company report vinpearl jsc

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Date: 20.10. 2011

COMPANY REPORT

VINPEARL JSC

TICKER: VPL (HOSE)

Stock information

Stock information

Price (10/14/2011) 89,000

Shares outstanding 205,498,489

Listed date 31/01/2008

Chartered Capital

(VND Mln) 2,054,984

52 week High-Low 96,500-28,400

EPS (2010) 693

BVPS 19,420

Highlights

Highlights

Rev (2010) 665 VND bn

NPAT (2010) 149 VND bn

Target revenue (2011) 1949 VND bn

Target NPAT (2011) 545 VND bn

ROA (2010) 1.93%

ROE (2010) 6.01%

Debt/Equity 1.91

VPL’s Price & Trading Volume

Source: Bloomberg

Summary

Our preliminary valuation shows that VPL is fundamentally overpriced. The

company has not been performing impressively during the past years, reflected in low and unstable growth rate, unattractive EPS, ROA and ROE. Also, VPL has anchored its business on a high D/E ratio, low solvency ratios and poor cash position.

Should we take a very aggressive outlook, VPL’s stock price will fall within the range of VND64,972 and 71,159. However, the higher end of the range is still far

from its current market price, i.e. -20.05%.

Earnings Outlook

Revenue of VPL comes from following projects: Vinpearl Nha Trang resort and

spa (on-going), Vinpearl Land (on-going), Vinpearl Nha Trang Luxury (operation

from 2Q11), Vinpearl Danang Luxury (operation from 2Q11) and Vinpearl Hoian

(operation from August 2012)

With targets of 1,949 VND bn in revenue and 545 VND bn in PAT, VPL appears to

have been on track for the current year. 1H2011’s revenue reached 478 VND bn

and net profit at 211 VND. However, 101 VND bn was booked from disposal of

20% of Green City Development JSC to VIC in the period.

In 2012, we estimate that the company could reach revenue of more than

VND2500 VND bln per year in the best scenario and 1,500 VND bln per year in

the worst scenario.

How the merger between VPL and VIC implies?

With the merger of VIC and VPL, the scale of the united company would be much

larger in stock market, catching more attention of investor’s especially

foreign ones. This opens more opportunities to raise capital to finance their

projects: (1) VPL could utilize customer base as well as shareholders network of

VIC in for improvement of selling products as well as fund raising (2) VIC could

utilize VPL’s rich land bank for the sake of collaterals or development purposes.

VPL with weaker fundamentals regarding ROE, ROA, earnings growth..., will

benefit its shareholders (the largest shareholders being Mr. Vuong and his

family’s members) should the stock swap ratio is close to 1:1.

However, we do not see much synergy with regard to the valuation of VIC

and VPL due to the fact that VPL and VIC have been under management by

Vingroup therefore the merger will likely put both firms under one umbrella of

Vingroup in an official manner rather than enable both of them to leverage the

strength of each other.

Our preliminary look at the merger case: By end of 2Q11, Book value per share of VIC stays at 15,414VND, lower than BVPS of VPL is 19,460VND. Should the swap ratio be at 1:1, a negative goodwill of 831bn VND may be recognized for post-merger VIC unless both companies are re-valued as a common practice (the revaluation may take place before and after the merger)

Finally, should VIC/VPL swap ratio be 1:1, we calculate the impact of the merger

on the largest shareholder group: if VIC price (after merger) is higher than

92,985VND, then total value of Mr’s Vuong ownership in VIC after the merger will

be higher than the Total value of Mr Vuong ownership in both VIC & VPL before

the merger.

Date: 20.10.2011 COMPANY REPORT 2011

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Contents

ANALYSIS ON VPL FUNDAMENTALS ............................................................................................................................................ 3

1. OVER VIEW ........................................................................................................................................................................................ 3

2. BUSINESS SCOPE ........................................................................................................................................................................ 3

3. BUSINESS STRATEGY ............................................................................................................................................................... 5

4. SHAREHOLDERS STRUCTURE ............................................................................................................................................ 5

5. MANAGEMENT ................................................................................................................................................................................ 6

6. EARNINGS .......................................................................................................................................................................................... 6

7. BALANCE SHEET .......................................................................................................................................................................... 7

8. CASH FLOW ...................................................................................................................................................................................... 8

9. OUTLOOK ........................................................................................................................................................................................... 8

10. INVESTMENT VIEW .................................................................................................................................................................. 9

Valuation ........................................................................................................................................................................................ 9

Upside catalysts ..................................................................................................................................................................... 10

Downside risks ........................................................................................................................................................................ 10

COMMENTS ON MERGER OF VIC & VPL................................................................................................................................... 12

Our view on the merger of VIC & VPL ................................................................................................................................ 12

Market sentiments towards the merger ............................................................................................................................ 13

APPENDIX ...................................................................................................................................................................................................... 14

VPL Profit & Loss Statement, 2008-2011 .......................................................................................................................... 14

VPL Balance Sheet, 2008-2011 ............................................................................................................................................... 14

DISCLAIMER ................................................................................................................................................................................................. 17

