Vietnam Engine & Agricultural Machinery Corp. [BUY, +32.2%]

COMPANY REPORT November 25th, 2019

1 www.eves.com.vn

Vietnam Engine & Agricultural Machinery Corp. [BUY, +32.2%] (VEA: UPCoM)

STOCK INFORMATION

Current Price (VND) 49,000 Target Price (VND) 64,000 Up/Downsize Potential (%) 32.2 52W High (VND) 64,450 52W Low (VND) 34,582 Out/(Underperform) 3M (%) (16.2) Out/(Underperform) 6M (%) 3.0 Out/(Underperform) 12M (%) 42.8 Market Cap (VND Billion) 64,313.9 Average 3M volume (shares) 281,917 Outstanding Shares (million) 1,328.8 Foreign Ownership (%) 0.04 FOL (%) 49.0 12M Trailing P/E (x) 9.2 12M Forward P/E (x) 11.5

FINANCIAL SUMMARY 2016 2017 2018 2019F

Net revenue (VND Bil.) 6,306.9 6,563.2 7,070.1 5,275.0 Revenue growth (% YoY) 7.0 4.1 7.7 (25.4) Net profit (VND Bil.) 4,504.5 5,046.1 7,010.4 7,413.9 Net profit growth (% YoY) 3.0 12.0 38.9 5.8 Net profit margin (%) 71.4 76.9 99.2 140.5 Owner's equity (VND Bil.) 13,310.3 18,575.4 24,849.6 25,574.1 Total assets (VND Bil.) 20,376.0 23,360.9 26,406.0 27,175.9 ROA (%) 24.0 23.3 28.3 27.8 ROE (%) 31.5 31.9 32.5 29.5 EPS (VND) 3,390 3,797 5,276 5,579 BVPS (VND) 9,869 13,836 18,701 19,246.0 Cash dividends (VND) - - 370 5,000 P/E (x) 14.5 12.9 9.2 11.5 EV/EBITDA (x) 1782.0 1357.2 274.8 N/A

P/B (x) 5.0 3.5 2.6 3.3

Source: FiinPro, EVS Estimated

Stock performance Vs. VN-Index

Source: Fiinpro

We recommend BUY with a target price of VND 64,000/share

INVESTMENT THESIS

• Vietnam's automobile market has great potential. Car ownership rate is low compared to other countries in the region, about 23 cars per 1,000 people, economic growth is stable and disposable income is increasingly improved. According to the Institute of Industrial Policy (Ministry of Industry and Trade), car sales are forecast to grow 22.6%/year to 2025 and 18.5%/year to 2035.

• Honda continues to expand its market share and sales volume of motorcycles in the context of a slowdown in Vietnam's motorcycle market. With a market share of 75.9%, Honda has almost absolute dominance in the Vietnamese motorcycle market.

• State divestment plan from 88% to 36.0%.

• Attractive valuation: VEA is trading at 2019F forward P/E of 11.5, attractive compared to the median P/E of international carmakers of 12.5x.

INVESTMENT CATALYSTS

• VEA's positive financial situation: abundant cash position, low leverage and tend to decline. The proportion of short-term cash and investments (savings deposits) accounts for 75% of the total assets structure.

• Attractive dividend policy when VEAM is expected to have no significant caital expenditure on production and associates in the segment of Cars & Motorcycles also do not plan to increase capacity in the near future.

VALUATION AND RISK

• We use the discounted cash flow method to value VEA stock.

• Target price: VEA stock is valued at VND 64,000/share.

• We recommend BUY for VEA stock.

• The main risks of VEAM is the State policies affecting the consumption of Automobiles & Motorbikes, ineffective commercial vehicles and agricultural machinery businesses.

Van Duy Ngoc Tan – Research Analyst [email protected]

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1. COMPANY OVERVIEW

Vietnam Engine and Agricultural Machinery Corporation (VEAM) was established in 1990 with 100% state-owned capital under the Ministry of Industry and Trade with 12 mechanical factories (7 factories in the North and 5 factories in the South). By 2010, VEAM was transformed into a limited liability company and operated under Parent Company – Subsidiary structure and by 2017, it was converted into a joint stock company. In 2018, VEAM was listed on UPCoM. Main business lines of VEAM:

Producing agricultural machinery & trading to domestic market and expand exports to Asian countries. VEAM currently has 5 companies producing engines (gasoline, diesel), grinding machines, pesticide sprayers. The main market is the South and some Central provinces.

Manufacturing and assembling automobiles & motorbikes, including vehicle with tonnage from 1 to 33 tons, dump trucks of 6.5 tons and tractors of 36 tons.

Supporting industrial products, mechanical products such as discs, chains, motorcycle components, bearings, gears, gear boxes…

However, most of these businesses are unprofitable, even at a very heavy loss. In 2015, the loss was VND 253 billion and gradually decreased to VND -50 billion in 2017. From 2018, VEAM business has improved, so the profit was VND 274 billion.

Chart 1: Business results Figure 1: Some products of VEAM

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Source: VEAM’s FS Source: VEAM

Despite being profitable in 2018, the revenue still did not meet the target set by VEAM leaders because VEAM's factories assembling trucks with old Euro 2 emission standards. Meanwhile products with new Euro 4 standards have not been developed in the first year of mass production.

Meanwhile, financial revenue exceeded the plan thanks to good performance of VEAM's companies, optimized short-term financial investment and strict cost management.

Short and long-term investments account for a large proportion in total assets structure

As of 3Q19, short-term investments focused mainly on cash & equivalents of VND 681 billion, term deposits were VND 14,253 billion while long-term investments were mostly investments in associates VND 4,862 billion. Major investments include three enterprises operating in the field of motor vehicle manufacturing, including Honda Vietnam - VND 3.513 billion, Toyota Vietnam - VND 689 billion and Ford Vietnam - VND 550 billion.

