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Company Report

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LOC TROI GROUP (LOC TROI – UNLISTED)

Current Price Target Price Dividend Yield Recommendation Sector

n/a VND77,940 n/a n/a Agriculture

Outlook – Short term Outlook – Long term Valuation

Negative Neutral Positive Negative Neutral Positive Not rated

Loc Troi Group, formerly known as An Giang Crop Protection

Chemicals Service Corporation, is the dominant agribusiness in

both the Crop protection chemical and Seed segments in

Vietnam with a vertically-integrated value chain. The company

plans to list its stock on UPCOM by 3Q2017.

Dominant position in Crop protection Chemical (CPC) and Seed segments thanks to nationwide distribution network and strong facilities. Loc Troi is the market leader in the CPC industry with a 21.0% market share, far exceeding the 2nd largest player VFG at 8.3%. In the seed segment, it focuses on researching OP rice seeds as well as hybrid corn and vegetable seeds at three seed research centers. The company has more than 5,000 distributors in Vietnam.

Improving production efficiency and output quality via a vertically-integrated value chain. Leveraging its strengths in the CPC and Seed segments, the company has successfully developed a unique and sustainable agricultural platform via a vertically-integrated value chain. Loc Troi has the large “Farmers' Friends Force” comprising 1,200 agricultural engineers to provide technical support to farmers in large-scale rice farms and five rice mills with a total capacity of 700,000 tons per annum.

Capturing potential upside in agriculture sector. We expect that the CPC industry sales will increase at a stable 4.4% yoy for 2017-2020 due to increasing population and limited arable land. In the seed segment, we expect 1) strong growth in domestic product consumption to help drive the shift from the informal to the formal channel, and 2) higher export demand for vegetables. For the Agrifood segment, we expect that export markets will be main grow drive as prospective from Chinese and Philippine market.

We set target P/E at 12.0x for Loc Troi, lower than peers’ average 14.4x, with forecasted FY17 EPS of VND6,495/share, thus target price for the company’s stock is VND77,940/share.

29 June 2017

Tuấn Nguyễn Thanh

[email protected]

Key statistics

Established year 1993

Outstanding shares (m) 67.1

Ownership

Source: Loc Troi

Shareholders

Standard Chatered Private Equity 33.4%

An Giang People's Committee 24.2%

Employee 18.2%

Vietnam Azalea Fund 6.1%

PENM 3.6%

(*) From 2015, EPS of public companies was calculated based on net profit after ajusted for bonus and welfare allocation.

Source: VNDIRECT

Financial summary (VND) 12-14A 12-15A 12-16A 12-17E

Net revenue (bn) 8,857 7,856 7,783 8,086

Revenue growth 19.1% (11.3%) (0.9%) 3.9%

Gross margin 23.2% 22.1% 20.8% 23.7%

Operating EBITDA (bn) 923 927 828 1,018

Net profit (bn) 504 319 347 513

Net profit growth 0.6% (36.7%) 8.8% 47.9%

EPS 7,805 (*) 4,083 4,392 6,495

BVPS 30,809 31,335 32,400 37,818

ROAE 27.6% 15.5% 16.2% 21.8%

Company Report


I. OVERVIEW

Loc Troi Group was established in 1993 under the name An Giang

Crop Protection Chemicals Service Corporation. In 1996, the

Company expanded into the seed industry with a focus on both

research and production. After more than two decades of

development, the Company is now a leading player in the CPC

segment with 21.0% market share (FY16) and number 2 in the seed

segment with 4.8% market share (FY15) in Vietnam.

Figure 1 Loc Troi Group’s Development Milestones

Source: Loc Troi

Leveraging its established position in the CPC and Seed segments,

the Company added the Agrifood business to their operation in 2010

by developing the large-scale rice farm model. With this model, Loc

Troi Group developed a vertically integrated value chain which

decreases the loss rate in rice production and increases the quality of

products. Moreover, with the unique Farmer’s Friend model with more

than 1,200 agricultural engineers to inform farmers of modern and

advanced farming techniques, the Company also succeeded in

building good relationships with millions of farmers in Mekong Delta.

Figure 2 Loc Troi’s large-scale farm Figure 3 Thoai Son Rice Mill

Source: Loc Troi Source: Loc Troi

Company Report


Figure 4 Overview of Loc Troi's Main Business Segments

CPC and Bio-fertilizer Seed Agrifood (Food – Rice)

Business Model Distributor and Producer Distributor and Producer Producer

Market Position Leader Leader Competitive player with nation-wide

network

Established Year 1993 1996 2010

Competitive Advantages

Diverse and high-quality

product portfolio

By far the largest distributor

for Syngenta in VN

Extensive distribution network

across the nation with:

22 branches

More than 5,000 retailers

Diverse and high-quality

varieties of rice, corn and

vegetable seeds

In-house production capacity:

5 rice seed factories –

72,000 tons/year

2 corn seed factories –

4,000 tons/year

1 vegetable seed

warehouse

In-house R&D capacity: 3

centers

Share the distribution network

with CPC and bio-fertilizer

products, creating one-stop

shops for farmers

Controlled input and production

process

Expertise from agricultural

engineers

High-quality and high-nutrient

branded rice products

In-house production capacity:

5 rice processing factories

– 700,000 tons/year

Source: Loc Troi

The Company is the first company in Vietnam to invest in and create a vertically integrated rice value chain via the large-scale farming model. This model aims to eliminate the inefficiencies that have long existed in rice production in Vietnam via controlling the quality of inputs, monitoring the production process and commercializing outputs.

Currently, the seed and CPC segments can supply 100% demands of inputs (seeds, CPCs, fertilizers) for the material zones (contracted areas for rice production). The company also provides technical supports to farmers via the largest engineer force in Vietnam at all of the material zones.

