Vietnamnaturalrubber-Sectorreport.pdf

Vietnam natural rubber sector Global natural rubber market Vietnam rubber sector Stock recommendation

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28March2011 Vietnam natural rubber sector

Table of Contents

Global natural rubber market page

Impressive recovery of natural rubber price 2

...supported by limited supply of natural rubber 2

Higher demand from China thanks to inventory build-up and recovery in global automobile sales 3

Higher crude oil prices support NR 5

Vietnam rubber sector page

Vietnam is one of the leading natural rubber producers in the world 6

with 85-90% of the production is for export 8

Vietnam has little impact on global rubber price 9

Simple operation model and recurring earnings of domestic companies 10

Vietnams rubber companies have limited organic growth but can benefit from high rubber price and depreciation of VND 11

TRC and DPR are our recommended stocks 12

Tay Ninh Rubber JSC 13

Dong Phu Rubber JSC 22

Phuoc Hoa Rubber JSC 31

Hoa Binh Rubber JSC 40

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Vietnam is one of the biggest rubber suppliers around the world. Vietnam currently ranks fifth among top world rubber producers and third among top world rubber exporters. High growth rate combined with high production yield will be supportive factors to Vietnams natural rubber sector.

Average natural rubber price is around 3,000 USD/ton in 2010 and still have positive supports to maintain this price level in 2011 thanks to (1) strong rubber demand from impressive recovery of world automobile production industry - controlling 68% of total natural rubber demand (2) shortage of natural rubber supply due to drought and decline in international rubber plantations (3) oil price may pick up as world economic recovery strengthened. However, natural rubber supply may increase significantly since 2012 as newly planted areas during 2005-2008 start production.

The Vietnam Rubber Group the state-owned enterprise has significant influence over the Vietnam rubber sector as (1) its subsidiaries controlling around 40% of the total rubber production in Vietnam (2) exerting controls over most biggest rubber companies, maintaining more than 60% stake in equitised rubber companies (3) fixing labor cost the highest proportion in cost of goods sold at around 40-42% of revenue, a mechanism to smooth earnings when rubber prices increase but also ensure margin and operational profits when rubber prices fall. Vietnams natural rubber sector has little organic growth in the next few years. Most listed rubber companies are facing declining plantations as they can be too old or replanted areas are not ready for yielding. The revenue growth can only come from increasing rubber prices, which Vietnam has no impact or influence on.

Investment recommendation: TRC and DPR are our two stock picks in natural rubber sector. We appreciate TRC and DPRs capability in maintaining outputs over the next two years thanks to their younger age profiles among peers, considering limited supply is the catalyst of higher rubber prices and improved margin.

TRC DPR PHR HRC

Current price (VND) 56,500 60,000 36,800 62,500

Target price (VND) 68,000 69,000 40,600 51,500

Upside/Downside 20% 15% 10% -18%

Recommendation ADD ADD HOLD REDUCE

Capitalization (VND bn) 1,702 2,688 2,951 1,079

2010 Consumption volume (ton) 12,800 16,470 31,006 6,518

2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0

2010 Net revenue (VND bn) 758 1,028 1,995 412

2010 Net profit (VND bn) 267.4 395.1 490 95.4

2010 EPS (VND) 8,929 9,188 6,026 5,514

2010 EPS growth (%) 75 74 83 45

PE (x) 6.3 6.5 6.1 11.3

Extending the favourable condition of high rubber price Hoang Thi Hoa, Manager [email protected] +84 8 3914 3588, ext. 146 Giang Hoang, [email protected] +84 8 3914 3588, ext. 142



Global natural rubber market Impressive recovery of natural rubber price... As the global economy recovered after the financial crisis in late 2008 and early 2009, rubber sector began to see signs of recovery since the second quarter of 2009. Natural rubber demand started to pick up thanks to positive moves in the tyre production industry which captures 68% of total natural rubber demand. Moreover, it was in 2009 that the three largest natural rubber producers (Thailand, Indonesia and Malaysia), accounting for 72% of total global rubber production cut down about 4.3% of their volume to stabilize the global rubber price. Consequently, the supply and demand gap has pushed up rubber price, especially from Q3/2009. Supported by high rubber demand and due to seasonal effect as Q1 and Q2 was off-peak season of rubber supply, rubber price in late April 2010 had exceeded the peak established in July 2008. Although the price trend paused from June to August due to the supply improvement as rubber producers begin harvesting season, rubber price continued to rise again and has seen the best performance in the rubber history to-date. Rubber companies enjoyed a good year when average selling price for 2010 was above USD3,000/ton, much higher than the pre-crisis level of 2008 of approximately USD2,600/ton. Of note, world rubber bounced back strongly after the earthquake in Japan in March 2011 and currently stands high at USD5,500/ton

Figure 1: Movement of Vietnams rubber export price Figure 2: 6 Asian countries account for 94% of total world production

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Source: Vietnam Rubber Association (VRA), Association of Natural Rubber Producing Countries (ANRPC)

...supported by limited supply of natural rubber According to preliminary forecasts of the Association of Natural Rubber Producing Countries (ANRPC), the world rubber volume might get a maximum increase by 6.3% in 2010. However, by October 2010, ANRPC adjusted downward the 2010 natural rubber growth to 5.3% due to bad weather and declining output in major natural rubber producing countries, especially Thailand and Indonesia the two largest natural rubber producers. Latest report shows a 5.7% increase in global rubber volume in 2010, ANRPC also forecasts a 5.3% increase in 2011.

Global economic recovery and declining supply of top 3 biggest

rubber-producing countries are major

supportive factors to surging rubber price.

World supply is restricted by bad

weather and decline in international plantations.



Figure 3: Rubber production forecast is 5.3% in 2011

Country 2009 2010 Growth 2011 Growth

Thailand 3,164 3,072 -2.9% 3,247 5.7% Indonesia 2,440 2,843 16.5% 2,938 3.3% Malaysia 857 970 13.2% 1,050 8.3% India 820 845 3.0% 890 5.3% Vietnam 724 750 3.6% 780 4.0% China 643 647 0.6% 690 6.7% Srilanca 137 148 8.0% 153 3.4% Philippines 98 102 4.1% 107 4.9% Cambodia 34 45 32.4% 63 40.0% Total ANRPC 8,917 9,422 5.7% 9,918 5.3%

Source: ANRPC

Age structure of rubber trees in most of the producing countries indicates a possibility of large-scale replanting in 2010 and 2011. The concern over natural rubber supply seems to persist until end of 2011 as the yielding area is unlikely to expand before 2012 when a large area planted in ANRPC countries, especially Thailand, from 2005 onwards is expected to start yielding from 2012 and the replanted trees attain higher yielding stage (in the life cycle of a rubber tree, gestation period is 7 years and productivity is highest after 10 years of plantation). During the 2005 2010 period, a total area of 2,544 thousand hectare have been planted in ANRPC countries, in which 927 thousand hectare were planted in Thailand during that period in response to attractive prices and positive outlook of the rubber industry. Especially, the annual new planted area increased significantly from 2005 2008 as prompted by the high prices of natural rubber at that time.

Figure 4: Annual new and replanted areas in Thailand from 2003 to 2010

Figure 5: Total new and replanted areas of natural rubber in ANRPC members

Source: ANRPC As a result, the net effect of replanting old-age with low yielding trees and new supply of higher yielding ones could lead to changes in the supply after 2011F. In addition, as a result of the current high market prices of natural rubber, there could be another surge in new plantings for natural rubber, which could lead to higher than forecasted supply of natural rubber subsequently. Higher demand thanks to recovery in global automobile sales and Chinas inventory build-up Currently, rubber demand for tyre production accounts for around 68% of the total demand. The recovery of global automobiles sales will have positive impact on the rubber industry. In 2009, China surpassed US to become the largest automobile producer with sales of 13.6 million cars, up 50% from

The surge in new plant areas during 2005 2008 as response to

high market prices for natural rubber will lead

to changes in natural rubber supply after

2012.



2008. Automobile sales in China are expected to increase by 15 million cars in 2010 thanks to stronger domestic consumption and export. The incentive programs of the US and EUs government in 2009 such as cash for clunkers did encourage a large number of vehicle owners to buy new cars by trading-in their old vehicles. In addition, the rise of higher income earners in Asian countries such as India, China who used to own vehicles of only two tyres (mainly motorbikes) - now have a demand to own private cars which will double the demand for tyres. These are strong market fundamentals that support the recent recovery in rubber price, rather than speculation as in 2008.

Figure 6: Monthly passenger car sales in China is maintaining at high level for over a year (in units)

Figure 7: Monthly passenger car sales in India is also on increasing trend thanks to higher domestic demand (in units)

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Being the largest natural rubber producer, Asia is also the main consumer, accounting for two thirds of the world natural rubber consumption. China is the largest consumer of natural rubber, accounting for more than 32% of the global demand in 2009.

Figure 8: Tyres account for the largest demand for rubber

Figure 9: Asia accounts for two thirds of the world natural rubber consumption and China is the largest natural rubber consumer in the world

Source: ANRPC, International Rubber Study Group (IRSG)

In 2009, China, India and Malaysia captured 47% of total global rubber demand. Import demand from China is anticipated to keep increasing when China is building up its natural rubber inventory as it anticipates the limited supply in Q1-Q2 of 2011. Closing stock of natural rubber in ANRPC countries also keeps increasing in recent years thanks to higher demand and better price trend during the first few months of the year.

Current recovery in rubber prices is based

on strong market fundamentals, originated

from the recovery in global automobile sales.

Rubber demand rising in line with the recovery in tyre production industry.



