June 23, 2015 - VPS2015 VPBS forecast 4.0% 4,165 2014 6.0% 3,907 2013 4.0% 4,158 2012 4.0% 4,926 2010-14 2015F 2014-19 ... GLOBAL TIRE INDUSTRY ... LV: Light vehicle: passenger car

www.VPBS.com.vn Page | 1

INITIATING COVERAGE: HOLD

Current price (6/19/2015) VND 49,700

Intrinsic Value:

VND 48,600

Short Term Trading Recommendation SELL

Resistance Level

VND 55,500

Support Level

VND 45,000

Bloomberg ticker: DRC VN Exchange: HSX

Industry: Rubber, Tires

Beta (1Y)

0.86

52w high / low (VND) 57,120/ 37,301

Outstanding shares

91,381,230

Market Cap (VNDbn)

4,542

Free Float (shares)

33,754,780

LTM Avg Trading Vol

133,597

Foreign-owned Ratio (%)

38.11%

Div.Yield EPS (VND)

2015 VPBS forecast 4.0% 4,165

2014

6.0% 3,907

2013

4.0% 4,158

2012

4.0% 4,926

2010-14 2015F 2014-19

CAGR VNDbn CAGR

Revenues 10.8% 3,937 11.2%

EBITDA 19.8% 840 7.1%

Net income 15.7% 414 7.0%

Ratio DRC Peer VNI

P/E 13.95 9.09 12.56

P/B 2.80 1.19 1.78

EV/EBITDA 7.95 5.59 8.66

Debt/ Equity 0.75 0.70 0.99

Profit margin 10.6% 8.7% 10.4%

ROA 10.9% 10.7% 2.7%

ROE 22.9% 20.8% 15.0%

Company Description:

- DRC is a state-owned enterprise, a member of Vietnam

National Chemical Group (Vinachem) established in 1975.

In 2006 the company was listed on the HSX.

- Business activities: specialized in producing many kinds

of tires and tubes including light truck tires, heavy truck

tires, off-the-road tires, retreaded tires, bicycle tires, and

motorcycle tires. Other products include technical rubber

products for traffic construction work, ports, and

automobile rubber parts.

- 2014 results: total assets of VND3,138 billion (USD145

million), total equity of VND1,536 billion (USD71 million),

net revenues of VND3,251 billion (USD150 million), and

net profit of VND353 billion (USD16.3 million)

We initiate coverage of Da Nang Rubber JSC (DRC) with a long

term HOLD recommendation. Investors should wait and

reconsider purchasing these shares at their technical support level

of VND45,000.

Radial project will be key driver for growth: The capacity

utilization for most traditional products is already high, so future

growth depends highly on the success of the radial tires project.

The second phase of this project is expected to enter operation

from 2017. This phase has the same capacity but only about 40

percent of the investment expense of the first, so should boost

the company’s profit margin when put into operation.

Current high profitability is expected to decline slightly:

DRC has been achieving very impressive profitability ratios over

the last few years. However, the ratios are expected to decline in

the future due to:

- Lower profit margin of radial tires: Revenues growth should

mainly derive from radial tires, which have lower profit margin

than traditional products while bearing significant depreciation

expenses.

- Stable input prices: We expect that natural rubber prices will

slightly recover, reducing DRC’s profit margin.

Domestic tire market should grow strongly while export

market has big potential: Growth of the Vietnam automotive

market is expected to continue strongly due to new regulations

regarding vehicle load limits, and exemptions from automotive

import tax from 2018 due to ATIGA. Tire exports also have big

potential should TPP be approved.

High valuation compared with its regional peers: DRC’s

relative P/E is much higher than its regional peers. Some

premium is justified because DRC has higher growth potential

and better profit margins, but we believe the current premium

may be too high.

-20

0

20

40

60

80

06/14 08/14 10/14 12/14 01/15 03/15 05/15

% p

rice c

ha

ng

e

DRC VN Peer Index VNINDEX

DA NANG RUBBER JOINT

STOCK COMPANY (DRC) June 23, 2015

Please see important disclosure information at the end of this report


CONTENTS

TIRE INDUSTRY OVERVIEW .................................................................................................................................................... 3

GLOBAL TIRE INDUSTRY .................................................................................................................................................. 3 VIETNAM TIRE INDUSTRY ................................................................................................................................................ 5

COMPANY OVERVIEW ............................................................................................................................................................. 8

HISTORY .............................................................................................................................................................................. 8 SHARESHOLDERS AND OWNERSHIP.............................................................................................................................. 8 MANAGEMENT .................................................................................................................................................................. 9

BUSINESS ACTIVITIES ............................................................................................................................................................. 9

PRODUCTS .......................................................................................................................................................................... 9 PRODUCTION ................................................................................................................................................................... 10 MARKET ............................................................................................................................................................................ 12 PROJECT IN PROGRESS: DRIVING FUTURE GROWTH ............................................................................................... 13

FINANCIAL PERFORMANCE .................................................................................................................................................. 13

GROWTH AND PROFITABILITY ....................................................................................................................................... 13 LIQUIDITY AND SOLVENCY ............................................................................................................................................ 16

FORECAST ASSUMPTIONS ................................................................................................................................................... 17

VALUATION ............................................................................................................................................................................. 19

DISCOUNTED CASH FLOW ............................................................................................................................................. 19 COMPARABLE MULTIPLES ............................................................................................................................................. 19

SENSITIVITY ANALYSIS ......................................................................................................................................................... 20

TECHNICAL ANALYSIS .......................................................................................................................................................... 21

CONCLUSION .......................................................................................................................................................................... 22


TIRE INDUSTRY OVERVIEW

GLOBAL TIRE INDUSTRY

Majority of tires are produced for replacement purposes

The tire industry is divided into two end-use markets: the original equipment tire

market (OEM) and the replacement tire market. The replacement market is much

more important and accounts for 70 to 75 percent of the total number of tires sold.

Demand of tires

Note: LV: Light vehicle: passenger car and light truck; MHCV: medium and heavy commercial

vehicle Source: LMC International 2013, VPBS

Tire production depends on vehicle market

World production is highly concentrated by brand, with the top five companies

making up about half of total world tire production annually.

Tires revenues of five biggest tire makers in 2013 Tire production by company (by sales value)

Source: Tire Business: 29th Global Tire Report Source: Tire Business, data based on 2013’s sales

0

5

10

15

20

25

30

US

D b

illi

on

Bridgestone

, 14.6%

Michelin,

13.7%

Goodyear,

9.4%

Continental

A.G, 6.0%

Pirelli, 4.3%

Sumitomo,

3.7%Hankook,

3.7%

Yokohama,

2.6%

Maxxis/Che

ngshin,

2.5%

Others,

39.5%

Current vehicles in

use (vehicle parc)

New vehicle

production

OE tire demand

LV: 28%

MHCV: 21%

No. of tires

per vehicle

Total tire demand

Replacement tire demand

LV: 72%

MHCV: 79%

Total tire production

Replacement

ratio

Trade in tires

The replacement market

accounts for 70 to 75 percent

of the total number of tires

sold.


China is the largest tire producer in the world, with output of 541 million tires in 2014

(including light/ medium/ heavy vehicle tires), accounting for 31 percent of global

output. China’s tire output was about three times higher than the second largest tire

maker, the United States.

Tire output breakdown by country in 2014

Source: Vietnam Rubber Association – Newsletter in May 2015

Tire production depends highly on vehicle sales. From 2007 to 2014, vehicle sales

grew with CAGR of 3.71 percent while CAGR of OEM tire production was 3.2 percent.

China is the biggest tire maker for OEM tire demand, followed by North America and

Europe.

