Dpm - PetroVietnam Fertilizer and Chemicals

DPM – PetroVietnam Fertilizer & Chemicals
Market: HOSE
Sector: Basic Materials
Industry: Fertilizer
HRS
Equity
25
March
2008Research
Horizon Securities
Research Team
Marc Djandji, CFA
Head of Research
marcdjandji@horizonsecurities.com
+84.90.318.9687
Khoi Pham
Analyst
khoipham@horizonsecurities.com
Neutral/Speculative 2S
Initiation of Coverage
Price (VND) 29,600
Target price (VND) 34,800
Expected share price return 17.6%
Expected dividend yield 4.4%
Expected total return 22.0%
Stock Profile/Statistics
Reuters Ticker
Sector
VND/USD 17,590
Shares Outstanding
Market Capitalisation (VNDmln)
Foreign room (%) 31%
52 week High/ Low (VND) 70,000 / 26,800
3-mth average daily trading
Estimated free float
Stock Performance (%) 1M 3M 6M
Absolute (%) - (19.43) (51.79)
Relative (%) (6.61) (5.03) (7.64)
Owership Structure %
PetroVietnam (State) 61.0%
BIDV 3.7%
PVFC 1.6%
ACB 1.0%
Others 32.7%
10,716,000
387,786
139,200,000
24-Mar-08
DPM.HM
Fertilizer
380,000,000
B10
DailyDPM.HM,.VNI 10/6/2008-4/1/2009(BKK)
Line,DPM.HM,LastTrade(Last)
Initiation of Coverage
PetroVietnam Fertilizer & Chemicals Corporation (DPM):
Established in 2004, Petrol Vietnam Fertilizer and Chemicals
Corporation (DPM) was privatized and listed on HOSE in 2007.
DPM is engaged in the production and trading of nitrogen
fertilizer (urea) and other related chemical products such as;
liquid ammonia and crop-protection chemicals. Sales of urea
fertilizer account for approximately 97% of total turnover. At the
moment, it is the largest domestic producer of urea fertilizer
representing more than 40% of the Vietnam’s urea market. DPM
runs the Phu My Fertilizer Plant in Ba Ria-Vung Tau with a total
production capacity of 740,000 tons of fertilizer per annum. By
2010, the company expects to increase its urea capacity at the
Phu My Plant to 800,000 tons per annum.
Investment highlights:
We are initiating coverage on Vietnam’s only listed fertilizer blue
chip: Petrol Vietnam Fertilizer & Chemicals JSC (DPM.HM) with
a NEUTRAL rating given that, in the longer term, we believe the
company will benefit from strong underlying industry
fundamentals, as long as no major corporate restructuring
events occur. Our blended valuation approach gives us a target
price for DPM of VND34,800 (US$1.99) per share which
represents a 17.6% premium to the current market price.
Urea price is the key value driver for DPM’s stock price. As the
company has a high level of fixed costs, a swing in urea prices
can greatly impact its bottom line. At the moment, domestic
prices are still at a high level and we expect to see pressure for
DPM to reduce its prices in the second half of the year.
DPM’s valuation and earning power is highly sensitive to
fluctuations in urea prices. A 10% change in urea price results
in a 20% change in our DFC valuation and a 30% change in
earnings.
Natural gas is the main component of production costs and
accounts for 30% of total production costs for DPM. The
company is purchasing subsidized natural gas from Dai Hung
oil field at US$2.2/MMBTU; 30-40% lower than the current
market price in Vietnam.
The Ca Mau takeover results - The AGM was held yesterday and
shareholders voted on the acquisition of the Ca Mau Urea
Fertilizer project from PetroVietnam (PVN). We learned that the
plant is currently being developed by PVN, with a total
investment cost of ~US$900 million and design capacity of
800,000 tons a year. By the end of the AGM, shareholders had
rejected the takeover by 65%-35% to vote against. However,
following the announcement of the results, the Chairman of
DPM (who is also PVN’s representative) suggested that it might
put the deal back on the table for another shareholders’ vote at
a later date.
3/24/2009,29,600
Line,.VNI,LastTrade(Last)
3/24/2009,270.62
Price
VND
0
30,000
35,000
40,000
45,000
Price
VND
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270
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Vol,DPM.HM,LastTrade
3/24/2009,783,820.0000 Volume
.1234
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06 13 20 27 03 10 17 24 01 08 15 22 29 05 12 19 02 09 16 23 02 09 16 23 30
October2008 November2008 December2008 January2009 February2009 March2009
Please refer to the important disclosures at the end of this document.

Initiation of Coverage – Petrol Vietnam Fertilizer & Chemicals
The long-term case for fertilizers
Fertilizers are the nutrients required to grow abundant, healthy plants. In agriculture,
fertilizers allow farmers to achieve abundant yields of high quality crops. Each
harvest removes nutrients from the soil so fertilizers are needed on an annual basis.
Although fertilizer applications can be skipped, the impact on yields is significant; the
complete elimination of fertilizers could cause yields to drop anywhere from 40% to
60%. Consequently, farmers who may decide to reduce fertilizers applications in one
specific year, generally have to apply more the following years.