Figure 5 Loc Troi Group's Value Chain and Established Year

Source: Loc Troi, VNDIRECT

Company Report


II. BUSSINESS LINES

Figure 6 Loc Troi's net revenue distributed by segments Figure 7 Loc Troi's gross profit distributed by segments

Source: VNDIRECT Source: VNDIRECT

1. The CPC and Fertilizer Segment (CPC Segment) - cash

generator:

Segment’s FY16 net revenue: VND4.728trl (60.8% company’s revenue)

Segment’s FY16 gross profit: VND1.414trl (87.5% company’s GP)

Major products: Herbicide, Insecticide, Fungicide, Bio-fertilizer…

CPC – Crop Protection Chemicals and Fertilizer are key products of the company, accounting for more than 60% of FY16 net revenue and leading the CPC market with about 21% market share. 60% of CPC products are imported from Syngenta, while the rest are either imported directly from other manufacturers or reformulated and sold as AGPPS products (company owned-brands).

a. Market Overview

Heavily Relying on Import and Concentrated Distribution. The CPC industry of Vietnam has relied heavily on import to satisfy the domestic demand because manufacturing CPC requires the handling of over 50 different toxic chemicals, which Vietnamese companies do not yet have the technical expertise.

According to Market and Market Report, Vietnam CPC market estimated value during 2016 was over US$1bn. Over the past five year, Vietnam has spent about US$500mn annually on importing plant protection products and 90% of CPC’s imported ingredients are from China (Souce: Plant Protection Department under the Ministry of Agriculture and Rural Department).

Fragmented market

Currently, there are about 200 companies, over 20,000 sales agents and 97 chemical processing and packaging facilities of CPCs in Vietnam. Loc Troi Group is the market leader in the CPC market, holding 21.0% market share (2016 Est.), which is more than double that of the second largest player in the industry.

Title:

Source:

Please fill in the values above to have them entered in your report5,129

5,279

4,083

4,728

1,413

2,619

2,905

2,241

744

809

685

568

0 2,000 4,000 6,000 8,000 10,000

2013

2014

2015

2016

VNDbn

CPC Agrifood Seed Packaging Other

Title:

Source:

Please fill in the values above to have them entered in your report1,431

1,572

1,283

1,414

111

201

225

77

196

256

197

80

-100 400 900 1,400 1,900 2,400

2013

2014

2015

2016

VNDbn

CPC Agrifood Seed Packaging Other

Company Report


Figure 8 Main Competitor of CPC Industry

Source: VNDIRECT Research

Most domestic manufacturing companies have simple business models: they import active ingredients for reformulating and packaging. However, as many local CPC handlers are small firms or households/individuals, there is little assurance regarding the safety and quality of CPC finished goods.

Price-sensitive. Farmers are very price-sensitive and want to see immediate effects of CPC on their crops without considering potential negative consequences to the cultivated soil and harvested products. As a result, they tend to choose cheap products that show immediate effects, and their harvested products often end up having a lot of CPC residues.

However, there is recent trend of increasing health concern and enforcing food safety regulations (i.e Circular 21/2015, Circular 03/2016) in the domestic market, which, together with high export standards, we believe will make farmers pay more attention to the quality of CPC products and their usage to keep the CPC residues within an approved level.

Sector Prospects – Forecast 2016-2020F CAGR 4.4%

Vietnam’s population is forecasted to reach 98.2 million in 2020. Meanwhile, the total arable land has not been able to increase in the past 10 years, staying at around 6.5mn ha. Therefore, crop yield needs to increase. When the application of new technology and research achievements in production is still limited, Vietnam’s agriculture still has to rely heavily on CPC to increase crop yield.

Figure 9 Total area of arable land in Vietnam Figure 10 CPC Industry’s Estimated Market Size

Loc Troi Group

JSC

Vietnam

Fumigation

(VFG)

Tan Thanh

Biochem

Hop Tri

Investment

Corp.

Golden Rice

Agro Chemistry

Corporation

Bayer

CropScience

Vietnam

H.A.I Agrochem

Location An Giang HCMC Can Tho HCMC Binh Duong Dong Nai HCMC

Products CPCs, fertilizers,

crop seeds, rice

CPCs, crop

seeds

CPCs, fertilizers,

rice

CPCs, other pest

control chemicals

CPCs, other post

control chemicals

CPCs, crop seed CPCs, fertilizers,

crop seeds

Main supplier Syngenta, Dow

AgroSciences,

Boom Devi, Vital

Earth, NTS…

Nufarm, Dow

Agroscience,

Syngenta & other

Japanese

suppliers

N/A N/A N/A N/A Nissan

Chemical,

Nippon Soda,

Dupont,

2016 est. market

share

21.0% 8.3% N/A N/A N/A N/A 6.2%

Distribution

network

21 branches

nationwide,

>5,000 retail

agencies national

wide

17 branches in

large cities,

2,450 retail

agencies

5 branches in

Mekong Delta,

2,200 retail

agencies

600 retail

agencies

N/A 3 branches in

large cities

16 branches,

1800 retail

agencies

Factory 2CPC factories 1 factory at Le

Minh Xuan IZ

1 factory in Long

An

1 factory in Nha

Be

2 factories in

Binh Duong and

Vinh Long

1 factory in Dong

Nai

1 factory in Long

An

Company Report


Source: FAOstat Source: Market and Market Report

b. Loc Troi CPC segment highlights

Distributor of products of giant brands. Beside products from

Syngenta, largest CPC company in the world in term of FY15 sales,

Loc Troi also distributes products from Dow AgroSciences (FY15 world

4th largest), Devi Cropscience… and possibly Dupont (FY15 world’s 6th

largest) after it merges with Dow Agrosciences in the future. With

strong back-up by world class partner, Loc Troi offers a wide-range

CPC portfolio of more than 60 different products from herbicides,

insecticides, fungicides, to seed treatment and other products…

Extensive distribution network across the nation. CPCs and

fertilizers of the Company are now distributed via an extensive

distribution system including 22 branches and more than 5,000 agents

nationwide, though with larger coverage in the South. The distribution

system of Loc Troi Group is currently the most widespread distribution

network of CPCs in Vietnam.

