FPT CORPORATION (FPT) - MBS · 5 FPT Corporation (FPT) 22/08/2016 Software outsourcing is a...

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FPT CORPORATION (FPT)

Initiation Proving level of a blue-chip

■ A leader in Vietnam’s software outsourcing and solution, generating revenue in both

foreign market (Japan, EU, USA, other emerging countries, etc) and domestic one.

The company is scaling up its IT human resources to grab more opportunities of

sustainable global market as well as of recovering domestic one.

■ The third in Vietnam’s telecom market in terms of market share. FPT has

determined in upgrading Vietnam’s internet technology from xDSL to FTTx from

2014. Aggressive investment costs have dragged the bottom line, but now they

nearly come to an end.

■ The divestment of FPT Retail and Trading, the segment with humble growth outlook

especially the Trading, will free the whole FPT’s performance.

■ Action: Initiating coverage of FPT with a BUY rating and a 12-month price target of VND 50,000.

Financial indicators

VNDbn 2014 2015 2016F 2017F* 2018F*

Revenue 32,645 37,927 34,678 18,863 21,432

of which

Technology 7,040 8,630 9,421 10,952 12,678

Telecom & Digital content

4,728 5,567 6,440 7,227 8,016

Distribution & Retail 22,731 25,637 20,463 - -

Education 590 586 633 684 738

PBT 2,459 2,851 2,657 2,652 3,058

Diluted EPS (VND) 3,707 3,947 3,467 3,392 3,977

Growth (%) 1.5% 6.5% -12.2% n/a 17.2%

PE 10.6 12.0 12.3 10.5

ROE (%) 21.6% 23.4% 19.2% 16.9% 17.9%

*2017&18 assuming to finish divesting from Retail & Trading, but not including extraordinary profit

from the divestment. (Source: FPT, MBS Research)

Investment thesis

We are initiating coverage of FPT Corporation (FPT) with a BUY rating and a price target of

VND 50,000 (20% upside) based on these following:

Setting a sprat to catch a mackerel. After the divestment of FPT Retail and

Distribution, which we expect to complete some-when between 2016 and 2017, FPT is a

two-armed beast, sprawling its tentacles in the Techno (32% contribution to the PBT) and

the Telecom (37%). We expect these two arms to help FPT post a 17% CAGR on PBT from

core business per annum, tripling its best performance in the previous years.

Software now takes the main steer and Hardware can no more be a drag. The

proportion between Software and Hardware revenue in Techno segment was 79%/10% as

of 2015 (this used to be 51%/20% in 2010), implying much minor effect of ‘boring’

Hardware into the whole Techno. And thanks to (1) Vietnam’s competitive cost advantage

in outsourcing services; and (2) the recovery in domestic market as well as the expansion

into other emerging ones of solution sub-segment, FPT’s Software is expected to

continuously enjoy its fruitful outlook, of 22% CAGR during 2016-2020. We notice an

aggressive plan in scaling up FPT’s number of IT engineers, which is the key catalyst for

the Software to sustainably grow.

22nd August, 2016

Rating BUY

Price target (VND) 50,000

Upside 20%

Cash dividend 10.0%

Dividend yield 2.6%

Stock dividend 0.0%

Stock data

Current price (VND) 41,500

Outstanding shares 459,344,308

Market cap (Bil. VND) 19,614

52-week average volume 1,933,670

52-week price range 36,100 – 46,400

% foreign owned 49%

% FOL 0%

12 month stock chart

Contact

Nguyen Thach Thao

Senior Analyst

E: [email protected]

T: +84 907 655 495

0

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VND per share Volume Last Price

2 FPT Corporation (FPT)

22/08/2016

Aggressive investment period in Telecom seems coming to an end, signaling a

turning point in profit. The final costs for fiberization in Hanoi and HCMC may finish

being allocated in July 2016; while those in tier-2 cities (equal to only one-third of in Hanoi

and HCMC) are expected to end in 2H2018. Thus, PBT margin will correspondingly recover.

We expect Telecom & Digital content PBT to grow at a CAGR of 14% in the next five years.

The cheapest blue-chip. We expect EPS from core business after the divestment to be

approximately VND3,700 in 2017-2018, implying a P/E ratio of 11.2x at the current price,

much lower than the current P/E of VN-Index of 15.0x. It does make sense in case FPT

continues growing at a ‘boring’ rate; however, considering FPT’s higher potential growth

outlook, its stock deserves a re-pricing.

