COTEC CONSTRUCTION JOINT STOCK COMPANY (CTD) Hoang Cong Tuan Email: Tuan.hoangcong@tls.vn Ticker: CTD Exchange: HSX Analyst s opinion: HOLD Targert price: 29,738 VND STOCK STATISTICS Price as of 12/12/2011: VND 28,000 Sector:Construction industry Business Model: Civil construction Listed since 20/1/2010 Outstanding Shares 31,750,000 Floating Shares 18,625,000 Market Cap (billion VND) 718 52 Week High (VND) 69,600 52 Week Low (VND) 20,400 10 Day Average Volume 36,165 % Price Change 1 Month 28.3% % Price Change 3 month -23.2% % Price Change 6 month -36.3% % Price Change 12 month -59.7% % Foreign Ownership 26.6% % Foreign Ownership Limit 49% Source: TLS Price fluctuation of CTD and Vnindex 20% 0% -20% -40% -60% -80% Source: TLS 200 150 100 50 Volume CTD Vnindex FINANCIAL HIGHLIGHTS (billion VND) 2010 2011E 2012E Assets 2,017.33 2,324.18 2,312.80 Equity 1,275.35 1,472.40 1,596.99 Gross revenue 3303.78 3763.00 3167.00 EBIT 227.03 189.39 161.79 EAT 240.31 178.79 158.09 EPS (VND) 7815.07 5631.31 4979.29 PB (x) 1.21 0.56 0.60 PE (x) 6.40 4.62 6.02 Sales growth 68.36% 13.90% -15.84% EPS growth -4.40% -16.58% -14.57% Gross margin 8.54% 7.77% 8.09% Net margin 7.27% 4.75% 4.99% ROA 11.91% 7.69% 6.84% ROE 18.84% 12.14% 9.90% Source: CTD & TLS 0 We expect that net income of CTD would likely decline in 2011 and 2012 because the frozen real estate market would negatively influence construction business. EPS of CTD in 2011 is forcasted at VND 5,640 and its book value per share would be VND 46,435. With average PE, PB of some similar companies which are operating in construction industry of 6.04 and 0.55 respectively. We think that the target price of CTD should be VND 29,738 per share. According to our rating system (please see the last page), we recommend investors to hold this stock. COMPANY PROFILE CTD has the chartered capital of VND 317.5 billion, retained earnings of VND 219 billion and shareholder s equity of VND 1,316 billion. The main business lines of CTD include civil construction, designation consultant and construction project management. In 2010, the Company reported VND 240 billion net income, of which the construction business is the key activities accounting for 99.8% net income and revenue. CTD is a sound company which has a high development speed, stable development strategy and dominant position in construction industry. Currently, the Company is expanding its business activities in the whole country of Vietnam. NEW DEVELOPMENT On 8/9/2011, CTD signed a construction contract of Grand Ho Tram Ho Tram Strip project at Xuyen Moc District, Vung Tau Province with Asian Coast Development Group as investor. Total value of package in phase one is around USD 155 million or equivalents to VND 3,200 billion. Phase one is expected to be completed in January 2013. Scale and value of the project reach record high level compared to other contracts the company has signed previously. CTD was officially selected as the main contractor of the project Dielac milk plant, owned by Vietnam Milky Joint Stock Company (VNM). The construction contract was signed on 27/ 9/ 2011 with a total package of VND 300 billion, 12-month construction period. INVESTMENT HIGHLIGHT In recent years, CTD has been ranked as one of the leading construction companies in Vietnam thanks to its expertise and experience in construction industry. The Company mainly undertakes construction of civil works, industrials, urban areas and resorts. Currently, constructions of CTD appear in almost main provinces and cities of Vietnam such as Hochiminh city, Dong Nai, Binh Duong, Vung Tau, Ha Noi, Da Nang etc CTD was assigned to be general contractor of Grand Ho Tram Strip Complex in Xuyen Moc District, Vung Tau Province. Investor of this project is Asian Coast Development Group. Total value of construction package of this project is too big that promises high revenue and net income to the Company in coming years. VALUATION With the assumption that CTD s revenue in 2011 would mainly come from construction businesses, we project that revenue of CTD in 2011 should be VND 3,768 billion and net income of CTD should be VND 178.79 billion. With average PE, PB of some similar companies operating in construction industry at around 6.04 and 0.55 respectively, our target price for CTD in 2011 is VND 29,738. We recommend investors to hold this stock. RISKS The real estate market is currently frozen and gloomy therefore construction demand in apartment buildings, urban area, resort and hotel strongly declines. This phenomenon negatively influences to the core business of the Company. 1 TLS Vietnam: Thang Long Tower,
FINANCIAL SUMMARY Income statement (VND) 2010 2011E 2012E 2013E Balance sheet 2010 2011E 2012E 2013E Net sales 3303.78 3763.00 3167.00 3825.00 Current Assets Cost of sales -3021.57-3470.44-2910.70-3516.06 Cash and cash equivalents 289.87 455.60 576.45 665.67 Gross profit 282.21 292.56 256.30 308.94 Fianancial investment 5.99 5.99 5.99 5.99 Gross profit margin 0.09 0.08 0.08 0.08 Accounts receivable 513.48 649.50 563.99 628.77 Other operating income 22.28 12.50 2.00 2.00 Inventory 440.70 475.40 422.65 510.55 Selling expenses 0.00 0.00 0.00 0.00 Prepaid expenses, other CA 34.23 37.63 31.67 38.25 General administration expenses -77.03-105.36-95.01-114.75 Total current assets 1,284.27 1,624.13 1,600.74 1,849.23 Other operating expenses -0.43-10.30-1.50-1.50 Property and equipment EBIT 227.03 189.39 161.79 194.69 At cost 421.75 421.75 471.75 571.75 Less accumulated Investment income 85.09 50.00 50.00 50.00 depreciation (62.31) (95.31) (133.31) (181.31) Net interest 0.71-1.00-1.00-1.00 Net property and equipment 359.44 326.44 338.44 390.44 Net financial items 85.80 49.00 49.00 49.00 Other long - term assets 373.62 373.62 373.62 373.62 P&L from joint venture 0.00 0.00 0.00 0.00 Total Assets 2,017.33 2,324.18 2,312.80 2,613.29 Earnings before tax 312.83 238.39 210.79 243.69 Income tax -70.39-59.60-52.70-60.92 Current Liabilities Profit after taxes 240.31 178.79 158.09 182.77 Financial debts 0.00 0.00 