Loc Troi has 2 CPC factories with total capacity of 50,000 tons per

year (compared with VFG’s capacity of 12,500 tons per year, HAI’s

capacity of 8,000 tons per year), 3 fertilizer factories with total capacity

of 27,780 tons per years.

High and stable gross margin: In period FY14-16, CPC segment

recorded average gross margin of 29.7%, although sales fluctuated

due to weather condition. The stable gross margin was the mix of

owned-brands products with higher margin (contributing of about 19%

FY15 total sales) and distribution of other brands’ products with lower

margin.

Figure 12 CPC segment's Net revenue, gross profit and GM of Loc Troi and listed companies

Source: Company data, VNDIRECT calculation

Focus on environment-friendly fertilizer. Fertilizer products hasn’t

significantly contributed to CPC segments with only 0.58% in FY total

Title:

Source:

Please fill in the values above to have them entered in your report

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1995 2000 2005 2010 2015

Mil

ion

Ha

The amount of arableland seem to have

reached its limit in recent yearsTitle:

Source:


21,766 22,965

23,975 25,030

26,131 27,281

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2015 2016F 2017F 2018F 2019F 2020F

VN

Dbn

Title:

Source:


29.9%

23.4%

12.8%

23.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

1,000

2,000

3,000

4,000

5,000

Lộc Trời VFG HAI SPC

VN

Db

n

Net revenue Gross profit Gross margin

Figure 11 CPC Segment net revenue, gross profit & gross margin

Source: VNDIRECT

Title:

Source:

Please fill in the values above to have them entered in your report10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2013 2014 2015 2016

VN

Dbn

CPC Segment net revenue

CPC Segment gross profit

CPC Segment gross margin

Company Report


revenue. Loc Troi Group sells most of its fertilizer products to its large-

scale rice farms to build brand equity and improve farmers’ awareness

on bio-fertilizer products.

Recently, rising environmental awareness, concerns over soil fertility

and increasing demand for organic food are driving the growth of the

organic fertilizer and bio-fertilizer markets. As a result, there are a lot

of growth potentials in this segment. When the market picks up, the

Company can shift the distribution to external parties and market the

products to much larger market.

Segment outlook: We estimate net revenue of CPC and Fertilizer

Products will reach VND5.201trl (+10% yoy) in FY17. For mid-term

outlook, we expect that CPC segment could growth slightly (as

Vietnam’s CPC market size of is forecasted to growth with FY17-20F

CAGR of 4.4%).

2. Seed segment – Aim to become market leader

Segment’s FY16 net revenue: VND568bn (7.3% company’s revenue)

Segment’s FY16 gross profit: VND79.5bn (4.9% company’s GP)

Major products: Rice, corn, vegetable and fruit seeds.

The Seed segment of Loc Troi was established in 1996 when the Government’s research division was spun off and merged with AGPPS (the old name of Loc Troi Group).

Loc Troi Group’s Dinh Thanh Agriculture Research Center is the only test center in the region that is allowed by the Ministry of Agriculture and Rural Development to conduct seed certification.

Moreover, having a large distribution network of over 5,000 agents and established brand awareness, Loc Troi Group is now the leading rice seed provider in Mekong Delta and the second biggest player in Vietnam.

a. Market Overview:

Vietnam’s Seed Industry can self-produce rice seeds, while corn and vegetable seeds are dependent on import

Rice is one of the main agricultural products of Vietnam, accounting for 65% of total harvested area in Vietnam. Therefore, Vietnam’s seed industry has been focusing on R&D on rice and can self-supply the total domestic demand for rice seeds.

As for corn and vegetables, due to relatively lower harvested area and demand as well as heavy reliance on hybrid seeds, many domestic companies are reluctant to invest in the R&D of those seeds. Therefore, the domestic market is dependent on import or multinational companies for the supply of hybrid seeds.

2 channels of seed industry

The formal channel is characterized by extensive research effort, monitored production, and labeled products which are strictly enforced by national regulations, whereas the informal channel remains manual and on a local scale.

According to AgroInfo, about 50% of farmers buy seeds from official

channels, 20% farmers chose private unofficial seed producers, 6.7%

of them use leftover seeds or trade with other farmers.

Organic fertilizer and bio-fertilizer are relatively

new in Vietnam, so their demand is currently

low. In 2015, the demand for those products

was only 400,000 tons, accounting for only

3.7% of the total fertilizer market. This is mostly

due to farmers’ unawareness of those products

themselves and concern over their slow

effectiveness.

Figure 13 Value Breakdown of Vietnam's Seed Industry (2015)

Source: Loc Troi

Title:

Source:


16.3%

12.1%

Rice Corn Vegetables

Company Report


Figure 14 Vietnam’s Seeds Formal channel

Source: AgroInfo

Figure 15 Vietnam’s Seeds Informal channel

Source: AgroInfo

Because of favorable soil and weather conditions, 90% of the rice seeds used in Vietnam is open-pollinated. While hybrid seeds cannot be multiplied by themselves due to the potential manifestation of unwanted recessive traits, OP seeds can easily be multiplied, saved and traded by farmers without buying from certified sale agents. As a result, roughly 50% of rice seeds come from the informal channel. However, in recent years, there are several forces driving the shift from the informal channel to the formal channel.