Drivers of fertilizer demand are increasing populations, rising worldwide living
standards, greater demand for meat protein, and the emergence of biofuels, all of
which increase world demand for grains and oilseeds. In addition, declining arable
land per capita and the move toward more optimal fertilizer use are adding to
demand. On the supply side worldwide, modest capacity increases over the next few
years suggest a relatively tight fertilizer supply market going forward. That being said,
it is important to remember the fertilizer industry is a cyclical industry and while we
believe the long-term demand trends should lessen the cyclicality somewhat, they
are unlikely to completely eliminate the cycles.
Drivers of fertilizer demand are the
increased population, rising
worldwide living standards, greater
demand for meat protein, and the
emergence of biofuels, all of which
increase world demand for grains
and oilseeds.
In addition, declining arable land
per capita and the move toward
more optimal fertilizer use are
adding to demand.Following the fall in soft commodities as well as lack of access to credit, fertilizer
demand came to an abrupt halt in late 2008. World urea prices plummeted from
over US$770/ton to a low of US$240/ton in a matter of just a few months. Around
the world, the rapid fall in urea prices led to substantial capacity shut downs. Industry
sources suggest that the absolute drop in urea supply may have reached 26% of
global supply, when accounting for lower capacity utilization rates and plant
shutdowns in China. Nonetheless, as demand picked up in the northern hemisphere
urea prices have risen by close to 23% since the start of 2009 to USD295/ton, from
December 2008 lows of USD240/ton.
In Vietnam, although the magnitude was not as significant, urea prices did follow the
same trend. Urea went from VND4.15mln/ton (US$259/ton) in July 2007, peaked at
VND9.5mln/ton (US$575/ton) in August 2008, and then fell to VND6mln/ton
(US$338/ton) throughout the end of 2008. In March 2009, DPM raised its at-the-
gate urea price by 5% to VND6.3mln (US$355) as international prices started picking
up and local demand heated up in view of the upcoming winter-spring rice season. In
our view, the short-term volatility makes the longer-term picture more important than
ever.
We believe the rise in urea prices is sustainable but argue that recent restarts of
nitrogen producers may limit the near-term upside and/or the sustainability of urea
price increase and look for an average price of USD275/ton for the rest of 2009.
2 Horizon Securities

Valuation
We are initiating coverage on Vietnam’s only listed fertilizer blue chip: Petrol Vietnam
Fertilizer & Chemicals JSC (DPM.HM) with a NEUTRAL rating given that, in the longer
term, we believe the company will benefit from strong underlying industry
fundamentals, as long as no major corporate restructuring events occur. Our blended
valuation approach gives us a target price for DPM of VND34,800 (US$1.99) per
share which represents a 17.6% premium to the current market price.
Base on our blended valuation
approach, our target price of DPM is
VND34,800 (US$1.99) per share,
which is 17.7% premium to the
current market price.
Our blended valuation approach assigned equal weights to the combination of our
absolute (Discounted Cash Flow) valuation and our relative (Price to Earnings
multiple) valuation methods.
Figure 1. DPM - Blended Valuation
2009E Est. Value Weight Weighted
per Share (%) Value
Discounted cash flow approach WACC 16.5% 35,959 50% 17,979
Comparable P/E ratio approach P/E 12.00x 33,695 50% 16,847
Weighted average share price VND34,800
Current share price VND29,600
% Upside from Current Price 17.6%
Source: Horizon Securities
We ran our financial model through 2014 to derive our DCF-based valuation. We
forecast urea prices will average US$275/ton from 2009 to 2014. We applied a
16.5% WACC and 1.5% terminal growth rate, taking into account the current long-
term government bond yield of 9% pa and an equity risk premium of 7%. Our
valuation model includes the 60,000 tons increase in capacity in 2011 resulting from
the new CO2 Collecting System, which began construction in early 2009.
We have run our financial model
through 2014 to derive DCF based
fair value.
Due to the lack of clarity and economic visibility on the company’s various proposed
investment projects, we have not ascribed any value to the proposed investments in
the Ca Mau plant, the DAP project in Morrocco, the urea/ammonia project in Russia,
the two other chemical plants, and some real estate projects and earnings from its
joint-ventures and investments. We acknowledge that these projects may
consequentially impact our estimates, and we intend to revisit these projects if and
when there are concrete plans to execute them. At this time, we note that the current
financial crisis may curb DPM’s investment plans.
Figure 2. Product price and earning outlooks
2008A 2009E 2010E 2011E 2012E 2013E 2014E
Urea price US$/ton 383 275 275 275 275 275 275
VND/ton 6,457,684 4,812,500 4,812,500 4,812,500 4,812,500 4,812,500 4,812,500
Earnings
Sales VND'mln 6,475,368 5,721,325 5,721,325 5,924,925 5,068,300 5,068,300 5,068,300
Change (%) 71.35% (11.64%) -- 3.56% (14.46%) -- --
EBITDA VND'mln 2,478,175 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856
Margin (%) 38.27% 38.04% 37.86% 32.00% 35.29% 34.67% 34.05%
EBT VND'mln 1,495,618 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681
Margin (%) 23.10% 18.70% 22.50% 28.22% 30.32% 29.17% 28.54%
Net profit VND'mln 1,385,293 1,064,194 1,378,913 1,808,204 1,776,209 1,822,443 1,888,789
Margin (%) 21.39% 18.60% 24.10% 30.52% 35.05% 35.96% 37.27%
EPS VND 3,652 2,808 3,629 4,758 4,674 4,796 4,970

In our relative valuation, we value DPM stock price at 12x 2009 expected earnings;
the average of its regional peers.
