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Vietnam Plastics and Plastic Packaging Industries: Opportunities and Challenges

APEC 2017: What’s Next for Vietnam Industries

HCMC | Lotte Legend SaigonPresented by: Nguyen Quang Thuan, CEO, StoxPlus

2Copyright @ 2017 StoxPlus, an Associate of Nikkei Inc. All Rights Reserved.

• Date of incorporation: March 11, 2008

• Number of staff: 80 (as of June 2017) including Data Analysts, Content Editors, Researchers, Product Developers.

• Capital: VND30bn

• Two offices: Hanoi Head Office and HCMC Office

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OUR SECTOR EXPERTISE AND PARTICIPATION OF INDUSTRY EXPERTS ENSURE INFORMATION COMPREHENSIVENESS AND IN-DEPTH ANALYSIS

Our Covered Sectors

RETAILINDUSTRIALS

OTHERS

FINANCIALS

Consumer Finance

Banking

Insurance

Microfinance

PACKAGING

Flexible Packaging

Plastic Packaging

Convenience Store

Food Processing

Apparel

Cement

Cold Storage

Logistics

Infrastructure

AGRIBUSINESS

Fertilizers

Agrochemical

Animal Feed

Pesticides

M&A

SOE Restructuring

HEALTHCARE

Hospitals & Clinics

Medical Devices

Pharmaceuticals


• StoxPlus existing database

• General Statistics Office

• Stock Exchanges

• The Media

• Banks

• VCCI

• Credit Information Centre

• Chambers of Commerce

• Ministries (MOF, MOIT)

• Self –contribution by businesses

• Trade Associations

• Field Survey

• Exhibitors

• Crowd Sourcing

INTEGRATED DATA SOURCES

BIINFORM – THE MOST HOLISTIC BUSINESS INFORMATION DATABASE IN VIETNAM

Our Information Database


1

2 Impacts from the Petrochemical Master Plan

Agenda

Overview of Plastics and Plastic Packaging in Vietnam

3 Impacts from Foreign Trade Agreements

4 Opportunities and Challenges


Packaging, US$4.71bn,

38%

Household, US$3.68bn,

29%

Construction, US$2.30bn,

18%

Technical, US$1.89bn,

15%

Plastics industry in Vietnam is sized at US$12.6bn in 2016 with over 2,000 firms. Of which, packaging is the largest segment, accounting for 38% of total market size.

Plastic Industry in Vietnam

[Vietnam Plastic Industry Market Size by Segment]

Source: StoxPlus, Vietnam Plastics AssociationHistorical data 1995-2015 is from VPA while forecast is based on Master Plan of Vietnam Plastic Industry in accordance to Decision 2922/QD-BCT. Market size is estimated based on imported plastic resins & standard cost structure

21%30% 30%

39% 38% 35% 31%

60%25% 20%

21% 29%18%

17%

15%

30%30%

21%18%

25%27%

4%15% 20% 19% 15%

22% 25%

1995 2000 2005 2008 2015 2020f 2025f

Packaging

Household

Construction

Technical

• The Government aims to increase the contribution of technical and construction plastics segments that are high value-added and serve demand from construction and manufacturing industries (automotive, electronics).

2016


Vietnam has a trade deficit of US$10.3bn in 2017 for plastic sector due to heavy reliance on import raw materials

Plastic Industry in Vietnam

[Trade Balance for Plastics Industry, Annual, 2010 - 2017e]

(12.84)

2.53

(4.16)(5.12) (5.34) (6.48)

(7.43) (7.64)

(8.44) (10.31)

(21)

(18)

(15)

(12)

(9)

(6)

(3)

-

3

6

2010 2011 2012 2013 2014 2015 2016 2017e

28%

72%

Plastic Products

42%Resin58%

Composition of import by goods(Vietnam, 2010 → 2017e)

Export value

Import value

Trade balance

(US$billion)

Source: StoxPlus, Vietnam CustomsThe classification of goods is based on the international Harmonized System (HS)


Plastic Packaging is the largest and fastest-growing segment with total size of approx. US$4.7bn in 2016

Plastic Packaging in Vietnam

[The Structure of Vietnam Packaging Industry]

Source: StoxPlusMarket share by segmentation is calculated by total sales. Plastic Packaging market size is estimated by StoxPlus based on imported resin and standard cost structure.

