle tires
0
1,000
2,000
3,000
4,000
5,000
6,000
0%
5%
10%
15%
20%
25%
30%
2010 2011 2012 2013 2014
US
D/t
on
ne
s
Gross profit margin EBIT margin
Net profit margin NR rubber price
1,000
1,750
2,500
3,250
4,000
2010 2011 2012 2013 2014
VN
D m
illio
n
0
100
200
300
400
500
2010 2011 2012 2013 2014
VN
D m
illio
n
Profit margins show a
negative correlation with
natural rubber price.
A slight decrease in profit
margins in 2014 was due to
new radial tires products.
www.VPBS.com.vn Page | 15
Radial tires projects: Total investment capital of VND1,859 billion (USD85.8
million), starting May 2011 and finished in June 2013.
Movement and expansion of motorcycle and bicycle tires factory: Total
investment capital of VND134 billion (USD6.1 million), starting August 2010 and
finished in October 2011.
Movement and expansion of automotive tires factory: Total investment capital
of VND393 billion (USD18.1 million), starting September 2012 and finished in
December 2014.
Total assets Shareholders’ equity
Source: DRC, VPBS Source: DRC, VPBS
Equity and liabilities have been growing strongly over the period. DRC has issued
shares annually from retained earnings to increase its share capital. Liabilities also
climbed quickly over the period as DRC borrowed to finance major projects as noted
above.
Profitability
ROA and ROE have been at satisfactory level for several years. In 2014, the ratios
slightly decreased as DRC officially put the new radial tires factory into operation,
leading to lower profit margin and asset turnover (radial tire products have low profit
margin, and total assets increased significantly in 2013 and 2014 as explained above).
ROA and ROE Dupont analysis
Source: DRC, VPBS Source: DRC, VPBS
14.6% 14.7% 15.2%13.3% 11.1%
24.4% 24.6% 30.5% 29.5%24.1%
0%
5%
10%
15%
20%
25%
30%
35%
2010 2011 2012 2013 2014
ROA ROE
9.1% 7.5% 11.2% 13.4% 10.8%
0%
35%
70%
105%
140%
175%
210%
245%
2010 2011 2012 2013 2014
Asset turnover Asset/Equity Net profit margin
0
1,000
2,000
3,000
4,000
2010 2011 2012 2013 2014
VN
D b
illi
on
Non-current assets Current assets
0
1,000
2,000
3,000
4,000
2010 2011 2012 2013 2014
VN
D b
illi
on
Equity Liabilities
www.VPBS.com.vn Page | 16
Future growth depends on success of radial tires projects
DRC expects to complete the second phase of the radial tire project in Q4/2016; this
will be the key driver of DRC’s growth in revenues and profits. In the next five years,
we expect that net revenues will grow with CAGR of 11.2 percent, while EBITDA and
net profit should have CAGR of 7.2 percent and 7.0 percent. ROA and ROE should not
improve significantly before more radial tires from the second phase can be sold. We
believe the growth rate of net profit will be slower than revenues as the gross profit
margin of radial tires is lower than other traditional products due to depreciation. We
expect the gross profit margin of all products to decrease due to the recovery of
natural rubber prices (please refer to our forecast assumption about profit margin for
more details).
Forecast net revenues and selling volume Forecast profitability
Source: DRC, VPBS Source: DRC, VPBS
LIQUIDITY AND SOLVENCY
Reasonable financial leverage
Total debts to equity ratio has increased significantly over the last five years, from
54.1 percent as of December 31, 2010, to 74.6 percent as of December 31, 2014. As of
December 31, 2014, DRC had VND336.6 billion (USD15.5 million) in short-term loans
and VND808.4 billion (USD37.3 million) in long-term loans. About 83 percent of long-
term loans were used to finance radial project phase one, the remainder was loan for
moving the automotive tires factory to Lien Chieu industrial park. Radial project
phase one was constructed from May 2011 to June 2013, with a total investment
capital of VND1,859 billion (USD85.8 million), of which 70 percent was financed by
loans. Moving of the automotive tire factory started in September 2012 and was
completed in December 2014, with a total investment capital of VND393 billion
(USD18.1 million); we estimate that the project was 65 percent financed by owner’s
equity and 35 percent by loans. Although financial leverage decreased considerably
compared to 2013, we expect that it will stay at this level for the next three years as
DRC will borrow to finance the second phase of the radial project.