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2. BUSINESS ACTIVITIES ANALYSIS

Main business activities:

VEAM main business activities including: engines & agricultural machinery; Auto and Moto; supporting industries. In addition, VEAM also engages in other business lines such as freight transportation, iron ore mining and processing, trading in materials, equipment and mechanical spare parts.

Manufacture of engines and agricultural machines

VEAM is a large manufacturing enterprise, a leader in agricultural machines manufacturing in Vietnam, with a certain reputation in the domestic and regional markets. Currently, VEAM has 5 companies specializing in manufacturing engines, agricultural machines that produce the main products such as engines (gasoline engines, Diezel engines), 2-wheel tractors with 1-cylinder engine from 8HP up to 35HP, mills, rubber rollers, pesticide sprayers, harvesters, and gearboxes used in aquaculture. In general, the products produced by VEAM have good quality, relatively reasonable prices and are competitive in the domestic market. The average annual export value of all types of engines and agricultural machines is about US $ 30 million per year.

Automobiles & Motorcycles assembling

Along with cooperation and joint venture with large reputable partners in automobiles and motorcycles assembling such as Honda, Toyota, Ford, VEAM has invested a factory to assemble trucks with tonnage from below 1 ton to 33 tons and other special-use vehicles. With quite modern equipment and production lines (automatic welding line, painting, high-capacity stamping) VEAM Automotive factory has gradually developed in both quantity and quality, improved models, met needs and tastes of customers.


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Production of supporting industry products

Production capacity of supporting products such as: sidebars, crankshaft, bearings, motorcycle components ... of VEAM has been increasingly improved. Currently, there are 4 companies belonging to VEAM specializing in manufacturing mechanical products for large partners: Honda, Yamaha, Piaggio... From 2014 to now, VEAM started to export some spare parts and products (Japan). Oversea revenues reach about USD 11 million/year. However, due to preferential policies for supporting industries, there are still many inadequacies, technology and equipment for manufacturing mechanical products of VEAM enterprises have not kept up with the level of advanced countries in the world; On the other hand, under heavy competitive pressure from low quality and cheap imported products, domestic mechanical manufacturing enterprises face many difficulties.

Relatively stable revenue growth

VEAM's net revenue is relatively stable over the years. 2018 net revenue reached more than VND 7,070 billion, an increase of 7.7% compared to 2017 and mainly came from the production of movers and agricultural machinery. However, in 9M19, net revenue reached VND 3,353 billion (-28.4% YoY) due to difficulties in vehicle consumption at the VEAM (VM) automobile factory, slow sales of inventories leading to production value decreased by -24.0% YoY and only completed 25% of the year plan. The policy of VEAM is that production must go hand in hand with consumption while VM factory no longer having capital to produce inventory.

Despite the relatively high revenue, VEAM's net profit in recent years mainly comes from joint ventures and associates. Accordingly, VEAM is participating in the joint venture and owns 20% of charter capital in Honda Vietnam, 30% of charter capital at Toyota Vietnam and 25% of Ford Vietnam. These are businesses operating in automobiles and motorcycles assembling and currently are dominating with leading market share in Vietnam. Business situation of these joint ventures has grown very well in recent years, thereby bringing enormous profits to VEAM. Specifically, the profit shared from the joint venture activities of the VEAM reached VND 4,576 billion in 2016, VND 5,170 billion in 2017 and VND 6,852 billion in 2018, of which the first 9 months of 2019 are 4,973 billion VND.

Table 1: List of subsidiaries and associates of VEAM

Subsidiaries Fields Ownership Precision engineering No. 1 Mechanical products 51% Pho Yen Mechanical Manufacture of spare parts 51% Co Loa Mechanical Cargo 53.66% VEAM Trading & Transpotation Passenger transport 51% Whole equipment supplies Wholesale of machinery 51.99% Spare part No. 1 Manufacture of spare parts 55% Tractors and agri. machinery Agricultural machines 100% Tran Hung Dao Mechanical Agricultural machines 100% Diesel Song Cong Manufacture of spare parts 100% Southern agricultural machine Manufacture of spare parts 100% Institute of Technology Research & application 100% VEAM Korea Export (Korea) 89% Vinh Mechanical Metal structures 59.93% Associates Fields Ownership Nakyco Spare parts 49%


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An Giang Mechanical Manufacture of harvesters 47.41% VEAM Tay Ho Office services 29% Honda Vietnam Auto & Moto assembling 30% Toyota Vietnam Automobile assembling 20% Ford Vietnam Automobile assembling 25% Matexim Hai Phong Passenger transport 20.38% Other investments Fields Ownership KUMBA Mechanical components 3.5%

Source: VEAM

VEAM's position in Vietnam automobile industry

Engines and agricultural machines

Currently, conssumption market of small diesel engines (less than 30 HP), tractors and agricultural machines come from 3 main sources: domestic products, imported products from China and second-hand imported machines from Japan, Korea... Domestic products are mainly produced and assembled by operating units of Vietnam Engine and Agricultural Machinery Corporation (VEAM). Chinese products include two main lines, imported from mainstream manufacturers and illegal imported products from private manufacturers, mainly imitators and counterfeit brands of mainstream manufacturers. In addition, there are a number of domestic enterprises that assemble Chinese machines and engines in the form of CKD. In terms of the competitive position between domestic engine and agricultural machine manufacturing with industrial properties (i.e., localization rate of more than 60%), VEAM is the leader in these fields. However, in terms of market share, at present, domestic enterprises account for about 30% (of which VEAM accounts for about 15 to 25%).

Automotive industry

The field of manufacturing and assembling trucks is inexperienced field of VEAM and faces many difficulties and challenges. Compared to the big brands in market such as Truong Hai, TMT, Toyota, Huyndai ... VEAM brand is a relatively new brand, market share in 2014 is only 1.8%. However, VEAM's Trucks products have been continuously improved with significantly lower failure rate. increasingly satisfied customers. In recent years, VEAM has provided the market with high quality trucks, although the market share is not large but still ensures an annual growth rate, which is considered by dealers and customers across the country as a among truck brands with high quality products, diverse models and brands that have a great competitive influence in the market.