0.00 0.00 Minority interest 0.00 0.00 0.00 0.00 Trade payables 706.28 808.19 677.83 818.81 Profit for parent company 240.31 178.79 158.09 182.77 Other liabilities 29.73 37.63 38.00 38.25 Earnings per share (.VND) 7815 5640 4979 5756 Total Current Liabilities 736.01 845.82 715.84 857.06 Dividend rate 15% 10% 15% 15% Long-term debt 5.97 5.97 (0.03) (0.03) Stockholders' equity 1,275.35 1,472.40 1,596.99 1,756.26 Cash flow statement 2010 2011E 2012E 2013E Common stock 307.50 317.50 317.50 317.50 Net profit 240.31 178.79 158.09 182.77 Development fund 200.91 230.91 260.91 300.91 Adjustments for: Retained earnings 280.18 427.22 521.82 641.08 Depreciation and amortisation 28.12 33.00 38.00 48.00 Budget sources&other funds 486.76 496.76 496.76 496.76 Change in inventories -172.92-34.70 52.75-87.90 Minority interest 0.00 0.00 0.00 0.00 Change in trade receivables -195.13-139.42 91.48-71.36 Total liabilities and equity 2,017.33 2,324.18 2,312.80 2,613.29 Change in trade payables 64.75 109.81-129.98 141.22 Growth and Margin (%) 2010 2011E 2012E 2013E Cash flow from operations -34.87 147.48 210.35 212.73 Sales Growth 68.36% 13.90% -15.84% 20.78% EBIT Growth -4.40% -16.58% -14.57% 20.34% Change in tangible fixed assets -288.37 0.00-50.00-100.00 Net Income Growth 5.36% -25.60% -11.58% 15.61% Change in intangible fixed assets 164.31 0.00 0.00 0.00 EPS Growth -36.79% -27.94% -11.58% 15.61% Change in long term investments 139.40 0.00 0.00 0.00 Gross Margin 8.54% 7.77% 8.09% 8.08% Cashflow from investments 15.34 0.00-50.00-100.00 EBIT Margin -4.40% -16.58% -14.57% 20.34% Equity issued 101.77 10.00 0.00 0.00 ROA 11.91% 7.69% 6.84% 6.99% Change in other funds 10.24 40.00 30.00 40.00 ROE 18.84% 12.14% 9.90% 10.41% Change in financial debts 0.00 0.00 0.00 0.00 Inventory days 53 50 53 53 Change in long term liabilities 3.01 0.00-6.00 0.00 Receivable days 57 63 65 60 Dividends to shareholders -174.64-31.75-63.50-63.50 Payable days 85 85 85 85 Cash flow from financing -59.62 18.25-39.50-23.50 Net debt/equity 58.18% 57.85% 44.82% 48.80% Net cash flow -79.15 165.73 120.85 89.23 Ratio Opening cash 369.03 289.87 455.60 576.45 Valuation Closing cash 289.87 455.60 576.45 665.67 PB 1.21 0.56 0.60 0.72 PE 6.40 4.62 6.02 6.95 Projected Free Cash Flow Dividend Yield 3.00% 4.00% 5.00% 4.00% Profit after Taxes 240.31 178.79 158.09 182.77 Add back depreciation 28.12 33.00 38.00 48.00 (-) increase in CA, except cash -368.05-174.13 144.23-159.26 (+) increase in CL 64.75 109.81-129.98 141.22 (-) increase in PEaC -211.16 0.00-50.00-100.00 Source: Thang Long Securities Free Cash Flow -246.03 147.48 160.35 112.73 Notes:CA = current assets;cl = current liabilities;peac = Property and Equipment at Cost 2 TLS Vietnam: Thang Long Tower,
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E a Urbanization rate in Vietnam 45% INVESTMENT HIGHLIGHT 1.1 Construction industry outlook 18.50 % 20.50 % 23.50 % 25.80 % 33% 1.1.1 Construction industry outlook in short term Construction industry would likely encounter many difficulties in Quarter IV of 2011 and first half of 2012 because of some crucial following factors: 1989 1997 1999 2004 2010 2020E Source: General Stastistics Office Gloomy real estate market: many real estate projects could be delayed because of highly increasing prices of material, narrowed credit for real estate industry according to the Government s policy. Many apartment buildings, office towers and commercial centers have been encountering many difficulties in selling their products because supply has exceeded demand. Above reasons make many investors delay to start new project, therefore demand in construction industry declines. 1400 1200 1000 800 600 400 200 0 GDP per capita 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Infrastructure investment from Government budget and Government bond was cut: since the beginning of 2011, the Government announced solution package to control inflation, the core solution is to cut public investment. Infrastructure investment would be strongly cut by not starting new projects, delaying prolonged projects and cutting inefficient projects. Construction material prices strongly volatiles: at the beginning of 2011, steel price increased by 10%, brick price increased by 15%, cement price increased by 5%, labor expense and interest rate strongly increased. These difficulties made it hard for many construction companies. Electricity price, coal and gasoline price would likely increase next year according to new policy of the Government, putting new pressure on construction material next year. Source: IMF 1.1.2 Construction industry outlook in long term 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Population growth rate In long term, construction industry has a bright prospect as demand for construction works in Vietnam including infrastructure works, civil works and industrials are still very large. In coming ten years, the demand for infrastructure investment in Vietnam is very large. According to the Government, capital needed for infrastructure investment would capture 10-11% of GDP from now to 2020. In detail, Vietnam would needs around USD 70-80 billion for infrastructure investment in the next five years. The Vietnamese Government really focuses on investment in building infrastructure in long term. This policy would create a source of potential demand for construction industry in coming years. Source: General Stastistics Office Vietnam is a developing country with large population. Annual population growth rate is relatively high. The demand for housing, infrastructure is forecasted to continue at high level in coming years. According to Vietnamese real estate market analysis of UN-HABITAT, there are currently 70% Vietnamese households lacking suitable living facilities and Vietnam lacks about 20 millions apartments. In the future, construction of urban areas, housing areas would be accelerated to meet potential demand of people, creating an additional source of demand for construction industry in coming years. 1.2 Long term prospect of CTD 1.2.1 Experienced player and dominant position in construction industry 3 TLS Vietnam: Thang Long Tower,