OEM tire production vs. vehicle sales OEM tire production volume by country

Source: just-auto, Bloomberg Source: just-auto, Bloomberg

Recent growth in tire demand comes mainly from emerging countries

The number of vehicles has been increasing strongly in emerging countries in recent

years, especially in China and India, in contrast to low growth in developed countries

such as members of the North American Free Trade Agreement (NAFTA) and

Western Europe.

China

31%

USA

9%Japan

9%S. Korea

6%Thailand

4%

India

3%

Brazil

3%

Russia

2%

Others

33%

0

150,000

300,000

450,000

600,000

750,000

0

20,000

40,000

60,000

80,000

100,000

2007 2008 2009 2010 2011 2012 2013 2014

Tir

e u

nit

Veh

icle

un

it

Vehicle production Vehicle sales OEM tire production

China,

26.6%

North

America

, 18.8%Europe,

18.6%

Japan ,

10.0%

Korea,

5.5%

India,

5.3%

Others,

15.2%

Emerging countries have

driven demand growth in the

global tire market recently.


Vehicle parc growth by country Light vehicle replacement tire sales

Source: LMC International , 2013; VPBS Source: LMC International , 2013; VPBS

VIETNAM TIRE INDUSTRY

Most tires in Vietnam are produced by FDI companies

At the end of 2012, there were 830 companies operating in the tire industry in

Vietnam, of which 30 were tire manufacturers, and the remainder trading companies.

Domestic companies have much smaller capacity than FDI companies. Three major

domestic tire companies are Southern Rubber Industry JSC (HSX: CSM), Da Nang

Rubber JSC (HSX: DRC), and Saovang Rubber JSC (HSX: SRC).

Some of the major automotive tire makers in Vietnam, domestic and otherwise

Company Automotive tire capacity

Southern Rubber Industry JSC

(Casumina)

350,000 automotive radial tires per year and 34,950 tonnes of

material per year for other tires

Da Nang Rubber JSC 1.08 million units per year

Sao Vang Rubber JSC 500,000 units per year

Bridgestone Tire Manufacturing

Vietnam

25,000 units per day (about 9 million units per year)

Cheng Shin Rubber (Vietnam) 64,720 units per day (about 23 million units per year) - automotive

and motorcycle tires

Kumho Tire (Vietnam) 3 million units per year

Sailun (Vietnam) 7.8 million units per year

Yokohama Tyre Vietnam 800,000 automotive tires per year and 180 tonnes of material per

year for automotive and motorcycle tires

Source: Tire Business: 29th Global Tire Report, VPBS

FDI tire companies in Vietnam focus on exports and have little direct competition

with domestic companies for whom the main market is local.

Tire exports surpassed imports

Tire export value surpassed imports for the first time in 2010 and this trend has

continued. In 2014, total tire export value was USD529 million, while the value of

imports was USD338 million. Most export value was contributed by FDI companies,

of which Kumho Tire (Vietnam) made up the biggest contribution with 26 percent of

total export value.

0% 5% 10% 15% 20%

Western Europe

South America

Oceania

NAFTA

Middle East

India

Eastern Europe

East Asia

China

Central Europe

Asean

World

5 year annual average

MHCV LV

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012

Mil

lio

n u

nit

s

Emerging markets Developed markets

Most tires in Vietnam are

produced by FDI companies,

but the competition between

FDI and domestic companies

is low.


Vietnam tire import and export over time Top tire exporters in 2014

Source: Vietnam Rubber Association Source: Vietnam Rubber Association

Over half of export sales were passenger car tires. Japan and USA are the two

biggest tire export markets for Vietnam. Truck tires made up the largest portion of

imports, about 62 percent of total value. Thailand and China are the two main import

sources for Vietnam, accounting for over half of total import value in 2014.

Export value by product type in 2014 Import value by product type in 2014

Source: Vietnam Rubber Association – Newsletter in May 2015 Source: Vietnam Rubber Association – Newsletter in May 2015

Export value by country in 2014 Import value by country in 2014

Note: EPZ: Export Processing Zone


Note: EPZ: Export Processing Zone


0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011 2012 2013 2014

US

D m

illio

n

Export Import

Kumho Tire

(Vietnam)

26%

Bridgestone

Vietnam

13%

Cheng Shin

(Vietname)

10%

Sailun

Vietnam

9%

Kenda

(Vietnam)

9%

Casumina

7%

Others - 198

companies

26%

Passenger

car tires

55.5%

Truck tires

18.6%

Motorcycle

tires

15.7%Bicycle

tires

4.5%

Industrial

tires

3.2%

OTR tires

1.4%Agricultural

tires

0.7%

Others

0.4%

Passenger

car tires

31.9%

Truck tires

61.6%

Motorcycle

tires

1.9%

Bicycle

tires

0.9%

Industrial

tires

2.2%

Aircraft

tires

1.0%

Others

0.5%

Japan

14.9%

USA

13.4%

Malaysia

7.6%

S.Korea

5.8%

China

5.6%

Brazil

4.7%

Saudi

Arabia

3.9%

Others

44.1%Thailand

41.8%China

15.8%

Hong Kong

14.5%

Japan

8.7%Vietnam -

EPZ

5.4%

Indonesia

4.0%

Korea

2.9%

Others

6.9%


Vietnam tire market has great potential

The Vietnam tire market has great potential due to strong growth in the country’s

automotive market. The automotive market in Vietnam is still small compared to

other regional countries, but demand is increasing due to significant growth in the

economy, and developing infrastructure. Over the last three years, the market has

shown a dramatic growth in sales.

Automotive sales in Vietnam Comparison with other regional countries

Source: ASEAN Automotive Federation Source: ASEAN Automotive Federation, World Bank, VPBS

In the next few years, the Vietnam tire market is expected to benefit from the

following changes:

- Import tax for vehicles imported from ASEAN will reduce to nil from 2018

according to the ASEAN Trade In Goods Agreement (ATIGA) (currently the

import tax for passenger cars is 50 percent, and for trucks is five percent).

Automotive demand in Vietnam is expected to increase significantly from 2018.

- Actual load capacity of vehicles was reduced when Official Dispatch No.

3703/BGTVT-VT came into effect on April 1, 2014, tightening transport regulations

and increasing future demand for commercial vehicles.

- If approved, the Trans-Pacific Partnership (TPP) will boost the export business of

Vietnamese tire companies. We believe that competition in the Vietnam tire

market will be little affected by TPP as Vietnam imports tires mostly from Asian

countries such as Thailand and China, which are not TPP members. Among TPP

members, the USA is the biggest tire market, but the current tire import tax rate

is low at four percent, thus Vietnam tire producers should only marginally benefit

from TPP.

- China is the biggest tire exporter to the USA, but currently being investigated by

the USA under antidumping duty for passenger vehicle and light truck tires. On

January 21, 2015, the US Department of Commerce announced an affirmative

preliminary determination for antidumping duty, under which the tax rates

applied to Chinese tire companies would vary from 19.17 percent to 87.99

percent. If the antidumping duty is officially approved, there will be a big

opportunity for tire companies in other countries, including Vietnam.

0

20,000

40,000

60,000

80,000

100,000

2007 2008 2009 2010 2011 2012 2013 2014

Un

its

Passenger vehicles Commercial vehicles

41.2

3.5

19.8

0.9

6.6

6.1

0.9

2.2

1.3

2.6

1.5

2.2

7.0

0.6

0 10 20 30 40 50

Brunei

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Commercial vehicle sales (unit)/ 000 peoplePassenger vehicle sales (unit)/ 000 people


COMPANY OVERVIEW

HISTORY

Da Nang Rubber JSC (DRC), a member of Vietnam National Chemical Group

(Vinachem), was established in December 1975. The company listed its shares on the

Ho Chi Minh Stock Exchange (HSX) on December 29, 2006.