Supporting industry products manufacturing

So far, with current capacity, VEAM has been able to produce frame and engine parts, especially those with difficult engine parts such as crankshaft, and sidebars (connecting rod), bearings ... VEAM's units have provided spare parts for motorcycles, raising Vietnam's surplus value in finished products. VEAM is now the main supplier of spare parts for large joint ventures in Vietnam such as Honda, Yamaha, Piaggio... Cooperating with large corporation in addition to having a stable source of outputs also allows VEAM to improve management capacity. and brand. Currently, there have been a number of foreign companies such as Sumitomo, Toshiba, Konishi ... participating in ordering.

Industry outlook

Agricultural engine and machinery industry

Currently agriculture accounts for more than 60% of the country's labor force but contributes only more than 20% of Vietnam GDP. According to the national master plan on agricultural development up to 2020 and a vision to 2030 (approved together with the Prime Minister's Decision No. 124 / QD-TTg in 2012), agricultural mechanization rate in 2010 of land preparation stage is 70%, 25% in planting and tending stage, 30% in the harvest stage and 30% in the processing stage. So far, agricultural machinery has not yet been widely popularized.


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In general, the manufacturing facilities of tractors and agricultural machines in Vietnam are mostly small-scale, low-output, closed production processes, lack of specialization, lack of cooperation in organizing production. Domestic agricultural mechanical products are mainly small-capacity engines. Agricultural machines with high demand such as transplanting machines, harvesters are mainly imported and have not been manufactured in the country.

Agriculture has many different types of crops, and each will require its own machinery. However, the industry's general value chain includes the following basic stages: (1) Cultivation, (2) Harvesting, (3) Transportation, (4) Processing, (5) Preservation. These stages have the potential to mechanize with different types of machines. In 2014, the Prime Minister issued Decision No. 1342 / QD-TTg approving the Action Plan for the development of agricultural machinery industry to implement the Vietnam Industrialization Strategy within the appropriate framework. Vietnam - Japan cooperation towards 2020, vision 2030 according to the Prime Minister's Decision No. 1043/QD-TTg in 2013. Accordingly, by 2020, the mechanization rate will reach 95% in the land prep. stage with planting, tending and fertilizing reaching 70%, and processing stage reaching 70%.

Machine mechanics for agricultural production is one of the industries that play an important role in supplying production materials for agriculture. With large agricultural land and a large part of the population engaged in agricultural production, along with the tendency of mechanization, bringing application machines into agricultural production to replace manual labor, increase labor productivity in terms of agricultural activities, reduced post-harvest losses, the mechanical engineering industry has great potential for development.

Motorcycle manufacturing industry

The motorbike market is growing slightly in which growth motivation is scooter

The motorcycle market grew rapidly in the period of 1995 - 2018, 15x times in 24 years in which 2018 sales volume of motorcycles was 3.39 million vehicles (according to VAMM), increasing by 3.5% YoY. In 9M19, sales reached more than 2.33 million vehicles (-5% YoY), equivalent to approximately 8,600 motorcycles sold every day. It should be noted that VAMM data is only for domestic cars sold by the 5 manufacturers of the Association but not for export vehicles and Vinfast.

The Vietnam motorcycle market is said to have reached a saturated level as annual vehicle sales slow down. In theory, with a population of about 100 million, when the number of motorcycles in circulation reaches about 33 million, the Vietnamese motorcycle market is considered saturated. Government's development plan for Transportation System, by 2020 Vietnam will have 36 million motorbikes in circulation. But by the end of 2018, this number had reached 51 million vehicles, far exceeding the theoretical and planning saturation point of the Government.

The market returned to growth in the period 2015 - 2018 due to the new car-changing cycle of consumers. Because every 5 years of use (starting in 2011), consumers tend to change cars. This cycle is tending to repeat and it is likely that by 2020, the motorcycle market will start to be active again. However, the current market is different from the previous years, because of the introduction of electric motorcycles with many new models, longer storage batteries, go further at cheaper costs, with the positive trend of automobile market making the demand for motorcycles is decreasing.

Although purchasing power is showing signs of slowing down, Vietnam still ranks fourth in the world motorcycle consumption, after India, China and Indonesia. Vietnam's motorcycle market of 3 million units / year will remain in the long term. In particular, the segment of high-end scooters will grow higher than the general growth of the whole motorcycle market. The reason is that the convenience of gasoline motorbikes is still superior to electric car, needs of travelling at close distances. The market is forecast to grow 2-3% to 2030 (the time when motorcycles will be restricted circulation) and the number of motorcycles in circulation will reach 60 million vehicles by 2020.


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Chart 2: Motorcycles sales volume Chart 3: Motocycles sold by type

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Source: VAMM Source: VAMM

Honda to dominates Vietnam's motorcycle industry

Honda Vietnam with a market share of 2-wheelers segment in 2018 was 75.9% more than 3 times that of all other brands (Yamaha, Suzuki, SYM, Piaggio). For the whole of 2018, Honda's sales reached 2.6 million units (+9.0% YoY). With the advantage of durability and fuel economy, spare parts are widely available, Honda has almost no rival in both scooter and motorbile.

The increase in per capita income is also a driving force for Honda's sales growth due to the life and psychological needs of the Vietnamese who always want to own their own motorbike even for families who have already had a car for convenient reasons. In Vietnam, the word "Honda" is synonymous with "motorbike". VEAM owns 30% of charter capital in Honda Vietnam, receives 100% cash dividends annually and these profits will compensate for the less bright core business.

