VIETNAM’S STEEL SECTOR

Strike while the iron is hot

March 2018 Viet Capital Research

1
Vietnam is transforming into a global hot spot for steel consumption

Vietnam is becoming a galvanized steel heavyweight in the region

Listed players expected to withstand direct impact of US tariffs

Domestic industry to continue to enjoy protection from imports

Deeper vertical integration provides more independency

Though abnormally high margins should not be expected but

industry profitability is getting more sustainable

We like the leaders and the good stories: top picks are HPG and NKG

2
 Vietnam is transforming into
a global hot spot forv steel consumption

3
 Strong growth in steel consumption with lots of headroom for more

1,200 Apparent steel use per capita

1,000 (kilograms of finished steel products)
800
600
400 329 279
207 252 236
200
0

25%
Apparent steel use per capita
20% CAGR 2009 - 2016

15%
10%
10% 8%
5%
5% 3% 3%

0%

-5%

Source: World Steel Association (WSA)

4
 Residential, industrial and infrastructure construction driving growth
Construction steel selling volumes are in sync with the real estate cycle
Galvanized steel selling volumes are benefiting from steady industrialization and urbanization

CAGR 2009 – 2013: CAGR 2013 – 2017:

• Construction steel: 3% • Construction steel: 19%
80 • Galvanized steel: 31% • Galvanized steel: 19%

70

60

50

40

30

20

10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F

Total condonium transaction ('000 units - LHS)

Total construction steel selling volume (million tons - RHS)
Source: CBRE, Vietnam Steel Association (VSA), VCSC
Galvanized steel domestic consumption (million tons - RHS)

5
 Apartment construction activity boosting long steel demand

Condo transaction volume reached record high in

2015 - 2018
80
+
70 18 – 30 month time lag for construction between
73
sales to delivery
60
  Solid demand for construction materials 57 58
56
50  to last through 2017 – 2020
40

30
29
20 24 26
18
10 12
10
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F

Total condonium transaction ('000 units - LHS)

Source: CBRE

6
 Apartment handover schedule a leading indicator of construction backlog

 Solid demand for construction materials

 to last through 2017 – 2020

35 35
33
31

14

2014 2015 2016 2017 2018F 2019F 2020F

Mid-range to high-end apartment handover in HCMC (‘000 units)

Source: CBRE

7
 Increasing urbanization is driving growth in domestic galvanized steel sales

Housing area per person and urban population

should both enjoy healthy growth to 2020
25.0

23.4
22.8 40.0
22.2

21.1

19.6
19.1 35.1
34.6
18.3 33.9
17.5 33.1
32.2
16.7 31.6 31.8

30.5
29.7

2009 2010 2011 2012 2013 2014 2015 2016 2017E 2020E

Housing area per person (sqm/capita - LHS) Urban population rate (% - RHS)

Source: Ministry of Construction, GSO, VCSC estimate

8
Vietnam is becoming a galvanized steel
heavyweight in the region

9
 Vietnam is becoming the largest galvanized steel exporter in the region

Domestic galvanized steel producers, including leaders HSG and NKG, export
around 40%-50% of their total production, mostly to ASEAN markets

2.5 45% 46% 46% 50%

42% 45%
2.0 40%
33%
31% 35%
1.5 30%

20% 25%
1.0 20%
15%
0.5 10%
5%
0.0 0%
2011 2012 2013 2014 2015 2016 2017

Exported galvanized steel (million tons - LHS)

Domestic galvanized steel selling volume from local producers (million tons - LHS)
Export share of total consumption (% - RHS)

Source: VSA, VCSC estimate

10
 Vietnam’s exports are mostly finished steel products
Vietnam exported high volumes of flat steel, mostly
finished products, i.e., galvanized/color-coated flat steel, not HRC

Exports of flat steel products

(million tons, including all kinds: HRC, CRC, finished flat steel)

50 1.4
Thousands

45
1.2
40
35 1.0
30 0.8
25
20 0.6

15 0.4
10
0.2
5
0 0.0

2014 2015 2016

2014 2015 2016
Source: WSA, VSA, VCSC estimate

11
Listed players expected to withstand
direct impact of US tariffs

12
 Listed steel producers in Vietnam have moderate sales exposure to the US

“Trump said he will impose tariffs of 25% on imported steel and

10% on aluminum for ‘a long period of time’”

