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TLS Vietnam: Level 6, Toserco Building 273 Kim Ma, Ba Dinh, Hanoi, Vietnam

Web site: www.tls.vn Bloomberg : TLSV <GO>

Sales & Trading - Hanoi Nguyen Viet Dzung

E: [email protected]

Sales & Trading - HCMC Nathan Nguyen


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VIETNAM CONSTRUCTION AND IMPORT-EXPORT JSC 8/7/2011

Pham Thanh Son Analyst

Email: [email protected] Ticker: VCG - Exchange: HNX

Recommendation: HOLD Target price: VND15,165

STOCK STATISTICS Price as of 8/7/2011

13,200 VND

Industry: Construction, materials, and real estate Business model: Construction, industrial production, and real estate

Listed since 9/2008

Outstanding Shares 300,000,000

Market Cap (Billion VND) 3,960 52 Week High (VND) 32,440 52 Week Low (VND) 12,700 10 Day Average Volume 650,040

% 1 Month Price Change -12.58

% 3 month Price Change -38.03



% Foreign Ownership 7.25 % Foreign Ownership Limit 49 Beta 6-month 1.15

Source: TLS

Price movement of VCG & HNXINDEX

Source: TLS

FINANCIAL HIGHLIGHTS (Billion VND) 2009 2010 2011E

Total assets 27,239 31,687 34,798 Equity 2,981 3,657 3,875 Revenue 13,017 15,062 15,837

EBIT 434 1,043 1,222

EBT 191 741 774

EAT 203 466 581 EPS (VND) 31 662 955

PE (x) 1.678,80 37.32 7.59 PB (x) 3.28 2.03 1.79

Revenue growth 35.83% 15.71% 5.14%

Gross profit margin 13.58% 14.54% 14.64% Net profit margin 0.04% 1.32% 1.81%

ROE 4.54% 5.43% 7.39% ROA 0.75% 0.63% 0.82%

Source: TLS

VCG is a well known construction and real estate development company in Vietnam. Since its

equitization, the company has been actively restructuring its operations, focusing on two major fields

of business, at which it is strong, construction and real estate development. Given its ongoing

projects, the company has great potentials for development. With the forecast price of VND15,165/

share, we recommend to HOLD VCG stock.

COMPANY OVERVIEW

In 2006, Vinaconex was chosen to be one of the first state-owned companies in the pilot equitization

program. After being equitized, VCG developed fast to be a big company with total assets of

VND31,686 billion and equity of 3,656 billion as of end of 2010, having more than 50 subsidiaries and

affiliates. The company has been setting a development strategy to focus on its two strong business

areas, construction and real estate development.

UPDATES

Q1 2011: The parent company had the revenue of VND482 billion, profit before tax of VND93.8

billion, profit after tax of VND90.6 billion, equal to 99.5%, 104%, and 123% of those in Q1 2010,

respectively.

15/3/2011: The sale of apartments in the Splendora project was launched with the price of VND36-

40 million and four-phase payment method.

25/1/2011: The Golden Silk (Kim Van Kim Lu) was officially commenced with the initial investment

of more than VND3,000 billion, providing the housing floor area of more than 350,000 square meters.

2010: For the consolidated business results, the revenue reached VND15,062 billion, profit before tax

was VND740 billion, profit after tax achieved VND466 billion, increasing by 16%, 287%, and 129%

year on year, respectively.

INVESTMENT HIGHLIGHTS

VCG is a big company in Vietnamese construction industry with recognized credit and brand

name as it has done a lot of large projects.

- The cash inflow has been realizing from a number of large real estate development projects such

as N05 and Splendora. The unearned revenue of the N05 project will be recognized in 2011.

- The operation of construction materials plants has been getting sustained after initial

investment and construction and is expected to be more efficient such as Cam Pha Cement Plant, Yen

Binh Cement Plant, and Vinaconex Clean Water Plant.

- Highly experienced in implementing BT and BOT projects: With strong brand name in the

construction industry, VCG is chosen to be the developer of a number of BT and BOT projects. In

turn, it is allowed to develop other real estate projects, which are valuable for its sustainable

development.

VALUATION

Applying P/E and P/B valuation methods, the forecast price of VCG stock is VND15,165/share.

Given the current price of VND13,200 /share, we recommend to HOLD VCG stock.

MAJOR RISKS

Macroeconomic risks: The prices of input materials like steel and metal has been being under the

pressure to increase, likely negatively affecting VCG’s profit as the company may not increase revenue

to offset the rising costs due to high competition and unrenegotiable contracts. Furthermore, in the

context that the government has been implementing tightened monetary policies, the credit,

especially the real estate credit, has been being narrowed and the debt interest rates has been

getting high. This has been negatively affecting the capital mobilization of the company.

- Extensive investment: Being the first large state-owned company equitized, after three

years of new operation, VCG is facing with difficulties in restructuring and extensive investment in the

fields that it does not have experience and expertise, leading to low efficiency and profitability. It is

highly risky if VCG cannot control the progress, quality, and cost.

High financial leverage has been putting high pressure on costs. The company has a large amount

of debt in foreign currencies worth VND2,600 billion by the end of 2010, resulting in more exposure to

the exchange rate risk.