Moderate liquidity ratios
Current ratio declined steadily over the last five years but maintained at satisfactory
levels, being always above 1.0x, however the quick ratio was quite low as inventories
made up a major portion of the current assets structure.
2,000
3,000
4,000
5,000
6,000
0
200
400
600
800
2014 2015 2016 2017 2018 2019
VN
D b
illi
on
Th
ou
san
d t
ires
Automotive tires Radial tires from 1st phase
Radial tires from 2nd phase Net revenues
0%
5%
10%
15%
20%
25%
30%
0
200
400
600
800
1,000
2014 2015 2016 2017 2018 2019
VN
D b
illi
on
EBITDA Net profit ROE ROA
www.VPBS.com.vn Page | 17
Liquidity and solvency ratios
2010 2011 2012 2013 2014
Current ratio 2.7 x 2.2 x 1.9 x 1.4 x 1.4 x
Quick ratio 1.1 x 0.5 x 0.4 x 0.3 x 0.4 x
Total liabilities/Total assets 31.24% 45.87% 52.81% 56.72% 51.05%
Total borrowings/Equity 29.74% 54.08% 75.95% 102.80% 74.55%
EBIT/Interest expense 32.4 x 20.0 x 51.4 x 14.5 x 6.8 x
EBITDA/ Total borrowings 38.0 x 23.0 x 56.9 x 16.6 x 8.3 x
Source: DRC, VPBS
FORECAST ASSUMPTIONS
Selling volumes
Selling volume 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
(Unit)
1. Bicycle tires 3,567,000 3,483,000 3,705,000 4,170,000 4,295,100 4,423,953 4,556,672 4,693,372 4,834,173
% Growth -22.5% -2.4% 6.4% 12.6% 3.0% 3.0% 3.0% 3.0% 3.0%
2. Motorcycle tires 1,162,000 1,450,000 1,136,000 1,314,000 1,405,980 1,504,399 1,609,707 1,722,386 1,842,953
% Growth 37.4% 24.8% -21.7% 15.7% 7.0% 7.0% 7.0% 7.0% 7.0%
3. Automotive tires 740,000 703,000 742,200 777,000 800,310 808,313 816,396 824,560 832,806
% Growth -2.8% -5.0% 5.6% 4.7% 3.0% 1.0% 1.0% 1.0% 1.0%
4. Radial tires 0 0 14,800 115,000 240,000 270,000 314,800 400,000 510,000
% Growth 0.0% 0.0% 0.0% 677.0% 108.7% 12.5% 16.6% 27.1% 27.5%
- Bicycle tires: DRC plans for the selling volume of bicycle tires to increase by 3.1
percent in 2015; We forecast that the growth rate is 3.0 percent. The growth rate
is not expected to change until 2019 when production of bicycle tires reaches full
capacity.
- Motorcycle tires: DRC plans for selling volume of motorcycle tires to increase by
6.5 percent in 2015; we have adjusted this to seven percent given good sales
growth last year. This rate is assumed to be unchanged over the next five years.
- Automotive tires: We apply the same growth rate as DRC’s target for this year.
From 2015, the production line will operate at full capacity, thus we lower the
growth rate of this product type after 2015.
- Radial tires: We apply the same growth rate as DRC’s target for this year. The
radial tires factory will operate at 80 percent capacity in 2015, and we expect this
to climb to 90 percent in 2016 and 100 percent in 2017. From 2017 the radial tires
factory phase two can operate and contribute to growth of this segment.
Gross profit margin
Gross profit margin 2013 2014 2015F 2016F 2017F 2018F 2019F
1. Bicycle tires, tubes 17.8% 22.7% 22.0% 21.5% 21.0% 20.5% 20.0%
2. Motorcycle tires, tubes 21.9% 27.2% 26.5% 26.0% 25.5% 25.0% 24.5%
3. Automotive tires, tubes, flaps 27.2% 29.6% 29.0% 28.5% 28.0% 27.5% 27.0%
4. Automotive radial tires, tubes, flaps 8.3% 6.1% 9.8% 10.6% 9.6% 9.7% 11.4%
- Margin excluding depreciation 46.3% 19.6% 19.5% 19.3% 19.0% 18.8% 18.5%
5. Others 38.9% 40.3% 40.0% 40.0% 40.0% 40.0% 40.0%
GPM 25.6% 24.7% 22.7% 22.3% 21.1% 19.9% 19.5%
www.VPBS.com.vn Page | 18
Gross profit margins of production lines, except radial tires, are expected to slightly
decline compared with 2014 as we expect the price of natural rubber – the main raw
material – will marginally recover from 2015 and reduce profit margins. The profit
margin of radial tires will increase steadily as DRC improves capacity utilization of the
production line, leading to reduction in depreciation expenses per produced unit.
