fpt retail (frt) [buy +43.7%] initiationfrt.vn/wp-content/uploads/2018/04/frt-20180423-buy.pdf ·...

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A proven retailer with a bright growth outlook • We initiate on FRT with a BUY rating, total return of 44%. Attractive 3-yr PEG of 0.7.

• FRT is a proven retailer. Backed by its creative initiatives, FRT’s legacy mobile

segment still boasts a robust outlook, while its entry into pharmacy looks promising.

• NPAT CAGR of 21% for the mobile segment during 2017-2022F driven by resilient

SSSG, expansion in both traditional format and Apple stores and margin improvement.

• We project FRT’s pharmacy will reach a total store count of 208 by YE2022 vs eight at

YE2017, contributing to a total NPAT CAGR of 25% for FRT during 2017-2022F.

• Upside catalysts: (1) mobile SSSG outperforms our expectation on FRT’s consumer

financing and price subsidy programs, (2) pharmacy roll-out outpaces our projections.

• Downside catalysts: (1) excessive bad debt from financing and price subsidy programs,

(2) price competition from e-commerce and (3) stricter drug prescription enforcement.

Why FRT even though we already recommend MWG? Because these two companies

boast distinct growth drivers despite some overlap. Our current thesis on MWG is premised

on its minimart foray and the still fast-growing consumer electronics segment. On the other

hand, we like FRT due to the bright outlook of its mobile segment and pharmacy foray.

While FRT’s continuing expansion will likely undercut MWG’s market share in the mobile

phone segment, the impact should be manageable for MWG.

FRT’s pioneer consumer financing (F.Friends) and price subsidy programs underpin

its mobile segment. F.Friends allows qualified customers to pay in installments at zero

interest. Meanwhile, in the price subsidy program, FRT partners with mobile telcos to

reduce the total price a customer pays for their phone and data. These programs will enable

FRT to acquire market share while improving its margins due to minimal marginal operating

expenses. The downside is that FRT bears risks on receivables.

FPT to accelerate roll-out of Apple Premium Reseller (APR) stores to take up a larger

portion of the Apple pie. FRT owns 12/15 APR stores in Vietnam. This format will benefit

from Apple’s new warranty policy in Vietnam, which disregards unauthorized hand-carry

products. To open APR stores, one must meet Apple’s many rigorous requirements and

FRT has the advantage of having worked with Apple (32% of FRT’s sales) for a long time.

Acquisition of Long Chau an early win for FRT in pharmacy. In January 2017, FRT

acquired Long Chau, which is a prestigious pharmacy brand in HCMC and boasts much

higher sales/store than competitors (an average of USD136,000/store/month or 4x the

second highest competitor). After acquiring know-how from the previous owner, FRT is

building up retail capabilities for the chain and will speed up its roll-out from 2018.

Initiation FPT Retail (FRT) [BUY +43.7%]

Industry: Retailing 2017 2018F 2019F 2020F

Report Date: April 23, 2018 Rev Growth 21.1% 17.1% 22.5% 19.4%

Listing Price: VND125,000 EPS Growth 39.7% 32.6% 26.8% 24.7%

Target Price VND177,700 GPM 13.8% 14.2% 14.5% 14.8%

NPM 2.2% 2.5% 2.6% 2.7%

Upside to TP: +42.1% EV/EBITDA 12.4x 9.9x 8.0x 6.6x

Dividend Yield: +1.6% P/Op CF 28.0x 94.4x 28.1x 18.2x

TSR: +43.7% P/E 17.2x 13.0x 10.3x 8.2x

Market Cap: $220.3mn FRT Peers* VNI Company Overview

Established in 2012, FPT Retail has quickly

become the second-largest mobile phone retailer

in Vietnam with nearly 15% market share in 2017.

To sustain long-term growth, the company has

entered the pharmacy market.

Foreign Room: $38.8mn P/E (ttm) 17.2x 18.0x 19.4x

ADTV30D: NA P/B (curr) 7.6x 2.3x 3.0x

State Ownership: 0.0% Net D/E 40.5% 22.8% N/A

Outstanding Shares: 40.0 mn ROE 44.2% 15.6% 15.1%

Fully Diluted Shares: 40.0 mn ROA 6.8% 3.3% 2.3%

3-yr PEG 0.7 * Domestic and foreign peers using adjusted market multiples.

Dao Nguyen Senior Analyst [email protected] +848 3914 3588 ext. 185 Phap Dang Senior Manager [email protected] +848 3914 3588 ext. 143

http://www.vcsc.com.vn/

mailto:[email protected]

mailto:[email protected]


Contents

A proven retailer with a bright growth outlook .............................................................................. 1

Why FRT despite MWG? .................................................................................................................. 3

FRT’s growth = mobile phone + pharmacy ......................................................................... 3

MWG’s growth = consumer electronics + minimart ............................................................. 3

Company overview........................................................................................................................... 5

Established as an FPT Corp subsidiary, it inherits the brand equity of Vietnam’s largest IT

company ............................................................................................................................. 5

Strong management team: entrepreneurial, pragmatic, execution-focused and detail-

oriented ............................................................................................................................... 6

There is no shame in being a follower ................................................................................ 7

A focus on big-ticket and premium products, especially Apple, is how FRT differentiates

itself .................................................................................................................................... 9

Pharmacy: promising business off to a good start ............................................................ 10

Historical business performance .................................................................................................. 11

Strong top-line growth on the back of aggressive store openings ..................................... 11

Margins are expanding in conjunction with scale .............................................................. 12

F.Friends: FRT’s self-created consumer financing program ............................................. 13

Telco price subsidy: a potential game changer ................................................................. 14

Mobile phone business outlook .................................................................................................... 16

FPT Shop: resilient SSSG and selective store openings .................................................. 16

F.Studio: store expansion to speed up .............................................................................. 17

Online sales should continue to take off ........................................................................... 17

Margins to expand on the back of larger scale and higher contribution from F.Friends and

telco subsidy programs ..................................................................................................... 18

Long Chau pharmacy outlook ....................................................................................................... 19

We opt to be more conservative than management in terms of future store openings at this

early stage ........................................................................................................................ 20

Summary of P&L projections ........................................................................................................ 22

Key investment risks ..................................................................................................................... 24

Bad debt from F.Friends and price subsidy programs ...................................................... 24

Price war from pure e-commerce players ......................................................................... 25

Long Chau – stricter enforcement on drug prescription .................................................... 25

Valuation ......................................................................................................................................... 26

Discounted Cash Flows – Mobile (FPTShop and F.Studio) .............................................. 26

Discounted Cash Flows – Long Chau ............................................................................... 27

Peer comparison ............................................................................................................... 28

Financial Statements ..................................................................................................................... 29

Rating and Valuation Methodology .............................................................................................. 31

Disclaimer ....................................................................................................................................... 32

Contacts .......................................................................................................................................... 33



Why FRT despite MWG?

This is a question that naturally comes up when we make an investment case for FRT given

our bullish stance on MWG. Our view is that FRT and MWG do not have to be mutually

exclusive from an investment perspective because while both companies have made their

names by retailing mobile phones, their future growth will come from different avenues. In

addition, while MWG still undeniably possesses the best management team in Vietnam’s

retailing sector, we believe FRT’s management team should be appreciated more given

the company’s proven track record since its establishment in 2012.