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EQUITY RESEARCH

mailto:[email protected]







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FINANCIALS Unit: Billion VND

Earning Model 2010 2011E 2012E 2013E

Balance Sheet 2010 2011E 2012E 2013E

Net sales 15,062 15,837 17,421 19,395

Current Assets

Cost of sales -12,873 -13,518 -14,756 -16,359

Cash and cash equivalents 2,928 4,809 4,564 3,747

Gross profit 2,189 2,319 2,664 3,036

Fianancial investment 220 249 293 343

Gross profit margin 14.54% 14.64% 15.29% 15.66%

Accounts receivable 6,696 6,839 7,636 8,502

Other operating income 161 161 161 161

Inventory 6,710 7,012 7,656 8,291

Selling expenses -413 -396 -436 -485

Prepaid expenses, other CA 887 972 1,052 1,168

General administration expenses -767 -713 -784 -873

Total current assets 17,441 19,882 21,202 22,050

Other operating expenses -128 -150 -286 -188

Property and equipment EBIT 1,043 1,222 1,320 1,652

At cost 12,018 12,807 14,674 17,140

Investment income 924 998 783 686

Less accumulated depreciation -2,120 -2,761 -4,228 -5,942

Net interest -1,325 -1,549 -1,622 -1,618

Net property and equipment 9,897 10,046 10,446 11,198

Net financial items -401 -551 -840 -932

Other long - term assets 4,349 4,891 5,713 6,568

Earnings before tax 741 802 967 1,057

Total Assets 31,687 34,819 37,361 39,817

Income tax -275 -201 -242 -264

Profit after taxes 466 602 725 793

Current Liabilities

Minority interest 267 294 309 324

Financial debts 4,350 4,491 4,891 5,713

Profit for parent company 199 307 416 468

Trade payables 9,173 9,785 10,511 11,653

Earnings per share (000.VND) 662 1,025 1,812 1,982

Other liabilities 3,245 3,006 2,613 2,909

Dividend rate (common stock) 7% 12% 10% 10%

Total Current Liabilities 16,768 17,281 18,016 20,275

Long-term debt 9,355 11,733 12,165 11,969

Stockholders' equity 3,657 3,898 5,273 5,666

CashFlow Statements 2010 2011E 2012E 2013E

Common stock 3,000 3,000 4,000 4,000

Net profit 466 602 725 793

Investment, development funds 426 426 426 426

Adjustments for:

Retained earnings -471 -230 145 538

Depreciation and amortisation 510 640 1,467 1,714

Budget sources and other funds 702 702 702 702

Change in inventories -1,048 -302 -644 -635

Minority interest 1,907 1,907 1,907 1,907

Change in trade receivables -1,546 -228 -877 -982

Total liabilities and equity 31,687 34,819 37,361 39,817

Change in trade payables 1,436 373 334 1,437

Growth and Margin (%) 2010 2011E 2012E 2013E

Cash flow from operations -181 1,084 1,005 2,327

Sales growth 15.71% 5.14% 10.00% 11.33%

EBIT growth 140% 17% 8% 25%

Change in tangible fixed assets -1,855 -789 -1,867 -2,466

Net Income Growth 3311% 55% 35% 13%

Change in intangible fixed assets -43 -29 -44 -49

EPS Growth 2005% 55% 77% 9%

Change in long-term investments -43 -543 -822 -855

Gross Margin 14.54% 14.64% 15.29% 15.66%

Cashflow from investments -1,940 -1,361 -2,733 -3,370

EBIT Margin 6.92% 7.72% 7.58% 8.52%

Ratios

Equity issued 1,168 0 1,000 0

ROE 5.43% 7.89% 7.89% 8.26%

Change in other funds 316 0 0 0

ROA 0.63% 0.88% 1.11% 1.18%

Change in financial debts 797 141 401 822

Inventory days 190 189 189 185

Change in long-term liabilities 1,130 2,378 433 -197

Receivable days 162 158 160 160

Dividends to shareholders -597 -360 -350 -400

Payable days 260 264 260 260

Cash flow from financing 2,813 2,158 1,483 225

Net debt/equity 7.14 7.44 5.72 5.69

Net cash flow 692 1,881 -245 -818

Opening cash 2,503 2,928 4,809 4,564

Valuation (Multiples)

Closing cash 2,928 4,809 4,564 3,747

PB(x) 2.03 2.00 NA NA

PE(x) 37.32 8.92 NA NA

Projected Free Cash Flow

Dividend yield

Profit after Taxes 466 602 725 793

Add back depreciation 510 640 1,467 1,714

(-) increase in CA, except cash -2,710 -531 -1,521 -1,617

Notes:CA = current assets;CL = current liabilities;PEaC = Property and Equipment at Cost

(+) increase in CL 2,233 513 734 2,259

Source: Thang Long Securities

(-) increase in PEaC -1,180 -789 -1,867 -2,466

Free Cash Flow -680 435 -461 683







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INVESTMENT HIGHLIGHTS

The construction and real estate industries

VCG has been setting a strategy to focus on the construction and real estate businesses. The

construction business is the foundation to develop the real estate business. Hence, the sustained

development of the construction business, resulting from the sustained development of the

construction industry, will help develop its real estate business.

Sustained construction industry

For years, the construction industry has developed in the same pace of the economy, making an

important contribution to Vietnam’s GDP. In 2010, the industry accounted for 7% of the GDP of the

country. Since 2004, its annual growth before inflation adjustment has been more than 20% (except

in 2009 with 15%). After inflation adjustment, this figure has been more than 10% (except in 2008

with 0.37%).