Figure 3. Relative Valuation
Company Country Mkt Cap EV/EBITDA EV/Ton P/E P/B
(US$'mln) (US$/ton) 2008A 2009E 2010E 2011E 2008A
Sichuan Lutianhua Company Limited CHN 798.82 7.76 561.49 11.96 13.55 14.13 10.45 2.22
China BlueChemical Ltd. HKG 2,176.04 6.35 953.72 10.28 8.83 8.90 7.49 1.71
Liaoning Huajin Tongda Chemicals Co. Ltd CHN 1,244.39 - 830.83 18.95 n/a n/a n/a 1.41
Guizhou Chitianhua Co.,Ltd. CHN 348.81 12.44 717.90 16.14 n/a n/a n/a 1.59
Sichuan Meifeng Chemical Ind. Co., Ltd. CHN 518.84 9.05 473.28 16.21 14.14 11.78 8.44 2.17
Hubei Yihua Chemical Industry Co., Ltd. CHN 873.04 8.65 N/A 15.15 15.53 13.98 10.45 2.89
Yunnan Yuntianhua Co., Ltd. CHN 1,895.26 13.47 N/A 18.72 17.23 16.19 12.82 3.62
Taiwan Fertilizer Co., Ltd. TWN 1,507.52 90.92 N/A 13.86 15.20 16.47 16.33 1.06
Namhae Chemical Corporation KOR 740.81 21.09 N/A 39.25 10.92 10.88 n/a -
Chambal Fertilisers & Chemicals Limited IND 296.97 5.52 N/A 6.29 6.06 6.35 7.08 -
Average 1,040.05 19.47 707.45 16.68 12.68 12.34 10.44 2.08
Median 835.93 9.05 717.90 15.65 13.85 12.88 10.45 1.94
Source: Horizon Securities, Reuters
Sensitivity Analysis
In the short term, the urea market may continue to be quite volatile due to the
aftermath of the financial crisis, volatile gas prices, and unpredictable government
policies over the sector. As urea price is the main revenue driver for DPM, we want to
highlight the sensitivity of our DCF valuation and EPS to changes in urea prices. As
our analysis shows, DPM’s valuation and earning power is highly sensitive to
fluctuations in urea prices. A 10% change in urea price results in a 20% change in
our DCF valuation and a 30% change in earnings.
As our analysis show, DPM
valuation and earning power is
highly sensitive to fluctuations in
urea prices. A 10% change in urea
price results in 20% change in our
DCF valuation and a 30% change in
earnings.
Figure 4. DCF valuation and earnings are highly sensitive to urea price
Urea Price DCF value per share 2009 EPS
% US$ VND % VND %
20% 330 50,161 39% 4,477 59%
15% 316 46,610 30% 4,060 45%
10% 303 43,060 20% 3,643 30%
5% 289 39,509 10% 3,225 15%
0% 275 35,959 0% 2,808 0%
-5% 261 32,408 -10% 2,391 -15%
-10% 248 28,858 -20% 1,973 -30%
-15% 234 25,307 -30% 1,556 -45%
-20% 220 21,757 -39% 1,138 -59%
Source: Reuters, Horizon Securities
The Ca Mau Takeover Scenario
For weeks we had been hearing reports that DPM would takeover the Ca Mau Urea
Fertilizer project from its parent, PetroVietnam (PVN). At the time, we knew the AGM
was scheduled to be held on March 24, 2009, but no information about the
acquisition had been released to shareholders. To our surprise, just four days before
the AGM, DPM posted a ten-line memo on its website stating that there would be a
shareholder vote on the acquisition of the Ca Mau project. Shareholders would have
to wait until the AGM to learn about the details of what they would be voting on that
day.
Minority shareholders’ rights were
upheld. The acquisition was
avoided, for now…

The AGM was held yesterday and the shareholders present had a chance to get a few
more details about the acquisition before voting. We learned that the plant is
currently being developed by PVN, with a total investment cost of ~US$900 million
and design capacity of 800,000 tons a year. Management also announced that it
would not issue new shares, but finance 20-30% of the investment from internally
generated cash. The new plant is expected to be depreciated within 8 years starting
from 2012, using a straight-line method. Gas cost for the Ca Mau Urea Fertilizer
project in 2012, is expected to be $5.03 per million BTU, which is ~26% higher than
what gas will cost for DPM at that time.
Approximately US$69 million have already been invested in the project; construction
will begin this year and should be completed by 2012. Contracts with the contractor
were signed in July 2008, and PVN is looking to transfer the total investment cost to
DPM. Finally, we learned the takeover would require a supermajority vote.
At a total investment cost of
US$900 million, the Ca Mau Urea
Fertilizer project is almost 3 times
more expensive than DPM’s
current plant. At a cost of
US$1,125 per ton it is even more
expensive than the average
US$1,000 per ton cost for
Greenfield projects worldwide.
According to our break-even cost
analysis of the Ca Mau Urea
Fertilizer project, urea prices
would need to be above US$320
per ton for it to be profitable. In
sum, we see this deal as being
more expensive and less
profitable than DPM’s current
plant, and believe it would have
been a hard pill to swallow for
shareholders.