FRT’s growth = mobile phone + pharmacy

In our current projections, mobile phone will be responsible for 78% of FRT’s NPAT

growth between 2017-2022 with the remaining 22% contributed by pharmacy.

In our view, given that MWG (45% market share in 2017) has stopped store expansion for

its mobile chain, FRT (13% market share in 2017) is best positioned to spearhead growth

in this industry on the back of further footprint expansion of its flagship chain (FPT Shop),

the roll-out of APR stores to obtain market share in Apple products and its self-initiated

consumer financing and price subsidy programs to buoy SSSG.

On the other hand, FRT is off to a good start with its pharmacy foray thanks to the

acquisition of Long Chau, a prestigious pharmacy brand in HCMC. Besides the brand, FRT

also attained valuable know-how. FRT has been constructing back-end capabilities for

Long Chau over the last year and as this shapes up, Long Chau’s pace of store expansion

will gradually pick up in the coming years.

MWG’s growth = consumer electronics + minimart

In our current projections, consumer electronics will account for 49% of MWG’s

NPAT growth between 2017-2022 while minimarts will contribute 40%.

The footprint coverage of MWG’s mobile chain (TGDD) has been saturated with nearly

1,100 standalone stores in addition to the mobile phone sections built into every consumer

electronics store (642 of them as of YE2017). Therefore, future growth of this chain will

primarily be derived from organic industry growth.

Under our current projections, MWG’s mobile market share will slide from 45% currently to

40% in 2022 while FRT’s will swell from 13% to 23%. Nevertheless, this is not to say that

TGDD’s sales will decline, as we still project a 5% revenue CAGR during 2017-2022 for

this chain vs a 7%-8% CAGR for the overall mobile phone market, per GFK. In other words,

FRT is going to occupy a larger part of a growing pie thanks to its more aggressive store

expansion and sales initiatives now that TGDD has ceased expanding its store network.

We note that MWG also bought a pharmacy chain itself, namely An Khang (previously

known as Phuc An Khang). Nonetheless, unlike FRT, which has already come to grips with

how its pharmacy format is going to be, MWG will likely undergo two to three years of

experimentation with An Khang before it scales up the chain more aggressively. Therefore,

contribution from pharmacy to MWG will likely be insignificant in the next three to five years.



Figure 1: 2017-2022 NPAT projections for FRT (VNDbn) Figure 2: 2017-2022 NPAT projections for MWG (VNDbn)

Source: VCSC

0

200

400

600

800

1,000

2017 2018 2019 2020 2021 2022

Mobile Pharmacy

-1,000

1,000

3,000

5,000

7,000

2017 2018 2019 2020 2021 2022

Mobile CE Grocery



Company overview

Established as an FPT Corp subsidiary, it inherits the brand equity of

Vietnam’s largest IT company

FRT was founded in 2012 as a subsidiary of FPT Corp (HSX: FPT). FPT owned 85% of

FRT with the remaining stake held by individual investors (likely FPT insiders). FPT is the

leading IT company in Vietnam and the second leading player in fixed-line broadband with

a brand associated with prestige, quality and service. As such, since its inception, FRT,

with its flagship brand FPT Shop, has benefited from FPT’s brand equity.

Figure 3: FPT Shop format

Source: FRT

In December 2017, FPT completed a partial sell-down in FRT. This was in accordance

with FPT’s strategy to focus on its core businesses of Software and Telecom. FPT sold

30% of FRT to Dragon Capital and VinaCapital in August 2017 and followed that with

another 8% stake sale to retail investors in December 2017 to facilitate the listing of FRT

on the Ho Chi Minh Stock Exchange.

Figure 4: FRT’s shareholder structure as of April 6, 2018

Source: FRT’s prospectus

FPT, 47%

Foreign investors,

31%

Insiders, 8%

Others, 13%



Strong management team: entrepreneurial, pragmatic, execution-

focused and detail-oriented

It is easy to think of FRT as a “copycat” of MWG given the company’s strategy of “follow

the leader” since its inception. It is common to see an FPT Shop located nearby MWG’s

stores while FRT has also imitated many of MWG’s pioneer customer services. However,

credit should be given when due. This strategy has proven to be successful, enabling FRT

to shortcut its learning process in a sophisticated sector. FRT quickly became the second

largest mobile phone retailer, surpassing other players with longer tenures, such as Vien

Thong A and Viettel Store.

And FRT has shown itself to be more than just a copycat by pioneering in creative financing

and price subsidy packages to acquire customers, which we will detail later on page 14. In

addition, FRT made a valuable acquisition to enter the fragmented pharmacy market, which

took place about one year earlier than MWG’s own transaction in this space.

FRT is led by CEO Ms. Nguyen Bach Diep and Deputy CEO Ms. Trinh Hoa Giang, who

have been with the company since its establishment. In 2016, FRT welcomed Mr. Nguyen

Viet Anh, who heads the company’s business development strategies.

Figure 5: FRT’s key personnel

Name/Title Background

Ms. Nguyen Bach

Diep

Chairwoman cum

CEO

- 07/2013 - now: CEO of FPT Retail.

- 05/2012 - 06/2013: Deputy CEO of FPT Retail.

- 05/2010 - 12/2010: Project Manager of Alfa Mart parnership – FPT Trading.

- 10/2008 - 04/2010: Head of FPT Telecom, Southern branch.

- 09/2003 - 09/2005: Deputy Head of FPT Mobile Technology Company

Limited, HCMC.

- 05/2003 - 08/2003: Director of FIS BANK HCM Center.

- 05/1995: Joined FPT as a Sales Officer at FPT HCMC Branch.

Ms. Trinh Hoa

Giang

BOD member

cum Deputy CEO

- 2012-present: Deputy CEO cum Board member of FPT Retail.

- 2007-2011: Head of Sales cum Deputy CEO of FPT Retail.

- Joined FPT in 2003, in charge of FPT Mobile showroom network.

- 2001-2003: Head of HR, VKO Shopping Center.

Mr. Nguyen Viet

Anh

Deputy CEO

- Joined FRT in March 2016, in charge of merchandizing, marketing and

business development strategies.

- 2014-2015: Head of Sales – Apple South Asia Pte Ltd.

- 2010-2011: Head of Finance and Head of Sales – Nokia.

- 2009-2010: Head of Supply Chain – L’OREAL Group.

- 2004-2008: P&G Vietnam, undertook various roles including Finance

Director, Business Development Director, Director of Financial Analysis (Asia).

Source: FPT, FRT



There is no shame in being a follower

FRT is the youngest company among the leading mobile phone retailers in Vietnam,

which include Vien Thong A (established in 1997), MWG (2004) and Viettel Store (2006).

Recognizing MWG’s undefeatable power but knowing the market had room for more than

one player, FRT has pursued a strategy of mirroring MWG, particularly in terms of customer

services and store locations. At the same time, it has concentrated on building up back-

end capabilities, including IT, internal management systems and human resources.

Second largest store network in Vietnam... FRT operated 473 stores as of YE2017. This

trails MWG’s 1,072 standalone mobile stores and 642 consumer electronics stores (each

of which contains a separate section for selling mobile phones), but is well ahead of other

competitors such as Viettel and Vien Thong A. Furthermore, our observation suggests that

FRT’s store traffic only trails that of MWG and is far superior than the other two retailers.

