SMC TRADING INVESTMENT JOINT STOCK COMPANY

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2 GENERAL INFORMATION ABOUT COMPANY Overall Formation and Development History Goods and Services Operation Network Organizational Structure CONTENT OPERATIONAL COVERING Chairman s Statement Honour Awards 2014 Financial Highlights Board of Director s Report Supervisory Board s Report EVOLUTIONARY INNOVATION Board of Management s Report 32 Introduction to Board of Management 32 Summary of Financial Statements in Assessments on key financial highlights in 2014 business operation and Performance years Breakthrough & Leap Forward CONNECTION and CONTRIBUTION Sustainable Growth Report Organization and Human Resources 2015 Financial Target and Business Strategy Corporate Governance Associations and Joint-ventures ACRONYMS SMC : SMC Trading Investment Joint Stock Company JSC : Joint Stock Company Co., Ltd : Limited Company IZ : Industrial zone AGM : Annual General Meeting Business : Manufacturing and trading IA GD DGD BOD IE RO VTU : Internal Audit : General Director : Deputy General Director : Board of Directors : Import and Export : Representative Office : Vietnamese Trade Union LEADING SERVICE STANDARD Report of the Board of Management Auditors Report Consolidated Balance Sheet Consolidated Income statement Consolidated Cash flow statement Notes to the consolidated financial statements

3 OVERALL FROM A SMALL STEEL SHOP, AFTER 26 YEARS OF DEVELOPMENT, ESPECIALLY AFTER EQUITIZATION, SMC HAS GROWN AND BECOME A LEADING STEEL TRADER IN VIETNAM. WITH THE ADVANTAGE OF AN EXPERIENCED STEEL SERVICES PROVIDER AND STEEL DISTRIBUTOR, SMC HAS NOT ONLY SUSTAINED ITS GROWTH, BUT ALSO ACHIEVED IMPRESSIVE RESULTS IN THE GLOOMY ECONOMY. Vietnamese name English name Trading name Abbreviation Head quarter CÔNG TY CỔ PHẦN ĐẦU TƯ THƯƠNG MẠI SMC SMC Investment Trading JSC Steel Materials Company SMC 396 Ung Van Khiem St., Ward 25, Binh Thanh District, HCMC Tel (84-08) Fax (84-08) Website Charter capital Ticker Face value Listed shares 295,183,610,000 VND SMC 10,000 VND 29,518,361 shares on the Ho Chi Minh Stock Exchange Production, trading, import and export of all kind of steels, metal goods, construction materials, interior decoration, construction equipment, mechanical equipment, warehouse framework, factory by steel, stainless steel, and aluminum. Construction and installation of civil, industrial, transport, irrigation, and interior design projects in accordance with the laws. Business Activities Preparation of construction investment projects, consulting, designing, and trading lodgement in accordance with the laws. Trading electrical products, groceries, consumer food and goods. Logistics and warehousing services for domestic and import export products. Trading real estate and land use rights of the owners or lessee. 4 SMC INVESTMENT TRADING JSC 5

4 FORMATION AND DEVELOPMENT HISTORY years Breakthrough & Leap Forward 2014 Achieving goals for 5-year business strategy from with total steel consumption volume of 867,000 tons Receiving First Class Labour Medal and establishing SMC Tan Tao One Member Co., Ltd. Establishing joint-venture SMC Summit between SMC and Sumitomo Group (Japan) Establishing SMC Ha Noi JSC Achieving goals for 5-year business strategy from with total steel consumption volume of 558,000 tons Establishing SMC Hiep Phuoc One Member Co., Ltd. and Steel Trading One Member Co., Ltd. Establishing SMC Binh Duong One Member Co., Ltd and SMC Mechanic Steel One Member Co., Ltd Receiving Second Class Labour Medal and establishing SMC Steel Co., Ltd at Ba Ria Vung Tau Listed on the Ho Chi Minh Stock Exchange with the stock code: SMC Equitization and changing into SMC Trading Investment JSC Registering trademark certification for SMC brand Receiving Third Class Labour Medal and officially introducing SMC Logo Official launch of SMC brand-name, which stands for Steel Materials Company Transformation into Manufacturing and Trading Construction Materials Enterprise No.1 Establishment of the Construction Materials Store No.15 belonged to Southern Retail and Wholesale Construction Materials Center 6 SMC INVESTMENT TRADING JSC 7

5 GOODS AND SERVICES SUPPLIED Wire rod Rebar Flat bar Construction steels including wire rod, rebar, round steel, and deformed steel. Hot rolled coil, cold rolled coil, welded wire mesh, flat bar, high tensile steel, purlin, steel pipe, section steel, galvanized steel plates, secondary steel 4 Coil Center systems throughout from the North to the South and located in such big city as Ha Noi, Ho Chi Minh, Ba Ria Vung Tau are well equipped with modern machineries and processing lines imported from Taiwan according to Germany technology. Scientific management technique according to ISO 9001:2000 allows the processing systems to professionally split and cut various sizes of cold and hot rolled coils, galvanized steel sheets, color coated steel sheet, and stainless steels with high quality and precision. Coil Center Coil Center System Capacity Unit CRC cutting line 116,000 Tons/year HRC cutting line 145,000 Tons/year CRC splitting line 108,000 Tons/year HRC splitting line 120,000 Tons/year Hot rolled steel Cold rolled steel Purlin Euro mesh welded mesh steel 8 SMC INVESTMENT TRADING JSC 9

