Dpm - PetroVietnam Fertilizer and Chemicals

DPM – PetroVietnam Fertilizer & Chemicals Market: HOSE Sector: Basic Materials Industry: Fertilizer

HRS Equity

25 March 2008 Research

Horizon Securities Research Team Marc Djandji, CFA Head of Research [email protected]+84.90.318.9687 Khoi Pham Analyst [email protected] Neutral/Speculative 2S Initiation of CoveragePrice (VND) 29,600 Target price (VND) 34,800 Expected share price return 17.6%Expected dividend yield 4.4%Expected total return 22.0%

Stock Profile/StatisticsReuters TickerSectorVND/USD 17,590 Shares OutstandingMarket Capitalisation (VNDmln)Foreign room (%) 31%52 week High/ Low (VND) 70,000 / 26,800 3-mth average daily tradingEstimated free float

Stock Performance (%) 1M 3M 6MAbsolute (%) - (19.43) (51.79) Relative (%) (6.61) (5.03) (7.64)

Owership Structure %PetroVietnam (State) 61.0%BIDV 3.7%PVFC 1.6%ACB 1.0%Others 32.7%

10,716,000

387,786 139,200,000

24-Mar-08DPM.HMFertilizer

380,000,000

B10

Daily DPM.HM, .VNI 10/6/2008 - 4/1/2009 (BKK)

Line, DPM.HM, Last Trade(Last)

Initiation of Coverage PetroVietnam Fertilizer & Chemicals Corporation (DPM): Established in 2004, Petrol Vietnam Fertilizer and Chemicals Corporation (DPM) was privatized and listed on HOSE in 2007. DPM is engaged in the production and trading of nitrogen fertilizer (urea) and other related chemical products such as; liquid ammonia and crop-protection chemicals. Sales of urea fertilizer account for approximately 97% of total turnover. At the moment, it is the largest domestic producer of urea fertilizer representing more than 40% of the Vietnam’s urea market. DPM runs the Phu My Fertilizer Plant in Ba Ria-Vung Tau with a total production capacity of 740,000 tons of fertilizer per annum. By 2010, the company expects to increase its urea capacity at the Phu My Plant to 800,000 tons per annum.

Investment highlights:

We are initiating coverage on Vietnam’s only listed fertilizer blue chip: Petrol Vietnam Fertilizer & Chemicals JSC (DPM.HM) with a NEUTRAL rating given that, in the longer term, we believe the company will benefit from strong underlying industry fundamentals, as long as no major corporate restructuring events occur. Our blended valuation approach gives us a target price for DPM of VND34,800 (US$1.99) per share which represents a 17.6% premium to the current market price.

Urea price is the key value driver for DPM’s stock price. As the company has a high level of fixed costs, a swing in urea prices can greatly impact its bottom line. At the moment, domestic prices are still at a high level and we expect to see pressure for DPM to reduce its prices in the second half of the year.

DPM’s valuation and earning power is highly sensitive to fluctuations in urea prices. A 10% change in urea price results in a 20% change in our DFC valuation and a 30% change in earnings.

Natural gas is the main component of production costs and accounts for 30% of total production costs for DPM. The company is purchasing subsidized natural gas from Dai Hung oil field at US$2.2/MMBTU; 30-40% lower than the current market price in Vietnam.

The Ca Mau takeover results - The AGM was held yesterday and shareholders voted on the acquisition of the Ca Mau Urea Fertilizer project from PetroVietnam (PVN). We learned that the plant is currently being developed by PVN, with a total investment cost of ~US$900 million and design capacity of 800,000 tons a year. By the end of the AGM, shareholders had rejected the takeover by 65%-35% to vote against. However, following the announcement of the results, the Chairman of DPM (who is also PVN’s representative) suggested that it might put the deal back on the table for another shareholders’ vote at a later date.

3/24/2009, 29,600Line, .VNI, Last Trade(Last)3/24/2009, 270.62

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06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19 02 09 16 23 02 09 16 23 30October 2008 November 2008 December 2008 January 2009 February 2009 March 2009

Please refer to the important disclosures at the end of this document.

mailto:[email protected]

mailto:[email protected]

Initiation of Coverage – Petrol Vietnam Fertilizer & Chemicals

The long-term case for fertilizers Fertilizers are the nutrients required to grow abundant, healthy plants. In agriculture, fertilizers allow farmers to achieve abundant yields of high quality crops. Each harvest removes nutrients from the soil so fertilizers are needed on an annual basis. Although fertilizer applications can be skipped, the impact on yields is significant; the complete elimination of fertilizers could cause yields to drop anywhere from 40% to 60%. Consequently, farmers who may decide to reduce fertilizers applications in one specific year, generally have to apply more the following years. Drivers of fertilizer demand are increasing populations, rising worldwide living standards, greater demand for meat protein, and the emergence of biofuels, all of which increase world demand for grains and oilseeds. In addition, declining arable land per capita and the move toward more optimal fertilizer use are adding to demand. On the supply side worldwide, modest capacity increases over the next few years suggest a relatively tight fertilizer supply market going forward. That being said, it is important to remember the fertilizer industry is a cyclical industry and while we believe the long-term demand trends should lessen the cyclicality somewhat, they are unlikely to completely eliminate the cycles.