Low impact: Moderate impact:

Construction steel producer Galvanized steel producers

HPG HSG NKG

Domestic Total export Domestic Export to the US Export to other regions

Source: VSA, VCSC estimate

13
 ASEAN is the major market for Vietnamese exported steel

“Trump said he will impose tariffs of 25% on imported steel and

10% on aluminum for ‘a long period of time’”

US share of Vietnam’s total steel exports dropped from 27% in 2016 to 11% in 2017

Top 10 destinations of Vietnamese exported steel in volume (2017)

Taiwan Australia
The US 2% 2%
11%
India Pakistan
4% 1%
Japan
Korea 1%
Rest of world 6%
ASEAN 30% UAE
59% Others
0%
5%
The EU
9%

Source: VSA, VCSC compilation

14
 Vietnam’s Government can extend trade protection measures if necessary

“Trump said he will impose tariffs of 25% on imported steel and

10% on aluminum for “a long period of time”

Fear that excess Chinese supply will flood the market due to new US tariffs is likely
unwarranted as China is not a major exporter to the US

Top 10 sources of US imported steel volume (2017)

South Korea
10%
Brazil
13%

Mexico
Rest of World Top 10 sources Canada 9%
22% 78% 16%
Russia
India 9%
2%
Germany
3% Taiwan Japan Turkey
4% 5% 7%

Source: The US International Trade Administration, VCSC compilation

15
Domestic industry to continue to enjoy
protection from imports

16
 Prolonged oversupply led China to dump cheap steel on global markets

Total Chinese steel exports have grown in line with additional surplus

Chinese domestic demand improved and steel production capacity fell as Chinese
authorities aggressively closed inefficient and polluting steel mills

China’s steel exports grew in line

with the additional surplus, which flooded global steel markets
140

120 13.8% 13.2%

100 11.1%
9.6%
80
7.3% 7.3%
60 6.3% 6.6%

40 4.0%

20

0
2009 2010 2011 2012 2013 2014 2015 2016 6M 2017
Export (million tons - LHS) Surplus (million tons - LHS) Export share of production (% - RHS)

Source: The US International Trade Administration, VCSC compilation

17
 Vietnam has been a major market for China’s steel exports

China’s top five export markets by China’s top five export markets by
product in 2016 product in 9M 2017

Vietnam South Korea

South Korea Vietnam
Flat steel Pakistan Philippines
(HRC, CRC, Philippines Pakistan
galvanized) India Thailand

South Korea South Korea

Indonesia Philippines
Long steel Philippines Indonesia
Thailand Hong Kong
(construction)
Vietnam Vietnam

India South Korea

South Korea India
Pipe and Kuwait Kuwait
tube UAE Philippines
Egypt
mn tons Australia mn tons

0 2 4 6 8 0 1 2 3 4

Source: The US International Trade Administration, VCSC compilation

18
 Aggressive protectionism for domestic industry will likely continue if needed
The Government’s active trade protection measures should shield local producers from imports
CONSTRUCTION STEEL GALVANIZED STEEL PRE-PAINTED GALVANIZED STEEL
MOIT’s No. 2968/QD-BCT issued No. 1105/QD-BC issued on No. 1931/QD-BCT issued
decision on July 18, 2016 March 30, 2017 on May 31, 2017
Type Anti-dumping Anti-dumping Quotas and out-of-quota tariff
Status Four-year final Five-year final Three-year final
Galvanized steel sheet Pre-painted galvanized steel sheet
Products Steel billet and long steel
(35 codes) (7 codes)
Import
All countries China and South Korea All countries
origin
Steel billet Long steel
March 22, 2016 to Total
14.2% Out-of-quota
March 22, 2016 to August 1, 2016 imported
23.3% rate
March 21, 2017 August 2, 2016 to quota
15.4%
March 21, 2017
March 22, 2017
March 22, 2017 to Jun 15, 2017 to
to 21.3% 13.9% 380,679 19%
March 21, 2018 Jun 14, 2018
March 21, 2018 3.17% - 38.34% depending
Rate
March 22, 2018 on specific producer
March 22, 2018 to Jun 15, 2018 to
to 19.3% 12.4% 418,747 19%
March 21, 2019 Jun 14, 2019
March 21, 2019
March 22, 2019
March 22, 2019 to Jun 15, 2019 to
to 17.3% 10.9% 460,622 19%
March 21, 2020 Jun 14, 2020
March 21, 2020
March 22, 2020 March 22, 2020 Jun 15, 2020
0.0% 0.0% 0 0
onward onward onward
August 2, 2016 to April 14, 2017 to Jun 15, 2017 to
Valid period
March 22, 2020 April 13, 2022 Jun 15, 2020