6 Ha Noi Capital Myanmar Laos Đa Nang ROWING GOF SERVICES Thailand Paracel Islands Campuchia Ho Chi Minh City Binh Duong Ba Ria - Vung Tau Spratly Islands Malaysia Singapore Countries to which SMC exports its products. 10 SMC INVESTMENT TRADING JSC 11

7 ORGANIZATIONAL STRUCTURE GENERAL MEETING OF SHAREHOLDERS BOARD OF SUPERVISORS BOARD OF DIRECTORS CEO DEPUTY GENERAL DIRECTOR OF PRODUCTION DEPUTY GENERAL DIRECTOR OF BUSINESS DEPUTY GENERAL DIRECTOR OF FINANCE & ACCOUNTANCY DEPUTY GENERAL DIRECTOR OF ADMINISTRATION JOINT VENTURE SMC STEEL Co., LTD SMC HANOI JSC SMC TAN TAO ONE MEMBER Co., LTD SMC STEEL TRADING ONE MEMBER Co. LTD PROJECT BUSINESS DIVISION SMC HIEP PHUOC ONE MEMBER Co., LTD SMC BINH DUONG ONE MEMBER Co., LTD SMC DA NANG BRANCH FINANCIAL DEPARTMENT ACCOUNTING DEPARTMENT BOARD OF INTERNAL CONTROL PERSONNEL DIVISION ADMINISTRATIVE DIVISION MARKETING DIVISION SMC STEEL MECHAN- ICAL ONE MEMBER Co., LTD SMC- SUMMIT LIMITED LIABILITY COMPANY BOARD OF RISK CONTROL PROJECT DIVISION STORE No. 147 PROJECT BUSINESS DEPARTMENT STEEL BUSINESS DEPARTMENT STORAGE DEPARTMENT IMPORT-EXPORT DEPARTMENT PURCHASE DIVISION ERP DIVISION TECHNICAL DIVISION 12 SMC INVESTMENT TRADING JSC 13

8 VISION Being a prestigious and professional distributor AMBITION Speaking of steel, thinking of SMC - Mentioning SMC, thinking of steel MISSION SMC desires to focus its ability and knowhow for benefit and wining the trust of customers that will help the stable and sustainable future of Vietnam s steel industry. CORE VALUES: - Being professional in all activities - Fulfilling customer expectations - Striving toghether toward common goals - Honoring integrity - Being a prestigious brand - Striving to learn Chairman s Statement Honour Awards 2014 Financial Highlights Board of Director s Report Supervisory Board s Report

9 CHAIRMAN S STATEMENT WITH FOUR PROCESSING FACTORIES OF HRC, CRC, AND GALVANIZED STEEL PRODUCTS HAVING CAPACITY OF MORE THAN 300,000 TONS PER YEAR, COUPLED WITH THE STRONGEST CONSTRUCTION STEEL SALES TEAM NATIONWIDE, SMC HAS REACHED THE NEW CONSUMPTION RECORD OF OVER 860,000 TONS OF VARIOUS STEEL PRODUCTS BOTH IN DOMESTIC AND EXPORT MARKETS. Dear Honorable Shareholders, One more year has gone, SMC continues to mature as well as has more challenges and threats. No doubt this year operation is not completely successful but it is also not a failure. The difficulty continues wave after wave, despite that the company hold strong and firm there are stumbling and hardships. But the most courage of all is the confrontation and the will to find the ways for the whole group development. With four processing factories of HRC, CRC, and galvanized steel products having capacity of more than 300,000 tons per year, coupled with the strongest construction steel sales team nationwide, SMC has reached the new consumption record of over 860,000 tons of various steel products both in domestic and export markets. As so, in 2014 the system has consumed more than 150,000 tons compared to 2013, exceeding the 800,000 tons target set up to It also required strengthened in all aspects of operations including human resources, warehouse equipment and machinery, capital and financial resources, as well as corporate governance and administration. SMC is also proud to win significant contracts in 2014 to supply steels for famous global brands project that have invested in Vietnam such as, Formosa Ha Tinh, Samsung - VN and the first metro line in the Ho Chi Minh city, Metro line 1. We can say this is the right choice of foreign clients as well as the confirmation of SMC capability to meet the demanding service of market and foreign partners. However, 2014 also witnessed SMC s poor business performance, failing to complete the profit target, regardless of strong growths in sales volume and revenue. It is also a major obstacle for the capital accumulation for subsequent years development of the system, leading to strong correction and less attractive of SMC shares on the stock market. Entering 2015, as the world oil prices has plunged from Q4/2014 leading to an impairments of the mining industry including iron ore, steel prices continuously following downward trend is major challenge for the iron and steel enterprises with large inventories. The whole SMC system is facing and fend off the problem with the efficiency. This is also a challenge that SMC has encountered many times and got experiences. With a long history and the real strength of the brand and position in the marketplace, SMC believes it will surpass and enhance the system to develop and be stronger. Sincerely, Chairman, NGUYEN NGOC ANH 16 SMC INVESTMENT TRADING JSC 17

10 HONOUR AWARDS 2014 FINANCIAL HIGHLIGHTS 1,000,000 Total steel and cement consumption 1,008,829 Sales volume break-down by key steel product segments Total consumption Steel Cement & Clinker 820, % 500, , , ,083 Construction steel Flat Steel 38.7% 1.8% 1.1% Section steel Other steels First Class Labour Medal 2005, 2007, 2008, 2009, 2010, 2011, 2012 Vietnam Gold Star Award & Top 100 Vietnamese Brand NET REVENUE (VND bn) NET PROFIT AFTER TAX (VND bn) 2009, 2010 Vietnam Excellent Retail Distributor 2008, , 2008, , The Best Service Trade Award Vietnam Strong Brand Emulation Flag of Prime Minister The best distribution system development and organization award Vietnam Top 500 companies with the largest revenue Second Class Labour Medal 12,000 10,000 8,000 6,000 4,000 2,000 6,858 8,940 8,964 9,651 10, Third Class Labour Medal SMC INVESTMENT TRADING JSC 19

