INTERNATIONAL UNIVERSITY

VNU – HCMC

SUBMISSION COVER SHEET

BUSINESS ANALYSIS & VALUATION
COMPANY RESEARCH PROJECT

Course coordinator: Dr. Tien C. Ng.

Group members:

Team Member
Student ID Full Name Signatures Contribution
(max 100%)

1. BAFNIU20092 Trần Thị Hồng Phúc Phúc 100%

2.BAFNIU20296 Đào Nhật Hưng Hưng 100%

3.BAFNIU19155 Nguyễn Bảo Quỳnh Quỳnh 100%

4.BAFNIU19182 Lê Quỳnh Trâm Trâm 100%

We declare that this assessment item is the own work of our group, except where acknowledgement,
and has not been submitted for academic credit elsewhere.

Signed: ………………Hưng………… Date: …28/05/2023………………………………

 Sector: Materials – Industry: Industrial Metals
Ho Chi Minh Stock Exchange (HOSE)
HOA SEN GROUP (Ticker: HSG)

INVESTMENT SUMMARY

With a target price of VND 14,481, representing a loss of 6% from its closing
price of VND 15,350 on May 28, 2023, we propose that investors HOLD
Date: 28th May 2023 Hoa Sen Group Joint Stock Company while they wait for the business to
recover from its challenging 2023 phase and resume its development
potential. Our recommendation is based on the following criteria:
Revenue-Reducing In 2023, Long-Term Growth Slowing, But Still
Strong
Our conservative forecast is that revenue growth will slow slightly over the
next 5 years, given the volatile domestic market and slowing export growth
especially causing a sharp drop in sales in 2023. However, profit will still
grow at a CAGR of 23.3% during the forecast period 2023 to 2027.
HSG Leads The Domestic Market Share In Galvanized Steel Products
(Accounting For 32%)
Specifically, HSG owns a distribution system including Hoa Sen Home
supermarket, 600 stores, 10 factories spread across the country.
Stable Liquidity and Leverage
Hoa Sen Group has adopted a flexible strategy to combat economic
challenges, resulting in a significant decrease in D/E and D/A ratios. These
ratios are forecasted to continue decreasing for the next five years, leading
to reduced borrowing costs and increased debt repayment capacity,
enhancing profitability. Improved short-term liquidity is reflected in
consistently increasing current and quick ratios. Investment in production
expansion may cause a temporary decrease in these ratios in 2023, but they
are predicted to improve again once Hoa Sen Home is completed and in
operation.
Outstanding Inventory Management
The days inventories outstanding for the company have remained stable at
around 81 days since 2018. Despite a significant increase in inventories in
2021, the days inventories outstanding remained at 81.85 days, indicating
efficient inventory management practices. There are indications that basic
high-priced inventory decreased by 1.7 times in 2022 compared to 2021,
including signs of bottoming out in inventory turnover. With the early cut of
steel capacity and increased sales discount rate, it is expected that the
company has effectively managed high-priced inventories from previous
years.

1
 BUSINESS DESCRIPTION
Net revenue
Established in 2001, HSG formerly known as Hoa Sen Joint Stock Company,
60,000
specializes in manufacturing, and trading steel products and other industrial
Billions

40,000 production with 10 subsidiaries. The company is also a steel exporter to 85

20,000 different countries. In 2022, the enterprise’s net revenue is VND 49,710 billion
0 with the 2018A – 2022A CAGR of 7.62% and the net profit after tax is VND
2018 2019 2020 2021 2022 251 billion with the CAGR of -7%.
MARKET SHARE
Net profit after tax
Galvanized sheet: (contribute from 78% to 85% to the net revenue) HSG is the
5,000 market leader in galvanized steel consumption with the proportion continuously
Billions

4,000 improving from 30% in 2019. In the first quarter of 2022, the market share of
3,000 galvanized steel consumption maintained the proportion as high as 32%. In
2,000 which, export accounts for 54% of HSG's total consumption of galvanized steel
1,000 (Export consumption always accounts for over 50%).
0
Steel pipe: (contribute from 7% to 13% to the net revenue) Hoa Sen steel pipe
2018 2019 2020 2021 2022
market share ranks second in the whole market and continuously improves from
17% in 2018 to 19% in 2021 reaching more than 422 thousand tons. In the first
Net revenue Breakdown quarter of 2022, reached more than 107 thousand tons, up 21% compared to the
fourth quarter of 2021, of which domestic accounted for more than 102
thousand tons, this shows that HSG has a strength in steel pipe consumption in
the domestic market than in the export market.
Other industrial production: (contribute from 8% to the net revenue)
Including producing and trading plastic pipes, purlins, building materials,
interior decoration. According to the management, the profit margin of these
products is lower than that of the main products (galvanized sheet and steel
Galvanized sheet Steel pipe Other pipe).
Domestic and Export Consumption In The Fourth Quarter of 2022
Tight monetary policy globally in the second half of 2022 has caused
investment and consumption demand shrinks. Therefore, HSG's export
activities began to decline in the fourth quarter. Specifically, the export of
galvanized steel only reached 90.5 thousand tons, down 76% over the same
period and 59% compared to the quarter before. Steel pipe export volume
decreased by 31% over the same period and 42% compared to the previous
quarter, down 4 thousand tons.
In the domestic market, adjustments in the real estate sector and restrictions on
bank credit to the economy limited the demand for galvanized steel. However,
thanks to high trade discounts (4th quarter revenue/revenue deduction is 2.6%
compared to the quarterly average of 0.5% over the past 5 years) and the low
base of the fourth quarter of 2020-2021 (a large-scale blockade period),
galvanized steel output in Q4 increased by 36% YoY while steel pipe increased
by 19% YoY.