Figure 10: China is building up its natural rubber inventory

Figure 11: Closing stocks at year end in ANRPC countries

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Source: ANRPC, Bloomberg

Demand for natural rubber in China and India may keep increasing as automobile industry in China is expected to grow at 8%/year in the period 2011 2015. Automobile sales in India are also on rising trend as more middle and high-income earners have higher demand for private cars. Based on the International Rubber Study Group (IRSG)s estimate, global demand for natural rubber may reach 12.4 million tons by 2015 and 14.2 million tons by 2020, but the worldwide natural rubber production can only reach 13.6 million tons/year in 2020, not taking into account new planting areas that may be stimulated from the current high market prices of natural rubber as last seen in the 2005-2008 period.

Higher crude oil prices support NR Rubber price is believed to have a close relationship with oil price. This is often explained by the presumption of a replacement between natural rubber and synthetic rubber. Based on historical data of crude oil price and natural rubber price (Thai RSS3) from 2002 to 2010, the correlation coefficient between oil price and natural rubber price is quite significant at 83%. As a result, natural rubber prices normally changes in the same direction with oil price and vice versa.

Figure 12: Natural rubber accounts for around 43% of total rubber demand

Figure 13: Rubber price changes in the same direction with oil price.

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Source: IRSG, Reuters

Synthetic rubber consumption accounts for around 55% of total global rubber demand. Synthetic rubber is synthesized from oil and requires different technology, which explains a close correlation between natural rubber price and crude oil price. Currently, there is a gap between natural rubber price and crude oil price, which partly comes from a higher increase in natural rubber price in comparison with oil price. Therefore, natural rubber price is under some pressures to adjust downward to close to gap.

However, as the world economy recovery strengthens, crude oil price is expected to pick up gradually, closing the current gap between natural rubber price and crude oil price. Based on recent forecast of

Correlation coefficient between oil price and natural rubber price is

83%.

Demand for natural rubber may reach 12.4

million tons by 2015 and 14.2 million tons by

2020.

Crude oil price is on recovery trend, driven by

bullish sentiment about the global economic

outlook.



Goldman Sachs, the medium term outlook for oil prices is quite positive, supported by global oil stockpiles shrink and oil production tightens. On a long run, we believe that rubber prices and oil prices will both benefit from price appreciation in key commodities, maintaining the close relationship between them.

Vietnam rubber sector Vietnam is one of the leading natural rubber producers in the world In 2009, Vietnams natural rubber volume ranked fifth worldwide with total production volume of 724 thousand tons. Total export volume increased 10% to 731.4 thousand tons in 2009, 800 thousand tons in 2010, and total export turnover of natural rubber reached USD2.35bn in 2010. With impressive increase in export volume, Vietnam has surpassed Malaysia to become the third biggest natural rubber exporter in the world. In 2010, Vietnams total rubber area is about 715 thousand ha in which 445 ha are ready for harvesting.

Figure 14: Vietnam is the world fifth largest producer and third largest exporter of natural rubber

Figure 15: Rubber area and productivity of main producing countries in 2009

Source: ANRPC

Thanks to governments incentive measures to develop rubber plantations, Vietnam has the fastest growth rate among leading NR producing countries. During the period from 2003-2009, the annual growth rate of total rubber area and total rubber harvesting area was 7.5% and 7.9% respectively. Plantation productivity has improved remarkably during the past six years. Vietnams harvesting to reach in 2009 1.72 ton/ha, similar to that of Thailand.

Figure 16: Vietnam export volume and value increase dramatically over the past 10 years

Figure 17: and production yield of Vietnam natural rubber improved largely within the past 5 years

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Source: ANRPC

Vietnam records the fastest growth rate in

leading countries in term of productivity.



The government outlined a plan to develop Vietnam rubber plantations until 2020. With new plantation area of 30,000-40,000 ha/year, Vietnams rubber area may reach 1 million ha and 1.2 million tons of volume by the end of 2020.

Figure 18: Development plan of Vietnam rubber industry to 2020

Region 2010 2015 2020 Southeast ha 385,000 406,000 420,000 Central Highlands ha 231,000 300,000 420,000 Central Coast ha 70,000 96,000 110,000 Northwest ha 14,000 48,000 50,000 Total area ha 700,000 850,000 1,000,000 Total volume tons 750,000 880,000 1,200,000

Source: VRA

Vietnam Rubber Group (VRG) is the biggest state-owned enterprise whose subsidiaries control about 269.3 thousand hectares of total rubber plantations in 2009, corresponding to 40% of total nationwide area and 85% of export production. VRAs total production in 2009 was 298,800 tons, accounting for 41.2% of the nationwide volume. All currently listed natural rubber companies (PHR, TRC, DPR, HRC) are members of VRA, except for TNC.

Figure 19: Production and sales volume of VRA members in 2009

Company/Region 2009 Production (tons) 2009 Sales volume (tons)

Southeast 242,290 266,697

1 Dau Tieng rubber company 45,898 53,186

2 Dong Nai rubber company 45,280 47,897

3 Phu Rieng rubber company 27,500 28,238

4 Binh Long rubber company 24,775 25,052

5 Phuoc Hoa rubber company (*) 24,092 32,393

6 Dong Phu rubber company (*) 16,802 19,593

7 Loc Ninh rubber company 15,048 14,037

8 Tay Ninh rubber company (*) 13,211 13,095

9 Tan Bien rubber company 12,421 13,798

10 Ba Ria rubber company 6,420 7,259

11 Hoa Binh rubber company (*) 5,118 6,300

12 Binh Thuan rubber company 4,480 4,618

13 Rubber Institution 1,245 1,231

Highlands 48,240 50,499

14 Kontum rubber company 10,350 10,600

15 Chu Se rubber company 9,015 10,122

16 ChuProng rubber company 7,600 7,840

17 Mang Yang rubber company 6,250 6,212

There is large potential in the natural rubber

industry

VRA controls around 40% of the total rubber production and 85% of

rubber export in Vietnam.



18 ChuPah rubber company 6,150 6,557

19 Eah'Leo rubber company 5,230 5,000

20 Krongbuk rubber company 3,645 4,168

Central coast 8,335 10,365

21 Quang Tri rubber company 6,042 8,082

22 Ha Tinh rubber company 1,283 1,237

23 Quang Nam rubber company 830 830

24 Quang Ngai rubber company 180 216

Total 298,865 327,561

Source: VRA (*) Listed rubber companies

The natural conditions in the Southeast region are very suitable for rubber development. Total rubber area in the Southeast region is estimated to account for 67% of total plantation in the whole country. Thanks to high productivity in the region of about 1.9 ton/ha, annual harvesting volume is almost 79% of total productivity in Vietnam.

Figure 20: Allocation of rubber area by zones Figure 21: Allocation of rubber volume by zones

Source: VRA

With 85-90% of the production is for export Annually, 85-90% of Vietnam natural rubber is consumed in foreign markets. In 2009, Vietnam exported natural rubber to 71 countries, in which China was the largest importer with the annual growth rate of 6.6%, reaching 494.6 thousand tons or USD 789 million. Total export turnover of natural rubber in 2009 was USD1.2 bn and the turnover in 2010 is USD2.35bn thanks to good rubber prices in the year.

Rubber plantation is mainly focused in the

Southeast region.

Tyre production industry in the region is the key

source of demand for NR products of Vietnam.



Figure 22: Export products structure of Vietnamese rubber

Figure 23: China is the main consumer of Vietnam rubber 68% of Vietnam export

Source: VRA

Domestic consumption volume in 2009 was about 120 thousand tons of rubber, corresponding to 14.1% of total consumption volume, up 20% from 2008. This growth was a great progress of natural rubber sector, particularly when the tyre production factory of Kumho was established in Binh Duong province. At present, tyre production factories use about 80-90 thousand tons of natural rubber per year to produce an estimated number of 150 thousand small tyres and 1.65 million truck tyres of all kind.

Figure 24: Vietnam tyre market

Kind of tyre Total tyre products

demand Products made

in VN %products/

demand

Radial 1,200,000 150,000 12.5%

Bias 2,100,000 1,650,000 78.6%

Light truck 1,100,000 950,000 86.4%

Heavy truck 1,000,000 700,000 70.0%

Motorbike 20,000,000 1,990,000 10.0%

Source: VRA

Vietnam has little impact on global rubber price

In spite of being the world fifth largest producer and third largest exporter of natural rubber, Vietnam only contribute approximately 7% of rubber volume into total global natural rubber supply compared to roughly 20% of the largest exporter Thailand. In addition, as two third of Vietnam rubber is exporting to a sole consumer - China, Vietnam is fully impacted by fluctuations in international rubber price as well as changes in global rubber production and global rubber demand.

In addition, as the brand name of Vietnam rubber has not been set up, Vietnams rubber selling prices are usually cheaper than those of Thailand or Indonesia. Moreover, due to having heavy dependence on China market (accounting for 70% of Vietnams export volume), Vietnam has limited bargaining power in the global markets.

Domestic consumption market is quite small,

only accounting for 10-15% of total quantity.

Vietnams rubber prices are normally cheaper

and have no impact on the world rubber price.



Simple operation models and recurring earnings of domestic companies By applying simple technology, the initial investment costs for rubber plantations are mainly focused on planting and taking care of the plantations, about VND70 million/ha in the Southeast region and VND100 million/ha in the Central Highland. In addition, liquidation value of the plantations is sufficient for investment in planting new trees in the same area. As a result, rubber companies use little leverage in their capital structure.

