DA NANG RUBBER JSC

(DRC – HSX)

UPDATE REPORT April 26, 2021

DRC – BUY DRC: GROWTH FROM EXPORT

 Export volume recovers and grows impressively, VCBS believes that this is the
INFORMATIONS best time for DRC to increase produced capacity to boost their export figure in US, Brazil...
(April 14, 2021) The growth rate of exports to the US Market structure of imported tires
70.0%
60.0%
Exchange HSX 50.0%
40.0%
Volume 118,792,605 30.0%
20.0%

10 days – average 1,585,410 10.0%

0.0%
-10.0%
Market price 26,300 -20.0%

Fair price 35,813 Vietnam Thailand Taiwan Mexico Thailand Japan Korea Canada China
Canada Indonesia Korea China Mexico Vietnam Taiwan Others

Equity Research Manager
Ngo Duy Tai
ndtai@vcbs.com.vn
+84-438 200 751 (Ext: 641)
The US-China trade war has forced a group of large tire producers to looking for countries
with competitive advantages in rubber, Thailand - Vietnam, to shift the supply chain. This
leads to the fact that the output of tires and tubes export in Thailand and Vietnam has grown
rapidly at 2 digits in recent years. Normally, when a market booms, US do have an
investigation of anti-dumping taxes and subsidies. Fortunately, the latest DOC investigation
has come to a very positive conclusion for the Vietnamese market and negative for other
competitive markets such as Thailand, Taiwan ... The rapid increase of DRC export figure
to the US and Brazil are the evidence for this trend.
Radial Factory – Radial Factory – Radial Factory – Radial Factory –
Phase 1: 300,000 Phase 2: 600,000 Phase 1: Over Phase 3:1,000,000
depreciation

2013 2017 2020 2021-2023

 The shortage of containers in T1 + T2 has a significant impact on the sales volume

VCBS’s Report System
www.vcbs.com.vn/vn/Services/AnalysisResearch
of most exporting countries. VCBS estimates that DRC's revenue and EBT in Q1.2021 will
reach VND 950 billion (+ 14% YoY) and VND 75 billion (+ 63% YoY), respectively.
 VCBS forecast for the whole year 2021 net sales of 4,148 billion VND (+ 13.7%
yoy) and EAT of 316.4 billion VND (+ 23.4% yoy), equivalent to EPS of 2,664 VND /
share based on 3 main factors: (1) Radial tire sales volume has grown well in export
markets; (2) Radial output is more than 600,000 tires / year - equivalent to 100% of
capacity; (3) Radian Plant Phase -1 is fully depreciated since Q4.2020.
 We reiterate our BUY recommendation for DRC with a target price of VND35,813
/ share.

VCBS Research Department Page | 0

 DRC – UPDATE REPORT

UPDATE REPORT

Raw Material DRC restructured inventories in Q4.2020 when rubber prices turned down sharply.

Profits from the stockpile of natural rubber at a low price level from Q2.2020 has brought DRC significant profits
and has been shown in the business results of the company in Q3 and Q4.

Since the middle of Q4.2020, rubber prices have suddenly plummeted. DRC financial statements for Q4 showed
that inventory value seems to be unchanged.

Therefore, it can be temporarily affirmed that DRC's profit from rubber speculation will be temporarily no
longer in the business results of the company in Q1.2021.

Global Rubber Price

210 140
Q1.20 Q2.20 Q3.20 Q4.20 Q1.21
+10,3% qoq +8,0% qoq -10,3% qoq
120
190

100
170

80
150
60

130
40

110
20

90 0
1-Jan 1-Apr 1-Jul 1-Oct 1-Jan

Latex60% SMR20 Days Of Inventories 2 per. Mov. Avg. (Days Of Inventories)

Source: ANRPC, VCBS

At the beginning of Q1.2021, world rubber prices increased rapidly before showing signs of cooling in the last days
of March. VCBS believes that rubber prices will continue to decrease slightly when Q2 & Q3 is the time to exploit
Rubber in the year after the rubber tree deciduous process.

Sales volume  Overview

increased strongly
+ Radial tires: Radial output increased sharply in Q4.2020 to 168,437 tires (+ 31.9% YoY; + 23.3% QoQ),
reaching 112.3% of design capacity. Radial gross margin increased to 16.9%, compared to 8% in Q3.2020 and
16.5% over the same period in 2019.