2
 INDUSTRIAL ANALYSIS
DEMAND OUTLOOK
The Manufacturing and Processing Sector In Vietnam Is On The Rise and
Has The Potential To Attract Growing FDI In The Upcoming Time
Vietnam has consistently received growing FDI inflows, especially to the
manufacturing and processing sector (2022: 58%). Vietnam’s manufacturing
and processing industry maintains its position as a high-potential spot in
attracting FDI with the advantages of: (1) dedicated industrial and economic
zones, (2) strategic location, (3) cheap labor cost, (4) robust infrastructure
spending, and (5) investment and land rental incentives. Therefore, demand
growth for steel product is thus expected to gradually recover and increase since
they are widely used in the construction of factories, warehouses, and
machinery manufacturing, etc.
Government Spending
The National Assembly has issued a Resolution on the National Master Plan for
the period of 2021 - 2030, with a vision to 2050, which will pave the way for
programs to renovate old apartments, social housing projects ... Starting from
2023, according to the national master plan, some provinces and cities will have
specific mechanisms for urbanization, infrastructure, and industrial parks with
a clearer development direction. Moreover, with the amendments to the Law on
Construction, Investment and Real Estate, it will help to remove the bottlenecks
that are preventing the development of the real estate industry in recent years.
The National Assembly also approved an economic recovery support package
worth VND 350,000 billion, of which VND 113,850 billion was allocated for
infrastructure development, leading to increased demand for iron and steel.
Inflation Falls From Mid 2023
Inflation in many countries around the world is cooling down, in which,
inflation in the US peaked at 9% and is currently in a downward trend.
Following this trend, it can be said that inflation pressure in Vietnam in 2023
will not be too great. In the coming time, inflation over the same period in
Vietnam will tend to decrease gradually after peaking in January 2023, thanks
to the prudent monetary policy of the State Bank in 2022. Average inflation in
Source: General Statistics Office
2023 is forecasted to be around 3.5%. The 2023 inflation control target is around
Of Vietnam 4.5% or even below 4%. Lower inflation rates can lead to greater economic
stability, which can provide a better environment for HSG to operate, the
purchasing power of consumers increases, which can lead to an increase in
demand for steel products.
Steel Industry Exports Show Signs Of Thrive
It is likely that this positive trend will be maintained soon, especially with the
need to fill up stockpiles to serve the positive outlook on demand in the Chinese
market. Real estate in China is also showing signs of stabilizing, which will be
a bright spot for the consumption of metals in the construction sector, thereby
supporting steel prices. In addition, The Trade Remedies Department (PVTM)
received information that on February 1, 2022, the Indian Ministry of Finance
issued Decision No. 7/2022-Customs (ADD) to revoke the order to impose anti-
dumping duties on the with some steel products originating or imported from
3
Vietnam, Korea, and China.
According to statistics of the General Department of Vietnam Customs, in the
first 15 days of February 2023, our country exported more than 303,000 tons of
iron and steel of all kinds, earning a turnover of 227.5 million USD, doubled
compared to the same period last year. period last year. Export value has also
increased by more than 63.5%. The positive export signal brings more positive
expectations to the domestic construction iron and steel industry.
SUPPLY OUTLOOK
Raw Material Price Fluctuations
Export coking coal prices at Australian ports tend to increase sharply again after
falling in April 2022A. Specifically, after the price of coking coal increased
sharply to $235/ton, peaking at $627/ton in March, it was again dropped deeply
to $360/ton in April, then rebounded sharply. Scrap steel at the time just
recorded a decrease in May after a previous increase.
In general, prices of production materials are still fluctuating quite reversed
during the past period due to the impact of the recovery from the global
economy and the effects of the war between Russia and Ukraine.
Self-producing Hot Rolled Steel (HRC)
In May 2017, the value chain of Vietnam's flat steel industry made a great step
forward when Formosa-Ha Tinh (FHS) launched the first batch of HRC steel in
the country. Formosa Ha Tinh provides input HRC steel materials for
enterprises producing galvanized steel sheets and steel pipes, which not only
does not increase the pressure of domestic competition, but also minimizes the
risk of price fluctuations compared to imports, which takes 20-30 days shipping
time and exchange rate risks.