Figure 16 Comparing the Seed Formal and Informal channels

Source: AgroInfo

The Usage of Open-Pollinated (OP) and Hybrid Seeds Varies by

Region and by Crop

Vietnamese farmers currently use both OP and hybrid seeds in crop cultivation. Due to their distinctive advantages and disadvantages, their usage is dependent on the condition of cultivation areas.

Formal channel Informal channel

Advantages - Guaranteed quality through

extensive research

- Known traits and traceable

origin

- Cheaper

- Reduce cost by using farm-saved

seeds

- Easily accessible through other

farmers/ farmers’ unions

Disadvantages - More expensive - Questionable origin and quality

- Contaminated seeds are easily mixed

in with other OP seeds

- Cannot verify the quality until plants

are fully developed

- Depends mostly on goodwill and trust

- Significant loss if the seeds are bad

Company Report


Figure 17 Comparing OP seeds and Hybrid seeds

Source: AgroInfo

Mekong Delta, the biggest rice granary in Vietnam, has good soil and weather condition thus making little difference in yield of OP and hybrid rice seeds so farmers in the region use nearly 100% OP rice seeds because of their much lower price. Farmers in other regions still use mainly OP seeds, but also combine with hybrid seeds in areas with harsh condition.

Figure 18 Types of Rice, Corn and Vegetable Seeds in Vietnam

Source: AgroInfo

Main competitors:

Excluding farmers’ unions and other informal private groups, there are over 250 seed research and producing companies in the formal channel, and they can be divided into three segments: national-level companies, provincial-level companies as well as the group of private companies, joint-ventures and 100% FDI companies.

Figure 19 Leading companies in Vietnam‘s Seed industry

Open-pollinated (OP) Hybrid

Advantages - Cheaper than hybrid seeds

- Can multiply to many

generations

- High yield

- Combine the good traits of many

different breeds

- Can withstand harsh soil and extreme

weather conditions

Disadvantages - Cannot withstand harsh soil

and extreme weather conditions

- Require a lot of research effort

- More expensive than OP seeds

- Only the F1 generation is considered

good, later generations can show

unwanted recessive traits

Title:

Source:


90%

10%

Rice

10%

90%

Corn

OP Hybrid

40%

60%

Vegetable

Company Report


Source: VNDIRECT market research

Sector prospect – Negative growth in Rice seed, slight growth in

Corn and Vegetable seed

With Rice segment Restructure Plan in 2015, MARD plans to cut the total rice cultivation area by 10% by 2020, affecting the size of the rice seed market but the shift from the informal channel to the formal channel may drive the growth of the formal rice seed products. In addition, the Ministry of Agricultural and Rural Development (MARD) has started enforcing strict regulations on seed production and trading in Vietnam since 2015.

The corn seed segment is slowing down, as domestic corn faces strong competition from South America. Domestic corn price is always higher than price of corn imported from South America, thus resulting in huge import volume from the region.

Vietnam’s seed industry can only supply 15% vegetable seeds, while the remaining 85% is imported or bought from multinational companies in Vietnam. This is due to lack of research facilities dedicated to R&D on vegetable seeds, as most effort has concentrated on rice seed. However, in recent years, several domestic companies, notably Loc Troi Group have started investing in R&D on vegetable seeds, so the segment is likely to see shift from the import to domestic supplies.

Figure 20 Market Size of the Seed Industry in Vietnam (2016E – 2021F)

Loc Troi Group JSC Southern Seed

Corporation

(SSC)

National Seed

JSC (NSC)

Techno-

Agricultural

Supplying JSC

(TSC)

Thai Binh Seeds East-West Seeds Mosanto

Location An Giang HCMC Ha Noi Can Tho Thai Binh Binh Duong HCMC

- OP Rice Seeds

- Hybrid Corn Seeds

- Hybrid Vegetable

Seeds

- OP and Hybrid

Rice Seeds

- OP and Hybrid

Corn Seeds

- OP and Hybrid

Vegetable Seeds

- OP and Hybrid

Rice Seeds

- Hybrid Corn

Seeds

- OP and Hybrid

Vegetable Seeds

N/A OP and Hybrid

Rice Seeds

- Hybrid Corn

Seeds

- Vegetable

Seeds

- Hybrid Corn

Seeds

- Hybrid

Vegetable Seeds

- Hybrid Corn

Seeds

-Vegetable

Seeds

2015 Market

share

4.8% 3.8% 5.7% 0.6% 2.6% N/A N/A

Distribution

network

21 branches

nationwide, > 5,000

retail agencies

national wide

4 branches 1,000 level-1

sales agents

1 branch 15 branches, 500

retail agents

nationwide

1 branch 1 branch

Factory 3 research centers

and 7 seed

processing factories

and about 800 ha

seed farm

5 seeds farms, 1

research center

and 1 processing

factory

2 research

centers and 1

seed processing

factory

N/A 2 seed

processing

factories

N/A N/A

Title:

Source:


7,9097,549 7,311 7,074 6,960 6,845

907 918 924 952 981 1,005

2,400 2,500 2,600 2,700 2,800 2,900

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2016E 2017F 2018F 2019F 2020F 2021F

VN

Db

n

Rice seed Corn seed Vegetable seed

Company Report


Source: Loc Troi

b. Loc Troi seed segment highlights

Currently Loc Troi Group has 3 R&D centers, 5 rice seed factories, 2 corn seed factories and 1 vegetable seed facility with the total capacity of 72,000 tons of rice seeds and 4,000 tons of corn seeds and 0.2 tons vegetable seeds. Dinh Thanh R&D center is among the research facilities with the most advanced technology and equipment in Mekong Delta.