Chart 4: Honda Vietnam sales volume (HVN) Chart 5: Survey on motorbike needs of VN cities

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Source: VAMM (Calculated according to the fiscal year ending on March 31th of Honda Vietnam) Source: Q&Me

Chart 6: Honda Vietnam revenue & profit (VND billion) Chart 7: Market share of motorcycle manufacturers

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Source: VIRAC Source: Q&Me

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VEAM's share

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Automobile industry

Compared to the world, Vietnam is late in developing th automotive industry. Although there have been many incentive policies for automobiles - a key industry in the process of industrialization and modernization of the country, up to now, it can be said that the Vietnam Automobile industry is only a baby among giant manufacturers with an outstanding reputation and long history in the automotive industry. With the goal of modernizing the automobile industry, in the future, the State will have more drastic policies to promote the development of the automotive industry, including commercial vehicles. According to Decision 1168 / QD-TTg of the Prime Minister dated July 16, 2014, trucks, passenger cars and special-use vehicles is considered to be the priority product group that needs to be developed, focusing on multi-purpose small trucks for agricultural and rural production and medium- and short-range passenger cars running inter-provincial, district and inner-city... suitable to local terrain conditions and transport infrastructure with reasonable price, safe and convenient.

Chart 8: VAMA sales volume Chart 9: VAMA sales volume by type

Source: VAMA Source: VAMA

Government policies play a key role in driving demand for automobiles of all kinds.

In general, although the high GDP growth rate will support the growth of vehicle sales in Vietnam. But in the current period, this is not the decisive factor. Consumption of cars of all kinds in Vietnam is strongly affected by the taxation and fee policies imposed by the Government. According to VCCI statistics, automobiles are subject to 14 different types of fee & taxes, accounting for a total of about 60% of the car sale price. Therefore, these policies have a great impact on the selling price as well as the costs paid during the registration and use of cars, thereby greatly affecting the needs of the people.

Chart 10: Vietnam GDP Chart 11: Vietnam GDP per capita

Source: GSO Source: GSO

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For example, in 2012, in addition to the impact of low GDP growth rates, interest rates rose dramatically and the Dollar appreciated; the increase of taxes and fees with large amplitude (road tolls from VND 2.09 million to VND 16.76 million/ year, registration tax frame increased from 10 - 15% to 10 - 20%, fees for restricting individual vehicle of up to VND 50 million/car/year...) has immediately negatively affected people's demand for cars. After being proposed by the Ministry of Finance not to collect some taxes and fees, along with the positive changes of the Vietnam economy, automobile sales had grown strongly.

Chart 12: Number of vehicles in circulation Chart 13: Vehicle in circulation by type

Source: Vietnam Register Source: Vietnam Register

Level of competition with imported cars is increasing

According to statistics of Vietnam Register, the number of cars in circulation is still growing steadily in the last 6 years with a growth rate of 15.2% per year. The two most common types are cars with less than 9 seats accounting for about 50% and trucks accounting for about 40%. The growth potential of Vietnam Automobile market is still very large. By the end of 2019, the car ownership rate in the population in Vietnam was still low, only about 23 cars per 1000 people. According to our estimates, this figure will increase to about 25 cars/1000 people in 2020, but still very low compared to other countries in the region.

In 2019, when the import tax rate drops to 0%, domestic manufacturers are racing to increase imported cars and limit domestic assembly. For example, Honda in 2017, assembled cars accounted for 87%, but in 2019 only 30% of sales. Cars import tax rate of 0% will not only come from ASEAN countries such as Thailand and Indonesia, but also from the members of CPTPP and EVFTA, such as Japan, Canada, Germany, England, and France. in the next 7-10 years. The fierce competition from imported cars seriously affects the domestic automobile industry.

Figure 2: Car ownership rate per 1000 people in 2019 Chart 14: Net profit margin of VN automotive businesses

Source: Seasia.co Source: Fiin Pro, EVS estimated

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According to the MoIT, in 2019, the automobile trade deficit will reach a record of over $3.4 billion and it is difficult for the State to solve the problem of foreign currency balance. The key to disassembly is still to reduce costs and increase market size. This is a vital issue of Vietnam automobile industry because for many years, production costs have always been 10-20% higher than other ASEAN countries, especially Thailand. The success of Thailand also comes from building supporting industries since 1990 with a series of policies: the first is that they raise taxes strongly on imported cars, imported components for protection as well as strong investments in infrastructure, roads, which Vietnam is still struggling to solve. The main reasons why production costs in Vietnam are higher than the region and the localization rate is low (PC 10-20%, CV 40 - 60% depending on type):

Supporting industry is modest: the number of Tier 1 suppliers is only 84 and the number of Tier 2, 3 suppliers is 145, much lower than 690 Tier 1 suppliers and 1,700 Tier 2, 3 suppliers in Thailand.

High logistics costs plus a young manufacturing base, merely with 3 stages of import components, assembling (welding, washing, painting), retail distribution.

Low sales volume (300,000 units/year) leads to high fixed cost per product. Retailing system is the decisive factor for output but has not yet developed.

Table 2: Large businesses operate in the Automotive industry Company Operation Line-up Product Brands

THACO Assembly & distribution

PC, Truck, Bus

CBU & CKD Mazda, Peugeot, Kia, Thaco (xe

khách và xe tải hiệu Fuso)

SVC Distribution PC CBU & CKD

Hyundai, Toyota, Ford, Suzuki, Chevrolet, Misubishi, Fuso, Honda, Hino, Veam (ngừng

bán) HHS Distribution PC CBU Dong Feng HAX Distribution PC CBU & CKD Mercedes-Benz

HTL Distribution PC, Truck CBU & CKD Datano, Hino, Shinmaywa

TMT Assembly & distribution

Truck, Bus CBU & CKD Tata, Sinotruk, Hyundai (xe tải)

CMC Assembly & distribution

Special-use

Vehicle CBU Komatsu, Hitachi

CTF Distribution Bus CBU & CKD Ford

SOME INCENTIVE POLICIES Source: EVS Estimated

Special consumption tax is lower for small-capacity vehicles

According to Law No. 106/2016/QH13 from January 1, 2018, special consumption tax is reduced by 5% for PC with cylinder capacity of less than 2.0 liters, while cars with engine sizes of 2.5 - 3.0 liters are subject to higher taxes (60%).