CONTACT INFORMATION .................................................................................................................................................................... 17


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ANALYSIS ON VPL FUNDAMENTALS

1. OVER VIEW

Vinpearl Joint stock company formerly known as Hon Tre tourism Investment Development Trade and Service

Co., Ltd. was established on 25 July 2001 in Nha Trang, Khanh Hoa (Vietnam). The company currently has

chartered capital of VND2000 bn, listed in Hose on 31 Jan 2008 (VPL) and is among top ten largest market cap

companies in Vietnam’s public equity market. The company is the developer of Vinpearl Tourism and Recreation

Project of Hon Tre Island, Nha Trang, turning a primitive and poor island into a leading 5–star international

standard marine resort and recreation complex in Vietnam and also in the South East Asia regarding scale and

distinction.

The company has now developed its Vinpearl-branded projects in other key tourism cities such as Da Nang, Hoi

An, Da Lat, Phu Yen, Ha Noi and HCMC in order to target a chain of 1000 luxury hotel rooms under a single brand

name (VINPEARL) and to grasp the leading position in the tourism industry.

Although the company is somewhat new to the industry in Vietnam, it has been approaching the leading position

mostly thanks to huge capital-intensive investments and rich land-bank in many favorable and beautiful places

nationwide.

VPL has not limited itself to a single-business-unit entity but expanded under a corporate multi-division structure

with several subsidiaries and associates:

Subsidiaries

Name Chartered Capital (VND) Ownership

Other owners Principal activities

Green city development JSC* 1000 30% VIC: 44% Real Estate

Vietnam Nha Trang Tourism JSC 10 80% Tourism Service

Nam Qua Ecotourism Co, Ltd 110 80% Ecotourism and Hotel Services

Hon Mot Tourism JSC 167 83.60% Tourism and Hotel services

Tay Ho View Tourism and Hotel 1145 70% Real estate and Hotel service

Future Property Invest 1056 100% Real estate

Associates

Vitours JSC 29 29% Tourism service

Vietnam Tourism in HCMC JSC 31.5 25.20% Tourism service

Royal city Real-estates investment and Development JSC 3200 21.25%

VIC: 51.98% Real estate

Tay Tang Long Real Estate Co, Ltd 300 49% Real estate

*Green City has just bought 10mil shares of VPL in late Sep11. After buying, ownership of Green City in VPL is

4.8%.

2. BUSINESS SCOPE

Since its establishment, VinGroup, the founder of VPL, had VPL focus on the following areas:

Hotel and Tourism Business: Eco – tourism, tourist villages, restaurant, domestic travel business, art

performance, computer games for foreigners and other recreational services; sport entertaining services,

movies theater, local food and drink product, souvenir and merchandise, beauty salon


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Property –related business: Property trading, leasing of facilities with special technical equipment, industrial

and civil engineering, wholesale of machinery and material and other fittings for construction

Other businesses support to core businesses: inland passenger transportation, water passenger, cable-

car transportation; plane, train and bus ticket agencies, trade brokerage, traditional handicraft, fisheries and

forest planting.

By and large, though VPL plans on having its footprint in property development in Hanoi and HCMC city,

we still view the firm mainly as a player in the hospitality industry to this point. Most of the revenue sources

have come from the hotel and tourism segment, i.e. over 99% total revenue through the 2008-2010 period. Up to

2010, there were only 2 projects in operation, Vinpearl Nha Trang spa and resort and Vinpearl Land. Several other

property–related projects and even hospitality ones will likely be released in the next few years. (Refer to the table

below)

List of VPL projects (completed and under development)

Project Owner- ship

Sq Area/ Total invested

Location Description Occupancy rate

Come in Operation Date

Vinpearl Nha Trang - Resorts and Spa

100% Hon Tre Island - Nha Trang city

485 5-star standard rooms, 4 restaurants, 3 bars, spa salons and gyms, out-door swimming pool with 5000m3 total volume

Peak: 100%, Average: 75%

2007

Vinpearl Land

100% 20ha Hon Tre Island - Nha Trang city

Many modern and unique large-scale facilities comparable to the leading entertainment parks across the region and the world.

To support Vinpearl Nha Trang - Resorts & Spa

2007

Vinpearl Nha Trang Luxury Resort

100% 7.18 ha Hon Tre Island - Nha Trang city

High-end tourism service and product series using world 5+ star standards 84 luxurious bungalows

30-40% on average, though expected to sharply increase soon, especially in peak season Expected rate: 70%,

11-05-11

Vinpearl golf course and villas

100% 275ha/ 2174 VND bn

Nha Trang city

2 golf courses; 9 holes each and a series of villas

1 course just came into operation; the other one next year

Vinpearl Da Nang Luxury 1

100% 15.5ha 1600 VND bn

Son Tra - Dien Ngoc midway between Hoi An and Da Nang; Surrounded by three UNESCO World Heritage Sites: My Son Sanctuary, Hoian Ancient Town and Hue Citadel

204 five-star-plus international standard room 39 deluxe villas (1000m2 each)