Key Risks:

Divestment fulfillment risk: The failure of the divestment may turn FPT to its old story of

disappointing performance.

Exchange rate risk: The company exposes to the devaluation of JPY, USD and EUR,

especially the JPY given high proportion of Japan market in FPT’s software revenue. We were

told that the company has no GBP revenue; thus, there is minor risk from the Brexit.


22/08/2016

WHY CAN A BLUECHIP TRADE AT THIS LOW PRICE?

Figure 1: FPT’s financial performance vs. FPT’ stock price

performance

(Source: FPT, MBS Research)

Looking at FPT’s historical P/E level which has been consistently below 10x over years, there

should be a bunch of surprises for such a top blue-chip, especially if one compares with the

average P/E level of 12x to 15x of VN-Index in the recent four years. But, everything happens

for a reason and as looking at FPT’s bottom line performance in the same period, it is hardly for

FPT’s fans to blame the market. 6.5% EPS growth posting in 2015 was FPT’s best performance,

lower than even deposit rates.

We, now, are not here to complain more about FPT but to tell a trust in its future brighter

outlook – 17% growth on core business per annum, which is tripling its historical best

performance and is attributable to two main forces namely Technology and Telecom. Noting

that FPT Retail and Trading is planned to be divested for no more be consolidated into the

parent’s results. FPT currently expects the divestment to fulfill in Q4/2016.

A brighter outlook deserves such a higher P/E level and FPT’s investors can dream of a P/E of

over 12x for sure.

TECHNOLOGY: SWITCHING FROM HARD TO SOFT AND LIFE

MAY BECOME SOFTER

What has driven the growth down?

Figure 2: FPT’s Technology performance


2,872

3,820

3,499 3,652 3,707 3,947

3,762 33.0%

-8.4%

4.4%

1.5%

6.5%

-4.7%

-20%

-10%

0%

10%

20%

30%

40%

0

1,000

2,000

3,000

4,000

5,000

2010 2011 2012 2013 2014 2015 H1/2016

FPT's EPS performance (2010-6M2016)

EPS (bonus-adjusted, VND) EPS growth

8.6

5.1 5.3

7.0

9.2

10.4 10.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010 2011 2012 2013 2014 2015 H1/2016

FPT's P/e level (2010-current)

P/E level

0

2,000

4,000

6,000

8,000

10,000

2010 2011 2012 2013 2014 2015

VN

Dbn

FPT's Techno revenue performance

IT services System integration Software

CAGR 16.1% CAGR 0.4% CAGR 29.3%

0

200

400

600

800

1,000

2010 2011 2012 2013 2014 2015

VN

Dbn

FPT's Techno PBT performance

IT services System integration Software

CAGR -21.5% CAGR 9.4% CAGR 13.8%

CAGR 4.4% CAGR 14.7%


22/08/2016

In fact, Technology segment, one of FPT’s proud, did not bring fair cash compared to its well-

known brand name. 2010-2015 CAGR on revenue was 14.7% and that on PBT was much more

humble at 4.4%. So, whether this segment is not as delicious as it sounds or something else

happened? We broke down the Techno and here is the answer.

FPT’s Technology includes three parts, namely Software, System integration (Hardware) and IT

services, with the two formers are the dominant growth drivers. Software has been the best

performer, posting a CAGR of 29.3% on revenue and 13.8% on PBT while the loser was

Hardware, with the figures of 0.4% and negative 21.5% respectively. Thus, it can be concluded

that Hardware’s poor results combined with its large proportion did drag the final figure of the

whole Techno segment, regardless how well Software has done.

Figure 3: IT expenditure in Vietnam

(Source: IDC, MBS Research)

This, however, is consistent with International Data Corporation (IDC)‘s expectations of a shift

from hardware to software. And along with this shifting, Software has gradually taken the main

steer in FPT’s Techno boat. In details, as of the end of 2015, Software made up 79% in total

Techno PBT while that of Hardware was only 10%. These figures used to be balance at 51%

and 40% respectively five years ago.

Figure 4: Changes in FPT’s Technology breakdown


Given Hardware’s current proportion, we expect its negative effect to be minor in the whole

Techno segment; and correspondingly, we foresee a more attractive growth that this segment

can register in the future, driven by the new captain namely Software.