Solutions to support the domestic automotive industry

Decree 125/2017, effective from January, 2018, offers preferential import duties for Auto parts for the period 2018-2022. Eligible assemblers will be exempted from import tax on spare parts for automobile production with conditions:

Commitment to comply with Euro 4 emission standards for the period of 2018-2021 and Euro 5 starting from 2022.

Assemblers must meet minimum production output requirements in order to be exempt from tax. Specific details as in the table below:

Table 3: Minimum production output to be exempt from spare parts import tax

Unit: Thousands 2018 2019 2020 2021 2022

Minimum production output 8.0 8.5 10.0 11.5 13.5

Output for committed model 3.0 3.5 4.0 4.5 5.0


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Source: EVS Estimated

Decree No. 116/2017/ND-CP, effective from January, 2018, tightens the Imported automotive market because Cir. 20 has expired since 2016, according to which:

Automobile importers are required to have a Car Import License from the Ministry of Industry and Trade. To obtain this license, importers must carry out warranty and maintenance activities, and be authorized by the relevant foreign manufacturer / assembler to carry out product recalls in Vietnam. Many private importers cannot meet this requirement. This is once again beneficial for authorized importers, who have operational standards and professional organizations.

The quality control regulations for imported vehicles under this Decree are much stricter than current regulations. Accordingly, importers are required to provide approval certificates of an overseas competent authority for cars; and quality control will be carried out on each newly imported vehicle lot. This is a technical barrier that makes it difficult for imported cars to access Vietnam market because the import tax has dropped to 0%. Toyota and Honda stopped importing cars after Decree 116 was issued: Since mid-January 2018, Toyota and Honda have announced that they will stop importing imported cars (Toyota Fortuner, Hilux, Yaris). and all Lexus models; Honda CR-V). The reason is that Toyota and Honda find it difficult for them to follow the new provisions in Decree 116, so they need some time to get the necessary documents.

Table 4: Tax on passenger cars of less than 9 seats

Under 9 seats 2015 2016 2017 2018 2019 2020

Import Tax

In ASEAN 50% 40% 30% 0% 0% 0%

Outside ASEAN 70% 70% 70% 70% 70% 70%

Special-consumption tax

Engine capacity

< 1.5L 45% 40% 40% 35% 35% 35%

1.5 - 2.0L 45% 45% 45% 40% 40% 40%

2.0 - 2.5L 50% 50% 50% 50% 50% 50%

2.5 - 3.0L 50% 55% 55% 60% 60% 60%

3.0 - 4.0L 60% 90% 90% 90% 90% 90%

4.0 - 5.0L 60% 110% 110% 110% 110% 110%

5.0 - 6.0L 60% 130% 130% 130% 130% 130%

> 6.0L 60% 150% 150% 150% 150% 150%

VAT 10% 10% 10% 10% 10% 10%


Prospects of the automobile industry 2018 - 2020

Vietnam's automobile sales growth was positive in 2018 (+10.5% YoY). In 9 months of 2019, sales reached 230,334 vehicles (+18% YoY), of which PC reached 168,694 (+30% YoY), CV reached 57,523 vehicles (-3.0% YoY), specialized vehicles reached 4,117 vehicles (-27% YoY). The recovery of domestic demand due to cheaper car prices after the import tax policy took effect. In addition, growth is driven by a growing middle class, increased disposable income and a low lending rate environment.

According to VAMA, 2019 sales volume will reach 384,000 vehicles (+ 38.7% YoY), and in 2020 sales volume will increase +25% YoY in which PC is 29% and CV is 15%.


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Supporting industry products manufacturing

Supporting industry plays a huge role for many manufacturing industries in the economy in general, and the two segments that VEAM is participating in particular. Underdeveloped supporting industries will make assemblers and other final product processing companie relied heavily on imports. Although these products can be supplied cheaply abroad, but because they are too many types, transportation costs, insurance will increase input logistics costs. That is not to mention the risk of progress, time to receive imported goods. It can be said that if the manufacturing industry does not develop, the main industries will be uncompetitive and the scope will be limited to a small number of industries.

Currently, Vietnam supporting industry is still weak due to the limited and limited capital supply and capital approach; The process of product quality management has not really complied with strict foreign standards... However, it is considered as one of the key products in the development of Vietnam Industry. Supporting businesses in the future will receive the concentration of investment and encouragement of the State, with the criteria to improve the ability to supply the domestic market, proceed to export, improve competitiveness to become international suppliers of supporting products. In order to develop supporting industries, Decision 1168/QD-TTG has also introduced the strategy and objectives including:

Accessing and applying technology to manufacture important supplies and components such as transmission, gearbox, engine, body, etc. for some types of vehicles; strengthen cooperation with major automobile manufacturers to choose the types of spare parts and components that Vietnam can produce to take on the role in the global production and supply chain, investment in advanced technology, production for export.

By 2020, to basically form a supporting industry for automobile production, meeting ~35% (in value) of the demand for components and spare parts for domestic automobile assembly and manufacturing.

In the period of 2021 - 2025, production of some important parts of the transmission, gearbox and engine (especially for buses and light trucks) begins to step by step joining the product supply system in the global value chain of the world automotive industry.

In the period of 2026 - 2035, continuing to develop supporting industries for automobile production, striving to become an important supplier of many components and spare parts for the regional and world automobile industry. Meeting over 65% (by value) of demand for components and spare parts for domestic automobile assembly and manufacturing

3. PROJECTED MODEL AND VALUATION

For commercial vehicles and agricultural machinery business

By the end of September 2019, VEAM's old EURO 2 - inventory was nearly VND 2,400 units with a value on the balance sheet of VND 1,200 billion. These are cars facing the risk of loss, unable to sell or be forced to reduce selling prices. In order to be cautious and in accordance with the conclusions of the recent inspection of the Government Agents, we believe that VEAM's commercial vehicles and agricultural machinery business will not grow in the next 5 years compared to the results of 2019. .

