 Vietnam natural rubber sector Global natural rubber market Vietnam rubber sector Stock recommendation www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 28March2011 Vietnam natural rubber sector Table of Contents Global natural rubber market page Impressive recovery of natural rubber price 2 supported by limited supply of natural rubber 2 Higher demand from China thanks to inventory build-up and recovery in global automobile sales 3 Higher crude oil prices support NR 5 Vietnam rubber sector page Vietnam is one of the leading natural rubber producers in the world 6 … with 85-90% of the production is for export 8 Vietnam has little impact on global rubber price 9 Simple operation model and recurring earnings of domestic companies 10 Vietnam’s rubber companies have limited organic growth but can benefit from high rubber price and depreciation of VND 11 TRC and DPR are our recommended stocks 12 Tay Ninh Rubber JSC 13 Dong Phu Rubber JSC 22 Phuoc Hoa Rubber JSC 31 Hoa Binh Rubber JSC 40 www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 1 28March2011 Vietnam natural rubber sector Vietnam is one of the biggest rubber suppliers around the world. Vietnam currently ranks fifth among top world rubber producers and third among top world rubber exporters. High growth rate combined with high production yield will be supportive factors to Vietnam’s natural rubber sector. Average natural rubber price is around 3,000 USD/ton in 2010 and still have positive supports to maintain this price level in 2011 thanks to (1) strong rubber demand from impressive recovery of world automobile production industry - controlling 68% of total natural rubber demand (2) shortage of natural rubber supply due to drought and decline in international rubber plantations (3) oil price may pick up as world economic recovery strengthened. However, natural rubber supply may increase significantly since 2012 as newly planted areas during 2005-2008 start production. The Vietnam Rubber Group – the state-owned enterprise – has significant influence over the Vietnam rubber sector as (1) its subsidiaries controlling around 40% of the total rubber production in Vietnam (2) exerting controls over most biggest rubber companies, maintaining more than 60% stake in equitised rubber companies (3) fixing labor cost – the highest proportion in cost of goods sold – at around 40-42% of revenue, a mechanism to smooth earnings when rubber prices increase but also ensure margin and operational profits when rubber prices fall. Vietnam’s natural rubber sector has little organic growth in the next few years. Most listed rubber companies are facing declining plantations as they can be too old or replanted areas are not ready for yielding. The revenue growth can only come from increasing rubber prices, which Vietnam has no impact or influence on. Investment recommendation: TRC and DPR are our two stock picks in natural rubber sector. We appreciate TRC and DPR’s capability in maintaining outputs over the next two years thanks to their younger age profiles among peers, considering limited supply is the catalyst of higher rubber prices and improved margin. TRC DPR PHR HRC Current price (VND) 56,500 60,000 36,800 62,500 Target price (VND) 68,000 69,000 40,600 51,500 Upside/Downside 20% 15% 10% -18% Recommendation ADD ADD HOLD REDUCE Capitalization (VND bn) 1,702 2,688 2,951 1,079 2010 Consumption volume (ton) 12,800 16,470 31,006 6,518 2010 Average selling price (VNDmn/ton) 60.3 61.2 63.4 63.0 2010 Net revenue (VND bn) 758 1,028 1,995 412 2010 Net profit (VND bn) 267.4 395.1 490 95.4 2010 EPS (VND) 8,929 9,188 6,026 5,514 2010 EPS growth (%) 75 74 83 45 PE (x) 6.3 6.5 6.1 11.3 Extending the favourable condition of high rubber price Hoang Thi Hoa, Manager Hoa.hoang@vcsc.com.vn +84 8 3914 3588, ext. 146 Giang Hoang, Analyst giang.hoang@vcsc.com.vn +84 8 3914 3588, ext. 142 www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 2 28March2011 Vietnam natural rubber sector Global natural rubber market Impressive recovery of natural rubber price As the global economy recovered after the financial crisis in late 2008 and early 2009, rubber sector began to see signs of recovery since the second quarter of 2009. Natural rubber demand started to pick up thanks to positive moves in the tyre production industry which captures 68% of total natural rubber demand. Moreover, it was in 2009 that the three largest natural rubber producers (Thailand, Indonesia and Malaysia), accounting for 72% of total global rubber production cut down about 4.3% of their volume to stabilize the global rubber price. Consequently, the supply and demand gap has pushed up rubber price, especially from Q3/2009. Supported by high rubber demand and due to seasonal effect as Q1 and Q2 was off-peak season of rubber supply, rubber price in late April 2010 had exceeded the peak established in July 2008. Although the price trend