Software: Is it still attractive?

The next question is whether Software still enjoys fruitful outlook.

Software is comprised of Software outsourcing (70-80% in revenue) and Software solution. Of

which, while outsourcing witnessed consistent growth of over 30% over years, solution growths

were flat and only strongly rebounded last year.

573

642

728

823

925

1,270

1,289

1,285

1,209

1,211

0 500 1,000 1,500 2,000 2,500

2014

2015

2016

2017

2018

IT expenditure in Vietnam (USDmn)

Software and IT services Hardware

33%

57%

10%

61%

29%

10%

FPT's Techno revenue breakdown The outer ring: 2015 The inner ring: 2010

Software System integration IT services

51% 40%

9%

79%

10%

11%

FPT's Techno PBT breakdown The outer ring: 2015 The inner ring: 2010

Software System integration IT services


22/08/2016

Software outsourcing is a contract, hiring an IT company to add up one or many functions to an

already-complete software; and cost is the main criteria for one to choose a suitable partner.

According to A.T.Kearney report in 2015, Vietnam was the most financially attractive, scoring

3.30 compared to other outsourcing countries, which implies an inevitable advantage of

Vietnamese outsourcers in general and FPT in specific in this segment.

Figure 5: Outsourcing analysis

(Source: A.T.Kearney, FPT, MBS Research)

About Japan market, FPT’s current biggest clients, besides offering competitive service fees,

another key point to overcoming Indian and Chinese rivals is being able to fluently communicate

in Japanese. And the ’10,000 BrSE program’, to train 10,000 bridge software engineers who are

competent in both IT and Japanese language skills, is FPT’s strategy to win over this market.

Table 1: Criteria for choosing outsourcers in Japan

Outsourcers ranking in Japan Vietnam China India Korea

Cost ◎

Japanese Language Skills ◎

IT Experiences ◎ ◎

Number of software engineers ◎ ◎

Access to Japan ◎ ◎

◎- excellent; - good; - not good

(Source: JETA, FPT, MBS Research)

On top of these factors, we also note that according to Gartner’s estimates, IT outsourcing

spending in Japan was roughly USD92.7bn in 2015, and is expected to be around USD98.6bn by

2019, equivalent to a CAGR of 2%. Despite acknowledging the slowing down of Japan market,

we still see substantial room for FPT’s growth due to low base effect given its relatively small

market share, of 0.2% there.

1,300

1,736

2,154

2,928

4,130

2,359

33.5%

24.1%

35.9%

41.1%

37.1%

0%

5%

10%

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45%

0

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2011 2012 2013 2014 2015 6M2016

FPT Software Outsourcing Revenue (VNDbn)

Software outsourcing revenue Growth y-o-y

45%

27%

16%

12%

FPT’s software outsourcing revenue breakdown in 2015

Japan The U.S. Europe Asia Pacific

3.14

2.26

2.72

2.67

3.15

3.01

3.06

1.81

2.99

3.20

2.28

3.30

2.35

0.49

2.73

3.30

0.94

2.74

2.21

3.11

0.00 2.00 4.00 6.00 8.00

India

China

Malaysia

Mexico

Indonesia

Thailand

Philippines

Brazil

Bulgaria

Egypt

Poland

Vietnam

Chile

US

Lithuanua

Sri Lanka

Germany

Romania

United Arab Emirates

Jordan

Outsourcers ranking in 2015

Financial attractiveness People skills and availability Business environment


22/08/2016

Software solution is a contract, hiring an IT company to actualize a software idea, from A to Z;

thus, high technology should be a key catalyst to select a partner. This revenue of FPT is largely

domestic-driven and has been under pressure both from the decline in government and

domestic private companies IT spending. For domestic private companies, they cut or delayed

some new projects as they are still recovering from the earlier economic crisis. These led to flat

performance in solution revenue as discussed briefly above.

Figure 6: Solution analysis


In 2015, in order to diversify geographic risks, FPT determined to strongly expand its solution

products to other emerging markets, such as Laos, Cambodia, Myanmar, Bangladesh,

Philippines, etc. Since then, the company has signed sizable contracts overseas, including a

USD10mn contract in Cambodia, two contracts in Bangladesh worth USD33.6mn and USD9.1mn

respectively and the most recent, a USD50mn contract in Malaysia. The executing timeline of

these contracts are in between 18 months and five years, based on their sizes. And as projects

have not come to completion phase, none of their value was already recorded into FPT’s

revenue.