Currently, Loc Troi’s seed Segment provides a portfolio that includes rice seeds – research and produce; corn seeds – distribute Syngenta products; and vegetable seeds – distribute for other brands.

Dominate Mekong Delta market thanks to focusing on OP rice: Although the company entered the Seed segment later than other formerly state-owned competitors such as the National Seed JSC (NSC) and the Southern Seed Corporation (SSC), it chose the right product segment from an early stage, which was OP rice seeds (while other competitors concentrated on hybrid seeds).

The Mekong Delta region, which has the biggest rice granary in Vietnam, has fertile soil and good weather condition that make little difference in yield between OP and hybrid seeds, not enough to justify the price difference. Therefore, almost 100% of Mekong Delta farmers purchase OP rice seeds, which previously were not offered by large seed companies SSC and NSC.

Loc Troi’s proprietary rice variety AGPPS 3, now renamed as Loc Troi 01, won the Top-3 Best Rice in the 2015 World’s Best Rice Contest.

Segment business result is affected by weather condition and market demand forecast.

Loc Troi Seed revenue and gross margin didn’t perform well in FY15-16 because of bad weather condition (Strong El Nino and weak La Nina in Vietnam) and unfavorable forecast for demand of 2016 rice harvest.

Over-production in 2016 led to lower average price and hurt gross margin (FY16 GM of 14.0% compared with FY15’s 28.7% and FY14’s 31.6%).

The average GM of Loc Troi is lower than NSC and SSC because of product structure when OP seeds have lower gross margin than hybrid ones.

Figure 23 FY16 Seed segment's net revenue, gross profit and GM of Loc Troi and listed company

Figure 21 The Revenue Breakdown of the Seed segment (2015)

Source: Loc Troi

Figure 22 Seed segment net revenue, gross profit & gross margin

Source: VNDIRECT

Title:

Source:


28.2%

8.3%

Rice seeds Corn seeds Vegetable and fruit seeds

Title:

Source:


26.3%

31.6%28.7%

14.0%

0%

5%

10%

15%

20%

25%

30%

35%

0

200

400

600

800

1,000

2013 2014 2015 2016

VN

Dbn

Seed Segment net revenue

Seed Segment gross profit

Seed Segment gross margin

Company Report


Source: Company data, VNDIRECT calculation

(*)SSC is a subsidiary of NSC. NSC’s data in the chart is exclude from Separate FS

Aiming to be the market leader

With the vision to provide farmers with the best-quality seeds which are also suitable to the ecological conditions in Vietnam, contributing to the changes of Vietnam’s agriculture towards farming efficiency, Loc Troi Group plans to expand rice and vegetable seed product, aiming to be the market leader in Vietnam seed market.

Beside distribution from foreign partnership to provide high yield product, Loc Troi plans to increase propotion of manufactured products. Loc Troi will seek for strategic partner to expand seed portfolio and could increase market share via M&A activities.

Segment outlook: We estimate net revenue of Seed segment could

grow 10% in 2017 (VND710bn, equivalent to Loc Troi’s plan) as result

of better weather condition in 2017. As the sale bounce back, we

assume that Seed segment’s gross margin could achieve FY13-15

average at 28.9% (doubled FY14’s GM of 14%).

For mid-term outlook, we expect that Seed segment revenue could

growth with FY17-21F CAGR of 15.6%.

Title:

Source:


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

200

400

600

800

1,000

Loc Troi SSC NSC (*) TSC

VN

Dbn


Company Report


3. Agrifood segment– Vision to add more value to Vietnam Rice

products.

Segment’s FY16 net revenue: VND2.241trl (28.8% company’s net revenue)

Segment’s FY16 gross profit: VND77.007bn (3.4% company’s GP)

Major products: Fragrance Rice, White rice, Vibigaba germinated rice

The Agrifood segment of Loc Troi Group was established in 2010 and was strongly invested in 2011, with this the company had completed vertically integrated rice value chain via the large-scale farming model.

Using the large-scale rice farm model, Loc Troi Group aims to be the first company in Vietnam to successfully develop branded rice for both the export and domestic markets, resulting in higher selling price and thus higher profit margin.

a. Market overview

Vietnam is among the top three largest rice exporters in the world.

Figure 24 World's top rice exporter (milled basis)

Source: USDA

In 2016, the total harvested area of rice in Vietnam was 7.9 million ha and the total production was 46.3 million tons rice and 27.6 million tons of milled rice (Source: GSO, BMI). From 2007 to 2016, total production increased at the CAGR of 2.2% while the yield per ha also increased 12% from 5.0 tons/ha to 5.6 tons/ha in the same period.

Figure 25 Harvested area (2007-2016E) Figure 26 Vietnam Rice Production and Yield (2007-2016E)

Source: GSO Source: GSO, VNDIRECT calculation

Vietnam currently cultivates in two main regions: the Red River Delta and the Mekong Delta regions. Due to differences in soil fertility and weather condition, rice produced from the Mekong Delta has higher productivity and better quality. About 55% of rice

Title:

Source:


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

India Thailand Vietnam Pakistan United States Burma

MIllio

n to

n

2014 2015 2016

Title:

Source:


6,800

7,000

7,200

7,400

7,600

7,800

8,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

ha

Title:

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5.0

5.2 5.2 5.3

5.5 5.6 5.6

5.8 5.8

5.6

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

0

10

20

30

40

50

60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

tons/h

aMillio

n t

on

Total Production Yield

The Company is a member of the Sustainable

Rice Platform (SRP), which is a multi-

stakeholder partnership to promote resource

efficiency and sustainability both on-farm and

throughout the rice value chain. Being the

member of such reputable association is the

key to market the Company’s products to high

value export markets.