[Packaging Market Size by Segmentation, 2016]

Paper & Corrugated Boxes

PAC

KA

GIN

G

PLASTIC PACKAGING

Glass Packaging

Metal Packaging

Others

PLA

STIC

S Technical

Household

Construction

Plastic PackagingUS$4.7bn,

64%

Paper & Corrugated

BoxesUS$1.2bn,

16%

Metal PackagingUS$1.1bn,

14%Glass

PackagingUS$0.5,

6%


Plastic Packaging

64%

Paper & Corrugated

Boxes16%

Metal Packaging

14%

Glass Packaging

6%

Plastic Packaging is the largest segment and also a fastest growing segment with total size of approximately US$4.7bn in 2016


[Vietnam Packaging Industry by Segmentation, 2016]

[Vietnam Plastic Packaging Market Size, 2011 – 2016 (US$m)]

3.1 3.13.7

4.0 4.34.7

2011 2012 2013 2014 2015 2016

• Flexible packaging includes mono-layered & multi-layered segments. Of which, the former is dominated by medium and small family businesses while the later serves increasing demand from food & beverage and is estimated at US$953mn in 2016.

• Rigid packaging includes companies that manufacturing PET/ non PET (HDPE, LDPE) bottles, preforms, trays and tubes used for packaging.

[Plastic Packaging = Flexible + Rigid]

Source: StoxPlusMarket share by segmentation is calculated by total sales. Plastic Packaging market size is estimated by StoxPlus based on imported resin and standard cost structure.

FLEXIBLE

RIGID

PE films/bagsWoven sheets/bags

BOPP films/bagsPlates

Laminated films/bags

Mold tubesHDPE products

PETOthers

CAGR = 10%


Vietnam flexible packaging market is mostly dominated by the top 14 players, accounting for 53.9% market share


TIER 1

• The market is dominated by the top 14 players, accounting for 54% of the total flexible packaging market. 336 other companies share the remaining 36%. Big names in Vietnam flexible packaging are Tan Tien Plastic Packaging, Liksin, BATICO, J.S Packaging and Saplastic.

• Foreign flexible packaging companies such as Huhtamaki (Finland), J.S Packaging (South Korea), Tong Yuan (Taiwan), and Ngai Mee (Singapore) entered into Vietnam since 1996. These are all subsidiaries of major global flexible packaging companies who have served multinational end-users like Unilever for a long time. They are aggressively competing with local companies, leveraging their modern machinery and equipment, as well as expertise on flexible packaging.

TIER 2 & TIER 3

• Tier 2 (30 companies) are medium ones with net sale of about US$3–5 mn while Tier 3 (306 firms) are small flexible manufacturers (US$1mn net sales).

[Multi-layered Flexible Packaging Competition Landscape, 2016]

Source: StoxPlusMarket share is estimated by total annual sales of independent manufacturers only (excluding in-house packaging). The total sales may include non-plastic packaging sales.

TAPAK6.5%

LIKSIN5.9%

BATICO5.6%

RANG DONG5.5%

J.S PACKAGING4.5%

SAPLASTIC4.2%

APP4.1%

THANH PHU3.8%

HUHTAMAKI3.8%NGAI MEE

2.7%TONG YUAN

2.2%

SAIGON TRAPACO

2.2%

MIVIPACK2.1%

SAPACO0.8%

Other46.1%


Vietnam is still highly dependent on imported plastic resin to meet the plastic packaging production due to the not yet developed petrochemical infrastructure


• Domestic market only supplies around 626k tons of raw materials and additives, which only met 12% of current plastic resin material demand.

• Key risks:

• The increase in import tariff of PP (from 0% in 2016 to 3% from 1st Jan 2017 onward) reduces the competitiveness of domestic enterprises.

• Resin price index will cause significant impact on the performance of plastic firms.

• The exchange rate is also an important factor that affects plastic firms’ results importing raw materials

• Plastic resin prices declined in the first half of year in tandem with oil prices, but has recovered since Q3.2016. Most plastic resins are produced by crude oil and natural gas, only a modest amount is produced by corn or some other biological products, so plastic resins price depends on oil prices volatility as well as natural gas prices.

