FPT Corp (FPT) – FLASH NOTE - TVS reports/2016/T12... · Technology, Telecom, Trading, Retail, and Education. FPT expands into 19 countries and is among one of the most well-known

FPT CORPORATION Divestment Delay

NOT-RATED

Son Nguyen, Senior Analyst [email protected]

Trading Data and Key Metrics Ticker FPT

Sector Technology

Listed since 13-Dec-2006

Price as of 29-Nov- 2016 VND 43,150

52-week range (VND’000) 47,900-42,700

Market cap (VND bn) 19,821

Shares outstanding (mn) 459.43

Free Float (mn) 364.26

10-day average volume 543,070

Trailing P/ BV (x) 2.2

Trailing P / E (x) 11 Source: TVS, Thomson Reuters Data

Price Performance Chart

Source: TVS, Thomson Reuters Data

Price Perf. (%) 3M 12M YTD

Absolute -2.9 3.1 2.9

Source: TVS research, Thomson Reuters Data

Company Description

Founded in 1988, FPT Corporation is a Vietnamese-based information technology conglomerate. The company operates in various sectors including Technology, Telecom, Trading, Retail, and Education. FPT expands into 19 countries and is among one of the most well-known Vietnamese companies.

Revenue Structure

Source: Company data, TVS research

-10.00%

0.00%

10.00%

20.00%

30.00%

1-Dec-15

1-Jan-16

1-Feb-16

1-Mar-16

1-Ap

r-16

1-May-1

6

1-Jun

-16

1-Jul-16

1-Au

g-16

1-Sep-16

1-Oct-16

1-No

v-16

1-Dec-16

FPT VNIndex

23%

17%58%

2%

% total revenue

Technology

Telecom

Distribution& Retail

FLASH NOTE I December 1, 2016

We attended the FPT Capital Market Day regarding 3Q2016 and 9M2016 business

performance review. Key updates are highlighted as follows:

3Q2016 witnessed a good performance as revenue and EBT grew by +7% and +22% YoY

respectively. Revenue exhibited the strongest quarterly performance since 2Q2015. Telecom

and Technology sector contributed most to both top line and bottom line growth.

Consequently, FPT had consolidated revenue of VND 28,468 billion (-2.7% YoY). EBT was VND

2,011 billion and net income was VND 1,330 billion (+4.7% YoY). EPS accumulated to VND

2,900 (+4.1% YoY). We expect the company surpasses 2016 targets slightly when Software

Outsourcing, Telecom Services and Integration System segments do well.

Divestment delay in Retail and Distribution segments disconnects 2016’s earnings.

Distribution & Retail segments continue incurring low margin compared with others in

9M2016 and it created the economic sense to divest them from FPT’s portfolio. As per

management guidance, the divestment deal may not be closed in 2016 as they can not reach

agreement with the potential buyers to sell bundle of Retail and Distribution.

Healthy growth in Software Segment driven by oversea market development, particularly

Japan. 9M-2016 witnessed a jump of revenue to VND4,169 billion (+27% YoY) and EBT to VND

604 billion (+30% YoY). Oversea markets also signify a very high profit margin as they possess

only 15% of FPT’s revenue but account for 30% of EBT. Among foreign markets, Japan plays

an increasingly important role that represents the best foreign market in 2016 so far and an

average 32% growth / year over the last 10 years.

In 2017, management team expects Bangladesh, Korea and Europe will add more penny to

their pocket when they have positive talk with some potential clients, such as Airbus.

Table: 9M2016 Business Performance

9M-2016 9M-2015 % change (YoY)

Revenue 28,468 29,257 -2.7%

EBITDA 3,224 2,873 12.2%

EBT 2,012 1,969 2.2%

EBT margin 7.10% 6.70% 6.0%

Net income 1,330 1,270 4.7%

EPS - adjusted (VND) 2,900 2,787 4.1%

Source: Company Data and TVS Research

Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages.

mailto:[email protected]

Please visit TVS Research on Bloomberg at <TVSJ> GO

FPT Corp (FPT) – FLASH NOTE 2

9M2016 BUSINESS PERFORMANCE UPDATE

Q3 and 9M-2016 performance. Q3-2016 recorded VND 10,650 billion (+7% YoY) in

revenue and VND 754 billion Earnings Before Tax (+22% YoY). This was much better

than the previous quarter when EBT had gone down 7% YoY. Q3’s sales were aided

by strong growth from Telecom sector (EBT VND320 billion, +18% YoY) and cost

reductions from Technology sector (EBT292 billion, +45% YoY). Company’s earnings

increased by 29% YoY to reach VND667 billion. Q3’s revenue exhibited the strongest

quarterly performance since Q2-2015. Gross profit maintained a considerable 21%

in recent quarters but net profit margin felt to 4%.