Company Report


production in Vietnam and 90% of rice exported was grown in Mekong Delta.

Figure 27 Cultivation Schedule of Farmers in the Red River and Mekong Delta Regions

Source: VNDIRECT research

Inefficiency of traditional rice production model:

Small farm size: Currently, the local rice production is very fragmented. About 85% of farming households have less than 0.5 ha of agricultural land per household. Each household holds on average 6-11 plots, which results in low and inconsistent product quality.

High post-harvest loss rate: Vietnam is among the countries that have the highest post-harvest loss rate. The post-harvest lost rate of Vietnam is currently at 13.7%, much higher than that of Thailand (6.1% to 9.1%) and India (6%). High loss rate occurs mostly because of the undeveloped process of drying and stocking.

Low-end outputs: Currently, Vietnam exports rice mostly to low-end markets. The Philippines and China are the two traditional export markets, accounting for more than 50% of the total export volume. Export opportunities to high-end markets such as Japan, The US and EU are still limited. In addition, rice exported from Vietnam is often traded at a lower price than similar types exported from other countries such as Thailand and India.

Figure 29 Comparison of Rice Export Prices from Some Countries (2010 – 2016)

Source: FAO

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Red River Delta

Mekong Delta

Winter-spring

Summer-autumn

The third season

Both summer-autum and the third season

US$/ton,

FOB

Thai White

100% B second

grade

Thai Parboliled

100%

U.S. Long

grain #, 4%

Thai 5% Viet 5% India 25% Thai 25% Viet 25% Thai A1

Super, white

broken

2010 518 532 510 492 416 - 444 387 386

2011 565 563 577 549 505 409 511 467 464

2012 588 594 567 573 432 391 560 397 540

2013 534 530 628 518 391 402 504 363 483

2014 435 435 571 423 410 377 382 377 322

2015 395 392 490 386 353 337 373 334 327

2016 417 421 454 406 357 337 393 340 348

Figure 28 Rice Production by Region

Source: AgroInfo, Ricepedia

Company Report


b. Loc Troi Agrifood segment highlights

Figure 30 The Advantages of Loc Troi's Rice Value Chain

Source: Loc Troi

The Unique model of Farmers’ Friends (or FF engineers)

Farmers in the model are provided with high-quality inputs with the

credit up to 120 days, technical supports from FF engineers (with

c.1,200 engineers), supports with paddy transportation, harvest with

high-tech, free drying and storage. It is estimated that on average,

farmers saved 10% - 20% of the production costs for every kg

produced. After over 5 years of implementation, thousands of farmers’

living conditions have been improved in the Mekong Delta region.

Figure 31 Loc Troi's Large-Scale Rice Farm Model

Company Report


Source: Loc Troi

Figure 32 Development Timeline of Loc Troi's Material Zone and FF Engineer Force (2006 – 2015)

Source: Loc Troi

Develop both domestic and export market. Prospective from Chinese and Philippine markets.

The Company sells its rice to both the domestic and export markets. For the domestic market, it targets both consumers (branded, packaged rice) and B2B (in bulk). For the export markets, it exports directly to wholesalers in several markets like Singapore, Hong Kong. For other export markets, the Company also has plans to reach out to distributors in those markets instead of exporting via international trade houses to achieve a higher margin.

Figure 33 Volume of Loc Troi's Rice by channel (2016 - 2017 Projection)

Figure 34 Breakdown of Loc Troi’s Export Volume of Rice by Destination (2015)

Company Report



China is the largest export market of Loc Troi, accounted for 59% FY15 export volume. In May 2017, Loc Troi has agreed to form two joint ventures with Hunan Yuan’s Science and Technology Development Co Ltd to expand its Chinese market reach. Loc Troi expects the presence of this JV will help curb price manipulation of Vietnamese agriculture commodities to China, as well as further promote the image of the exported products. The demand for import rice is growing in China as the result of concern about heavy metal contamination in domestic rice product.

Loc Troi is also planning to expand Philippine market to capture opportunity when its government allow participation of private and foreign sector in the rice market.

2016 – difficult year for Agrifood segment. FY16 net revenue of Agrifood segment went down 23% to VND2.241trl, the gross margin narrrowing to 3.4% (FY15 GM of 7.8%). Beside the same reasons with Seed segment (Bad weather condition and inefficient forecast), the Agrifood’s sale was affected by difficult of world rice export market. In 2016, Vietnam’s export value of rice product fell by 21% because of slumps in demand of some major markets such as China and the Philippines...

Plan to reduce size of material zone and increase yield.

The decrease in net revenue is forecast to continue in 2017 but GM will improve. In 2017, Loc Troi Loc Troi plans to reduce the size of the material zone by 2/3 size and focus on raising up yield. To fill up the output gap, Loc Troi will buy rice from outside the material area. In order to keep image of quality, Loc Troi branded product inputs will only supplied from owned material zone.

Target high-end market:

Although Vietnam is the world’s 5th largest rice producer and 3rd largest

rice exporter, Vietnam’s rice is still considered a commodity and is

unbranded, thus leading to lower selling price both domestically and

abroad. In many cases, its rice is returned after being exported due to

the high residues of CPC. By closely monitoring production from inputs

to outputs, Loc Troi Group manages a rigid rice production system that

creates premium rice varieties that have: Origin traceability, safe –

controlled chemical residual, healthy, high nutrition, Vietnamese

branded rice.