19 out of 39 villas sold Current occupancy rate is low (30 - 40%) though expected to ascend to 50 - 60% on average

08-05-11

Vinpearl Da Nang Luxury 2

100% 50ha Next to Vinpearl Danang Luxury 1

Deluxe hotel and villas NA NA

Vinpearl Hoi An

100% 6.95ha/ ~800 VNDbn

Cua Dai beach

High-class marine ecological resort; 147 5-star hotel room 26 luxury villas. The building density is

Occupancy rate expected to be high (40%-60%)

Coming soon (08/2012)


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Project Owner- ship

Sq Area/ Total invested

Location Description Occupancy rate

Come in Operation Date

less than 20%

Lang Van Resort

100% 1500 ha/5 USD bn

Da Nang NA NA site clearance

Vinpearl Phu Yen

100% 1700 ha Tuy An-Phu Yen Resort and villas, already obtained land site

NA NA

Vinpearl Cam Ranh

100% NA Phu Yen as above NA NA

Vinpearl Bai Dai

100% NA Phu Yen NA NA

Vinpearl Van Phong

100% NA Phu Yen NA NA

Royal City 21.25% 12 ha/ 9999 VND bn

Hanoi Complexity 4Q.2013

Tay Ho View 70% 1.3ha, 1145 VND bn.

58 Tay Ho-Hanoi Complexity, VPL may exit for profits

NA

Green City 50% 280 ha HCMC 4Q2015

Vinpearl Da Lat

100% 250 ha Da Lat Resort and villas 4Q2015

Vinpearl Luxury Saigon

NA NA 1 District, HCMC Luxury Hotel

Hotel facilities will be under VPL’s management when finished

4Q.2012

Vinpearl Hanoi

100% NA Hanoi Luxury Hotel NA NA

3. BUSINESS STRATEGY

Developing a series of services and values: Along with developing a chain of hotels and resorts under

Vinpearl brand name, the company aims at upgrading equipment and facilities as well as introducing attractive

service packages to customer in an effort to deliver services with the world standard.

Maintaining and constantly generating stable income in order to partially meet the capital needs for its

ongoing projects: the company will focus on its “niche” advantage in recreational facilities such as theme

parks, water- park, golf courses in order to generate a stable and growing inflow of income. It also continues

to strengthen its real estate activities in order to achieve another strong source income from sale of residential

apartments/ villas to foster its capital investment

Strengthening cooperation for the promotion of the Vinpearl brand name and hosting national and

international cultural and tourism events

Applying state-of-the-art management technologies and the industry’s most advanced practices

4. SHAREHOLDERS STRUCTURE

Major shareholders (80%)

Vingroup 23.1%

Ecology development JSC 15.87%

Dynamic Invest Group Ltd 9.45%

Mr. Pham Nhat Vuong 9.63%

Thiên An Investment & Trading JSC 9%

Ms. Pham Thu Huong 7.27%

PFV Investment JSC 5.73%

Source: VPL, as of March 31, 2011

52% 36.15%

11.80%

Shareholders' structure

Organization

Individuals

Foreign


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The ownership structure exhibits that a large portion of the company stakes is held by individuals, most of them are somewhat related to Mr. Pham Nhat Vuong – Chairman of Vingroup. Specifically, Mr Vuong himself and his wife own 17% of VPL as individual shareholders. Vingroup possesses of 23% VPL. Foreign investors’ ownership accounts for 11.8%.

Mr. Vuong founded VinGroup which originally gave birth to VPL during its initial days. VPL, previously known as Hon Tre Tourism Investment Development Trade and Service Co., Ltd. was serving as an investment arm of VinGroup in the tourism and hospitality industry. Upon its establishment, Mr. Vuong and his related parties, on behalf of then Hon Tre company, were leveraging their networks with banks and central/local authorities to develop the whole project after taking ownership of Hon Tre island in Nha Trang city.

Though the chairman of Vingroup does not normally show up and participate in the firm’s daily operation, most investors seem to see that VPL has been somehow under strict control by Vingroup through the VinGroup itself and its member companies.

5. MANAGEMENT

Normally, VPL has run the projects on their own from the first day. That does not go with the industry conventional practice when it comes to huge projects. In fact, several other luxury hotel and resorts normally choose foreign expert manager to manage their hotel.

VPL may utilize its current unique geographic advantages in its Vinpearl Land Project in Nha Trang. However, the competition in Nha Trang will become more intensive in the coming time with other developers putting money in the hospitality area. Several islands in the same water area are now targeted to erect similar projects like VinPearl Land.

Regarding its project in Da Nang, VPL may be put at disadvantage since the industry dynamics has been already been very high. The firm may not see a lot of advantages as it has gained in its first project in Nha Trang.

Relative shortage of very professional experience in the management team compared to the industry practice could be seen as one of the disadvantages at VPL. However, we also believe that the company’s leadership should be already aware of this problem and will soon employ professional managers and consultants to bring in managing businesses so as to catch up with the industry, especially in their new projects in Da Nang and Hoi An.