• Packaging segment accounts for the largest share, so PP and PE resins are two types of materials accounting for the largest proportion in import turnover.

[Total Plastic Resin Import Volume to Vietnam]

Source: StoxPlus, Vietnam Customs

5.0

7.5

4.5

6.3

VOLUME (mn Tonnes)

VALUE (US$bn)

2016 2017e


1

2 Impacts from Petrochemical Master Plan

Agenda





Limited domestic supply for increasing plastic resin demand in Vietnam

Petrochemical Master Plan

[Existing Plastic Raw Material Manufacturers in Vietnam]

Dong Nai

VNPS

Plant

Hoang Sa

Truong Sa

Ba Ria Vung Tau

Binh Son Refining & Petrochemical

LG Vina Chemicals

Binh DuongYoul Chon Vina

AGC Chemicals Vietnam

TPC VinaFormusa Industries

Quang Ngai

ITEM COMPANY CAPACITY(tons/year)

PP Binh Son Refinery 150,000

PVC AGC Chemicals Vietnam 200,000

PVC TPC Plastic & Chemical 190,000

PS Vietnam Polystyrene 48,000

EPS Vietnam Polystyrene 38,000

PLASTIC RESIN 626,000PET Hung Nghiep Formosa 145,000

BOPP Hung Nghiep Formosa 60,000

BOPP Euro Film Corporation 30,000

BOPP Youl Chon Vina Plastic 12,000

DOP LG Vina Chemical 40,000

PLASTIC FILM 287,000

• Total annual demand is around 4.539 million tons while domestic supply only satisfied 0.626 million tons.

Source: StoxPlus

RESIN

FILM


Taking into account of all planned projects, domestic production would reach 2.60mn tons, meeting 26% of domestic demand in 2023 (compared to 11% in 2017)


[Upcoming Projects in Vietnam Petrochemical]

[Existing Domestic Plastic Resin Capacity]

[Domestic Production of Plastic Resin in Vietnam]

PROJECT CAPACITY(mn tons/year) PRODUCT STATUS

Nghi Son Refinery & Petrochemical 0.4 PP Launch in 2018Long Son 1.6 PP, HDPE, LLDPE Launch in 2021Hyosung 0.3 PP Approval pendingVung Ro Petroleum 0.7 PP DelayedPTT – Aramco 0.8 PE Delayed

0.63 0.63 0.63 0.63 0.631.00 1.00 1.00

2.60 2.60 2.60

1.80 1.80

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: StoxPlus, Decision 676/QD-BCT dated on 6th Mar 2017, Decision 2412/QD-BCT dated on 17th May 2011Data is consolidated from Master Plan on Development of Petrochemical Sector with update & validation from StoxPlus on these project’s status.

ITEM COMPANY CAPACITY(mn tons/year)

PP Binh Son Refinery 0.15PVC AGC Chemicals Vietnam 0.20PVC TPC Plastic & Chemical 0.19PS Vietnam Polystyrene 0.05EPS Vietnam Polystyrene 0.04

PLASTIC RESIN 0.63UNCERTAIN

Nghi Son Project

Long Son Project


Limited domestic supply for increasing plastic resin demand in Vietnam


[Demand vs. Production Capacity of in Vietnam] [Imported Plastic Resin Volume (mn tons)]

• Total annual demand is around 4.539 million tons while domestic supply only satisfied 0.626 million tons.

Source: StoxPlus, Vietnam Customs, Master Plan on Development of Petrochemical SectorVung Ro and PTT-Aramco projects have not been taken into account due to the fact that these projects are currently delayed. Plastic resin demand is forecasted with CAGR of 10% during the period 2018 – 2023.