Drivers of fertilizer demand are the increased population, rising worldwide living standards, greater demand for meat protein, and the emergence of biofuels, all of which increase world demand for grains and oilseeds. In addition, declining arable land per capita and the move toward more optimal fertilizer use are adding to demand.

Following the fall in soft commodities as well as lack of access to credit, fertilizer demand came to an abrupt halt in late 2008. World urea prices plummeted from over US$770/ton to a low of US$240/ton in a matter of just a few months. Around the world, the rapid fall in urea prices led to substantial capacity shut downs. Industry sources suggest that the absolute drop in urea supply may have reached 26% of global supply, when accounting for lower capacity utilization rates and plant shutdowns in China. Nonetheless, as demand picked up in the northern hemisphere urea prices have risen by close to 23% since the start of 2009 to USD295/ton, from December 2008 lows of USD240/ton. In Vietnam, although the magnitude was not as significant, urea prices did follow the same trend. Urea went from VND4.15mln/ton (US$259/ton) in July 2007, peaked at VND9.5mln/ton (US$575/ton) in August 2008, and then fell to VND6mln/ton (US$338/ton) throughout the end of 2008. In March 2009, DPM raised its at-the-gate urea price by 5% to VND6.3mln (US$355) as international prices started picking up and local demand heated up in view of the upcoming winter-spring rice season. In our view, the short-term volatility makes the longer-term picture more important than ever. We believe the rise in urea prices is sustainable but argue that recent restarts of nitrogen producers may limit the near-term upside and/or the sustainability of urea price increase and look for an average price of USD275/ton for the rest of 2009.

2 Horizon Securities


Valuation We are initiating coverage on Vietnam’s only listed fertilizer blue chip: Petrol Vietnam Fertilizer & Chemicals JSC (DPM.HM) with a NEUTRAL rating given that, in the longer term, we believe the company will benefit from strong underlying industry fundamentals, as long as no major corporate restructuring events occur. Our blended valuation approach gives us a target price for DPM of VND34,800 (US$1.99) per share which represents a 17.6% premium to the current market price.

Base on our blended valuation approach, our target price of DPM is VND34,800 (US$1.99) per share, which is 17.7% premium to the current market price.

Our blended valuation approach assigned equal weights to the combination of our absolute (Discounted Cash Flow) valuation and our relative (Price to Earnings multiple) valuation methods. Figure 1. DPM - Blended Valuation

2009E Est. Value Weight Weighted per Share (%) Value

Discounted cash flow approach WACC 16.5% 35,959 50% 17,979 Comparable P/E ratio approach P/E 12.00x 33,695 50% 16,847

Weighted average share price VND34,800Current share price VND29,600% Upside from Current Price 17.6% Source: Horizon Securities We ran our financial model through 2014 to derive our DCF-based valuation. We forecast urea prices will average US$275/ton from 2009 to 2014. We applied a 16.5% WACC and 1.5% terminal growth rate, taking into account the current long-term government bond yield of 9% pa and an equity risk premium of 7%. Our valuation model includes the 60,000 tons increase in capacity in 2011 resulting from the new CO2 Collecting System, which began construction in early 2009.

We have run our financial model through 2014 to derive DCF based fair value.

Due to the lack of clarity and economic visibility on the company’s various proposed investment projects, we have not ascribed any value to the proposed investments in the Ca Mau plant, the DAP project in Morrocco, the urea/ammonia project in Russia, the two other chemical plants, and some real estate projects and earnings from its joint-ventures and investments. We acknowledge that these projects may consequentially impact our estimates, and we intend to revisit these projects if and when there are concrete plans to execute them. At this time, we note that the current financial crisis may curb DPM’s investment plans. Figure 2. Product price and earning outlooks

2008A 2009E 2010E 2011E 2012E 2013E 2014EUrea price US$/ton 383 275 275 275 275 275 275

VND/ton 6,457,684 4,812,500 4,812,500 4,812,500 4,812,500 4,812,500 4,812,500 EarningsSales VND'mln 6,475,368 5,721,325 5,721,325 5,924,925 5,068,300 5,068,300 5,068,300 Change (%) 71.35% (11.64%) -- 3.56% (14.46%) -- --EBITDA VND'mln 2,478,175 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856 Margin (%) 38.27% 38.04% 37.86% 32.00% 35.29% 34.67% 34.05%EBT VND'mln 1,495,618 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681 Margin (%) 23.10% 18.70% 22.50% 28.22% 30.32% 29.17% 28.54%Net profit VND'mln 1,385,293 1,064,194 1,378,913 1,808,204 1,776,209 1,822,443 1,888,789 Margin (%) 21.39% 18.60% 24.10% 30.52% 35.05% 35.96% 37.27%EPS VND 3,652 2,808 3,629 4,758 4,674 4,796 4,970