6. EARNINGS

Revenue and earnings grew at an unstable rate: VPL was recording very low earnings for several years due to massive capital expenditures put in development of Vinpearl projects in Nha Trang. Though VPL’s earnings have started picking up in recent years, its growth rate remains unstable.

VND mln 1H2011 2010 2009 2008

Revenue 477,857 664,708 485,478 471,000

Growth rate of revenue 41% 37% 3% 18.4%

COGS 248,071 403,423 293,312 322,352

Financial Incomes 54,172 (94,780) (80,000) 41,077

NPAT 211,535 149,708 70,387 73,195

Growth rate of Earnings 402% 112.69% -3.84% -58%

The structure of visitors has changed significantly over years toward the trend of increasing domestic

visitor/foreign visitor ratio:


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High gross margin and net margin. Admin & Selling cost/ Revenue fluctuated.

1H2010 2010 2009

Gross margin 48% 40% 40%

Net margin 44% 22.52% 14.50%

Admin cost 11.52% 8.60% 8.19%

Selling cost 4.16% 8% 5.70%

Gross margin stays high, at around 40%-48% and net margin improved over years because of

extraordinary incomes rather than improvement in SG&A. Specifically, net margin in 2010 increased

sharply due to a significant income of from non-core activities ( 139 VND bn) and net margin in 1H2011 rose

dramatically thanks to the financial earnings from divestment (101 VND bn).

Meanwhile, the ratio of Administrative cost/revenue seemingly follows uptrend while selling cost/revenue ratio

has been fluctuating over years reflecting the fact that those expenses do not seem to have been well

managed.

EPS, ROE and ROA do not look attractive:

1H2011 2010 2009

ROA 2.23% 1.93% 0.98%

ROE 5.30% 6.01% 4.75%

EPS 1070 693 508

EPS is VND1,070 for 1H2011 and expected to reach ~ 2600 VND by the end of this year given the company’s target earnings to be achieved. Still, 2011 PE is very high at nearly 40x, which is not an attractive figure in the current equity market. Reversely, ROA and ROE are low, reflecting the firm’s low utilization of its high value assets and huge capital.

Financial revenue and expense nearly offset each other. Ineffective financial investment

Net financial income has been negative in the past few years and just turned positive in 1H2011 thanks to a gain of VND101 bln by selling stakes of GCD to VIC. Financial earnings have not contributed to the company’s earnings yet, somewhat reflecting ineffective financial investment to this point.

7. BALANCE SHEET

Debt/Equity ratio quite high yet reduced significantly in 2010 (to 1.91 from 3.84 in FY2009) due to raising chartered capital and debt settlement in 1H2011 (D/E at 1.14 in 1H2011). The total long-term debt as of 30/06/2011 was at VND4,319 bn in which VND3,500 bn is in bonds (with maturity of 3 or 5 year, annual payment with different coupon rates) and the remaining portion is in bank loans. Short- term debt amounts to VND394 bn funded by VIC and banks. Heavy interest expense, exceeding VND500 bln a year in 2009 and


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2010, has obviously weakened the financial health of the company. That would likely continue eating up its future earnings.

Multiple questionable internal transactions to boost up Balance sheet size

As we observed in the financial statements, there are many internal transactions between VPL, Vingroup, Vincom and VPL’s subsidiaries and associates. Most of those transactions are lending and borrowing activities between one another within the accounting period, which are shown in notes on internal business transactions between VPL and its subsidiaries and associates in VPL’s financial statements. As a result, financial incomes and expenses all are recorded for those entities.

We do not see much motivation for doing so except the sake of boosting financial revenues and increase the size of Balance Sheet while those doings have yet to be economically effective. Moreover, we note that, over last few years, the increase in long-term assets versus long-term debt is not in line and inconsistent.

The company has been using large capital for short-term investments rather than investing in ongoing projects. In 1H2011, short -term investments amounted to 1,880 VND bn in which: 200 VND bln invested through a third party - Handico Company, 129 VND bln invested in Dong Phu Hung Company and 843 VNDbln for lending individuals.

Especially, most of those lending to individuals were unsecured and taking placing among members or related parties and members of BOD of VPL or Vingroup). Besides, VND509 bln was invested in securities. Yet those investments generated insignificant incomes for the company.

Goodwill booked at VND596 bn from the merger of Vinpearl JSC with Vinpearl Da Nang, Vinpearl Hoi An and Vincharm in 1Q2011. In coming years, CoGS will likely increase a little due to goodwill amortization.

8. CASH FLOW

Weak cash position: Cash and cash equivalent is quite small, only 23 VND bln in 2010 and 45 VND bln in 1H2011. Cash flow from operating activities has been negative over recent years. Cash outflow mostly for investment in projects or advance payment to related parties, i.e., subsidiaries or associates. Looking at the investment cash flow, we see that the activities of lending and borrowing were dominant as compared to operational activities. Cash flow from financing activities was mostly for debt settlement purpose.

In years to come, we see new projects that just came into operation in 2011 and some in 2012 would bring a solid source of income to the company. Therefore, cash flow could be improved on the back of cash inflow from more core business activities.