Figure 1: Quarterly performance


Working capital would be better in next year as the company focuses to enhance

inventories turnover. Capex in 2016 is projected to be lower than the previous year

because there have been setbacks at telecom projects and construction of office

buildings. FPT Play is also projected to suffer loss in 2016 (-VND 170 billion) and 2017

due to 2-year cost allocation, although the performance is hoped to slightly improve

next year.

Over 9 months, FPT had consolidated revenue of VND 28,468 billion (-2.7% YoY). EBT

was VND 2,011 billion and net income was VND 1,330billion (+4.7% YoY). EPS

accumulated to VND 2,900 (+4.1% YoY). 9-month earnings went up 4.7% while

revenue was reduced 2.7% thanks to the high net profit of Q2. 9M’s growth was

made possible due to good performance at sectors including Software outsourcing,

Telecom services, and Integration System. Based on current results, we expect the

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016

14,713

11,744

9,72910,476

8,703 9,21310,650

425 457 389 662 346 515 468

Revenue Net income

Telecom and Technology sector

contributed most to both top line

and bottom line growth.

FPT Play continues suffering loss

due to cost allocation.

We expect the company

surpasses 2016 target slightly

when Software Outsourcing,

Telecom Services and Integration

System segment do well.



company to just slightly surpass last year’s performance (VND 38,707 billion revenue

VND 2,851 billion EBT).

Table 1: Financial summary (VND billion)

9M-2016 9M-2015 % change (YoY)

Revenue 28,468 29,257 -2.7%

EBITDA 3,224 2,873 12.2%

EBT 2,012 1,969 2.2%

EBT margin 7.10% 6.70% 6.0%

Net income 1,330 1,270 4.7%

EPS - adjusted (VND) 2,900 2,787 4.1%


Figure 2: Quarterly Gross profit margin Figure3: Quarterly Net profit margin


Distribution & Retail segment. Across all sectors, Distribution & Retail accounted for the biggest share of revenue (58%), followed by Technology (23%) and Telecom (17%). Yet, Distribution & Retail incurred low margin while Telecom and Technology contributed most to the firm’s EBT, 42% and 32% respectively.

The company had to set provision for inventories of Nokia Lumia in Q3 and will continue to do so in Q4. Number of stores continued to expand to 355 stores (47% YoY), achieving 113% plan of 2016.

FPT wants to sell the two sectors in one block but unable to finish the deal. FPT may

have to revive the plan and split into 2 separate trades in Q1-2017, but the firm

asserts its attention to hold maximum 49% of the shares after exit.

11%

15%

20%21%

19%21% 21%

0%

5%

10%

15%

20%

25%

Gross margin

2.9%

3.9% 4.0%

6.3%

4.0%

5.6%

4.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Profit margin

It is very unlikely that the selling

of FPT Trading/Retail will go

through in 2016.



Regarding the cooperation with VNM, 30-40sqm out of 120-150sqm at each store

would be reserved to sell dairy products. FPT presents two main reasons for this

cooperation:

FPT would have another revenue stream from VNM’s products while fixed costs are

reduced. Risks are low and support from VNM is high. FPT does not have to suffer

loss period when entering a new market (often 2-3 years after opening). At the

moment, revenues from dairy products at FPT stores have doubled the break-even

point and the stores get profit immediate after opening. This cooperation would

have to yield at least a profit margin equal to current that of FPT retails.

Maximum in the next 2 years, handset market would reach maturity point. This

pushes FPT to find a new market to diversify. Generous offers from VNM did not

trigger this cooperation; rather it was initiated by FPT’s need to change. Cooperation

with VNM is just the pilot project. If the plan goes well, FPT would open independent

stores and enter into other new sectors.

Figure 5: Revenue breakdown (VND billion) Figure 6: Revenue breakdown (%)


Figure 7: Earnings before tax breakdown (VND billion) Figure 8: Earnings before tax breakdown (%)


6,641

4,92216,333

572

Revenue (VND billion)

Technology

Telecom

Distribution &Retail

Education -Others

23%

17%58%

2%

% total revenue

Technology

Telecom


Education -Others

649

853

397

113

EBT

Technology

Telecom


Education -Others

32%

42%

20%

6%

% EBT

Technology

Telecom


Education -Others

Cooperation with dairy

company expected to add

more revenue and

diversify concentrated

risks.