DRC currently specializes in producing many kinds of tires and tubes including light

truck tires, heavy truck tires, Off-The-Road tires of various sizes for agricultural

tractors, mining industry, construction industry, retreaded tires, bicycle tires, and

motorcycle tires. The company also produces technical rubber products for traffic

construction work, ports, and automobile parts.

DRC has only one associate - Philips Carbon Black JSC. DRC currently owns a five

percent stake in this company with investment value of VND6.1 billion (USD300,000).

Milestones

1975 DRC’s factory was established at an American military retreading factory

2005 Transformation into a Joint Stock Company

2006 Listed on HCMC Stock Exchange

2013 Put new all-steel radial factory with capacity of 300,000 tires into operation

2014 Completed moving automotive tires factory to Lien Chieu industrial park

2015 Start to construct the second stage of radial tires factory from Q2/2015

Source: DRC

SHARESHOLDERS AND OWNERSHIP

Vietnam National Chemical Corporation (Vinachem) holds a controlling share

position with a 50.51 percent stake. Foreign investors account for 30 percent

ownership, of which two significant shareholders are Asia Value Invest Ltd and

Amersham Industries Ltd.

Type of ownership Major shareholders

Data as of June 12, 2015. Source: Bloomberg Data as of June 12, 2015. Source: Bloomberg

Governme

nt

68.4%Investmen

t Advisor

18.2%

Other

6.2%Corporati

on

4.3%

Hedge

Fund

Manager

1.6%

Individual

0.9%Holding

Company

0.5%

Vinachem

50.5%

Asia Value

Invest

3.3%

Amersha

m

Industries

2.9%

Vietnam

Holding

2.8%

Norges

Bank

2.4%

Others

38.2%

A member of Vietnam

National Chemical Group,

established in 1975.


MANAGEMENT

With a controlling share, Vinachem takes the leading role in determining

development strategies as well as allocating key personnel in DRC, in line with

Vinachem’s development plan. DRC’s Board of Directors and management include

people with extensive experience in the tire and chemicals industries.

List of members of the board of director, board of management, and board of supervisory

Board of Directors Title Experience/Qualification Ownership

Nguyen Van Thieu Chairman Bachelor’s degree in economics. Appointed in April 2014. 0.01%

Nguyen Thanh Binh BOD member Masters in Technology. Joined DRC in 1983 and BOD member since 2006. Was appointed

as General Director in Jan 2014 0.28%

Nguyen Manh Son BOD member Bachelor of Economics, Chemical Engineer. Joined DRC in 1984 and appointed as BOD

member and Deputy General Director in 2006 0.03%

Ha Phuoc Loc BOD member Bachelor of Economics. Joined DRC in 1990 and appointed as BOD member and Deputy

General Director in 2005 0.07%

Pham Ngoc Phu BOD member Doctor of Economics. Appointed in March 2009 0.14%

Nguyen Huy Hieu BOD member Bachelor of Laws. Appointed in 2014 0.00%

Hoang Manh Thang BOD member Master of Economics. Appointed in 2010 0.06%

Board of Management

Nguyen Thanh Binh General Director As above. 0.28%

Ha Phuoc Loc Deputy GD As above. 0.07%

Nguyen Manh Son Deputy GD As above. 0.03%

Pham Quang Vinh Deputy GD Electric Engineer. Joined DRC in 1981 and appointed as Deputy GD in 2007 0.07%

Tran Thi My Le Chief Accountant Bachelor of Economics –Accounting major. Joined DRC in 2006 0.00%

Board of Supervisors

Nguyen Thi Van Hoa Head of

Supervisory Board Masters in Finance 0.01%

Chu Quang Tuan Member Bachelor of Economics 0.00%

Vo Thi Hong Member Bachelor of Language –English major 0.00%

Source: Annual report; Ownership from Management report as of January 26, 2015

BUSINESS ACTIVITIES

PRODUCTS

Automotive tires, tubes, and flaps make up the majority of revenues

DRC’s products are tires, tubes, and flaps which are categorized into the types of

vehicles that the products serve, including bicycle, motorcycle, automotive, and

technical rubber products. The company has numerous products, however revenues

are highly concentrated in automotive products (including bias tires, radial tires,

tubes, and automotive flaps) which contribute about 85 percent to revenues.

Revenue by product line Revenue breakdown in 2014

Source: DRC

0

400

800

1,200

1,600

2,000

2,400

Bycicle Motorcycle Automotive Radial tires Others

VN

D b

illi

on

2013 2014Bycicle

6.0%

Motorcycle

8.0%

Automotive

67.4%

Radial tires

18.3%

Others

0.3%

Automotive tires, tubes, and

flaps make up 85 percent of

revenues. All automotive

products are aimed at trucks

and off-road vehicles.


Automotive tires: Only focus on trucks and off-road vehicles

All DRC’s automotive tires are used for trucks and off-the-road (OTR) vehicles

including agricultural tractors, mining, giant container cranes, reach stackers in ports,

motor graders, and excavators. At present, DRC do not produce tires for passenger

cars as these products require high technology and would face big competition from

foreign companies. Furthermore, the values of these vehicles are high, and

consumers value high quality and reputation over price.

PRODUCTION

Natural rubber makes up over 45 percent of total input material

Input materials include natural rubber, synthetic rubber, fabric, black carbon, steel

cord, and chemicals, which make up about 80 percent of total production cost.

Natural rubber is the main material that accounts for about 40-45 percent total value

of materials and is all provided locally. The other materials must be imported. As

truck and OTR tires require much more natural rubber than passenger car tires,

focusing on trucks and OTR tires offers DRC a big advantage compared with its local

and overseas competitors as DRC can exploit Vietnam’s natural rubber supply with

competitive prices.

Production cost structure Input materials

Material Supply Weighting

Natural rubber Local 40-45%

Synthetic rubber Import 12-17%

Fabric Import 14-18%

Black coal Import 7-10%

Steel cord Import 2-3%

Chemicals and

others Local & Import 14%

Source: DRC, VPBS estimate Source: DRC

Natural rubber price

Source: Bloomberg

Labor cost

8%

Materials

82%

Depreciation

5% Others 5%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 1/2012 1/2013 1/2014 1/2015

US

D/T

on

ne

RSS3 TOCOM

Focusing on truck and OTR

tires gives DRC a big

advantage.


High capacity utilization rate constrains future growth of traditional products

Almost all traditional production lines are operating with capacity utilization of over

80 percent. Although actual production of some products such as tubes and flaps can

exceed designed capacity due to simple production lines and the application of

technology improvements in production, these products have low value compared to

tire products. Thus the current high capacity utilization rate should constrain DRC’s

future growth unless DRC makes additional investments to expand its business

activities.

Production capacity by product line

Source: DRC, VPBS

Radial tires create more opportunity for growth

Automotive tires are divided into bias tires and radial tires. Bias tires (general call

automotive tires in this report) are DRC’s traditional products while radial tires are a

new line that DRC started to produce at the end of 2013. Since radial tires were

introduced to the market, they have shown rapid growth in consumption. DRC

operated at about 38 percent of full capacity of its radial tires production line in 2014,

and the company expects to raise this rate to 80 percent in 2015. DRC also plans to

complete radial tires phase 2 project in Q4/2016 and increase capacity from 300,000

tires to 600,000 tires to meet high demand for radial tires and for exports.