Selling and general & administrative expenses (SG&A expenses)
Selling and G&A expenses 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
Selling expenses/revenues 1.9% 2.2% 2.7% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0%
GA expenses/revenues 1.9% 2.9% 2.5% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
The new radial tires products were introduced to market at the end of 2013, requiring
DRC to bear high selling expenses initially. Tighter transport regulations also came
into effect on April 1, 2014, limiting vehicle load and transportation costs increasing.
Thus the selling-expense-to-revenue ratio increased significantly in 2014. In 2015,
although these regulations will continue to burden DRC, current low oil prices lead us
to expect DRC’s selling-expense-to-revenue ratio to decrease considerably.
When Circular 200/2014//TT-BTC becomes effective, we estimate that around 0.8
percent of net sales (based on 2014’s data) will be changed to COGS, causing the
selling-expense-to-revenues ratio to decrease.
Working capital demand and borrowings
Working capital demand 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
Inventory DOH (days) 138 121 164 113 113 113 113 113 113
Receivable DOH (days) 25 20 33 30 30 30 30 30 30
Payable DOH (days) 1 1 0 1 1 1 1 1 1
Shortage period (days) 162 141 197 142 142 142 142 142 142
Working capital demand (VND billion) 965 826 1,083 902 1,112 1,182 1,276 1,435 1,633
Short-term bank loan (VND billion) 287 117 544 337 445 473 510 574 653
% short-term loan/ Working cap demand 30% 14% 50% 37% 40% 40% 40% 40% 40%
We expect DRC’s shortage period to be about 142 days, and 40 percent of the
company’s working capital demand to be financed by loans over the forecast period.
Interest income and expense
Interest income: the amount of financial income has been very minimal in the past
due to small cash and cash equivalent value. Over the forecasting period we assume
a short-term deposit rate of 4.5 percent, though the rate has very little effect on the
company’s net profit.
Interest expenses: DRC borrows short-term and long-term in both USD and VND. The
average interest rate in 2014 was 6.6 percent. Due to decline in bank interest rates in
2015, as well as DRC currently receiving better interest rate offers for the radial tire
phase two project (about 5.2 to 5.3 percent in VND for long-term loans compared
with above 8.0 percent currently), we believe that the average interest rate will be
lower from 2015 to 2019.
Interest rate 2014 2015 2016 2017 2018 2019
Average deposit rate 6.8% 4.5% 4.5% 4.5% 4.5% 4.5%
Average borrowing interest rate 6.6% 6.0% 6.0% 6.0% 6.0% 6.0%
www.VPBS.com.vn Page | 19
Tax rate
DRC applies the normal corporate income tax rate. Current tax rate is 22 percent and
will decrease to 20 percent from 2016.
VALUATION
Based on the discounted cash flow (DCF) and comparable multiples methods, we
derive a target price for DRC at VND48,600 per share.
Valuation method (VND/share) Weighting
DCF 51,785 50%
P/E 45,464 50%
Target price (VND/share) 48,600
DCF achieves a much higher price than the P/E method as it reflects potential growth
in the company’s net income while the P/E method does not.
DISCOUNTED CASH FLOW
The fair price derived from our DCF model is VND51,785 per share and includes the
following assumptions:
Cost of Equity
5-year government bond yield 6.4%
Beta one year 0.86
Market risk premium 8.5%
Cost of equity 13.7%
Cost of Debt
Long-term interest rate 8.2%
Effective tax rate 22.0%
After tax cost of debt 6.4%
WACC
Current share price (VND/share) 49,700
Number of shares (million) 91.38
Market capitalization (VND billion) 4,541.65
Debts (VND billion) 1,145.00
WACC 12.24%
Terminal growth rate 3.0%
COMPARABLE MULTIPLES
Local peers include Southern Rubber Industry JSC (HSX: CSM) and Saovang Rubber
JSC. (HSX: SRC). The profitability of DRC and its local peers are very similar but DRC
is trading with a higher P/E than others. The reason may be that DRC has high
potential growth as DRC’s market is more stable and has greater potential. DRC
focuses on truck tires in the local market, while CSM focuses on passenger car tires
and motorcycle tires with many foreign competitors in Vietnam, and SRC focuses on
bicycle and motorcycle tires; DRC’s business is highly transparent.