…which doubles up as delivery hubs for online sales. In 2017, FRT’s online sales

surged by 120% to USD89mn, representing 15% of total sales. This is compared to

USD250mn and 9% at MWG. Similar to MWG, by using physical stores as shipping points,

FRT can offer one-hour delivery for customers located within 10 km of its stores across

Vietnam. Meanwhile, Viettel and Vien Thong A can only commit to one-hour delivery in

HCMC and Hanoi.

Figure 6: Standalone store count of leading mobile phone retailers in Vietnam

Source: VCSC compilations (store count as of YE2017)

1,072

473

336

209

Thegioididong FRT Viettel Vien Thong A



Figure 7: Market share structure of mobile phone retail market in 2013 vs 2017

Source: VCSC estimates

Customer centric. From H2 2015 to 2016, FRT launched an employee training program

called ““We” love FPT Shop”, carried out directly by the CEO and the training director

across its store network with the purpose of standardizing and upgrading its customer

services. As part of this program, the company incorporated customer satisfaction as a

critical KPI for the sales force in addition to revenue. Sales staff were trained in skills such

as how to greet customers and serve them while they are in the store. In addition, FRT

introduced a 30-day product return policy in which customers can exchange a faulty product

for a new one within 30 days of their purchase, while also extending warranty periods. As

a result of this program, FRT’s brand awareness, customer satisfaction and loyalty all

displayed marked improvement.

MWG, 19%

FRT, 6%

Other retail

chains, 26%

Mom-and-pop,

50%

2013

MWG, 45%

FRT, 13%

Other retail

chains, 32%

Mom-and-pop, 10%

2017



A focus on big-ticket and premium products, especially Apple, is how

FRT differentiates itself

Figure 8: FRT’s sales by product ASP in comparison to others (2017)

Source: FRT

Apple accounts for 32% of FRT’s revenue vs ~15% for MWG. Besides FPT Shop, FRT

has obtained authorization for all three levels of Apple concepts: AAR (Apple Authorized

Reseller), APR (Apple Premium Reseller) and iCorner. AAR and APR stores only sell Apple

products and strictly follow Apple’s standards in terms of design and staff training. As of

YE2017, FRT operates 12 Apple APR stores (under the F.Studio brand).

Figure 9: FRT’s different Apple concepts

APR AAR iCorner

Source: FRT

Laptops and tablets constitute 12% of FRT’s revenue vs 5% of MWG. According to

GFK, FRT’s average market share for laptops in H1 2017 was around 23% in terms of

value, well above the combined market share of MWG, Vien Thong A and Viettel of 18%.

While laptops and tablets bolster the average ticket size of FRT, the flip side is this category

is growing very sluggishly.

60%

38%

FRT Others

< USD440

> USD440



Figure 10: FRT’s 2017 revenue by category

Source: FRT

Pharmacy: promising business off to a good start

In January 2017, on behalf of FRT, CEO Nguyen Bach Diep purchased 100% of Long

Chau, a renowned pharmacy brand in HCMC. FRT plans to consolidate Long Chau in

H2 2018 or 2019 once it finishes formalizing Long Chau’s back-end operations, such as

supply chain, paperwork, inventory management and IT infrastructure. So far, apart from

know-how transfer, FRT has focused on developing software for Long Chau to better

manage inventories, credit and sales commissions as well as tools to support the sales

staff. For example, FRT is building an app that its sales staff can use to search information

about various drugs so they can consult customers more effectively.

New stores are generating encouraging sales levels backed by Long Chau’s brand

name. At the time of FRT’s acquisition, Long Chau was running five stores, all of them

located on Hai Ba Trung Street, District 3, and generating around USD132,000 in monthly

sales/store. Since then, FRT has opened four new Long Chau stores in other districts,

which are displaying positive sales progress and approaching the level of the legacy stores.

Currently, 60% of Long Chau sales come from western drugs. The remaining 40% are

derived from vitamin supplements, beauty products and medical equipment.

Long Chau sources 60% of its products directly from the manufacturers and the rest

from wholesalers.

Figure 11: Long Chau Pharmacy

Source: FRT

Apple, 32%

Mobile phones excl iPhone, 43%

Laptops and tablets excl Ipad, 12%

Accessories, 10%

Others, 3%



Historical business performance

Strong top-line growth on the back of aggressive store openings

From only 50 stores back in 2012, FRT reached 473 stores by YE2017, implying a pace of

85 new stores/year compared to 140 by MWG during the same period.

Figure 12: FRT’s historical store count

Source: FRT

Figure 13: FRT’s historical revenue (VND bn)

Source: FRT

50

473

0

100

200

300

400

500

2012 2013 2014 2015 2016 2017

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2012 2013 2014 2015 2016 2017



Margins are expanding in conjunction with scale

FRT’s margins have been strengthening consistently since 2012 as a growing scale

bolsters its bargaining power with vendors. Margins have also been ratcheting up on the

back of better store efficiency and expense rationalization.

Figure 14: FRT’s historical NPAT (VND bn) and NPAT margin

Source: FRT, VCSC

We see more room for margin expansion as FRT’s scale and store efficiency

continue to improve. Compared to MWG’s mobile chain, whose NPAT margin is around

4.5% currently, FRT’s NPAT margin is still far behind. We attribute this sizeable difference

to (1) product mix: Apple products, which account for a bigger part of FRT’s revenue,

typically yield a thinner GPM (10%-11%) than other brands; (2) MWG’s back-end costs are

shared by its mobile and CE chains; and (3) scale, i.e., bargaining power against vendors.

While the first and second factors are unlikely to change, we believe FRT can enhance its

same-store sales, which, coupled with new store openings, will bolster FRT’s scale and

enable it to negotiate for better terms with vendors.

-35 -32

41

146208

290

-2.9%

-1.1%

0.8%

1.8% 1.9%2.2%

2012 2013 2014 2015 2016 2017

NPAT NPM



F.Friends: FRT’s self-created consumer financing program

FRT, MWG and other brands offer traditional consumer finance packages in their stores.

In addition, FRT has developed the F.Friends as a more cost-competitive option.

Figure 15: Comparison between F.Friends and other consumer financing options

Bank loan Traditional consumer

finance Credit cards F.Friends

Interest rates 9-11% 30% 0-30% 0%

Down payment 0 40-60% 0 0

Applicable periods All year All year Seasonally All year

Applicable products All products Minimum value of

USD132

Minimum value of

USD132

Minimum value of

USD44

Eligible for use with other

promotions (except flash

sales, stock clearance)

Yes Yes No Yes

Source: FRT

F.Friends contributed 4.5% to FRT’s revenue in 2017 and management targets to

nudge this up to 15% in the next five years. FRT started piloting F.Friends in October

2016 and officially launched the program in January 2017.

How F.Friends works

• FRT approaches Vietnamese companies and makes them members of the

F.Friends program.

• Current membership base: 2,000 companies with 650,000 members.

• Qualified employees (see more below) can buy products from FRT and pay in

monthly installments over six months at zero interest.

• Monthly installments are taken directly from the employees’ payroll bank account

via a platform developed between FRT and its partner banks.

How FRT controls credit risks

• Only employees with (1) at least eight months of tenure and (2) a salary paid via

bank transfer qualify for the program.