Source: Horizon Securities



In our relative valuation, we value DPM stock price at 12x 2009 expected earnings; the average of its regional peers. Figure 3. Relative Valuation Company Country Mkt Cap EV/EBITDA EV/Ton P/E P/B

(US$'mln) (US$/ton) 2008A 2009E 2010E 2011E 2008ASichuan Lutianhua Company Limited CHN 798.82 7.76 561.49 11.96 13.55 14.13 10.45 2.22 China BlueChemical Ltd. HKG 2,176.04 6.35 953.72 10.28 8.83 8.90 7.49 1.71 Liaoning Huajin Tongda Chemicals Co. Ltd CHN 1,244.39 - 830.83 18.95 n/a n/a n/a 1.41 Guizhou Chitianhua Co.,Ltd. CHN 348.81 12.44 717.90 16.14 n/a n/a n/a 1.59 Sichuan Meifeng Chemical Ind. Co., Ltd. CHN 518.84 9.05 473.28 16.21 14.14 11.78 8.44 2.17 Hubei Yihua Chemical Industry Co., Ltd. CHN 873.04 8.65 N/A 15.15 15.53 13.98 10.45 2.89 Yunnan Yuntianhua Co., Ltd. CHN 1,895.26 13.47 N/A 18.72 17.23 16.19 12.82 3.62 Taiwan Fertilizer Co., Ltd. TWN 1,507.52 90.92 N/A 13.86 15.20 16.47 16.33 1.06 Namhae Chemical Corporation KOR 740.81 21.09 N/A 39.25 10.92 10.88 n/a -Chambal Fertilisers & Chemicals Limited IND 296.97 5.52 N/A 6.29 6.06 6.35 7.08 -

Average 1,040.05 19.47 707.45 16.68 12.68 12.34 10.44 2.08 Median 835.93 9.05 717.90 15.65 13.85 12.88 10.45 1.94 Source: Horizon Securities, Reuters

Sensitivity Analysis In the short term, the urea market may continue to be quite volatile due to the aftermath of the financial crisis, volatile gas prices, and unpredictable government policies over the sector. As urea price is the main revenue driver for DPM, we want to highlight the sensitivity of our DCF valuation and EPS to changes in urea prices. As our analysis shows, DPM’s valuation and earning power is highly sensitive to fluctuations in urea prices. A 10% change in urea price results in a 20% change in our DCF valuation and a 30% change in earnings.

As our analysis show, DPM valuation and earning power is highly sensitive to fluctuations in urea prices. A 10% change in urea price results in 20% change in our DCF valuation and a 30% change in earnings.

Figure 4. DCF valuation and earnings are highly sensitive to urea price

Urea Price DCF value per share 2009 EPS% US$ VND % VND %

20% 330 50,161 39% 4,477 59%15% 316 46,610 30% 4,060 45%10% 303 43,060 20% 3,643 30%5% 289 39,509 10% 3,225 15%0% 275 35,959 0% 2,808 0%

-5% 261 32,408 -10% 2,391 -15%-10% 248 28,858 -20% 1,973 -30%-15% 234 25,307 -30% 1,556 -45%-20% 220 21,757 -39% 1,138 -59%

Source: Reuters, Horizon Securities

The Ca Mau Takeover Scenario For weeks we had been hearing reports that DPM would takeover the Ca Mau Urea Fertilizer project from its parent, PetroVietnam (PVN). At the time, we knew the AGM was scheduled to be held on March 24, 2009, but no information about the acquisition had been released to shareholders. To our surprise, just four days before the AGM, DPM posted a ten-line memo on its website stating that there would be a shareholder vote on the acquisition of the Ca Mau project. Shareholders would have to wait until the AGM to learn about the details of what they would be voting on that day.

Minority shareholders’ rights were upheld. The acquisition was avoided, for now…



The AGM was held yesterday and the shareholders present had a chance to get a few more details about the acquisition before voting. We learned that the plant is currently being developed by PVN, with a total investment cost of ~US$900 million and design capacity of 800,000 tons a year. Management also announced that it would not issue new shares, but finance 20-30% of the investment from internally generated cash. The new plant is expected to be depreciated within 8 years starting from 2012, using a straight-line method. Gas cost for the Ca Mau Urea Fertilizer project in 2012, is expected to be $5.03 per million BTU, which is ~26% higher than what gas will cost for DPM at that time. Approximately US$69 million have already been invested in the project; construction will begin this year and should be completed by 2012. Contracts with the contractor were signed in July 2008, and PVN is looking to transfer the total investment cost to DPM. Finally, we learned the takeover would require a supermajority vote.

At a total investment cost of US$900 million, the Ca Mau Urea Fertilizer project is almost 3 times more expensive than DPM’s current plant. At a cost of US$1,125 per ton it is even more expensive than the average US$1,000 per ton cost for Greenfield projects worldwide. According to our break-even cost analysis of the Ca Mau Urea Fertilizer project, urea prices would need to be above US$320 per ton for it to be profitable. In sum, we see this deal as being more expensive and less profitable than DPM’s current plant, and believe it would have been a hard pill to swallow for shareholders.