We expect software solution to perceive such amazing growth in the coming years, driven by

(1) the continuous rebound of domestic market (this market witnessed a substantial recovery in

2015 with growth of 92% y-o-y); and (2) the new support from projects in emerging markets.

Human resource – key catalyst for future growth

Main input material of technology, especially software, is human resource, which makes up 70%

in software’s cost of goods sold. To sustain a ~ 20-30% growth per year, FPT aims to raise its

number of engineers up to 30,000 engineers as of 2020 from the current figure of 10,000,

equivalent to 25% growth per annum.

Figure 7: Numbers of IT engineers (historical vs. planning)


581 604 665 653

1,098

311

4.0% 10.1%

-1.8%

68.1%

-6.6%

-20%

-10%

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2011 2012 2013 2014 2015 6M2016

FPT Software Solution Revenue

(VNDbn)

Software solution revenue Growth y-o-y

581 604 483

388

743

- - 182 265

355

0

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015

FPT Software Solution Revenue breakdown (VNDbn)

Vietnam Emerging markets

6,500 8,528 10,000

30,000

0

10,000

20,000

30,000

40,000

2013 2014 2015 2016P 2017P 2018P 2019P 2020P

Numbers of engineers

CAGR 25%


22/08/2016

FPT University can be one of the primary supplies, meeting approximately 20-40% of the

demand per year. In 2016, total new admissions of FPT University is planned at 2,000 students,

with 50% of them applies for IT majors. However, the unmet demand is still significant and we

expect FPT to give up some software margins in the near term to grow the business more

aggressively. Software PBT margin dropped from a level of 19-21% in 2012-2013 to 14% in

2014-2015; of which, outsourcing PBT margin came down from 21-22% to 15-18% in the same

period.

TELECOM: LESS FIBERIZATION COSTS DRAGGING THE

BOTTOM LINE

Good growth on top-line …

FPT holds 22% market shares in telecom industry, after the two state-owned companies namely

VNPT (52%) and Viettel (25%). The company witnessed consistently growth in its number of

active subscribers, which was 25% annually.

Figure 8: FPT Telecom shares and growth

(Source: VNTA, FPT, MBS Research)

According to VNTA, Vietnam’s internet subscribers reached 7.7 million as of 2015. However, it

should be noted that this figure may include also the ‘inactive subscribers’; for example, FPT’s

inactive registrars make up around 80%. By assuming that this inactive proportion is similar for

other telecom companies, we estimate Vietnam’s real internet penetration per household was

23.6% as of 2015.

The government orientates this figure to achieve 40% in 2020, equivalent to 13% growth per

annum in number of subscribers (assuming Vietnam’s population to grow 2%/year). In our

view, Vietnam is likely to surpass this target given (1) new technology in internet namely FTTx

pushes outputs; and (2) Vietnam’s internet fee for households is attracting at USD110-120 per

year, equivalent to only 5-6% of its GDP per capita while this figure at other developing

countries is 30% (based on Vietnam Internet Association’s data).

… but stuck in PBT. Whether it ends soon?

Fiber optic swap had been executed since 2010 but only expand more aggressively in 2014, in

all big competitors VNPT, Viettel and FPT Telecom.

For FPT, the first fiber optic swap was applied for subscribers in Hanoi and Hochiminh City

starting in April 2014 and ending in June 2015. The costs relating to last-mile cable and modem

are allocated in 12 months accordingly and planned to end in July 2016.

Then, FPT’s second fiber optic swap began in September 2015, in five tier-2 cities including Hai

Phong, Da Nang, Binh Duong, Dong Nai and Can Tho. Given the timeline of the first project, we

expect this second one to end in the late half of 2017 and its final costs to be allocated one year

after.

52%

25%

22%

1%

Shares in terms of xDSL & FTTx

headline subscribers

VNPT Viettel FPT Others 0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2012 2013 2014 2015

Number of FPT's active subscribers

CAGR 25.1%


22/08/2016

Figure 9: FPT Telecom analysis


According to FPT, fiber costs in tier-2 cities are expected to be around one-third of that in Hanoi

and HCMC due to smaller scale and less number of accounts to be swapped. Thus, PBT margin

during the second fiberization project would be higher than during the first one.