• Loan amounts range from 1.5x-2x the employee’s monthly salary, depending on

how long they have been with their company.

• Because payments are deducted directly from an employee’s monthly salary

account, the employee can only default on the loan if he quits his job.

• For Samsung phones (largest market share in Vietnam), if FRT does not receive

the payments in due course, the phones will be remotely shut down (rendering

them unusable) via a program (software) embedded inside the phone’s chip, which

is co-developed by FRT and Samsung. FRT expects to implement a similar

software with Oppo (third biggest market share in Vietnam behind Samsung and

Apple) later in 2018.

Figure 16: F.Friends process

Source: FRT

Approach the companies

Member registration

Credit limit approval

Money collection via

debitting employee's

monthly salary account



The economics of F.Friends

Per FRT, major expenses (as a percentage of sales value) for F.Friends include:

• 2% for bad debt provisions. Up to now, actual bad debt has been <1%, per FRT;

• 3% for interest expenses, assuming the company will finance the loans with 100%

bank borrowings at 6% interest rate/year and will pay them back after six months;

• 1% for other expenses, e.g., expenses for acquiring members.

Given a GPM of around 14%, the EBIT margin of F.Friends could amount to approximately

8%. Since F.Friends transactions take place at FRT’s existing stores (qualified customers

will bring necessary documents to the stores), F.Friends will improve FRT’s EBIT margin

as it generates incremental traffic and sales without requiring additional store-related costs,

such as rent and staff expenses.

Telco price subsidy: a potential game changer

In November 2017, FRT began to roll out a new program where it sells phones at a discount

to customers who subscribe to telephone data packages.

How it works

• FRT partners up with telcos, who will subsidize phone prices for FRT customers.

In exchange, the phone buyers will subscribe to a 12-month data package provided

by the telcos.

• In our observation, the subsidy amount ranges from 7%-58% of the phone price,

depending on the models and data packages. No data has been provided on the

actual average subsidy across all models up to now.

• For consumers, it means that they will get the phone and the data package for a

lower bundle price compared to buying each separately.

• For FRT, it will first receive the down payment. After that, every month, FRT will

receive the monthly payment from the telcos after the latter has received data

subscription payments from the customers. This will take place over 12 months.

Figure 17: Barriers and opportunities for telco subsidy program

Barriers Opportunities

Low ARPU: USD5-6/month

4G LTE was rolled out in October 2016

Higher data consumption higher demand for

buffet carrier packages

Prepaid subscribers: 95% Mobile number portability Intense competition

between telcos to retain customers

Vietnamese telcos do not own strong retail

networks and expertise Mobile phones sold without carrier subsidy: 99%

No centralized system for personal credit

history

Risk of bad debt

Source: FRT



How FRT controls credit risks

• Compared to F.Friends, in which only employees of member companies can

participate, this price subsidy program is open to everyone. As such, to manage

credit risks, only Samsung phones are eligible for this program at the moment. If a

customer does not pay in due course, FRT will remotely shut down his phone. As

FRT develops more embedded programs with other vendors, such as Oppo, more

products will become eligible for this program.

• FRT buys trade receivables insurance. Per FRT, as of now, insurance covers 100%

of FRT’s receivables, unless in the case of late customer payments, FRT’s

embedded program does not function properly.

Figure 18: Illustration of the price subsidy package for Samsung Note 8

Source: VCSC

In November 2017, FRT and Vietnamobile (No.4 mobile telco company in Vietnam)

started a pilot program with the Samsung Note 8 model. Vietnamobile subsidizes

VND9mn (USD396) of a total phone price of VND22.5mn (USD990). In return, the phone

buyers subscribe to a 12-month data package that costs USD44/month.

Mobifone (No.3 mobile telco) joined forces with FRT in early 2018. This is a positive

development given Mobifone’s much larger market share of 16% in 2016 vs Vietnamobile’s

2% in 2016, according to the Ministry of Information and Communication.

Currently, about a dozen Samsung models are available for this program, including

Galaxy S9 | S9+ | Galaxy Note 8 | Galaxy S8 | Galaxy S8+ | Galaxy A8 2018 | Galaxy A8

Plus 2018 | Galaxy J7 Pro | Galaxy J7+| Galaxy J3 Pro | Galaxy J2 Pro 2018, whose retail

prices range from USD150 to USD1,035.

With Apple unlikely to be keen on the software interference, this program will likely

only cover Android phones. Currently, outside of Samsung, FRT is working on this

Customer

Samsung FRT

Upfront:

USD595, or

USD99/month over

six months USD33/month

12-month package: FPT990

USD44/month

Premium Pays for

bad debt

Telcos

Insurance company



technology with Oppo. Apple will likely stay away due to its stringent security and privacy

control.

FRT has high expectations for this program. Management said that if the program

continues to yield positive results, i.e., a low default rate, the company will ramp this

program up to at least 15% of total revenue in the next five years compared to 5% since

the program was launched. In 2018, FRT will work on on-boarding the remaining telcos,

namely Viettel (58% market share) and Vinafone (24%).

The economics of the price subsidy program

Per FRT, major expenses (as a percentage of sales value) for this program include:

• 2-3% of bad debt expenses, inclusive of insurance premiums. So far, actual bad

debt has been around 1%, per FRT;

• 3% for interest expenses, assuming an average down-payment ratio of 50% and

FRT will finance the receivable amount with bank borrowings at a 6% interest

rate/year and pay them back after 12 months.

• 1% for other expenses.

As such, EBIT margin of this program should be similar to F.Friends and it can enhance

FRT’s EBIT margin the same way F.Friends does.

Mobile phone business outlook

FPT Shop: resilient SSSG and selective store openings

The mobile phone market in Vietnam is expected to grow 7%-8% per annum over the

next five years, driven mainly by ASP as Vietnam enters a replacement cycle. This is

slower than the 22% CAGR during 2013-2017, which was fueled by a surge in smartphone

penetration. According to Nielsen, smartphone penetration in key cities jumped to 84% in

2017 vs 30% in 2012 and 52% in 2014. Meanwhile, smartphone penetration in rural areas

currently stands at 68%.

We project a total store count of 555 by YE2020 for FPT Shop vs 473 as of YE2017

as FRT pursues a “piggyback” strategy. Specifically, we pencil in 50 new stores in 2018,

20 in 2019 and another 10 in 2020. FRT’s store count is less than half of MWG’s standalone

mobile stores. If we count MWG’s consumer electronic stores (642 of them as of YE2017),

which dedicate a separate section for selling mobile phones, then FRT’s store count is just

about one-fourth of MWG. As such, there is still room for FRT to widen its FPT Shop’s

footprint. Having said that, given the aforementioned decelerating growth of the overall

market, FRT will be selective in terms of location. The company will only open stores where

its competitors are generating around VND3bn (USD132,000) in sales/store/month.

F.Friends and price subsidy programs will buoy SSSG despite closer store proximity

and cannibalization from online sales. Thanks to F.Friends and the telco subsidy

program, we project 11% SSSG in 2018 for FPT Shop, which will taper down to 4%-5% in

2019-2022, compared to flat SSS without these programs in our projections. Our

assumptions are relatively conservative compared to management’s targets as we only

project a combined 16% revenue contribution from these two programs in 2022, up from

6%-7% in 2017, but well below management’s target of at least 30%.