As directed by VRA, labor cost, which captures around 40% of revenue, will be determined based on rubber prices and the annual revenue of each company. This mechanism prevents rubber companies from enjoying enormous earnings when rubber prices increase. However, being subsidiaries of VRA, rubber companies are also protected from incurring losses especially when rubber prices fall dramatically. For this reason, rubber companies are able to control cost of goods sold and keep their gross profit margin of over 20% even when rubber prices fell remarkably as in 2008.

Vietnams government considers rubber trees as one of the strategic plants for export and poverty reduction. Therefore, Vietnam rubber sector receive many supports from the government. In addition to cheap land renting cost, rubber companies are also supported in terms of selling price. In the end of 2008 and beginning of 2009, when rubber price dropped deeply, the Government permitted Vietnam Rubber Association to buy all domestic rubber in order to stabilize rubber price and ensure a minimum profit for rubber companies.

We analyse two scenarios when rubber price is at the 2010 lowest level of USD2,100 per ton and at USD3,300/ton a conservative 10% increase from 2010 average price.

Scenario 1: Rubber price is at USD2,100 per ton or VND44.1 million/ton. With the productivity of 1.7 ton/ha (the average productivity of the sector), revenue per hecta is about VND 75.0 million. Cost of goods sold is about VND 50 million in which labor cost is a variable cost accounting for 42% of revenue and fixed costs of VND18.5 million/ha . Thus, gross profit might is VND 25 million/ha, corresponding to a 33% gross profit margin.

Scenario 2: Rubber price reaches USD3,300 per ton or VND69.3 million/ton (10% increase from the average rubber price in 2010). The gross profit per hecta is VND 49.8 million and gross profit margin is 42%.

Figure 25: Profit model of rubber companies at USD2,100 per ton

Figure 26: Profit model of rubber companies at USD 3,300 per ton

Initialinvestment:VND70mil/ha

+Sellingprice:VND44mn/ton(~2,100

USD/ton)+Productivity:1.7ton/ha

Revenue/ha:VND75mn

+Laborcost:VND31.5mn/ha+Rawmaterialcost:VND9

mn/ha+Depreciation:VND4.5mn/ha

+Other:VND5mn/ha

Annualcost/ha:VND50mn

Grossprofit/ha:VND25mn/ha

Initialinvestment:VND70mil/ha

+Sellingprice:VND69.3mn/ton(~3,300

USD/ton)+Productivity:1.7ton/ha

Revenue/ha:VND117.8mn

+Laborcost:VND49.5mn/ha+Rawmaterialcost:VND9

mn/ha+Depreciation:VND4.5mn/ha

+Other:VND5mn/ha

Annualcost/ha:VND68mn

Grossprofit/ha:

VND49.8mn/ha

Source: VCSC

Liquidation value is sufficient for replanting.

Controlling labor costs at 40% of revenue and

price support from VRA ensure a minimum profit

margin of over 20% for rubber companies.

Natural rubber sector is supported by the

Government.



Vietnams rubber companies have limited organic growth but benefit from high rubber price and depreciation of VND As global rubber prices are still in upward trend, Vietnams rubber export prices also move in line with the global prices. Average rubber price for 2010 is USD3,000 per ton, or VND58.5 million/ton, the highest level in the rubber history. Moving into 2011, the discrepancy between global demand and supply is still a supporting factor to rubber prices. As of February 2011, rubbers off-peak season, world rubber price reaches over USD5,000 per ton while domestic price also reaches around VND100mn. Vietnams rubber companies also benefit from devaluation of VND against USD as the majority of their revenue is in US dollars. VND has devalued nearly 10% year to date. Thus, in addition to benefit from high rubber prices, rubber companies also earn better financial income thanks to currency conversion. As the majority of rubber plantation is either too old or not mature enough to start yielding, rubber companies have limited organic growth over the next few years, at least until 2013, when a large area of new rubber plantations planted in 2005 starting production. Figure 27: Annual new rubber plantation over years

Source: VRA

In addition, according to the development plan of the rubber industry set out by VRA, the expansion of new plantation areas may grow at an annual rate of around 4% from 2010 to 2020. Rubber production is expected to increase at around 3% from 2010 2015 and 6% from 2015 2020.

In normal conditions, harvested volume of rubber companies was the lowest in Q1 when rubber trees began falling leaves and increased gradually until peak season in Q4. The allocated volume ratio through quarters is 10%:20%:30%:40% in Q1, Q2, Q3 and Q4 respectively. As such, revenue and profit of rubber companies normally have cyclical growth at year-end. In addition, rubber trees can only start yielding after 7 years and provide the highest yield from year 10th to year 26th. Therefore, productivity of each company will be varied based on the structure of the plantations.

Rubber price continues to stay high thanks to

supply shortage.

Exchange rate is another element

supporting domestic rubber companies.

Growth cycle of rubber trees is reflected by rubber companies

operation.

Rubber production is expected to increase at around 3% from 2010

2015.



TRC and DPR are our top picks in the sector Among listed natural rubber companies, we like TRC and DPR. In addition to benefit from global rubber price, we appreciate TRC and DPRs capability in maintaining output as their rubber plantations will be in age of high productivity and volume in coming years. Their 2010 profit is estimated to be 60-80% higher than it was in 2009 while their 2010 PE are 7.4x and 6.9x a quite attractive level for medium or long-term investment.

Figure 28: Comparison between listed rubber companies

TRC DPR PHR HRC

Current price (VND) 56,500 60,000 36,800 62,500

Target price (VND) 68,000 69,000 40,600 51,500

Upside/Downside 20% 15% 10% -18%

Recommendation ADD ADD HOLD REDUCE

Capitalization (VND bn) 1,702 2,688 2,951 1,079

2010 Consumption volume (ton) 12,800 16,470 31,006 6,518

2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0

2010 Net revenue (VND bn) 758 1,028 1,995 412

2010 Net profit (VND bn) 267.4 395.1 490 95.4

2010 EPS (VND) 8,929 9,188 6,026 5,514

2010 EPS growth (%) 75 74 83 45

PE (x) 6.3 6.5 6.1 11.3

Source: VCSC


28 March 2011

Tay Ninh Rubber JSC (HSX: TRC) Initiation

Giang Hoang, Analyst [email protected] +84 8 3914 3588, ext. 142

ADD

Target price VND68,000 Upside 20%

Natural Rubber Key Indicators

Price (24 Mar. 2011) 56,500 52-week low 51,440 52-week high 68,140 10-day avg trading day vol shares 2,141 Outstanding shares 30,000,000 Market cap (VND bn) 1,702 Market cap (USD mn) 85

Valuation 2009 2010 2011F

EPS (VND) 5,110 8,929 9,015

EPS growth -22.7% 74.7% 1.0%

P/E 11.0 6.3 6.2

P/B 2.7 2.2 1.9

ROE 24.4% 34.9% 30.0%

ROA 19.4% 25.4% 25.0%

ROIC 22.7% 33.4% 29.3%

Debt/Equity 7.4% 4.5% 2.2%

Dividend yield 2.9% 5.4% 5.4% Source: Company

Price performance 1M 3M 12M

Absolute (%) (11) (14)

(14) Relative (%) (2) (9) (2)

Source: Bloomberg

Ownership structure Vietnam Rubber Group 60.0% Foreign investors 32.9% Individual investors 7.1%

See important disclosure at the end

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

TRC VNIndex

Power of the youth TRC is one of the few pure plays in the natural rubber in the market. Other listed plantation companies in the region (such as IOI Corp., Kuala Lumpur Kepong and Genting Plantations) are hybrids between rubber and other crops. TRC is also the largest manufacturer of latex in Vietnam. As we believe that high NR price is likely to hold, investors might want exposure on the stock.

Undervalued. Our NR price forecast is USD3,100/ton for 2011 (spot price USD3,500/ton for latex concentration) and USD2,900/ton-USD3,200/ton for 2012F-2015F. Our DCF-derived price target of VND68,000 suggests an upside of 20% against the current price. On a price multiple basis, TRC is trading at attractive 6.3x 2010 earnings and 6.2x 2011F earnings, lower than the industry average at P/E2010F 7.2x and P/E2011F 7.1x. We initiate on TRC with an ADD recommendation.

81% EPS growth for 2010, driven by: (1) higher NR price at VND60mn/ton in 2010 from VND32.2mn/ton in 2009 and (2) gross margin improved to 42.8% in 2010 from 34.2% in 2009. We note that TRC expensed a total of VND26.6bn in goodwill in 2010.

Flat earnings growth in 2011F. Looking forward to 2011F, we project a flat earnings growth given the following factors: (1) 9% decline in selling volume; (2) international NR latex price will remain at the same level with this year; (3) gross margin slightly down to 40%; and (4) removed the affect of expensing goodwill, administrative expenses going down to normal level.

Healthy estates bringing material growth in subsequent years. We like TRC in light of its healthy estates with young trees, good yield and its strength in high margin NR latex concentrates. Even though TRCs expansion project pipeline is weaker than its listed peers, it should maintain its competitive advantage at least until 2016 as the company has the lowest attrition rate of its productive plantation.

Low liquidity remains an issue. As VRG holds 60.0% and foreign investor 32.9% (the highest percentage of foreign ownership among the four listed peers), TRCs floating shares for individual investors are roughly 7.1%. The stock has consistently been trading with substantially lower liquidity than its peers.


28 March 2011 Tay Ninh Rubber JSC (HSX: TRC) ADD

Company overview TRC is the third largest listed rubber company by market cap and plantation acreage. The company manages 7,205ha of planted land-bank, of which 5,552ha in productive stage which yielded approximately 12,000 tons in 2010.