Source: Ministry of Industry and Trade (MOIT), VCSC compilation

19
 Anti-dumping tariffs had immediate positive impact for construction steel

Anti-dumping tariffs for construction steel

came into effect
1.2

1.0

0.8

0.6

0.4

0.2

0.0
Oct-15

Oct-16

Oct-17
Apr-15

Jul-15

Apr-16

Jul-16

Apr-17

Jul-17
Nov-15
Dec-15

Nov-16
Dec-16

Sep-17

Nov-17
Dec-17
Jan-15

May-15

May-16

May-17
Feb-15
Mar-15

Jun-15

Aug-15
Sep-15

Jan-16

Mar-16

Jun-16

Aug-16
Sep-16

Jan-17

Mar-17

Jun-17

Aug-17
Feb-16

Feb-17
Construction steel sales volume Quarterly average sales volume

Source: MOIT, VSA

20
 Anti-dumping tariffs had slower but also positive impact for galvanized steel

Pre-painted galvanized
Galvanized steel anti-dumping steel import quota
tariffs came into effect came into effect
(5-year final) (3-year final)
400 Galvanized steel anti-dumping
tariffs came into effect
350 (120-day provisional)
300

250

200

150

100

50

0
Oct-15

Oct-16
Nov-16

Oct-17
Apr-15
May-15

Jul-15
Aug-15

Apr-16
May-16

Jul-16

Apr-17
May-17

Jul-17
Sep-15

Nov-15
Dec-15

Aug-16
Sep-16

Dec-16

Aug-17
Sep-17

Nov-17
Dec-17
Jan-15
Feb-15
Mar-15

Jun-15

Jan-16
Feb-16
Mar-16

Jun-16

Jan-17
Feb-17
Mar-17

Jun-17
Galvanized steel sales volume (thousand tons) Quarterly average sales volume (thousand tons)

Source: MOIT, VSA

21
Deeper vertical integration provides
more independence for
domestic steel producers

22
 Deeper vertical integration making Vietnamese producers more independent

Most of Vietnam’s imported flat steel are semi-finished Imported HRC & CRC are used as input
products (HRC & CRC) that have limited local capacity materials in galvanized steel industry

14,000 ‘000 tons 14,000 ‘000 tons

12,000 12,000

10,000 10,000

8,000 8,000

6,000 6,000

4,000 4,000

2,000 2,000

- -
HRC & CRC Galvanized & Coated 2013 2014 2015 2016

Imported HRC & CRC

2013 2014 2015 2016 Total finished flat steel products

Source: VSA, VCSC compilation

23
 Hot rolled coil is currently imported

HPG is the
Long steel
largest
rolling line Long steel
local
producer
with an Most common galvanized
integrated steel production process
mill (BOF)

Hot rolled coil Cold rolled coil Galvanzed steel

100% imported from (HRC) (CRC) sheet
China, India, Japan,
South Korea

Source: VCSC compilation

24
 HPG is expanding into hot rolled coil production

HPG’s
Long steel
current
rolling line Long steel
production
process

HPG’s
expansion
over
2018 - 2022
Hot rolled coil Cold rolled coil Galvanzed steel
(HRC) (CRC) sheet