In comparison to regional peers, DRC has higher ROA and ROE and is trading at high
relative P/E. The main reason for the high return ratio is that DRC has a much higher
net profit margin while assets turnover is lower. Vietnam is a big natural rubber
producer and DRC can buy natural rubber – the main material for their products –
with favorable prices, and we believe this is the main reason for DRC’s high profit
margin.
www.VPBS.com.vn Page | 20
As DRC has much higher profitability ratios, we adjust up the average relative P/E of
its regional peers by 10 percent, and derive DRC’s target P/E at 10.9x.
Valuation method Relative VN-Index Target DRC’s stock price
(VND/share)
P/E 0.79*1.1 = 0.87 12.5x 10.9x 45,464
Peer comparison
Data as of June 19, 2015. Source: Bloomberg, VPBS
SENSITIVITY ANALYSIS
Sensitivity of WACC and terminal growth rate to DCF stock price
WACC
Te
rmin
al g
row
th r
ate
8% 9% 10% 11% 12% 13% 14% 15% 16%
7% 529,809 257,885 167,266 121,971 89,734 76,707 63,788 54,105 46,580
6% 266,565 172,923 126,121 98,054 75,689 66,008 56,007 48,235 42,025
5% 178,817 130,441 101,434 82,109 65,522 57,984 49,955 43,540 38,297
4% 134,942 104,953 84,976 70,720 57,820 51,743 45,114 39,698 35,191
3% 108,618 87,960 73,220 62,178 51,785 46,750 41,153 36,496 32,563
2% 91,068 75,823 64,403 55,534 46,928 42,665 37,852 33,787 30,311
1% 78,533 66,719 57,546 50,219 42,935 39,260 35,059 31,465 28,358
0% 69,131 59,639 52,060 45,871 39,594 36,380 32,665 29,453 26,650
-1% 61,819 53,975 47,571 42,247 36,757 33,911 30,590 27,692 25,143
Net
profit
margin
Asset
turn
over
ROA ROE P/E EV/EBITDA
LTM LTM LTM Rel. LTM Rel. LTM Rel. LTM Rel.
Regional peers (USDmn) % Time % % Time % Time % Time % Time Time
MULTISTRADA ARAH SARANA TBK MASA IJ INDONESIA 193 0.19 0.45 33.10 0.08 0.03 0.14 0.01 N/A N/A 7.57 0.69 0.52
ND RUBBER PCL NDR TB THAILAND 25 5.80 1.41 47.36 8.16 3.12 23.82 2.22 12.44 0.63 14.25 1.16 2.92
ENKEI WHEELS INDIA LTD EWIL IN INDIA 25 0.60 1.26 28.32 0.76 0.28 13.29 0.94 67.05 3.07 6.06 0.50 8.65
HWA FONG RUBBER THAILAND PCL HFT TB THAILAND 73 11.37 1.06 0.00 11.87 4.53 14.31 1.34 8.45 0.43 3.70 0.30 1.16
GOODYEAR THAILAND PCL GYT TB THAILAND 88 6.25 0.83 0.00 5.17 1.97 6.53 0.61 11.40 0.57 3.86 0.31 0.81
XINGDA INT'L HOLDINGS 1899 HK CHINA 419 5.86 0.56 12.19 3.29 1.75 6.42 0.45 8.01 0.72 4.68 0.48 0.50
INOUE RUBBER (THAILAND) PCL IRC TB THAILAND 103 5.75 1.41 2.90 8.08 3.09 12.68 1.18 9.11 0.46 4.92 0.40 1.36
INDAG RUBBER LTD IDR IN INDIA 67 13.47 1.62 0.00 21.85 8.06 28.21 1.99 13.03 0.60 9.03 0.75 3.32
GOODYEAR INDIA LTD GDYR IN INDIA 191 6.41 1.80 0.00 11.55 4.26 22.00 1.55 12.01 0.55 5.49 0.46 2.45
TVS SRICHAKRA LTD SRTY IN INDIA 230 4.61 2.18 25.02 10.06 3.71 41.00 2.90 14.72 0.67 7.96 0.66 5.20
JK TYRE & INDUSTRIES LTD JKI IN INDIA 312 4.50 1.13 39.25 5.09 1.88 26.39 1.86 5.59 0.26 4.83 0.40 1.42
CEAT LTD CEAT IN INDIA 420 5.51 1.56 16.38 8.61 3.18 23.40 1.65 7.82 0.36 4.26 0.35 1.59