Loc Troi’s germinated rice, white rice and fragrance rice are all branded of high-quality. The company also has the plan to introduce new product lines such as Vitamin Supply Rice... These new and high-

Title:

Source:

Please fill in the values above to have them entered in your report59%

12%

10%

6%

5%

8%

China Hongkong Phillippines USA Singapore Other market

Figure 35 Loc Troi's Agrifood sale and Vietnam Rice Export Value FY12-16

Source: Loc Troi, GSO

Figure 36 Loc Troi Group's Main Rice Varieties

Source: Loc Troi

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0

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3,000

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2012 2013 2014 2015 20160.0

1.0

2.0

3.0

4.0

VN

Dbn

US

$bn

Loc Troi Agrifood gross sale (VNDbn)

Vietnam Rice Export value (US$bn)

Company Report


end lines are expected to be growth driver for branded products, which is now just contributes small proportion in total production. (estimate volume of branded product in FY16 of over 3,000 tons).

Segment outlook: We estimate net revenue of Agrifood Segment will decrease 15% in 2017 (VND1.904trl) as result of smaller material zone and GM will recover to 7.0% (Compared with FY16’s 3.4% and FY12-15 average level of 7.8%). For mid-term outlook, we expect that Rice segment could return to growth from FY18.

Figure 37 Agrifood Segment net revenue, gross profit & gross margin

Source: Loc Troi

Title:

Source:


7.9% 7.7% 7.8%

3.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 2014 2015 2016

VN

Dbn

Agrifood Segment net revenue

Agrifood Segment gross profit

Agrifood Segment gross margin

Company Report


III. FINANCIAL PERFORMANCE

As the result of the decrease in seed and Agrifood segment, Loc Troi’s revenue decreased from VND8.857tr in FY14 to VND7.783tr in FY16. FY16 gross margin was 20.8% vs. FY14’s GM of 23.2%.

Although FY16 gross profit went down by 6.98% yoy, Loc Troi also succeeded on reducing operation expenses as Financial expense slumped by 27.7% (VND150bn), while sales and general administration expenses decreased by 9.1% and 3.2%, respecitvely.. As the result, the Company recorded positive-number in net profit growth of 8.8% (FY16 net profit of VND347bn), FY16 basic EPS of VND5,167, adjusting EPS after 15% allocating to funds of VND4,392.

Figure 39 Loc Troi's Income - expense Figure 40 Loc Troi's net revenue, net profit and net margin FY13-16


Preferential interest rates for agriculture firms.

By the end of FY16, Loc Troi has total debt of about VND1.979trl (96% was short-term debt), D/E ratio of 0.9x. Most debts of Loc Troi enjoy low interest rate, ranging from 2.0% to 2.3% per annum for debts in USD and 4.5% to 5.6% per annum for debts in VND (exclude the debt of Real Estates Subsidiary – An Giang Real Estate JSC of VND3.5bn and the loans from Loc Troi’s Trade Union of VND190mn with interest rate from 6.5% to 7.0% per annum).

Figure 41 Loc Troi's Debt structure Figure 42 Loc Troi's interest coverage ratio


Title:

Source:


0

500

1,000

1,500

2,000

2,500

2013 2014 2015 2016

VN

Db

n

Other expense General administration expense

Sale expens Financial expense

Other income Financial Income

Gross profit

Title:

Source:


6.73%

5.69%

4.06%4.46%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2013 2014 2015 2016 -

1,000

2,000

3,000

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8,000

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Net revenue Net profit Net margin

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2013 2014 2015 2016 -

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Dbn

Owner's Equity Long-term Debt

Short-term Debt Debt/Equity ratio

Title:

Source:


675 701

425 464

53 80 118 115

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2013 2014 2015 2016 -

100

200

300

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500

600

700

800

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Dbn

Pretax profit Interest expense Interest coverage

Figure 38 Loc Troi's net revenue, gross profit and GM

Source: Loc Troi

Title:

Source:


23.81% 23.19% 22.11%20.76%

0%

5%

10%

15%

20%

25%

30%

2013 2014 2015 2016 -

2,000

4,000

6,000

8,000

10,000

VN

Dbn


Company Report


ROE was hurt in FY15-16 but still at high level. FY16 ROE slumped to 16.0% from FY14’s figure (25.7%), but Loc Troi’s ROE was still at peer-level.

Loc Troi also has stable dividend payment, the company plans to pay FY17 cash dividend of VND3,000/share, equal to FY15-16 payments. For period FY18-21, Loc Troi plan to reduce cash dividend ratio to VND2,000/share to get more funding for new investments.

IV. 2017 FORECAST AND VALUATION

We estimate that FY17 gross revenue of Loc Troi will reach VND8.319 (+3.9%yoy), net revenue of VND8.086trl (+3.9%) with main assumptions as below:

FY17 CPC net revenue of VND5.201trl (+10% yoy) and seed net revenue of VND710bn (+10%yoy) as result of better weather condition in 2017.

FY17 Agrifood net revenue of VND1.904trl (-15% yoy) as the result of smaller material zone.

FY17 packaging and other revenue increase by 10%, record net revenue of VND180bn and VND90bn.

We expect gross margin of both Agrifood and Seed segments will recover after having plummeted in FY16, thus, company’s FY17 gross margin will increase to 23.7%. We forecast FY17’s gross profit of VND1.920bn (+18%yoy), thus, FY17 net profit could reach VND513.2bn (+47.9% yoy), FY17 EPS VND6,495 (adjusted EPS after 15% bonus and welfare allocation).

Compared with other listed companies in agriculture sector, we estimate fair value of Loc Troi at target P/E of 12.0x (lower than peer-average P/E of 14.4x), thus, equivalent to VND77,940/share.