F.Studio: store expansion to speed up

Hand-carried, unauthorized Apple products remain prominent in Vietnam. These

products are VAT-free and hence sold at a discount vs authorized products sold by retailers

such as MWG and FRT. Thus, we estimate that currently, MWG and FRT occupy only 44%

of the Apple category in Vietnam, compared to 65% in other brands.

Apple’s new warranty policy is a boon to authorized sellers. In January 2018, Apple

changed its guarantee allowance. Now, it only accepts authorized products with proof of

purchase, i.e., a receipt. Thus, unauthorized hand-carried products, which typically only

have one receipt for a whole batch, will not qualify. Apple did this to not only create a more

level playing field for the authorized retailers such as MWG and FRT, but also to project its

brand image and retail price stability.

FRT should be the top beneficiary from this shift given Apple’s substantial

contribution to its revenue. Apple accounted for 32% of FRT’s revenue in 2017.

Against this backdrop, FRT looks to speed up the roll-out of F.Studio. Management

is targeting to reach a total store count of 102 for F.Studio by YE2020 compared to 12 as

of YE2017. Our assumptions are slightly more conservative, as we currently pencil in 20

new stores in 2018 and 30 per annum in 2019 and 2020. Underpinned by F.Studio’s fast-

track expansion, we project FRT will increase its market share in Apple to over 30% in the

next five years from ~15% currently.

F.Studio’s same-store sales (SSS) typically start low and then pick up quickly.

According to FRT, FRT’s revenue/store tends to be low in the first year at around

USD88,000/month. Nonetheless, annual SSSG after the first year can range from 15%-

20%. This is because F.Studio customers tend to be very loyal and so they will not only

come back but also recommend the service to their friends and relatives.

Figure 19: Estimated market share in Apple products (2017 vs 2022)

Source: VCSC

Online sales should continue to take off

We are projecting a 29% CAGR for FRT’s online sales in the next five years due to the

widening popularity of online shopping among Vietnamese consumers and FPT continuing

to utilize its physical store network to provide an omni-channel experience for customers.

In 2022, online sales will constitute 30% of FRT’s revenue based on our projections,

compared to 15% in 2017.

44%

56%

2017

55%

45%

2022

MWG and FRT

Mom-and-pop andother small chains



Figure 20: VCSC’s revenue forecasts for FRT’s mobile phone business

Source: VCSC forecasts

Margins to expand on the back of larger scale and higher contribution

from F.Friends and telco subsidy programs

GPM is boosted by a larger scale, but is partly reined in by a widening contribution

from F.Studio. Per FRT, iPhone sales only yield a GPM of 10%-11% compared to an

average of ~15% for other brands. Due to F.Studio’s rising contribution to revenue, the

upward trend in FRT’s GPM will start to phase out starting from 2022, per our projections.

Net margin to be further aided by increasing contributions from F.Friends and telco

subsidy programs. As we explained above, additional sales from these programs will prop

up margins of FRT’s mobile segment. We currently assume that the combined contribution

from F.Friends and telco subsidy programs will balloon to 15.6% of mobile revenue in the

next five years compared to 6%-7% in 2017. Again, this is more conservative than

management’s target of at least 30%.

Figure 21: VCSC’s margin projections for FRT’s mobile segment

Source: VCSC

13.8%14.2%

14.4% 14.5% 14.5% 14.5%

2.8%3.0% 3.2% 3.3% 3.4% 3.4%

2.2%2.5% 2.6% 2.8% 2.9% 3.0%

0%

1%

2%

3%

4%

5%

6%

10%

11%

12%

13%

14%

15%

2017 2018 2019 2020 2021 2022

GPM (LHS) EBIT margin (RHS) NPM (RHS)

Same store sales (excl. F.Friends

and subsidy)

F.Friends and telco subsidy

Online sales

F.Studio

New stores

-

5,000

10,000

15,000

20,000

25,000

2017 2018 2019 2020 2021 2022



Long Chau pharmacy outlook

Extensive growth headroom as Vietnam’s pharmacy market remains dominated by

mom-and-pop stores. Vietnam’s pharma sector boasts a market size of USD4.7bn in

2017, according to BMI, in which pharmacies account for one-third of the market. There

are over 40,000 pharmacies in Vietnam, but only less than 250 are owned by modern

chains. The largest chain by store count, Pharmacity, only has 100 stores currently.

Long Chau boasts superior sales/store thanks to its prestigious brand and an

extensive range of SKUs. According to FRT, Long Chau’s average monthly sales per

store are USD136,000 currently, head and shoulders above other chains (see Figure 22).

This is owing to:

• Long Chau is a top-of-mind brand when it comes to prescription drugs.

• Long Chau’s extensive product assortment, which consists of more than 5,000

SKUs, 5x-6x larger than its closest competitor. This makes Long Chau a one-stop

shop for customers as most of the time, they can find everything they need for their

prescription at Long Chau instead of having to go to different stores.

• Experienced pharmacists (>10 years of experience on average), who will stay with

Long Chau post-FRT’s acquisition. These senior pharmacists will play an important

role in training new staff as FRT expands its store network.

Figure 22: Revenue/store of Long Chau vs other pharmacy chains (USD ’000/month)

Source: FRT

New stores are surprisingly displaying similar sales progress as legacy stores. As

mentioned above, prior to FRT’s acquisition, all five of Long Chau’s stores were located on

the same Hai Ba Trung street in District 3. Since taking over Long Chau, FRT has opened

another four stores in District 7, District 3, Go Vap District and Tan Binh District. Per FRT,

sales at these stores ranged from USD66,000 to USD88,000/month/store in the first one to

two months and then gradually ramped up to USD154,000-USD198,000 after four to six

months, which is very impressive. When launching a new store, in its marketing and

promotion campaigns, FRT uses a headline of “Long Chau is now present in District X” to

leverage Long Chau’s brand name.

1118

2532

136

Pharmacity Phano Eco Pharma An Khang (MWG) Long Chau



Figure 23: Long Chau draws strong traffic thanks to its prestige and extensive SKUs

Source: VCSC

We opt to be more conservative than management in terms of future

store openings at this early stage

We project 25 new stores per annum for 2018-2019 and 50 stores per annum during

2020-2027. Before further accelerating the pace of store roll-outs, Long Chau will need to

fine tune its back-end capabilities, strengthen its understanding of locations, i.e., which

types of locations work best, as well as prepare human resources, i.e., the pharmacist pool.

Compared to mobile phones, pharmacies are a more challenging format due to (1) its

broader range of SKUs, (2) product expiry, (3) the need for capable pharmacists who can

reliably consult customers and also have good sales skills and (4) a wide variety of

suppliers.

Management’s aggressive plan. Management is targeting a total of 390 stores by

YE2021 compared to our projection of 158. As such, there is material upside to our

forecasts if FRT can deliver on its pharmacy game plan.