FPT announces to continue the fiberization process in all 63 cities/provinces considering (1) as

mentioned above, fiberization is the motivation for the recent recovery of internet subscribers;

and (2) competitors depend on each other’s plan – Viettel and VNPT do not intend to stop the

process here. However, we expect the capex for coming swaps to be minor given their much

smaller swapped accounts compared to those at previous big cities.

EARNINGS MODEL AND VALUATION

A 20% CAGR on Technology PBT during 2016-2020 …

- Software outsourcing: revenue to grow at 24% p.a., attributable to 19% growth per year

of the IT engineer number.

- Software solution: performance may be unstable at the beginning but we expect revenue in

long-term to grow at 10% annualized.

- System integration (hardware): we expect revenue from this segment to decline 5% per

annum going onwards.

- IT services: increasing humbly at 5%/year.

Figure 10: MBS’s forecasts for the period of 2016-2020

(Source: MBS Research)

- PBT margin of Outsourcing may continuously decline to 13% in the long run due to

employment attracting activity. However, for the whole Technology, we expect to see some

703,394 , 50%

281,357 , 20%

422,036 , 30%

FPT's subscriber breakdown by geography

HN & HCMC Tier-2 cities Others

23.4% 25.1% 25.5%

21.5%

16.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F

PBT margin

Whole year

fiber effect

- H1: fiber

costs in Hanoi and HCMC

- H2: in tier-2

3,944

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

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6,000

8,000

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12,000

14,000

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20,000

2015 2016F 2017F 2018F 2019F 2020F

Technology revenue (VNDbn)

IT services System integration Software 6M2016 (Techno)

CAGR 5.0%

CAGR 22.3% CAGR -5.0%

358

0

300

600

900

1,200

1,500

1,800

2,100

2,400

0

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600

900

1,200

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2015 2016F 2017F 2018F 2019F 2020F

Technology PBT (VNDbn)

IT services System integration Software 6M2016 (Techno)

CAGR 22.7% CAGR -5.0%

CAGR 5.0%

Fiber optic

swap in Hanoi

and HCMC

(April 2014)

H2: finish fiber

costs in tier-2

cities


22/08/2016

improvement in PBT margin, to around 11-12% somehow, given the switch from Hardware

(lower margin) to Software (higher margin).

- For 2016, we forecast Technology to post a revenue of VND9,421 billion (+9.2%) and a

PBT of VND962 billion (+3.9%) due to some solution projects have not come to completion

phase.

… and a 14% CAGR on Telecom & Digital content PBT

- Active subscribers: to increase 13% per annum, similar to the industry.

- ARPU: we expect this item to slightly decline 2-3% annually as the company expands to

poorer provinces onwards.

Figure 11: MBS’s forecasts for the period of 2016-2020


- PBT margin: this year 2016 should witness a recovery in PBT margin unless there is 1.5%

provision on telecom revenue for the Public Telecom Fund. Because of that, we estimate

this segment’s PBT margin at 13-14% in 2016, before gradually recovering up to 15-16% in

the long-term along with the fiberization process fulfillment.

- For 2016, we expect Telecom’s revenue and PBT at VND6,440 billion (+15.7%) and

VND997 billion (-4.3%) due to negative effect of provision for Public Telecom Fund starting

this year.

The foreseen divestment of FPT Retail and Trading

FPT plans to fulfill the divestment of FPT Retail and Trading in Q4/2016. In our view, this

divestment is a plus for FPT considering that (1) the retail industry is facing heightened

competition from strong players, especially Mobile World (MWG), the sector leader; and (2)

while in the distribution sector, FPT no longer stands at the monopolistic distributor of Apple in

Vietnam, which strongly affected its selling activities. In sum, we expect this segment to post a

CAGR on PBT of only 2.3% per annum.