Figure 44 Main ratio of Loc Troi's peers

Source: FiinPro

Sub-sectorMarket cap

(VNDbn)FY16 ROE EPS TTM P/E

SSC Seed 1,651 16.8% 11,750 9.19

NSC Seed 927 10.1% 2,583 24.04

VFG Pesticide 1,250 19.8% 7,617 9.24

PAN Food products 4,278 10.2% 1,841 22.71

HAI Pesticide 447 4.6% 544 7.00

Average 14.44

Median 9.24

Figure 43 ROE of Loc Troi and peers (FY16)

Source: FiinPro, Company data

For FY17, Loc Troi set target net revenue of

VND8.28trl (+6.5%yoy), net profit of VND460bn

(+31.8%yoy).

In FY17, We assume that gross margin of CPC

segment remain at 29.7%, Agrifood’s GM of 7%

(compared with 3.4% in FY16), Seed

segment’s GM of 28.9% (compared with 14.0%

in FY16).

Title:

Source:

16.0% 14.5%

4.6%

16.8% 17.8%

10.1%

0%

10%

20%

Loc Troi CPC HAI NSC SPC SSC

Company Report


Financial Summary

Source: VNDIRECT

Income statements

(VNDbn) 12-15A 12-16A 12-17E

Net revenue 7,856 7,783 8,086

Cost of sales -6,119 -6,167 -6,166

Gen & admin expenses -441 -427 -458

Selling expenses -690 -628 -695

Operating profit 606 561 767

Operating EBITDA 927 828 1,018

Depreciation and amortisation -321 -267 -251

Operating EBIT 606 561 767

Interest income 24 25 26

Financial expense -205 -150 -134

Net other income 0 27 29

Income from associates & JVs 0 0 0

Pre-tax profit 425 464 688

Taxation -105 -115 -172

Minority interests -0 -2 -3

Net profit 319 347 513

Adj. net profit to ordinary 319 347 513

Cash flow statement

(VNDbn) 12-15A 12-16A 12-17E

Pretax profit 425 464 688

Depreciation & amortisation 105 122 99

Other non cash gains/(losses) 101 47 18

Other non operating gains/(losses) 116 97 133

Tax paid -109 -9 -172

Other operating cash flow -82 -114 29

Change in working capital -988 686 105

Cash flow from operations -433 1,294 900

Capex -384 -163 -346

Proceeds from assets sales 7 18 22

Others 4 -12 0

Other non-current assets changes 0 0 0

Cash flow from investing activities -373 -157 -324

New share issuance 91 3 0

Shares buyback 0 0 0

Net borrowings 812 -727 -503

Other financing cash flow 0 0 0

Dividends paid -196 -91 0

Cash flow from financing activities 707 -815 -503

Cash and equivalents at beginning of period 176 190 279

Total cash generated -98 322 73

Cash and equivalents at the end of period 78 513 352

Balance sheets

(VNDbn) 12-15A 12-16A 12-17E

Cash and equivalents 190 279 352

Short term investments 0 25 0

Accounts receivables 1,526 1,733 1,627

Inventories 2,684 2,170 2,261

Other current assets 145 63 83

Total current assets 4,545 4,270 4,323

Fixed assets 1,558 1,563 1,810

Total investments 9 0 0

Other long-term assets 294 326 347

Total assets 6,406 6,159 6,480

Short-term debt 2,325 1,905 1,190

Accounts payable 1,270 1,545 1,712

Other current liabilities 271 407 463

Total current liabilities 3,866 3,857 3,364

Total long-term debt 372 74 301

Other liabilities 64 52 274

Shareholders' equity 2,104 2,176 2,540

Minority interests 0 0 0

Total liabilities & equity 6,406 6,159 6,480

Key ratios

12-15A 12-16A 12-17E

Dupont

Net profit margin 4.1% 4.5% 6.3%

Asset turnover 1.3 1.2 1.3

ROAA 5.3% 5.5% 8.1%

Avg assets/avg equity 2.9 2.9 2.7

ROAE 15.5% 16.2% 21.8%

Efficiency

Days account receivable 67.0 79.6 70.7

Days inventory 160.1 128.8 133.8

Days creditor 75.8 91.7 101.3

Fixed asset turnover 5.5 5.0 4.8

ROIC 6.6% 8.4% 12.7%

Liquidity

Current ratio 1.2 1.1 1.3

Quick ratio 0.5 0.5 0.6

Cash ratio 0.0 0.1 0.1

Cash cycle 151.3 116.7 103.2

Growth rate (yoy)

Revenue growth (11.3%) (0.9%) 3.9%

Operating profit growth (18.0%) (7.4%) 36.6%

Net profit growth (36.7%) 8.8% 47.9%

Share value

EPS (VND) 4,083 4,392 6,495

BVPS (VND) 31,335 32,400 37,818

Company Report


DISCLAIMER

This report has been written and distributed by Research Department, VNDIRECT Securities Corporation. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. Unless otherwise stated, this report is based upon sources that VNDIRECT considers to be reliable. These sources may include but are not limited to data from the stock exchange or market where the subject security is listed, or, where appropriate, any other market. Information on the company(ies) are based on published statements, information disclosure and announcements of the company(ies), and information resulting from our research. VNDIRECT has no responsibility for the accuracy, adequacy or completeness of such information.

All estimates, projections, forecasts and expression of opinions contained in this report reflect the personal views and opinions of the analyst(s) responsible for the production of this report. These opinions may not represent the views and position of VNDIRECT and may change without notice.

This report has been prepared for information purposes only. The information and opinions in this report should not be considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments. VNDIRECT takes no responsibility for any consequences arising from using the content of this report in any form.

This report and all of its content belongs to VINDIRECT. No part of this report may be copied or reproduced in any form or redistributed in whole or in part, for any purpose without the prior written consent of VNDIRECT.

Phương Nguyễn Mai, CFA – Director

Email: [email protected]

Tuấn Nguyễn Thanh – Analyst


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