Despite being influenced by a number of factors such as input materials price and supply, and the

situation of the real estate market, the construction industry remains a good fundamental one of

Vietnam’s economy, where the demand for construction increases as the economy grows. As a

result, the industry has a sustained outlook and may have the annual growth of more than 10% in

coming years, and, in turn, is the momentum for the development of the economy.

Huge demand for real estate, especially in large cities

The demand for real estate in Vietnam, especially in large cities has been being supported by a

variety of factors such as population size, population structure, urbanization, migration, and income.

These factors have increased/improved, positively affecting the demand for real estate.

Population size and urbanization growth has been rising year by year in large cities like Ha Noi and

Ho Chi Minh City (HCMC), increasing the demand for real estate. The percentage of population in the

working age, who has great demand for housing and retail, (15-64) has increased for the last two

decades, from 56% in 1989 to 61% in 1999 and 68% in 2010.

GDP per capita has gradually improved, reaching US$1,160 for Vietnam, US$2,800 for HCMC, and

US$1,900 for Ha Noi in 2010. Accordingly, the affordability of Vietnamese people has improved,

supporting the demand for real estate.

For the VCG case, the company has been implementing some important real estate development

projects in Ha Noi, Splendora, Golden Silk (Kim Van Kim Lu), and Tay Mo – Dai Mo. These projects

locates in the areas that have increasing population. From 2005 to 2009, the population growth in

Tu Liem and Hoang Mai districts is the highest in Ha Noi, 38% and 33%, respectively. Those high

figures may persist as the land bank for real estate development in these districts is abundant.

VCG

VCG is a large company in the construction industry with well known brand name, which has

been recognized from key projects such as Trung Hoa Nhan Chinh New Urban Area, expanded Lang

Hoa Lac Road, National Conference Center, and Ha Noi Museum.

Being the first large state-owned company equitized, VCG has opportunities to develop

strongly. The company, consulted by Credit Suisse, is restructuring to focus on construction and real

estate businesses and reduce the involvement in the materials production business.

Having large real estate development projects at favorable locations: After the success of

the Trung Hoa Nhan Chinh New Urban Area project, VCG has been implementing two major

projects, 240-ha Splendora, which is close to Lang Hoa Lac Road, and Tay Mo – Dai Mo, which is in

the planning phase. Both projects are large and have great potentials. Its subsidiaries also have a

number of projects like Golden Silk of VC2 and the mixed use project of VC1.

Cash inflow from large real estate development projects invested for a long time, the N05

project and the Splendora project. In 2011, the unearned revenue of the N05 project is planned to

be recognized all. The Splendora officially launched sales from March 15, 2011.

For the last three year, the revenue from the real estate business has been rising, from VND512

billion in 2008 to VND1,905 billion in 2009 and 2,650 billion in 2010.

Construction value

Source: Viet Nam’s General Statistics Office

Population, urbanization and migration


Viet Nam’s population structure


Population growth by district in Ha Noi


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20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

0%

5%

10%

15%

20%

25%

30%

2004 2005 2006 2007 2008 2009 2010

Billion VND

Construction value

Construction growth at current price

Real construction growth

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5%

10%

15%

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25%

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40%

Hai Phong

Viet Nam

Ha Noi Da Nang HCMC Binh Duong

Million people

Net migration rate over 5 years 2004-2009

Urbanization growth rate per year 1999-2009

Population

0%

20%

40%

60%

80%

100%

1989 1999 2009

<15 15-64 >=65

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Hoan K

iem

Hai Ba T

rung

Ba D

inh

Dong D

a

Thanh X

uan

Ha D

ong

Tay H

o

Cau G

iay

Long B

ien

Hoang M

ai

Tu L

iem







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In 2011 and coming years, it is expected that VCG and its subsidiaries will accelerate the

implementation of their real estate development projects and meet requirements set by authorities.

Revenue recognition from the N05 and Splendora projects will help increase revenue and profit.

Meanwhile, revenue and profit from the projects of VC1, VC2, VC3, VC9, XMC, etc. that are in the

selling phase are promising as well.

Operation of materials production plants are getting sustained: Big materials production

projects are getting sustained after the construction phase and expected to be efficient such as Cam

Pha Cement Plant, Yen Binh Cement, and Song Da Clean Water Plant.

Cam Pha Cement Plant was put into operation in 2009. In the first year of operation, it achieved

95% of the total capacity, producing and selling 2.1 million tons of cement and 1.8 million tons of

klinker, generating the revenue of VND2,300 billion. Because of its high operational efficiency and

marketable products, the profitability of this plant is expected to be improved.

The operation of Vinaconex Advanced Compound Stone JSC. has been improved and more efficient.

Highly experienced in implementing BT and BOT projects: With strong brand name in the construction industry, VCG is chosen to be the developer of a number of BT and BOT projects. In turn, it is allowed to develop other real estate projects, which are valuable for its sustainable development.

The choice of some large investors: Some large investors like Viettel, BIDV, and Techcombank has

chosen VCG as a long-term investment. Currently, Viettel holds more than a 18% stake of VCG. This

proves the attractiveness of VCG stock and the strong support from large shareholders.

INVESTMENT RISKS

Macroeconomic risks: There has been economic instability negatively affecting VCG’s business.