12% 11% 16% 15% 13%31% 28% 26%

88% 89% 84% 85% 87%69% 72% 74%

2016 2017e 2018f 2019f 2020f 2021f 2022f 2023f

IMPORT

DOMESTIC PRODUCTION

2.73.2 3.5

3.94.5

5.0

2012 2013 2014 2015 2016 2017e

Forecast plastic demand at 2018-2023 CAGR = 10%

Nghi Son ProjectLong Son Project


1


Agenda





Lower tariff under FTA with Korean and Thailand help imported resin cheaper compared with non-FTA countries such as Saudi Arabia

Impacts from Foreign Trade Agreements

[Import Tariff for Plastic Resin – to 2016]

PRODUCTFavor Tax

Rate

FTAs

ASEANVietnam

-KoreaASEAN-

China

PE 0% 0% 0% 0%

PP 0% 0% 0% 0%

PVC 5% 5% 5% 20%

PS 5% 0% 0% 0%

Effective date 6th Mar to 31st Dec 2016

Source: StoxPlus, Vietnam CustomsWe calculated decrease in net profit margin based on standard cost structure, import volume and value of PP resin in 2017 from Vietnam Customs.

NEGATIVE IMPACT TO PLASTIC FIRMS!

Import tariff imposed on PP resin increased from 0% to 3% after Circular 16/2016/TT-BTC on import tariff expired

PRODUCTFavor Tax

Rate

FTAs

ASEANVietnam

-KoreaASEAN-

China

PE 0% 0% 0% 0%

PP 3% 0% 0% 0%

PVC 5% 5% 5% 20%

PS 5% 0% 0% 0%

Effective date 1st Jan 2017

• Shift imported resin from Saudi Arabia to South Korea and Thailand due to FTAs• Expect a decrease by 1.0% in net profit margin of Vietnam plastic firms due to an increase by 3% in import tariff imposed on

PP from 1st Jan 2017 onward

[Import Tariff for Plastic Resin – from 2017]


20.7%

17.9%

14.4%9.3%

9.0%

28.6%

Saudi Arabia,19.5%

Korea,18.3%

Taiwan,13.8%

Thailand,9.8%

China,10.5%

Other,28.1%

It is reflecting in the actual increase the import from Thailand (ASEAN), China (ASEAN+1) and Korea (VNKFTA)

Impacts from Foreign Trade Agreements

• Saudi Arabic, Korea and Thailand remained the main countries exported plastic resin into Vietnam. However, thanks to favor import tariff rate from Vietnam Korean and ASEAN FTAs which creates competitive advantages for suppliers from these countries, Korean and Thai suppliers are gaining their foothold in Vietnam plastic sector in terms of supply import raw materials.

• PT Indorama from Thailand and Hyosung (Korea) are the biggest resin supplier for PET Bottle Manufacturers in Vietnam. Established in Indonesia, but Thailand’s branch remained the main source of importing resin

[Average price/ kg of Top exporter plastic resin to Vietnam, 2017]

[Top Exporters of Plastic Resin Vol to Vietnam, 2016 vs. 2017]

• Average imported price (CIF) from China was the most expensive due to special import tariff as stated in FTAs, especially for PVC resin.

Source: StoxPlus, Vietnam Customs. Average price is calculated by taking total import value divided by total volume.

1.49

1.15

1.60 1.56 1.33

1.74

1.38 1.09

1.47 1.44 1.28

1.61

AVERAGE SaudiArabic

Korea Taiwan Thailand China

2017 2016

20172016


1


Agenda





Especially from the consumption growth in instant coffee (12.2%) and confectionery (9%) and Sauces & Condiment (7.7%) in Vietnam

Strong Growth Opportunities from Food Sector

SEGMENT SIZE 2016US$mn

2015-2016 Growth

2011-2016 CAGR

COMMENT

Noodle 1,388 -2.5% 2.8% Due to the increasing consumer concern for hygiene and food

safety, noodles manufacturers need to innovate and focus on premium products that meet requirement about health issues. However, noodles sector is currently in mature stage.

Instant Coffee 251 8.3% 12.2%

The outperformance of Nestle and Mac Coffee indicated that international companies outperformed local ones in 2016 due to caffeine scandal, which led many consumers switch to reputable international brand names.

Instant coffee is expected to be the key driver for flexible packaging in Vietnam in terms of growth and volume demand.

Sauces & Condiment 970 9.6% 7.7%

Glass and flexible plastic are projected to maintain their top positions, although the portion of glass is shrinking.

Stand-up pouches continued to be negligible in sauces, dressings and condiments in the country. Indeed, this was not only due to a lack of innovation from manufacturers, but also due to the low consumer demand for new packaging despite the higher demand for convenience

Confectionery 1,245 8.8% 9.0% Improved living standard, increased disposable income and

demand for sweet snacks as gifts and rising awareness of food hygiene were supporting growth of confectionery category in 2016.