paused from June to August due to the supply improvement as rubber producers begin harvesting season, rubber price continued to rise again and has seen the best performance in the rubber history to-date. Rubber companies enjoyed a good year when average selling price for 2010 was above USD3,000/ton, much higher than the pre-crisis level of 2008 of approximately USD2,600/ton. Of note, world rubber bounced back strongly after the earthquake in Japan in March 2011 and currently stands high at USD5,500/ton Figure 1: Movement of Vietnam’s rubber export price Figure 2: 6 Asian countries account for 94% of total world production 0 1,000 2,000 3,000 4,000 5,000 6,000 01/05 04/05 07/05 10/05 01/06 04/06 07/06 10/06 01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 Latex STR 20 STR 5 USD/ton Source: Vietnam Rubber Association (VRA), Association of Natural Rubber Producing Countries (ANRPC) supported by limited supply of natural rubber According to preliminary forecasts of the Association of Natural Rubber Producing Countries (ANRPC), the world rubber volume might get a maximum increase by 6.3% in 2010. However, by October 2010, ANRPC adjusted downward the 2010 natural rubber growth to 5.3% due to bad weather and declining output in major natural rubber producing countries, especially Thailand and Indonesia – the two largest natural rubber producers. Latest report shows a 5.7% increase in global rubber volume in 2010, ANRPC also forecasts a 5.3% increase in 2011. Global economic recovery and declining supply of top 3 biggest rubber-producing countries are major supportive factors to surging rubber price. World supply is restricted by bad weather and decline in international plantations. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 3 28March2011 Vietnam natural rubber sector Figure 3: Rubber production forecast is 5.3% in 2011 Country 2009 2010 Growth 2011 Growth Thailand 3,164 3,072 -2.9% 3,247 5.7% Indonesia 2,440 2,843 16.5% 2,938 3.3% Malaysia 857 970 13.2% 1,050 8.3% India 820 845 3.0% 890 5.3% Vietnam 724 750 3.6% 780 4.0% China 643 647 0.6% 690 6.7% Srilanca 137 148 8.0% 153 3.4% Philippines 98 102 4.1% 107 4.9% Cambodia 34 45 32.4% 63 40.0% Total ANRPC 8,917 9,422 5.7% 9,918 5.3% Source: ANRPC Age structure of rubber trees in most of the producing countries indicates a possibility of large-scale replanting in 2010 and 2011. The concern over natural rubber supply seems to persist until end of 2011 as the yielding area is unlikely to expand before 2012 when a large area planted in ANRPC countries, especially Thailand, from 2005 onwards is expected to start yielding from 2012 and the replanted trees attain higher yielding stage (in the life cycle of a rubber tree, gestation period is 7 years and productivity is highest after 10 years of plantation). During the 2005 – 2010 period, a total area of 2,544 thousand hectare have been planted in ANRPC countries, in which 927 thousand hectare were planted in Thailand during that period in response to attractive prices and positive outlook of the rubber industry. Especially, the annual new planted area increased significantly from 2005 – 2008 as prompted by the high prices of natural rubber at that time. Figure 4: Annual new and replanted areas in Thailand from 2003 to 2010 Figure 5: Total new and replanted areas of natural rubber in ANRPC members Source: ANRPC As a result, the net effect of replanting old-age with low yielding trees and new supply of higher yielding ones could lead to changes in the supply after 2011F. In addition, as a result of the current high market prices of natural rubber, there could be another surge in new plantings for natural rubber, which could lead to higher than forecasted supply of natural rubber subsequently. Higher demand thanks to recovery in global automobile sales and China’s inventory build-up Currently, rubber demand for tyre production accounts for around 68% of the total demand. The recovery of global automobiles sales will have positive impact on the rubber industry. In 2009, China surpassed US to become the largest automobile producer with sales of 13.6 million cars, up 50% from The surge in new plant areas during 2005 – 2008 as response to high market prices for natural rubber will lead to changes in natural rubber supply after 2012. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 4 28March2011 Vietnam natural rubber sector 2008. Automobile sales in China are expected to increase by 15 million cars in 2010 thanks to stronger domestic consumption and export. The incentive programs of the US and EU’s government in 2009 such as “cash for clunkers” did encourage a large number of vehicle owners to buy new cars by trading- in their old vehicles. In addition, the rise of higher income earners in Asian countries such as India, China – who used to own vehicles of only two tyres (mainly motorbikes) - now have a demand to own private cars which will double the demand for tyres. These are strong market fundamentals that support the recent recovery in rubber price, rather than speculation as in 2008. Figure 6: Monthly passenger car sales in China is maintaining at high level for over a year (in units) Figure 7: Monthly passenger car sales in India is also on increasing trend thanks to higher domestic demand (in units) 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Source: Bloomberg Being the largest natural rubber producer, Asia is also the main consumer, accounting for two thirds of the world natural rubber consumption. China is the largest consumer of natural rubber, accounting for more than 32% of the global demand in 2009. Figure 8: Tyres account for the largest demand for rubber Figure 9: Asia accounts for two thirds of the world natural rubber consumption and China is the largest natural rubber consumer in the world Source: ANRPC, International Rubber Study Group (IRSG) In 2009, China, India and Malaysia captured 47% of total global rubber demand. Import demand from China is anticipated to keep increasing when China is building up its natural rubber inventory as it anticipates the limited supply in Q1-Q2 of 2011. Closing stock of natural rubber in ANRPC countries also keeps increasing in recent years thanks to higher demand and better price trend during the first few months of the year. Current recovery in rubber prices is based on strong market fundamentals, originated from the recovery in global automobile sales. Rubber demand rising in line with the recovery in tyre production industry. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 5 28March2011 Vietnam natural rubber sector Figure 10: China is building up its natural rubber inventory Figure 11: Closing stocks at year end in ANRPC countries 0 20 40 60 80 100 120 140 160 2007 2008 2008 2009 2009 2010 2010 2011 '000tonnes Source: ANRPC, Bloomberg Demand for natural rubber in China and India may keep increasing as automobile industry in China is expected to grow at 8%/year in the period 2011 – 2015. Automobile sales in India are also on rising trend as more middle and high-income earners have higher demand for private cars. Based on the International Rubber Study Group (IRSG)’s estimate, global demand for natural rubber may reach 12.4 million tons by 2015 and 14.2 million tons by 2020, but the worldwide natural rubber production can only reach 13.6 million tons/year in 2020, not taking into account new planting areas that may be stimulated from the current high market prices of natural rubber as last seen in the 2005-2008 period. Higher crude oil prices support NR Rubber price is believed to have a close relationship with oil price. This is often explained by the presumption of a replacement between natural rubber and synthetic rubber. Based on historical data of crude oil price and natural rubber price (Thai RSS3) from 2002 to 2010, the correlation coefficient between oil price and natural rubber price is quite significant at 83%. As a result, natural rubber prices normally changes in the same direction with oil price and vice versa. Figure 12: Natural rubber accounts for around 43% of total rubber demand Figure 13: Rubber price changes in the same direction with oil price. 0 20 40 60 80 100 120 140 160 ‐ 1,000 2,000 3,000 4,000 5,000 6,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 ThaiR SS3 WTIcrushing U S D / t o n U S D / b a r r e l Source: IRSG, Reuters Synthetic rubber consumption accounts for around 55% of total global rubber demand. Synthetic rubber is synthesized from oil and requires different technology, which explains a close correlation between natural rubber price and crude oil price. Currently, there is a gap between natural rubber price and crude oil price, which partly comes from a higher increase in natural rubber price in comparison with oil price. Therefore, natural rubber price is under some pressures to adjust downward to close to gap. However, as the world economy recovery strengthens, crude oil price is expected to pick up gradually, closing the current gap between natural rubber price and crude oil price. Based on recent forecast of Correlation coefficient between oil price and natural rubber price is 83%. Demand for natural rubber may reach 12.4 million tons by 2015 and 14.2 million tons by 2020. Crude oil price is on recovery trend, driven by bullish sentiment about the global economic outlook. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 6 28March2011 Vietnam natural rubber sector Goldman Sachs, the medium term outlook for oil prices is quite positive, supported by global oil stockpiles shrink and oil production tightens. On a long run, we believe that rubber prices and oil prices will both benefit from price appreciation in key commodities, maintaining the close relationship between them. Vietnam rubber sector Vietnam is one of the leading natural rubber producers in the world In 2009, Vietnam’s natural rubber volume ranked fifth worldwide with total production volume of 724 thousand tons. Total export volume increased 10% to 731.4 thousand tons in 2009, 800 thousand tons in 2010, and total export turnover of natural rubber reached USD2.35bn in 2010. With impressive increase in export volume, Vietnam has surpassed Malaysia to become the third biggest natural rubber exporter in the world. In 2010, Vietnam’s total rubber area is about 715 thousand ha in which 445 ha are ready for harvesting. Figure 14: Vietnam is the world fifth largest producer and third largest exporter of natural rubber Figure 15: Rubber area and productivity of main producing countries in 2009 Source: ANRPC Thanks to government’s incentive measures to develop rubber plantations, Vietnam has the fastest growth rate among leading NR producing countries. During the period from 2003-2009, the annual growth rate of total rubber area and total rubber harvesting area was 7.5% and 7.9% respectively. Plantation productivity has improved remarkably during the past six years. Vietnam’s harvesting to reach in 2009 1.72 ton/ha, similar to that of Thailand. Figure 16: Vietnam export volume and value increase dramatically over the past 10 years Figure 17: and production yield of Vietnam natural rubber improved largely within the past 5 years 0 500 1,000 1,500 2,000 2,500 0 100 200 300 400 500 600 700 800 900 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Export volume ('000 tonnes) Rubber export (USD mn) '000ton USDmn Source: ANRPC Vietnam records the fastest growth rate in leading countries in term of productivity. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 7 28March2011 Vietnam natural rubber sector The government outlined a plan to develop Vietnam rubber plantations until 2020. With new plantation area of 30,000-40,000 ha/year, Vietnam’s rubber area may reach 1 million ha and 1.2 million tons of volume by the end of 2020. Figure 18: Development plan of Vietnam rubber industry to 2020 Region 2010 2015 2020 Southeast ha 385,000 406,000 420,000 Central Highlands ha 231,000 300,000 420,000 Central Coast ha 70,000 96,000 110,000 Northwest ha 14,000 48,000 50,000 Total area ha 700,000 850,000 1,000,000 Total volume tons 750,000 880,000 1,200,000 Source: VRA Vietnam Rubber Group (VRG) is the biggest state-owned enterprise whose subsidiaries control about 269.3 thousand hectares of total rubber plantations in 2009, corresponding to 40% of total nationwide area and 85% of export production. VRA’s total production in 2009 was 298,800 tons, accounting for 41.2% of the nationwide volume. All currently listed natural rubber companies (PHR, TRC, DPR, HRC) are members of VRA, except for TNC. Figure 19: Production and sales volume of VRA members in 2009 Company/Region 2009 Production (tons) 2009 Sales volume (tons) Southeast 242,290 266,697 1 Dau Tieng rubber company 45,898 53,186 2 Dong Nai rubber company 45,280 47,897 3 Phu Rieng rubber company 27,500 28,238 4 Binh Long rubber company 24,775 25,052 5 Phuoc Hoa rubber company (*) 24,092 32,393 6 Dong Phu rubber company (*) 16,802 19,593 7 Loc Ninh rubber company 15,048 14,037 8 Tay Ninh rubber company (*) 13,211 13,095 9 Tan Bien rubber company 12,421 13,798 10 Ba Ria rubber company 6,420 7,259 11 Hoa Binh rubber company (*) 5,118 6,300 12 Binh Thuan rubber company 4,480 4,618 13 Rubber Institution 1,245 1,231 Highlands 48,240 50,499 14 Kontum rubber company 10,350 10,600 15 Chu Se rubber company 9,015 10,122 16 ChuProng rubber company 7,600 7,840 17 Mang Yang rubber company 6,250 6,212 There is large potential in the natural rubber industry VRA controls around 40% of the total rubber production and 85% of rubber export in Vietnam. www.vcsc.com.vn | VCSC<GO> VIET CAPITAL SECURITIES | 8 28March2011 Vietnam natural rubber sector 18 ChuPah rubber company 6,150 6,557 19 Eah'Leo rubber company 5,230 5,000 20 Krongbuk rubber company 3,645 4,168 Central coast 8,335 10,365 21 Quang Tri rubber company 6,042 8,082 22 Ha Tinh rubber company 1,283 1,237 23 Quang Nam rubber company 830 830 24 Quang Ngai rubber company 180 216 Total 298,865 327,561 Source: VRA (*) Listed rubber companies The natural conditions in the Southeast region are very suitable for rubber development. Total rubber area in the Southeast region is estimated to account for 67% of total plantation in the whole country. Thanks to high productivity in the region of about 1.9 ton/ha, annual harvesting volume is almost 79% of total productivity in Vietnam. Figure 20: Allocation of rubber area by zones Figure 21: Allocation of rubber volume by zones Source: VRA With 85-90% of the production is for export Annually, 85-90% of Vietnam natural rubber is consumed in foreign markets. In 2009, Vietnam exported natural rubber to 71 countries, in which China was the largest importer with the annual growth rate of 6.6%, reaching 494.6 thousand tons or USD 789 million. Total export turnover of natural rubber in 2009 was USD1.2 bn and the turnover in 2010 is USD2.35bn thanks to good rubber prices in the year. Rubber plantation is mainly focused in the Southeast re g ion. Tyre production industry in the region is the key source of demand for NR products of Vietnam. [...]