Figure 5. Estimated break-even cost for Ca Mau

Average cash cost Ca MauAmmoniaGas price (US$/MMBTU) 5.03$ Gas use (MMBTU/mt NH3) 37 Gas cost (US$/mt NH3) 186$ Other prod. Cost (US$/mt NH3) - Total cash cost 186$

UreaAmmonia cost (US$/mt NH3) 186$ Ammonia use (NH3/mt urea) 0.58 Ammonia cost (US$/mt urea) 108$ Other prod. Cost 49$ Total cash cost 157$ Other costs 20$ Depreciation cost 141$ Estimated break-even 318$ Source: Horizon Securities, Company

Fortunately, PVN, PVFC and DPM’s management were excluded from the vote (due to obvious conflicts of interest). By the end of the AGM, shareholders had the takeover by 65% against to 35% for the acquisition. However, following the announcement of the results, the Chairman of DPM (who is also PVN’s representative) suggested that it might put the deal back on the table for another shareholders’ vote at a later date.



Earning Outlooks

Urea price; the main revenue driver Sales of nitrogen fertilizer represent more than 97% of total revenues of DPM. As the company has a high level of fixed cost, a swing in urea price impacts significantly on its bottom line. Urea prices were extremely volatile in 2008. International prices rallied by more than 114% from January to July 2008, followed by a substantial fall in the second half of the year.

As the company has a high level of fixed cost, a swing in urea price would have a greater impact on its bottom line.

Vietnam’s fertilizer sector is not under direct government control; however as the government is still the largest stakeholder in the sector, and as Vietnamese producers still receive subsidized gas, the State does reserve the right to instruct producers regarding their selling price. Last year, when the country was suffering from rampant inflation, the government urged fertilizer companies not to raise prices and as a result the domestic urea price did not increase as much as international prices. Figure 6. DPM’s revenue structure Figure 7. Domestic vs. International urea prices

DPM urea74%

Imported urea23%

Electricity0%

Pakaging0% Others

0%Ammonia

3%

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Jan-0

7

Feb-07

Mar-07

Apr-07

May-07

Jun-0

7Ju

l-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-0

8

Feb-08

Mar-08

Apr-08

May-08

Jun-0

8Ju

l-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-0

9

Feb-09

International Price (US Gulf) Domestic price (DPM)

Source: Company report Source: Horizon Securities, Reuters Since 2007, domestic urea prices have fluctuated but the magnitude has not been as dramatic as on international markets. Price peaked in August 2008, up by more than 70% from January 2008, and then dropped by 37% during the last quarter of the year. We’ve learned from management that DPM’s average selling price for the first two months of 2009 was US$340/ton; higher than current international prices of ~US$295/ton. Domestic urea prices have strengthened since the beginning of the year; supported by 1) the lack of cheap fertilizers imports from China; and 2) strong demand from the 2008/09 winter-spring rice crop. China is a net exporter of urea and 90% of all Vietnamese urea imports come from China. However, China urea exports are no longer price-competitive based on current international prices (near parity with domestic prices) after factoring in the hefty 110% export tax for Feb-June 2009. In February 2009, Chinese urea in Northern Vietnam was selling for ~30% more than DPM’s products. By mid-February, encouraged by rising rice prices, farmers had planted 27.2% more spring/winter rice paddies than the year before.



We expect domestic prices to converge towards international prices and expect to see some pressure on DPM to reduce its price in the second half of the year. Production costs Vietnam is within the average of gas producing countries; with gas prices around US$3.3-3.6/MMBTU, versus US$4.5-8.6/MMBTU in West Europe and the US, and US$1.0-1.5/MMBTU in the Middle East. At current market prices, many manufacturers in the West are running at break-even, while producers in Asia and the Middle East are still profitable as a result of their low costs. Gas costs account for ~30% of total production costs for DPM. The company is purchasing subsidized natural gas from Dai Hung oil field at US$2.2/MMBTU; 30-40% lower than the current market price in Vietnam. At the current gas price of US$2.2/MMBTU, we estimate the cash cost for DPM’s production at approximately US$96/ton. By the end of 2010, the government will reduce gas subsidies to DPM, which means production costs will increase and margins will fall. In 2011, we estimate DPM’s production cost (excluding depreciation) will increase by 24% to US$140/ton when the company has to buy natural gas at market prices.

DPM is currently purchasing natural gas from Dai Hung oil field at US$2.2/MMBTU, which is 30-40% lower than the current market prices in Vietnam.