Seafood Export 7,053 7.3% 2.9% The rise in seafood export will increase the demand for flexible packaging

Source: StoxPlus and EIU


A case study in meeting plastic packaging for Instant Coffee


SEGMENT SIZE 2016

US$mn

2015-2016

Growth

2011-2016

CAGR

Noodle 1,388 -2.5% 2.8%

InstantCoffee 251 8.3% 12.2%

Sauces & Condiment 970 9.6% 7.7%

Confectionery 1,245 8.8% 9.0%

Seafood Export 7,053 7.3% 2.9%

[Coffee Sales Value (US$mn) in Vietnam, 2011-2016]

[Instant Coffee Sales Value & Growth by Category, 2016]

115 140 162 196 221 2524162 69

74 7478

2011 2012 2013 2014 2015 2016

Instant Coffee Fresh Coffee

0.4%

73.5%

26.1% 2-1 Instant coffee3-1 Instant coffeeInstant Specialty

+ 13.8%

2015-2015Growth

The premium products would be innovated to meet customers’ demand for convenience, health and sophistication. Consumers’ rising health-consciousness and disposal income results in the willingness to pay more for premium instant coffee that meet their requirement for both the sake of convenience and high quality. Along with higher quality product, the unit price of Coffee is expected to grow higher.

However, the problem is that market almost dominated by top 5 key players with 80% market share: Nescafe SA: 35.1%, Vinacafe 21.3%, G7 16.7% and Mac Coffee 5.7%.


CAGR = 12%


A strong growth of many items in NON-FOOD SECTOR especially from Skin care (15.1%), Laundry care (13.0%) and Surface care (12.2%)

Strong Growth Opportunities from Non-Food Sector

SECTOR SEGMENT SIZE 2016US$mn

2015-2016 Growth

2011-2016 CAGR COMMENT

HOMECARE

Laundry care 1,082 16.3% 13.0%

Fabric softeners became the most dynamic laundry care category.

laundry care market is expected to grow at a relatively stable and modest level in near-term future.

Surface care 94 8.3% 12.2%

Surface care sector is expected to expand healthily in near term future.

Eye-catching packaging design and television advertising campaigns are believed to be the key drivers to boost up manufacturers’ total sales

PERSONAL CARE

Skin care 280 12.3% 15.1%

International brand names have occupied mostly total market share with diversified product ranges, while domestic players or private labels remained blurred in Vietnam market due to its low quality.

Hair care 208 5.2% 8.8% Skincare market is expected to become more

dynamic with more participation of international brand names such as Bio-essence and HadaLabo

Bath & Shower 138 8.0% 9.6% Bath and shower market is expected to grow

at a slower pace as the market is reaching its maturity stage



A case study in meeting plastic packaging for Skin Care


[Skin Care Sales (US$mn) and Growth, 2012-2016]

[Key Players by Sales Value, 2016]

Vietnam consumers are paying more attention on skin care as a method to protect their skin from harmful chemicals, they are willing to purchase high-quality product with natural or organic ingredients, especially after cheap products scandals that damaging users skin. There are 03 main segmentations: (i) Body care, (ii) Facial care and (iii) Hand care, of which, Facial careaccounted for around 92% of total skin care revenue (2015).

SEGMENTSIZE 2016

US$mn

2015-2016

Growth

2011-2016

CAGR

Laundrycare 1,082 16.3% 13.0%

Surfacecare 94 8.3% 12.2%

Skin care 280 12.3% 15.1%

Hair care 208 5.2% 8.8%

Bath & Shower 138 8.0% 9.6%

167 198 229 250 281

20% 19%15%

9%12%

2012 2013 2014 2015 2016

COMPANY BRAND SHARE %

Unilever Vietnam Pond’s, Hazeline, Dove 10.1%

LG Vina Cosmetics The Face Shop, Ohui, Whoo, Isa Knox 8.1%

Shiseido Cosmetics Shiseido, Za 7.3%

Procter & Gamble Vietnam Olay 4.6%

AmorePacific Vietnam Laneíge, Sulwasho 4.9%Source: StoxPlus and EIU


It is depending on each company and its shareholder. M&A would be a great way to realize their investment as part of succession planning but also a threat if the business remain old fashion

M&A as both opportunities and threats!