COMPETITIVE POSITIONING
Thanks to the competitive pricing, huge economies of scale, and superior
product quality enhanced by deployment of technologies, HSG manages to
have (1) low threat of new entrants; and (2) low threat of substitutes. yet due
to the highly competitive market and huge dependence on overseas suppliers,
HSG has (3) relatively low bargaining power with suppliers, (4) moderate
bargaining power with buyers, and (5) high rivalry.
Proactive Closed Production and Business Process
Helps regulate and closely control costs at each stage of the production process
and thereby help minimize costs and achieve economies of scale. This is the
basis for HSG to implement the market leadership strategy based on the lowest
production and business costs.
Modern Production System
HSG has completed an investment in 11 factories distributed in all 3 north,
central, and south regions, helping to optimize transportation costs and
respond quickly to market demand. The factories are invested in modern
machinery, producing products of outstanding quality, uniformity, ensuring
4
 output, delivery time, and specific requirements in each different market area.
Large Distribution System
The distribution system includes more than 536 branches-stores nationwide and
export channels to more than 85 countries and regions worldwide. With
centralized and unified management according to common policies, combined
with an optimal management model and a synchronously and consistently
operated ERP system, it has become a great advantage for the group to directly
access to consumers, strictly control product quality and quickly bring products
to market and be flexible in sales policies to ensure cash flow in the context of
market volatility. In the field of building materials, the only enterprise that owns
a distribution system stretching across the country, builds a chain of principal
building materials retail stores with a diversified product portfolio.

CORPORATE STRATEGIES
Streamlining The Branch
Hoa Sen had 470 branches at the end of 2018. Now, just 53 provinces' branches
manage 536 connected stores around the country. During this time, the number
of branches was reduced by 88.7%, which allowed HSG to quickly cut
administrative and selling costs.
Profit vs Gross Profit
Focus On Items With High Gross Profit Margin
Margin
Profit increased dramatically while sales declined somewhat as the gross profit
6,000 20.00%
margin climbed. In the year 2019 to 2020, the gross profit margin increased
Billions

4,000
10.00% approximately 1.5 times, from 11.41% to 16.81%. The results were obtained by
2,000 HSG's product restriction, focused on trading items with high gross profit
0 0.00% margins rather than pursuing competitive price pressure.
2018 2019 2020 2021
Innovation Strategy
Profit Gross profit margin
The company's innovation strategy is focused on developing new technologies
and products to stay ahead of the competition and meet the changing needs of
customers. The company has invested heavily in research and development to
develop new products, such as high-quality galvanized steel, metal roofing
systems, and pre-painted galvanized steel, that are eco-friendly and comply with
international quality standards.
Cost Optimization Strategy
The company's cost optimization strategy is focused on reducing production
costs, enhancing operational efficiency, and improving supply chain
management. The company has implemented several measures to reduce its
energy consumption, waste generation, and environmental impact, while also
increasing its operational efficiency and improving its supply chain
management.
Risk Management Strategy
The company's risk management strategy is focused on mitigating risks and
uncertainties related to its business operations. The company has implemented
several measures to reduce financial risks, such as foreign exchange and
commodity price risks, and has diversified its product portfolio and customer
5
 Cash Flow from Operating Activities base to reduce dependency on a few markets or clients.
8
FINANCIAL ANALYSIS
Trillions

6
Cash Flow From Operating Activities
4

2
From the chart above, Hoa Sen Group has a positive net cash flow from
operating activities from 2018 to now, which is a positive signal for a business
0 enterprise. However, cash flow from operating activities is decreasing day by
2018A 2019A 2020A 2021A 2022A
-2 day. This decrease comes from the fact that the business spends a lot of money
on inventory in 2021, even if its operating profit increases to 257% and
-4
payables are delayed and reaching a sudden increase of 195% in 2021 also
-6 Change in inventory could not offset the amount of money spent on inventory accumulation,
Change in payables causing a decrease in cash flow from business activities in 2021.
-8
Depreciation and
amortisation Cash flow from operating activities of the enterprise reached the highest level
Accounting Profit before
tax in 2019, which is explained by the fact that this year the enterprise did not
focus on inventory, the previous year's receivables were recovered from other
activities’ credit sales in the previous year.
Depreciation rate of fixed assets of enterprises has remained stable from 2018
to 2022 when enterprises tend to limit investment in fixed assets since 2018
until now.
Cash flow from investing activities

1
Cash Flow From Investing Activities
Trillions

Investment cash flow has increased from negative 2.393 billion dong in 2018
0 to negative 786 billion dong in 2019. This figure continues to increase to
2018A 2019A 2020A 2021A 2022A
negative 408 billion dong in 2022. Cash flow from investment activities is
-1
negative, shows that the enterprise uses profits from business activities to
invest. The items that have a great impact on the investment cash flow of the
-1
business are the sale and purchase of fixed assets. In 2018, enterprises spent
the most money on investment activities when increasing a large amount of
-2
expenses on purchasing fixed assets (VND 2,723 billion), the amount of cash
-2
spent on this item is decreasing, and enterprises also started to liquidate
unnecessary fixed assets when following the motto of restructuring the
-3 operating model, eliminating fixed assets that do not serve their product
distribution activities.
-3
From 2018 to 2020, cash flow from collections on loan receivable tends to
increase when the company's idle cash is not used. However, through 2021,
Payments for additions to fixed assets
Payments for term deposits
Hoa Sen Group also made cuts in the payment of term deposits, the loan
Collections on loan receivables amount of the business decreased very low compared to 2020 to only 19 billion
Net cash flow
dong.
Cash Flow From Financing Activities
Net cash flow from financing activities has been negative from 2019 to
present. However, which was due to Hoa Sen Group's policy of repaying its
debts. By paying off its debts, the company reduced the pressure that comes
with using debt to finance its operations, which is also known as financial
leverage. This means that the company became less reliant on borrowing
money to meet its financial obligations and was able to decrease its negative
cash flow from financing activities. According to the chart above, Hoa Sen
Group made significant payments to settle loan principals, with the largest
amount being in 2021A at 39.544 billion VND, much higher than the cash flow
6
 Cash flow from financing activities from issuing equity of only VND 44 billion.
10 HRC Price Impact on HSG's Profit Margins
Trillions