GOODYEAR INDONESIA PT GDYR IJ INDONESIA 53 1.71 1.35 0.00 1.79 0.64 3.75 0.33 27.46 1.24 2.52 0.23 0.92
SOUTHERN RUBBER INDUSTRY JSC CSM VN VIETNAM 122 10.41 0.99 43.72 9.57 3.51 22.61 1.51 9.45 0.75 6.65 0.77 0.92
MULTISTRADA ARAH SARANA TBK MASA IJ INDONESIA 193 0.19 0.45 33.10 0.08 0.03 0.14 0.01 N/A N/A 7.57 0.69 0.52
SAOVANG RUBBER JSC SRC VN VIETNAM 22 6.92 1.90 18.25 11.80 4.33 18.94 1.26 8.72 0.70 4.54 0.52 1.46
Average 5.60 1.25 18.72 7.36 2.77 16.48 1.24 15.37 0.79 6.12 0.54 2.11
Median 5.77 1.31 17.31 8.12 3.10 16.62 1.30 10.43 0.61 5.20 0.49 1.39
Local peers
SOUTHERN RUBBER INDUSTRY JSC CSM VN 122 10.41 0.99 43.72 9.57 3.51 22.61 1.51 9.45 0.75 6.65 0.77 0.92
SAOVANG RUBBER JSC SRC VN 22 6.92 1.90 18.25 11.80 4.33 18.94 1.26 8.72 0.69 4.54 0.52 1.46
Average 8.67 1.44 30.98 10.68 3.92 20.78 1.39 9.09 0.72 5.59 0.65 1.19
DANANG RUBBER JSC DRC VN 208 10.59 1.03 37.74 10.94 4.02 22.91 1.53 13.95 1.11 7.95 0.92 2.80
Company BB code
Market
cap
Debt
to
asset
P/BCountry
www.VPBS.com.vn Page | 21
TECHNICAL ANALYSIS
DRC’s technical chart has shown an accumulation phase of 51,000-55,000 for three
months from February to May, 2015. After failing to cross over the resistance level of
55,000, the price of DRC has been adjusting to break down the short-term support
level of 51,000.
Its trading volume has increased recently, indicating that selling pressure is
dominated buying force. This may force the price of DRC to continue to move down
to the mid-term support level of 45,000.
Therefore, we recommend SELL for DRC at the time of this updating report.
As of June 19, 2015 (VND/share)
Horizon analytic 3 to 6 months
3-month highest price 55,500
3-month lowest price 49,500
Current MA50 days 52,500
Current MA100 days 52,000
Mid-term resistance level 55,500
Mid-term support level 45,000
Recommendation SELL
www.VPBS.com.vn Page | 22
CONCLUSION
We believe that DRC, as well as other tire companies in Vietnam, are enjoying many
favorable conditions for expanding business and profitability. As a major natural
rubber producer, Vietnam’s tire companies have a big advantage in competing with
other tire companies worldwide. Although the export value of DRC is still small, the
export market has great potential and will be the key driver for the growth of DRC in
the future. The main market for DRC is still local, and the company is now operating
at high capacity utilization and should increase its capacity to meet local tire demand,
which is expected to grow strongly over the next few years.
DRC has higher profitability but P/E is trading quite high relative to its regional peers.
This may be due to the market reflecting the potential growth of DRC in its share
price. We believe that such appreciation is reasonable, but at a smaller level. In our
opinion, in the long term, DRC can achieve high growth in revenues and favorably
expand its scale of business, however its profitability should steadily shrink as we
expect natural rubber prices will recover.