However, our rough estimation of the firm’s CapEx for its coming projects reveal that VPL may need some trillions VND (VND2,000 – 3,000 bln.) to finance those projects. It will likely resort to debt financing when its cash flow from core business operating activities will definitely be insufficient for those investments.

9. OUTLOOK

Based on the information of the existing projects, we have come up with preliminary revenue estimates of VPL in 2011 and 2012 anchored on two scenarios. Revenue comes from following projects: Vinpearl Nha Trang resort and spa (on-going), Vinpearl Land (on-going), Vinpearl Nha Trang Luxury (operation from 2Q11), Vinpearl Danang Luxury (operation from 2Q11) and Vinpearl Hoian (operation from August 2012). The revenue from those projects is forecast based on two main factors:

Occupancy rate: In the best scenario, we assume this rate reaches the expected level (as mentioned in the table of project above). In worst scenario, this rate falls to the lower end of the range (refer to the table of project above)

Average daily price: In the best scenario, we assume price will increase by 5-10% yoy in 2012 while in the worst one, price level is assumed unchanged.

Revenue contribution ratios: Vinpearl Nha Trang Resort /Vinpearl Land is expected to remain at 60/40 (similar to that in FY2010) and Restaurant, Spa &Service/Hotel is at 60%. Exchange rate is roughly at 21,000 VND in 2011 and 21,500 VND in 2012 on average.

We have not taken into account of all revenues from selling deluxe villas in Vinpearl Danang and Vinpearl Hoian, seasonal leasing revenue from those villas (Condotel model) as well as revenue from golf courses and


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other projects which do not come to operation in 2012 yet. Moreover, we discard revenue from other businesses such as agency service or passenger transportation and other trading due to lack of information to evaluate. However, we also deem those revenues and incomes (if any) to be insignificant in both scenarios.

2011: With targets of 1,949 VND bln in revenue and 545 VND bln in PAT, VPL appears to have been on track for the current year. 1H2011’s revenue reached 478 VND bln and net profit at 211 VND. However, 101 VND bln was booked from disposal of 20% of GDC (Green City Development JSC) to VIC in the period.

In 2012: in the best scenario, we estimate that the company could ensure revenue of more than VND2500 VND bln per year and VND1,500 bln per year in the worst scenario.

Following estimates are the most likely to happen, in our view:

Financials (unit) 2008A 2009A 2010A 2011E 2012E

Sales (bn VND) 471.3 485.9 665.1 1947.0 2308.2

EBIT (bn VND) 69.6 124.8 148.8 407.9 531.1

EBITDA (bn VND) 133 193 220 511 659

Pre tax Profit (bn VND) 28.3 73.3 165.8 613.9 792.7

Net profit (bn VND) 35.7 70.4 149.7 521.8 673.8

EPS (VND) 417 508 832 2,539 3,279

EBITDA/share (VND) 1,334 1,935 1,221 2,484 3,209

BVPS (VND) 10,700 11,844 10,872 19,417 -

Dividend (VND) - - - - -

Equities (bn. VND) 1,070 1,184 1,956 2,055 NA

Assets (bn. VND) 3,170 7,186 7,766 10,204 NA

Net Debts (bn. VND) 1,710 5,301 4,804 4,949 NA

ROA 1.32% 1.19% 1.54% 4.79% NA

ROE 3.9% 7.2% 6.1% 12.2% NA

10. INVESTMENT VIEW

Valuation

In order to come up rough valuation of VPL, we would look into how investors view other players in the hospitality and tourism market.

Charter Capital Trailing PER

(LTM) PBR

Price (VND)

OCH Ocean Group Hospitality 1000 21.83 1.5 16,000

NVT (*) Ninh Vay Bay 605 55.6 0.35 4,000

DSN Dam Sen Water Park 84.5 4.35 1.59 23,000

RIC Royal International Corp 683 10.43 0.59 8,800

VNG Vina Golf 100 28.81 1.45 15,600

Average 16.35 1.07

(*) PE 2010, 12 months trailing PE is not available due to loss

At the current price of VND89,000 per share, VPL has been fundamentally overpriced given its earnings growth

outlook. Our estimate shows that VPL is trading at PE2011 of 35x and PE2012 of 27x, extremely high compared

other comparable’.

Should we take a very aggressive outlook, VPL’s stock price will fall within the range of VND64,972 and 71,159.

However, the higher end of the range is still far from its current market price, i.e. -20.05%.

PE forward (12-month)

20.0 20.5 21.0 21.5 22.0 22.5 23.0 23.5 24.0


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Price: 61,878 63,425 64,972 66,519 68,065 69,612 71,159 72,706 74,253

Upside catalysts

First mover advantage: VPL was one of the first tourism companies in Vietnam entering the luxury tourism

services segment. It has applied the modern world-renowned business model that focuses on development of

ecotourism by developing a chain of deluxe hotels and resorts and entertainment parks which is not popular in

Vietnam yet.