0
2018A 2019A 2020A 2021A 2022A
The decline in domestic and export demand for galvanized steel in the second
-10 half of 2022, combined with the sharp drop in the price of HRC, had a
significant impact on HSG. Unlike other steel companies with lower inventory
-20
levels and flexibility to adjust, HSG operates across the value chain as both a
-30 manufacturer and a retailer. This dual role led to stockpiling of raw materials
-40
as a manufacturer and finished products as a retailer. As a result, the decrease
in raw material prices affected HSG's gross profit margin, impacting on both
-50 input costs and the selling price of its products.
Net cash flow
Outstanding Inventory Management
Payments to settle loan principals
Days inventories outstanding has been remained stable after 2018 around 81
Proceeds from equity issued
days. Especially, in 2021, although the inventories go up dramatically (from
VND 5,524 b in 2020 to VND 12,349b), the days inventories outstanding was
still remained at 81.85 days. This indicates that the company's inventory
management practices are efficient which boost the business effectiveness of
the company. Besides, we believe that basic high-priced inventory has recorded
a decrease of 1.7 times in 2022 compared to 2021, based on the following signs:
(1) Inventory turnover has shown signs of being created. bottom in 2022 at
80.48 days. (2) Steel companies like HSG usually store inventory for 2-3
months of sales. With the early cut of steel capacity from April 2022, and
drastic increase in sales discount rate, we expect HSG has handled relatively
high-priced inventories in previous years.
Stable Liquidity and Leverage
The D/E ratio has displayed a significant decrease over the years. Starting at
3.13 in 2018, it has steadily declined and is forecasted to reach 0.32 in 2027.
Additionally, the D/A ratio has experienced a significant decline since Q2/2022
when the steel industry became more challenging. This flexible strategy
adopted by HSG aligns well with the current economic environment
characterized by continuously increasing and high interest rates. We predicted
that these two ratios will continue for the next 5 years as it will help reduce
borrowing costs, enhance debt repayment capacity, and support the
development of the corporation's profitability.
In terms of liquidity, both the current ratio and quick ratio have increased
consistently, representing improved short-term liquidity and the ability to meet
current obligations. According to the construction plan of Hoa Sen Home
investment, we predict that there will be a decrease in the current ratio to 1.89
and quick ratio to around 1 in 2023, serving for investment in production
expansion. After Hoa Sen Home plan is completed, the above two indexes will
improve again, continuing the upward momentum.
Low-average performance
The ROE indicator of the company is excessively low and has experienced a
significant decline after 2021. Furthermore, the ROA witnessed a significant
decline in 2022 due to a decrease in the company's profitability, which, in turn,
affected efficiency-related indicators. This demonstrates the strong impact of
the economic recession on the company's operations (in the steel industry in

7
general). The primary reason for this decline is that while the revenue
increased slightly, the costs escalated significantly.

VALUATION
We have applied the Discounted Free Cash Flow to Firm (FCFF) method to
value HSG. Particularly, the DCF analysis concentrates on the steel-related
operation such as key drivers of revenue and gross margin. DCF will be useful
in providing reasonably accurate results, reflecting the long-term growth of
HSG based on the fundamental driver of business value.
Discounted Free Cash Flow
We apply a Two-stage H model for HSG, in which we divide the firm’s
development into two phases: a high growth period (2022- 2030), then decline
linearly until reaches a sustainable growth rate (2030 onwards).
Discount Rate
We apply CAPM model to compute HSG’s Cost of Equity. The risk-free rate
is 3.05% which is the Vietnamese 10-year Government Bond (taken from the
Vietnam Bond Market Association’s data). The market risk premium is equal
to 14.81% which is computed by taking the required market return subtracting
it from the risk-free rate. The beta is computed using a regression model
between the daily return of HSG's stock and the daily return of the VN Index
during the period 2018-2022. The beta result is 1.42 (greater than 1) which
indicates that the stock price of HSG is more volatile than the market price.
The cost of debt is computed by taking the average interest expense divided by
the average net debt during the period 2018-2022, the result is 6.66%. The tax
rate is 20%. Based on the calculated components, WACC is equivalent to
22.27%, which is the discount rate for our value.
At the annual general meeting of shareholders held on March 21, 2022,
Chairman Le Phuoc Vu stated that Hoa Sen is now too big in the galvanized
steel industry, so there is not much room for growth. In addition to galvanized
steel, Hoa Sen also has other key steel products: steel pipes. In terms of market
share, Hoa Sen is ranked 2nd in the steel pipe market (after Hoa Phat Group).
Last year, Hoa Sen ranked first in Southeast Asia in galvanized steel, leading
in Vietnam, ranked in the top 2 in Asia, including China and India", besides
Hoa Sen exported to the whole world, including the US and India. Europe,
worth over 1 billion USD. This is a very large number.”
Moreover, Hoa Sen had ambitions to do Ca Na steel project in Ninh Thuan
province with an estimated investment of 10 billion USD but then gave up
because of many obstacles. Currently, the group has no ambition to invest in
upstream steel. Therefore, we predicted that HSG would maintain a short-term
growth rate of 7% each year throughout the years 2022–2032, at which point
it will progressively decline and approach a sustainable growth rate of 1.8%.
Terminal Growth Rate

