Tire and Natural rubber Industry - FPTS

Tire and Natural

rubber Industry

“… The low cost of Radial tire manufacturing, being attributed the dramatic reduction in Rubber prices, enables domestic enterprises to foster sustainable

development, thereby helping to put Vietnam tire brands on the world map…”

Luan Ngo Kinh

Senior Analyst

E: [email protected]

P: (08) - 6290 8686 - Ext: 7595

Oct 2014

POTENTIAL GROWTH IN

TIMES OF HARDSHIP

mailto:[email protected]

Tires and Natural Rubber

CONTENT

A. NATURAL RUBBER AND TIRES 4

I. Overview of the Natural Rubber 4

1. The Global Rubber Value chain 7

2. Vietnam’s Natural Rubber Industry 9

3. Value chain of Natural rubber industry of Vietnam 12

4. The position of Vietnam Natural rubber industry 14

5. The difference among Vietnam and the 3 neighboring countries Thailand,

Malaysia and Indonesia 15

6. Exporting – Importing of natural rubber of Vietnam 18

7. Analysis of the 5-Forces model of Vietnam Natural Rubber Industry 21

8. Policies related to Natural Rubber 22

9. Natural rubber industry outlook (NR) 23

II. Tire Industry 24

1. Overview of global tire industry 24

2. The Tire industry in Vietnam 28

3. Tire industry value chain in Vietnam 34

4. Era of Radial tire 37

5. SWOT Analysis of Tire industry in Vietnam 39

6. Policies related to tire industry 41

7. Tire industry outlook 42

B. UPDATED TIRE & RUBBER COMPANIES 43

I. Overview of listed companies in the industry 43

II. Opposite Business Performance between Natural rubber and Tire 48

III. Financial Analysis 52

C. INVESTMENT RECOMMENDATION 57

D. APPENDIX 64

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SUMMARY The world’s natural rubber industry

In the period of 2003-2013, the global production and consumption reach the CAGR of 4.2% and 3.7%, respectively.

The rubber plantation and the tapping production are largely located in Asia (93%) By the end of 2013, 88.85% of natural rubber’s global production is attributable to 6 countries including:

Thailand (34.41%); Indonesia (25.6%); Vietnam (7.89%); China (7.11%); India (6.99%) and Malaysia (6.85%).

About 68.7% of total NR demand of the world is consumed by China (36.65%), India (8.46%), US (8.06%), Japan (6.23%), Indonesia (4.72%) and Thailand (4.59%)

The supply surplus is expected to continue until the end of 2016. It shows that the motivation for price increase is quite low. Hardly any factor can apparently promote price increase in the years to come.

Vietnam’s natural rubber industry

Rubber planting area in 2013 was 955,700 ha (+4.1% yoy), production volume was 949,100 tons (an +8.2% yoy).

In the ten-year phase of 2003-2013, CAGR of rubber area was 8.0%/year with exploitation volume reaching 10.1%/year.

Vietnam ranks the fifth in the world in terms of rubber area and the third in term of production volume of natural rubber. In 2013, Vietnam surpassed its competitor – India, becoming one of the leading countries in exploiting capacity – 1.74 tons/ha.

56% of rubber area is in the Southeast of Vietnam.

Up to 2013, rubber area of Vietnam in Laos and Cambodia were 28,000 ha and 89,000 ha, respectively. Especially, HAGL possessed an area of 36,130 ha in the 2 countries above, and Gemadept JSC was planting 29,500 ha of rubber trees in Cambodia.

Domestic consumption of rubber is only 15-16% of the total supply.

There still remains a vast distinction in operation between Vietnam and neighbouring countries like Thailand, Malaysia, and Indonesia.

In the first 6 months of 2014, export volume decreased by 8.7% and export value reduced by more than 32% yoy.

In the first 6 months of 2014, Vietnam imported about 44,557 tons natural rubber with value of 82.9 mil USD, a decrease of 12.1% in quantity and 35.4% in value yoy.