Though radial tires should contribute a major portion to the growth of sales and

profits, the profit margin is much lower than automotive bias tires and will depress

DRC’s profit margin in the future. In 2014, gross profit margin (GPM) of bias

automotive tires was 29.6 percent while GPM of radial tires was just 6.1 percent.

Depreciation made up a big portion of the production cost of radial tires; we estimate

that the GPM of radial tires excluding depreciation was 19.7 percent, still lower than

that of bias tires. As radial tires are in an initial period of introduction to the market,

DRC must lower their selling price to penetrate local market dominated for many

years by import products, thus the GPM of such products remains low.

Capacity (unit/year)

% utilization % utilization % utilization

Bicycle tires 5,000,000 69.66% 5,000,000 74.10% 5,000,000 83.40%

Bicycle tubes 5,000,000 85.68% 5,000,000 86.84% 5,000,000 93.90%

Motorcycle tires 2,000,000 72.50% 2,000,000 56.80% 2,000,000 65.70%

Motorcycle tubes 5,000,000 66.00% 5,000,000 64.32% 5,000,000 80.70%

Automotive tires 700,000 100.43% 700,000 106.03% 780,000 99.62%

Automotive tubes 500,000 103.40% 500,000 122.96% 800,000 93.38%

Automotive flaps 400,000 99.50% 400,000 106.75% 400,000 128.50%

Automotive retreaded tires 40,000 97.50% 40,000 95.00%

Automotive radial tires 300,000 4.93% 300,000 38.33%

2012 2013 2014

High capacity utilization rate

constrains future growth

unless additional investment

is made to expand business

activities.

Since radial tires were

introduced to the market,

they have shown a rapid

growth in consumption.

Though they should

contribute a major portion of

the growth of sales and

profits, radial tires will lower

the profit margin of the

company as a whole.


MARKET

Local market is still the largest

Most of DRC’s products are sold locally. The local market accounted for about 89

percent of total sales in 2014, unchanged from 2013, with the Central area making up

about 50 percent of the total, and the remainder divided nearly equally between the

Northern and Southern areas.

Local vs. export sales Local sales by location

Source: DRC Source: DRC

DRC sells its products in the local market through two distribution channels: agents

and directly to customers. Agents account for 75-80 percent of local sales. At the end

of 2014, DRC had 43 automotive tires agents and 53 bicycle & motorcycle tires

agents. The second channel includes selling tires to automakers, cement producers,

and companies belonging to the Vietnam Ministry of National Defense.

DRC’s distribution channel

Source: DRC

Export is marginal but has potential

The proportion of sales to the export market is still marginal at about 11 percent of

total sales in 2014. DRC’s products are exported to about 33 countries, mostly in Asia

where DRC can sell products with good prices. Local market demand is quite stable,

and DRC must operate at high capacity utilization, leading to only a small volume for

export. The new radial factory with current capacity of 300,000 tires per year,

increasing to 600,000 in Q4/2016, should create more volume for export in the future.

Indeed, this product achieved the highest growth in selling volume among export

product in 2014.

91% 89% 89%

9% 11% 11%

0%

20%

40%

60%

80%

100%

2012 2013 2014

Local Export

49% 51% 51%

26% 27% 25%

25% 22% 24%

0%

20%

40%

60%

80%

100%

2012 2013 2014

Central area Northern area Southern area

DRC sales market

Local sales: 89%

Agents: 75-80%

- Over 63 provinces

- 43 automotive tires agents.

- 53 bicyle and motocycle tires agents

Directly to customers: 20-25%Export: 11%

- To 33 countries

The local market accounted

for about 89 percent of total

sales in 2014, of which the

central area made up half.


Products Export volume (unit)

Main market 2013 % product sales 2014 % product sales

Bicycle tires 245,500 6.6% 504,670 12.1% Argentina, Ghana

Bicycle tubes - 0.0% 1,520 0.0%

Motorcycle tires 22,610 2.0% 25,281 1.9% Morocco, Myanmar

Motorcycle tubes - 0.0% 2,600 0.1%

Automotive tires 93,070 12.5% 62,507 8.0% Malaysia, Laos, Cambodia, Pakistan,

Panama

Automotive radial tires 2,266 15.3% 33,160 28.8% Thailand, Brazil, Ghana, Iraq

Automotive tubes 55,385 9.0% 36,274 4.9% Laos, Pakistan, Myanmar

Automotive flaps 45,819 10.7% 32,300 6.3% Laos, Pakistan, Myanmar

Source: DRC, VPBS

PROJECT IN PROGRESS: DRIVING FUTURE GROWTH

Almost all production lines are operating with high capacity utilization except the

new radial tires factory with a current utilization ratio of 38 percent, which DRC

expects to increase to 80 percent in 2015. Thus increasing capacity is necessary for

future growth. DRC will begin to construct the second stage of the radial tires factory

from Q2/2015 and expects to finish in Q4/2016. The capacity of the second stage is

300,000 tires per year, equal to the first stage, however the expected investment

capital is only around 38% that of the first stage. This is because DRC has already

invested in the factory and most of the construction works, machinery, and

equipment. We expect the second stage to improve DRC’s profitability significantly.

Radial tire project Phase 1 Phase 2 Total

Investment capital (VND billion) 1,859 705 2,564

Capacity (tires per year) 300,000 300,000 600,000

Construction period 5/2011 - 6/2013 Q2/2015 - Q4/2016

Investment capital per tire (VND) 6,196,667 2,350,000 4,273,333

IRR (VPBS estimates) 6.7% 20.6% 10.3%

Source: DRC, VPBS

FINANCIAL PERFORMANCE

GROWTH AND PROFITABILITY

Revenues growing significant due to contribution from radial tires

From 2010 to 2014, selling volume of automotive tires was quite stable at around

750,000 units, while the selling volume of motorcycle and bicycle tires fluctuated

more. Although the selling volume was lower than others, automotive tires made up

the majority of revenues (82 percent in 2013 and 67 percent in 2014), thus the

fluctuation in selling volume of bicycle and motorcycle tires had less impact on

revenues.

Net revenues experienced a considerable growth with a CAGR of 10.8 percent over

the period. Net revenues showed a significant increase in 2011 due mainly to an

increase in average selling prices, with a sluggish climb from 2011 to 2013 before

suddenly rising in 2014 due to a big contribution from new radial tires products. In

2014, DRC sold around 115,000 radial tires with revenue of VND595.6 billion

(USD27.5 million), accounting for 18.3 percent of total net revenues. As the current

capacity of the radial tires factory is 300,000 tires per year, and demand for them is

high both for the domestic and export markets, there is potential for DRC to increase

revenue from this segment in the near future.

From 2010 to 2014, net

revenues have grown with a

CAGR of 10.8 percent. Radial

tires are a key driver of growth

from 2014 onwards.

With low investment capital

but the same capacity as

phase one, the radial factory

phase two will improve DRC’s

profitability significantly.


Net revenues Tires selling volume

Note: Left axis: motorcycle, automotive, radial tires; Right axis: bicycle tires

Source: DRC, VPBS Source: DRC, VPBS

Downtrend of natural rubber price improved profit margins

Over the period from 2010 to 2014, net profit saw dramatic growth with CAGR of 15.7

percent due mostly to falling prices of the natural rubber that is the main raw

material for DRC’s products. When the price of natural rubber reached its peak in

2011, DRC’s net profit was nearly unchanged compared to 2010 although net

revenues had achieved significant growth that year. Gross and net profit margins

stayed at their lowest levels in 2011 but improved dramatically afterwards.