Software Segment. Apart from Distribution & Retail, we see that Software Outsourcing and Broadband were the two sub-sectors contributing the most to the firm revenue in the first 9 months, VND 3,666 billion and VND 3,171 billion respectively.

Foreign markets demonstrated a desirable development. 9M-2016 witnessed a jump

of revenue to VND4,169 billion (+27% YoY) and EBT to VND 604 billion (+30% YoY).

Oversea markets also signify a very high profit margin as they possess only 15% of

FPT’s revenue but account for 30% of EBT. Among foreign markets, Japan plays an

increasingly important role that represents the best foreign market in 2016 so far

and an average 32% growth / year over the last 10 years. It is on track to achieve

USD100 million revenue this year. Bangladesh and Korea are rising stars which have

potential to contribute a bigger part in coming years. EU market will be promising in

2017 as FPT is in progress of negotiating with big potential clients.

EBT increased quicker than revenue in which 60-65% were recurring revenue. The

company has attempted to reduce currency risk by hedging currency exchange.

Overall, fluctuation of JPY affected 7-8% of FSoft revenue in 2016. Revenue from

domain and automotive accounted for 40% and 15% respectively.

In 2017, revenue from EU market is expected to make a big jump as negotiations

with big clients such as Airbus in progress. The company does not deem China as

competition threat as the neighbor nation faces increasing salary. Instead, the

Vietnamese software developer would take advantage of China’s shortage of human

resource to gain outsource contracts by continually boosting human capital, both

qualitatively and quantitatively. Impacts of the US presidential election on the

company are still unclear. There are possibilities that visas may be tightened and

wages may have to go up. Yet, the Management will not release responses until the

US new policies are clearer.

Figure 9: Earnings before tax breakdown (VND billion) Figure 10: Earnings before tax breakdown (%)


24,299

2,006730

476

454

502

9M-2016 Revenue (VND billion)

Domestic market

Japan

US

EU

APAC

Emerging markets

1,408

604

EBT (VND billion)

Domestic market

Overseas markets

Healthy growth in software

segment driven by oversea

market development,

particularly Japan.

Bangladesh, Korea and EU

markets expected to add more to

top line in 2017.



Telecom experienced a good growth. Costs of installation of fiber-optic cables have

been decreased. Japan market witnessed the strongest growth of 50%YoY, followed

by Pacific markets (+30%YoY) and EU markets (+10%YoY). The USD85 billion –

acquisition deal between AT&T and Time Warner played a contributing factor in -

10% YoY growth in US market as the newly-merged company aims to cut costs across

IT contractors including FPT.

Integration System (IS) suffered setbacks from traditional clients. Government has

tightened fiscal policies and cut budgets scheduled projects. Moreover, big clients in

banking system have been carrying out systematic reform. This also caused

reduction in spending. Nevertheless, IS sector welcomed new implementations of

Intelligent traffic system at Hanoi-Lao Cai highway or other projects to recognize

number plates and detect car density in HCMC.

Table 2: Sectors performance in 2015-2016

Revenue EBT

Q3-2016 Q3-2015 9M-2016 9M-2015 Q3-2016 Q3-2015 9M-2016 9M-2015

Technology

1,307 1,099 3,666 2,901 207 167 556 452

949 615 1,838 1,606

84 33 93 152 232 288 544 622

209 194 593 609

Telecom

1,113 969 3,171 2,700 253 220 676 694

505 380 1,408 1,006

126 106 343 269 67 52 177 121

Distribution 2,315 2,007 5,607 5,424

72 91 240 391 1,037 2,073 3,358 8,076

Retail 2285 1918 6544 5170

59 38 157 109 347 96 824 419

Education 165 151 464 412 36 37 122 114




Table 3: Sub-Sectors performance in 2015-2016

Sub-sectors

Revenue EBT

Q3-2016 Q3-2015 9M-2016 9M-2015 Q3-2016 Q3-2015 9M-2016 9M-2015

Technology

Software outsourcing 1,307 1,099 3,666 2,901 207 167 556 452

System integration 949 615 1,838 1,606

84 33 93 152 Software solutions 232 288 544 622

IT service 209 194 593 609

Telecom

Broadband 1,113 969 3,171 2,700 253 220 676 694

Leased-lines & others 505 380 1,408 1,006

Online advertising 126 106 343 269 67 52 177 121

Distribution IT distribution 2,315 2,007 5,607 5,424

72 91 240 391 Mobile Manufacturing & Distribution

1,037 2,073 3,358 8,076

Retail Retail 2285 1918 6544 5170

59 38 157 109 Online retail 347 96 824 419

Education Education 165 151 464 412 36 37 122 114




FINANCIAL SUMMARY

Earning Model (VNDbn) 2011A 2012A 2013A 2014A 2015A Balance Sheet (VNDbn) 2011A 2012A 2013A 2014A 2015A