Typical constructions of CTD Constructions Contracts signed in 2009 Unit: billion VNĐ Bids value KenTon Tower 474 Cargo Warehouse 450 Marble Moutain Beach Resort 1144 Contracts signed in 2010 City Garden apartment complex 866 Indochina Plaza 441 Pullman Sai Gon Center 1200 Contracts signed in 2011 Thăng Long apartment complex 598 Madarin Gadern 450 Everich II 469 Ho Tram Strip 3200 Source: CTD s statement The main constructions constructed by CTD are in the residential and tourist field that have relatively big value. These works belong to investors that are non-state owned enterprises. In recent years, CTD has been ranked as one of the leading companies operating in construction industry thanks to its experience and expertise. The Company mainly undertakes construction of civil works, industrials, urban areas and resorts. The Company gains experience and expertise from many resorts, apartment buildings, urban areas, industrial parks which have high technical and artistic requirement such as Nam Hai resort, Marble mountain Beach Resort, Ocean Villas Da Nang and Ho Tram Sanctuary Besides, CTD has enough equipment, skilled workers, talent engineers and financial strength to construct big scale projects which strictly require quality and progress. CTD was ranked as the number one private company in construction industry in four years 2007, 2008, 2009 and 2010 by Vietnamnet and Vietnam report. In the period of 2008 2011, Vietnamese economy encountered many obstacles for companies operating in construction industry. However, business performance of CTD still grew and the Company still remained its brand name in the market. 1.2.2 Revenue and net income potential from construction of Ho Tram Strip project With huge investment of USD 4.2 billion, building on an area of 160 ha, Ho Tram Strip is classified as high-end resort which have largest scale in Vietnam. CTD deployed this project since 11/2010 and contract signing ceremony was organized on 8/9/2011 between Asian Coast Development Group and CTD assigned to be general contractor (CTD is in charge to construct main items and manage whole project). Total value of package in phase one is around USD 155 million equivalents to VND 3,200 billion. Phase one is expected to be completed in January 2013. This project plays an important role for the development of CTD in coming years thanks to its scale and package value reaching high record level compared to other contract the Company has signed previously. This project would ensure stable source of work for the Company in many coming years. The project marks a new stage of development of the Company because so far most of large scale projects, 100% investment capital of foreign investors, assigned foreign contractors as general contractor, Vietnamese construction companies only serve as sub contractors. INVESTMENT RISK 2.1 Economic risk Vietnam's economy is in a difficult and unstable period. This significantly impacts the construction industry in general and business performance of the CTD in particular. A series of construction projects has been delayed or extended due to lacking of funds or due to declining demand. This has a direct impact to the source of the work of the units operating in the construction industry. 2.2 Typical risk of construction industry 4 TLS Vietnam: Thang Long Tower,
Construction industry is always impacted by economic cycle. In fact, demand for construction industry strictly depends on economic growth. If economic growth speed declines business performance of CTD will strongly decline due to demand for construction of residential houses, office buildings, resorts and commercial markets declines. Currently, construction industry encounters many difficulties due to many adverse elements such as high interest rate, narrowed credit, and fiercer competition in the same time. Fluctuations of raw material price (steel, cement ) and fuel price (electricity, gasoline ) may affect construction activities of the Company because these expenses capture a large proportion of the cost of construction. Construction industry has a low entry barrier and a high number of companies therefore competitive pressure is always high in this industry. Besides, economic integration of Vietnam with the world brings many international construction contractors to Vietnam. They have strong financial potential, high technology creating high competitive pressure on local construction companies. Account receivable of CTD for years 700 600 500 400 300 200 100 0 Source: TLS projection and summary Increasing accounts receivable make risk of delaying payment by investors increase due to financial deficit of investors. 2.3 Business risk of CTD Construction projects usually last one to two years, therefore no one can measure all changes in such a long time. CTD often encounters risk of delayed payment because investors financial strength is not healthy. This affects the financing source of projects and reduces business effectiveness of CTD. Gloomy real estate market makes real estate companies delay their projects. These companies are the real estate companies which based on payment of customers to finance their projects. Ignorance of CTD on being subcontractor creates opportunity for its main competitor (HBC) to lead in commercial projects. Even though we believe that CTD may still award contracts thanks to close relationships with local real estate companies but we worry about the profitability growth of CTD in the future because almost new projects constructed by CTD are residential and touristic projects which have low profitability. We have not seen the change of CTD on developing relationship with foreign real estate companies, considering subcontract and signing more construction contracts on construction sector which have higher profitability. VALUATION We expect that revenue of CTD in coming years would mainly come from construction activity. Contracts signed of CTD would bring stable revenue to the Company, especially Ho Tram Strip project. Revenue from leasing its office would likely remain stable thanks to its occupancy of 90%. Revenue from leasing equipment is expected to be stable in coming years. We think that CTD would encounter some difficulties in 2012 due to frozen real estate market which may causes demand in construction sector significantly decline. However, with dominant position and its already signed contracts, revenue of CTD would likely decrease in 2012 and increase again in 2013. 3.1 Projected revenue in 2011, 2012 and 2013 5 TLS Vietnam: Thang Long Tower,