Table 5: Core business results forecast

Unit: VND billion 2019F 2020F 2021F 2022F 2023F

Net revenue 4,470 4,470 4,470 4,470 4,470

Profit after tax 415 415 415 415 415



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For motorbike business associating with Honda

lthough motorbikes will be restricted by 2030, according to the experts' survey, 70% of Vietnamese people will still use motorcycles as the main means of transportation due to their mobility and cheap price. Unlike other developed countries like Singapore, Vietnam's current public transport system only meets 8 - 10% of the travel needs of the people.

Sales volume of motorcycles is forecasted to continue to increase by 2-3% per year, of which Honda's sales will increase at 5% and the market share will remain at 75%.

Chart 15: Estimated output of motorcycles sold Chart 16: Motorcycles sold in 1H19

a a

Source: VAMM, EVS Estimated Source: Q&Me

For automotive business associating with Honda, Toyota, and Ford

According to the Institute of Industrial Strategy and Policy Research (Ministry of Industry and Trade), car sales are forecast to increase by 22.6%/year to 2025 and 18.5% / year to 2035.

The output of Honda/Toyota/Ford in 1H19 reached 16,419/37,901/15,460 units, recording a two-digit growth of 46.8%/43.8%/61.4% over the same period last year from a low base of 1H18 due to Impact of Decree 116. We see an increase in the proportion of imported cars (CBUs) in all of VEAM's automotive affiliates, similar to the recovery of the general market. Specifically, Honda/Toyota/Ford increased the proportion of imported cars to 70%/40%/62% in 1H19 compared to 57%/1%/34% in 1H18. It should be noted that imported cars often have a lower gross profit margin than locally assembled vehicles. Accordingly, we believe that the gross profit margin of the trend will decrease slightly when contributing more from imported cars at least in the short-term. The domestic automobile manufacturers is trying to expand the production of locally assembled vehicles in the coming time to limit the impact of technical barriers from Decree 116.

Table 6: Valuation

Unit: VND billion Estimate value Assumptions of discounted cash flow model

Commercial vehicles and agricultural machinery segment

2,378 Beta 1.2

Motorbike associating with Honda 49,350 Risk free rate 6.0%

Automobiles associating with Toyota & Ford

34,177 Risk premium 6.2%

Total 85,845 The cost of capital 13.44%

Total liabilities 1,205 Profit after tax growth rate

Outstanding shares 1,328,800,000 Motorcycle segment

2.5%

Target price (VND) 64,000 Automobiles segment

15.0%

a Source: EVS Estimated

74%

69%

71%

76%

77%

75%

68%

69%

70%

71%

72%

73%

74%

75%

76%

77%

78%

2.5

2.6

2.7

2.8

2.9

3

3.1

3.2

3.3

3.4

3.5

2015 2016 2017 2018 2019F 2020F

Mil. unitsSales volume Honda's Market share

1.17 1.17

1.59 1.5

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1H18 1H19

Mil. units Honda Vietnam

73.7% 77.8%


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We recommend BUY for VEAM stock with target price of VND 64,000/share

We use a discounted cash flow valuation method to determine the fair value of VEAM. The target price of VEAM is expected in 2020 to be reasonably determined at VND 64,000/share. Forward P/E of 11.5. We recommend BUY VEAM stock because the stock is trading at a relatively low level at the moment.

4. INVESTMENT HIGHLIGHTS

VEA's financial situation is safe with large amount of cash, low leverage and tends to decrease

By the end of 3Q19, VEAM's total assets reached 31,044 billion (+25.3% YoY), of which, money and deposits were 14,934 billion (accounting for 48.1% of total assets). Short-term receivables were VND 6,247.1 billion (+ 32.8% YoY), accounting for 20% of total assets, due to dividend receivables from associating in the auto segment which has been announced but has not yet received is VND 4,636 billion. VEAM's short-term and long-term debt as of the end of 3Q19 reached VND 290.2 billion (-41.2% YoY). Accordingly, the VEAM's leverage is very low with D/E ratio of 0.04 times.

Honda continues to expand its market share in spite of Vietnam's slowing-down motorcycle market at 1H19.

Honda's 1H19 motorbike sales reached 1,169,429 vehicles, going flat compared to 1,170,038 units at 1H18. However, Honda surpassed the overall motorcycle market in Vietnam in 1H19 which recorded a 4% decrease in sales compared to the same period last year. Accordingly, Honda continues to expand its market share to reach 77.8% by the end of 1H19 compared to 68.1%/73.7%/74.8% at 1H18/2018/1Q19. In addition, the Board of Directors also shared the trend of shifting to scooters that remained stable during the period, boosting revenue and profit growth of Honda in the motorbike segment. The proportion of gears/scooters in Honda's sales structure by the end of 2018 was 32%/68%.

Passenger car market recovered strongly in 1H19 compared to the sluggish caused by Decree 116 in 1H18.

Passenger car market in Vietnam recovered strongly in 1H19 to 109,432 units (32% YoY growth), according to the Vietnam Automobile Manufacturers Association (VAMA). Hyundai, known as one of the major car manufacturers in Vietnam, but not a VAMA member also recorded strong growth in passenger car sales over the same period last year. We believe that the market for passenger cars in Vietnam was stagnant in 1H18 due to the effect of Decree 116 requiring type certificates (VTA) to be eligible to import cars with a tax rate of 0% from ASEAN. Accordingly, the proportion of domestically assembled vehicles / imported vehicles in 1H18 was 87% / 13% compared to 63%/37% at 1H19, indicating a strong recovery of CBU imports in 1H19.