Huge land bank in different beautiful and favorable places in many tourism cities such as Nha Trang,

Da Nang, Da Lat, Hoi An, Phu Yen, Ha Noi and HCMC. The company already obtained a rich land bank with

many plots located in many well-known sightseeing places and all of them are ready for construction

Ability to establish loans through securing its huge land bank, most of which are freehold, and other

large assets as collaterals to continue approaching other projects.

Potential financial incomes from selling its stake at some projects in its large portfolio nationwide

Downside risks

Heavy debt burden: the company’s debt level has stayed consistently at a large amount in the financial

structure putting high pressure on financial expense in years to come.

Specifically, its net debt has been around VND5,000 bln. over the past three years with cash and cash

equivalents having been aroundVND20 bln. During the past four years, VPL’s earnings growth has been very

low with EBITDA/Interest expenses being around 1 - 1.2 times, implying a signal of a continued debt burden

for years to come.

VPL has kept accumulating assets and boosting its equities through M&A activities. Specifically, VPL

has issued a large number of shares to merge Vinpearl Da Nang, Vinpearl Hoi An and Vincharm, acquire Tay

Ho view and Green City. That was basically an internal transaction within Vingroup’s member companies.

Though no new cash was generated through those transactions, VPL has significantly improved its D/E ratios,

from 3.89 to 1.14.

However, we still believe that VPL may not be able to improve its interest coverage ratios in a few years given

its past and future capital-intensive investments which have been mostly debt-funding.

Unclear accounting information and complicated business relationship between the company and

some individuals: the firm’s financial statements suggest that there have been complicated transactions

among Vingroup and VPL or VPL and others of VinGroup’s members.

Specifically, there are many internal businesses between VPL, Vingroup, Vincom and VPL’s subsidiaries and

associates. Most of them participate in lending and borrowing activities and divestment which have derived

financial incomes and expenses recorded for those related parties. For instance, VPL gained VND101 bln

profit, equivalent to nearly 50% of the firm’s EBT in 1H.2011, after selling its stake at Green City Development

JSC (GCD) to VIC. Green City Development has just bought 4.8% of VPL in Sep11 while VPL still holds 30%

of Green City Development.

In fact, we have yet to do see much motivation and extra value for pursuing that practice other than boosting

financial incomes and the size of Balance Sheet.

Besides, the company lends an amount of more than VND800 bn to individuals, some of them are

shareholders or BOD’s relatives or Mr. Vuong’s family members. This activity could be seen as a risk to

minority shareholders of VPL.


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Poor cash reserves: VPL’s cash and cash equivalents have been very moderate which would unlikely

enable the company to earn high financial income from deposits or short term investment. That will also cause

difficulties in case of emergency or in disbursement for business activities given very low-liquidity current

ratios.

Rising pressure from a large number of projects running concurrently: VPL would certainly face

increasing pressure of capital requirement and insufficiently liquidity at the same time.

Excessive dependence on Vingroup, to deal with banks and other political authorities: this could be

seen as one of the major risks for VPL’s business when it is dependent upon its parent firm’s reputation and

network in negotiating with local authorities and banks.

Management’s insufficient professional experience in the tourism industry: BOD and the Executive

team with different backgrounds and most of them do not seem to have a lot of experience in the industry,

especially in management of luxury hotel chain and other tourism service.

On the contrary, the industry dynamics has been increasingly competitive, which may negatively impact VPL’s

earnings growth in the future. Though VPL appears to have reaped some success in its current unique project

in Nha Trang, i.e. Vinpearl Resort & Spa, the firm would face a lot of competition in other projects outside Nha

Trang..


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COMMENTS ON MERGER OF VIC & VPL

Our view on the merger of VIC & VPL

1. With the merger of VIC and VPL, the scale of the post-merger company would be much larger in the stock

market, catching more attention of investors, especially foreign ones. This opens more opportunities

to raise capital to finance their projects:

VPL could utilize customer base as well as shareholders network of VIC in for improvement of selling

products as well as fund raising

VIC could utilize VPL’s rich land bank for the sake of collaterals or development purposes.

2. VPL with weaker fundamentals regarding EPS, ROE, ROA, earnings growth..., will benefit its

shareholders, mostly Vingroup’s shareholders, should the stock swap ratio be close to 1:1. While VPL’s

fundamentals may not seem strong enough, its current shareholder structure and its very low liquidity

together with Vingroup’s M&A target may prevent VPL from dropping significantly from the current

price.

3. However, we do not see much synergy with regard to the valuation of VIC and VPL due to the fact that

VPL and VIC have been under management by Vingroup therefore the merger will likely put both firms under one umbrella

of Vingroup in an official manner rather than enable both of them to leverage the strength of each other.

4. We note that VPL & VIC has been using swap share method for merging activities recently. In particular:

VIC: on 20Dec10, Sinh Thai company – an associate company of VIC has issued addition shares at 1:1 to

merge with 4 other companies Thien An, May Man, Ngoc Viet and IGS.

VPL: On 15Mar11, VPL issued additional 25.59mil shares to swap with Vincharm, Vinpearl Danang,

Vinpearl Hoi An. Goodwill was booked at VND596 bn from this merger in 1Q2011.