Prospects of domestic natural rubber are not proved very bright considering the excess supply situation will continue at a high level and will not stop until 2016.

The world’s tire industry

The world’s tire industry is categorized into 2 segments: OEM (25-27%) and Replacement tires (73-75%).

70% of global market share is dominated by the top 5 countries such as Japan (23.9%), France (14.2%), the USA (13.1%), China (13.5%).

In terms of auto tire production: 60-61% of global products belongs to the Asia.

Regarding consumption: Consumption of the Asia, Europe and North America in combination is 86% of global consumption.

Currently, Radial tires are dominating the world’s consuming market.

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Vietnam’s Tire industry

There are about 830 enterprises operating in the tire industry in Vietnam.

Tires for bicycles in Vietnam are close to saturation while tires for motorbikes can satisfy only 80% of

the demand. As for automobile tires, 80-90% of the volume is for export.

61% of the truck tire market share in the country is traced back from the 5 enterprises as follows:

Bridgestone (importation), Michelin (exportation), Da Nang rubber (DRC), Casumina (CSM) and

Yokohama (manufacturing and importing).

Speaking of tire market share in the country: Casumina makes up for 33% followed by DRC (25%),

SRC (10%) and others (31%).

For Radial tires, 90% of the market share is dominated by FDI corporations and imported tires.

According to the statistics of the first 6 months of 2014, export value achieved USD 217 mil, an increase

of 12.9% yoy. Import value of tires of Vietnam was 140.57 mil USD, decreasing by 16% yoy.

The year of 2014 has witnessed the initial penetration of Radial tires of DRC and CSM. In the phase of

2015-2016, it is predicted that sales will grow and market share of both DRC and CSM for this segment

will increase accordingly.

Recommendation

Phuoc Hoa Rubber JSC. (PHR – HOSE) NEUTRAL, TARGET PRICE: 30,300 VND/share (+4.5%. Revenue in 2014 is expected to reduce by 16-20% yoy. EAT is estimated to be around 221-245 bn VND, 8-17% lower than 2014 plan – a decrease of 49-54% yoy. With the above estimation, EPS 2014 will be 2,154-2,388 VND/share. Accordingly, PHR is trading with PE forward of 11x, which is relatively higher than the average. The

target price measured by FCFF is 30,300 VND/share. (More details)

Dong Phu Rubber JSC. (DPR – HOSE) NEUTRAL, TARGET PRICE: 35,400 VND/share (-16%) Revenue in 2014 is expected to be around VND 925-940 bn, achieving 92% of the plan for the whole

year.

EBT of the whole year is about VND 211-221 bn, achieving 85-89% of the 2014 plan, a decrease of

46% yoy.

With this estimation, EPS 2014 will achieve 4,565 – 4,723 VND/share. Short-term target price is 35,400

VND/share, 16% lower than the market price. Currently DPR price can range from 40,000 – 50,000

VND/share thanks to the purchase of 2,000,000 shares. We, thus, recommend a NEUTRAL for this

stock. (More details)

Tay Ninh Rubber JSC. (TRC – HOSE) NEUTRAL, TARGET PRICE: 33,200 VND/share (+3.8%) Revenue yield from rubber business will be about 532 bn VND making a total revenue of the year of 573 bn VND, achieving 80% of the plan. EBT is estimated to be around VND 168 bn, exceeding 23% of the plan and decreasing by 37% yoy. Accordingly, EPS achieves 4,740 VND/share. In terms of PE, target price of TRC is 33,200 VND, equivalent to PE of 7.0x. (More details)

Hoa Binh Rubber JSC. (HRC – HOSE) SELL With more than 50% of aged rubber trees, low productivity and ineffective business activity, the future does not look very positive. Revenue of the year is VND 230.7 bn, achieving 88% of the plan. EAT this year will be about VND 53.7

bn, achieving 77% of the plan – a decrease of 17% yoy.