Figure 12: FPT’s structure in 2015


3,178

0

2,000

4,000

6,000

8,000

10,000

12,000

0

2,000

4,000

6,000

8,000

10,000

12,000

2015 2016F 2017F 2018F 2019F 2020F

Telecom revenue (VNDbn)

Digital content Telecom 6M2016 (Telecom)

CAGR 10.3% CAGR 10.0%

533

0

300

600

900

1,200

1,500

1,800

2,100

0

300

600

900

1,200

1,500

1,800

2015 2016F 2017F 2018F 2019F 2020F

Telecom PBT (VNDbn)

Digital content Telecom 6M2016 (Telecom)

CAGR 14.8%

CAGR 10.0%

8,630 ; 21%

5,567 ; 13%

25,637 ; 61%

(1,908); -5% Revenue (VNDbn)

Technology Telecommunication Distribution & Retail Others

926 ; 32%

1,041 ; 37%

729 ; 26%

155 ; 5% PBT (VNDbn)

Technology Telecommunication Distribution & Retail Others


22/08/2016

Our guts feeling is that FPT may sell higher than 50% for no more being consolidated FPT Retail

and Trading into the parent company. In details, we assume FPT to sell 60% of the stake and

the deal can be closed during 2017. After the divestment, Technology and Telecom will almost

equally drive FPT’s final performance.

In total, we expect PBT from core business to grow at a CAGR of 17% per annum

after the divestment of FPT Retail and Trading, tripling its best record in the

previous period of 2010-2015 of 6.5%. For 2016 (before divestment), we forecast

the company to earn an EPS of VN3,500.

Table 2: Forecast income statement and balance sheet (before divestment)

Income statement (VNDbn)

2013 2014 2015 2016F

Balance sheet (VNDbn)

2013 2014 2015 2016F

Revenue 27,028 32,645 37,927 34,678

Current assets 12,908 16,964 18,959 20,665

Growth (%) 9.9% 20.8% 16.3% -8.6%

Cash & cash equivalents 2,751 4,336 3,585 4,069

COGS 21,489 26,371 30,466 27,829

S-T investment 1,443 1,441 2,617 2,618

Gross profit 5,539 6,273 7,494 6,848

Receivable 3,418 3,710 4,195 4,750

Growth (%) 18.1% 13.3% 19.5% -8.6%

Inventory 3,329 5,096 5,268 5,718

Margin (%) 20.5% 19.2% 19.7% 19.7%

Other current assets

1,967

2,381

3,294

3,510

Selling expenses 1,357 1,703 2,227 2,034

Long – term assets 4,662 5,694 7,087 8,104

G&A expenses 1,847 2,183 2,332 2,130

L-T investments 707 797 728 764

EBIT 2,336 2,387 2,935 2,684

Net fixed Assets 2,803 3,536 4,698 5,680

Growth (%) 4.7% 2.2% 22.9% -8.6%

Other L-T assets 1,152 1,362 1,661 1,661

Margin (%) 8.6% 7.3% 7.7% 7.7%

Total assets 17,571 22,658 26,046 28,769

Financial profit 115 14 -168 -112

Total liabilities 9,317 13,401 15,863 16,761

Other profit 107 111 84 86

S-T liabilities 9,069 13,057 14,968 15,927

Profit before tax 2,516 2,459 2,851 2,657

L-T liabilities 248 344 896 834

Growth (%) 4.5% -2.2% 15.9% -6.8%

Owners’ equity 7,209 7,913 8,581 9,891

Margin (%) 9.3% 7.5% 7.5% 7.7%

Total liabilities & equity

17,571 22,658 26,046 28,769

Net profit 1,608 1,632 1,931 1,769

Growth (%) 4.4% 1.5% 18.3% -8.4%

Margin (%) 5.9% 5.0% 5.1% 5.1%

EPS (VND/share) 3,652 3,707 3,947 3,467

Growth (%) 4.4% 1.5% 6.5% -12.2%


Table 3: Forecast income statement and balance sheet (after divestment)

Income statement (Bil. VND)

2015 2016F 2017F* 2018F*

Segmentation analysis (Bil. VND)