11 BOARD OF DIRECTORS REPORT BOARD OF DIRECTOR Mr. NGUYEN NGOC ANH Mrs. NGUYEN THI NGOC LOAN Mr. VO HOANG VU Mr. MA DUC TU Mr. TAIRA YOSHIYUKI Mrs. VU THI THANH HONG Chairman of SMC BOD/ Member of Thong Nhat Steel JSC BOD/ Member of Nam Khang Investment JSC BOD Vice Chairwoman of SMC BOD Member of SMC BOD Member of SMC BOD / Vice chairman of Thu Duc Import Export JSC BOD / Member of Real Estate No.9 JSC BOD Member of SMC BOD / CEO of Hanwa Vietnam Co., Ltd Member of SMC BOD / Chief Representative of Bao Viet Fund Management HCMC branch 20 SMC INVESTMENT TRADING JSC 21

12 BOARD OF DIRECTORS REPORT (continued) REPORT OF THE 2014 AGM IMPLEMENTATION THE BOARD MEETS ON QUARTERLY BASIS WITH THE SUPERVISORY BOARD, BOM, AND OTHER COMPANY S KEY OFFICERS TO ASSESS THE IMPLEMENTATION OF BOD S DIRECTIONS AND BUSINESS PERFORMANCE; TO DISCUSS AND AGREE ON POLICIES, MANAGEMENT SOLUTIONS, AND BUSINESS PLANS FOR NEXT QUARTER. GENERAL STATEMENT In October 2014, the Board of Director has appointed Mr. Truong Tuan Dung Hung officially served as Chief Financial Officer of the company since 9th October 2014 in replacement for Mr. Nguyen Binh Trong. The company s rules, regulations, and activities are all in compliance with the regulations on corporate governance law. However, the Board of Director has not allocated appropriate time to participate the required training courses on corporate governance in On quarterly basis, the Board of Director has organized meetings with Board of Supervisor, Board of Management, and key officers of the company for assessments on the implementation of BoD s guidelines, the financial performance and results, discussion and agreement on managing policies and solutions, and planning for next quarter business activities. In addition, the BoD also hold extraordinary meetings to timely consider and approve significant policies and strategies related to corporate governance activities of the BoM. In 2014, the BoD has arranged 09 meetings in total and issued 06 resolutions on important issues. EVALUATION ON THE BOM CORPORATE GOVERNANCE, BUSINESS MANAGEMENT, AND IMPLEMENTATION OF THE 2014 AGM RESOLUTIONS In 2014, the BoM has attempted to fulfill the consumption volume target, creating a favourable momentum for the company s operation activities, constantly and flexibly managing and developing new high margin products for more operational efficiency of the whole system, maintaining and improving SMC s brand-name and position on the market, sustaining and promoting strengths and advantages of the entire system, stabilizing organizational structure, courageously increasing training programmes for the staff inheritance group, ensuring financial resources for the operation of the whole system at low cost and effective cash flow management. However, this is the third consecutive year under the managing execution of the BoM that SMC failed to achieve the target net profit, mostly caused by both local and global difficulties, from the general economic situation to the steel industry problems, together with the company s subjective factors such as high-cost inventories stocked up and unexpected deeply decreasing steel price that SMC could not complete the target plan. Key items UNIT Target ACTUAL % Total steel consumption volume Tons 750, , Construction steels Tons 455, , Flat steels Tons 275, , Other steels Tons 20,000 24, Total cement and clinker consumption volume Tons 100, , Revenue VND bn 10,000 10, Net profit after tax VND bn 50,0 20, Cash dividend payment VND/share 1, Audit firm selection KEY FACTORS AFFECTING 2014 BUSINESS OPERATIONAL PERFORMANCE The management team and the entire system have been actively implementing all proposed business strategies, flexible in operational management, and dynamic in business and production activities in order to promptly respond to the complicated situations of the economy and market. The national economy and steel industry in 2014 recorded positive movements. The economic growth rate has been slightly recovered BoD has choosen DFK Vietnam Auditing Co. to audit the company s 2014 financial statements with higher than previous year GDP at 5.98%. The average CPI in 2014 only went up 4.09% from 2013, being the lowest inflation rate within the past 10 years. Liquidity of the commercial banking system considerably improved, foreign exchange rate stabilized, foreign reserves increased, and the interest rate adjusted down by 1-2% from last year. The real estate market also proved some signs of improvement thanks to more efficient subsidy regulations by the government and more direct foreign investment inflows. As a result, consumption of construction materials sector has been more active than before. Total cement consumption in 2014 increased 8.7%, in which export of cement and clinker went up 13% yoy. Total steel consumption in 2014 almost reached 13.9 million tons, increasing by 16.8% from last year, including nearly 5.4 million tons consumed by construction steel products, up 14.2% yoy, 1.2 million tons consumed by steel pipe segment, strongly up 51.9% yoy, and more than 3.5 million tons consumed by galvanized steel segment, up 34.6% yoy. 22 SMC INVESTMENT TRADING JSC 23