Figure 8. Cash cost on urea producers

Average cash cost W.EU/US Ukraine DPMAmmoniaGas price (US$/MMBTU) 4.50$ 8.60$ 2.20$ Gas use (MMBTU/mt NH3) 36 38 37 Gas cost (US$/mt NH3) 162 327 81 Other prod. Cost (US$/mt NH3) 26 27 - Total cash cost 188 354 81

UreaAmmonia cost (US$/mt NH3) 188 354 81 Ammonia use (NH3/mt urea) 0.58 0.58 0.58 Ammonia cost (US$/mt urea) 109 205 47 Other prod. Cost 45 67 49 Total cash cost 154 272 96 Source: SEB Enskilda, Horizon Securities

Imported fertilizer drove down profit margins Apart from its own production, DPM distributes imported fertilizers. Gross margins of

DPM fell from 39% to 29% in 2008 due to the increase in imported fertilizers prices. In 2008, DPM imported approximately 250,000 tons of fertilizers, of which 197,538 tons had been sold during the year. Due to falling fertilizer price throughout the end of 2008, DPM recorded a loss from its imported fertilizer. Total loss and provision in 2008 amounted to VND1,000 billion (US$57 million) which drove down its profit margins. According to management, in

2009 the company will continue to import around 250,000 tons of fertilizers per

Figure 9. DPM’s profitability

--

5%

10%

15%

20%

25%

30%

35%

40%

45%

2005A 2006A 2007A 2008U

Gross Margin (%) Operating Margin (EBIT) (%) Net Margin (%)

Source: Horizon Securities



year; the amount of imports will be reduced when new capacity comes on stream. As the current plant will be fully depreciated in 2010, we expect gross margins to improve from 2011 onwards.

Investment pipeline

According to the management, the company is currently investing in three major projects; a CO2 Collecting System, an office building in downtown Ho Chi Minh City and a commercial center in Ca Mau Province. Total capital expenditure for the three projects and maintenance costs for the current plant is expected to be US$44 million in FY09, US$35 million in FY10 and US$7.8 million after-wards. Figure 10. Total capital expenditures

2009 2010 2011 2012 2013 2014Total US$ 43,910,055 35,051,095 7,879,666 7,879,666 7,879,666 7,879,666

VND'mln 768,426 613,394 137,894 137,894 137,894 137,894 Source: Company report, Horizon Securities In addition, from yesterday’s AGM, the company announced several large-scale projects, which are still at a feasibility study stage; a DAP plant in Marocco (US$600-900 million), and a Urea/Ammonia plant in Russia (US$3 billion).

Key investment risks We rate DPM’s shares Speculative Risk. Key risks to our price objective include the natural volatility of the agricultural markets and weather uncertainties. Earnings can be impaired by poor weather conditions, which can cause a reduction in fertilizer application rates; lower international urea prices, which would adversely affect revenue; higher natural gas prices, which increase costs; and fluctuations in the volume of international purchases. We are also wary that the acquisition of the Ca Mau Urea Fertilizer project may be put back on the table for another shareholders’ vote. A highly cyclical sector

The fertilizer sector in Vietnam is highly cyclical. A significant fall in rice output as a result of climate change may cause demand for urea to slump. In addition, a fall in rice prices would squeeze farmers’ profits and force them to reduce usage of fertilizers. Volatility of urea prices

Fertilizer prices are highly correlated to agricultural commodity prices. Therefore a steep decline in corn, soy or wheat prices would result in acreage declines, lower fertilizer usage and lower application rates. Urea prices were extremely volatile last year. International prices rallied by more than 114% in the first half of 2008, followed by a fall of 76% throughout the latter part of 2008. We recall the last economic crisis when urea price fell below US$80 per ton in 1999 from a level of US$230-240 per ton in 1996. High volatility in this sector makes forecasting prices for the medium and long-term quite difficult. Also, a potential elimination of Chinese urea tariffs would result in cheaper Chinese product flooding the local market and would temper nitrogen price increases.

Fertilizer prices are highly correlated to agricultural commodity prices. Therefore a steep decline in corn, soy or wheat prices would result in acreage declines, lower fertilizer usage and lower application rates.

Gas supply concerns

Currently, natural gas prices in Vietnam are still cheaper than on international markets. As DPM’s plant uses gas-based production, inadequate gas supply and increased gas costs could affect its cost structure in the future. The company is



benefiting from subsidized gas from PetroVietnam at a price of US$2.2 through 2010. Should the subsidies be lifted prematurely or should the amount of subsidies be revisited, this would negatively impact our valuation. The company has already signed a long-term contract with PV Gas (a distributor for British Petroleum in Vietnam) to source gas at US$3.91 in 2011 and increasing by 2% per year thereafter. Government intervention

In general, the fertilizer sector in Vietnam is not directly controlled by the government and companies can decide on their selling prices depending on market conditions. However, as the government (represented by PetroVietnam) is still the majority stakeholder at DPM, it has great influence over the company. In a period of high inflation the government might take some actions to urge fertilizer producers not to raise price in order to control inflation. On the other hand, if international prices fall too much below domestic prices the government might raise import taxes to protect local manufacturers. Historically, government policies in Vietnam are very unpredictable and that poses some risks to the sector. Ca Mau takeover; value destructive for current shareholders Even though, the takeover of Ca Mau has been rejected at the AGM, there is a possibility that DPM or PVN might re-propose the deal later on. The takeover would have a consequential impact on DPM’s earnings and capital structure. From our analysis, we believe that at US$275/ton for urea, the takeover of the Ca Mau plant will have a dilutive effect over DPM’s value as the new plant would have a higher EV/EBITDA multiple than its current operation; of 11.3x versus 5.2x.