In 2014, natural rubber prices continued to decrease sharply, and all the company’s

products except radial tires showed improvement in profit margins. As radial tires

had small profit margins due to high depreciation expenses at the start of production,

DRC’s gross profit margin and net profit margin went slightly down. DRC also

suffered considerable interest expenses in 2014 as the new factory was mostly

financed by loans, thus net profit slightly decreased in 2014.

Net profits Profit margins vs. natural rubber price

Source: DRC, VPBS Note: NR rubber price: Quarterly RSS3 average price at TOCOM

Source: DRC, VPBS

Total assets and equity on dramatic growth path

Total assets saw sharp growth with CAGR of 31.0 percent from 2010 to 2014. Most of

the increase in total assets came from fixed assets. By the end 2010, DRC’s assets

were nearly fully depreciated; the company has subsequently invested in projects

with high value leading to a sharp increase in fixed assets. Some projects that DRC

has invested in from 2010 to 2014 include:

3,000

3,500

4,000

4,500

5,000

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014

Th

ou

san

ds u

nit

s

Th

ou

san

ds u

nit

s

Motocycle tires Automotive tires

Radial tires Bicycle tires

0

1,000

2,000

3,000

4,000

5,000

6,000

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014

US

D/t

on

ne

s

Gross profit margin EBIT margin

Net profit margin NR rubber price

1,000

1,750

2,500

3,250

4,000

2010 2011 2012 2013 2014

VN

D m

illio

n

0

100

200

300

400

500

2010 2011 2012 2013 2014

VN

D m

illio

n

Profit margins show a

negative correlation with

natural rubber price.

A slight decrease in profit

margins in 2014 was due to

new radial tires products.


Radial tires projects: Total investment capital of VND1,859 billion (USD85.8

million), starting May 2011 and finished in June 2013.

Movement and expansion of motorcycle and bicycle tires factory: Total

investment capital of VND134 billion (USD6.1 million), starting August 2010 and

finished in October 2011.

Movement and expansion of automotive tires factory: Total investment capital

of VND393 billion (USD18.1 million), starting September 2012 and finished in

December 2014.

Total assets Shareholders’ equity


Equity and liabilities have been growing strongly over the period. DRC has issued

shares annually from retained earnings to increase its share capital. Liabilities also

climbed quickly over the period as DRC borrowed to finance major projects as noted

above.

Profitability

ROA and ROE have been at satisfactory level for several years. In 2014, the ratios

slightly decreased as DRC officially put the new radial tires factory into operation,

leading to lower profit margin and asset turnover (radial tire products have low profit

margin, and total assets increased significantly in 2013 and 2014 as explained above).

ROA and ROE Dupont analysis


14.6% 14.7% 15.2%13.3% 11.1%

24.4% 24.6% 30.5% 29.5%24.1%

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

ROA ROE

9.1% 7.5% 11.2% 13.4% 10.8%

0%

35%

70%

105%

140%

175%

210%

245%

2010 2011 2012 2013 2014

Asset turnover Asset/Equity Net profit margin

0

1,000

2,000

3,000

4,000

2010 2011 2012 2013 2014

VN

D b

illi

on

Non-current assets Current assets

0

1,000

2,000

3,000

4,000

2010 2011 2012 2013 2014

VN

D b

illi

on

Equity Liabilities


Future growth depends on success of radial tires projects

DRC expects to complete the second phase of the radial tire project in Q4/2016; this

will be the key driver of DRC’s growth in revenues and profits. In the next five years,

we expect that net revenues will grow with CAGR of 11.2 percent, while EBITDA and

net profit should have CAGR of 7.2 percent and 7.0 percent. ROA and ROE should not

improve significantly before more radial tires from the second phase can be sold. We

believe the growth rate of net profit will be slower than revenues as the gross profit

margin of radial tires is lower than other traditional products due to depreciation. We

expect the gross profit margin of all products to decrease due to the recovery of

natural rubber prices (please refer to our forecast assumption about profit margin for

more details).

Forecast net revenues and selling volume Forecast profitability


LIQUIDITY AND SOLVENCY

Reasonable financial leverage

Total debts to equity ratio has increased significantly over the last five years, from

54.1 percent as of December 31, 2010, to 74.6 percent as of December 31, 2014. As of

December 31, 2014, DRC had VND336.6 billion (USD15.5 million) in short-term loans

and VND808.4 billion (USD37.3 million) in long-term loans. About 83 percent of long-

term loans were used to finance radial project phase one, the remainder was loan for

moving the automotive tires factory to Lien Chieu industrial park. Radial project

phase one was constructed from May 2011 to June 2013, with a total investment

capital of VND1,859 billion (USD85.8 million), of which 70 percent was financed by

loans. Moving of the automotive tire factory started in September 2012 and was

completed in December 2014, with a total investment capital of VND393 billion

(USD18.1 million); we estimate that the project was 65 percent financed by owner’s

equity and 35 percent by loans. Although financial leverage decreased considerably

compared to 2013, we expect that it will stay at this level for the next three years as

DRC will borrow to finance the second phase of the radial project.

Moderate liquidity ratios

Current ratio declined steadily over the last five years but maintained at satisfactory

levels, being always above 1.0x, however the quick ratio was quite low as inventories

made up a major portion of the current assets structure.

2,000

3,000

4,000

5,000

6,000

0

200

400

600

800

2014 2015 2016 2017 2018 2019

VN

D b

illi

on

Th

ou

san

d t

ires

Automotive tires Radial tires from 1st phase

Radial tires from 2nd phase Net revenues

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1,000

2014 2015 2016 2017 2018 2019

VN

D b

illi

on

EBITDA Net profit ROE ROA


Liquidity and solvency ratios

2010 2011 2012 2013 2014

Current ratio 2.7 x 2.2 x 1.9 x 1.4 x 1.4 x

Quick ratio 1.1 x 0.5 x 0.4 x 0.3 x 0.4 x

Total liabilities/Total assets 31.24% 45.87% 52.81% 56.72% 51.05%

Total borrowings/Equity 29.74% 54.08% 75.95% 102.80% 74.55%

EBIT/Interest expense 32.4 x 20.0 x 51.4 x 14.5 x 6.8 x

EBITDA/ Total borrowings 38.0 x 23.0 x 56.9 x 16.6 x 8.3 x

Source: DRC, VPBS

FORECAST ASSUMPTIONS

Selling volumes

Selling volume 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

(Unit)

1. Bicycle tires 3,567,000 3,483,000 3,705,000 4,170,000 4,295,100 4,423,953 4,556,672 4,693,372 4,834,173

% Growth -22.5% -2.4% 6.4% 12.6% 3.0% 3.0% 3.0% 3.0% 3.0%

2. Motorcycle tires 1,162,000 1,450,000 1,136,000 1,314,000 1,405,980 1,504,399 1,609,707 1,722,386 1,842,953

% Growth 37.4% 24.8% -21.7% 15.7% 7.0% 7.0% 7.0% 7.0% 7.0%

3. Automotive tires 740,000 703,000 742,200 777,000 800,310 808,313 816,396 824,560 832,806

% Growth -2.8% -5.0% 5.6% 4.7% 3.0% 1.0% 1.0% 1.0% 1.0%

4. Radial tires 0 0 14,800 115,000 240,000 270,000 314,800 400,000 510,000

% Growth 0.0% 0.0% 0.0% 677.0% 108.7% 12.5% 16.6% 27.1% 27.5%

- Bicycle tires: DRC plans for the selling volume of bicycle tires to increase by 3.1

percent in 2015; We forecast that the growth rate is 3.0 percent. The growth rate

is not expected to change until 2019 when production of bicycle tires reaches full

capacity.