2015 2016F 2017F* 2018F*

Revenue 37,927 34,678 18,863 21,432

Revenue 37,927 34,678 18,863 21,432

Growth (%) 16.3% -8.6% n/a 13.6%

Technology 8,630 9,421 10,952 12,678

COGS 30,466 27,829

Software 5,228 6,536 8,133 9,917

Gross profit 7,494 6,848

Outsourcing 4,130 5,780 7,301 9,002

Growth (%) 19.7% 19.7%

Solution 1,098 756 831 915

Margin (%) 19.5% -8.6%

Informatics system 2,530 2,100 1,995 1,895

Selling expenses 2,227 2,034

IT services 873 786 825 866

G&A expenses 2,332 2,130

Telecommunication 5,567 6,440 7,227 8,016

EBIT 2,935 2,684 2,440 2,720

Telecom 5,192 5,997 6,740 7,481

Growth (%) 22.9% -8.6% n/a 11.5%

Digital content 375 443 487 535

Margin (%) 7.7% 7.7% 12.9% 12.7%

Distribution & Retail 25,637 20,463 - -

Financial profit*** -168 -112

Distribution 17,795 11,100 - -

Other profit 84 86

Retail 7,842 9,363 - -


Others (1,908) (1,647) 684 738

Growth (%) 15.9% -6.8% n/a 15.3%

Education 586 633 684 738

Margin (%) 7.5% 7.7% 14.1% 14.3%

Investment, (2,494) (2,280) - -


22/08/2016

including elimination **

Net profit 1,931 1,769 1,731 2,030


Growth (%) 18.3% -8.4% n/a 17.2%

Technology 926 962 1,204 1,432

Margin (%) 5.1% 5.1% 9.2% 9.5%

Software 732 824 1,064 1,288

EPS (VND/share) 3,947 3,467 3,392 3,977

Outsourcing 634 809 1,022 1,215

Growth (%) 6.5% -12.2% n/a 17.2%

Solution 98 15 42 73

Informatics system 88 42 40 38

IT services 106 95 100 105

Telecommunication 1,041 997 1,253 1,416

Telecom 874 800 1,037 1,178

Digital content 167 197 217 238

Distribution & Retail 729 548 - -

Distribution 549 333 - -

Retail 180 215 - -

Others 155 151 195 210

Education 167 180 195 210

Investment, including elimination **

(12) (29) - -


* Assuming FPT to complete divestment FPT Retail & Trading.

**We do not have enough data to forecast this item after divestment.

*** For 2017, we do not include a likely extraordinary profit from selling FPT Retail & Trading.

VALUATION

Before divestment

Discounted cash flow methodology

We use discounted cash flow methodology hereby FCF to valuate the ticker FPT. Target price is

VND39,345, 5% lower than current price on 15 August 2016 of VND41,600 per share.

Assumptions are as follows:

Forecast period starts from 2016 to 2020 before going into stable period.

WACC is 9.8%. WACC is relatively low due to low cost of debts along with low rate of

preferential corporate income tax of 14%.

Terminal growth rate of 3% due to assumed stable business activities.

Table 4: FCF Valuation method

VNDbn 2016F 2017F 2018F 2019F 2020F

FCF 305 278 1,310 1,511 1,718

WACC 9.8%

Forecast Year 0.67 1.67 2.67 3.67 4.67

Discount factor 0.94 0.86 0.78 0.71 10.51

PV of FCF 287 238 1,022 1,074 18,056

Total PV of FCFF 6,960 Discount factor

PV of Terminal value 7,841 Beta 0.68

Enterprise value 20,676 Risk – free rate 6.34%

(+) Cash & S-T investments 6,202 Cost of equity 12.7%

(-) Short and long – term debts -8,806 Cost of debt 3.3%

Equity value (VNDbn) 18,073 WACC 9.8%

Outstanding shares (Mil. shares) 459.3

Price per share (VND) 39,345



22/08/2016

Sum of the parts

We choose our target relative P/E for each of FPT’s business segments based on the median

figures of its regional peers in the three main segments, namely telecom, software & IT

services, and IT distribution & retail.

Table 5: Sum-of-the-parts Valuation method

VND in billion

Net income 2016E

Relative P/E

Absolute P/E

Equity Value

FPT's Ownership

Valuation

Technology group 935 1.3 15.0 14,025 100% 14,025

Telecommunication 953 1.0 12.0 11,454 45.6% 5,223

Distribution & Retail 443 0.8 10.1 4,493 100% 4,493

Education 169 1.0 12.0 2,026 100% 2,026

Total 25,766

Outstanding shares (million shares) 459.3

Value per share 56,093


Table 6: Comparables

Company name Country

Market Cap

LTM P/E

LTM P/B

LTM Relative P/E

ROA ROE 3Y Avg sales

growth

Telecom

(USDmn)

(%)