13 BOARD OF DIRECTORS REPORT (continued) Accompanying with the whole industry advance together with utilizing itself competitive advantages such as well-known brand name, various and diversified product portfolio, strong operation and distribution capability, modern Coil Center systems and warehouses, coupled with dedicated and experienced staffs and leaders, SMC has upholded the processing and distributing activities to push up the companys total steel and cement consumption in 2014 by 20.9% yoy and 36.6% yoy respectively. This is such an encouraging volume growth rate not only for its higher than the industry average but also as the efforts of the company under unfavourable and unexpected business surroundings. The business operation activites of most companies generally has been less difficult but not yet overcoming all problems due to internal and external economic and political instability. In particular, the tightening regulation on overload transportation pushed up rates and transport costs doubled while companies could not adjust selling price and share costs immediately to customers. Moreover, tension and instability caused by domestic violences in large industrial parks also seriously affected business operations of many foreign firms, hence directly negatively impacting the operational activities of SMC s related business. The year 2014 also witnessed the consecutive down trend in steel material prices worldwide, including the strongest falls in iron ore and scrap steel, followed by price adjustments in billet, HRC, and CRC. High-cost inventories due to continuously dropping input costs coupled with adjusted low selling price caused low operational efficiency. Meanwhile, the sudden drop and deep decline in oil and gas prices in the last months of the year pushed steel prices down further; the currency devaluations of such large steel producers and exporters as Russia and India created fiercer price competition, being a huge challenge to not only SMC but also other domestic steel players. STRATEGIC ORIENTATION FOR NEXT YEAR PLAN S IMPLEMENTATION Continue following the longterm development strategy, which is trading, processing and distributing different types of steel products, targeting total consumption volume of 1 million tons of steel per year; however, quality and efficiency will be more focused than quantity for the year 2015, based on stable platform for solid and long-term growth. Continue increasing the proportion of flat steel products in total consumption structure, ensuring the efficiency and high ultilization rate of processing lines, expanding and enhancing value added of processed steel products. Secure financial activities to well explore bank loans capital resources and tightly controlling working capitals needed for business operation activities at the possible lowest costs, descending toward finishing bad debts. Increase forecasting activities, updating and anticipating market trend domestically and globally. Continue improving and increasing the quality of employees to not only being able to overcome difficulties but also having appropriate human resources development in accordance with the growth of the company. Maintain and promote corporate culture in the spirit of general interests, for the benefit of customers and for sustainable long term development target. Establish and maintain clear competitive advantages with other companies. 24 SMC INVESTMENT TRADING JSC 25

14 BOARD OF DIRECTORS REPORT (continued) Besides the overall difficulties and objective factors, regulation risk, price volatility risk, and other unforeseen risks, SMC has also encountered many challenges caused by itself business operation nature and other subjective factors. Therefore, SMC always has the flexibility in its corporate governance and business management, establishing the risk management strategy and internal control system to ensure the effective risk management activities to minimize the impact of unfavourable factors on the company s operational performance. RISK ASSESSMENT and RISK MANAGEMENT ACTIVITIES Financial risk management Operational risk management Going along with the economic recovery and the industry consumption growth, SMC is self-equipped and well invested in new processing systems to catch up with the general growth rhythm to ensure the efficient growth of the business. Steel price moved in a negative direction has directly affected the company s performance, yet the management always focuses on flexible sales policies and strategies to balance between import-export activities and inventories, establishing executive committees closely and actively research and update steel price and steel market domestically and globally in order to minimize possible related risks. Moreover, the processing activities at Coil Center plants are also tightly controlled, checked, and maintained regularly to ensure that machineries and equipments always running safely and efficiently, providing the best quality products as requested by customers. Investments in Coil Center systems with total 04 high value processing plants continuously within the past 03 years required a large capital demand for working capital and investment and operational activities, meanwhile the equity market was not favourable for new capital issuance, leading to a large mobilization from bank loans, pushing up the debt to equity ratio so high in the past few years. With a high proportion of bank loans, SMC is easily and strongly affected by credit policy and foreign exchange rate fluctuations. As a result, new plants, increasing sales volume and revenue, corresponding increasing inventories, and dropping selling prices all together pulled down operational efficiency as well as pushed up provision for bad debts. Accordingly, SMC has always maintained a high credit standing with most major banks and financial institutions to ensure loans with high credit limits and low interest rates. At the same time, the company also has flexible solutions in debt collections, reviews on each client s prestige in trading and payment to have appropriate and efficient sales policy, debt limit and debt collection plans. Human resources and Subsidiary risk management With the constantly expansion of the company over the past few years, the size of the unit personnel and members of SMC growing more and more associated with the risks of internal competition, inefficient performance of subsidiary, and the ability to hold key personnel. Actually, SMC with a solid corporate culture expressing the unity and solidarity of all members and employees toward a common goal, all departments and subsidiaries have good interactions and mutual supports to enhance productivity and operational efficiency, together for the development of the whole system. In addition, SMC has also frequently and appropriately implemented training systems, and competition and promotion policies to ensure the motivation for the efforts of all employees and affiliates. 26 SMC INVESTMENT TRADING JSC 27