- Motorcycle tires: DRC plans for selling volume of motorcycle tires to increase by

6.5 percent in 2015; we have adjusted this to seven percent given good sales

growth last year. This rate is assumed to be unchanged over the next five years.

- Automotive tires: We apply the same growth rate as DRC’s target for this year.

From 2015, the production line will operate at full capacity, thus we lower the

growth rate of this product type after 2015.

- Radial tires: We apply the same growth rate as DRC’s target for this year. The

radial tires factory will operate at 80 percent capacity in 2015, and we expect this

to climb to 90 percent in 2016 and 100 percent in 2017. From 2017 the radial tires

factory phase two can operate and contribute to growth of this segment.

Gross profit margin

Gross profit margin 2013 2014 2015F 2016F 2017F 2018F 2019F

1. Bicycle tires, tubes 17.8% 22.7% 22.0% 21.5% 21.0% 20.5% 20.0%

2. Motorcycle tires, tubes 21.9% 27.2% 26.5% 26.0% 25.5% 25.0% 24.5%

3. Automotive tires, tubes, flaps 27.2% 29.6% 29.0% 28.5% 28.0% 27.5% 27.0%

4. Automotive radial tires, tubes, flaps 8.3% 6.1% 9.8% 10.6% 9.6% 9.7% 11.4%

- Margin excluding depreciation 46.3% 19.6% 19.5% 19.3% 19.0% 18.8% 18.5%

5. Others 38.9% 40.3% 40.0% 40.0% 40.0% 40.0% 40.0%

GPM 25.6% 24.7% 22.7% 22.3% 21.1% 19.9% 19.5%


Gross profit margins of production lines, except radial tires, are expected to slightly

decline compared with 2014 as we expect the price of natural rubber – the main raw

material – will marginally recover from 2015 and reduce profit margins. The profit

margin of radial tires will increase steadily as DRC improves capacity utilization of the

production line, leading to reduction in depreciation expenses per produced unit.

Selling and general & administrative expenses (SG&A expenses)

Selling and G&A expenses 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Selling expenses/revenues 1.9% 2.2% 2.7% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0%

GA expenses/revenues 1.9% 2.9% 2.5% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%

The new radial tires products were introduced to market at the end of 2013, requiring

DRC to bear high selling expenses initially. Tighter transport regulations also came

into effect on April 1, 2014, limiting vehicle load and transportation costs increasing.

Thus the selling-expense-to-revenue ratio increased significantly in 2014. In 2015,

although these regulations will continue to burden DRC, current low oil prices lead us

to expect DRC’s selling-expense-to-revenue ratio to decrease considerably.

When Circular 200/2014//TT-BTC becomes effective, we estimate that around 0.8

percent of net sales (based on 2014’s data) will be changed to COGS, causing the

selling-expense-to-revenues ratio to decrease.

Working capital demand and borrowings

Working capital demand 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Inventory DOH (days) 138 121 164 113 113 113 113 113 113

Receivable DOH (days) 25 20 33 30 30 30 30 30 30

Payable DOH (days) 1 1 0 1 1 1 1 1 1

Shortage period (days) 162 141 197 142 142 142 142 142 142

Working capital demand (VND billion) 965 826 1,083 902 1,112 1,182 1,276 1,435 1,633

Short-term bank loan (VND billion) 287 117 544 337 445 473 510 574 653

% short-term loan/ Working cap demand 30% 14% 50% 37% 40% 40% 40% 40% 40%

We expect DRC’s shortage period to be about 142 days, and 40 percent of the

company’s working capital demand to be financed by loans over the forecast period.

Interest income and expense

Interest income: the amount of financial income has been very minimal in the past

due to small cash and cash equivalent value. Over the forecasting period we assume

a short-term deposit rate of 4.5 percent, though the rate has very little effect on the

company’s net profit.

Interest expenses: DRC borrows short-term and long-term in both USD and VND. The

average interest rate in 2014 was 6.6 percent. Due to decline in bank interest rates in

2015, as well as DRC currently receiving better interest rate offers for the radial tire

phase two project (about 5.2 to 5.3 percent in VND for long-term loans compared

with above 8.0 percent currently), we believe that the average interest rate will be

lower from 2015 to 2019.

Interest rate 2014 2015 2016 2017 2018 2019

Average deposit rate 6.8% 4.5% 4.5% 4.5% 4.5% 4.5%

Average borrowing interest rate 6.6% 6.0% 6.0% 6.0% 6.0% 6.0%


Tax rate

DRC applies the normal corporate income tax rate. Current tax rate is 22 percent and

will decrease to 20 percent from 2016.

VALUATION

Based on the discounted cash flow (DCF) and comparable multiples methods, we

derive a target price for DRC at VND48,600 per share.

Valuation method (VND/share) Weighting

DCF 51,785 50%

P/E 45,464 50%

Target price (VND/share) 48,600

DCF achieves a much higher price than the P/E method as it reflects potential growth

in the company’s net income while the P/E method does not.

DISCOUNTED CASH FLOW

The fair price derived from our DCF model is VND51,785 per share and includes the

following assumptions:

Cost of Equity

5-year government bond yield 6.4%

Beta one year 0.86

Market risk premium 8.5%

Cost of equity 13.7%

Cost of Debt

Long-term interest rate 8.2%

Effective tax rate 22.0%

After tax cost of debt 6.4%

WACC

Current share price (VND/share) 49,700

Number of shares (million) 91.38

Market capitalization (VND billion) 4,541.65

Debts (VND billion) 1,145.00

WACC 12.24%

Terminal growth rate 3.0%

COMPARABLE MULTIPLES

Local peers include Southern Rubber Industry JSC (HSX: CSM) and Saovang Rubber

JSC. (HSX: SRC). The profitability of DRC and its local peers are very similar but DRC

is trading with a higher P/E than others. The reason may be that DRC has high

potential growth as DRC’s market is more stable and has greater potential. DRC

focuses on truck tires in the local market, while CSM focuses on passenger car tires

and motorcycle tires with many foreign competitors in Vietnam, and SRC focuses on

bicycle and motorcycle tires; DRC’s business is highly transparent.

In comparison to regional peers, DRC has higher ROA and ROE and is trading at high

relative P/E. The main reason for the high return ratio is that DRC has a much higher

net profit margin while assets turnover is lower. Vietnam is a big natural rubber

producer and DRC can buy natural rubber – the main material for their products –

with favorable prices, and we believe this is the main reason for DRC’s high profit

margin.


As DRC has much higher profitability ratios, we adjust up the average relative P/E of

its regional peers by 10 percent, and derive DRC’s target P/E at 10.9x.

Valuation method Relative VN-Index Target DRC’s stock price

(VND/share)

P/E 0.79*1.1 = 0.87 12.5x 10.9x 45,464

Peer comparison

Data as of June 19, 2015. Source: Bloomberg, VPBS

SENSITIVITY ANALYSIS

Sensitivity of WACC and terminal growth rate to DCF stock price

WACC

Te

rmin

al g

row

th r

ate

8% 9% 10% 11% 12% 13% 14% 15% 16%

7% 529,809 257,885 167,266 121,971 89,734 76,707 63,788 54,105 46,580

6% 266,565 172,923 126,121 98,054 75,689 66,008 56,007 48,235 42,025

5% 178,817 130,441 101,434 82,109 65,522 57,984 49,955 43,540 38,297

4% 134,942 104,953 84,976 70,720 57,820 51,743 45,114 39,698 35,191

3% 108,618 87,960 73,220 62,178 51,785 46,750 41,153 36,496 32,563

2% 91,068 75,823 64,403 55,534 46,928 42,665 37,852 33,787 30,311

1% 78,533 66,719 57,546 50,219 42,935 39,260 35,059 31,465 28,358

0% 69,131 59,639 52,060 45,871 39,594 36,380 32,665 29,453 26,650

-1% 61,819 53,975 47,571 42,247 36,757 33,911 30,590 27,692 25,143

Net

profit

margin

Asset

turn

over

ROA ROE P/E EV/EBITDA

LTM LTM LTM Rel. LTM Rel. LTM Rel. LTM Rel.