5. Our preliminary look at the merger case shows that: By end of 2Q11, Book value per share of VIC stays at

15,414VND, lower than BVPS of VPL is 19,460VND. Should the swap ratio be at 1:1, a negative goodwill of

831bn VND may be recognized for post-merger VIC unless both companies are re-valued as a common

practice (the revaluation may take place before and after the merger).

6. Based on the assumption that the VIC/VPL swap ratio would be 1:1, we calculate the impact of the merger on

the largest shareholder group:

Case 1: Based on Mr Vuong ownership in both VPL & VIC

Ownership Number of share

outstanding Market price on 14/10/2011 Total value

VIC 39.17% 391,149,893 93,500 14,325,454,123,737

VPL 9.64% 205,498,489 89,000 1,763,094,836,224

Total (pre-merger) 16,088,548,959,962

VIC (post-merger) 29% 596,648,382 92,985

If VIC price is higher than 92,985VND, then total value of Mr Vuong’s ownership in VIC after the merger will be higher than that in the pre-merged VIC & VPL.

Case 2: Based on Mr Vuong, his wife & Vingroup ownership in both VPL & VIC

Ownership Number of Market price on 14/10/2011 Total value


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shareoustanding

VIC 55.90%* 391,149,893 93,500 20,444,035,882,485

VPL 34.14%* 205,498,489 89,000 6,243,989,388,869

Total (pre-merger) 26,688,025,271,354

VIC (post merger) 48% 596,648,382 92,407

If VIC price is higher than 92,407VND, then total value of Mr Vuong’s and other major shareholders’ ownership in

VIC after the merger will be higher than that in the pre-merging case.

Market sentiments towards the merger

In fact, we see that investor community tend to see the merger as a way of Vingroup to:

(1) To officially bring out the brand name to the investor community (recently Vingroup established VIP Vingroup

cards to its customers which applied for an integrated service of Vingroup including real –estate service,

hospitality, restaurant, entertainment, etc which is considered to be a valued and well-defined asset to customers);

(2) To raise market cap and acquire more assets to collateralize their future investments;

(3) To enable Vingroup’s shareholders and VPL’s shareholders to divest more easily.


www.ssi.com.vn 14

APPENDIX

VPL Profit & Loss Statement, 2008-2011

VND mln 2008A 2009A 2010A 2011E

Revenue 471,269 485,863 665,086 1,946,993

Provision (618) (385) (377) 0

Revenue (net) 470,651 485,478 664,708 1,946,993

Cost of Goods Sold (322,120) (293,313) (403,424) (1,230,179)

Gross profit 148,531 192,165 261,284 716,814

Financial revenue 153,648 213,271 462,171 617,000

Financial expense (198,065) (336,864) (556,951) (590,000)

Interest expense (177,320) (319,883) (526,510) (566,521)

Selling cost (42,505) (27,651) (55,185) (149,457)

Administration cost (36,471) (39,758) (57,346) (159,431)

Profit (Loss) from operating activities 25,138 1,163 53,973 434,926

Other revenues 3,529 28,271 149,859 68,000

Other expenses (415) (3,531) (10,416) (2,000)

Other earnings (net) 3,114 24,740 139,443 66,000

Profit (Loss) from associates - 47,409 (27,657) 112982

Net profit (loss) before tax 28,252 73,312 165,759 613,908

Current tax expense 131 2,593 13,441 69348

Deferred tax expense (7,598) 333 2,610 4,321

Tax expense (7,467) 2,926 16,051 73,669

Net earnings (loss) after tax 35,719 70,386 149,708 540,239

Minority interest (5,970) (14,906) 30,199 33,219

Equity holders of the parent 41,689 85,293 119,510 573,458

EPS 417 508 729 2,629

BVPS 12,492 8,548 9,518 10,000

Outstanding Shares (M mils) 85.657074 138.55512 205.498 205.498

VPL Balance Sheet, 2008-2011

VND mln 2008A 2009A 2010A 2011E

CURRENT ASSETS 972,945 2,427,865 1,715,238 3,380,025

Cash and cash equivalent 74,112 10,136 23,619 45,917

Cash 74,112 10,136 17,055 21,317

Cash equivalent - 200 6,564 24,600

Short-term investments 664,748 1,522,647 1,168,080 2,180,572

Short-term investments 664,748 1,522,647 1,168,080 2,180,572

Provision for short-term investments - - - -

Current receivables 216,765 114,386 452,089 609,351

Trade receivables 19,235 14,830 13,141 44,943

Advances to suppliers 16,564 6,437 75,769 291,665

Intercompany receivables - - - -

Construction receivables - - - -


www.ssi.com.vn 15

VND mln 2008A 2009A 2010A 2011E

Other receivables 180,966 93,364 363,201 272,742

Provision for doubtful debts - (245) (22) -

Inventories 12,078 11,612 16,517 403,947

Inventories 12,078 11,612 16,517 403,947

Provision for inventories - - - -

Other current assets 5,242 769,084 54,933 140,238

Short-term prepaid expenses - 40,890 33,039 94,418

Value added tax deductible 214 4,407 8,732 33,012

Tax and other receivables from the State 44 1,241 661 2,014

Other current assets 4,984 722,546 12,501 10,794

FIXED ASSETS 2,197,014 4,757,651 6,050,417 6,824,138

Long-term receivables - - - -

Long-term receivables from customers - - - -

Internal receivables - - - -

Other receivables - - - -

Provision - - - -

Fixed assets 1,942,116 1,967,106 2,885,517 3,441,871

Tangible fixed assets 1,203,205 1,192,106 1,183,223 1,788,668

Cost 1,350,443 1,404,941 1,462,391 2,186,783

Accumulated depreciation (147,238) (212,836) (279,168) (398,115)