Figure 5. Estimated break-even cost for Ca Mau
Average cash cost Ca Mau
Ammonia
Gas price (US$/MMBTU) 5.03$
Gas use (MMBTU/mt NH3) 37
Gas cost (US$/mt NH3) 186$
Other prod. Cost (US$/mt NH3) -
Total cash cost 186$
Urea
Ammonia cost (US$/mt NH3) 186$
Ammonia use (NH3/mt urea) 0.58
Ammonia cost (US$/mt urea) 108$
Other prod. Cost 49$
Total cash cost 157$
Other costs 20$
Depreciation cost 141$
Estimated break-even 318$
Source: Horizon Securities, Company
Fortunately, PVN, PVFC and DPM’s management were excluded from the vote (due to
obvious conflicts of interest). By the end of the AGM, shareholders had the takeover
by 65% against to 35% for the acquisition. However, following the announcement of
the results, the Chairman of DPM (who is also PVN’s representative) suggested that it
might put the deal back on the table for another shareholders’ vote at a later date.

Earning Outlooks
Urea price; the main revenue driver
Sales of nitrogen fertilizer represent more than 97% of total revenues of DPM. As the
company has a high level of fixed cost, a swing in urea price impacts significantly on
its bottom line. Urea prices were extremely volatile in 2008. International prices
rallied by more than 114% from January to July 2008, followed by a substantial fall in
the second half of the year.
As the company has a high level of
fixed cost, a swing in urea price
would have a greater impact on its
bottom line.Vietnam’s fertilizer sector is not under direct government control; however as the
government is still the largest stakeholder in the sector, and as Vietnamese
producers still receive subsidized gas, the State does reserve the right to instruct
producers regarding their selling price. Last year, when the country was suffering
from rampant inflation, the government urged fertilizer companies not to raise prices
and as a result the domestic urea price did not increase as much as international
prices.
Figure 6. DPM’s revenue structure Figure 7. Domestic vs. International urea prices
DPM urea
74%
Imported urea
23%
Electricity
0%
Pakaging
0%
Others
0%
Ammonia
3%
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Jan-07Feb-07M
ar-07Apr-07M
ay-07Jun-07Jul-07
Aug-07Sep-07O
ct-07N
ov-07D
ec-07Jan-08Feb-08M
ar-08Apr-08M
ay-08Jun-08Jul-08
Aug-08Sep-08O
ct-08N
ov-08D
ec-08Jan-09Feb-09
International Price (US Gulf) Domestic price (DPM)
Source: Company report Source: Horizon Securities, Reuters
Since 2007, domestic urea prices have fluctuated but the magnitude has not been
as dramatic as on international markets. Price peaked in August 2008, up by more
than 70% from January 2008, and then dropped by 37% during the last quarter of
the year. We’ve learned from management that DPM’s average selling price for the
first two months of 2009 was US$340/ton; higher than current international prices
of ~US$295/ton.
Domestic urea prices have strengthened since the beginning of the year; supported
by 1) the lack of cheap fertilizers imports from China; and 2) strong demand from the
2008/09 winter-spring rice crop.
China is a net exporter of urea and 90% of all Vietnamese urea imports come from
China. However, China urea exports are no longer price-competitive based on current
international prices (near parity with domestic prices) after factoring in the hefty
110% export tax for Feb-June 2009. In February 2009, Chinese urea in Northern
Vietnam was selling for ~30% more than DPM’s products.
By mid-February, encouraged by rising rice prices, farmers had planted 27.2% more
spring/winter rice paddies than the year before.

We expect domestic prices to converge towards international prices and expect to
see some pressure on DPM to reduce its price in the second half of the year.
Production costs
Vietnam is within the average of gas producing countries; with gas prices around
US$3.3-3.6/MMBTU, versus US$4.5-8.6/MMBTU in West Europe and the US, and
US$1.0-1.5/MMBTU in the Middle East. At current market prices, many
manufacturers in the West are running at break-even, while producers in Asia and
the Middle East are still profitable as a result of their low costs.
Gas costs account for ~30% of total production costs for DPM. The company is
purchasing subsidized natural gas from Dai Hung oil field at US$2.2/MMBTU; 30-
40% lower than the current market price in Vietnam. At the current gas price of
US$2.2/MMBTU, we estimate the cash cost for DPM’s production at approximately
US$96/ton. By the end of 2010, the government will reduce gas subsidies to DPM,
which means production costs will increase and margins will fall. In 2011, we
estimate DPM’s production cost (excluding depreciation) will increase by 24% to
US$140/ton when the company has to buy natural gas at market prices.
DPM is currently purchasing natural
gas from Dai Hung oil field at
US$2.2/MMBTU, which is 30-40%
lower than the current market
prices in Vietnam.
Figure 8. Cash cost on urea producers
Average cash cost W.EU/US Ukraine DPM
Ammonia
Gas price (US$/MMBTU) 4.50$ 8.60$ 2.20$
Gas use (MMBTU/mt NH3) 36 38 37
Gas cost (US$/mt NH3) 162 327 81
Other prod. Cost (US$/mt NH3) 26 27 -
Total cash cost 188 354 81
Urea
Ammonia cost (US$/mt NH3) 188 354 81
Ammonia use (NH3/mt urea) 0.58 0.58 0.58
Ammonia cost (US$/mt urea) 109 205 47
Other prod. Cost 45 67 49
Total cash cost 154 272 96
Source: SEB Enskilda, Horizon Securities
Imported fertilizer drove down profit margins
Apart from its own production, DPM distributes imported fertilizers. Gross margins of
DPM fell from 39% to 29% in
2008 due to the increase in
imported fertilizers prices. In
2008, DPM imported
approximately 250,000 tons
of fertilizers, of which
197,538 tons had been sold
during the year. Due to falling
fertilizer price throughout the
end of 2008, DPM recorded a
loss from its imported fertilizer.
