20131218-Maybank_KERPL-All_Gea_red_Up_For_Agriculture_13页_681kb

Hoang Anh Gia Lai (HAG) Company Visit Summary - 18 December 2013

Core Information

• Company Name: Hoang Anh Gia Lai (HAG)
• Share Price: VND20,900
• Market Cap (USD m): 710.7
• Shares Issued (m): 718.2
• Free Float (%): 54.7
• 3-mth Avg Daily Turnover (USD m): 1.6
• VN Index: 505.7
• Major Shareholders:
  • Doan Nguyen Duc (Chairman/Founder): 43.4%
  • Deutsche Bank AG: 5.0%
  • Vietnam Century Fund: 2.5%
  • Vietnam Growth Fund: 1.4%
  • Van Eck Associates C: 1.1%

Key Indicators

• ROE (annualised %): 9.4
• Net Cash (VND b): -12,627
• NTA/shr (VND): 22,200
• Interest Cover (x): 1.9

Company Overview

HAG, once a major real estate developer in Vietnam, is now transitioning to agriculture, with a focus on sugarcane, rubber, and palm oil. The company is also involved in construction, minerals, and furniture. It has exited the domestic real estate and hydropower markets.

Competitive Advantages in Agriculture

HAG claims to have three competitive advantages in its agricultural operations:

1. Scale: Large land holdings in Laos and Vietnam, especially in sugarcane with 10,000ha in Attapeu.
2. Productivity: Utilises drip irrigation technology from Israel, which allows for a full 12-month harvesting season and a higher commercial cane sugar ratio (14 vs. 11 in Vietnam).
3. Pricing: Achieves a lower ASP (VND4,700/kg) compared to Vietnamese sugar (at least VND12,000/kg) and potentially lower than Thailand.

Sugarcane Business

• Revenue Contribution: VND644b in 9M13 (32% of total revenue)
• Target Markets: Vietnam, Thailand, China
• Yield: 120tons/ha (compared to 64tons/ha in Vietnam in 2012)
• Costs: Includes land cost amortisation, depreciation, labour (minimised via harvesters), and transportation
• Biofuel Use: Sugarcane bagasse is used as biofuel for thermal power stations and recycled into fertilisers

Rubber Business

• Planted Area: 42,400ha across Vietnam, Laos, and Cambodia (7,000ha under tapping)
• Yield (Sample): 2kg of liquid latex per tree per day (first year)
• Realistic Estimate: 2.0-2.5tons/ha
• Costs: ASP of VND48m/ton, COGS of VND24m/ton
• Labour Costs: VND200,000/person/day in Laos (covers 2ha) vs. VND150,000/person/day in Vietnam (covers 3ha)
• Depreciable Life: 20 years, after which rubber trees yield wood products

Palm Oil Business

• Planted Area: Mainly in Laos and Cambodia, with 4,000ha tested and yielding positive results
• Yield: Still some way off, with the company not providing forecasts
• Growth: Strong in Gia Lai, despite less favourable soil conditions

Myanmar Commercial Centre

• Project Status: Under construction (8ha), started in June 2013
• Phase 1 Completion: Expected by end-2014
• Financing: Funded through the sale of hydropower plants in Vietnam

Social and Infrastructure Investments

• Hospitals and Schools: HAG has invested in hospitals and schools in Attapeu and Gia Lai
• Airport Development: An airport is currently under development in Attapeu
• Hospital: A 200-bed hospital with a monthly profit of about VND1.5b

Football as a PR Tool

• Academy: HAG partnered with Arsenal F.C. to develop a football academy in 2007
• Impact: Recent graduates performed well in the 2013 AFF U-19 Youth Championship, gaining national attention
• Publicity: Helps offset negative publicity from accusations by Global Witness regarding environmental and human rights issues

Performance and Financials

Revenue and Earnings (FYE Dec)

Key Ratios (FYE Dec)

Conclusion

HAG is transitioning from real estate to agriculture, focusing on sugarcane, rubber, and palm oil. The company has a significant landholding advantage, especially in sugarcane, and has implemented advanced irrigation and fertilisation techniques. While the rubber yield is promising, it is still subject to uncertainty. The company's social and infrastructure investments, along with its football-related PR efforts, are seen as positive factors. However, the stock has underperformed the market by 11.4% YTD, and there are concerns about the reliability of the forecasts provided. The upside potential lies in the agricultural segments and the Myanmar project, but these are not without caveats.