Revenue from rubber exploitation consisted of 95% of TRCs revenue in 2009. The companys main products are centrifuged latex concentration accounting for 72% of the company revenue, block rubber SVR 3L 10%, SVR 10-20 12%, and skim 6%. Long-term export contracts accounts for 48% of TRCs total revenue and contracts with domestic traditional partners making up 52%.

Mature plantation, High yield, and Flat output

Among the listed rubber companies, TRC has the most evenly distributed plantation across maturity. Immature trees (younger than 6 years) covers 23% total plantation area of TRC, young trees (7-16 year old) 30%, prime trees (17-23 year old) 30% and post-prime trees (over 24 years old) 17%, making the average lifetime age of TRCs plantation 14.6, in line with its peer. However, with 60% of the plantation are at young and prime age, the average productive age of TRC is the lowest among the 4 peers at 12.1.

Figure 1: TRCs 2010 tree age profile and corresponding yield

Source: Company, VCSC

Despite the fact that the plantation is in a relatively less fertile area, given the plantations young age profile, the topology and inland location, TRC had the second highest yield of 2.24 tons/ha (after DPR 2.25 tons/ha) within the Vietnam Rubber Group, above the industry average of 1.78 tons/ha in 2010. We expect TRCs yields to continue to stay above 2.00tons/ha until 2015.

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www.vcsc.com.vn | VCSC

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2010 results TRC reported VND758bn in revenue (+72% YoY), and VND267bn in PAT (+74% YoY) in 2010. The companys average selling price reached VND60mn per ton, up 78.3% from an average VND32.2mn per ton in 2009.

Production output came at 12,400 tons (-6% YoY). Due to the seasonal nature of rubber crops, the vast majority of outputs falls into the second half of any given year with production volume allocation ratio of 10:20:30:40 each quarter, the results are close to VCSCs last projection (61% of our whole-year production forecast of 12,000 tons (-10% YoY)). Unlike PHR and HRC, TRCs purchasing volume remained insignificant at 80 tons, making total selling volume came in at 12,800 tons in 2010.

The company already expensed VND26.6bn in goodwill in 2010 due to changes in Vietnamese accounting rules that came into effect in 2010. Prior to 2010, goodwill was required to be amortized on a straight line method over a period not exceeding 10 years. The new rules require that goodwill from revaluations post-equalisation be completely expensed within 3 years. Since 2010 is a good year for the company, TRC allocated the whole goodwill balance of VND26.6bn this year.

Surging financial income helped improve bottom line. Financial income doubled the same period, to VND33bn in 2010 from VND14bn in 2009 thanks to higher interest income (VND20bn, +400% YoY) and exchange rate gain (VND11.6bn). Among the 4 peers, TRC appears to be the one most benefited from the depreciation of the VND.

EPS 2010 is at VND9,154/share, up 79% YoY.

The company intends to increase 2010 dividend to VND3,000/share from VND2,000/share, providing a dividend yield of 5.5% at the current price of VND56,500 (Mar 24 2011). The company will request shareholders approval at the 2011 annual meeting.

Earnings Outlook We foresee VND765bn in revenue (+1%) and VND265bn in PAT (+1%) for 2011. The following factors will adversely impact revenue and earnings growth.

(1) Average selling price stays at USD3,000/ton or VND65.1mn/ton (assuming exchange rate of USD:VND21,000)

(2) As tapping area is expected to shrink 5% to 5,304 hectares in 2011 from 5,552 hectares in 2010, we estimate that tapping volume will decline by 724 tons (-6% YoY, which is the second lowest declining rate in tapping volume among the 4 peers) to 11,276 tons in 2011 from 12,000 tons in 2010.

We note that the company has not drafted concrete earnings guidance for 2011. However, VRG has guided a selling price of VND50mn/ton for 2011 for companies under its umbrella.

Financial Investments Limited expansion plan. Among the four listed rubber companies, TRC is the one that has least invested in both related and unrelated projects with financial investment of VND143bn by the end of 2010.

TRC currently has only two new plantation projects and both are limited to capital contribution. Thus, TRC has a proportionate economic interest in 2,500ha (or 35% of TRCs current land-bank) in these new plantations.

Viet Lao Rubber JSC: TRC participated in the project with a nominal 10% stakes (HRC also has 15% stakes in this JV). The JV cultivates 10,000ha with total capital of VND600bn. TRC has completed its capital commitment of VND60bn in the JV. The first 2,000ha planted in 2005 is tapped in Q42010. The block rubber processing factory with capacity of 15,000 tons/year will go into operation in Q2 2011 instead of late 2010. The company expects 3000 tons SVR 3L in 2012 the first year of operation. Thus, TRC expects dividend from the JV starting 2012.



Dau Tieng-Lao Cai Rubber JSC: In October 2010, TRC has committed VND60bn in the JV Dau Tieng-Lao Cai JSC to cultivate 10,000ha in Vietnams mountainous northern province Lao Cai. Dau Tieng Rubber JSC holds 60% stakes in the JV, TRC 15% and DPR 10%. First 2,000ha will be planted in 2011.

As for non-core investments, TRCs portfolio is fragmented just like other rubber companies in the Group. The company already started to earn dividend from the some of these projects.

We expect nonmaterial dividend income to be VND2.7bn for 2010 and increase to around VND10bn in 2016.

Figure 4: TRCs Financial investments

Projects Committed capital Disbursed

amount as of 12/30/2010

Amount (VND bn) %

1 Dau Tieng-Lao Cai Rubber JSC 60.0 15% 60.0 2 Viet Lao Rubber JSC 60.0 10% 60.0 3 Nghe An Rubber Development JSC 12.5 8% 7.4 4 Wood Processing & Export-Import Tay Ninh JSC 10.5 - 10.5 5 Trade and Tourism Rubber JSC 10.0 4% 10.0 6 Ninh Dien Mineral Water JSC 1.5 15% 1.5 7 Infrastructure Investment Ltd.-VRG 26.8 10% 26.8 8 VN Rubber Urban and IZ Development JSC 20.0 - 20.0 Total 200.8 196.2

Valuation Key assumptions apply to our DCF model

Cash Flows assumptions

Revenue: TRC revenue comes from its rubber production activities. o Volume: We calculate exploitation volume based on TRCs current plantation and

planned liquidation and replacement for the period 2010-2015F. Purchasing volume for 2011F-2015F is forecasted to remain nominal at 80tons/year.

o Price: We adopt a cautious stance in terms of price and forecast 2011 average selling price at USD3,100, then a drop of 10% to USD2,945/ton in 2012 and a stable growth of 2% per annual from 2012F-2015F. We also assume a 2% devaluation of the VND against the USD each year for the same period.

Cost Structure: o Labour cost: As rubber exploitation is a labour intensive process, labour costs make up

the majority of COGS. For TRC, labour costs are paid at 40-42% of revenue according to VRAs guidance, representing 67-68% COGS across our forecast period.

o Depreciation: Depreciation makes up 4-6% COGS. o Other components of COGS: Other costs such as fertilizer, gas, exploiting materials,

labour miscellaneous, export insurance account for 25-28% of the cost base.

o Land tax: Like other rubber companies, TRC benefits from 50% discount of land use right tax, which accounts to 1mn/ha/year and totals to VND7bn/year for the company.

Taxes: TRC enjoys preferential tax treatment for operating and creating employment in the poor condition area of Go Dau, Tay Ninh. The company is exempted from CIT during the first 3 years after requisition (2007-2009) and 50% tax rebate on a 15% tax rate for the following 7 years.



Consequently, TRC is subject to preferential tax rate of 7.5% for 2010-2016 and 15% tax rate for rubber exploitation from 2017-2018 and 25% tax rate from 2019 onwards. Tax rate of 25% applies to financial and other income.

Figure 5: WACC assumptions

2-stage DCF assumptions Growth Terminal

Cost of equity 22.4% 22.4% Cost of debt 16.0% 12.0% Effective tax 10.0% 15.0% D/E 7.3% 2.0% WACC 21.9% 22.2% Terminal Growth of FCFF 4%

Figure 6: DCF valuation

Valuation Results

Terminal Value 1,595,770 PV of explicit FCFF 1,059,735 PV of Terminal Value 593,417 Enterprise Value 1,653,152

add est. cash & equivalents 2010 430,206 less est. net debt 2010 34,757

Fair Equity Value 2,059,601 Shares, Outstanding 30,000,000 Terminal Value/Firm Value 28% Fair Value per Share (VND) 68,049



Sensitivity Analysis Figure 7: DCF sensitivity analysis

WACC

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5.5% 71,380 70,592 69,839 69,120 68,431 67,773 67,142 5.0% 70,965 70,194 69,457 68,753 68,079 67,435 66,818 4.5% 70,573 69,818 69,097 68,407 67,747 67,116 66,511 4.0% 70,203 69,463 68,756 68,049 67,433 66,814 66,222 3.5% 69,852 69,127 68,433 67,770 67,136 66,529 65,948 3.0% 69,520 68,808 68,128 67,477 66,855 66,259 65,688 2.5% 69,205 68,506 67,838 67,199 66,587 66,002 65,441

Figure 6: DCF valuation

2010 2011F 2012F 2013F 2014F 2015F Productive area (ha) 5,752 5,304 5,153 5,082 5,096 5,091

% YoY -3% -8% -3% -1% 0% 0% Productivity (ton/ha) 2.16 2.13 2.11 2.10 2.12 2.08 Tapping volume 12,402 11,276 10,887 10,697 10,783 10,569 Purchasing volume 80 80 80 80 80 80 Total selling volume 12,832 11,706 11,317 11,127 11,213 10,999