The prices of input materials like steel and metal has been being under the pressure to increase,

likely negatively affecting VCG’s profit as the company may not increase revenue to offset the rising

costs due to high competition and unrenegotiable contracts. Furthermore, in the context that the

government has been implementing tightened monetary policies, the credit, especially the real

estate credit, has been being narrowed and the debt interest rates has been getting high. This has

been negatively affecting the capital mobilization of the company.

In addition, in the context of tightened monetary policy, the credit for real estate has been

narrowed, debt interest rates has increased, resulting in low capital mobilization of VCG.

High financial leverage has been putting high pressure on costs. The company has a large

amount of debt in foreign currencies worth VND2,600 billion by the end of 2010, resulting in more

exposure to the exchange rate risk.

Extensive investment: Being the first large state-owned company equitized, after three

years of new operation, VCG is facing with difficulties in restructuring and extensive investment in

the fields that it does not have experience and expertise, leading to low efficiency and profitability.

For the time being, VCG invests in more than 50 companies, including 42 subsidiaries and 10

affiliates and joint ventures. The subsidiaries are doing business in a variety of fields, from

construction, real estate, materials production, industrial production, energy, to human resource

services, tourism, and commerce.

Profitability of its real estate business remains moderate: Its real estate business is expected to

generate huge revenue and profit for VCG. However, its real estate projects has experienced low

moderate profitability because of a long period of implementation, limited funds, and high cost of

debt. In 2010, the gross profit margin of its real estate business improved to the range of 25%-28%,

but was still lower than those of some other competitors.

Source: VCG’s audited financial statements

Gross profit margin 2008 2009 2010

Parent

company Consolidated

Parent


Parent


Construction -2.88% 4.74% 2.28% 8.77% 2.34% 7.48%

Real estate

19.22% 20.29% 20.24% 24.50% 27.66%

Industrial production

11.70% 14.73%

18.77%

24.69%







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The construction business generates high revenue. However, in 2008, the gross profit margin from

this was negative as the cost was quite high. In 2010, the figure increased, but remained low at

2.34% for the parent company and 7.48% as the consolidated one.

Oversupply in the cement industry: Although the products of Cam Pha Cement Plant and Yen

Binh Cement Plant have been absorbed by the market, these plants are facing with operational

efficiency problem as the competition is high in the context of the high level of electricity price,

materials price, depreciation cost, debt interest rate, and exchange rate risk.

High financial leverage: As debt interest rates are high, high financial leverage will lead to high

cost. Especially, the amount of debt in foreign currencies reaching more than USD2,600 by the end

of 2010 is exposed to the exchange rate risk. Increasing debt to finance the projects create more

financial risks.

Financial leverage

Item 2007 2008 2009 2010

Long-term debt/Total assets 0.47 0.40 0.30 0.30

Short-term debt/Total assets 0.39 0.48 0.53 0.53

Debt/Equity 9.32 12.26 7.64 7.14


VALUATION

We apply P/E and P/B methods based on the assumptions on 2011 business performance of VCG, as

follows:

Revenue

In 2011, VCG’s construction business will likely face with difficulties in the context of narrowed state

investment and increasing materials price. The company has screened all of its projects in order to

delay or lengthen projects’ timeline. As a result, there has been 72 out of 134 projects adjusted the

timeline with the decreasing investment value of VND1,206 billion. We expect its 2011 consolidated

revenue will be slightly lower than that in 2010, at VND7,100 billion.

In 2011, its industrial production business is expected to be hard as well. Difficulties in the real

estate market, especially in the apartment for sale sector, and narrowed state investment in

construction projects are negatively affect the demand for VCG’s industrial products, increasing the

competition in this field. We expect its consolidated revenue from this business will decrease by 10%

against that in 2010, staying at VND1,042 billion.

VCG’s real estate business may have increasing revenue as compared to 2010. In 2011, the

company will recognize all the unearned revenue of the N05 project. In addition, other real estate

development projects are expected to generate revenue like the Mo Market project in Ha Noi, the

Vinaconex 1 Residential and Office project of VC1 in Ha Noi, the 310 Minh Khai project of VC3 in Ha

Noi, the Ngo Thi Nham project of XMC in Ha Noi, Golden Silk of VC2. However, as the real estate

market is gloomy, this business will face with certain difficulties. We expect 2011 consolidated

revenue will be approximately VND3,180 billion.

The revenue from other businesses is expected to increase by 10% against that in 2010, reaching

VND4,500 billion.

Cost of goods sold

In 2011, prices of materials and fundamental products like electricity and gasoline increase. Although

VCG has a number of measures to ease that burden on its cost of goods sold (COGS) such as

reserving materials and negotiating with developers on price, the burden remains quite high this

year. We expect 2011 COGS margin of its construction business will be 93%.

For the industrial production business, 2011 COGS margin is assumed at 76%. That figure of the real

estate business is forecast to be 73%.







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Other assumptions

Although it is necessary to increase the chartered capital to VND5,000 billion to ease the debt

pressure, lower the financial leverage to a safe level, and finance large projects of the company,

especially real estate development projects. However, as the economy and financial markets are

facing with difficulties, this plan is expected to be hard to implement. We assume the company is

unable to raise the chartered capital in 2011, but 2012.

2011 financial income is expected to be VND997 billion. Under the pressure to decrease the debt

burden, support the struggling construction business, and implement the restructuring plan, VCG

plans to divest from some of its subsidiaries and focus on the fields that it has strengths and

advantages. Apart from divesting, the revenue comes from interest, dividend, foreign exchange

profit, and others.