Regional peers (USDmn) % Time % % Time % Time % Time % Time Time

MULTISTRADA ARAH SARANA TBK MASA IJ INDONESIA 193 0.19 0.45 33.10 0.08 0.03 0.14 0.01 N/A N/A 7.57 0.69 0.52

ND RUBBER PCL NDR TB THAILAND 25 5.80 1.41 47.36 8.16 3.12 23.82 2.22 12.44 0.63 14.25 1.16 2.92

ENKEI WHEELS INDIA LTD EWIL IN INDIA 25 0.60 1.26 28.32 0.76 0.28 13.29 0.94 67.05 3.07 6.06 0.50 8.65

HWA FONG RUBBER THAILAND PCL HFT TB THAILAND 73 11.37 1.06 0.00 11.87 4.53 14.31 1.34 8.45 0.43 3.70 0.30 1.16

GOODYEAR THAILAND PCL GYT TB THAILAND 88 6.25 0.83 0.00 5.17 1.97 6.53 0.61 11.40 0.57 3.86 0.31 0.81

XINGDA INT'L HOLDINGS 1899 HK CHINA 419 5.86 0.56 12.19 3.29 1.75 6.42 0.45 8.01 0.72 4.68 0.48 0.50

INOUE RUBBER (THAILAND) PCL IRC TB THAILAND 103 5.75 1.41 2.90 8.08 3.09 12.68 1.18 9.11 0.46 4.92 0.40 1.36

INDAG RUBBER LTD IDR IN INDIA 67 13.47 1.62 0.00 21.85 8.06 28.21 1.99 13.03 0.60 9.03 0.75 3.32

GOODYEAR INDIA LTD GDYR IN INDIA 191 6.41 1.80 0.00 11.55 4.26 22.00 1.55 12.01 0.55 5.49 0.46 2.45

TVS SRICHAKRA LTD SRTY IN INDIA 230 4.61 2.18 25.02 10.06 3.71 41.00 2.90 14.72 0.67 7.96 0.66 5.20

JK TYRE & INDUSTRIES LTD JKI IN INDIA 312 4.50 1.13 39.25 5.09 1.88 26.39 1.86 5.59 0.26 4.83 0.40 1.42

CEAT LTD CEAT IN INDIA 420 5.51 1.56 16.38 8.61 3.18 23.40 1.65 7.82 0.36 4.26 0.35 1.59

GOODYEAR INDONESIA PT GDYR IJ INDONESIA 53 1.71 1.35 0.00 1.79 0.64 3.75 0.33 27.46 1.24 2.52 0.23 0.92

SOUTHERN RUBBER INDUSTRY JSC CSM VN VIETNAM 122 10.41 0.99 43.72 9.57 3.51 22.61 1.51 9.45 0.75 6.65 0.77 0.92

MULTISTRADA ARAH SARANA TBK MASA IJ INDONESIA 193 0.19 0.45 33.10 0.08 0.03 0.14 0.01 N/A N/A 7.57 0.69 0.52

SAOVANG RUBBER JSC SRC VN VIETNAM 22 6.92 1.90 18.25 11.80 4.33 18.94 1.26 8.72 0.70 4.54 0.52 1.46

Average 5.60 1.25 18.72 7.36 2.77 16.48 1.24 15.37 0.79 6.12 0.54 2.11

Median 5.77 1.31 17.31 8.12 3.10 16.62 1.30 10.43 0.61 5.20 0.49 1.39

Local peers

SOUTHERN RUBBER INDUSTRY JSC CSM VN 122 10.41 0.99 43.72 9.57 3.51 22.61 1.51 9.45 0.75 6.65 0.77 0.92

SAOVANG RUBBER JSC SRC VN 22 6.92 1.90 18.25 11.80 4.33 18.94 1.26 8.72 0.69 4.54 0.52 1.46

Average 8.67 1.44 30.98 10.68 3.92 20.78 1.39 9.09 0.72 5.59 0.65 1.19

DANANG RUBBER JSC DRC VN 208 10.59 1.03 37.74 10.94 4.02 22.91 1.53 13.95 1.11 7.95 0.92 2.80

Company BB code

Market

cap

Debt

to

asset

P/BCountry


TECHNICAL ANALYSIS

DRC’s technical chart has shown an accumulation phase of 51,000-55,000 for three

months from February to May, 2015. After failing to cross over the resistance level of

55,000, the price of DRC has been adjusting to break down the short-term support

level of 51,000.

Its trading volume has increased recently, indicating that selling pressure is

dominated buying force. This may force the price of DRC to continue to move down

to the mid-term support level of 45,000.

Therefore, we recommend SELL for DRC at the time of this updating report.

As of June 19, 2015 (VND/share)

Horizon analytic 3 to 6 months

3-month highest price 55,500

3-month lowest price 49,500

Current MA50 days 52,500

Current MA100 days 52,000

Mid-term resistance level 55,500

Mid-term support level 45,000

Recommendation SELL


CONCLUSION

We believe that DRC, as well as other tire companies in Vietnam, are enjoying many

favorable conditions for expanding business and profitability. As a major natural

rubber producer, Vietnam’s tire companies have a big advantage in competing with

other tire companies worldwide. Although the export value of DRC is still small, the

export market has great potential and will be the key driver for the growth of DRC in

the future. The main market for DRC is still local, and the company is now operating

at high capacity utilization and should increase its capacity to meet local tire demand,

which is expected to grow strongly over the next few years.

DRC has higher profitability but P/E is trading quite high relative to its regional peers.

This may be due to the market reflecting the potential growth of DRC in its share

price. We believe that such appreciation is reasonable, but at a smaller level. In our

opinion, in the long term, DRC can achieve high growth in revenues and favorably

expand its scale of business, however its profitability should steadily shrink as we

expect natural rubber prices will recover.

All factors considered, we adopt a long term HOLD recommendation for DRC stock

with a target price of VND48,600 per share.


Income Statement (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F

Revenue

1. Bicycle tires, tubes 182 196 205 212 220 228 236

Growth rate 8% 5% 4% 4% 4% 4%

2. Motorcycle tires, tubes 229 259 277 296 317 339 363

Growth rate 13% 7% 7% 7% 7% 7%

3. Automotive tires, tubes, flaps 2,298 2,191 2,263 2,298 2,334 2,370 2,401

Growth rate 2% 2% 2% 1%

4. Automotive radial tires, tubes, flaps 87 596 1,181 1,329 1,549 1,968 2,510

Growth rate 587% 98% 13% 17% 27% 28%

5. Others 9 10 11 12 13 14 16

Net Revenue 2,637 2,785 2,804 3,251 3,937 4,147 4,433 4,919 5,524

Growth rate 22% 6% 1% 16% 21% 5% 7% 11% 12%

Cost of Goods Sold (excluding depreciation) 2,173 2,142 2,005 2,317 2,857 3,037 3,278 3,687 4,195

Gross Profit 464 643 799 934 1,080 1,111 1,154 1,232 1,329

Gross Profit Margin 18% 23% 28% 29% 27% 27% 26% 25% 24%

Total Selling Expenses 51 60 74 161 157 166 177 197 221

% sales 1.9% 2.2% 2.7% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Total General & Admin Expenses 50 82 71 68 82 87 93 103 116