Total loss and provision in
2008 amounted to VND1,000
billion (US$57 million) which
drove down its profit margins.
According to management, in
2009 the company will continue to import around 250,000 tons of fertilizers per
Figure 9. DPM’s profitability
--
5%
10%
15%
20%
25%
30%
35%
40%
45%
2005A 2006A 2007A 2008U
Gross Margin (%) Operating Margin (EBIT) (%) Net Margin (%)

year; the amount of imports will be reduced when new capacity comes on stream. As
the current plant will be fully depreciated in 2010, we expect gross margins to
improve from 2011 onwards.
Investment pipeline
According to the management, the company is currently investing in three major
projects; a CO2 Collecting System, an office building in downtown Ho Chi Minh City
and a commercial center in Ca Mau Province. Total capital expenditure for the three
projects and maintenance costs for the current plant is expected to be US$44 million
in FY09, US$35 million in FY10 and US$7.8 million after-wards.
Figure 10. Total capital expenditures
2009 2010 2011 2012 2013 2014
Total US$ 43,910,055 35,051,095 7,879,666 7,879,666 7,879,666 7,879,666
VND'mln 768,426 613,394 137,894 137,894 137,894 137,894
Source: Company report, Horizon Securities
In addition, from yesterday’s AGM, the company announced several large-scale
projects, which are still at a feasibility study stage; a DAP plant in Marocco (US$600-
900 million), and a Urea/Ammonia plant in Russia (US$3 billion).
Key investment risks
We rate DPM’s shares Speculative Risk. Key risks to our price objective include the
natural volatility of the agricultural markets and weather uncertainties. Earnings can
be impaired by poor weather conditions, which can cause a reduction in fertilizer
application rates; lower international urea prices, which would adversely affect
revenue; higher natural gas prices, which increase costs; and fluctuations in the
volume of international purchases. We are also wary that the acquisition of the Ca
Mau Urea Fertilizer project may be put back on the table for another shareholders’
vote.
A highly cyclical sector
The fertilizer sector in Vietnam is highly cyclical. A significant fall in rice output as a
result of climate change may cause demand for urea to slump. In addition, a fall in
rice prices would squeeze farmers’ profits and force them to reduce usage of
fertilizers.
Volatility of urea prices
Fertilizer prices are highly correlated to agricultural commodity prices. Therefore a
steep decline in corn, soy or wheat prices would result in acreage declines, lower
fertilizer usage and lower application rates. Urea prices were extremely volatile last
year. International prices rallied by more than 114% in the first half of 2008, followed
by a fall of 76% throughout the latter part of 2008. We recall the last economic crisis
when urea price fell below US$80 per ton in 1999 from a level of US$230-240 per
ton in 1996. High volatility in this sector makes forecasting prices for the medium
and long-term quite difficult. Also, a potential elimination of Chinese urea tariffs
would result in cheaper Chinese product flooding the local market and would temper
nitrogen price increases.
Fertilizer prices are highly correlated
to agricultural commodity prices.
Therefore a steep decline in corn,
soy or wheat prices would result in
acreage declines, lower fertilizer
usage and lower application rates.
Gas supply concerns
Currently, natural gas prices in Vietnam are still cheaper than on international
markets. As DPM’s plant uses gas-based production, inadequate gas supply and
increased gas costs could affect its cost structure in the future. The company is

benefiting from subsidized gas from PetroVietnam at a price of US$2.2 through 2010.
Should the subsidies be lifted prematurely or should the amount of subsidies be
revisited, this would negatively impact our valuation. The company has already
signed a long-term contract with PV Gas (a distributor for British Petroleum in
Vietnam) to source gas at US$3.91 in 2011 and increasing by 2% per year thereafter.
Government intervention
In general, the fertilizer sector in Vietnam is not directly controlled by the government
and companies can decide on their selling prices depending on market conditions.
However, as the government (represented by PetroVietnam) is still the majority
stakeholder at DPM, it has great influence over the company. In a period of high
inflation the government might take some actions to urge fertilizer producers not to
raise price in order to control inflation. On the other hand, if international prices fall
too much below domestic prices the government might raise import taxes to protect
local manufacturers. Historically, government policies in Vietnam are very
unpredictable and that poses some risks to the sector.
Ca Mau takeover; value destructive for current shareholders
Even though, the takeover of Ca Mau has been rejected at the AGM, there is a
possibility that DPM or PVN might re-propose the deal later on. The takeover would
have a consequential impact on DPM’s earnings and capital structure. From our
analysis, we believe that at US$275/ton for urea, the takeover of the Ca Mau plant
will have a dilutive effect over DPM’s value as the new plant would have a higher
EV/EBITDA multiple than its current operation; of 11.3x versus 5.2x.