2011 general administration expenses are expected to account for 4.5% of the revenue as compared

to 5.5% in 2010 as the company is expected to strictly manage cost in the context of increasing

material price and debt interest. 2011 selling expense is expected to be 2.5% of the revenue.

In 2011, the corporate income tax is assumed at 25%.

Valuation results

We apply P/E and P/B methods to value VCG stock based on the comparison with other large

companies in the construction and real estate industries. The average historical P/E and P/B are

used to apply for VCG.

T

Based on above assumptions and 300 million outstanding shares in 2011, we expect that 2011 EPS

VND955, book value per share is VND12,925 for 2011 and other results are as follows:

T

The expected VCG stock price is VND15,165/share. Given the current price of VND13,200/share,

we recommend to HOLD VCG stock.

FINANCIAL ANALYSIS

Revenue

In 2010, the revenue growth reached a good level of 16%, the revenue from the construction

business increased slightly year on year to VND7,151 billion. The company completed a number of

major projects, including ones for the 1000-year anniversary of Thang Long, such as Ha Noi Museum,

Thang Long Avenue, Cua Dat Hydropower, Buon Kuop Hydropower, Buon Tua srah Hydropower. The

No. Ticker P/E P/B

1 CTD 6.09 1.14

2 DIG 4.45 0.88

3 HAG 8.92 2.03

4 IJC 4.03 0.95

5 ITA 6.03 0.72

6 KBC 6.18 1.50

7 PVX 1.17

8 QCG 6.26 1.00

9 SJS 8.90 1.92

10 VIC 19.54 6.54

Average 7.59 1.79

Method VCG stock price (VND) Weight

P/E 7,256 50%

P/B 23,075 50%

Average 15,165

Revenue by business


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2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2008 2009 2010

Billion VND

Total Construction

Industrial production Real estate

Others







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revenue from its real estate business rose by 39% to VND2,651 billion from the N05 project, the 310

Minh Khai project of VC3, the Ngo Thi Nham project of XMC, the Vinaconex 1 Residential and Office

project of VC1 among others.

Unit: Billion VND

Revenue 2010 Growth against

2009

Total 15,062 16%

Construction 7,151 0.1%

Industrial production 1,158 -64%

Real estate 2,650 39%

Other 4,103 443%


It should be noted that the revenue contribution of the construction business decreased gradually in

recent years, from 76% in 2008 to 47% in 2010. By contrast, the figure of the real estate business

increased gradually from 5% in 2008 to 18% in 2010. This is in line with the restructuring plan of the

company, focusing on these businesses. High growth of the real estate business will help secure the

growth of the company as the growth of the construction business in the future is moderate.

Cost

Item 2007 2008 2009 2010

Revenue 7,048 9,583 13,017 15,062

Cost of goods sold 6,086 8,884 11,250 12,873

Percentage of revenue 86.3

% 92.7% 86.4% 85.5%

Financial expenses 250 306 687 1,325

Percentage of revenue 4% 3% 5% 9%

Selling expenses 60 98 336 413

Percentage of revenue 0.9% 1.0% 2.6% 2.7%

General administrative expenses 354 502 598 767

Percentage of revenue 5.0% 5.2% 4.6% 5.1%


Selling expenses and general administration expenses has remained rather stable, showing that the

company has managed well indirect costs to improve operational efficiency.

It should be noted that financial expenses increased much to be 9% of 2010 total revenue. High

financial leverage, high interest rates, and VND depreciation in 2010 were major reasons for this. In

addition, the company has a significant amount of debt in foreign currencies, reaching VND2,600

billion by the end of 2010. Specifically, interest expenses rose from VND592.4 billion in 2009 to

VND908.8 billion in 2010, loss due to VND depreciation was VND93.4 billion in 2009 to VND318 billion

in 2010.

COGS breakdown

Item 2007 2008 2009 2010

Construction 89.6% 95.2% 91.2% 92.5%

Real estate - 85.3% 81.2% 75.3%

Industrial production - 80.7% 79.8% 72.3%

Other 68.4% 87.5% 79.9% 84.5%

Total 86.3% 92.7% 86.4% 86.5%


2010 COGS decreased against 2009, staying at 85.5%. However, this result mainly came from the

contribution of the real estate business. Meanwhile, the COGS of the construction business and others







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increased. This could be partly explained by the increase of materials price. However, the cost

management issue should be addressed as the COGS of the construction business has been quite

high.

Profitability

Item 2007 2008 2009 2010

Gross profit margin 13.65% 7.29% 13.58% 14.54%

EBIT margin 7.77% 1.03% 6.40% 6.70%

Net profit margin 4.60% 4.16% 0.04% 1.32%

ROA 1.68% 1.76% 0.02% 0.63%

ROE 18.37% 24.38% 0.20% 5.43%


In 2010, the gross profit margin improved to more than 14%. However, the net profit margin has

been down since 2008 as the company got loss from new businesses like Cam Pha Cement Plant,

which has a loss of VND652 billion in 2010 and has been its biggest burden. There have been a

number of reasons for the loss of Cam Pha Cement Plant, including high depreciation cost, interest

expenses, VND depreciation, unstable business, and competition, as well as VCG’s lack of experience

in managing and operating a cement plant (a weakness in its current business model, investing in the

fields that the company is inexperienced).