All factors considered, we adopt a long term HOLD recommendation for DRC stock
with a target price of VND48,600 per share.
www.VPBS.com.vn Page | 23
Income Statement (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F
Revenue
1. Bicycle tires, tubes 182 196 205 212 220 228 236
Growth rate 8% 5% 4% 4% 4% 4%
2. Motorcycle tires, tubes 229 259 277 296 317 339 363
Growth rate 13% 7% 7% 7% 7% 7%
3. Automotive tires, tubes, flaps 2,298 2,191 2,263 2,298 2,334 2,370 2,401
Growth rate 2% 2% 2% 1%
4. Automotive radial tires, tubes, flaps 87 596 1,181 1,329 1,549 1,968 2,510
Growth rate 587% 98% 13% 17% 27% 28%
5. Others 9 10 11 12 13 14 16
Net Revenue 2,637 2,785 2,804 3,251 3,937 4,147 4,433 4,919 5,524
Growth rate 22% 6% 1% 16% 21% 5% 7% 11% 12%
Cost of Goods Sold (excluding depreciation) 2,173 2,142 2,005 2,317 2,857 3,037 3,278 3,687 4,195
Gross Profit 464 643 799 934 1,080 1,111 1,154 1,232 1,329
Gross Profit Margin 18% 23% 28% 29% 27% 27% 26% 25% 24%
Total Selling Expenses 51 60 74 161 157 166 177 197 221
% sales 1.9% 2.2% 2.7% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Total General & Admin Expenses 50 82 71 68 82 87 93 103 116
% sales 1.9% 2.9% 2.5% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
Income from Affiliated Companies - - - - - - - - -
EBITDA 363 501 654 704 840 858 884 933 993
EBITDA Margin 14% 18% 23% 22% 21% 21% 20% 19% 18%
Depreciation 48 49 82 130 185 187 221 253 253
EBIT 315 452 572 574 655 671 664 680 740
Financial income 8 4 11 10 9 11 13 23 27
Financial expenses 65 45 85 143 142 155 161 160 163
Interest Expense 16 9 39 85 72 80 82 72 64
Net Financial Income (Expense) (58) (41) (74) (133) (133) (144) (148) (137) (136)
Other profit 6 6 3 11 8 9 10 11 12
% sale 0.22% 0.20% 0.11% 0.33% 0.21% 0.21% 0.21% 0.21% 0.21%
Pretax Income 264 417 501 452 530 536 525 553 616
Income Tax Expense 66 105 125 100 117 107 105 111 123
Effective Tax Rate 25.04% 25.17% 25.03% 22.19% 22.00% 20.00% 20.00% 20.00% 20.00%
Profit after tax 198 312 375 352 414 429 420 443 493
Net Income 198 312 375 352 414 429 420 443 493
Net Profit Margin 7% 11% 13% 11% 11% 10% 9% 9% 9%
Average Number of Shares (million) 46 58 83 83 91 91 91 91 91
EPS (VND) 3,940 4,926 4,158 3,907 4,165 4,321 4,231 4,456 5,394
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Balance Sheet (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F
Current Assets
Cash & Near Cash Items 78 76 54 85 129 177 392 485 688
Short Term Investments - - - - - - - - -
Accounts & Notes Receivable 180 152 257 268 325 342 365 405 455
Inventories 822 712 901 716 882 938 1,012 1,138 1,295
Other Current Assets 134 104 87 43 53 56 60 67 76
Total Current Assets 1,213 1,044 1,300 1,111 1,388 1,513 1,830 2,096 2,515
Long-Term Assets
Gross Fixed Assets 668 736 2,354 2,645 2,713 2,739 3,453 3,460 3,469
Accumulated Depreciation 514 560 637 723 908 1,095 1,315 1,568 1,820
Net Fixed Assets 154 176 1,717 1,921 1,805 1,644 2,137 1,892 1,648
Long Term Investments 8 8 5 5 5 5 5 5 5
Intangibles 2 1 1 1 1 1 1 1 1
Other Long Term Assets 244 1,248 165 99 275 735 30 30 30
Total Long-Term Assets 408 1,434 1,888 2,026 2,085 2,385 2,173 1,928 1,684
Total Assets 1,622 2,478 3,188 3,137 3,473 3,898 4,003 4,024 4,200
Current Liabilities
Accounts Payable 4 4 2 5 6 6 7 7 9
Accrued Expenses - - - - - - - - -
Short Term Borrowings 287 117 544 337 445 473 510 574 653