8
 Because HSG's steel segment operates primarily in Asia-Pacific, we decide to
use long-term steel consumption growth in this region as the terminal growth
rate for our valuation, reasoning that HSG will eventually converge at this stable
growth rate when it reaches a certain size. To calculate the long-term growth in
steel consumption in Asia Pacific, we quantify the proportion of steel
consumption and GDP growth rate in this region from 2017 to 2023 and apply
this disparity to Asia-Pacific long-term GDP growth to arrive at the target
terminal growth rate of 1.8%.
Revenue Forecasting
Based on 2 options of HSG's target set for 2023 with the revenue plan will
Revenue decrease to 32% and 28% for options 1 and 2 respectively. We agree that in
60 100.00% 2023 HSG's revenue will decrease and specifically a 32% decrease based on the
Trillions

50 80.00%
60.00%
following reasons:
40
40.00%
30
20.00% Because the real estate market has not recovered. As of the current May 2023,
20 0.00% we see support policies such as Resolution on the National Master Plan,
10 -20.00%
0 -40.00% economic recovery support package, Amended Land Law, etc. proposed in
2023 is still in the process of approval and implementation but we believe that
the recovery will be relatively slow. The reason is that the real estate market
needs time to restructure the project, so it will be difficult for the galvanized
Net Sales % growth rate
steel sheet demand to grow strongly in 2023. Therefore, the demand for
galvanized steel will still be less positive until the end of 2023.
As for exports, due to the protection orders put in place in countries such as
China, Europe and the US, sales also decreased significantly. In addition,
demand from the US and EU decreased, the world selling price dropped sharply,
making Vietnamese coated steel sheet enterprises like HSG no longer have the
competitive advantage in price as before.
Especially, the selling price of galvanized steel decreased due to the decrease in
the price of HRC input materials. In addition, HSG also increased the discount
rate for customers to push inventory while the demand was very weak and
compared to Quarter 4, 2022, the selling price of HSG galvanized steel was still
in a downtrend. So, in 2023, revenue will drop sharply.
However, after 2023 will be a period of recovery for HSG, specifically revenue
we predict that for 2024, will decrease slightly at 5%, then maintain the growth
rate according to the average growth rate of the Vietnam's economy is in the
range of 3%-7% a year according to Worldbank.org, specifically, we predict
HSG's revenue will increase by 3%, 5% and 7% respectively for 2025, 2026
and 2027, because:
We predict that by 2024, all support policies from the government on real estate
will be approved and public investment will be promoted, which will help
9
 improve the real estate situation.
The selling pressure has slowed down as HRC prices have bottomed and the
HRC market will also be in balance with supply and demand thanks to the
Short-term borrowing
reduced supply as many Chinese factories close their furnaces.
15
Besides, the real estate market in China has shown signs of returning, which is
Trillions

10
a factor that helps steel demand in general recover and HRC price is unlikely to
5 fall as deeply as in 2022. In February 2023, there were Positive signals about
0 2024F China Real Estate such as: (1) >50% of the 290 previously suspended real estate
2018A
2019A
2020A
2021A
2022A
2023F

2025F
2026F
2027F
projects have been restarted, (2) revenue of Top 10 Companies has been
restarted, large real estate companies in China have grown again over the same
period.
Long-term borrowing Debt Schedule
4,000
Because HSG is having a very good debt control period, applying streamlining
Billions

3,000
the branch strategy and there are no big investment projects during this time,
2,000 specifically for short-term loans, it decreased by 38.36%, 10.18%, 9.75% and
1,000 25.13% in 2019, 2020, 2021 and 2022 respectively. With such a positive trend
0 in reducing short-term debt, we forecast the percentage of debt reduction for
each subsequent year to be 20.85% or average growth rate of debt from 2019
2018A
2019A
2020A
2021A
2022A
2023F
2024F
2025F
2026F
2027F

to 2022.
For long-term debt, the company has paid off in 2022 and the remaining 2 loans
are due in 2024 and will be paid by the company.
Relative P/E Method
For the relative P/E method, we choose a list of 5 peer companies based on some
criteria (1) same industry and business operation, (2) similar market capitalization, (3)
similar financial ratio and profitability. The average relative P/E is computed by taking
the average P/E of peer companies divided by the average market P/E and the result is
60.71%. We then multiply this percentage by the P/E of the VN-Index steel market and
arrive at the target P/E of 6.7. After multiplying the target P/E with HSG’s forecasted
EPS in 2023, we have the price per share is 852.

Conclusion
Finally, we apply a 95%-5% weighted average valuation of the two methods above to
have the 12-month target price per share of 14,481 which is a 6% downside compared
to the closing price of 15,350 VND on May 28, 2023. The Hold Recommendation is
given to investors because we believe in the long-term potential of the company.
Investors can choose to hold HSG shares and wait for the company to overcome this
difficult 2023 period and achieve growth potential again.