Furthermore, high interest expenses and VND depreciation in 2010 were reasons for decreasing net

profit margin of VCG.

In 2011, the business units that got loss are expected to stabilize their production and selling

activities, leading to an improvement of the net profit of VCG. The loss of Cam Pha Cement JSC is

expected to decrease to VND460 billion.

Above mentioned reasons were also ones that led to low ROA and ROE in 2010. In addition, the

increase of chartered capital to VND3,000 billion in Q3 2010 push the ROE down as well.

In general, VCG has had rather low profitability and business performance.

DuPont analysis

Applying 5-step DuPont analysis, 2010 ROE decreased due to decreasing financial leverage. Also,

because of rising interest expenses, the profit before tax/ profit before tax and interest ratio dropped,

leading to lowering ROE. However, two operational ratios, say, the revenue/ total assets (assets

turnover) and the profit before tax and interest/ revenue, rose.

In the process of lowering financial leverage, VCG has operational efficiency improved. However, in

order to increasing ROE, the company should improve more its operational efficiency and have

revenue growth higher than total assets growth in the context of high interest rates. Furthermore, it

should apply exchange rate risk management as the debt in foreign currencies is quite high.

N


Liquidity

VCG has good liquidity with 2010 current ratio of 1.04. Quick ratio and cash ratio has improved year

by year. As a company in the construction industry, it has a high level of inventory, reflected in the

ongoing business expenses item, leading to the difference between the quick ratio and the cash ratio.

Item 2007 2008 2009 2010

Total assets/Shareholders’ equity 10.92 13.85 9.14 8.67

Revenue/Total assets 0.13 0.32 0.48 0.48

EBIT/Revenue 0.10 0.09 0.07 0.14

Profit before tax/EBIT 0.66 0.64 0.22 0.36

Net profit/Profit before tax 0.68 0.73 0.03 0.27

ROE 6.76% 18.43% 0.20% 5.43%

Profitability


ROA, ROE

Nguồn: Báo cáo tài chính của VCG

0%

2%

4%

6%

8%

10%

12%

14%

16%

2007 2008 2009 2010

Gross profit margin

EBIT margin

Net profit margin

Liquidity


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2007 2008 2009 2010

Current ratio

Quick ratio

Cash ratio







9

9

Item 2007 2008 2009 2010

Current ratio 1.25 1.03 0.98 1.04

Quick ratio 0.83 0.60 0.59 0.64

Cash ratio 0.22 0.12 0.17 0.17


Operational ratios

Item Đơn vị 2007 2008 2009 2010

Receivables turnover time 1.87 2.19 2.54 2.25

Inventory turnover time 1.93 1.88 1.99 1.92

Fixed asset turnover time 0.82 1.02 1.27 1.35

Asset turnover time 0.37 0.42 0.48 0.48


VCG’s operational ratios have been good and stable since 2007. Stable receivables turnover shows the

stability in cash collection from clients. Total assets and fixed assets generated more revenue in

recent years. It is expected that the company will improve its operational efficiency as it is

implementing the restructuring plan.

Assets structure Unit: Billion VND

Item 2007 2008 2009 2010

Total assets 19,243 22,659 27,239 31,687

Growth

18% 20% 16%

Fixed assets and long-term investment 9,895 11,322 12,975 14,246

Growth

14% 15% 10%

% of total assets 51% 50% 48% 45%

Fixed assets 8,559 9,366 10,285 11,118

Growth

9% 10% 8%

% of total assets 44% 41% 38% 35%

Current assets and short-term investment

9,348 11,337 14,264 17,441

Growth

21% 26% 22%

% of total assets 49% 50% 52% 55%


Fixed assets and long-term investment accounted for 45% of total assets in 2010, reducing from 51% in 2007, in which fixed assets accounted for 35% of total assets in 2010, down from 44% in 2007. By contrast, current assets and short-term investment’s share in total assets has increased. This shows that the company has been coming to the mature stage and generating profit mainly from fixed assets invested in the past and current assets.

Summary: VCG’s operational efficiency has improved and its liquidity has been in a good condition.

However, high financial leverage cause interest expenses to go up, while exchange rate rist and low

business effectiveness have negatively affected profitability. In the future, its restructuring plan may

improve its operational efficiency, profitability of new businesses such as cement plant may be

realized after the initial stage, and more revenue and profit from real estate development projects

may be recognized. As a result, the company will improve its profitability.

BUSINESS MODEL

Company overview

Vietnam Construction Export and Import Corporation inherited business from Foreign Services and

Construction Company established in 1988. In 2006, VINACONEX was chosen one of first state-owned

Operational ratios


0

0.5

1

1.5

2

2.5

3

2007 2008 2009 2010

Time

Receivables turnover

Inventory turnover

Fixed asset turnover

Asset turnover







10

10

corporations equitized in a pilot program. Since its equitization, the company has developed fast to be

a big one. By 2009, it had the total assets of more than VND27,000 billion and equity of VND2,900

billion.

VCG has a strategic goal of accelerating its restructuring process and acquire potential projects.

Besides, the company plans to divest from the fields that it does not have strengths and restructure

financially to make the premise for investing in two major fields, construction and real estate. It also

aims at improving the professionalism in the real estate business. We think this is a sound plan to

take advantages of the company.