% sales 1.9% 2.9% 2.5% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%

Income from Affiliated Companies - - - - - - - - -

EBITDA 363 501 654 704 840 858 884 933 993

EBITDA Margin 14% 18% 23% 22% 21% 21% 20% 19% 18%

Depreciation 48 49 82 130 185 187 221 253 253

EBIT 315 452 572 574 655 671 664 680 740

Financial income 8 4 11 10 9 11 13 23 27

Financial expenses 65 45 85 143 142 155 161 160 163

Interest Expense 16 9 39 85 72 80 82 72 64

Net Financial Income (Expense) (58) (41) (74) (133) (133) (144) (148) (137) (136)

Other profit 6 6 3 11 8 9 10 11 12

% sale 0.22% 0.20% 0.11% 0.33% 0.21% 0.21% 0.21% 0.21% 0.21%

Pretax Income 264 417 501 452 530 536 525 553 616

Income Tax Expense 66 105 125 100 117 107 105 111 123

Effective Tax Rate 25.04% 25.17% 25.03% 22.19% 22.00% 20.00% 20.00% 20.00% 20.00%

Profit after tax 198 312 375 352 414 429 420 443 493

Net Income 198 312 375 352 414 429 420 443 493

Net Profit Margin 7% 11% 13% 11% 11% 10% 9% 9% 9%

Average Number of Shares (million) 46 58 83 83 91 91 91 91 91

EPS (VND) 3,940 4,926 4,158 3,907 4,165 4,321 4,231 4,456 5,394


Balance Sheet (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F

Current Assets

Cash & Near Cash Items 78 76 54 85 129 177 392 485 688

Short Term Investments - - - - - - - - -

Accounts & Notes Receivable 180 152 257 268 325 342 365 405 455

Inventories 822 712 901 716 882 938 1,012 1,138 1,295

Other Current Assets 134 104 87 43 53 56 60 67 76

Total Current Assets 1,213 1,044 1,300 1,111 1,388 1,513 1,830 2,096 2,515

Long-Term Assets

Gross Fixed Assets 668 736 2,354 2,645 2,713 2,739 3,453 3,460 3,469

Accumulated Depreciation 514 560 637 723 908 1,095 1,315 1,568 1,820

Net Fixed Assets 154 176 1,717 1,921 1,805 1,644 2,137 1,892 1,648

Long Term Investments 8 8 5 5 5 5 5 5 5

Intangibles 2 1 1 1 1 1 1 1 1

Other Long Term Assets 244 1,248 165 99 275 735 30 30 30

Total Long-Term Assets 408 1,434 1,888 2,026 2,085 2,385 2,173 1,928 1,684

Total Assets 1,622 2,478 3,188 3,137 3,473 3,898 4,003 4,024 4,200

Current Liabilities

Accounts Payable 4 4 2 5 6 6 7 7 9

Accrued Expenses - - - - - - - - -

Short Term Borrowings 287 117 544 337 445 473 510 574 653

Other Short Term Liabilities 264 417 388 452 547 576 616 684 768

Total Current Liabilities 555 538 934 793 998 1,055 1,133 1,265 1,429

Long Term Liabilities

Long Term Borrowings 188 771 874 808 803 957 782 536 364

Total Long Term Liabilities 189 771 874 809 803 957 782 536 364

Total Liabilities 744 1,309 1,808 1,602 1,801 2,012 1,915 1,801 1,793

Total Debt to Capital 35.1% 43.2% 50.7% 42.7% 42.7% 43.1% 38.2% 33.3% 29.7%

Equity

Share Capital & APIC 462 692 831 831 914 914 914 914 914

Retained Earnings 244 334 376 495 478 608 768 861 1,000

Other Equity 173 143 173 210 281 364 406 448 493

Total Shareholders Equity 878 1,169 1,380 1,536 1,672 1,886 2,089 2,224 2,407

Minority Interest - - - - - - - - -

Total Liabilities & Equity 1,621 2,478 3,188 3,137 3,473 3,898 4,003 4,024 4,200


Cash Flows (VND billion) 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F

Cash From Operation Activities 42 554 149 762 453 559 565 567 588

Cash From Investing Activities (248) (721) (562) (285) (235) (476) 4 16 18

Cash From Financing Activities 176 164 392 (447) (174) (34) (355) (490) (403)

Beginning Cash Balance 108 78 76 54 85 129 177 392 485

Net Changes in Cash (30) (3) (21) 30 44 49 215 93 203

Expected Ending Cash Balance 78 75 55 85 129 177 392 485 688

Free Cash Flow (FCFF) (105) (509) (340) 595 266 136 622 618 630

Ratio Analysis 2011A 2012A 2013A 2014A 2015F 2016F 2017F 2018F 2019F

Valuation Ratios

Price Earnings 12.7 x 11.9 x 11.5 x 11.7 x 11.2 x 9.2 x

PEG (2.1) 1.8 3.1 (5.7) 2.1 0.4

EV to EBIT 9.8 x 8.5 x 8.3 x 8.4 x 8.2 x 7.6 x

EV to EBITDA 8.0 x 6.7 x 6.5 x 6.3 x 6.0 x 5.6 x

Price to Book 2.7 x 2.7 x 2.4 x 2.2 x 2.0 x 1.9 x

Dividend Yield 6.0% 4.0% 4.0% 6.0% 6.0% 6.0%

Profitability Ratios

Gross Margin (ex. Dep) 17.6% 23.1% 28.5% 28.7% 27.4% 26.8% 26.0% 25.1% 24.1%

EBITDA Margin 13.8% 18.0% 23.3% 21.7% 21.3% 20.7% 19.9% 19.0% 18.0%

Operating Margin 12.0% 16.2% 20.4% 17.7% 16.6% 16.2% 15.0% 13.8% 13.4%

Profit Margin 7.5% 11.2% 13.4% 10.8% 10.5% 10.3% 9.5% 9.0% 8.9%

Return on Avg. Assets 14.7% 15.2% 13.3% 11.1% 12.5% 11.6% 10.6% 11.0% 12.0%

Return on Avg. Equity 24.6% 30.5% 29.5% 24.1% 25.8% 24.1% 21.1% 20.5% 21.3%

Leverage Ratios

Interest Coverage Ratio (EBIT/I) 20.0 51.4 14.5 6.8 9.1 8.4 8.1 9.4 11.6

EBITDA / (I + Cap Ex) 2.1 0.5 1.2 2.2 2.7 1.5 9.8 11.8 13.7

Tot Debt/Capital 35.1% 43.2% 50.7% 42.7% 42.7% 43.1% 38.2% 33.3% 29.7%

Tot Debt/Equity 54.1% 76.0% 102.8% 74.6% 74.6% 75.8% 61.9% 49.9% 42.2%

Liquidity Ratios

Asset Turnover (times) 2.0 x 1.4 x 1.0 x 1.0 x 1.2 x 1.1 x 1.1 x 1.2 x 1.3 x

Accounts Receivable Turnover (day) 22 25 20 33 30 30 30 30 30

Accounts Payable Turnover (day) 0 1 1 0 1 1 1 1 1

Inventory Turnover (day) 94 138 121 164 113 113 113 113 113

Current Ratio 2.2 x 1.9 x 1.4 x 1.4 x 1.4 x 1.4 x 1.6 x 1.7 x 1.8 x

Quick Ratio 0.5 x 0.4 x 0.3 x 0.4 x 0.5 x 0.5 x 0.7 x 0.7 x 0.8 x


GUIDE TO RATINGS DEFINITION

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Sell: Expected return, including dividends, over the next 12 months is below -10%.

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