Net sales 25,370 24,594 27,028 32,645 37,960 Cash and equivalents 2,902 2,319 2,751 4,336 3,585

Cost of sales 20,412 19,902 21,489 26,456 30,466 Financial investment 862 662 1,443 1,428 2,617

Gross profit 4,958 4,692 5,539 6,189 7,494 Accounts receivable 4,023 4,202 4,925 5,379 6,313

Selling expenses 2,396 2,461 3,203 3,854 4,559 Inventory 3,276 2,700 3,329 4,573 5,268

General administration expenses 0.00 0.00 0.00 0.00 0.00 Prepaid expenses, other CA 310 347 460 993 1,176

Other operating income/(expenses) 5 34 -133 -12 4 Total current assets 11,373 10,229 12,908 16,709 18,959

EBITDA 2,935 2,597 2,913 2,894 3,664 Property and equipment Depreciation & Amortization - - - - - At cost 3,139 3,938 4,672 5,891 7,632

EBIT 2,559 2,198 2,469 2,347 2,931 Less accumulated depreciation -1,257 -1,590 -1,869 -2,355 -2,966

Net interest income/(expenses) 0.00 0.00 0.00 0.00 0.00 Net property and equipment 1,883 2,349 2,803 3,536 4,666

Net investment income 36 33 22 41 - Net intangibles 485 485 504 635 319

Others (recurring) 65 53 38 34 39 Total investments 865 696 707 810 728

Pretax Profit 2,502 2,407 2,516 2,459 2,851 Other long - term assets 338 449 648 969 1,374

Income tax 422 421 450 380 413 Total Assets 14,943 14,209 17,571 22,658 26,046

Tax rate (%) 17 17 18 15 14 Account Payables 1,339 1,809 2,200 3,019 2,815

Minorities 705 912 1,045 1,344 1,601 Short-term debt 0 0 0 6,608 8,033

Net Income 2,079 1,985 2,065 2,079 2,438 Other current liabilities 7,137 5,010 6,869 3,343 4,119

EPS (basic VND, reported) 4,375 3,941 3,544 3,237 3,814 Total Current Liabilities 8,475 6,820 9,069 12,970 14,968

Weighted shares outstanding (mn) 384 391 454 455 456 Long-term debt 0 22 55 142 614 Other long-term liabilities 946 1,186 1,238 1,633 1,883

Common dividends declared - - - - - Total long-term liabilities 947 1,208 1,293 1,775 2,497

DPS (VND) 1,190 1,322 1,552 1,437 1,652 Dividend Payout ratio (%) 27% 34% 44% 44% 43% Stockholders' equity 5,521 6,182 7,209 7,913 8,581

Dividend cover (X) 3.68 2.98 2.28 2.25 2.31 Common Equity 2,161 2,738 2,752 3,440 3,975 Treasury shares -1 -1 -1 -1 -1

Growth and Margin (%) Capital surplus 50 49 49 49 49

Sales Growth (%) 27% -3% 10% 21% 16% Retained earnings 3,173 3,181 4,207 4,268 4,395

EBITDA Growth (%) 26% -12% 12% -1% 27% Budget sources and other funds 138 213 201 157 162

EBIT Growth (%) 28% -14% 12% -5% 25% Minority interest 705 912 1,045 1,344 1,601

Net Income Growth (%) 23% -5% 4% 1% 17% Total liabilities and equity 14,943 14,209 17,571 22,658 26,046

EPS Growth (%) 19% -10% -10% -9% 18% Capitalized leases - - - - -

Gross Margin (%) 20% 19% 20% 19% 20% Capital employed 6,468 7,390 8,502 9,688 11,078

EBITDA Margin (%) 12% 11% 11% 9% 10% EBIT Margin (%) 10% 9% 9% 7% 8% Ratios (%)

Net Income Margin (%) 7% 6% 6% 5% 5% ROE (%) 35.39 26.32 24.01 21.59 23.41 ROA (%) 15.26 13.62 13.00 10.34 10.01

Cash flow Statements (VNDbn) 2011A 2012A 2013A 2014A 2015A ROIC (%) 35.96 32.44 29.64 26.32 27.36