% YoY -1% -9% -3% -2% 1% -2% Selling price (in USD) 3,050 3,100 2,945 3,004 3,064 3,125 Selling price (VND mn) 59.48 65.10 63.08 65.63 68.28 71.04 Revenue 757,982 762,031 713,916 730,280 765,644 781,381

% YoY 72% 1% -6% 2% 5% 2% GM for Exploitation 39.5% 39.8% 39.4% 39.6% 39.6% 39.6% GM for Purchasing 11.0% 7.0% 7.0% 7.0% 7.0% 7.0% Gross Margin 39.3% 39.6% 39.2% 39.4% 39.3% 39.4%

EBIT 307,668 303,403 282,411 288,581 307,297 315,308Tax 10% 10% 10% 10% 10% 10% EBIT*(1-Tax) 277,016 272,934 253,867 259,723 275,772 282,749 D&A, impairment 29,023 28,913 20,609 18,922 19,064 17,530 Increase in NWC -83,369 115,097 1,432 -414 -1,391 -563 CAPEX -211 15,735 21,372 42,673 18,077 21,897 FCFF 389,619 171,015 251,672 236,386 278,150 278,944



Figure 8: Sensitivity Analysis to Changes in Rubber prices

Rubber price assumption (USD/ton)

EPS (VND) P/E(x) @ VND56,500 Fair value Upside

2011F 2012F 2011F 2012F (VND/share) 4,300 8,929 14,014 4.0 4.3 92,814 66% 4,200 8,929 13,597 4.1 4.4 90,751 62% 4,100 8,929 13,180 4.2 4.6 88,688 58% 4,000 8,929 12,764 4.4 4.7 86,624 55% 3,900 8,929 12,347 4.5 4.9 84,561 51% 3,800 8,929 11,931 4.7 5.0 82,497 47% 3,700 8,929 11,514 4.9 5.2 80,434 44% 3,600 8,929 11,098 5.0 5.4 78,370 40% 3,500 8,929 10,681 5.2 5.6 76,306 36% 3,400 8,929 10,265 5.5 5.9 74,242 33% 3,300 8,929 9,848 5.7 6.1 72,178 29% 3,200 8,929 9,432 5.9 6.4 70,113 25% 3,100 8,929 9,015 6.2 6.7 68,049 20% 3,000 8,929 8,599 6.5 7.0 65,985 18% 2,900 8,929 8,182 6.8 7.4 63,920 14% 2,800 8,929 7,765 7.2 7.8 61,855 10% 2,700 8,929 7,349 7.6 8.2 59,790 7% 2,600 8,929 6,932 8.1 8.7 57,724 3% 2,500 8,929 6,516 8.6 9.3 55,659 -1% 2,400 8,929 6,099 9.2 9.9 53,593 -4% 2,300 8,929 5,683 9.9 10.6 51,527 -8% 2,200 8,929 5,266 10.6 11.5 49,461 -12% 2,100 8,929 4,850 11.5 12.5 47,394 -15% 2,000 8,929 4,433 12.6 13.7 45,327 -19%

Risks Key downside risk to price target is (1) rubber price falling more than 10% in 2012 and increasing

less than 4% from 2012 onwards, (2) adverse weather conditions as heavy rain or drought both affect rubber outputs.

The upside is (1) higher than expected rubber prices versus our forecast (2) more than expected devaluation in the VND.



Summary of Financials Income (bn VND) 2008 2009 2010 2011F 2012F Growth 2008 2009 2010 2011F 2012F

Net Revenue 549.1 440.4 758.0 762.0 713.9 Revenue growth 11.6% -19.8% 72.1% 0.5% -6.3% Cost of Goods Sold 342.6 289.8 433.5 460.5 434.1 EBITDA growth -19.7% 98.3% -11.6% -5.8% Gross Profit 206.5 150.6 324.5 301.5 279.8 EBIT growth 10.7% -18.6% 86.6% -1.4% -6.9% Selling Expenses 6.4 4.2 7.5 7.5 7.0 Net income growth 11.7% -22.7% 74.7% 1.0% -6.9% Admin. Expenses 25.9 21.1 56.1 34.3 32.1 EPS growth 11.7% -22.7% 74.7% 1.0% -6.9% Operating Profit 174.2 125.2 260.9 259.7 240.7 Gross margin 37.6% 34.2% 42.8% 39.6% 39.2% Financial Revenue 23.8 14.4 33.0 33.3 33.3 EBITDA/Revenue 39.6% 39.6% 45.6% 40.1% 40.3% Financial Expenses 1.0 0.1 0.4 0.4 0.4 EBIT/Revenue 36.9% 37.4% 40.6% 39.8% 39.6% Other Income 5.6 25.3 14.1 10.7 8.8 EBITDA 217.2 174.4 403.7 305.8 288.0 EPS (VND) 6,607 5,110 8,929 9,015 8,391 Depr. & Amort. 14.7 9.5 96.0 2.4 5.5 DPS (VND) 2,000 1,600 3,000 3,000 3,000 EBIT 202.5 164.9 307.7 303.4 282.4 Interest Expenses 4.3 2.4 2.7 2.8 2.4 Profit before Tax 198.2 162.5 296.4 300.6 280.0 Indicators 2008 2009 2010 2011F 2012F Tax - 9.2 30.4 30.2 28.3 Liquidity Ratios Net Income 198.2 153.3 267.9 270.5 251.7 Current Ratio 1.65 2.53 2.07 3.95 4.89 Minority Interest - - - - - Quick Ratio 1.44 2.20 1.77 3.36 4.30 Net Income to Common 198.2 153.3 267.9 270.5 251.7

Profitability Ratios ROE 39% 24% 35% 30% 24%

Balance (bn VND) 2008 2009 2010 2011F 2012F ROA 30% 19% 25% 25% 21%

Cash & Equivalents 150.1 245.2 441.2 362.0 339.2 ROIC 36% 23% 33% 29% 24% ST Financial Investments 8.7 9.3 10.4 12 12 Accounts Receivable 22.9 10.0 34.7 34.9 32.7 Efficiency Ratios Inventories 27.2 38.9 85.6 90.9 85.7 Days Receivables 0 3 11 11 11 Other Current Assets 0.9 1.4 6.2 6.6 6.3 Days Inventory 29 49 72 72 72 Current Assets 209.6 304.8 578.2 609.1 710.2 Days Payables 1 2 2 2 2

Fixed Assets (At Cost) 421.5 434.4 443.9 434.3 444.4 Leverage Ratios Accumulated Depreciation (165.1) (174.6) (186.2) (188.5) (194.1) Debt/Equity 8% 7% 5% 2% 2% CIP 60.5 63.8 77.7 79.4 90.7 Debt/Capital Employed 7% 7% 4% 2% 2%

LT Investments 102.0 129.4 143.3 143.3 143.3 Interest Coverage 46.82 69.34 115.06

109.94

119.38 Other LT assets 32.1 33.0 3.1 3.1 3.1

Long-term assets 451.0 486.0 481.8 471.5 487.4 BVPS (1,000 VND) 16,816 20,940 25,580

30,087

34,283 Total assets 660.7 790.8 1,059.9 1,080.6 1,197.6 ST Debts 12.4 11.6 15.0 - - Accounts Payables 114.7 109.0 263.8 154.2 145.4 Valuation 2008 2009 2010 2011F 2012F

Current Liabilities 127.1 120.6 278.8 154.2 145.4 At market price of 56,500 56,500 56,500

56,500

56,500 LT Debts 26.9 34.8 19.7 17.8 16.3 P/E 8.5 11.0 6.3 6.2 6.7 LT Payables - 3.8 - - - P/B 3.3 2.7 2.2 1.9 1.6 Other LT Liabilities 2.2 3.4 4.0 4.0 4.0 EV/EBITDA 7.2 8.4 3.7 4.0 3.9 Total liabilities 156.2 162.6 302.6 178.0 169.1 Dividend yield 0.0 0.0 0.1 0.1 0.1 Charter Capital 300.0 300.0 300.0 300.0 300.0 Capital Surplus - - - - -

Treasury Stocks - - (23.9) (23.9) (23.9) At target price of 68,049 68,049 68,049

68,049

68,049 Retained Earnings 69.5 115.4 204.0 285.1 360.7 P/E 10.3 13.3 7.6 7.5 8.1 Other Equity 135.0 212.8 287.3 341.4 391.8 P/B 4.0 3.2 2.7 2.3 2.0 Minority Interest - - - - - EV/EBITDA 7.2 8.4 3.7 4.0 3.9 Total Equity 504.5 628.2 767.4 902.6 1,028.5 Total Liabilities & Equity 660.7 790.8 1,059.9 1,080.6 1,197.6


28 March 2011

Dong Phu Rubber JSC (HSX: DPR) Initiation

Giang Hoang, Analyst [email protected] +84 8 3914 3588, ext. 142

ADD


Natural Rubber Key Indicators Price (23 Mar 2011) 60,000 52-week low 44,990 52-week high 67,730 10-day avg trading day vol shares 48,316 Outstanding shares 43,000,000 Market cap (VND bn) 2,688 Market cap (USD mn) 138

Valuation 2008 2009 2010F EPS (VND) 5,269 9,188 9,794

EPS growth (9.9%) 74.4% 6.6%

P/E 11.4 6.5 6.1

P/B 2.8 2.1 1.7

ROE 24.3% 32.2% 27.7%

ROA 16.9% 23.6% 21.1%

ROIC 19.9% 31.2% 27.7%

Debt/Equity 21.9% 3.1% 0.0%

Dividend yield 2.7% 5.0% 5.0% Source: Company

Price performance 1M 3M 12M Absolute (%) (3) (1) 3 Relative (%) 6 4 15

Source: Bloomberg



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Most productive plantation + Upside from strong pipeline

One of our top two pick in the sector. As one of the leading natural rubber companies with major competitive advantages in productivity, profitability, and size, DPR deserves value investors interest.