Appendix
Company Background
Established in 2004, Petrol Vietnam Fertilizer and Chemicals Corporation (DPM) was
privatized and listed on HOSE in 2007. DPM is engaged in the production and trading
of nitrogen fertilizer (urea) and other related chemical products such as; liquid
ammonia and crop-protection
chemicals. Sales of urea
fertilizer accounted for
approximately 97% of total
turnover. At the moment, it is
the largest domestic producer
of urea fertilizer representing
more than 40% of the
domestic urea market. DPM
runs the Phu My Fertilizer
Plant in Ba Ria-Vung Tau with
a total production capacity of
740,000 tons of fertilizer per
annum. By 2010, the
company expects to increase
its urea capacity in the Phu
My Plant to 800,000 tons per annum.
Figure 11. Shareholder structure
PetroVietnam
(State)
60%
Others
33%
PVFC
2%
ACB
1%
BIDV
4%
Source: Company report
Industry Analysis
National demand for fertilizers in 2008 was around 7.6 millions tons a year, and is
estimated to grow by around 6.3% until 2013. Consumption of nitrogen fertilizers
(urea) in 2008 was around 1.9 millions tons or 25% of total fertilizer consumption. In
recent years, demand for urea fertilizer stabilized to around 1.8-1.9 million tons a
year due to the reduction in paddies areas and increased usage of hybrid crops.

Currently, local production can only supply approximately 50% of the domestic
consumption. There are only two urea manufacturing plants in the country, Petro
Vietnam Fertilizer & Chemicals (DPM) and Ha Bac Nitrogen Fertilizer (HANICHEMCO),
which have a combined design capacity of about 910,000 tons per year. The country
still has to import around 50% of the total urea needed; 90% of which from China.
We expect urea shortages to
persist until 2012 as no
additional supply is coming on
stream before then. Currently,
VinaChem is planning to
upgrade the Ha Bac urea
facility (HANICHEMCO) to
500,000 tons a year by 2011
and is planning to build
another plant in Ninh Binh
with a capacity of 560,000
tons a year. In addition, the
PetroVietnam Group and the
Cong Thanh Group also plan
to develop two manufacturing
facilities of 800,000 tons and
560,000 tons which are expected to become operational by 2012. By 2012, total
urea design capacity in the country is expected to reach 3.22 million tons.
As long as there is no substantial delay in the construction of these new plants and
demand remains at current levels, we believe the urea sector may be over-supplied
in 2012 by 1.3 million tons. Vietnamese producers would have to reduce production
or find export markets, e.g Laos and Cambodia. We believe DPM’s strategic location
is one of its competitive advantages to access the Southern market.
Figure 13. Capacity expansion schedule
Urea Tons Capacity
Company Type
Key
stakeholder(s) 2007 2008 2009 2010 2011 2012
PetroVietnam Fertilizers &
Chemicals JSC (DPM.HM) JSC PetroVietnam 740,000 740,000 740,000 740,000 800,000 800,000
Ha Bac Nitrogen Fertilizers &
Chemicals Co.
(HANICHEMCO) State VinaChem 170,000 170,000 170,000 170,000 500,000 500,000
Ninh Binh Fertilizers Project State VinaChem - - - - - 560,000
Ca Mau Urea Fertilizers Project State PetroVietnam - - - - - 800,000
Nghi Son Fertilizers Project JSC
Cong Thanh
Group - - - - - 560,000
Total 910,000 910,000 910,000 910,000 1,300,000 3,220,000
Figure 12. Demand outstripping supply
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2000 2001 2002 2003 2004 2005 2006 2007 2008E
tons
Consumption Local supply
Source: GSO

Financial Highlights
Income Statements VND'mln
FY ended, 31 December 2007A 2008A 2009E 2010E 2011E 2012E 2013E 2014E
Sales 3,779,038 6,475,368 5,721,325 5,721,325 5,924,925 5,068,300 5,068,300 5,068,300
COGS (2,298,181) (4,624,125) (4,251,177) (4,033,424) (3,838,237) (3,176,711) (3,235,289) (3,266,838)
Gross profit 1,480,857 1,851,244 1,470,148 1,687,901 2,086,688 1,891,589 1,833,011 1,801,462
S&A expense (213,907) (445,925) (400,493) (400,493) (414,745) (354,781) (354,781) (354,781)
EBIT 1,266,950 1,405,319 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681
Financial income 140,533 143,127 75,417 188,529 262,031 354,989 455,385 550,903
Financial expense (85,416) (53,580) (707) (506) (405) (355) (330) (317)
Interest expense (81,496) (31,216) (707) (506) (405) (355) (330) (317)
Income from JV&A - - - - - - - -
Other Profits 7,615 6,008 - - - - - -
EBITDA 2,356,362 2,484,728 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856
EBIT 1,266,950 1,405,319 1,069,655 1,287,408 1,671,944 1,536,808 1,478,230 1,446,681
EBT 1,329,682 1,500,874 1,144,365 1,475,431 1,933,569 1,891,443 1,933,285 1,997,266
Enterprise Income Tax (202) (115,581) (80,171) (96,518) (125,365) (115,234) (110,843) (108,477)
Deferred Income Tax - - - - - -
Net profit 1,329,480 1,385,293 1,064,194 1,378,913 1,808,204 1,776,209 1,822,443 1,888,789
EPS 5,171 3,652 2,808 3,629 4,758 4,674 4,796 4,970
Balance Sheets VND'mln
Current assets 2,467,577 2,692,502 3,604,440 4,476,687 5,609,031 6,671,802 7,878,290 9,149,853