RISKS
Risk Of Steel Price Fluctuations
HRC The price fluctuation of HRC steel has a great impact on Hoa Sen's selling
price because HRC steel is the main raw material in Hoa Sen's galvanized steel
production process and Hoa Sen's galvanized steel selling price is calculated as
a percentage difference from the price of steel HRC. With export revenue
accounting for more than 50% of total revenue, Hoa Sen's steel selling price is
10
influenced by both domestic and international steel price movements.
Risk Of Unstable Domestic Real Estate Market
The real estate market directly affects Hoa Sen's consumption of galvanized
steel and steel pipes. Steel consumption in the real estate sector accounts for
more than 30% of domestic steel consumption. Unstable developments in the
real estate situation will negatively affect the steel industry and Hoa Sen.
Risks Of World Economic Decline
The world economic situation directly affects the steel consumption demand of
countries around the world. The economic decline will directly affect the
investment and construction needs of countries, thereby negatively affecting
consumption output and HRC prices in the world. With the proportion of exports
accounting for nearly 50% of Hoa Sen's revenue structure, the economic
downturn will directly affect Hoa Sen's business results.

ENVIRONMENTAL, SOCIAL, GOVERNANCE

Environmental
The company has invested in advanced technology to improve energy
efficiency in its operations. For example, they have installed a cogeneration
system that utilizes waste heat to generate electricity at their steel plant in Binh
Dinh Province. This system has helped reduce the company's carbon footprint
and save energy costs.
Hoa Sen Group uses recycled materials such as scrap metal and plastic pellets
as inputs for their manufacturing processes. This reduces waste and pollution
while also reducing the company's reliance on raw materials.
The company implemented a program called "Hoa Sen Green Day" to
encourage employees to participate in environmental activities, such as
cleaning up beaches and planting trees. They have also implemented a tree
planting program to offset their carbon footprint.
Social
Hoa Sen Group provides a range of benefits and support for employees,
including health insurance, life insurance, and retirement funds. They also offer
training and development programs to support employee growth and career
advancement.
The company has established an Employee Assistance Program (EAP) to
provide counseling services and other forms of support to employees and their
families.
Governance
Hoa Sen Group has established a Code of Conduct for all employees and
suppliers, which includes guidelines for ethical behavior and compliance with
applicable laws and regulations.
The company maintains a strong corporate governance structure with
independent boards of directors and regular audits to ensure compliance with
legal and ethical standards.
11
Hoa Sen Group regularly discloses financial information to the public,
including annual reports and financial statements. They also maintain open
lines of communication with stakeholders to address any concerns or feedback.

12
Table of Contents
APPENDIX A: FINANCIAL STATEMENTS ...................................................... 14
Appendix A1: Income Statement ................................................................................................................... 14
Appendix A2: Balance Sheet .......................................................................................................................... 15
Appendix A3: Cash Flow Statement .............................................................................................................. 15
APPENDIX B: BUSINESS DESCRIPTION ........................................................ 16
Appendix B1: Core Business Activities ......................................................................................................... 16
Appendix B2: Subsidiaries Breakdown......................................................................................................... 16
Appendix B3: Shareholder Structure ............................................................................................................ 16
APPENDIX C: INDUSTRY AND COMPETITIVE POSITIONING ............... 17
Appendix C1: SWOT Analysis ....................................................................................................................... 17
Appendix C2: Porter’s Five Forces Analysis ................................................................................................ 18
Appendix C3: World Steel Industry Overview In 2022 ............................................................................... 19
Appendix C4: Vietnam Steel Industry Overview In 2022 ........................................................................... 20
APPENDIX D: FORECASTING ........................................................................... 21
Appendix D1: HSG’s Target Set For 2023 .................................................................................................... 21
Appendix D2: CAPEX .................................................................................................................................... 21
Appendix D3: Debt Schedule ......................................................................................................................... 22
APPENDIX E: VALUATION ................................................................................. 22
Appendix E1: Peer Relative Valuation .......................................................................................................... 22
Appendix E2: Cost of Equity.......................................................................................................................... 22
Appendix E3: WACC ...................................................................................................................................... 23
Appendix E4: FCFF ........................................................................................................................................ 23
APPENDIX F: ALTMAN Z-SCORE .................................................................... 23

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 APPENDIX A: FINANCIAL STATEMENTS

Appendix A1: Income Statement

14
Appendix A2: Balance Sheet

Appendix A3: Cash Flow Statement

15
 APPENDIX B: BUSINESS DESCRIPTION
Appendix B1: Core Business Activities
• Manufacturing roofing sheets by galvanized steel, zinc alloy, paint galvanized zinc plating and plating of
other alloys.
• Producing steel purlins, galvanized purlins.
• Manufacturing black steel pipes, galvanized steel pipes and other alloys.
• Manufacturing steel mesh, galvanized steel wire, steel wire.
• Producing PVC ceiling tiles.
• Producing construction materials.
• Buying and selling building materials, capital goods and consumer goods.
• Renting warehouses and transporting goods.
• Building industrial and civil constructions.
• Producing cold rolled steel coils.
• Leasing machinery and equipment and other tangible belongings.