Undervalued. Our NR price forecast is USD3,100/ton for 2011F and USD2,790/ton-USD3,000/ton for 2012F-2015F. Our DCF-derived price target of VND69,000 implies an upside of 15% against the current price. On a price multiple basis, DPR is trading at an attractive 6.5x FY10 earnings and 6.1x FY11F earnings, lower than the industry average at FY10 7.2x PE and FY11F 7.1x PE. We initiate on DPR with an ADD recommendation.

74% EPS growth for 2010, driven by: (1) higher natural rubber prices at VND61.8mn/ton in 2010 from VND30.4mn/ton in 2009 (2) improved gross margins to 45% in 2010 from 36% in 2009. We note that DPR expensed a total of VND33.7bn in goodwill in 2010.

Growth extended to 2011. We forecast growth of 12% in revenue and 6% in PAT in 2011F, given: (1) 6% decline in selling volume; (2) NR rubber price to remain at USD3,100/ton; (3) gross margin slightly down to 43%; and (4) administrative expenses going down to normal level after removing the affect of expensing goodwill.

Nominal growth onwards. However, DPR has the same limiting factors as other companies in the industry. The company has already fully exploited its plantation area and improving productivity requires considerable time. As there will be little volume expansion until new plantations mature in 2015-16, DPR will have to rely solely on price hike to ensure growth.

www.vcsc.com.vn | VCSC

28 March 201

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28 March 2011 Dong Phu Rubber JSC (HSX: DPR) ADD

Second lowest rate of attrition in tapping volume, just behind TRC. We estimate that DPRs productive area will progressively decrease from 7,135ha 2010 to 6,643ha in 2012F before increasing again in 2013F as new crops, that had been planted after 2005, mature and deliver sizable tapping volumes. Despite the increase in productive area, average yields will still be slightly lower, leading to a 13% reduction in tapping volume from an estimate of 15,822 tons for 2010 to 12,875tons for 2015F.

Figure 3: Exploiting volume and productive area over 2009-2015


Diverse product mix. Among the listed rubber companies, DPR has the most diverse product mix: block rubber SVR 3L accounting for 50% of the company revenue, latex concentrate 25%, SVR 10-20 15%, CV 50-60 5% and skim 5%. With relatively high percentage of latex concentration in revenue, DPR does not solely depend on the automobile industry demand.

2010 results DPR reported VND1,028.4bn in revenue (+59% YoY), and VND395.1bn in PAT (+87% YoY) in 2010. The companys average selling price reached VND61mn per ton, up 88% from an average VND32.4mn per ton in 2009.

Production output reached c. 15,800 tons in 2010. Due to the seasonal nature of rubber crops, the vast majority of outputs falls into the second half of any given year with production volume allocation ratio of 10:20:30:40 each quarter, the results are close to VCSCs projection (61% of our whole-year production forecast of 16,000 tons). Unlike PHR and HRC, DPRs purchasing volume from third parties did not surge, staying at 13% of total selling volume at 1,800 tons. Total selling volume came in at 16,470 tons in 2010.

The company expensed VND33.7bn in goodwill in 2010 due to changes in Vietnamese accounting rules that came into effect in 2010. Prior to 2010, goodwill was required to be amortized on a straight line method over a period not exceeding 10 years. The new rules require that goodwill from revaluations post-equitization be completely expensed within three years. Since 2010 is a good year for the company, DPR allocated the whole goodwill balance of VND33.7bn this year.

EPS FY10 reached VND9,188/share, up 75% YoY.

Tax rate: Starting 2010, DPR is subject to 7.5% tax rate on profits from rubber exploitation compared to a tax exemption in 2009 and 25% tax rate on financial income and other income. We further note that DPR is the only company in the four peers that does not book gains from selling rubber woods in other income but treat plantation liquidation as ongoing operating activity. With that method of accounting, DPR benefits from applying preferential tax rate (7.5% instead of 25%) on liquidation gains.

7,562

6,997

7,604

17,030

15,352

14,988

14,578

13,875

02,0004,0006,0008,00010,00012,00014,00016,00018,000

6,6006,7006,8006,9007,0007,1007,2007,3007,4007,5007,6007,700 Tapping Volum

e (ton)Prod

uctiv

e Ar

ea (h

a)

Productive area (ha) Tapping volume



The company intends to increase 2010 dividend to VND3,000/share from VND2,000/share, providing a dividend yield of 5% at the current price of VND60,000 (23 Mar. 2011). The company will request shareholders approval at the 2011 annual meeting.

Earnings Outlook Expected earning growth at 6% in 2011. We foresee VND1,156bn in revenue (+12%) and VND420bn in PAT (+6%) in 2011. The following factors will adversely impact revenue and earnings growth.

(1) Average selling price stays at USD3,100/ton or VND65.1mn/ton (assuming exchange rate of USD:VND21,000)

(2) As tapping area is expected to shrink by 5% to 6,781ha in 2011 from 7,135ha in 2010, we estimate that tapping volume will decline by 6% YoY, which is the lowest declining rate in 2011 tapping volume among the 4 peers, to 14,987 tons in 2011F from 15,822 tons in 2010.

We note that the company has not drafted a concrete earnings guidance for 2011F. However, VRG has guided a selling price of VND50mn/ton for 2011 for companies under its umbrella.

Financial Investments Going forward, DPR will concentrate in these following projects.

Figure 4: DPRs key ongoing projects

Plantation projects

Except for the Dong Phu-Dak Nong project which DPR holds a 90% stake and the Dong Phu-Snuol 100% stake, the three other new plantation projects are limited to capital contributions. Combined, these projects add a proportionate area of 19,000ha, almost doubled DPRs current land-bank. These projects can ensure growth for DPR in the long run once they are in full operation and starting to pay more significant dividend.

Dong Phu-Kratie Rubber JSC (in Kratie, Cambodia) is well on schedule. Total planted area for this project is 3,300ha. DPR expect to increase the total planted area of the project to 5,800ha at the end 2011F and 9,000ha by end 2012F. If implementation is smooth, the company could start the construction of a SVR 3L processing factory as soon as 2012.

Dong Phu-Snoul Rubber Ltd. (in Kratie, Cambodia) is an important project for DPR with proposed 10,000ha plantation. DPR is still in the process of obtaining exploitation permit and still waiting to receive clearance from the Cambodia authorities. As investment in the project is spreading over 6-7 years, DPR might have to finance this project by loans in the future. Because

Important Projects Acreage (ha) Total Capital

(VNDbn)

Committed capital Disbursed amount (VND

mn) 2010 Expected year to

have dividend Amount (VNDbn) %

Subsidiaries 1 Dong Phu - Dak Nong Rubber JSC 4,000 120 108 90% 2015 2 Dong Phu Technique Rubber JSC 110 56 51% 36.0 2011-2012 Joint Control 1 Dong Phu-Kratie Rubber JSC 10,000 200 80 40% 119.8 2014 Financial Investments 1 Sa Thay Rubber JSC 10,000 200 20 10% 10.0 - 2 Dau Tieng-Lao Cai Rubber JSC 10,000 400 40 10% - - Potentials Project Dong Phu-Snoul Rubber Ltd. 10,000 1,200 1,200 100% - -



the project is still in an early stage, we do not include it into our valuation and only see it as a potential upside for DPR.

Dau Tieng-Lao Cai Rubber JSC: In October 2010, DPR has committed VND40bn in the JV Dau Tieng-Lao Cai JSC to cultivate 10,000ha in Vietnams mountainous northern province Lao Cai. Dau Tieng Rubber JSC holds 60% stakes in the JV, TRC 15% and DPR 10%. First 2,000ha will be planted in 2011F.

Other domestic plantation projects in Dak Nong and Sa Thay-Kontum are being carried out slowly due to issues with land acquisition. DPR reportedly already planted 1,000ha in Dak Nong and 2,700ha in Sa Thay. Management of the company thinks that there could be possibility the two projects will stay at these numbers and not expand any further. The first crops of rubber trees planted in 2008-2009 will be ready to contribute to DPRs revenue and profit starting 2015F-2016F.

We note that at the end of April 2010, DPR successfully issued 3 million additional shares at average price of VND59,465 for 14 institutional investors (of which 13 were foreign institutions) in order to increase charter capital from VND400bn to VND430bn. The company received VND178.4bn and recorded a capital surplus of VND148.4bn which will be used to finance DPRs existing projects. Therefore, unless the Soul project is on its way, DPR has no immediate need for additional capital.