15 SUPERVISORY BOARD S REPORT INVESTMENT ACTIVITIES SMC has completed the investment plan for the periods following the strategy of enhancing added values to processing steel products, thereby increasing the competitive advantages over competitors. The Coil Center system including 02 plants for CRC processing activities and 02 plants for HRC processing activities have always steadily operated with increasing output over years. The proportion of flat steel product in the company s total volume consumption has significantly increased from 23% in 2011 to 30.1% in 2012, to 34.8% in 2013, and reached 38.7% in The operational efficiency of the coil center system has considerably contributed to the company s market share increase and more professional operating activities, creating and enhancing confidence of foreign partners, being the foundation for more corporation expansion in the coming time. FINANCING ACTIVITIES SMC has guaranteed well cash flow management and enough capital needed for processing and operating activities. Total short and long term loans significantly increased over years are necessary for the growth of the company following long term development strategy FINANCIAL PERFORMANCES Mrs. HO THI NGOC TUYET Mr. NGUYEN KINH LUAN Mrs. TRAN THUY BICH HAN Item Unit Actual Target Actual (%) Target (%) Volume Tons 717, , , Revenue VND bn 9,650 10,000 10, Net profit VND bn Chief Board EVALUATION ON BOARD OF DIRECTOR S DIRECTION OF OPERATING ACTIVITIES The BoD has critically executed all contents of the 2014 AGM resolutions, timely guided the whole system to overcome difficulties and challenges, created opportunities to enhace operating efficiency, and built up the entire system becoming more and more stable. The activities of the Board are all in compliance with its functions, responsibilities, duties, and powers under the Corporation Law and the Charter of the Company. All meetings of the BoD have the attendance Member of the Board of Supervisor; discussions and votings are done transparently in accordance with regulations. EVALUATION ON CEO S OPERATING MANAGEMENT ACTIVITIES The CEO has fully and timely implemented the 2014 AGM resolutions and BoD directions in accordance with the functions, duties, and powers given in the Charter of the Company. Although constantly facing many difficulties over the past year, the CEO has put all efforts in business operating managing activities for the sustainability of the company. The Board of Management Member also minded on activities of the company s unions, maintained policies on performances related to social responsibility, community sharing and charity for the poors, and ensuring regulations and policies for employee s welfare, salary and bonus. CONSOLIDATED FINANCIAL STATEMENTS The Board of Supervisor agrees with the opinion of the DFK Auditing Co. on the company s consolidated financial statements ended 31 December The financial reports were reasonably and honestly presented, in accordance with the Vietnam accounting standards and other current law regulations. The year 2014 recorded a positive growth in consumption with total sales volume of 867,378 tons of steel products, increasing 16% and 21% from the target and the same period last year respectively. SMC has basically completed the consumption strategic objective of 800,000 tons for the 5-year period from 2011 to RECOMMENDATION Maintaining internal control activities for timely adjustments, supplementations, and issuances of new procedure according to the actual operating performance, providing more professional presentation to be the guidance to the whole system. Enhancing organizational structure, strengthening management and supervision activities to meet the growth rate of the company, the domestic and foreign markets. Continuing the implementation of information sharing ans corporating mechanism amongs departments and subsidiaries to improve the quality of management reports on management, investment, and financing activities in order to generate conditions for the Company to achieve 2015 target plans, ensuring the highest benefits to the enterprise and shareholders. Continuing the risk management tightening policy in business and financing activities, especially in the areas of credit loans, foreign exchange rate, and imported inventories. Promoting the integrated system, enhancing consistant brand management activities throughout the whole system, accompanying with community related activities and contributing to the overall development of the country. 28 SMC INVESTMENT TRADING JSC 29

16 Board of Management s Report 32 Introduction to Board of Management 32 Summary of Financial Statement in Assessments on key financial highlights in business operation and Performance

17 BOARD OF MANAGEMENT S REPORT BOARD OF MANAGEMENT BOARD OF MANAGEMENT OF SMC HAS FIVE MEMBERS INCLUDING THREE MEMBERS REPRESENTING IN THE BOARD OF DIRECTOR. Mr. NGUYEN NGOC ANH Mrs. NGUYEN THI NGOC LOAN Mr. VO HOANG VU Mr. NGUYEN VAN TIEN Mr. NGUYEN BINH TRONG CEO Deputy General Manager/ Sales Executive Deputy General Manager/ Production Executive Deputy General Manager/ HR and Administration Executive Deputy General Manager/ Finance Executive 32 SMC INVESTMENT TRADING JSC 33

18 BOARD OF MANAGEMENT S REPORT (continued) SUMMARY OF FINANCIAL STATEMENTS IN 2014 Unit INCOME STATEMENT Net Revenues VND bn 8, , ,911.4 Cost of Goods Sold VND bn 8, , ,588.5 Gross Profit VND bn Profit from operating activities VND bn Profit before tax VND bn Net profit after tax VND bn Earnings per share (EPS) VND 2, BALANCE SHEET Current Assets VND bn 1, , ,571.5 Cash and cash equivalents VND bn Account Receivables VND bn 1, ,026.1 Inventories VND bn , ,159.8 Non-current Assets VND bn Fixed Assets VND bn Total Assets VND bn 2, , ,103.1 Short-term debts VND bn , ,671.5 Account payables VND bn , Long-term debts VND bn Total Liabilities VND bn 1, , ,536.2 Owner s Equity VND bn Charter Capital VND bn Retained earnings VND bn KEY FINANCIAL RATIOS Net revenue growth rate % Net profit growth rate % Gross margin % Net margin % Return on Assets (ROA) % Return on Equity (ROE) % Debt/Equity ratio % OVERALL EVALUATION ON 2013 FINANCIAL PERFORMANCE Along with the consumption recovery of the whole industry, SMC continues to ultilize its competitive advantages to gain market share and sales volume in the domestic market. With total steel consumption in 2014 reached 867,378 tons, up 20.9% yoy, achieving 116% whole year target, and total cement and clinker consumption was 141,451 tons, gained 36.6% yoy, finishing 141.5% target, the net revenue of the whole system went up to VND 10,911 billion, increasing 13.1% from the previous year and reaching 109.1% whole year target, regardless of any steel price adverse movements. Focusing on investments and expansions of the Coil Center systems in the previous years have brought positive results and being a significant foundation for SMC to continuously increase total sales volume as well as net revenue recently. At the end of 2014, SMC has well equipped with total 10 flat steel cutting and splitting systems contained by 04 Coil Center plants with total processing capacity of 300,00 tons per year, including 02 plants specializing for hot rolled steels and 02 plants speciliazing for cold rolled steels. In 2014, the company also developed new processing steel products for small size galvanized steel sheets and small size hot rolled coils, contributing to the diversification of processing product portfolio, thereby increasing productivity and efficiency for the whole system. Thus, the total consumption of flat steel products in 2014 reached 335,360 tons, equivalent to a high proportion of 38.7% of total consumption of the whole system, gradually changing the features of SMC from a purely commercial trading company to a large capability steel processing enterprise. Gross profit margin although was slightly improved, other high costs including depreciation cost, selling and transportation costs, and provision expenses caused 2014 profit after tax dropping to VND 19.9 billion, equivalent to only 39.8% year plan, one more time omitted with shareholders on the ability to accomplish the assigned target profit Actual 2014 Actual 2014/2013 Target /target Steel consumption volume (tons) 717, , % 750, % Cement consumption volume (tons) 103, , % 100, % Net revenue (VND bn) 9, , % 10, % NPAT (VND bn) % % Dividend (Dong/share) % 1, % 34 SMC INVESTMENT TRADING JSC 35