Source: VCSC compilation

25
 HSG and NKG are also expanding cold rolled coil capacity

Long steel
rolling line Long steel

HSG and NKG has been

increasing CRC capacity

Hot rolled coil Cold rolled coil Galvanzed steel

(HRC) (CRC) sheet

Source: VCSC compilation

26
 Formosa looking to produce hot rolled coil too

Long steel
rolling line Long steel

Hot rolled coil Cold rolled coil Galvanzed steel

(HRC) (CRC) sheet

Formosa Ha Tinh Steel Complex is

now focusing on producing HRC
Source: VCSC compilation

27
 Abnormally high margins
should not be expected,
but rather, sustainable profit growth

28
 Iron ore’s wild ride created margin expansion in 2017, but high base for 2018

Up-and-down swings of iron ore prices created “accumulation points” for steel companies to stock
up input materials when prices were deemed low

18 Accumulation 100 700 Accumulation

Accumulation
point 90 point point
16 Accumulation
point 600
80
14
70 500
12 60

50 400
10
40
300
8
30

6 20 200

May-16
Jul-16

May-17
Jul-17
Nov-16

Nov-17
Jan-16
Mar-16

Sep-16

Jan-17
Mar-17

Sep-17

Jan-18
May-16
Jul-16

May-17
Jul-17
Sep-16
Nov-16

Sep-17
Nov-17
Mar-16

Mar-17

Mar-18
Jan-16

Jan-17

Jan-18

Iron ore (USD/ton - RHS)

HPG's construction steel ASP (VND/ton - LHS) HRC (USD/ton - LHS)
China domestic steel rebar ASP (VND/ton - LHS) Galvanized steel sheet (USD/ton)

Source: Bloomberg, VSA, VCSC compilation

29
 Aggressive capacity cut-down relieves pressure on China’s need to export…

The massive glut in Chinese steel is expected to balance out,

which reduces China’s need to export excess production

Chinese domestic demand has improved and steel production capacity has fallen as
Chinese authorities have aggressively closed inefficient and polluting steel mills

China’s steel exports grew in line

with the additional surplus, which flooded global steel markets
140

120 13.8% 13.2%

100 11.1%
9.6%
80
7.3% 7.3%
60 6.3% 6.6%

40 4.0%

20

0
2009 2010 2011 2012 2013 2014 2015 2016 6M 2017
Export (million tons - LHS) Surplus (million tons - LHS) Export share of production (% - RHS)

Source: The US International Trade Administration, VCSC compilation

30
 …and also on global finished steel prices

Iron ore prices have increased since mid-2017 and are expected to maintain at a high level in 2018

18 100 700

90
16
600
80
14
70 500
12 60

50 400
10
40
300
8
30

6 20 200

May-16
Jul-16

May-17
Jul-17
Nov-16

Nov-17
Jan-16
Mar-16

Sep-16

Jan-17
Mar-17

Sep-17

Jan-18
Mar-18
May-16
Jul-16

May-17
Jul-17
Sep-16
Nov-16

Sep-17
Nov-17
Mar-16

Mar-17

Mar-18
Jan-16

Jan-17

Jan-18

Iron ore (USD/ton - RHS)

HPG's construction steel ASP (VND/ton - LHS) HRC (USD/ton - LHS)
China domestic steel rebar ASP (VND/ton - LHS) Galvanized steel sheet (USD/ton - LHS)

Source: Bloomberg, VSA, VCSC compilation

31
We like the leaders and the good stories:
top picks are HPG and NKG

32
Leaders are pushing for market consolidation

Construction steel Galvanized steel

HPG took first position HSG holds

from VNSteel group dominate position NKG is expanding fast

12% 11% 14%

9% 12%
13% 10% 13%
16% 15%
11% 13%
18% 13% 16%
22% 15%
17%
17%
20%

39% 36% 36%

26% 32% 34%
19% 21% 22%
15%

2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

HPG's market share VNSteel's market share Ton Dong A's market share NKG's market share
POM's market share HSG's market share