Figure 24: Long Chau’s new store opening projections (FRT vs VCSC)

Source: FRT, VCSC

We project Long Chau will contribute 18% and 15% to FRT’s revenue and NPAT,

respectively, in 2022. We assume that the chain will be consolidated in 2019. For new

stores, we pencil in VND2bn (USD88,000) in sales/month in the first year, which will grow

at an annual rate of 10%-15% in the following five years. In 2018-2019, we conservatively

pencil in an NPAT margin of 2% for Long Chau as we assume GPM improvement, which

will be driven by a larger scale, will be partly offset by FRT’s back-end investments as well

as spending on marketing and promotions. NPAT margin is then projected to step up

gradually to 2.4% in 2022 as a result of cost rationalization and continuing scale expansion.

Figure 25: Margin projections for Long Chau during 2018-2022

Source: VCSC

30

80120

150

390

25 2550 50

158

2018 2019 2020 2021 Total store countas of YE2021F

FRT's guidance VCSC's projection

16.5% 16.5%17.0% 17.2% 17.4%

2.5% 2.5%2.7%

2.9% 3.0%

2.0% 2.0%2.2%

2.3% 2.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2018 2019 2020 2021 2022

GPM (LHS) EBIT margin (RHS) NPM (RHS)



Summary of P&L projections

Figure 26: VCSC’s base-case projections for FRT

VND bn 2018 2019 2020 2021 2022 2017-2022

CAGR

Revenue 15,397 18,854 22,507 26,591 30,543 18%

YoY 17% 22% 19% 18% 15%

In which:

FPTShop 14,725 16,131 17,739 19,326 20,749

F.Studio 672 1,368 2,347 3,342 4,219

Long Chau 0 1,355 2,421 3,923 5,575

Gross

profit 2,184 2,739 3,323 3,970 4,579 20%

YoY 20% 25% 21% 19% 15%

In which:

FPTShop 2,110 2,365 2,653 2,928 3,145

F.Studio 74 150 258 368 464

Long Chau 0 224 412 675 970

EBIT 467 595 731 888 1,019 23%

YoY 29% 27% 23% 21% 15%

In which:

FPTShop 462 562 659 747 791

F.Studio 6 0 7 28 60

Long Chau 0 34 65 114 167

NPAT 384 487 608 754 890 25%

YoY 33% 27% 25% 24% 18%

In which:

FPTShop

& F.Studio 384 460 555 663 756

Long Chau 0 27 52 91 134

GPM 14.2% 14.5% 14.8% 14.9% 15.0%

NPM 2.5% 2.6% 2.7% 2.8% 2.9%

Source: VCSC



We provide below an alternative projection, in which we incorporate FRT’s

aforementioned guidance for Long Chau store expansion instead of using our own

assumptions. The number of new stores in 2022 is assumed to be 150, similar to FRT’s

2021 plan.

Figure 27: Projections for FRT if management’s plan for Long Chau is incorporated

VND bn 2018 2019 2020 2021 2022 2017-2022

CAGR

Revenue 15,397 19,652 24,951 31,403 38,356 24%

YoY 17% 28% 27% 26% 22%

In which:

FPTShop 14,725 16,131 17,739 19,326 20,749

F.Studio 672 1,368 2,347 3,342 4,219

Long Chau 0 2,153 4,864 8,735 13,388

Gross

profit 2,184 2,871 3,738 4,798 5,938 27%

YoY 20% 31% 30% 28% 24%

In which:

FPTShop 2,110 2,365 2,653 2,928 3,145

F.Studio 74 150 258 368 464

Long Chau 0 355 827 1,502 2,330

EBIT 467 615 797 1,028 1,253 28%

YoY 29% 32% 30% 29% 22%

In which:

FPTShop 462 562 659 747 791

F.Studio 6 0 7 28 60

Long Chau 0 54 131 253 402

NPAT 384 503 662 870 1,089 30%

YoY 33% 31% 31% 31% 25%

In which:

FPTShop

& F.Studio 384 460 557 668 768

Long Chau 0 43 105 203 321

GPM 14.2% 14.6% 15.0% 15.3% 15.5%

NPM 2.5% 2.6% 2.7% 2.8% 2.8%

Source: VCSC



Key investment risks

Bad debt from F.Friends and price subsidy programs

The following situations could undermine FRT’s NPAT:

- Runaway bad debt in F.Friends.

- Increases in insurance fees in the price subsidy program if the default rate proves

higher than the expectations of insurance providers. Non-life insurance contracts

are typically renewed on a yearly basis.

We currently factor in 3% bad debt in 2018 for these two programs, which will gradually

increase to 4% in 2022 as FRT intensifies its roll-out. These assumptions are higher than

FRT’s 2% guidance.

However, we believe this risk will be under control and our bad-debt assumptions

are highly conservative. We understand that for traditional consumer finance players

such as FE Credit, Home Credit and HDSaison, NPLs in consumer durable loans are below

5%. Given FRT’s much stricter approval process and protection mechanism, we think it is

reasonable to expect that NPLs in F.Friends and price subsidy programs will be much lower

than 5%.

Figure 28: VCSC’s base-case projections for F.Friends and price subsidy programs

Base case 2018 2019 2020 2021 2022

F.Friends + price subsidy as %

of FRT’s total revenue 11.8% 13.5% 14.1% 15.0% 15.6%

Bad debt/revenue for F.Friends

and price subsidy 3.0% 3.2% 3.5% 3.8% 4.0%

FRT’s total NPAT (VND bn) 384 487 608 754 890

Source: VCSC

Figure 29: Scenario analysis

FRT’s assumptions 2018 2019 2020 2021 2022




% vs base case 104% 105% 106% 107% 108%

2018 2019 2020 2021 2022




% vs base case 92% 92% 92% 92% 92%

2018 2019 2020 2021 2022




% vs base case 73% 72% 72% 72% 72%

Source: VCSC



Price war from pure e-commerce players

E-commerce players have been aggressively undercutting on prices to chase GMV

(Gross Merchandize Value). Most notable are Lazada and Tiki, as demonstrated in Figure

30 below, whose offerings are very attractive to price-sensitive consumers.

Figure 30: Selling price (VND) comparison between Lazada, Tiki, MWG and FRT

Model Lazada Tiki MWG and FRT

iPhone X (64GB) 25,790,000 25,890,000 29,990,900

Samsung Galaxy S9+ 23,490,000 19,490,000 23,490,000

Samsung Galaxy A8+ 11,528,000 12,990,000 13,490,000

Samsung Galaxy S8 15,800,000 14,890,000 15,990,000

Source: VCSC compilations

MWG and FRT hold the advantage in terms of customer trust, services and delivery.

As we mentioned above, MWG and FRT’s extensive store network allows them to provide

quick delivery even in rural areas and seamless omni-channel experiences for customers,

something that pure e-commerce players cannot offer.

Figure 31: MWG and FRT offer the most attractive after-sales policies

Return/Exchange

policy Lazada Tiki MWG and FRT

Faulty products Seven-day

exchange

Seven-day

exchange;

after seven-30 days,

send to warranty

service

* First month: free exchange

or 80% refund.