19 BOARD OF MANAGEMENT S REPORT (continued) ASSESSMENTS ON KEY FINANCIAL HIGHLIGHTS IN 2014 BUSINESS OPERATION AND PERFORMANCE CONSUMPTION VOLUME AND NET REVENUE Unit Total steel consumption volume Ton 601, , ,378 Steel consumption volume growth % Total cement and clinker consumption volume Ton 84, , ,451 Cement and clinker consumption volume growth % Total steel and cement consumption volume Ton 686, ,925 1,008,829 Total consumption volume growth % Net revenue VND bn 8,964 9,651 10,911 Net revenue growth % STEEL CONSUMPTION BREAKDOWN BY KEY SEGMENT Construction steel Flat steel Section steel Others 62.4% 33.1% 2.1% 2.4% 2014 Construction steel Flat steel Section steel Others 58.5% 38.7% 1.8% 1.1% OPERATIONAL PROFITABILITY AND EFFICIENCY Unit Gross Profit VND bn Net profit after tax and minority VND bn Net profit growth rate % Gross margin % Financial expenses / Net revenue % Interest expenses / Net revenue % General & Selling expenses / Net revenue % Administration expenses / Net revenue % Net margin % Return on Assets (ROA) % Return on Equity (ROE) % With the significant contribution from flat steel product segment, gross margin of SMC in 2014 gained 0.2% to 3.0% from the earlier year. However, rising costs in most operational activities all together pulled down net profit after tax following the downward trend in previous years. In particular, financial expenses, especially expenses for bad debt provisions, continued to increase more than VND 30 billion in The selling expenses and administration expenses over net revenue ratios also increased by 0.2% each in 2014, mainly affected by (1) strong increases in transporation costs due to the overload tightening control policy, and (2) expenses for sales team and sales channels related to higher consumption. As so, ending 2014, SMC s net profit after tax and minority interest only achieved VND 19.9 billion, down significantly 23.5% from last year. Net margin remained at very low level of only 0.2%. Total steel sales volume increased nearly 21% yoy in 2014 across all steel segments, in which the flat steel section showed the most impressive growth rate of 41.2% yoy from the previous year, accounting for 38.7% the whole company s total steel sales volume, which increasing the proportion by 5.6% from a year before. Construction steel segment also went up positively by 13.4% yoy to total consumption of 507,136 tons, accounting for 58.5% total steel sales volume in In addition, cement and clinker segment also expressed good competencies with 36.6% volume growth rate from last year. As a result, total sales volume including steel and cement of the whole group in 2014 reached over 1 million tons, noticeably up by 23% from the year Ending 2014, thanks to encouraging increasing in sales volume, especially leading by the flat steel segment, the company s net revenue is guaranteed for the continuous uptrend at higher growth rate of 13.1% yoy than previous years, pushing net revenue up to VND 10,911.4 billion for the whole year SMC INVESTMENT TRADING JSC 37