VCBS’s Research Department Page | 1

 DRC – UPDATE REPORT

RADIAL TIRES CONSUMPTION BIAS TIRES CONSUMPTION

20% 200,000 30%

16.5% 16.9% 26.5% 26.2%26.0%26.1%
140,000 25.2%
16% 23.6%23.3% 25%
21.9% 22.1%
12.0% 21.5%
125,000 11.2% 20.4%20.6%
12%
20%
8.0%
110,000 6.8%
5.7% 8%
4.6% 4.2% 150,000 15%
3.5%
95,000
4%
1.2%
10%
80,000 0%
-3.3%

65,000 -4% 5%

50,000 -8% 100,000 0%

Q1.18Q2.18Q3.18Q4.18Q1.19Q2.19Q3.19Q4.19Q1.20Q2.20Q3.20Q4.20 Q1.18Q2.18Q3.18Q4.18Q1.19Q2.19Q3.19Q4.19Q1.20Q2.20Q3.20Q4.20

Radial Radial's margin Bias Bias's margin

Source: DRC, VCBS

+ Bias tires: Consumption volume increased by 15% yoy to 206,691 tires, of which main products were heavy
truck tires unexpectedly growing 44,495 (25% yoy), while light truck tires continued to grow positively reaching
150,391 tires (+ 14% yoy). Gross profit margin remained stable at 26% compared to 26.5% in the same period last
year, and 26.2% compared to the preceding quarter.

Local Market + Radial tires: Although total radial tire sales volume has grown strongly. However, domestic radial tire sales
volume has not grown correspondingly. Domestic Radial sales in Q4.2020 reached 32,522 tires + 5.7% YoY.

This shows that the domestic market is subject to a lot of competition from big brand FDI enterprises from the
world. DRC's new Radial tire products have not received much confidence from domestic customers. With the
selling price 5 - 10% higher than famous products from competitors. VCBS believes that DRC's domestic business
output cannot grow is understandable.

+ Bias tires: Domestic Bias production tends to recover in the short term. However, in the long term, Bias tire
consumption is still in a downward trend. Radial tires are durable and friendly environmental that’s why it is
replacing Bias to become a primary product.

Domestic Bias tire sales volume reached 127,152 (-6.6% YoY). VCBS expects domestic Bias tire sales volume will
increase slightly in 1H.2021 thanks to increased demand for trucks and pickup trucks for construction. The growth
of public investment spending from Q2.2020 will be a premise for tire replacement demand to increase from
Q1.2021.

Export Market + Radial Tires: Export figures increased sharply to 135,915 tires (+ 84% YoY; + 81% QoQ) - accounting for 81%
of DRC's production, up 5% over the same period in 2019.

Increased output comes from the Brazilian and US markets. The Brazilian market has long been the export market
for DRC's traditional Radial tires. Brazil is one of three countries (China, India, Brazil) that plays an important role
in the growth of demand for Radial tires for trucks. Taking advantage of the impact of the epidemic, DRC has
increased its market share in the DRC market by increasing output and increasing discounts for distributors.

VCBS’s Research Department Page | 2

 DRC – UPDATE REPORT

For the US market, this can be seen as a new market for DRC, with great prospects thanks to good selling prices
and the overall industry trend as analyzed by VCBS at the beginning of the article.

EXPORT Q4.20 Q4.19 Q3.20 yoy qoq

Radial 135,915 96,929 104,542 40% 30%
% Export Radial 81% 76% 77%
Bias 79,539 43,130 43,829 84% 23%
% Export Bias 38% 24% 26%

Source: DRC, VCBS

+ Bias Tires: Bias tire export volume continues to grow. DRC is looking to export to markets where the demand
for Bias is still high. VCBS assesses this as a reasonable strategy for the business when the domestic Bias business
output is decreasing due to the trend of radialization.

Positive cash flow Thanks to the high sales growth and the surplus from low-priced inventories, the free cash flow of the business in
growth creates a the last 2 quarters perform well. Cash and short-term financial investments also increased as well.
premise for
investment in As VCBS assessment this is an important time for DRC to increase production capacity as quickly as possible to
machinery and increase market share in the US market.
equipment
Cash + Debt Free CashFlow
200 0
-5
0
-10
-200 -15
-20
-400 -25
-30
-600
-35
-800 -40
-45
-1,000

-1,200

CFO FCFE

Source: VCBS

With the available warehouse space at Radial - Phase 1 project, DRC can easily increase capacity by importing and
assembling machines at the old factory. Radial tire sales volume has reached over 103% of design capacity in
Q4.2020. In 2021, DRC plans to invest only in machinery and equipment to expand capacity to 1 million tires /
year.