Financial lease assets - - -

Cost - - - -

Accumulated depreciation - - - -

Intangible fixed assets 89,232 97,483 297,421 417,529

Cost 93,881 104,268 306,581 432,392

Accumulated amortization (4,649) (6,785) (9,160) (14,863)

Construction in progress 628,199 656,601 1,384,761 1,215,964

Investment properties 21,480 20,916 20,112 19,711

Cost 22,712 22,932 22,932 22,932

Accumulated depreciation (1,232) (2,016) (2,820) (3,621)

Long-term investments 166,429 2,730,334 3,092,175 2,761,705

Investment in subsidiaries - - - -

Investment in associates 26,183 748,041 1,116,066 1,123,505

Other long-term investments 140,246 1,982,293 1,976,109 1,638,200

Provision - - - -

Goodwill - - - 578,656

Other long-term assets 88,469 60,211 72,725 41,906

Long-term prepaid expenses 80,127 59,297 40,248 41,906

Differed tax assets 7,598 914 32,477 -

Other long-term assets 744 - - -

TOTAL ASSETS 3,169,961 7,185,715 7,765,656 10,204,164

LIABILITIES 1,976,315 5,702,942 5,274,137 6,214,063

Current liabilities 438,885 1,219,715 1,286,498 1,173,857

Short-term loans and borrowings 251,355 832,124 872,458

594,062


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VND mln 2008A 2009A 2010A 2011E

Trade payables 45,307 36,909 50,022

174,887

Advances from customers 21,098 22,497 34,805

39,372

Statutory obligations 652 1,905 8,881

30,193

Payables to employees 1,489 1,962 14,159

13,878

Accrued expenses 117,523 245,826 296,660

225,702

Intercompany payables - - - -

Construction payables - - - -

Other payables 1,461 78,492 9,513

95,764

Provision - - - -

Non-current liabilities 1,537,430 4,483,227 3,987,639 5,040,206

Long -term payable to suppliers - - - -

Long-term intercompany payables - - - -

Other long-term liabilities 800 754 870

1,592

Long-term loans and debts 1,533,212 4,478,651 3,948,141

4,819,652

Deferred tax liabilities - 964 35,137

215,690

Provision for severance allowance 3,418 2,858 3,491

3,271

Provision for other long-term payables - - - -

Unearned revenue - - - -

OWNERS' EQUITY 1,069,568 1,184,351 1,955,834 3,990,101

Capital 1,070,015 1,184,351 1,955,834 3,990,101

Legal capital 1,000,000 1,000,000 1,799,057

2,054,985

Capital surplus - - -

1,381,596

Other fund - - - -

Treasury shares - - -

195,749

Assets revaluation reserve - - -

(5,327)

Foreign exchange reserve - (2,149) (2,206) -

Investment and Development fund - 4,994 5,994

10,994

Financial reserve fund - - - -

Other funds - - - -

Retained earnings 70,015 181,506 152,988

352,104

Other resource and funds (447) - - -

Bonus fund (before 2010) (447) - - -

State fund - - -

Minority Interest 124,078 298,422 535,685

47,729

TOTAL RESOURCES 3,169,961 7,185,715 7,765,656 10,204,164


www.ssi.com.vn 17

DISCLAIMER

The information, statements, forecasts and projections contained herein,

including any expression of opinion, are based upon sources believed to be

reliable but their accuracy completeness or correctness are not guaranteed.

Expressions of opinion herein were arrived at after due and careful consideration

and they were based upon the best information then known to us and in our

opinion are fair and reasonable in the circumstances prevailing at the time.

Expressions of opinion contained herein are subject to change without notice.

This document is not and should not be construed as, an offer or the solicitation

of an offer to buy or sell any securities. SSI and other companies in the SSI

and/or their officers, directors and employees may have positions and may affect

transactions in securities of companies mentioned herein and may also perform

or seek to perform investment banking services for these companies.

This document is for private circulation only and is not for publication in the press

or elsewhere. SSI accepts no liability whatsoever for any direct or consequential

loss arising from any use of this document or its content. The use of any

information, statements forecasts and projections contained herein shall be at the

sole discretion and risk of the user.

CONTACT INFORMATION

Phuong Hoang Director, Institutional Research & Investment Advisory

[email protected]

Cuong Vu Senior Analyst [email protected]

Pham Huyen Trang Research Analyst [email protected]

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