20 BOARD OF MANAGEMENT S REPORT (continued) ASSET AND CAPITAL STRUCTURES Unit Assets Total Assets growth rate % Current asset growth rate % Non-current asset growth rate % Liabilities Total bank loans VND bn , ,790.0 Total liabilities growth rate % Current liabilities growth rate % Non-current liabilities growh rate % Total bank loans growth rate % Owners Equity OE growth rate % Debt / Equity % Interest Coverage Times Current ratio Times Quick ratio Times Total assets in 2014 increased by 33.7% compared with the year 2013, mainly driven by cash and short term financial investments increases in current assets while non-current assets was slightly down. Along with total assets, liabilities of the company also went up significantly mostly from short term bank loans. Ending 2014, total short and long term loans reached up to VND 2,790 billion, strongly up by 123.7% from last year ending, making the debt to equity ratio surged to nearly 5 times, doubling the debt and equity capital structure in previous years. The operations of new Coil Center systems at the end of 2012 and 2013 together with increases in import-export activities, inventories arranged for large projects distribution, and total sales volume required SMC having an extensive working capitals serving for operational activities. Meanwhile, the company s owners equity had no significant moves as charter capital remained unchanged and retained earnings were low. This explains why the debt to equity ratio of SMC increasingly high. The large and rapid debt capital rising over recent years brought a higher risk to the company for the debt and interest expense payment ability. However, financial ratios showing the company s interest coverage payment, quick ratio and current ratio in 2014 all are still good enough to ensure the safety of the company in credit financing activities. IMPORT AND EXPORT ACTIVITIES Unit target +/- 14/13 % target Total export volume Tons 83,360 86,231 85, % % Total import volume Tons 399, , , % 91.2 % Export / Total vol consumption % % 87.6 % Importation and exportation played an active role supporting business operation, processing and distributing activities of the whole system. Total importexport volume in 2014 was 450,327 tons of steel products, reducing 6.7% from the previous year as guidance. In which import volume went down by 8.8% from the year 2013 as the supplies for HR, PO, CR, EG, and GI products were more actively sourced domestically. Importation activities besides the role of guaranteeing enough goods and raw materials for processing and distributing activities, was also well regulated and controlled under unfavourable adverse trend in steel price, balancing among consumption importation and domestically supply sources in order to diminish possible negative impacts on the whole system s operational efficiency. In addition, exportation activities continued to be well maintained in key export markets including Cambodia and neighbouring countries, bringing total export volume in 2014 up by 3.4% from the previous year. TOTAL IMPORT- EXPORT VOLUME IN 2014 WAS 450,327 TONS OF STEEL PRODUCTS, REDUCING 6.7% FROM THE PREVIOUS YEAR AS GUIDANCE. IN ADDITION, EXPORTATION ACTIVITIES CONTINUED TO BE WELL MAINTAINED IN KEY EXPORT MARKETS INCLUDING CAMBODIA AND NEIGHBOURING COUNTRIES, BRINGING TOTAL EXPORT VOLUME IN 2014 UP BY 3.4% FROM THE PREVIOUS YEAR. 38 SMC INVESTMENT TRADING JSC 39

21 Sustainable Growth Report Organization and Human Resources 2015 Financial Target and Business Strategy Corporate Governance Associations and Joint-ventures

22 SUSTAINABLE GROWTH REPORT Sustainable Growth Strategy Corporate Governance Model Overview SUSTAINABLE GROWTH STRATEGY Sustainable growth is the growth that satisfies needs of the present without compromising the ability of future generations in order to meet their own needs Related Entities Participation Sustainable Growth Organization and Human Resouces for sustainable growth strategy After nearly 27 years of operation, SMC has set the goal of sustainable growth as the core focus of the entire organizational operation and development orientations. After 6 years of heavy investment in the steel processing system, SMC now has 04 Coil center plants and clearly follows the operational objectives and targets for long term sustainable development that basically changes the company s nature of business and ensures future growth of the entire SMC, as well as guarantees all three aspects of sustainable growth including economy social and environment. SMC s sustainable growth strategy s implementing method is expressed through corporate governance activities in order to make sure the entire SMC system operating closely and consistently CORPORATE GOVERNANCE MODEL WITHIN 26 YEARS OF OPERATION, SMC HAS ALWAYS FOCUSED ON CONSTRUCTION AND IMPLEMENTATION OF SUSTAINABLE GROWTH STRATEGY, IN WHICH FOCUSSING ON THE GENERAL MEETING OF SHAREHOLDERS SUCCESSFUL COMPLETION OF LONG - TERM SOLID GROWTH OBJECTIVE IN COMBINATION WITH ACCOMPLISHMENT OF OTHER SOCIAL AND ENVIROMENTAL OBJECTIVES, ENSURING HARMONY OF INTERESTS OF RELATED ENTITIES. BOARD OF DIRECTOR BOARD OF SUPERVISOR Internal board of supervisor SCOPE OF REPORT SMC has performed an incorporated report between annual report and sustainable growth report, in which the sustainable growth report is executed on the basis of guideline documents for sustainable growth report issued by the State Securities Commission and the IFC (International Finance Corporation) CEO Risk management econtrol board Import - export directing board HRC trading directing board The financial datas in the content of the economic objectives are extracted from the company s consolidated financial statements. Other social and environmental activities summarizing main performances are carried out at the parent company and at all the subsidiaries. The report reflects all operational results in FUNCTIONAL DIRECTOR CONTACT The report is prepared by SMC, all comments please contact to: SUBSIDIARIES, JOINT - VENTURE FUNCTIONAL GROUP Ms. Hoang Thi Kieu Secretary Tel: or to: kieuhoang@smc.vn Add: SMC Investment Trading JSC 396 Ung Van Khiem, Ward 25, Binh Thanh District, HCMC 100% OWNERSHIP >50% OWNERSHIP JOINT - VENTURE SMC STEEL CO., LTD SMC MECHANIC STEEL ONE MEMBER CO., LTD SMC HA NOI JOINT STOCK COMPANY SMC - SUMMIT JOINT - VENTURE SMC BINH DUONG ONE MEMBER CO., LTD SMC HIEP PHUOC ONE MEMBER CO., LTD SMC STEEL TRADING ONE MEMBER CO., LTD SMC TAN TAO ONE MEMBER CO., LTD 42 SMC INVESTMENT TRADING JSC 43