We forecast that revenue of CTD in 2011, 2012 and 2013 would mainly come from contracts signed in 2010 and 2011. We don t expect CTD could sign many new construction contracts in 2012 and 2013 due to gloomy real estate market. We project revenue from construction activity of CTD based on the value of signed contracts, construction progress and revenue recognition of each contract. We note that real construction progress of projects could be different from progress stated by investors; therefore revenue recognition of CTD could be different from our projection. We forecast that Vietnamese economy would encounter many difficulties and the real estate market would remain gloomy in 2012, therefore investors would likely delay their projects. This is significant risk which negatively affects revenue of CTD. Projected revenue of CTD in 2011, 2012 and 2013 Unit: billion VND Construction Estimated revenue Construction value 2011 2012 2013 Constructions signed in 2009 KenTon Tower 474 150 100 0 Hoan Cau Hotel 206 0 0 0 Dao Xanh Hotel 148 0 0 0 Nha Trang Phaza 237 47 0 0 Carina Plaza apartment area 355 0 0 0 River Park Phu My Hung 349 0 0 0 Cargo Warehouse 450 0 0 0 Marble Moutain Beach Resort 1144 576 0 0 River Park Residence 350 223 0 0 Carina Plaza 236 20 Nam A Bank Building 88 20 Ocean Villas Da Nang 341 0 0 0 Constructions signed in 2010 City Garden apartment area 866 770 0 0 Diamond Island 185 120 0 0 Thanh Yen Building 122 98 0 0 Ken Ton Apartment Building 117 20 0 0 Everich II (Sample + basement) 199 190 0 0 Tricon Tower 233 140 93 0 Ecopark apartment area 171 71 100 0 Indochina Plaza 441 69 0 0 Unis School 111 78 0 0 Pullman Sai Gon Center 1200 0 400 600 Constructions signed in 2011 Dielac milky plant 300 40 260 0 Thăng Long apartment area 598 60 300 238 Nestle Route 344 147 197 0 Erowindow Tower 165 65 100 0 6 TLS Vietnam: Thang Long Tower,
Madarin Gadern 450 45 150 150 President Palace 229 29 100 100 Lim Tower 135 135 0 0 Everich II 469 69 30 200 Ho Tram Strip 3200 366 1000 1200 Other construction 180 0 0 Constructions signed in 2012 1200 300 700 Constructions signed in 2013 1500 600 Revenue from leasing office 20 22 22 Revenue from leasing equiqment 15 15 15 Total 3728 3130 3788 3.4 Cost of goods sold in 2011 We expect that COGS margin of CTD in 2011 would be significantly higher than that in 2010 because construction material price, labor expense both increased. With portion of revenue from construction activity, the cost of goods sold margin would possible increase by 92.3% from 91.5%. With portion of revenue from leasing office, the cost of goods sold margin would be likely unchanged at level of 80%. With portion of revenue from leasing equipment, the cost of goods sold margin would be likely unchanged at level of 90%. In detail, it is estimated that total COGS margin of CTD in 2011 should be around level of 92.2%. 3.5 Cost of goods sold in 2012 and 2013 We expect that COGS margin of CTD in 2012 and 2013 would be a bit lower than those in 2011 because the Company could increase construction price in some new contracts meanwhile construction material price and labor expense is expected to be stable. In detail, we project that total COGS margin of CTD in 2012 and 2013 should be around level of 91.9%. 3.6 Income tax As CTD s business activities simply includes construction business, the tax policies of government for real estate business impose the tax rate of 25%. We project that income tax imposed to CTD in 2011, 2012 and 2013 would remain unchanged at 25%. 3.7 Other factors in 2011 Based on our research, gross profit margin in construction business of CTD should be about 7.7% in 2011. Therefore this sector would create a gross profit of VND 287.06 billion. We assume that gross profit margin in leasing office should be about 20%. Thus, this sector would create a gross profit of VND 4 billion. Gross profit margin in leasing equipment should be about 10%. Thus this sector would create a gross profit of VND 1.5 billion. We project that the gross profit of CTD should be around VND 292.56 billion. 7 TLS Vietnam: Thang Long Tower,
We assume that administrative expense would slightly increase in 2011 and captures 2.8% of sales because the Company expands its operation, increases salary for administrative staff. The financial investment income of CTD in 2011 would mainly base on the dividends, interest from cash deposit and other financial activities. Based on the above assumptions, total net income of CTD in 2011 should be VND 178.9 billion. 3.8 Other factors in 2012 and 2013 We expect that, gross profit margin in construction business of CTD should be about 8% in 2012 and 2013. Therefore this sector would create a gross profit of VND 250.4 billion in 2012 and VND 303.4 billion in 2013. We assume that gross profit margin in leasing office and in leasing equipment should be about 20% and 10%. Thus, these sectors would create gross profit of VND 4 billion and VND 1.5 billion in 2012 and 2013. Thus this sector would create a gross profit of VND 1.5 billion. We project that the gross profit of CTD should be around VND 256.3 billion and VND 356.94 billion in 2012 and 2013. We assume that administrative expense would slightly increase in 2012 and 2013, capturing 3% of sales because the Company expands its operation, increases salary for administrative staff. We project that revenue from financial activities of the Company in 2012 and 2013 should be VND 50 billion, equivalent to those in 2011.The financial investment income of CTD in 2012 and 2013 would mainly base on the dividends, interest from cash deposit and other financial activities. Based on the above assumptions, total net income of CTD in 2012 and 2013 should be VND 158 billion and VND 182.77 billion. 