Figure 5: DPRs Financial investments at year end 2010

Investments Disbursed amount (VND bn) Joint Control 165.5

1 Dong Phu-Kratie Rubber JSC 119.8 2 Dong Phu Technique Rubber JSC 45.7 Other long term investment 140.4 1 Infrastructure Investment Ltd. - VRG 43.5 2 Viet Long Growth Fund 30.5 3 Rubber Trading and Tourism JSC 21.0 4 Sa Thay Rubber JSC 10.0 5 BOT DT 741 JSC 10.0 6 Thuan An Wood Processing 7.1 7 Other investments 5.9 8 Cash deposit of over 12M 28.4

Provision (16.0) Net Investment 305.9

Valuation Key assumptions to our DCF

Revenue: DPR revenue comes from its rubber production and liquidation activities (DPR is the only one in the four peers that categorize plantation liquidation as operating activities. We do not consider liquidation income is a revenue or earnings driver because rubber companies liquidate on a strict schedule and there is a trade off between disposable area and tapping output).

o Volume: We calculate exploitation volume based on PHRs current plantation and planned liquidation and replacement for the period 2010-2015F. Purchasing volume for is forecasted to remain nominal at 1,000 tons/year through 2011F-2015F.

o Price: We adopt a cautious stance in terms of price and forecast 2011F average selling price remaining USD3,168/ton, a drop of 10% to USD2,790/ton in 2012F and a stable growth of 2% per annual from 2012F-2015F. We also assume a 2% devaluation of the VND against the USD per year for the period.



Cost Structure: o Labour cost: As rubber exploitation is a labour intensive process, labour costs make up

the majority of COGS. For DPR, labour costs are paid at 40-42% of revenue according to Vietnam Rubber Associations guidance, representing 69-72% COGS across our forecast period.

o Depreciation: Depreciation makes up 4-7% COGS. o Other components of COGS: Other costs such as fertilizer, gas, exploiting materials,

labour miscellaneous, export insurance account for 21-27% of the cost base.

o Land tax: Like other rubber companies, DPR benefits from 50% discount of land use right tax, which accounts to 1mn/ha/year and totals to VND10bn/year for the company.

Taxes: DPR enjoys preferential tax treatment for operating and creating employment in the poor condition area in Binh Phuoc. The company is exempted from CIT during the first 3 years after equisition (2007-2009) and 50% tax rebate on a 15% tax rate for the following 7 years. Consequently, DPR is subject to special tax rate of 7.5% for 2010-2016 and 15% tax rate for rubber exploitation from 2017-2018 and 25% tax rate from 2019 onwards. Tax rate of 25% applies to financial and other income.

Figure 6: WACC assumptions

2-stage DCF assumptions Growth Terminal

Cost of equity 19.6% 19.6% Cost of debt 15% 10% Effective tax 9% 25% Target D/E 4.2% 0.0% WACC 19.4% 19.60% Terminal Growth of FCFF 4%

Valuation Results

Terminal Value 1,698,035 PV of explicit FCFF 1,893,515 PV of Terminal Value 588,298 Enterprise Value 2,481,813

add est. cash & equivalents 2010 507,874 less est. net debt 2010 37,796

Fair Equity Value 2,951,891 Shares, Outstanding 43,000,000 Terminal Value/Firm Value 20% Fair value per share (VND) 68,598



Sensitivity Analysis Figure 8: DCF sensitivity Analysis

WACC

Term

inal

Gro

wth

17% 18% 19.0% 19.6% 21% 22% 23%

5.5% 73,939 72,331 70,801 70,801 67,958 66,637 65,377 5.0% 73,269 71,693 70,195 70,195 67,410 66,115 64,881 4.5% 72,642 71,098 69,629 69,629 66,898 65,628 64,417 4.0% 72,056 70,541 69,100 68,598 66,419 65,172 63,982 3.5% 71,506 70,019 68,603 68,603 65,969 64,744 63,575 3.0% 70,990 69,528 68,136 68,136 65,547 64,342 63,192

2.5% 70,503 69,066 67,697 67,697 65,150 63,964 62,832

Figure 7: DCF Valuation

2010 2011F 2012F 2013F 2014F 2015F Productive area (ha) 7,112 6,781 6,643 6,615 6,643 6,711

% YoY -6% -5% -2% 0% 0% 1% Productivity (ton/ha) 2.22 2.21 2.13 2.05 1.97 1.83 Tapping volume 15,822 14,987 14,146 13,571 13,090 12,284 Purchasing volume 1,800 1,000 1,000 1,000 1,000 1,000 Total selling volume 16,470 16,487 15,646 15,071 14,590 13,784

% YoY -16% 0% -5% -4% -3% -6% Selling price (in USD) 3,100 3,100 2,790 2,846 2,903 2,961 Selling price (VND mn) 62.00 65.10 59.76 62.18 64.69 67.30 Revenue 1,028,420 1,156,504 1,021,571 1,027,019 1,037,382 1,025,014

% YoY 59% 12% -12% 1% 1% -1% GM for Exploitation 44.4% 44.0% 42.0% 42.5% 42.9% 43.8% GM for Purchasing 11.0% 6.0% 6.0% 6.0% 6.0% 6.0% Gross Margin 35.9% 43.0% 41.4% 41.9% 42.2% 42.9%

EBIT 443,762 462,109 393,670 397,109 403,826 406,921Tax 9% 9% 9% 9% 9% 16% EBIT*(1-Tax) 403,142 421,139 358,434 362,147 368,327 342,950 D&A, impairment 35,099 35,667 33,966 29,394 26,762 17,858

Increase in NWC

(114,347) (89,042) 25,226 1,017 (1,163) 7,435 CAPEX -6,507 5,949 11,484 15,495 19,623 21,110 FCFF 559,096 539,899 355,689 375,029 376,628 332,263



Figure 9: Sensitivity analysis to changes in rubber prices

Rubber price assumption (USD/ton) EPS (VND)

P/E(x) @ VND60,000 Fair value Upside

2011F 2012F 2011F 2012F (VND/share) 4,100 13,710 11,742 4.4 5.1 88,201 47% 4,000 13,319 11,401 4.5 5.3 86,241 44% 3,900 12,927 11,061 4.6 5.4 84,280 40% 3,800 12,535 10,720 4.8 5.6 82,320 37% 3,700 12,144 10,379 4.9 5.8 80,360 34% 3,600 11,752 10,039 5.1 6.0 78,400 31% 3,500 11,360 9,698 5.3 6.2 76,439 27% 3,400 10,969 9,358 5.5 6.4 74,479 24% 3,300 10,577 9,017 5.7 6.7 72,519 21% 3,200 10,186 8,676 5.9 6.9 70,558 18% 3,100 9,794 8,336 6.1 7.2 68,598 15% 3,000 9,402 7,995 6.4 7.5 66,638 11% 2,900 9,011 7,654 6.7 7.8 64,677 8% 2,800 8,619 7,314 7.0 8.2 62,717 5% 2,700 8,227 6,973 7.3 8.6 60,757 1% 2,600 7,836 6,632 7.7 9.0 58,797 -2% 2,500 7,444 6,292 8.1 9.5 56,836 -5% 2,400 7,052 5,951 8.5 10.1 54,876 -9% 2,300 6,661 5,611 9.0 10.7 52,916 -12% 2,200 6,269 5,270 9.6 11.4 50,955 -15%

Risks Key downside risks to price target include (1) rubber price falling more than 10% in 2012 and

increasing less than 4% from 2013 onwards, (2) adverse weather conditions as heavy rain or drought both affect rubber outputs.

On the upside we include (1) higher than expected rubber prices versus our forecast (2) more than expected devaluation in the VND.



Summary of financials Income (bn VND) 2008 2009 2010 2011F 2012F Growth 2008 2009 2010 2011F 2012F

Net Revenue 728.8 648.3

1,127.3

1,137.2

1,027.4 Revenue growth 3.6% 11.0% 73.9% 0.9% -9.7% Cost of Goods Sold 476.8 414.9 650.4 666.2 618.4 EBITDA growth 0.6% 80.6% 0.8% -12.3% Gross Profit 252.0 233.5 476.9 471.1 409.1 EBIT growth -1.3% -1.0% 75.5% 9.0% -12.9% Selling Expenses 11.2 5.6 12.4 12.5 11.3 Net income growth 0.9% -9.9% 77.8% 10.1% -13.0% Admin. Expenses 29.7 28.9 78.8 36.4 32.9 EPS growth 0.9% -9.9% 65.4% 10.1% -13.0% Operating Profit 211.1 198.9 385.7 422.2 364.9 Gross margin 34.6% 36.0% 42.3% 41.4% 39.8% Financial Revenue 23.2 27.2 42.3 43.4 40.7 EBITDA/Revenue 36.0% 40.7% 42.2% 42.2% 40.9% Financial Expenses 21.0 (6.5) 19.5 20.0 18.6 EBIT/Revenue 32.7% 36.4% 36.7% 39.7% 38.3% Other Income 25.1 3.5 5.8 6.0 6.3 EBITDA 262.3 263.8 527.0 479.9 420.7 EPS (VND) 3.6% -11.0% 73.9% 0.9% -9.7% Depr. & Amort. 23.9 27.8 112.7 28.3 27.3 DPS (VND) 0.6% 80.6% 0.8% -12.3% EBIT 238.4 236.0 414.2 451.6 393.4 Interest Expenses 4.4 15.3 3.7 - -

Profit before Tax 234.0 220.7 410.5 451.6 393.4 Indicators 2008 2009 2010 2011F 2012F

Tax - 10.0 35.8 39.0 34.5 Liquidity Ratios Net Income 234.0 210.8 374.7 412.6 358.9 Current Ratio 0.86 1.19 3.00 4.22 5.77 Minority Interest - 3.2 3.7 4.3 4.9 Quick Ratio 0.67 1.07 2.75 3.97 5.52 Net Income to Common 234.0 207.5 371.0 408.3 354.0

Profitability Ratios ROE 34% 24% 29% 25% 19%

Balance (bn VND) 2008 2009 2010 2011F 2012F ROA 22% 17% 23% 22% 16%

Cash & Equivalents 39 279 485 489 442 ROIC 30% 20% 28% 25% 19% ST Financial Investments 140 11 63 372 710 Accounts Receivable 29 43 75 76 69 Efficiency Ratios Inventories 61 38 60 62 57 Days Receivables 7 18 18 18 18 Other Current Assets 9 21 33 34 32 Days Inventory 53 34 34 34 34 Current Assets 277 393 716 1,033 1,310 Days Payables 3 4 4 4 4