Source: VSA

33
Local galvanized steel producers racing to expand capacity and market share

Capacity (tons)
Company
2015 2016 2017 2018
HSG
CRC 950,000 950,000 1,750,000 1,750,000
Galvanizing 1,220,000 1,620,000 2,230,000 2,230,000
Color-coating 420,000 540,000 705,000 705,000
Steel pipe 493,900 638,600 751,000 833,800
NKG
CRC 400,000 400,000 1,000,000 1,000,000
Galvanizing 420,000 420,000 870,000 1,220,000
Color-coating 156,000 156,000 276,000 276,000
Steel pipe 120,000 120,000 300,000 300,000
Dong A
CRC - 200,000 600,000 600,000
Galvanizing 170,000 370,000 870,000 870,000
Color-coating 120,000 120,000 200,000 200,000
Steel pipe - - - -
Dong A (***)
CRC - - - -
Galvanizing 250,000 250,000 250,000 250,000
Color-coating 140,000 140,000 140,000 140,000
Steel pipe - - - -
HPG
CRC - - - -
Galvanizing - - - 400,000
Color-coating - - - -
Steel pipe - - - 600,000

Source: Companies’ data, VSA, VCSC estimates

34
The crux of steel: ability to deliver good margins through input price volatility…

Gross margin comparison between local listed steel companies (% - LHS)

35 160
Leaders’ zone
30 140

120
25 HPG
100
20
HSG 80
15
60
NKG
10 Turnaround
40
zone POM
5 20

0 0

HPG HSG NKG POM VIS VGS DNY DTL Iron ore (USD/ton - RHS)

Source: Bloomberg, VCSC

35
…directly translates to more sustainable returns

30 ROE comparison between local listed steel companies (% - LHS) 160

Leaders’ zone 140

25
120
HPG
20
100

15 80
HSG
NKG 60
10

40
5 Turnaround POM
zone 20
0
0

-5 -20

HPG HSG NKG POM VIS VGS DNY DTL Iron ore (USD/ton - RHS)

Source: Bloomberg, VCSC

36
 HPG – The best is yet to come

STOCK INFO – Feb 28, 2018 KEY METRICS 2017 2018F 2019F
Rating BUY Rev Growth 38.7% 32.7% 19.6%
Market Cap, USD mn 4,410 EPS Growth 15.4% 11.7% 17.4%
Daily Val 30 day, USD mn 19.7 GPM 23.1% 21.9% 22.1%
Foreign Room, USD mn 395 NPM 17.3% 15.3% 15.0%
Estimate free float, % 58 EV/EBITDA 9.2x 8.4x 7.2x
P/B 16.5x 11.2x 9.8x
P/E 12.7x 11.4x 9.7x
INVESTMENT THESIS
• The largest local steel producer with 24% and 26% HPG’s construction steel sales volume
market shares in construction steel (current capacity (mn tons) 3.00
of 2.0 million tons) and steel pipes, respectively
2.40
2.18
• Mega Dung Quat project coming online in 2019-
1.80
2022 will add 2.0 million tons of construction steel
1.38
and 2.0 million tons of HRC 1.00
• Superior fundamentals and forecast 17% 5-year 0.61 0.70
CAGR profit growth at an attractive valuation
• Key risks: margin compression caused by volatile
2012 2013 2014 2015 2016 2017 2018F 2019F
iron ore prices
Source: Company data, VCSC

37
 NKG – Young player steels itself for long-term rivalry

STOCK INFO – Feb 28, 2018 KEY METRICS 2017 2018F 2019F
Rating BUY Rev Growth 41.2% 21.7% 13.7%
Market Cap, USD mn 192 EPS Growth 10.5% -9.2% 7.6%
Daily Val 30 day, USD mn 0.7 GPM 10.8% 10.0% 9.4%
Foreign Room, USD mn 109 NPM 5.6% 5.1% 4.9%
Estimate free float, % 48 EV/EBITDA 4.2x 2.1x 2.5x
P/B N/M 5.2x 5.8x
P/E 5.1x 5.6x 5.2x
INVESTMENT THESIS
• Second-largest local galvanized steel sheet 1.2 NKG’s sales volume by market
maker by both market share and capacity (mn tons)
1.0
• Keeping a balance between domestic and export
0.8
markets is a crucial growth strategy
0.6
• New production lines doubled capacity in 2017 and
are going to add 40% more in 2018 0.4

• Higher level of integration by adding more CRC 0.2

capacity will help to improve margin sustainability 0.0
• Key risks: 1) margin compression caused by volatile 2012 2013 2014 2015 2016 2017 2018F 2019F
HRC prices, 2) high leverage (2.0x Net D/E), and 3) Domestic Export
the possible US tariff Source: Company data, VCSC