Appendix Company Background

Established in 2004, Petrol Vietnam Fertilizer and Chemicals Corporation (DPM) was privatized and listed on HOSE in 2007. DPM is engaged in the production and trading of nitrogen fertilizer (urea) and other related chemical products such as; liquid

ammonia and crop-protection chemicals. Sales of urea fertilizer accounted for approximately 97% of total turnover. At the moment, it is the largest domestic producer of urea fertilizer representing more than 40% of the domestic urea market. DPM runs the Phu My Fertilizer Plant in Ba Ria-Vung Tau with a total production capacity of 740,000 tons of fertilizer per annum. By 2010, the company expects to increase its urea capacity in the Phu

My Plant to 800,000 tons per annum.

Figure 11. Shareholder structure

PetroVietnam (State)60%

Others33%

PVFC2%

ACB1%

BIDV4%

Source: Company report

Industry Analysis

National demand for fertilizers in 2008 was around 7.6 millions tons a year, and is estimated to grow by around 6.3% until 2013. Consumption of nitrogen fertilizers (urea) in 2008 was around 1.9 millions tons or 25% of total fertilizer consumption. In recent years, demand for urea fertilizer stabilized to around 1.8-1.9 million tons a year due to the reduction in paddies areas and increased usage of hybrid crops.



Currently, local production can only supply approximately 50% of the domestic consumption. There are only two urea manufacturing plants in the country, Petro Vietnam Fertilizer & Chemicals (DPM) and Ha Bac Nitrogen Fertilizer (HANICHEMCO), which have a combined design capacity of about 910,000 tons per year. The country still has to import around 50% of the total urea needed; 90% of which from China.

We expect urea shortages to persist until 2012 as no additional supply is coming on stream before then. Currently, VinaChem is planning to upgrade the Ha Bac urea facility (HANICHEMCO) to 500,000 tons a year by 2011 and is planning to build another plant in Ninh Binh with a capacity of 560,000 tons a year. In addition, the PetroVietnam Group and the Cong Thanh Group also plan to develop two manufacturing facilities of 800,000 tons and

560,000 tons which are expected to become operational by 2012. By 2012, total urea design capacity in the country is expected to reach 3.22 million tons. As long as there is no substantial delay in the construction of these new plants and demand remains at current levels, we believe the urea sector may be over-supplied in 2012 by 1.3 million tons. Vietnamese producers would have to reduce production or find export markets, e.g Laos and Cambodia. We believe DPM’s strategic location is one of its competitive advantages to access the Southern market. Figure 13. Capacity expansion schedule Urea Tons Capacity

Company TypeKey stakeholder(s) 2007 2008 2009 2010 2011 2012

PetroVietnam Fertilizers & Chemicals JSC (DPM.HM) JSC PetroVietnam 740,000 740,000 740,000 740,000 800,000 800,000 Ha Bac Nitrogen Fertilizers & Chemicals Co. (HANICHEMCO) State VinaChem 170,000 170,000 170,000 170,000 500,000 500,000 Ninh Binh Fertilizers Project State VinaChem - - - - - 560,000

Ca Mau Urea Fertilizers Project State PetroVietnam - - - - - 800,000

Nghi Son Fertilizers Project JSCCong Thanh Group - - - - - 560,000

Total 910,000 910,000 910,000 910,000 1,300,000 3,220,000 Source: Horizon Securities

Figure 12. Demand outstripping supply

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008E

tons

Consumption Local supply

Source: GSO



Financial Highlights Income Statements VND'mlnFY ended, 31 December 2007A 2008A 2009E 2010E 2011E 2012E 2013E 2014E

Sales 3,779,038 6,475,368 5,721,325 5,721,325 5,924,925 5,068,300 5,068,300 5,068,300 COGS (2,298,181) (4,624,125) (4,251,177) (4,033,424) (3,838,237) (3,176,711) (3,235,289) (3,266,838) Gross profit 1,480,857 1,851,244 1,470,148 1,687,901 2,086,688 1,891,589 1,833,011 1,801,462

S&A expense (213,907) (445,925) (400,493) (400,493) (414,745) (354,781) (354,781) (354,781) EBIT 1,266,950 1,405,319 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681

Financial income 140,533 143,127 75,417 188,529 262,031 354,989 455,385 550,903 Financial expense (85,416) (53,580) (707) (506) (405) (355) (330) (317)

Interest expense (81,496) (31,216) (707) (506) (405) (355) (330) (317) Income from JV&A - - - - - - - - Other Profits 7,615 6,008 - - - - - -

EBITDA 2,356,362 2,484,728 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856 EBIT 1,266,950 1,405,319 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681 EBT 1,329,682 1,500,874 1,144,365 1,475,431 1,933,569 1,891,443 1,933,285 1,997,266

Enterprise Income Tax (202) (115,581) (80,171) (96,518) (125,365) (115,234) (110,843) (108,477) Deferred Income Tax - - - - - -