3.10 CTD valuation 3.10.1 Stock valuation according to PE comparison method Ticker P/E EPS Average price in 2011 x VND VND LIG 4.17 2,400 10,000 PHH 6.57 700 4,600 PVV 7.87 750 5,900 PXI 6.18 1,100 6,800 SD9 7.17 1,200 8,600 SD6 4.11 1,800 7,400 ICG 4.55 2,200 10,000 CTD 3.85 5,640 21,700 HBC 3.90 5,000 19,500 We apply PE comparison method for the CTD s stock valuation with current average PE at 8.25 of some typical companies operating in construction industry. After carefully analyzing CTD projects deployed in recent years, we expect that net income of CTD in 8 TLS Vietnam: Thang Long Tower,
2011 will be about VND 178.79 billion and EPS will be about VND 5,640 in 2011. Therefore, we estimate that CTD s target price will be VND 34,091 by the end of 2011. Stock valuation according to PE comparison method Unit: VND Industrial average PE EPS Price PE 6.04 5,640 34,091 Price 34,091 3.10.2 Stock valuation according to PB comparison method Ticker P/B Book value per share Average price in 2011 x VND VND LIG 0.68 14,745 10,000 PHH 0.34 13,400 4,600 PVV 0.54 10,900 5,900 PXI 0.61 11,200 6,800 SD9 0.51 16,746 8,600 SD6 0.51 14,400 7,400 HBC 0.52 37,300 19,500 ICG 0.73 13,650 10,000 CTD 0.47 46,435 21,700 We apply PB comparison method for the CTD s stock valuation with current average PB at 0.55 of some typical similar companies operating construction industry. It is estimated that book value per share of CTD will be about VND 46,435 in 2011. Therefore, CTD s target price will be VND 25,384 by the end of 2011. Stock valuation according to PB comparison method Unit: VND Industrial average PB BVPS Price PB 0.55 46,435 25,384 Price 25,384 We combine two above valuation methods with weight of each method of 50%. We project that target price of CTD in 2011 should be VND 29,738 per share. FINANCIAL ANALYSIS 4.1 Financial ratio analysis 4.1.1 Revenue 9 TLS Vietnam: Thang Long Tower,
4500 4000 3500 3000 2500 2000 1500 1000 500 0 Revenue of CTD for years 80% 60% 40% 20% 0% -20% -40% Revenue of CTD had an impressive growth in the period of 2008-2011 due to the growth of the construction industry and business capacity of the Company. In 2012, revenue of the Company would likely dropp significantly due to economic instability and gloomy real estate market that makes construction demand decrease. We expect that revenue of the CTD would increase again in 2013 when Vietnamese economy back to stability. In general, revenue of the Company shows healthy growth that reflects the development in business operation and capacity of the company. We forecast revenue of the Company will continue to remain high in coming years based on its dominant position in construction industry of the company and constructions the company has signed previously. Revenue Revenue Growth Revenue of CTD Unit: Billion VND, % 2008 2009 2010 2011E 2012E 2013E Revenue 1823.18 1962.32 3303.78 3763.00 3167.00 3825.00 Growth rate 7.63% 68.36% 13.90% -15.84% 20.78% Common size 100.00% 107.63% 181.21% 206.40% 173.71% 209.80% 93% 92% 91% 90% 89% 88% 87% 86% 85% 84% 83% Cost of goods sold margin Since 2010, revenue of the Company dramatically increased because the Company was assigned to be general contractor for many residential real estate projects and resorts. We expect that the Company will continue to be successful with this model thanks to its experience in constructing big projects. 4.1.2 Cost of goods sold Cost of goods sold margin of CTD has been increasing in recent years. The main reason derives from construction material price, labor expense strongly increased in 2010 and 2011 meanwhile bids price for construction of CTD was difficult to increase due to fiercer competition in construction industry. We project that this unfavorable condition will continue in 2012 and 2013 that makes cost of goods sold margin of the Company growing over the years. This phenomenon reduces the business performance of the Company. Specifically, cost of goods sold margin from 90.85% of revenue in 2009 would increase to 91.92% of revenue in 2013. Cost of goods sold of CTD for year Unit: billion VND, % 2008 2009 2010E 2011E 2012E 2013E Cost of goods sold 1656.42 1691.64 3021.57 3470.44 2910.70 3516.06 COGS margin 90.85% 86.21% 91.46% 92.23% 91.91% 91.92% Common size 100.0% 102.13% 182.42% 209.51% 175.72% 212.3% 4.1.3 Financial expense 10 TLS Vietnam: Thang Long Tower,
One of the advantages of CTD compared with other companies in the same industry is very low financial expense capturing a small proportion compared with total revenue. Companies often focus on constructing constructions of private investors therefore the Company takes less payment risk than other companies in the same industry. Therefore, we always have enough cash and not use much debt in its business operation. Financial expense of CTD for years Financial expense of CTD for years 25.00 20.00 15.00 10.00 5.00 0.00 Financial expense Pecentage of revenue 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Unit: billion VND, % 2008 2009 2010 2011E 2012E 2013E Financial expense 4.12 20.77 0.71 1.00 1.00 1.00 Percentage of revenue 0.23% 1.06% 0.02% 0.03% 0.03% 0.03% We project that financial expense of the Company in coming years would likely remain at low level as the position of the company in construction industry is very solid. 