*Second month onward:

percentage of refund

declines five ppts after each

month past

e.g. Refund 75% in second

month, 70% in third month…

Non-faulty

products No exchange/return

30-day return, if the

product remains

unused

* First month: free exchange

or 80% refund

*Second month onward:

percentage of refund

declines five ppts after each

month past

e.g. Refund 75% in month

two, 70% in month three…

Source: VCSC compilations

Long Chau – stricter enforcement on drug prescription

A more stringent enforcement of prescription drug usage could hurt pharmacies. In

2016, the Ministry of Health issued Circular 05/2016/TT-BYT regulating drug prescription

in outpatient treatment. Under the Circular and its listed regulations, pharmaceutical

retailers are not allowed to sell medicines outside of the “non-prescription” drug list without

prescriptions from doctors. Having said that, up to now, enforcement has been rather loose

as it is challenging to manage all >40,000 POS across Vietnam, especially those in remote

areas. Consequently, it remains ubiquitous for pharmacies to sell drugs without

prescriptions in Vietnam. A tightening in enforcement, if it happens, will dampen pharmacy

sales.



Valuation

We adopt a Sum-of-the-Parts (SoTP) valuation for FRT, which includes a

combination of:

(1) An average of five-year DCF and adjusted-PER methods for the mobile segment; and

(2) A ten-year DCF for Long Chau with a 25% cost of equity given the high uncertainty of

our forecasts at this juncture. This will be phased out in the future as visibility of the progress

of the chain improves.

Adopting management’s store opening guidance for Long Chau, our TP would be

9% higher. If we incorporate management’s store expansion plan for Long Chau from 2018

to 2022 and keep the pace of new store openings at 100 stores per annum from 2023-

2027, our Long Chau’s valuation would jump by 131% vs our base case, adding an

additional VND15,700/share to our TP for FRT.

Figure 32: Valuation summary

Method Weighting

Equity

value

(VNDbn)

Target

price

(VND)

Contribution

(VND/sh)

FPTShop and F.Studio

DCF 50% 8,297 207,428 103,714

TTM PER @

18x* 50% 5,061 126,513 63,257

Long Chau DCF 100% 428 10,704 10,704

Target Price 177,700

2017 PER at TP 25.3x

2018F PER at TP 19.1x

Source: VCSC, *domestic and regional peer median

Discounted Cash Flows – Mobile (FPTShop and F.Studio)

Figure 33: DCF Valuation

Cost of Capital FCFF (Five Year)

Beta 0.8 PV of Free Cash Flows 1,546

Market Risk Premium % 8.0 PV of Terminal Val (2.5% g) 7,286

Risk Free Rate % 3.2 PV of FCF and TV 8,832

Cost of Equity % 9.6 + Cash & ST investments 638

Cost of Debt % 6.0 - Debt -1,173

Debt % 25.1 - Minority Interest 0

Equity % 74.9 Equity Value 8,297

Corporate Tax Rate % 20.0 Shares (mn) 40

WACC % 8.4 Price per share, VND 207,428



Figure 34: DCF

FY18 FY19 FY20 FY21 FY22

EBIT 539 638 761 893 993

- Tax -110 -130 -155 -182 -203

+ Depreciation 90 88 78 55 40

- Capex -73 -53 -43 -18 -13

- Working cap increase -332 -220 -207 -220 -214

Free Cash Flow 113 322 433 528 603

Present Value of FCF 106 280 350 395 416

Cumulative PV of FCF 106 386 735 1,130 1,546

Source: VCSC

Discounted Cash Flows – Long Chau

Figure 35: DCF Valuation

Cost of Capital FCFF (Five Year)

Beta NA PV of Free Cash Flow 69

Market Risk Premium % NA PV of Terminal Val (3.0% g) 359

Risk Free Rate % NA PV of FCF and TV 428

Cost of Equity % 25%* + Cash & ST investments 0

Cost of Debt % NA - Debt 0

Debt % NA - Minority Interest 0

Equity % 100% Equity Value 428

Corporate Tax Rate % 20% Shares (mn) 40

WACC % 25%* Price per share, VND 10,704

Source: VCSC

*We apply a high cost of equity for Long Chau to reflect the high uncertainty of our long-term

assumptions given that the chain remains in its early stage

Figure 36: Cash flows

VND bn FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27

EBIT 15 34 65 114 167 225 290 331 373 452

- Tax -3 -7 -13 -23 -33 -45 -58 -66 -75 -90

+ Depreciation 6 11 21 31 41 47 51 51 51 51

- Capex -30 -25 -50 -50 -50 -55 -50 -50 -50 -50

- WC increase -123 -58 -151 -145 -162 -73 -127 -3 -91 -86

Free Cash

Flow -135 -45 -127 -73 -37 99 106 263 208 277

PV of FCF -108 -28 -65 -30 -12 32 35 86 68 91

Cumulative

PV of FCF -108 -136 -201 -231 -244 -211 -176 -90 -22 69

Source: VCSC



Peer comparison

Figure 37: Comparable peers

(USD

mn)

Ticker

Country Mkt cap TTM Net

Sales Y-o-Y%

TTM

NPAT Y-o-Y %

Debt/

Equity ROE TTM P/E

Adjusted

TTM P/E LQ P/B

MWG VN Vietnam 1,451.1 2,920.2 48.7 97.1 39.8 115.1 45.3 14.3 14.3 5.5

REDI IN India 962.6 6,132.8 16.0 69.2 9.6 43.2 15.2 13.4 12.9 2.0

COM7

TB Thailand 730.0 664.5 31.5 18.0 49.7 72.8 28.4 36.8 46.3 9.9

002296

CH China 393.6 78.7 (7.3) 9.8 (30.3) 25.4 4.3 37.3 27.2 1.6

JMART

TB Thailand 260.9 372.6 17.9 14.5 11.8 231.3 15.9 17.1 21.6 2.5

ERAA IJ Indonesia 257.2 1,811.0 17.9 25.4 28.7 47.3 9.7 10.4 10.5 1.0

Median 561.8 1,237.8 17.9 21.7 20.3 60.1 15.6 15.7 18.0 2.3

Average 675.9 1,996.6 20.8 39.0 18.2 89.2 19.8 21.6 22.1 3.8

Source: Bloomberg



Financial Statements

INCOME STATEMENT (VND bn) 2017A 2018F 2019F BALANCE SHEET (VND bn) 2017A 2018F 2019F

Revenue 13,147 15,397 18,854 Cash & cash equivalents 638 538 512

COGS -11,330 -13,213 -16,115 Short term investment 0 0 0

Gross Profit 1,816 2,184 2,739 Accounts receivables 306 472 639

Sales & Marketing exp. -1,154 -1,365 -1,717 Inventories 1,723 2,059 2,737

General & Admin exp. -300 -352 -427 Other current assets 842 842 842

Operating Profit (EBIT) 362 467 595 Total Current assets 3,509 3,911 4,729

Financial income 54 55 62 Fix assets, gross 46 46 106

Financial expenses -82 -70 -77 - Depreciation -7 -9 -25

In which, interest expense -79 -70 -77 Fix assets, net 39 38 82

Share profit/loss from associates 0 0 0 LT investment 0 0 0

Net other income/(loss) 29 29 29 LT assets other 323 396 449

Profit before Tax 363 480 609 Total LT assets 362 434 531

Income Tax -73 -96 -122 Total Assets 3,871 4,345 5,259

NPAT before MI 290 384 487

Minority Interest 0 0 0 Accounts payable 1,499 1,668 2,069

NPAT less MI, reported 290 384 487 Short-term debt 1,173 1,173 1,280

NPAT less MI, adjusted 290 384 487 Other ST liabilities 403 403 403

EBITDA 448 558 694 Total current liabilities 3,075 3,244 3,752

EPS basic reported, VND 7,247 9,607 12,179 Long term debt 0 0 0

EPS basic adjusted, VND 7,247 9,607 12,179 Other LT liabilities 0 0 0

EPS fully diluted, VND 7,247 9,607 12,179 Total Liabilities 3,075 3,244 3,752

RATIOS 2017A 2018F 2019F Preferred Equity 0 0 0

Growth Paid in capital/Issued capital 400 400 400

Revenue growth 21.1% 17.1% 22.5% Add’l share capital/share premium 0 0 0

Operating profit (EBIT) growth % 57.3% 29.1% 27.4% Retained earnings 396 701 1,108