Appendix B2: Subsidiaries Breakdown

• Hoa Sen Ton One Member Co., Ltd
• Hoa Sen Building Materials Company Limited
• Hoa Sen Phu My Steel Sheet Factory, branch of Hoa Sen Group Joint Stock Company
• Hoa Sen Phu My One Member Company Limited
• Hoa Sen Binh Dinh One Member Company Limited
• Hoa Sen Nhon Hoi One Member Company Limited – Binh Dinh
• Hoa Sen Ha Nam One Member Company Limited
• Hoa Sen Nghe An One Member Company Limited
• Hoa Sen Yen Bai Building Materials Co., Ltd

Appendix B3: Shareholder Structure

No. Shareholders composition Number of shares %
1 Major shareholder 84326817 17.09
2 Other shareholders 409155079 82.91
2.1 Domestic shareholders 368646087 74.7
2.1a Domestic individual 346874950 70.29

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 2.1b Domestic organization 21771137 4.41
2.2 Foreign shareholders 40508992 8.21
2.2a Foreign individuals 2043764 0.41
2.2b Foreign organization 38465228 7.79
Total 493481896 100

Shareholder structure updated on 10/03/2022

- Percentage of share ownership of the board of directors
No. Name Job title % of share ownership
1 Lê Phước Vũ Chairman of the board 17.09
2 Trần Ngọc Chu Standing Vice Chairman of the Board of Directors – 0.31
Executive
3 Trần Quốc Trí Member of the Board of Directors, General Director 0.22
4 Nguyễn Văn Luân Independent member of the Board of Directors, 0.01
Chairman of the Audit Committee
5 Đinh Viết Huy Independent member of the Board of Directors, 0.01
Member of the Audit Committee
6 Lý Văn Xuân Non-executive BOD member, Audit Committee 0.13
member

APPENDIX C: INDUSTRY AND COMPETITIVE POSITIONING

Appendix C1: SWOT Analysis
Strengths Weaknesses
1. Strong brand image and solid reputation in the 1. Dependence on raw materials, especially steel,
roofing industry. can be subject to price fluctuations.
2. Diversified product portfolio with a focus on 2. Limited geographical presence, with most of
building materials that can be expanded to its sales concentrated in Vietnam.
other categories at a low cost. 3. Limited investments in research and
3. Well-established sales network and traditional development in comparison with competitors.
customer base across Vietnam.
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 4. Strong internal force of honesty, enthusiasm,
and synergy among all staff.

Opportunities Threats
1. Growth potential due to Vietnam's high 1. Intense competition from both domestic and
urbanization rate and infrastructure international players in the roofing industry.
development. 2. Fluctuations in raw material prices and
2. Expansion into other Southeast Asian currency exchange rates.
countries. 3. Economic instability and political risks in
3. Development of new products and categories Vietnam and other foreign markets.
to diversify its revenue stream.

Appendix C2: Porter’s Five Forces Analysis

Existing rivalry: High
The industry is fragmented and moderately concentrated, which suggests a high degree of competition. In
addition, the steel industry is characterized by low differentiation, meaning that customers have little incentive to
remain loyal to a particular supplier. This leads to intense price competition and low switching costs, which
increases the level of rivalry among competitors. Moreover, big established firms like Hoa Sen Group can
benefit from economies of scale by optimizing its operations and reducing costs, positioning itself as a low-cost
provider, however, competition from larger players such as Hoa Phat Steel and other international steel
manufacturers can limit the impact of economies of scale, which increase the existing rivalry
Threat of New Entrants: Low
Barrier of investment capital: Steel industry is a capital-intensive business. Therefore, the steel industry is a
market not for the companies with small capital to participate in.
Low-cost barrier: Most low-cost drivers are economies of scale, benefits of economies of scale are derived in the
form of lower fixed cost per unit and better bargaining power of raw materials. Companies with large market
share, such as Hoa Sen, Ton Dong A and Pomina will have the advantage of low cost which increases barriers to
entry for new entrants
High-profit advantages: steel companies that are integrated have their own key raw materials such as cold-rolled
steel coil, which defends them from the potential threat for new entrants to a significant extent. For example,
Hoa Sen invested in a cold rolling mill in 2007 to active raw materials and gaining additional gross profit from
the production stage of CRC. The higher profit companies can afford the higher investment, thereby resulting in
increased competitive advantage, increase barriers to entry into the industry.
Threat of Substitutes: Low
Steel is considered the essential thing of every industry. Currently, there are not many other resources or
materials to replace steel in construction, industrial machinery manufacturing, or in defense. Galvanized steel
sheet has a limited number of substitutes, which means customers find it difficult to find other products that
fulfill their needs. Although usage of aluminum and stainless steel has risen continuously in the automobile and
consumer durables sectors, it still does not pose any significant threat to steel as the latter cannot be replaced
completely and the cost differential is also very high. So, there is little or even pressure on substitute products for
the steel industry and the threat of substitutes is low
Bargaining power of supplier: Moderate
Suppliers of steel and raw materials for the steel industry are distributed in many countries around the world, so
the concentration of suppliers is low. Moreover, there is no single enterprise holding a monopoly in this field, so
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there is no exclusive sale. Steel and raw materials for the steel industry are not special goods, so buyers can
choose one or more input suppliers for production. However, with 50% of embryos to be imported, the ability to
negotiate on prices of Vietnamese enterprises is also low, almost completely subject to fluctuations in world
market prices. Thus, the pressure from suppliers on enterprises in Vietnam's steel industry is at an average level
Bargaining power of buyers: Moderate
HSG's buyers include both distributors and end-users of its products. The company's well-established sales
network and traditional customer base across Vietnam may provide some leverage in negotiations with
distributors. However, the construction industry in Vietnam is highly competitive, and there are various domestic
and international players providing similar products, which could lower the bargaining power of Hoa Sen Group.
Moreover, the availability of substitute products and materials, such as other types of roofing or alternative
construction materials, could impact buyer bargaining power. However, Hoa Sen Group's strong brand image and
solid reputation in the roofing industry may help to maintain customer loyalty and negotiate favorable prices.