Pre-tax Income 2,502 2,407 2,516 2,459 2,851 Inventory days 51.32 54.94 51.34 54.66 59.11

Adjustments for: Receivable days 53.03 61.20 61.80 57.76 56.37

Depreciation and amortization 376 400 443 547 733 Payable days 22.31 28.95 34.14 36.10 35.04

Change in inventories -834 584 -644 -1,312 -693 Asset Turnover (x) 1.9x 1.7x 1.7x 1.6x 1.6x

Change in trade receivables -291 105 -687 -681 -864 Net debt/equity (x) 0.3x 0.1x 0.1x 0.3x 0.5x

Change in trade payables 974 -115 618 1,086 395 Interest cover - EBIT(x) 0.1x 0.1x 0.0x 0.1x 0.1x

Other operating cash flow -880 -971 -846 -949 -1,267

Cash flow from operations 1,847 2,410 1,400 1,151 1,156 Valuation (Multiples)

Net Capital expenditure -465 -716 -920 -1,441 -2,090 EV / EBITDA (x) 3.7x 3.5x 4.2x 6.5x 6.4x

Acquisition - - - - - P/E (x) 5.5x 5.4x 8.0x 11.2x 11.0x

Divestures - - - - - Dividend Yield (%) 4.95 6.21 5.45 3.96 3.93

Other investments, net 572 262 156 190 227 P/B (x) 1.7x 1.4x 1.6x 2.1x 2.2x

Cash flow from investing 107 -253 -1,576 -1,469 -2,901

Equity issued 42 41 17 16 27

Net borrowings 198 -1,793 1,341 2,643 1,941

Dividends to shareholders -728 -988 -750 -756 -974

Cash flow from financing -487 -2,740 608 1,903 993

Net cash flow 1,466 -583 432 1,585 -752

Opening cash 1,436 2,902 2,319 2,751 4,336 Notes: CA = current assets; CL = current liabilities

Closing cash 2,902 2,319 2,751 4,336 3,585 Source: Thomson Reuters data, Thien Viet Securities model



ANALYST CERTIFICATION

I, Nguyen Thanh Son, hereby certify that all of the views expressed in this report accurately reflect my personal

views about the subject company or companies or its or their securities. I also certify that no part of my

compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed

in this report.

RATING and VIEWS

Buy (B), Neutral (N), Sell (S) – Analysts recommend stocks as Buys or Sell based on his own views. Being assigned

a Buy or Sell is determined by as total stock’s return (TSR) potential that represents the price differentials between

the current share price and the price target expected during the time horizon plus expected dividend yield. Any

stock not assigned as Buy or Sell is deemed Neutral.

TVS Investment Research: Equity Rating Definitions

12-month rating Definition

Buy Total Stock’s Return Potential > 15%

Neutral Total Stock’s Return Potential between (-15%) and 15%

Sell Total Stock’s Return Potential < (-15%)

Short-term rating Definition

Buy Stock price expected to rise within three-month because of a specific catalyst or event

Sell Stock price expected to rise within three-month because of a specific catalyst or event

Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target.

DISCLAIMER

Copyright©2016 Thien Viet Securities JSC (TVS). ALL RIGHT RESERVED. This research report is prepared for the

use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or

manner without the prior written consent of TVS. The information herein is obtained from various sources and

TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication

constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any

responsibilities for any investor’s decisions.



THIEN VIET SECURITIES JOINT-STOCK COMPANY

HO CHI MINH

63A Vo Van Tan St, District 3

Floor 9, Bitexco Nam Long Building

Tel: +84 (8) 299 2099

Fax: +84 (8) 299 2088

HA NOI

22 Lang Ha, Dong Da

TDL Building

Tel: +84 (4) 220 3228

Fax: +84 (4) 220 3227

RESEARCH DEPARTMENT

Duy Nguyen (Mr.), Manager

Equity Capital Market

[email protected]

Trang Vu (Ms.), Senior Analyst

Basic Material

[email protected]

Son Nguyen (Mr.), Senior Analyst

Real Estate

[email protected]

Trung Dong (Mr.), Associate

Consumer Goods

[email protected]

Bach Nguyen (Mr.), Analyst

Oil & Gas

[email protected]

Quang Luong (Mr.), Analyst

Team Support

[email protected]

INVESTMENT BANKING BROKERAGE DEPARTMENT

[email protected] [email protected]

[email protected]

mailto::[email protected]









Documents

FPT Corp (FPT) – FLASH NOTE - TVS reports/2016/T12... · Technology, Telecom, Trading, Retail, and Education. FPT expands into 19 countries and is among one of the most well-known