Jasmine Intl Public Co Ltd Thailand 875 12.1 2.3 0.6 5.6 20.1 10.5

Kazakhtelecom Kazakhstan 344 4.3 0.3 0.9 18.1 25.2 3.0

China Telecom Corp Ltd-H China 35,563 11.5 0.8 1.1 3.4 6.8 5.5

Maxis Bhd Malaysia 10,395 23.1 9.9 1.3 10.3 41.8 (1.3)

Median

5,635 11.8 1.5 1.0 7.9 22.7 4.2

Average

11,794 12.7 3.3 1.0 9.3 23.5 4.4

Software & IT services

Eclerx Services Ltd India 909 16.8 5.6 1.2 32.6 40.3 26.3

Sinosoft Technology Group Lt China 567 23.4 4.2 2.3 17.6 19.7 24.4

Niit Technologies Ltd India 515 12.4 2.2 0.5 13.2 19.0 9.9

Shenzhen Das Intellitech-A China 1,385 50.4 3.6 1.3 4.6 7.9 27.9 Kingdee International

Software Hong Kong 922 51.8 1.9 5.2 n/a 4.1 n/a

Wangsu Science & Technolog-A

China 8,018 50.0 8.4 1.0 20.0 23.3 55.0

Median

916 36.7 3.9 1.3 17.6 19.3 26.3

Average

2,053 34.1 4.3 1.9 17.6 19.0 28.7

Distribution & Retail

PET Vietnam 51 6.7 0.8 0.5 11.6 3.2 2.0

MWG Vietnam 850 12.1 4.6 1.2 15.0 54.2 51.7

Median

513 12.1 4.6 1.2 15.0 54.2 51.7

Average

513 12.1 4.6 1.2 15.0 54.2 51.7

FPT CORP Vietnam 834 10.0 2.1 0.7 7.9 21.4 15.7

(Source: Bloomberg)

After divestment

Sum of the parts

We still apply this method for FPT after the divestment as this method reflects the whole value

of the company. In case the divestment happens, FPT will receive an amount of cash proceeds

equivalent to the sold stake.


22/08/2016

Comparables using P/E ratio methodology

As mentioned, FPT historically traded at an unattractive P/E ratio due to its boring growth. Now,

considering its more fruitful outlook after divestment, we believe FPT deserve a higher level of

P/E.

Table 7: P/E ratio methodology valuation

Sector Market Cap (USDmn)

LTM P/E

LTM P/B

LTM Relative

P/E

ROA (%)

ROE (%)

3Y Avg sales growth (%)

Telecom 5,635 11.8 1.5 1.0 7.9 22.7 4.2

Software & IT services 916 36.7 3.9 1.3 17.6 19.3 26.3

Distribution & Retail 513 12.1 4.6 1.2 15.0 54.2 51.7

AVERAGE 2,334 19.3 2.7 1.0 12.9 23.6 19.1

FPT’s average EPS from core business in 2017-2018F (VND)

3,684

Average P/E of Vn-index in 2012-2015 12.6

Target P/E (=relative P/E * P/E of Vn-index) 13.0

Price target per share (VND) 47,906

Valuation summary

Table 8: Valuation summary

Method Weighted Result

Before divestment

FCF 25% 39,345

Sum of the parts 25% 56,093

After divestment

Sum of the parts 25% 56,093

P/E 25% 47,906

AVERAGE 100% 50,000

Combining all methods, we valuate FPT at VND50,000 per share, equivalent to an upside of

20%.


22/08/2016

Contact

Research: Pham Thien Quang

Email: [email protected]

Tel: +84 988 906 163

Institutional Sales: Truong Hoa Minh


Tel: +84 938 207 357

Research: Nguyen Thach Thao


Tel: +84 907 655 495

STOCK RATING: The recommendation is based on the difference between the 12-month target price and the current price:

Rating When [(target price – current price) + dividend]/current price

BUY >=20%

OUTPERFORM From 10% to 20%

HOLD From -10% to +10%

UNDERPERFORM From -20% to -10%

SELL <= -20%

DISCLAIMER: Copyrights. MBS 2014, ALL RIGHTS RESERVED. Authors have based this document on information from sources they

believe to be reliable but which they have not independently verified. The views expressed in this report are those of the authors and not

necessarily related, by any sense, to those of MBS. Neither any information nor comments were written for advertising purposes or

recommendation to buy / sell any securities. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on

any form or by any means, electronic, mechanical, photocopying recording, or otherwise, without the prior written permission of MBS.

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