Cash 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286 8,151,108
Short term investment - - - - - - - -
Account receivable 59,503 573,161 282,148 282,148 292,188 249,944 249,944 249,944
Inventory 400,698 1,111,308 908,471 861,937 820,226 678,859 691,377 698,119
Other current assets 35,024 65,319 57,213 57,213 59,249 50,683 50,683 50,683
Non current assets 3,270,970 2,499,870 2,161,308 1,896,230 1,810,106 1,696,403 1,555,122 1,413,841
Long- term receivables - - - - - - - -
Fixed assets 2,780,644 1,899,296 1,560,734 1,295,656 1,209,532 1,095,829 954,548 813,267
Investment in property - - - - - - - -
Long-term investments 24,425 205,536 205,536 205,536 205,536 205,536 205,536 205,536
Other long-term assets 465,901 395,038 395,038 395,038 395,038 395,038 395,038 395,038
TOTAL ASSETS 5,738,547 5,192,372 5,765,748 6,372,917 7,419,137 8,368,205 9,433,412 10,563,694
Current liabilities 1,361,269 438,629 440,511 428,767 426,783 359,643 362,406 363,899
Short term debt 580,104 4,021 2,011 1,005 503 251 126 63
Account payable 151,258 204,924 209,647 198,909 189,283 156,660 159,548 161,104
Advances from customers 40,490 55,018 57,213 57,213 59,249 50,683 50,683 50,683
Other current liabilities 589,417 174,666 171,640 171,640 177,748 152,049 152,049 152,049
Non current liabilities 117 12,318 12,318 12,318 12,318 12,318 12,318 12,318
Long-term loan & debt - 3,049 3,049 3,049 3,049 3,049 3,049 3,049
Other long-term liabilities 117 9,269 9,269 9,269 9,269 9,269 9,269 9,269
Deferred tax liabilities - - - - - - - -
Owner's Equity 4,377,161 4,719,424 5,290,918 5,909,832 6,958,036 7,974,244 9,036,687 10,165,476
Minority interest - 22,001 22,001 22,001 22,001 22,001 22,001 22,001
TOTAL LIABILITIES & OWNER'S EQUITY 5,738,547 5,192,372 5,765,748 6,372,917 7,419,137 8,368,206 9,433,412 10,563,694

Cashflows Statements VND'mln
Net profit (loss) before tax 1,329,682 1,500,873 1,144,365 1,475,431 1,933,569 1,891,443 1,933,285 1,997,266
Adjustment for:
Depreciation and amortisation 1,089,412 1,079,409 1,106,988 878,472 224,018 251,597 279,176 279,176
Other adjustments 40,494 525,920 (74,710) (188,023) (261,626) (354,634) (455,055) (550,585)
Income before changes in WC 2,459,588 3,106,202 2,176,643 2,165,880 1,895,961 1,788,405 1,757,406 1,725,856
(Increase) decrease in receivables 372,089 (581,225) 291,013 - (10,041) 42,245 - -
(Increase) decrease in inventories (152,612) (1,344,385) 202,837 46,533 41,711 141,367 (12,518) (6,742)
Increase (decrease) in payables (918,695) (304,069) 4,723 (10,738) (9,626) (32,623) 2,889 1,556
(Increase) decrease in prepaid exp 46,416 40,567
Interest paid (85,579) (30,990) (707) (506) (405) (355) (330) (317)
Enterprise income tax paid (131) (118,280) (80,171) (96,518) (125,365) (115,234) (110,843) (108,477)
Other cashflows from operating (26,186) (57,959) 7,275 - 6,108 (25,699) - -
Net cash flows from operations 1,694,890 673,860 2,601,614 2,104,652 1,798,344 1,798,106 1,636,604 1,611,876
Purchase of fixed assets (11,899) (116,473) (768,426) (613,394) (137,894) (137,894) (137,894) (137,894)
Disposals of fixed assets - -
Loans to other entities - -
Collections from borrowers 910,000 -
Payments for investments - (179,031) - - - - - -
Proceeds from sale of investments - -
Interest and dividends received 37,285 123,830 75,417 188,529 262,031 354,989 455,385 550,903
Change in other LT assets/liabilities - - - - - -
Net cash flows from investing 935,386 (171,675) (693,009) (424,865) 124,137 217,095 317,491 413,009
Issuance of shares 12,018 20,590 - - - - - -
Capital redemption (1,522,660) (35,053) - - - - - -
Borrowings received - 17,157 - - - - - -
Borrowings repaid (865,268) (590,191) (2,011) (1,005) (503) (251) (126) (63)
Finance lease principal paid - -
Dividends paid - (944,326) (492,700) (760,000) (760,000) (760,000) (760,000) (760,000)
Net cash flows from financing (2,375,910) (1,531,823) (494,711) (761,005) (760,503) (760,251) (760,126) (760,063)
Net increase (decrease) in cash 254,366 (1,029,638) 1,413,894 918,781 1,161,978 1,254,950 1,193,969 1,264,821
Cash at beginning 1,717,986 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286
Impact of exchange rate - - - - - - - -
Cash at end of year 1,972,352 942,714 2,356,608 3,275,389 4,437,367 5,692,317 6,886,286 8,151,108
Financial Ratios
Revenue Growth (%) 23.87% 71.35% (11.64%) -- 3.56% (14.46%) -- --
Gross Margin (%) 39.19% 28.59% 25.70% 29.50% 35.22% 37.32% 36.17% 35.54%
Operating Margin (EBIT) (%) 33.53% 21.70% 18.70% 22.50% 28.22% 30.32% 29.17% 28.54%
Net Margin (%) 35.18% 21.37% 18.60% 24.10% 30.52% 35.05% 35.96% 37.27%
Net Income Growth (%) 14.48% 4.09% (23.18%) 29.57% 31.13% (1.77%) 2.60% 3.64%
Receivable turnover (days) 22.31 17.83 27.28 18.00 17.69 19.52 18.00 18.00
Payable turnover (days) (32.47) (18.34) (17.80) (18.49) (18.46) (19.87) (17.84) (17.91)
Inventory Turnover (days) 97.95 77.85 86.71 80.11 79.98 86.12 77.29 77.62
Current Ratio (x) 1.81 6.14 0.12 0.10 0.08 0.05 0.05 0.04