... CAPITAL SECURITIES | 10 28 March 2011  Vietnam natural rubber sector Vietnam s rubber companies have limited organic growth but benefit from high rubber price and depreciation of VND Rubber price continues to stay high thanks to supply shortage Exchange rate is another element supporting domestic rubber companies As global rubber prices are still in upward trend, Vietnam s rubber export prices also move in... Motorbike %products/ demand Source: VRA Vietnam has little impact on global rubber price Vietnam s rubber prices are normally cheaper and have no impact on the world rubber price In spite of being the world fifth largest producer and third largest exporter of natural rubber, Vietnam only contribute approximately 7% of rubber volume into total global natural rubber supply compared to roughly 20% of... the largest exporter – Thailand In addition, as two third of Vietnam rubber is exporting to a sole consumer - China, Vietnam is fully impacted by fluctuations in international rubber price as well as changes in global rubber production and global rubber demand In addition, as the brand name of Vietnam rubber has not been set up, Vietnam s rubber selling prices are usually cheaper than those of Thailand...28 March 2011  Vietnam natural rubber sector Figure 22: Export products structure of Vietnamese rubber Figure 23: China is the main consumer of Vietnam rubber – 68% of Vietnam export Source: VRA Domestic consumption market is quite small, only accounting for 1015% of total quantity Domestic consumption volume in 2009 was about 120 thousand tons of rubber, corresponding to 14.1% of... the structure of the plantations VIET CAPITAL SECURITIES | 11 28 March 2011  Vietnam natural rubber sector TRC and DPR are our top picks in the sector Among listed natural rubber companies, we like TRC and DPR In addition to benefit from global rubber price, we appreciate TRC and DPR’s capability in maintaining output as their rubber plantations will be in age of high productivity and volume in coming... incurring losses especially when rubber prices fall dramatically For this reason, rubber companies are able to control cost of goods sold and keep their gross profit margin of over 20% even when rubber prices fell remarkably as in 2008 Vietnam s government considers rubber trees as one of the strategic plants for export and poverty reduction Therefore, Vietnam rubber sector receive many supports from... addition to cheap land renting cost, rubber companies are also supported in terms of selling price In the end of 2008 and beginning of 2009, when rubber price dropped deeply, the Government permitted Vietnam Rubber Association to buy all domestic rubber in order to stabilize rubber price and ensure a minimum profit for rubber companies We analyse two scenarios when rubber price is at the 2010 lowest... VRG such as Dau Tieng, Phu Rieng Rubber, Dong Nai Rubber, Binh Long Rubber, and Tan Bien Rubber also produce CV50-60 but with much lower percentage in revenue (10% for Dau Tieng Rubber) Purchasing rubber from third-party producers provides additional profits As operating profit margin of purchasing rubber from third parties for processing is historically low at 3-4%, rubber companies only maintain trading... prices Average rubber price for 2010 is USD3,000 per ton, or VND58.5 million/ton, the highest level in the rubber history Moving into 2011, the discrepancy between global demand and supply is still a supporting factor to rubber prices As of February 2011, rubber s off-peak season, world rubber price reaches over USD5,000 per ton while domestic price also reaches around VND100mn Vietnam s rubber companies... from high rubber prices, rubber companies also earn better financial income thanks to currency conversion As the majority of rubber plantation is either too old or not mature enough to start yielding, rubber companies have limited organic growth over the next few years, at least until 2013, when a large area of new rubber plantations planted in 2005 starting production Figure 27: Annual new rubber plantation . 28March2011 Vietnam natural rubber sector Table of Contents Global natural rubber market page Impressive recovery of natural rubber price 2 supported by limited supply of natural rubber 2.  Vietnam natural rubber sector Global natural rubber market Vietnam rubber sector Stock recommendation www.vcsc.com.vn. Vietnam rubber sector page Vietnam is one of the leading natural rubber producers in the world 6 … with 85-90% of the production is for export 8 Vietnam has little impact on global rubber