4.1.4 Selling expenses and administration expenses Pecentage of revenue of selling expense and administration expense over the years 3.0% 2.0% 1.0% 0.0% Selling expense Administration expense Selling expenses and administration expenses were relatively low, stable and accounted for a small percentage of revenue in recent years. Thanks to dominant position in construction industry, good capacity and close relationship with investors, the Company does not have to pay selling expense for investors. Selling expense of the Company account for zero percent of revenue. Selling expense and administration expense of CTD for years Unit: % 2008 2009 2010 2011E 2012E 2013E Selling expense 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Administration expense 1.9% 1.9% 2.3% 2.8% 3.0% 3.0% Administration expense of the Company tends to increase because the Company has been expanding its operations rapidly in recent years. In addition, the Company has sharply increased salaries for management staff also makes administration expense sharply increase. We project that administration expense of CTD would be likely at high level because the Company continue expanding its operations. 4.1.5 Gross profit and net income Gross profit of the company would likely decline in 2012 due to the real estate market makes quiet down makes demand in construction decrease. We forecast the Company's gross profit will increase again in 2013 when the real estate market flourishes help to demand in construction will increase. In general, growth in gross profit is lower than the revenue growth that reflects business performance of the Company is weakening due to construction cost increases during the construction bids price is not corresponding increase. 11 TLS Vietnam: Thang Long Tower,
2008 2009 2010E 2011E 2012E 2013E a Gross profit and net income of CTD for years Gross profit of CTD for years Unit: billion VND, % 350 300 250 200 150 100 50 0 Gross profit 80% 60% 40% 20% 0% -20% Growth rate 2008 2009 2010 2011E 2012E 2013E Gross profit 166.76 270.68 282.21 292.56 256.30 308.94 Growth rate 62.32% 4.26% 3.67% -12.39% 20.54% Common size 100.00% 162.32% 169.23% 175.44% 153.69% 185.26% 2008 2009 2010 2011E 2012E 2013E Net income 144.18 228.09 240.31 178.79 158.09 182.76 Growth rate 58.21% 5.36% -25.60% -11.58% 15.61% Common size 100.00% 158.21% 166.68% 124.01% 109.65% 126.77% 300 200 100 0 Net income of CTD 80% 60% 40% 20% 0% -20% -40% Net income of CTD has the same direction of fluctuation as gross profit. However, some expenses of CTD would likely increase in coming years. Therefore net income growth rate should be lower gross income growth rate. 4.1.6 Profitability Profit margin of the CTD is only at medium level compared with other companies in the same industry and tends to decrease. The main reason is the company to pursue a model being general contractor for big constructions so that profit margin is not high. Besides construction costs increased much in 2010 and 2011 while the bid price did not corresponding increase that made profit margin decline. Net income Growth rate Profitability of CTD for years Unit: % 25% 20% 15% 10% 5% 0% ROA, ROE of CTD for years ROA ROE 2008 2009 2010 2011E 2012E 2013E Gross profit margin 9.15% 13.79% 8.54% 7.77% 8.09% 8.08% Net profit margin 7.91% 11.62% 7.27% 4.75% 4.99% 4.78% ROA 12.47% 12.87% 11.91% 7.76% 6.89% 7.03% ROE 16.09% 20.78% 18.84% 12.30% 10.01% 10.50% The Company's ROA is at medium level compared to other companies in the same industry and tends to decrease in coming years because the Company expands its operation making asset size increase while sales and profits do not corresponding increase. The company's ROE would likely decline dramatically in the coming years because the company strongly increased its charter capital in 2009 to mobilize funds for development investment. Overall, the company tried to expand its operations, investment for development but profitability growth did not corespondingly increase with the scale. This phenomenon derives from the ability of management and effective cost management of intermediate expenses of CTD have not catched up with the new scale of the Company. 4.1.7 Capital structure 12 TLS Vietnam: Thang Long Tower,
The capital structure of the CTD is relatively healthy with low debt ratio and relatively stable for years. The company has a dominant position in the industry therefore it is able to choose construction projects of prestigious investors with healthy financial potential so that the Company takes less payment risk and has rich cash source. We believe that the debt ratio of the company in 2012 and 2013 will be reduced because the Company has enough cash to finance its daily business. Capital structure of CTD for years Unit: % Liability to total asset Liability to shareholders equity Long term debt to shareholders equity Current liability to shareholders equity 2008 2009 2010 2011E 2012E 2013E 22.48% 38.05% 36.78% 36.95% 31.18% 32.98% 29.01% 61.42% 58.18% 58.61% 45.30% 49.22% 0.00% 0.27% 0.47% 0.41% 0.00% 0.00% 29.01% 61.15% 57.71% 58.20% 45.31% 49.22% 4.1.8 Liquidity Liquidity of the CTD, expressed by the coefficients of liquidity, is so far pretty good and at a safe level. Cash ratio is although smaller than one but not too low. Two current ratio and quick ratio is quite high and are much higher than the safe level. However both current ratio and quick ratio are relatively far from each other that reflects the Company has a large inventory. We note that the inventory of the CTD is the construction works that are in progress and its liquidity is low so that high current ratio of the Company does not guarantee the Company's liquidity. However, we believe that this situation is not worrisome because of the short-term debt obligations of the Company are mainly accounts payable of materials, construction services suppliers. Liquidity of CTD for years Unit: time 2008 2009 2010 2011E 2012E 2013E Current ratio 2.92 1.73 1.74 1.90 2.21 2.14 Quick ratio 2.34 1.33 1.15 1.34 1.62 1.54 Cash ratio 1.69 0.80 0.40 0.52 0.79 0.77 4.1.9 DUPONT analysis Analysis of the components of ROE ratio of CTD shows that declined net profit margin of the Company is the main reason making ROE decrease sharply. Total asset turnover of CTD is at good level but tends to decrease due to no corresponding increase in revenue compared with an increase in scale. DUPONT analysis of CTD 13 TLS Vietnam: Thang Long Tower,