38
Other stocks

39
 HSG – Keeping an eye open for more than earnings in FY18

STOCK INFO – Feb 28, 2018 KEY METRICS FY17 FY18F FY19F
Rating MARKET PERFORM Rev Growth 46.1% 19.1% 17.8%
Market Cap, USD mn 375 EPS Growth -12.4% 15.5% 15.2%
Daily Val 30 day, USD mn 3.3 GPM 16.9% 17.2% 16.7%
Foreign Room, USD mn 83 NPM 5.1% 4.9% 4.8%
Estimate free float, % 37 EV/EBITDA 7.2x 5.7x 5.2x
FY of HSG starts from Oct 1 to Sept 30 P/B N/M 2.7x 6.8x
P/E 6.7x 5.8x 5.0x
INVESTMENT THESIS
• Largest local galvanized steel sheet maker by 2.5 HSG’s sales volume by market
both market share and capacity (mn tons)
2.0
• Unrivalled branded retail network of 314 branches
set a strong competitive advantage in local market 1.5
• Aggressively expanding capacity to fuel growth
1.0
and maintain dominant position
• Possesses fully integrated production chain from 0.5
CRC, which supports margin sustainability 0.0
• Key risks: 1) margin compression caused by volatile FY12 FY13 FY14 FY15 FY 16 FY17 FY18F FY19F
HRC prices, 2) high leverage (3.0x Net D/E), and 3) Domestic Export
the possible US tariff Source: Company data, VCSC

40
 HT1 – Looking beyond the expected turbulence

STOCK INFO – Feb 28, 2018 KEY METRICS FY17 FY18F FY19F
Rating BUY Rev Growth -0.3% 0.8% 0.8%
Market Cap, USD mn 248 EPS Growth* -23.5% 16.9% 2.0%
Daily Val 30 day, USD mn 0.1 GPM 16.3% 16.5% 16.1%
Foreign Room, USD mn 108 NPM 6.9% 7.9% 8.0%
Estimate free float, % 20 EV/EBITDA 5.9x 5.2x 4.6x
* Recurring NPAT and EPS P/B 6.5x 4.6x 4.9x
P/E 10.7x 9.1x 9.0x
INVESTMENT THESIS
• Largest domestic cement market with 11% market 1,500
share nationwide and 30% in the South 1,000
• Pay-down of foreign currency denominated debt 500
not only lowers interest burden as well as FX risks
but also bolsters earnings 0

• Stronger cash flow generation as capex slows -500

down and financial leverage reduces -1,000
• The stock is undervalued given stable earnings 2012 2013 2014 2015 2016 2017 2018F 2019F
outlook and healthy cash flow Operating profit Interest expenses
FX gain/loss Profit before tax
• Key risks: 1) increase in lower-margin outsourced
cement volume and 2) strong EUR/VND appreciation Source: Company data, VCSC

41
Vietnam is transforming into a global hot spot for steel consumption

Vietnam is becoming a galvanized steel heavyweight in the region

Listed players expected to withstand direct impact of US tariffs

Domestic industry to continue to enjoy protection from imports

Deeper vertical integration provides more independency

Though abnormally high margins should not be expected but

industry profitability is getting more sustainable

We like the leaders and the good stories: top picks are HPG and NKG

42
VCSC Contacts

RESEARCH INSTITUTIONAL SALES

Head of Research Head of Institutional Sales

Barry Weisblatt Michel Tosto, M. Sc.
barry.weisblatt@vcsc.com.vn michel.tosto@vcsc.com.vn
+8428 3914 3588 ext. 105 +8428 3914 3588 ext. 102

Senior Manager Head of Vietnam Sales

Lucy Huynh, CFA Dung Nguyen
lucy.huynh@vcsc.com.vn dung.nguyen@vcsc.com.vn
+8428 3914 3588 ext. 130 +8428 3914 3588 ext. 136

Senior Analyst – Materials

Vy Nguyen
vy.nguyen@vcsc.com.vn
+8428 3914 3588 ext. 147

43
Disclaimer

Analyst Certification of Independence

I, Vy Nguyen, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and
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