PBT growth % 40.0% 32.3% 26.8% Other equity 0 0 0

EPS growth %, adjusted 39.7% 32.6% 26.8% Minority interest 0 0 0

Total equity 796 1,101 1,508

Profitability Liabilities & equity 3,871 4,345 5,259

Gross Profit Margin % 13.8% 14.2% 14.5%

Operating Profit, (EBIT) Margin % 2.8% 3.0% 3.2% CASH FLOW (VND bn) 2017A 2018F 2019F

EBITDA Margin % 3.4% 3.6% 3.7% Beginning Cash Balance 1,458 638 538

NPAT less MI Margin, adj. % 2.2% 2.5% 2.6% Net Income 290 384 487

ROE % 44.2% 40.5% 37.4% Dep. & amortization 86 91 99

ROA % 6.8% 9.4% 10.1% Change in Working Capital 104 -332 -320

Other adjustments -301 -90 -88

Efficiency Cash from Operations 179 53 178

Days Inventory On Hand 59.1 52.2 54.3

Days Accts. Receivable 5.9 9.2 10.8 Capital Expenditures, net -52 -73 -85

Days Accts. Payable 47.1 43.7 42.3 Investments, net 315 0 -147

Cash Conversion Days 17.9 17.7 22.7 Cash from Investments 263 -73 -231

Liquidity Dividends Paid 0 -80 -80

Current Ratio x 1.1 1.2 1.3 ∆ in Share Capital 0 0 0

Quick Ratio x 0.6 0.6 0.5 ∆ in LT debt 0 0 0

Cash Ratio x 0.2 0.2 0.1 ∆ in ST debt -1,262 0 107

Debt / Assets 30.3% 27.0% 24.3% Other financing cash flows 0 0 0

Debt / Capital 59.6% 51.6% 45.9% Cash from Financing -1,262 -80 27

Net Debt / Equity 67.2% 57.7% 51.0%

Interest Coverage x 4.6 6.6 7.8 Net Change in Cash -819 -100 -27

Ending Cash Balance 638 538 512



Appendix Figure 1: 2017-2022 NPAT projections for FRT (VNDbn) ................................................................. 4

Figure 2: 2017-2022 NPAT projections for MWG (VNDbn) ............................................................... 4

Figure 3: FPT Shop format ................................................................................................................ 5

Figure 4: FRT’s shareholder structure as of April 6, 2018 ................................................................. 5

Figure 5: FRT’s key personnel .......................................................................................................... 6

Figure 6: Standalone store count of leading mobile phone retailers in Vietnam ................................ 7

Figure 7: Market share structure of mobile phone retail market in 2013 vs 2017 .............................. 8

Figure 8: FRT’s sales by product ASP in comparison to others (2017) ............................................. 9

Figure 9: FRT’s different Apple concepts .......................................................................................... 9

Figure 10: FRT’s 2017 revenue by category ................................................................................... 10

Figure 11: Long Chau Pharmacy .................................................................................................... 10

Figure 12: FRT’s historical store count ............................................................................................ 11

Figure 13: FRT’s historical revenue (VND bn) ................................................................................. 11

Figure 14: FRT’s historical NPAT (VND bn) and NPAT margin ....................................................... 12

Figure 15: Comparison between F.Friends and other consumer financing options ......................... 13

Figure 16: F.Friends process .......................................................................................................... 13

Figure 17: Barriers and opportunities for telco subsidy program ..................................................... 14

Figure 18: Illustration of the price subsidy package for Samsung Note 8 ........................................ 15

Figure 19: Estimated market share in Apple products (2017 vs 2022) ............................................ 17

Figure 20: VCSC’s revenue forecasts for FRT’s mobile phone business ........................................ 18

Figure 21: VCSC’s margin projections for FRT’s mobile segment .................................................. 18

Figure 22: Revenue/store of Long Chau vs other pharmacy chains (USD ’000/month) .................. 19

Figure 23: Long Chau draws strong traffic thanks to its prestige and extensive SKUs ................... 20

Figure 24: Long Chau’s new store opening projections (FRT vs VCSC) ......................................... 21

Figure 25: Margin projections for Long Chau during 2018-2022 ..................................................... 21

Figure 26: VCSC’s base-case projections for FRT .......................................................................... 22

Figure 27: Projections for FRT if management’s plan for Long Chau is incorporated ..................... 23

Figure 28: VCSC’s base-case projections for F.Friends and price subsidy programs ..................... 24

Figure 29: Scenario analysis ........................................................................................................... 24

Figure 30: Selling price (VND) comparison between Lazada, Tiki, MWG and FRT ........................ 25

Figure 31: MWG and FRT offer the most attractive after-sales policies .......................................... 25

Figure 32: Valuation summary ........................................................................................................ 26

Figure 33: DCF Valuation ................................................................................................................ 26

Figure 34: DCF ................................................................................................................................ 27

Figure 35: DCF Valuation ................................................................................................................ 27

Figure 36: Cash flows ...................................................................................................................... 27

Figure 37: Comparable peers .......................................................................................................... 28



Rating and Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock

defined as (target price – current price)/current price + dividend yield, and is not related to market performance.

This structure applies from May 27, 2015.

RATING DEFINITION

BUY Total stock return including dividends over next 12 months expected to exceed

20%

OUTPERFORM (O-PF) Total stock return including dividends over next 12 months expected to be

positive 10%-20%

MARKET PERFORM (M-PF) Total stock return including dividends over next 12 months expected to be

between negative 10% and positive 10%

UNDERPERFORM (U-PF) Total stock return including dividends over next 12 months expected to be

negative 10%-20%

SELL Total stock return including dividends over next 12 months expected to be

below negative 20%

NOT RATED The company is or may be covered by the Research Department but no rating

or target price is assigned either voluntarily or to comply with applicable

regulation and/or firm policies in certain circumstances, including when VCSC

is acting in an advisory capacity in a merger or strategic transaction involving

the company.

RATING SUSPENDED A rating that happens when fundamental information is insufficient to

determine an investment rating or target. The previous investment rating and

target price, if any, are no longer in effect for this stock.

Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-

month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based

on market price and the formal recommendation, thus these performance parameters should be interpreted

flexibly.

Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may

adversely affect the value, price or income of any security or related instrument mentioned in this report. For

investment advice, trade execution or other enquiries, clients should contact their local sales representative.



Disclaimer

Analyst Certification of Independence

I, Dao Nguyen, hereby certify that the views expressed in this report accurately reflect my personal views about the subject

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recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report

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factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment

Banking.

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Quynh Chau Quang Nguyen

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[email protected] [email protected]


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