Unit: %, time 2008 2009 2010 2011E 2012E 2013E Net profit margin 7.91% 11.62% 7.27% 4.75% 4.99% 4.78% Financial leverage 1.29 1.61 1.58 1.59 1.45 1.49 Total asset turnover 1.58 1.11 1.64 1.63 1.38 1.47 ROE 16.09% 20.78% 18.84% 12.30% 10.01% 10.50% Financial leverage ratio is kept low compared to other companies in the same industry and stable that reflects a sustainable development orientation of the Company. BUSINESS MODEL 5.1 Strategic orientation Strategic orientation of the CTD is to become a leading construction company in Vietnam, to specialize in constructing civil engineering and industrial works and to become the general contractor for construction with large-scale works. CTD specifies construction business as the core business capturing a high proportion of the whole structure of revenue and profit of the Company. The company does not invest spread into real estate projects like many other companies in the same industry. This strategy helps CTD to focus resources aiming to occupy high positions in the industry and limit the risks. In coming time, CTD oriented a model being general contractor for execution of the works of residence and the resorts which have great value to create long-term source of jobs and ensure stable growth for the company. The company continues to expand its operation in key economic areas of the country such as the Hochiminh City, Hanoi, Danang, Nha Trang... Besides investing in core business areas, CTD also considers the cooperation with foreign partners and larger potential units for construction of infrastructure such as roads, bridges and constructions of water supply and drainage. This is an area with great demand in society today; CTD will not ignore this opportunity when the chance is available. 5.2 Current business model 5.2.1 Business model Business activities of the CTD take construction activities as a core for development. Unlike other companies in the industry often distributed resources to many different activities; the business model of the CTD demonstrates a very high concentration in its core activities. The model of CTD differentiate its self from other companies in the same industry, especially on the quality of projects constructed by the Company including specification and construction progress. 14 TLS Vietnam: Thang Long Tower,
Position in construction industry Dominant position in construction industry Competitive advantages in market offer Quality and progress guaranteed. Competitive advantages in resource High quality human resource Modern, equiqment. Experience in constructing residential projects. Source: TLS Besides, CTD has always paid attention to build close relationships with the companies operating in real estate industry to ensure source of project. Specifically, the CTD has developed close ties with the famous real estate companies such as Phat Dat, Nam Bay Bay, Indochina Land. Recently, the company is also developing partnerships with new real estate companies in Hanoi such as: Minh Vietnam (MVI), VIHAJICO and Thuy Duong (TD Group). TYPICAL CONSTRUCTIONS 6.1 MGM Ho Tram Ho Tram Strip MGM Grand Ho Tram is the first area of the complex of Ho Tram Strip resort worth USD 4.2 billion on the beautiful coast along the Sea, developed by ACDL Company and is expected to be the largest tourist complex of Vietnam. ACDL is the owner and responsible for the finances for this project. MGM Resorts International Company is going to assist, manage brand development works and operate this five stars resort after it complete. MGM Grand Ho Tram, expected to be the most luxurious resort in Vietnam, is going to be designed with a series of recreational activities, regional, upscale restaurants, luxury spas and other innovative playground equipment one. CTD was selected as general contractor for the project (CTD responsible for constructing the main work items and operating the entire project); the total value of phase 1 is USD 155 million (equivalent to 3,200 billion) would be completed in early 2013. The project promises to bring source of revenue and profit to CTD in coming years. It can be said that business performance of the CTD in coming years depends greatly on this project. Area: Ho Tram seashore Vung Tau Category: Resort complex Total area: 160 ha Bid total value: USD 155 million Progress: One block is being built Despite the instability of the global economy has caused many challenges for projects not only in Vietnam but also in the whole world in recent years, but almost no effect on the 15 TLS Vietnam: Thang Long Tower,
MGM Ho Tram Ho Tram Strip Ho Tram Strip project, the project has been implemented as planned. Most likely the project will be completed on schedule and available for operation in 2013. 6.2 Pullman Sai Gon Center Project Pullman Hotel Saigon Centre has a total investment of approximately USD 60 million, was built on land formerly Metropole hotel and gas station of Comeco Company. By design, the hotel will include three basements and 24 floors with about 300 rooms and service categories such as restaurants, conference, health club and games with prizes... As planned, the hotel Pullman Saigon Centre is going to be completed in 2013, and Accor Corporation Group is going to manage the hotel. http://www.asiancoastdevelopment.com/ Pullman Sai Gon Center Location: Tran Hung Dao Street, District 1, Hochiminh City Total investment capital: USD 60 million Construction period: 2011 2013 Progress: technical infrastructure is being built 6.3 City Garden apartment complex This project is located in a convenient transportation position, 51 Ngo Tat To Street, Binh Thanh District, Hochiminh City. Garden City includes six towers that have wavy shape, from 21 to 26 floors in height, with 927 apartments, built on campus of 2.3 hectares, of which 23% of the area for apartment buildings, 77 % of areas for landscape design. Garden City is like a private heaven hidden between the busy and bustling of Hochiminh City. Location: Binh Duong New City Total bids value : VND 885 billion Construction period: 2010 2011 Progress: main construction works completed Source: http://www.coteccons.vn/ INVESTMENT PROSPECT OF CTD 7.1 SWOT analysis Based on comprehensive analysis about all aspects of CTD, we think that CTD has some strengths and weaknesses, opportunities and threats as follows: Strength: 1. CTD is one of the leading companies in construction industry with highly appreciated construction capacity, good reputation and experience in construction of large-scale projects. 