Total investment value for capacity expansion is estimated at VND 500 billion. DRC has now paid off all long-term
loans. VCBS believes that DRC can easily finance this project with a 200-300 billion loan without affecting the
company's dividend policy.

VCBS’s Research Department Page | 3

 DRC – UPDATE REPORT

VALUATION

Assumption VCBS forecasts DRC's business results in 2021 based on the assumption that the company will run 100% of the
designed capacity of Radial NM - Phase 2 - equivalent to 600,000 tires / year thanks to positive growth in export
volume.

Implementation 2020 Dự phóng 2021 %

Radial 508,197 609,836 +20%
Biên gộp 11.1% 10.1%
SL bias 672,173 705,784 +4.9%
Biên gộp 25.1% 24.8%
2021 2022 2023 2024 2025
EBITAT (NOPAT) 355,821 384,545 417,729 475,759 560,931
Unlevered CFO (unlevered CFO=CFO + Int*(1-t)) 452,886 448,835 473,547 512,372 567,755
Less: Capital expenditures (41,483) (283,708) (270,389) (18,669) (21,569)
Less: Purchases of intangible assets (2,000) (2,000) (2,000) (2,000) (2,000)
FCFF (before adjustment for timing factor) 409,403 163,127 201,157 491,703 544,186
FCFF at End of Fiscal Year 432,937 172,503 212,720 519,968 575,467
Discount number of years 1.38 2.38 3.38 4.38 5.38
Present value of Unlevered FCF 387,149 137,973 152,149 332,561 329,139

Source: VCBS
VCBS assumes that DRC will complete its capacity expansion investment in 2021 - 2023, increasing capacity to 1
million tires / day.
VCBS believes that DRC will continue to benefit from the shift of tire importers from the US. Currently, Vietnam
is still receiving many foreign investment registrations for the production of Radian tire products. When these
factories come into operation, it will lead to the risk that the US market will impose tax on products from Vietnam.
However, given the current market share of US tires and tubes, the risk of tax imposition in the short term is not too
high.

Business Result 2020E 2021F 2022F 2023F

Revenue 3,646,641 4,148,301 4,728,471 5,374,617

- COGs 3,047,253 3,540,283 4,044,238 4,591,955

Gross profit 599,388 608,018 684,233 782,662

EBIT 370,376 405,251 453,038 519,806

EBT 320,528 395,511 424,695 469,283

EAT 256,317 316,409 339,756 375,427

EPS VND 2,158 VND 2,664 VND 2,860 VND 3,160

Source: VCBS
VCBS forecast for the whole year 2021 net sales of 4,148 billion VND (+ 13.7% yoy) and EAT of 316.4 billion

VCBS’s Research Department Page | 4

 DRC – UPDATE REPORT

VND (+ 23.4% yoy), equivalent to EPS of 2,664 VND / share based on 3 main factors: (1) Radial tire sales
volume has grown well in export markets; (2) Radial output is more than 600,000 tires / year - equivalent to
100% of capacity; (3) Radian Plant Phase -1 is fully depreciated since Q4.2020.

Recommendation: Combining both relative comparison methods and discounted cash flow method, we believe that the fair value of
BUY DRC is VND35,813 per share.

Price (VND/share) Proportion

P/E 37,290 50%
DCF 34,337 50%
DRC’s Fair Value 35,813

We reiterate our BUY recommendation for DRC with a target price of VND35,813 / share.

VCBS’s Research Department Page | 5

 DRC – UPDATE REPORT

DISCLAIMER
This report is designed to provide updated information on the results of companies’ business as well as analysis of factors affecting the
prospects of the business. The report and / or any judgments and information in the report are by no means construed as investment
advices, buy or sell offers, or investment proposals of any financial products, securities of related companies analyzed in the report.
Therefore, this report should be best considered as a reference only. VCBS does not bear any responsibility for unwanted results when
the information in the report is used.All the information stated in the report has been collected and assessed as carefully as possible,
owever VCBS does not guarantee the accuracy of the information and has no obligation to update the information after the report was
released.
All opinions, judgments, estimations and projections in this report represent independent views of the analyst at the date of publication
only. Therefore, VCBS and/or departments of VCBS may have securities transactions inconsistent with recommendations in this
report.
This report may not be copied, reproduced, published or redistributed by any person for any purpose without the written permission of
anauthorized representative of VCBS. Please cite sources when quoting. Copyright 2010 Vietcombank Securities Company. All rights
reserved

INFORMATION
Tran Minh Hoang Ngo Duy Tai

Head of Research Equity Research Manager

tmhoang@vcbs.com.vn ndtai@vcbs.com.vn

VCBS’s Research Department Page | 6