The next stage is implementing its plan. So far, the company has extensively invested in a variety of

fields that it has not expertise, leading to poor management and performance with Cam Pha Cement

Plant as a notable example.

Business model

Currently, VCG is heading to focusing on construction and real estate. The construction business

contributed largely to the total revenue, supporting the development of the real estate business,

which centers on developing new urban areas.

The company has been successful in implementing BT projects. In turn, it has rights to develop urban

area development projects. VCG will continue applying this model in Ho Chi Minh City and other

provinces/cities.

Construction business

Almost all of VCG’s subsidiaries have the construction business and are strong in this field, such as

VC1, VC2, VC3, VC9, and Vimeco.

This business has made a major revenue contribution for the company with the revenue of more than

VND7,000 billion in 2008 and more than VND8,000 billion in 2010.

Revenue – Gross profit from the construction business

Item 2007 2008 2009 2010

Revenue

Parent company 2,097 1,977 2,937 3,801

Consolidated 4,555 7,241 7,141 7,150

Gross margin

Parent company NA -57 67 88

Consolidated NA 343 626 625


Revenue from the construction business is expected to increase as VCG is implementing a number of

projects such as Splendora and Thu Thiem Bridge. See the Appendix some ongoing construction

projects of VCG.

Real estate business

VCG is known as a big real estate developer in Vietnam for completing new urban areas in the

beginning of 2000s. After notable Trung Hoa – Nhan Chinh project, it has been developing a number

of large projects like Splendora and Tay Mo – Dai Mo in Ha Noi, and Cai Gia in Cat Ba, Hai Phong.

The construction business is the foundation for the company to develop real estate projects. The

company has been successful in implementing infrastructure, transportation, utilities projects under

the BT model. In turn, it has been allowed to develop real estate projects. See the Appendix some

real estate development projects of VCG and its subsidiaries and affiliates.

Revenue structure – Consolidated


76% 55%47%

5%

15%18%

13%25%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010

Construction Real estate Industrial production Others

Assets - Equity (Consolidated)


-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2007 2008 2009 2010

Billion VND

Total assets Liabilities Shareholders' equity







11

11

Revenue – Gross profit from the real estate business


Industrial production business

Being set to support the construction and real estate businesses, the industrial production businesses

has contributed significantly to VCG’s total revenue. Apart from highly efficient projects like Vinaconex

Advanced Compound Stone Plant, which has a well established brand name, the company has other

projects in the initial stage with unproven performance like Cam Pha Cement Plant and Yen Binh

Cement Plant.

We highly value Vinaconex Clean Water Plant with the current capacity of 300,000 m3/ day. In the

phase II, the capacity will double to 600,000 m3/ day to serve the high demand in Ha Noi. The plant

enjoys abundant and high quality supply from Da River.

Currently, 39% of Ha Noi’s people are supplied clean water by the urban clean water supply system.

Specifically, the figure in nine inner districts is almost 95%, in five outer districts is 15%, in Ha Dong

District is 91%, in Son Tay District is 72%, in eight districts in former Ha Tay province and new Me

Linh District is approximately 1%. The rest have to use other water sources.

As plan on the clean water supply system to 2030 with vision to 2050 of Hanoi, the percentage of

people having clean water in the city center is 100% with 180-200 liter/ person/ day. The figure in

satellite cities is 90% with 100-120 liter/ person/ day. As forecast, by 2020, people in urban and

nearby rural areas will utilize 1,224,000 m3/ day on average. The figure reaches 2,000,000 m3/ day

by 2030 and more than 2,500,000 m3/ day.

In terms of water source, the prevailing tendency would be to decrease underground water

exploitation and increase surface water exploitation in Hong River, Da River, Duong River, and Lo

River. According to scientists, the water of these rivers has good quality, while the quality of the

underground water has been getting worse.

Revenue – Gross profit from the industrial production business

Item 2007 2008 2009 2010

Revenue

Parent company 0 658 0 0

Consolidated 738 1,275 3,215 1,158

Gross margin

Parent company 0 77 0 0

Consolidated 96 188 603 286


SOME REAL ESTATE DEVELOPMENT PROJECTS

The Splendora new urban area project (Bac An Khanh)

The project is developed by An Khanh New City Development Joint Venture Company Limited (the

50%-50% joint venture between Vinaconex Corporation and Posco E&C, South Korea. The project

located in a number of wards, An Khanh, Lai Yen, Song Phuong, and Van Canh of Hoai Duc District,

Ha Noi. As detailed in the master plan, the project is a complex divided to various functional parts

Item 2007 2008 2009 2010

Revenue

Parent company 1,021 0 749 954

Consolidated 1,268 512 1,906 2,650

Gross margin

Parent company NA 0 152 234

Consolidated NA 99 386 733

Splendora project

Source: VCG







12

12

that are apartment, villa and townhouse, office for lease, shopping center, super market, and has five

phases.

- Scale: 264.13 ha - Land area for building (apartment): 241,500 m2 - Land area for complex (apartment, office, and public utilities): 163.900 m2 - Land area for villa: 249,200 m2 - Land area for townhouse: 91,900 m2 - Expected completion time: 2018 - Progress: Implementing Phase I in the land area of 50 ha and launched apartment sales for

this phase. - Total infrastructure investment for Phase I: VND3,391 billion

This is a major project of VCG, expected to generate considerable profit. However, the real estate

market is experiencing difficulties, likely negatively affect the apartment selling plan of the project.