Positive prospects for the automobile industry in Vietnam are supported by the following positive macro factors:

(1) GDP growth rate is expected to reach 6.5%/year in the period of 2019-2023 compared to 5.2% of the whole ASEAN region; (2) The fastest growing middle class and the richest; and (3) Supply is more stable and prices are good as international carmakers increase domestic production along with better supply of imported cars. We offer a positive view to the passenger car market in Vietnam with forecasted volume growth of 38.7% in 2019 compared to a positive 32% growth in 1H19 from a low base in 1H18 due to the impact of Decree 116. We leave the limitations of underdeveloped infrastructure in Vietnam affecting the speed of expanding the Vietnam automobile market and forecasting the market will grow by 25%/year by 2020.

Maintaining an attractive dividend policy when the VEAM expects no significant capital expenditure and associates in the Automotive segment also do not plan to expand capacity in the near future.

Attractive valuation: VEA is trading at forward P/E of 2019F of 11.5, attractive compared to the median P/E of 12.5 of world largest carmakers. The longer-term prospect also comes from listing on HoSE, opening up opportunities for VEA shares such as adding to the VN30 basket or future ETFs and licensing margin trading after 6 months of listing.

Table 7: Compare VEAM to some other major automobile enterprises in the world

Enterprises

Market Cap.

(Thousand USD)

TTM P/E TTM P/B D/E 2018 ROE 2018 NPAT


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Honda Motor Co Ltd 43,947 8.4 0.5 86.3 6.6 3.8

Kia Motors Corp 14,689 11.3 0.6 24.5 5.6 2.1

Hyundai Motor Co 22,767 18.0 0.4 99.2 2.1 1.6

Nissan Motor Co Ltd 2,416 12.5 4.1 - 33.0 18.8

Toyota Motor Corp 213,683 10.5 1.0 98.0 9.8 6.2

Astra International 18,612 12.5 1.9 49.3 15.8 9.1

Nissan Motor Co Ltd 25,625 12.0 0.5 142.8 4.0 2.8

Suzuki Motor Corp 18,377 13.6 1.3 22.7 9.8 4.6

Isuzu Motors Ltd 8,934 8.1 0.9 26.6 10.9 5.3

Mazda Motor Corp 5,190 11.4 0.5 48.6 4.0 1.8

Suzuki Motor Corp 18,377 13.6 1.3 22.7 9.8 4.6

Subaru Corp 20,775 13.0 1.3 6.5 10.2 4.7

SAIC Motor Corp Ltd 287,764 9.3 1.2 76.4 13.5 4.0

Hyundai Motor Co 27,456,362 18.0 0.4 99.2 2.1 1.6

Kia Motors Corp 17,714,378 11.3 0.6 24.5 5.6 2.1

DRB-Hicom Bhd 4,910 20.8 0.7 63.2 3.5 1.6

Yamaha Motor Co Ltd 5,546 6.6 0.9 51.3 13.3 5.6

Hero MotoCorp Ltd 7,119 14.9 3.9 2.4 27.5 10.3

Zhejiang Qianjiang Ltd 613 53.3 1.7 0.1 3.3 2.2

Sanyang Motor Co Ltd 567 6.1 1.2 106.4 20.6 3.3

Maharashtra Scooters 602 59.6 0.4 - 0.7 504.7

Bajaj Auto Ltd 10,957 16.0 3.4 - 22.6 16.7

Hero MotoCorp Ltd 513,088 14.9 3.9 2.4 27.5 10.3

Medium 2,018,057 16.3 1.4 45.8 11.4 27.3

Median 18,377 12.5 1.0 26.6 9.8 4.6

VEAM 2,939 9.2 2.6 0.04 32.5 133.5

Source: Bloomberg, EVS Estimated

5. INVESTMENT RISK

Core business activities has difficulties even at significant loss, eroding the profit gained from associates.

Dividend payment policy at associates is subject to change at any time, affecting VEAM's business results.

Limited access to financial information of VEAM’s associates.

Risk of doubtful receivables and large outdated inventories. Currently, VEAM has made a provision of about VND 431.4 billion, equivalent to about 33% of VEAM's receivables.

State divestment plan to 36% is still unclear. The time of divestment related to the agreement between VEAM and Honda, Toyota joint ventures. VEAM and Toyota agreed to establish Toyota Vietnam in 1995 and the cooperation will end in 2035. Toyota has provisions related to the acquisition of shares of VEAM in this enterprise if the State reduces its ownership below 51%. Meanwhile, Honda Vietnam was established after Toyota Vietnam one year and the agreement also lasted 40 years. VEAM owns 30% of charter capital, the remaining Honda Motor Thailand holds 28% and Honda Motor Japan holds 42%. Although it is not required to repurchase shares, if the Potential buyer is a business in the Auto & Moto industry leading to potential threat to Honda Vietnam's business, then this provision may be activated.


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Income Statements Balance Sheet (VND Billion) 2017 2018 (VND Billion) 2017 2018

Net revenue 6,563 7,070 SHORT-TERM ASSETS 10,987 16,408

Cost of goods sold -5,943 -6,467 Cash and cash equivalents 2,488 342

Gross profit 620 603 Short-term investments 2,152 9,650

Financial income 254 416 Receivables 2,610 4,011

Financial expenses -42 -79 Inventory, net 3,503 2,306

In which: interest expenses -36 -20 LONG-TERM ASSETS 12,374 9,998

Gains / (losses) from associates 5,170 6,852 Long-term receivables 117 157

Selling expenses -282 -176 Fixed assets 2,333 2,347

General & administration expenses -595 -480 Net of investment assets 41 40

Gains/(losses) from operating activities 5,125 7,135 Long-term unfinished assets 301 113