Other Short Term Liabilities 264 417 388 452 547 576 616 684 768
Total Current Liabilities 555 538 934 793 998 1,055 1,133 1,265 1,429
Long Term Liabilities
Long Term Borrowings 188 771 874 808 803 957 782 536 364
Total Long Term Liabilities 189 771 874 809 803 957 782 536 364
Total Liabilities 744 1,309 1,808 1,602 1,801 2,012 1,915 1,801 1,793
Total Debt to Capital 35.1% 43.2% 50.7% 42.7% 42.7% 43.1% 38.2% 33.3% 29.7%
Equity
Share Capital & APIC 462 692 831 831 914 914 914 914 914
Retained Earnings 244 334 376 495 478 608 768 861 1,000
Other Equity 173 143 173 210 281 364 406 448 493
Total Shareholders Equity 878 1,169 1,380 1,536 1,672 1,886 2,089 2,224 2,407
Minority Interest - - - - - - - - -
Total Liabilities & Equity 1,621 2,478 3,188 3,137 3,473 3,898 4,003 4,024 4,200
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Cash Flows (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F
Cash From Operation Activities 42 554 149 762 453 559 565 567 588
Cash From Investing Activities (248) (721) (562) (285) (235) (476) 4 16 18
Cash From Financing Activities 176 164 392 (447) (174) (34) (355) (490) (403)
Beginning Cash Balance 108 78 76 54 85 129 177 392 485
Net Changes in Cash (30) (3) (21) 30 44 49 215 93 203
Expected Ending Cash Balance 78 75 55 85 129 177 392 485 688
Free Cash Flow (FCFF) (105) (509) (340) 595 266 136 622 618 630
Ratio Analysis 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F
Valuation Ratios
Price Earnings 12.7 x 11.9 x 11.5 x 11.7 x 11.2 x 9.2 x
PEG (2.1) 1.8 3.1 (5.7) 2.1 0.4
EV to EBIT 9.8 x 8.5 x 8.3 x 8.4 x 8.2 x 7.6 x
EV to EBITDA 8.0 x 6.7 x 6.5 x 6.3 x 6.0 x 5.6 x
Price to Book 2.7 x 2.7 x 2.4 x 2.2 x 2.0 x 1.9 x
Dividend Yield 6.0% 4.0% 4.0% 6.0% 6.0% 6.0%
Profitability Ratios
Gross Margin (ex. Dep) 17.6% 23.1% 28.5% 28.7% 27.4% 26.8% 26.0% 25.1% 24.1%
EBITDA Margin 13.8% 18.0% 23.3% 21.7% 21.3% 20.7% 19.9% 19.0% 18.0%
Operating Margin 12.0% 16.2% 20.4% 17.7% 16.6% 16.2% 15.0% 13.8% 13.4%
Profit Margin 7.5% 11.2% 13.4% 10.8% 10.5% 10.3% 9.5% 9.0% 8.9%
Return on Avg. Assets 14.7% 15.2% 13.3% 11.1% 12.5% 11.6% 10.6% 11.0% 12.0%
Return on Avg. Equity 24.6% 30.5% 29.5% 24.1% 25.8% 24.1% 21.1% 20.5% 21.3%
Leverage Ratios
Interest Coverage Ratio (EBIT/I) 20.0 51.4 14.5 6.8 9.1 8.4 8.1 9.4 11.6
EBITDA / (I + Cap Ex) 2.1 0.5 1.2 2.2 2.7 1.5 9.8 11.8 13.7
Tot Debt/Capital 35.1% 43.2% 50.7% 42.7% 42.7% 43.1% 38.2% 33.3% 29.7%
Tot Debt/Equity 54.1% 76.0% 102.8% 74.6% 74.6% 75.8% 61.9% 49.9% 42.2%
Liquidity Ratios
Asset Turnover (times) 2.0 x 1.4 x 1.0 x 1.0 x 1.2 x 1.1 x 1.1 x 1.2 x 1.3 x
Accounts Receivable Turnover (day) 22 25 20 33 30 30 30 30 30
Accounts Payable Turnover (day) 0 1 1 0 1 1 1 1 1
Inventory Turnover (day) 94 138 121 164 113 113 113 113 113
Current Ratio 2.2 x 1.9 x 1.4 x 1.4 x 1.4 x 1.4 x 1.6 x 1.7 x 1.8 x
Quick Ratio 0.5 x 0.4 x 0.3 x 0.4 x 0.5 x 0.5 x 0.7 x 0.7 x 0.8 x
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GUIDE TO RATINGS DEFINITION
VPBank Securities (VPBS) uses the following ratings system:
Buy: Expected return, including dividends, over the next 12 months is greater than 15%.
Hold: Expected return, including dividends, over the next 12 months is from -10% to +15%.
Sell: Expected return, including dividends, over the next 12 months is below -10%.
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