Source: VCG

The Golden Silk new urban area project (Kim Van - Kim Lu)

The project is developed by Vinaconex 2 and located in Southwest Ha Noi in Dai Kim Ward, Hoang

Mai District, close to the Ring Road No. 3. Apart from improving the infrastructure of Dai Kim Ward,

the project is planned to help improve the urban landscape and make connections with surrounding

areas. After completion, the project will provide the market with the housing area of 350,000 square

meters. As planned, a land area of 28,373 square meters will be used for developing high-end

apartment. Public utilities will be also developed to meet basic needs such as shopping center, school,

swimming pool, park, kid’s garden, and parking lot. There will be administrative offices of Hoang Mai’s

authorities as well.

- Scale: 27 ha - Total investment: More than VND3,000 billion - Timeline: 2010 - 2015

By the end of Q1 2011, the developer has done site clearance for an area of 186,500 square meters.

Source: Vinaconex 2

The NO5 project

The project is assigned to Vinaconex as developer by Ha Noi’s authorities in the form of auction to

raised funds for the expanded Lang Hoa Lac Road project. It locates at the N05 land plot in the

Southeast Tran Duy Hung New Urban Area project, Trung Hoa Ward, Cau Giay Distric, Ha Noi.

There are two 25-storey buildings and two 29-storey buildings with the total floor area of 270,098

square meters and three basements connecting all four buildings. The first six storeys are used for

multi-functional area including kindergarten, sports, community services, office, retail, and the rest

are used for apartment.

- Scale: 29,680 square meters - Construction land area: 6,682 square meters - Timeline: 2007 - 2011, expected to deliver apartments to buyers.

Source: VCG

The Mo Market project

The project is developed by Vinaconex Trade Development JSC, locating at 459C Bach Mai, Truong

Dinh, Hai Ba Trung District, Ha Noi.

There are two basements for parking (20,000 square meters); one basement for traditional market

(10,000 square meters). Building A, from the 6th to 25th storey, is used for high-end office for lease

(46,657 square meters). Building B, from the 6th to 15th storey, is used for high-end apartment

(15.400 m2). The first five storeys of both building are used for shopping center (22,000 square

meters).

- Scale: 11,191 square meters - Total investment: VND1,500 billion - Timeline: 2009 – 2012

The project is expected to generate revenue and profit critical to VCG in 2011.

Source: VCG

Golden Silk project

Source: Vinaconex 2

N05 project

Source: VCG

Mo Market project

Source: VCG







13

13

APPENDIX

Table 1: Some ongoing projects

No. Project Total

Investment Completion

Time

1 Splendora New Urban Area (NUA) (Phase I) 3,391 2012

2 NO5 3,682 2011

3 Mo Market 1,504 2012

4 Cai Gia Tourism Urban Area - Cat Ba 1,413 2012

5 Thu Thiem Bridge II 3,927 2013

6 Dung Quat Water (Phase II) 827 2012

7 Tay Mo - Dai Mo New Urban Area NA NA


Table 2: Some real estate development projects

No. Project Total

Investment Scale Developer Timeline

1 Splendora NUA – Ha Noi 38.000 264 ha An Khanh New City 2008-2015

2 Cai Gia Tourism Urban Area - Cat Ba - Hai Phong

4.768 172 ha Vinaconex ITC 2008-2015

3 NO5 – Ha Noi 3.682 2.9 ha Vinaconex 2008-2011

4 CT4 Trung Hoa - Nhan Chinh – Ha Noi

2.100 120,000 m2 Vimeco 2010-2014

5 423 Minh Khai – Ha Noi NA 3.8 ha Vinaconex 2010-2013

6 Mo Market – Ha Noi 1.504 1.4 ha Vinaconex Trade

Development 2008-2012

7 Park City NUA – Ha Noi 1.500 77 ha International Urban

Development 2009-2020

8 Golden Silk NUA (Phase I) 1.495 18.6 ha Vinaconex 2 2010-2013

9 Vimeco – Hanel Complex – Ha Noi

1.400 83,600 m2 Vimeco 2010-2014

10 Vinaconex 1 Complex – Ha Noi

1.000 1.05 ha Vinaconex 1 2009-2011

11 310 Minh Khai – Ha Noi 585 85,000 m2 Vinaconex 3 2008-2011

12 Tay Mo – Dai Mo – Ha Noi NA 281 ha Vinaconex-Viettel NA

13 Thoi An Residential – District 12 - HCMC

1.004 NA Vinaconex 2010-2012

14 Da Nang NUA 1.500 2.1 ha Vinaconex 2010-2015

15 Thang Dau NUA – Hà Nội 700 98 ha Vinaconex 2010-2015

Source: VCG and TLS







14

14

Table 3: Major subsidiaries of VCG

No. Company Ownership

1 Vinaconex 1 JSC 55.1%






7 Vinaconex Sai Gon JSC 64.8%

8 Vimeco JSC 51.4%

9 Cam Pha Cement JSC 99.6%

10 Vinaconex E&C JSC 51.0%

11 Vinaconex Urban and Housing Development Investment JSC 70.0%

12 Vinaconex-Viwasupco JSC 75.6%

13 Vinaconex Xuan Mai JSC 67.2%

14 Northern Electricity Development and Investment No.2 JSC 54.6%

Source: VCG







15

15

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