Other income 20 11 TOTAL ASSETS 23,361 26,406

Other expenses -22 -19 LIABILITIES 4,786 1,556

Other income, net -3 -9 Short-term liabilities 4,563 1,399

Net profit before tax 5,122 7,126 Payables 2,155 447

Corporate income tax expenses -36 -79 Payment in advance 24 35

Net profit after tax 5,086 7,047 Unrealized revenue 0 3

Non-controlling interests 40 37 Short-term borrowings 285 384

Profit of parent company shareholders 5,046 7,010 Long-term liabilities 223 158

Long-term payment in advance 1 1

Operation ratios Unrealized revenue 10 10

2017 2018 Long-term borrowings 175 116

Gross profit margin 9.5% 8.5% TOTAL EQUITY 18,575 24,850

EBITDA/Net revenue 0.7% 3.4% Capital contribution 13,288 13,288

EBIT/Net revenue -3.9% -0.8% Retaining Earnings 4,993 11,360

Profit before tax ratio 78.0% 100.8% Non-controlling interests 169 195

Net profit margin 77.5% 99.7% TOTAL RESOURCES 23,361 26,406

Statements of cash flows Key indicators Indirect - VND Billion 2017 2018 2017 2018

Profit before tax 5,122 7,126 Valuation indicators

Depreciation and amortization 304 292 P/E 12.9 9.4

Gains/(losses) from investment activities -5,394 -7,266 Diluted P/E 12.9 9.3

Interest expenses 36 20 P/B 3.5 2.6

Profit / (loss) before changes in working capital 284 156 P/S 9.9 9.2

Changes in receivables -1,246 64 P/Tangible Book 3.5 2.6

Changes in inventory -1,246 -1,723 P/Cash Flow -120.4 -15.8

Changes in payables -1,182 1,215 EV/EBITDA 1,357.2 274.8

Changes in prepayment -16 -50 EV/EBIT -245.0 -1,209.4

Cashflows from operating activities -541 -4,129 Management Efficiency

Payments to fixed assets and long-term assets -462 -196 ROE% 31.7 32.3

Proceeds from liquidation of fixed assets 138 4 ROA% 23.1 28.2

Lending or buying debt instruments -2,238 -11,740 ROIC% -1.4 -0.2

Proceeds from lending 428 4,242 Financial structure

Investment in other businesses -13 0 Cash ratio 0.6 0.2

Proceeds from the sale of investments 1 1 Quick ratio 1.1 3.1

Dividends and interest received 5,271 10,192 Current ratio 2.4 11.7

Cashflows from investing activities 3,125 2,504 Short-term liabilities/Equity 0.3 0.1

Proceeds from the loan 1,473 1,543 Short-term receivables/Assets 0.2 0.1

Payments on borrowings -1,651 -1,504 Total receivables/Equity 0.3 0.1

Dividend paid -3,716 -560 Total receivables/Assets 0.2 0.1

Cash flows from financing activities -3,894 -521 Operation indicators

Net cash flows during the period -1,311 -2,146 Receivables turnover 3.5 3.8

Cash & equivalents at the beginning of the period 3,799 2,488 Inventory turnover 2.0 2.2

Cash & equivalents at the ending of the period 2,488 342 Payables turnover 4.6 5.0


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RATING

BUY: Expected return for 12-month is 14% or greater

HOLD: Expected return for 12-month is between –14% and 14%

SELL: Expected return for 12-month is below or equal to –14%

DISCLAIMER:

The information, forecasts and recommendations contained herein are based upon sources believed to be reliable but their

accuracy completeness or correctness are not guaranteed. However, excepting for information about Everest Securities

Corporation (“EVS”), EVS is not responsible for the accuracy of the information contained in this report. Expressions of opinion,

forecasts and estimations only show the research analyst’s personal views at issued time. Those statements are not

recognized as the views of EVS and are subject to change without notice. EVS has no liability to update or fix this report under

any circumstance as well as notice readers in cases that expressions of opinion, forecasts and estimations contained in this

report change or become incorrect.

EVS may use the report’s outcomes of research for trading securities itself with the status as a customer using the research

product. EVS’s Research Team operates as an independent research unit, and may trade for the company itself in accordance

with professional analysts’ suggestions in this report and may participate in securities transactions that are contradictory to

the consultancy advice and points of view expressed in the report.

EVS’s staff may have financial interests from revelant securities and financial tools mentioned in the report. This research

report is written for the purpose of providing general advisory information to all customers without considering any risky

tolerance, ability of risk, specific investment criterions, specific financial situation or any specific demand from any person,

who receive or read this report. Investors must pay attention that stock price always changes, it may go up or down and all

past happenings (if any) don’t imply for future outcomes. EVS accepts no liability whatsoever for any direct or consequential

loss from any use of this document or its content.

No part of this document may be copied, reproduced, republished or redistributed without approval document of EVS. Please

note the source when quote contents aprroved by EVS.

CONTACTS:

EVEREST SECURITIES CORPORATION (EVS)- www.eves.com.vn

Head Office:

Floor 2, VNT Tower, 19 Nguyen Trai Street, Thanh Xuan District, Ha Noi, Vietnam

Tel: (84) 24 3772 6699 - Fax: (84) 24 3772 6763

Saigon Branch:

Floor M, Central Park Tower, 117 Nguyen Du Street, Ben Thanh, District 1, Ho Chi Minh City, Vietnam

Tel: (84) 28 6290 6296 - Fax: (84) 28 6290 6399

Ham Nghi Branch:

Floor 4, Ruby Tower, 81-85 Ham Nghi Street, Nguyen Thai Binh, District 1, Ho Chi Minh City, Vietnam Tel: (84) 28 3915 2616 - Fax: (84) 28 3915 2618

Ba Trieu Branch:

Floor 1, Minexport Tower, 28 Ba Trieu Street, Hoan Kiem District, Ha Noi, Vietnam Tel: (84) 24 39366866 - Fax: (84) 24 3936 6586

Vietnam Engine & Agricultural Machinery Corp. [BUY, +32.2%]

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