2. Healthy financial status, qualified technical staff and workers Opportunities: 1. In long term, construction demand of residential works in Vietnam is great when Vietnam's economy Weakness: 1. The Company has not joined business field as subcontractor for foreign contractors in large-scale projects of foreign investors. This field is considered to have high profit margin and less risk. Threats: 1. Competitive pressure in the construction industry is very high due to low barriers to entry. 16 TLS Vietnam: Thang Long Tower,
develops steadily that promote urbanization and improve living standards of people. Competition pressure makes profit margin low. 2. Frozen real estate market causes demand in construction of residential and tourist construction down in 2012. 7.2 General evaluation of CTD CTD is a sound company which has a proper development strategy. The core business of CTD is sound, based on unsakeble competitive advantages and dominant position in construction industry. Even though CTD is operating a fierce competition due to low entry barrier of construction industry but business performance growth of the Company has been impressive in recent years. Thanks to its focus strategy, the Company could reduce its business risk, build its brand name and establishe its dominant position in construction industry. We highly appreciate expertise and experience of the Company in constructing residential constructions, resorts reflected by many large and famous projects constructed constructed by the Company in this sector. We project that business performance of the Company in 2012 would not be positive compared to that in 2011 due to unstable economy. However, competitive advantages and dominant position of CTD would help the Company overcome difficulties better than other companies in the same industry. 17 TLS Vietnam: Thang Long Tower,
ANALYST DECLARATION Conflicts of interest might exist as ThangLong Securities ( TLS ) and its clients might have stakes in the target firm through investments and/or advisory services in the past, at present or in the future. PRODUCT This product covers the latest developments on the target firm. Details on the firm can be obtained by contacting our analyst(s) or the sales persons named above. We thank clients for comments and feedbacks on our product. TLS publishes this product, but all errors if any are the authors. Analyst s opinion: BUY expected to gain more than 15% compared to the price on report issue date; SELL expected to drop more than 15% compared to the price on report issue date; HOLD expected to change between -15% to 15% compared to the price on report issue date. TLS RESEARCH TEAM We offer economic and equity research. The Economic Research Team offers periodic reports on macroeconomics, monetary policies and fixed income markets. The Equity Research Team offers reports on listed firms, private equities and sector reviews. TLS Research Team also offers regular market commentaries - The Investor Daily. THANGLONG SECURITIES (TLS) Established in 2000, TLS was one of the first securities firms operating in Vietnam. TLS provides a full range of services including brokerage, research and investment advisory, investment banking and capital markets underwriting. With over 400 employees located throughout an expansive network of offices in Hanoi, Ho Chi Minh City, Hai Phong, Da Nang and other strategic locations, TLS is one of the best known securities firms in Vietnam. Our client base consists of retail and institutional investors, financial institutions and corporations. As a member of the MB Group, including MB Bank, MB Land, MB Asset Management and MB Capital, TLS is able to leverage substantial human, financial and technological resources to provide its clients with tailored products and services that few securities firms in Vietnam can match. Since its establishment, TLS has become widely regarded throughout Vietnam as: A leading brokerage firm ranked No.1 in terms of brokerage market share since 2009; A renowned research firm with a team of experienced analysts that provides market-leading research products and commentaries on equity markets and the economy; and A trusted provider of investment banking services for corporate clients. OFFICES Headquarter: Level 5, 6, 7, Thang Long Tower, 98 Nguy Nhu Kon Tum, Thanh Xuan District, Hanoi. Phone: +84 4 37262600. HCMC Office: Level 2, Petro Vietnam Tower, 1-5 Le Duan, District 1, Ho Chi Minh City. Phone: +84 8 39106411. Research Office: Level 7, Thang Long Tower, 98 Nguy Nhu Kon Tum, Thanh Xuan District, Hanoi. Phone: +84 4 44568668. E: research@tls.vn DISCLAIMER The views expressed in this report are those of the authors and not necessarily related, by any sense, to those of TLS. The expressions of opinions in this report are subject to changes without notice. Authors have based this document on information from sources they believe to be reliable but which they have not independently verified. Any recommendations contained in this report are intended for general/public investors to whom it is distributed. This report is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe for any investment. This report may not be further distributed in whole or in part for any purpose. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Copyrights. TLS 2000-2010, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying recording, or otherwise, without the prior written permission of TLS. 18 TLS Vietnam: Thang Long Tower,