Appendix C3: World Steel Industry Overview In 2022

The world steel market in 2021 is affected by the disruption in the global supply chain which has led to the
downtrend of the world steel market. After peaking in the second quarter of 2021, the world's crude steel prices
and output fell and stabilized in the last months of the year. Steel industry in the first quarter of 2022 has positive
changes. Steel prices have started an uptrend again since December 2021 and February 2022 steel prices are
close to touching the peak set in June 2021.

Safeguard policies of China, Europe, and the US

China implements a policy of reducing carbon emissions and "three red lines" for the real estate market. China
has reduced steel supply because of policy implementation. China aims to reduce carbon emissions with the goal
of cutting an additional 13.5% of energy consumption/GDP and 18% of CO2/GDP emissions for the period
2021-2025. In addition, China aims to improve air quality in preparation for the 2022 Winter Olympics. Risks

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from China's real estate market come from the policy of imposing credit limit management based on three
commonly used expenditures called “three red lines”:
● Liabilities/assets < 70% (NPT excludes unrealized revenue and prepayments)
● Debts/equity < 100%
● Cash/short-term loans > 1
+ Quota safeguard measures in Europe: the EU imposes a quota limit on steel products imported into this market
with a quota limit based on the country's import volume in the previous year 5%. Export volume to the EU more
than the quota will be subject to a 25% tax rate.
+ Tax policy and want to implement the policy of reducing carbon emissions of the US: The US is the largest net
importer of steel in the world, but the US imposes a 15% tax on imported steel products. “Together, the United
States and the EU are working to limit their market access for dirty steel and restrict access to steel dumping
countries in both markets, contributing to oversupply worldwide. The agreement will be open to any interested
country that wishes to join and meet the criteria of restoring market orientation and reducing trade in high-
emissions steel and aluminum products".
+ India lifts anti-dumping duties on zinc-aluminum alloy clad steel originating or imported from Vietnam, Korea
and China
War between Ukraine and Russia
The war between Ukraine and Russia disrupted the world's steel supply, leading to a supply shortage and
increasing steel prices because: + Russia is a major steel exporter in the world, especially in the European
market. When the war broke out, countries began to implement sanctions on Russia that will lead to a supply
shortage while steel demand is recovering quickly in 2022 post-COVID-19. + High prices of energy products
lead to higher steel production costs. The prices of coke, iron ore, electricity, oil and gas prices increased very
quickly and almost returned to the old peaks set in 2021. In addition, sanctions targeting Russia's energy exports
made Russia's energy exports worse. shortage of energy supply for the European market.

Appendix C4: Vietnam Steel Industry Overview In 2022

- Domestic consumption
In February 2022, finished steel production reached 2,584 million tons, up 1.16% compared to January 2022 and
16.1% over the same period in 2021; Steel consumption of all kinds reached 2,574 million tons, up 5.8% over
the previous month and up 30.1% over the same period. Generally, in the first two months of 2022, finished steel
production reached 5.117 million tons, up 1.6% over the same period in 2021. Finished steel consumption
reached 5.014 million tons, up 18.5% over the same period last year. 2021. In which, exports reached 126,017
tons, up 11.6% over the same period last year.
- Export consumption
Export of steel products in 2021 also achieved positive results, reaching more than 14 million tons of finished
and semi-finished steel with more than 12.7 billion USD, contributing a large source of foreign currency revenue
for the country. Vietnam's steel products are exported to more than 30 countries in the region and the world.
Regarding the export situation, in January 2022, Vietnam's exports of finished steel products reached 815
thousand tons, down 10.28% compared to the previous month and down 15.8% compared to the same period in
2021. Export value reached 896 thousand USD, down 7.11% compared to December 2021 but up 43.79% over
the same period in 2021.

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 APPENDIX D: FORECASTING
Appendix D1: HSG’s Target Set For 2023

Appendix D2: CAPEX

21
Appendix D3: Debt Schedule

APPENDIX E: VALUATION
Appendix E1: Peer Relative Valuation

Appendix E2: Cost of Equity

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Appendix E3: WACC

Appendix E4: FCFF

APPENDIX F: ALTMAN Z-SCORE

Altman Z-Score is calculated to predict the probability for the company to go bankruptcy. The company with Z-
Score above 1.8, it is less likely to go bankruptcy. Whereas, if the Z-Score is below 1.8, it poses threats to the
company’s ability to pay debt and the high probability of bankruptcy.

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➢ Equation for Altman’s Z-score:
Z= 1.2*Z1 + 1.4*Z2 + 3.3*Z3 + 0.6*Z4 +1*Z5
➢ HSG is not likely to go bankrupt because the firm's Z-Score equal to 4.36 which is above 1.8

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