ACQUIRER COUNTRY TARGET COMPANY DEAL VALUE YEAR

MeiwaPax Group Japan Saigon Trading and Packaging (Sapaco)

93% forUS$16.5 mn

2014

Oji Holding Corporation

Japan United Packaging US$4.00 -7.00mn

2013

Siam Cement Group

Thailand Tin Thanh Packaging (Batico)

80% forUS$44.5 mn

2015

Dongwon Systems Corp

SouthKorea

Tan Tien Packaging and Minh Viet Packaging

US$97.08 mn for Tan

Tien and US$21 mn for 100%

Minh Viet

2016

Source: StoxPlus

• In only flexible packaging segment, there are around 400 companies in Vietnam and the market is very fragmented.

• In the meantime, the food sector and non-food sector as end-user customers, they normally maintain a top list of 5-10 suppliers only and in some items such as PET only 2-4 suppliers. This makes many small packaging companies still small and cannot capture the growth.

• In many cases, food and non-food companies they still maintain and even develop further in-house packaging, this further makes the packaging business even more fragile!

In this situation:• A number of companies find M&A as way for growth

(especially by foreign investors) or for investment realization as part of their business restructuring and succession planning. This is an good opportunity for many company owners where they can exit with attractive valuation. From our data, it is 1.1x EV/Sales and 15-17x EV/EBITDA.

• While some other still struggling with their growth model and profitability has been deteriorated because of fierce competition and a higher quality standards imposed by the market


Some companies having growth lagging behind while some other maintained a robust growth. Profitability remains slightly improved over years but at large players only.

M&A as both opportunities and threats!

[Net Sales Growth of Top 14 Flexible Packaging Companies]

22.1%17.1%16.8%

11.3%8.1%8.0%

5.9%4.8%4.2%

-0.4%-0.9%

-2.2%-10.8%

APPBATICO

SAPLASTICTHANH PHU

LIKSINRANG DONG

J.S PACKAGINGSAIGON TRAPACO

HUHTAMAKITONG YUAN

NGAI MEETAPAK

SAPACO

2011-2016 CAGR

2-DIGITGROWTH

NEGATIVEGROWTH

13.3% 13.7% 13.0%

16.1%17.2%

18.1%

5.2% 5.7% 4.9% 4.2%5.7%

7.0%

4.3% 4.9% 4.0% 4.0% 4.7% 5.0%

2011 2012 2013 2014 2015 2016

GPM OPM NPM

[Profitability of Vietnam Flexible Packaging Companies]

1-DIGITGROWTH

Source: StoxPlusCAGR = Compounding Annual Growth Rate, GPM = Gross Profit Margin, NPM = Net Profit Margin, OPM = Net Profit MarginAPP = Agriculture Printing & Packaging JSC., TAPAK = Tan Tien Plastic Packaging JSC., SAPACO = Saigon Packaging JSC.


1. Vietnam has been heavily depending on the import of plastic resin. Each year, the net import meaning net outflow of foreign currency is around US$10bn. The investment in petrochemical and downstream business is crucial for Vietnam to increase domestically made plastic resin and addictive supply with competitive price.

2. Plastic packaging will further posted a high growth thanks for the even higher growth rate of end-user sectors including food and especially non-food in Vietnam.

3. However market is rather very fragmented and tough competition right now. Consolidation is a must, innovation facilities to further improve efficiency. Net profit margin of the sector is just around 5% while waste/scraps is still high in many companies!

4. Opportunities remain with companies who invest in innovation, better product quality to meet the consumer trend and sophistication and even cleaning up the business model, ownership structure so as to make it attractive for M&A.

5. Threats persist with in-house packaging models, small businesses with poor production facilities which cannot meet the quality standards for large F&B players and the consumer sophistication in their consumption behaviors

6. In-house packaging still maintained and even developed by many food and beverage players but independent and professional packaging business will be preferred by food and beverage players. This is because of not only operational and investment efficiency but also the conflict of interests i.e. finding hard to provide spare packaging capacity for its F&B competitors!

SUMMARY


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