23 SUSTAINABLE GROWTH REPORT (continued) CORPORATE GOVERNANCE IN PARENT COMPANY (SMC) The corporate governance model of SMC s parent company includes: General assembly of shareholders, board of supervisor, board of director, CEO, and other directors. Their functions, duties, powers, work relations, and reporting and controlling mechanisms are detailed in the Charter of the Company and the governance regulations system promulgated first time in December Corporate Governance between parent company and affiliates The relationship between parent company (SMC) and all members is in compliance with regulations of Corporation Law, the Charter of the Company, and other related legislation regulations. By December 2014, SMC has total 6 affiliates with 100% equity ownership, 1 member with 80% ownership, and 1 joint-venture with 50% ownership. SMC completed its capital contributions and ownerships in accordance with the law and affiliate s charter regulations. To ensure solid management and efficient utilization of all resources, assets, and regulations of the entire system, to enhance the role of management and supervision of SMC in the affiliate system in performing assigned tasks and functions, SMC has issued regulations on system management for the first time in December 2011 and revised second time in December During 8 years of following the parent subsidiary corporate governance model, SMC has continuously reviewed and completed the governance model, clearly separated responsibilities among the parent company and subsidiaries in order to create initiatives and motivations for all members throughout all business operaion activities, while ensuring governance mechanism within the entire system to enhance the effectiveness of corporate governance, increase professionalism and productivity thereby improving the efficiency of business operation and performance for solid and sustainable growth. MEMBERS BOARD OF DIRECTOR Building long term development strategy, sustainable growth orientation for the whole system. CEO Directing execution and implementation of development strategy, building specific objectives for each financial period. Monitoring and evaluating results. DIRECTOR OF FUNTIONAL GROUP Transparency Accountability and With the orientation of sustainable growth, SMC always focuses on transparency aspect to help investors, suppliers, and customers clearly and fully understanding the company s specific business situation. As so, SMC always cares on the information disclosure activities on the operating performance, financial performance as well as other related issues generated during the business operations. Moreover, SMC always ensures the information disclosed in a transparent and clear way to fully provide all necessary and important information for investors, suppliers, and customers easily accessing and checking out. The company is also ready for performance explanation as requested at all time. All activities of SMC always comply with the provisions of law Establish and publish shortterm, medium-term, and longterm strategic objectives and performance, as well as evaluate the progress of implementation Carry out accounting and financing activities in accordance with accounting and auditing standards issued by authorized entities. Develop, implement, and maintain corporate culture, in which focusing on ethical issues in all aspect of business operations and activities. public media channels, and in accordance with the provisions of law, meanwhile interprete and explain all unclear or confused information to the users. Internal Control Board Control the processing information procedure: check the validity and completeness of the information and tightly control all documents and data books. Protect assets (control substances): periodically perform the comparison and checking between financial books and data with actual assets/ property. Analyze and review all the activities and performance by comparing actuall results with the sale period last year and with targets in order to detect any unusualy problem to be able to timely adjust strategic plans. Risk Management and Control Board Evaluate and analyze factors that might create risks to corporate operations, in which SMC has applied various risk management methods such as: forecasting system, data analysis, and regular check in order to estimate the magnitude of the risks that could affect the company s performance, consider the possibility of risks occurred and measures that can be used to deal with risks. Brand development and promotion SMC internal information channel: update all information related to products and services, and development orientations to all employees as they are direct traders, contactors and service/ product providers to customers this is the efficient message transmission channel of the company to customer. Information for public media and journals: maintains information publication activities on operations, products and services through television channels (HTV, VTV ), economic and financial magezines (Saigon Economic Times, Financial Investment, Connection Journal.), and most key economic sites (diendanhoptacdautu ) Information for partners, customers, shareholders and investors: throughout publications as annual report, capability profile, product catalogue and frequently and timely update related operational activities and results on the company website. Following targets, implementing and reporting Implementing specific tasks to accomplish target objectives Report business performance and results timely and transparently on various Maintain brand promotion scheme throughout 03 main channels: 44 SMC INVESTMENT TRADING JSC 45

24 SUSTAINABLE GROWTH REPORT (continued) Related participation entities Sustainable growth report is also based on the operations of the Company and other inside and outside related parties. Based on the consultation with investors, shareholders, employees, suppliers and customers, SMC identifies key aspects in this report as follows: Level of concern for related entities 2014 key reported indicators Community development Suppliers Work enviroment Products Investors Work safety Product: With the long term sustainable growth direction, from a purely steel commercial trading company (mainly distributing construction steels), SMC began to participate in the steel processing (coil center) field since 2006, and has become the corporation having the largest and most modern coil center system in Vietnam. Besides the expansion of flat steel processing activity, SMC has also frequently researched the local and global steel markets to take on new products for customer needs. Product portfolio that SMC currently supplies: Distributing Construction steel Wire rod Purlin Level of importance for the company Producer SMC Producing Flat steel Weld Mesh Product Development of new products for customers needs Processing HRC CRC Shareholders and investors Ensure safe and profitable investment Working safety Ensure safe working conditions and places in factories Working environment Green clean beautiful Community development Share achievements and help community Suppliers Supply qualified products to the market Shareholders and investors SMC is always active in investor relations activities and disclosure of all the information related to business operating performances on quarterly, semi-quarterly and yearly basis in a full, clear, and transparent manner. Other events and activities of the company are also updated frequently on the company website, on Hochiminh stock exchange website, and on most major economic and financial media reports and channels. In 2014, with the objective of deeper connection with shareholders for their understanding and updating on the companys operation, SMC has organized the 2014 annual general meeting with shareholders and investors at the company s factory in Phu My IZ BRVT, in which shareholders were able to visit 02 processing factories located there. In 2014, the company management board also frequently discussed and replied information to shareholders caring about the company performance through documents, , and telephone. As so, the management board of SMC would like to thanks to all contributions from shareholders to the operating management of the company SMC INVESTMENT TRADING JSC 47