Net profit 1,329,480 1,385,293 1,064,194 1,378,913 1,808,204 1,776,209 1,822,443 1,888,789 EPS 5,171 3,652 2,808 3,629 4,758 4,674 4,796 4,970

Balance Sheets VND'mlnFY ended, 31 December 2007A 2008A 2009E 2010E 2011E 2012E 2013E 2014E

Current assets 2,467,577 2,692,502 3,604,440 4,476,687 5,609,031 6,671,802 7,878,290 9,149,853 Cash 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286 8,151,108 Short term investment - - - - - - - - Account receivable 59,503 573,161 282,148 282,148 292,188 249,944 249,944 249,944 Inventory 400,698 1,111,308 908,471 861,937 820,226 678,859 691,377 698,119 Other current assets 35,024 65,319 57,213 57,213 59,249 50,683 50,683 50,683

Non current assets 3,270,970 2,499,870 2,161,308 1,896,230 1,810,106 1,696,403 1,555,122 1,413,841 Long- term receivables - - - - - - - - Fixed assets 2,780,644 1,899,296 1,560,734 1,295,656 1,209,532 1,095,829 954,548 813,267 Investment in property - - - - - - - - Long-term investments 24,425 205,536 205,536 205,536 205,536 205,536 205,536 205,536 Other long-term assets 465,901 395,038 395,038 395,038 395,038 395,038 395,038 395,038

TOTAL ASSETS 5,738,547 5,192,372 5,765,748 6,372,917 7,419,137 8,368,205 9,433,412 10,563,694

Current liabilities 1,361,269 438,629 440,511 428,767 426,783 359,643 362,406 363,899 Short term debt 580,104 4,021 2,011 1,005 503 251 126 63 Account payable 151,258 204,924 209,647 198,909 189,283 156,660 159,548 161,104 Advances from customers 40,490 55,018 57,213 57,213 59,249 50,683 50,683 50,683 Other current liabilities 589,417 174,666 171,640 171,640 177,748 152,049 152,049 152,049

Non current liabilities 117 12,318 12,318 12,318 12,318 12,318 12,318 12,318 Long-term loan & debt - 3,049 3,049 3,049 3,049 3,049 3,049 3,049 Other long-term liabilities 117 9,269 9,269 9,269 9,269 9,269 9,269 9,269 Deferred tax liabilities - - - - - - - -

Owner's Equity 4,377,161 4,719,424 5,290,918 5,909,832 6,958,036 7,974,244 9,036,687 10,165,476 Minority interest - 22,001 22,001 22,001 22,001 22,001 22,001 22,001 TOTAL LIABILITIES & OWNER'S EQUITY 5,738,547 5,192,372 5,765,748 6,372,917 7,419,137 8,368,206 9,433,412 10,563,694



Cashflows Statements VND'mlnFY ended, 31 December 2007A 2008A 2009E 2010E 2011E 2012E 2013E 2014ENet profit (loss) before tax 1,329,682 1,500,873 1,144,365 1,475,431 1,933,569 1,891,443 1,933,285 1,997,266 Adjustment for:

Depreciation and amortisation 1,089,412 1,079,409 1,106,988 878,472 224,018 251,597 279,176 279,176 Other adjustments 40,494 525,920 (74,710) (188,023) (261,626) (354,634) (455,055) (550,585)

Income before changes in WC 2,459,588 3,106,202 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856 (Increase) decrease in receivables 372,089 (581,225) 291,013 - (10,041) 42,245 - - (Increase) decrease in inventories (152,612) (1,344,385) 202,837 46,533 41,711 141,367 (12,518) (6,742) Increase (decrease) in payables (918,695) (304,069) 4,723 (10,738) (9,626) (32,623) 2,889 1,556 (Increase) decrease in prepaid exp 46,416 40,567 Interest paid (85,579) (30,990) (707) (506) (405) (355) (330) (317) Enterprise income tax paid (131) (118,280) (80,171) (96,518) (125,365) (115,234) (110,843) (108,477) Other cashflows from operating (26,186) (57,959) 7,275 - 6,108 (25,699) - -

Net cash flows from operations 1,694,890 673,860 2,601,614 2,104,652 1,798,344 1,798,106 1,636,604 1,611,876 Purchase of fixed assets (11,899) (116,473) (768,426) (613,394) (137,894) (137,894) (137,894) (137,894) Disposals of fixed assets - - Loans to other entities - - Collections from borrowers 910,000 - Payments for investments - (179,031) - - - - - - Proceeds from sale of investments - - Interest and dividends received 37,285 123,830 75,417 188,529 262,031 354,989 455,385 550,903 Change in other LT assets/liabilities - - - - - -

Net cash flows from investing 935,386 (171,675) (693,009) (424,865) 124,137 217,095 317,491 413,009 Issuance of shares 12,018 20,590 - - - - - - Capital redemption (1,522,660) (35,053) - - - - - - Borrowings received - 17,157 - - - - - - Borrowings repaid (865,268) (590,191) (2,011) (1,005) (503) (251) (126) (63) Finance lease principal paid - - Dividends paid - (944,326) (492,700) (760,000) (760,000) (760,000) (760,000) (760,000)