Fixed Assets (At Cost) 606 600 607 614 636 Leverage Ratios Accumulated Depreciation (190) (217) (246) (274) (301) Debt/Equity 16% 22% 2% 0% 0% CIP 134 184 198 212 214 Debt/Capital Employed 14% 18% 2% 0% 0% LT Investments 180 253 306 306 306 Interest Coverage 54.29 15.41 110.66 n/a n/a Other LT assets 37 34 14 14 14 Long-term assets 768 854 878 872 868 BVPS (1,000 VND) 17,021 21,691 30,343 38,019 44,696 Total assets 1,045 1,246 1,595 1,905 2,178

- - - - - ST Debts 73 161 - - - Accounts Payables 248 169 239 245 227

Current Liabilities 321 330 239 245 227 Valuation 2008 2009 2010 2011F 2012F

LT Debts 38 29 29 - - At market price of 60,000 60,000 60,000 60,000 60,000 LT Payables - - - - - P/E 10.3 11.4 6.5 6.1 7.2 Other LT Liabilities 1 2 3 3 3 P/B 3.5 2.8 2.1 1.7 1.5 Total liabilities 360 361 270 247 230 EV/EBITDA 8.9 8.7 3.8 3.5 3.5

Dividend yield 3% 3% 5% 5% 5% Charter Capital 400 400 430 430 430 Capital Surplus - - 147 147 147

Treasury Stocks - - - - - At target price of 68,598

68,598

68,598

68,598

68,598

Retained Earnings 119 211 398 646 861 P/E 11.9 13.2 8.0 7.2 8.3 Other Equity 162 257 329 412 484 P/B 4.1 3.2 2.3 1.8 1.5 Minority Interest 681 868 1,305 1,635 1,922 EV/EBITDA 9.2 9.1 4.1 3.4 3.2 Total Equity 3 17 20 23 26 Total Liabilities & Equity 1,044 1,246 1,595 1,905 2,178 Source: Company, VCSC


28 March 2011

Phuoc Hoa Rubber JSC (HSX: PHR) Initiation

Giang Hoang, [email protected] +84 8 3914 3588, ext. 142

HOLD


Natural rubber Key Indicators Price (23 Mar 2011) 36,800 52-week low 34,060 52-week high 42,040 10-day avg trading day vol shares 89,597 Outstanding shares 81,300,000 Market cap (VND bn) 2,951 Market cap (USD mn) 143

Valuation 2009 2010 2011F

EPS (VND) 3,290 6,026 6,491 EPS growth (6%) 83% 8%

P/E 11.2 6.1 5.7 P/B 3.0 2.4 1.9 ROE 27% 40% 34% ROA 15% 22% 24% ROIC 25% 35% 34% Debt/Equity 7% 14% 0% Dividend yield 4% 8% 8%

Source: Company

Price performance 1M 3M 12M

Absolute (%) (2) (9) 7 Relative (%) 7 (4) 5

Source: Bloomberg



35%

30%

25%

20%

15%

10%

5%

0%

5%

10%

15%

20%

VNIndex PHR

Improved product mix underpins earnings growth

Our NR price forecast is USD3,500/ton for 2011F (spot price USD4,660/ton for CV60) and USD3,150-3,343 for 2012F-2015F. Our 12-month price target of VND40,600 is based on sum-of-the-parts (core business and Cambodia plantation). Our target price suggests an upside of 10% against price on Mar 23. On a price multiple basis, PHR is trading at 6.1x 2010 earnings and 5.7x 2011F earnings, lower than the industry average at P/E2010 7.2x and P/E2011F 7.1x.

90% EPS growth in 2010, driven by: (1) higher NR selling price at VND60.5mn/ton in 2010 from VND31.9mn/ton in 2009 (PHR achieved the highest average selling price among members), (2) increased purchasing volume offsetting lower production volume, and (3) gross margin improved to 34.1% in 2010 from 26.5% in 2009. We note that PHR expensed a total of VND84.4bn in goodwill in 2010.

2011F - Improved product mix underpins earnings growth while revenue shrinks. Looking forward to 2011F, we project 7.0% growth in earnings, given the following factors: (1) 20% decline in selling volume due to reduction in both production and purchasing volume, (2) higher realized selling price due to global supply-demand imbalance and a depreciated VND, (3) gross margin continues to improve to 38.2% on a lower revenue base, given lower contribution of trading activities in revenue structure, (4) administrative expenses going down to normal level after removing the affect of expensing goodwill, and (5) declining interest expense since PHR has secured preferential loans with BIDV in November 2010.

Improved planting progress in Cambodia will bring material contributions by 2016. The planted area in Cambodia has risen to 2,500ha from 500ha by year end 2009. The target is to increase this planting area to 8,000ha by 2013 (equivalent to 53% of the companys land-bank in Vietnam). We estimate the project will add VND1,425 to PHRs share price.

Attractive dividend yield. As management raised dividend from VND2,000/share to VND3,000/share, PHRs dividend yield stands at 8.2%. Going forward, PHR still has lots of room for further increase in dividends.

We initiate a HOLD on PHR.


28 March 2011 Phuoc Hoa Rubber JSC (HSX: PHR) HOLD

Company overview PHR is the largest listed rubber company by market cap and plantation acreage. PHR manages 15,000ha of planted land-bank, of which 10,270ha in exploitation in 2010.

Revenue from rubber exploitation consisted of 99% of PHRs revenue in 2010. The companys main product is block rubber SVR CV50-60 (54.7% of total output) and SVR L-3L (20%). Long-term export contracts accounts for 50% of PHR total revenue, contracts with domestic traditional partners (local manufacturers such as Caosumina- HSX:CSM) making up 30%, and ad-hoc spot sales with maximum one-month delivering time accounting for 20%.

36% of the current tapping area will be off peak next year.

Figure 1: PHR 2010 tree age profile and corresponding yield


With 15,000ha in total planted area, of which 26% immature area, 4% 7-16 year old, 60% 17-23 year old and 10% over 24 year old, PHRs plantation has average lifetime age of 15.63 years old and average productive age of 16.65 years old. PHR has an average yield of 2.04 tons/ha for 2009 and 2.00 tons/ha for 2010, above the industry average of 1.78 tons/ha 2009.

Notably, PHR has a disportionately high number of rubber trees (37% of total tapping area) were planted in 1988 and now 22 years old. These trees will be off peak and provide much lower yield in the coming years. On the other hand, the expected liquidated areas (~800ha/year) are bigger than the additional mature area to be put in exploitation (~190-700ha/year for 2010-2015F).

Figure 2: PHRs mature plantation profile


0.80

1.74

2.08 2.08 2.08 2.08 1.80

0

0.5

1

1.5

2

2.5

-500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

0 2 4 6 8 10 12 14 16 18 20 22 24 26

Yield

-

0.50

1.00

1.50

2.00

2.50

0%10%20%30%40%50%60%70%80%90%

100%

2009 2010 2011 2012 2013 2014 2015

7-16 yrs 17-23 yrs >24 yrs Yield

Immature (1-6 yrs) 7-16 yrs 17-23 yrs >24 yrs


28 March 2011 Phuoc Hoa Rubber JSC (HSX: PHR) HOLD

With reducing averaged yield and shrinking exploitation area, we estimate the company will lose 30% of its current rubber output by 2015 (from 21,683 tons 2010 to 16,591 in 2015F). Therefore, beyond 2010, it will be a challenge for the company to maintain top line growth at least until 2016F-2017F when new Cambodian plantations of 8,000 ha come into production.

Figure 3: Exploiting volume and productive area over 2009-2015


Improved product mix awarded PHR with the highest average selling price among members of the Vietnam Rubber Association. In 2010, production of high-grade block rubber SVR CV50 and SVR CV60 increased to 54.7% of the companys total revenue, up from 37% in 2009.

CV50-60 historically has the highest prices following by Latex, SVR L-3L, and SVR 10-20. In the months of May to July 2010, the price gap between CV50-60 significantly widened from the historical average of USD50-100/ton (2-3%) to USD200-250/ton (around 10%). Consequently, improved product mix increased PHRs average selling price and its margins. In 2010, the company has been able to secure the highest average selling price among members of the Vietnam Rubber Association (VRA) at VND63mn/ton.

The companys competitive advantage in CV50-60 production lies in its long-term relationship with traditional clients. PHR has successfully positioned itself to target a small niche but stable and high demand market. Even though processing CV50-60 requires a long period of trial and error and bears high risk of processing failure turning high grade SVR CV50-60 to much cheaper low-grade SVR 10-20 or to become waste, PHRs direct competitors, namely TRC and DPR, consider the customer base is the most obstacle in selling the products (SVR CV 50-60 could be produced in the same production line with SVR L-3L).

Currently, other companies in VRG such as Dau Tieng, Phu Rieng Rubber, Dong Nai Rubber, Binh Long Rubber, and Tan Bien Rubber also produce CV50-60 but with much lower percentage in revenue (10% for Dau Tieng Rubber).

Purchasing rubber from third-party producers provides additional profits. As operating profit margin of purchasing rubber from third parties for processing is historically low at 3-4%, rubber companies only maintain trading activity to meet unfulfilled orders. However, as the price of CV50-60 increased during the

Documents

Vietnamnaturalrubber-Sectorreport.pdf