Cash to Current Debt (%) 144.89% 214.92% 534.97% 763.91% 1039.73% 1582.77% 1900.16% 2239.94%
Debt to Equity (%) 31.10% 9.56% 8.56% 7.46% 6.31% 4.66% 4.15% 3.70%
Cash Per Share (VND) 5,190 2,486 6,218 8,619 11,677 14,980 18,122 21,450
Net Debt (Cash) Per Share (VND) (1,608) (1,297) (5,023) (7,459) (10,522) (14,001) (17,136) (20,460)
Book Value Per Share (VND) 11,519 12,443 13,960 15,552 18,311 20,985 23,781 26,751
Return on Assets (%) 23.17% 26.65% 18.46% 21.64% 24.37% 21.23% 19.32% 17.88%
Return on Equity (%) 30.37% 29.32% 20.11% 23.33% 25.99% 22.27% 20.17% 18.58%

Horizon Securities' Rating System
Under our rating system, each stock is given a two-part rating, which indicates the
following:
Investment Ratings
• Buy (1)
• Neutral (2)
• Underperform (3)
Risk Ratings
• Low (L)
• Medium (M)
• High (H)
• Speculative (S)
Our Analyst's Methodology
Target price and expected total return
Initially, an analyst derives an expected 12-month target price using multiple
valuation methodologies (as specified in the Valuation section of the research). The
current market price is then compared with the target price to calculate an expected
gain or loss. The one-year projected dividend yield, if any, is then added to the
expected gain or loss to calculate an expected total return.
Risk rating
The analyst then assesses the risk of a stock based on various quantitative and
fundamental factors that relate to the stock's local market/country (as specified in
the Risk section of the research). We categorize risk as Low, Medium, High or
Speculative.
Ratings-Risk-Return Matrix
Finally, based on both the expected total return and risk rating, an investment rating
is established using our ratings-risk-return matrix (below). We categorize investment
ratings as Buy, Neutral or Underperform. All published research contains a Valuation
and Risk section where analysts must discuss how they derived their price targets
and risk ratings. Investors are encouraged to read this section for a detailed
description.
Expected Total Returns Ratings-Risk-Return Matrix
LOW Risk MEDIUM Risk HIGH Risk SPECULATIVE
BUY (1) R >10 R >15 R >20 R >35
NEUTRAL (2) 0 <R <10 5 <R < 15 10< R <20 15 < R < 35
UNDERPERFORM (3) R <0 R<5 R <10 R <15
R = Expected Total Return (12 months) = [(Target Price - Current Price)/Current Price]
+ Forecast 12-month Dividend Yield.
These benchmarks are subject to change.

Important Disclosures
Guide to Investment Ratings:
Horizon Securities’ stock recommendations include a risk rating and an investment
rating.
Risk ratings, which take into account both price volatility and fundamental criteria,
are: Low [L], Medium [M], High [H] and Speculative [S].
Investment ratings are a function of Horizon Securities’ expectation of total return
(forecast price appreciation and dividend yield within the next 12 months) and risk
rating. Investment ratings are:
Buy [1] (expected total return of 10% or more for Low-Risk stocks, 15% or more for
Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for
Speculative stocks); Neutral [2] (0% - 10% for Low-Risk stocks, 5% - 15% for Medium-
Risk stocks, 10% - 20% for High-Risk stocks, and 15% - 35% for Speculative stocks);
and Underperform [3] (negative total return for Low-Risk stocks, 5% or less for
Medium-Risk stocks, 10% or less for High-Risk stocks and 15% or less for
Speculative stocks).
Disclaimer
This report has been issued by the Horizon Securities Corporation (“HRS”) with the
instructional contributions of Horizon Capital whose employees are specified in the
publication. This report is for information of its institutional and professional
customers; and it is not intended for review of and should not be distributed for retail
customers in Vietnam.
This report is and should not be construed as an offer to sell or a solicitation of an
offer to purchase or subscribe for any investment. No consideration has been given
to the particular investment objectives, financial situation or particular needs of any
recipient. Investors are advised make their own financial decisions based on their
independent financial advisors as they believe necessary and based on their
particular circumstances such as their financial situation, investment objectives and
other considerations.
In preparing this report, we have relied upon and assumed the accuracy and
completeness of all information available from public and other sources which we
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Opinions, estimates, and projections expressed are current opinions of the authors
as of the original publication date appearing on this report only and the information,
including the opinions contained herein, are subject to change without notice.
HRS and its affiliates may from time to time perform investment banking or other
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employees involved in the preparation or issuance of this report may, from time to
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