Net cash flows from financing (2,375,910) (1,531,823) (494,711) (761,005) (760,503) (760,251) (760,126) (760,063) Net increase (decrease) in cash 254,366 (1,029,638) 1,413,894 918,781 1,161,978 1,254,950 1,193,969 1,264,821 Cash at beginning 1,717,986 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286 Impact of exchange rate - - - - - - - - Cash at end of year 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286 8,151,108

Financial RatiosFY ended, 31 December 2007A 2008A 2009E 2010E 2011E 2012E 2013E 2014E

Revenue Growth (%) 23.87% 71.35% (11.64%) -- 3.56% (14.46%) -- --Gross Margin (%) 39.19% 28.59% 25.70% 29.50% 35.22% 37.32% 36.17% 35.54%Operating Margin (EBIT) (%) 33.53% 21.70% 18.70% 22.50% 28.22% 30.32% 29.17% 28.54%Net Margin (%) 35.18% 21.37% 18.60% 24.10% 30.52% 35.05% 35.96% 37.27%Net Income Growth (%) 14.48% 4.09% (23.18%) 29.57% 31.13% (1.77%) 2.60% 3.64%Receivable turnover (days) 22.31 17.83 27.28 18.00 17.69 19.52 18.00 18.00 Payable turnover (days) (32.47) (18.34) (17.80) (18.49) (18.46) (19.87) (17.84) (17.91) Inventory Turnover (days) 97.95 77.85 86.71 80.11 79.98 86.12 77.29 77.62 Current Ratio (x) 1.81 6.14 0.12 0.10 0.08 0.05 0.05 0.04 Cash to Current Debt (%) 144.89% 214.92% 534.97% 763.91% 1039.73% 1582.77% 1900.16% 2239.94%Debt to Equity (%) 31.10% 9.56% 8.56% 7.46% 6.31% 4.66% 4.15% 3.70%Cash Per Share (VND) 5,190 2,486 6,218 8,619 11,677 14,980 18,122 21,450 Net Debt (Cash) Per Share (VND) (1,608) (1,297) (5,023) (7,459) (10,522) (14,001) (17,136) (20,460) Book Value Per Share (VND) 11,519 12,443 13,960 15,552 18,311 20,985 23,781 26,751 Return on Assets (%) 23.17% 26.65% 18.46% 21.64% 24.37% 21.23% 19.32% 17.88%Return on Equity (%) 30.37% 29.32% 20.11% 23.33% 25.99% 22.27% 20.17% 18.58%



Horizon Securities' Rating System Under our rating system, each stock is given a two-part rating, which indicates the following: Investment Ratings

• Buy (1) • Neutral (2) • Underperform (3)

Risk Ratings

• Low (L) • Medium (M) • High (H) • Speculative (S)

Our Analyst's Methodology Target price and expected total return Initially, an analyst derives an expected 12-month target price using multiple valuation methodologies (as specified in the Valuation section of the research). The current market price is then compared with the target price to calculate an expected gain or loss. The one-year projected dividend yield, if any, is then added to the expected gain or loss to calculate an expected total return.

Risk rating The analyst then assesses the risk of a stock based on various quantitative and fundamental factors that relate to the stock's local market/country (as specified in the Risk section of the research). We categorize risk as Low, Medium, High or Speculative.

Ratings-Risk-Return Matrix Finally, based on both the expected total return and risk rating, an investment rating is established using our ratings-risk-return matrix (below). We categorize investment ratings as Buy, Neutral or Underperform. All published research contains a Valuation and Risk section where analysts must discuss how they derived their price targets and risk ratings. Investors are encouraged to read this section for a detailed description.

Expected Total Returns Ratings-Risk-Return Matrix

LOW Risk MEDIUM Risk HIGH Risk SPECULATIVE BUY (1) R >10 R >15 R >20 R >35 NEUTRAL (2) 0 <R <10 5 <R < 15 10< R <20 15 < R < 35 UNDERPERFORM (3) R <0 R<5 R <10 R <15

R = Expected Total Return (12 months) = [(Target Price - Current Price)/Current Price] + Forecast 12-month Dividend Yield.

These benchmarks are subject to change.



Important Disclosures Guide to Investment Ratings: Horizon Securities’ stock recommendations include a risk rating and an investment rating. Risk ratings, which take into account both price volatility and fundamental criteria, are: Low [L], Medium [M], High [H] and Speculative [S]. Investment ratings are a function of Horizon Securities’ expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating. Investment ratings are: Buy [1] (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Neutral [2] (0% - 10% for Low-Risk stocks, 5% - 15% for Medium-Risk stocks, 10% - 20% for High-Risk stocks, and 15% - 35% for Speculative stocks); and Underperform [3] (negative total return for Low-Risk stocks, 5% or less for Medium-Risk stocks, 10% or less for High-Risk stocks and 15% or less for Speculative stocks).

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Dpm - PetroVietnam Fertilizer and Chemicals

Economy & Finance

Transcript of Dpm - PetroVietnam Fertilizer and Chemicals