EPS 2014 will achieve 3,110 VND/share. At the current price of 39,000 VND/share (dated Sep 30,

2014), HRC is trading at PE forward of 12.5x, which is relatively higher than the average of 7.0x. We

recommend SELLING this stock. (More details)




Thong Nhat Rubber JSC. (TNC – HOSE) SELL Business activities involve a number of unstable business fields, let alone small-scale plantation, low

productivity and inefficient business performance.

TNC is not as highly recognized as other listed corporations.

EPS 2014 is expected to be 694 VND/share. The company is now trading at PE forward of 17x, which

is relatively higher than the average of 7x. We recommend SELLING this stock. (More details)

Da Nang Rubber (DRC – HOSE) – HOLD, target price at the middle of 2015 is 60,300 VND/share (- 4,3%) The sale volume of both Bias tires and Radial tires increases quickly. The EAT is VND 369 – 383 bn,

declining by 2% yoy because the company recognizes the depreciation and interest expenses of Radial

factory.

It is very potential for the high growth of Radial tires in near future.

The estimated EPS of 2014 is about 4,450 – 4,615 VND/share. The target price of this year is 54,000

VND/share and 60,300 VND/share by the mid-2015. (More details)

Casumina (CSM–HOSE) – HOLD, the 12-month target price is 48,200 – 51,500 VND/share (increase from 3.4% to 10%). We forecast that the selling volume will highly rise, however, the profit will decrease because the

depreciation and interest expenses of Radial factory will be recognized next year.

The company will have an infrequent contribution from real estate in both 2014 and 2015.

It is very potential for the high growth of Radial tires in near future.

EPS of 2014 will be 4,820 VND/share (excluding the real estate transfer) and is 5,150 VND/share

(including the real estate transfer). (More details)

Sao Vang Rubber (SRC – HOSE) ADD, the year-end target price is 30,600 VND/share (+9%) We expect that the business result will be more positive than that of last year thanks to high growth

of demand of the market in general and SRC in particular on tires.

The selling quantity achieved the high growth in the first eight months of this year. Bicycle tires rose by

10%; motorcycle tires increased by 40%.

We forecast that the revenue of 2014 will reach VND 959 bn, PBT is VND 95.3 bn, increasing by 10%

yoy. Consequently, the EPS of 2014 will be 4,081 VND/share. The target price of this year is 30,600

VND/share. (More details)

Abbreviation

ANRPC : Association of Natural Rubber Producing Countries

IRSG : International Rubber Study Group

VRA : Vietnam Rubber Association

VRG : Vietnam Rubber Group

AFET : Agricultural Futures Exchange of Thailand

LMC : LMC Automotive

ASP : Average Selling Price

NR : Natural Rubber




A. Natural Rubber and Tire

I. Overview of the Natural Rubber

The world natural rubber’s production and consumption are 12.04 and 11.32 million ton respectively in 2013, increasing by 2.67% and 3.73%, respectively compared to that of 2012.

In the period of 2003-2013, the production achieves the CAGR of 3.7% higher than that of consumption of 3.4%.

The supply surplus of the world rose continuously from 2011 to 2013 by 243 thousand

tons, 524 thousand tons and 640 thousand tons, respectively.

The rubber plantation and the tapping production are the most densely in Asia (93%),

followed by Africa (4-5%) and Latin America (2-3%).

Asia is the largest consumer of natural rubber accounting for about 72% of total

demand, followed by Europe (12%); North of America (10%); 6% of others.

Supply – Demand of Global Natural Rubber

Source: IRSG and ANRPC

Source: IRSG

(600)

(400)

(200)

-

200

400

600

800

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Production

Consumption

Supply Surplus

93.4%

4.3% 2.5%

Asia

Africa

Latin America 72%

12%

10%

5%

1%

Asia

Europe

North of America

Latin America

Africa




By the end of 2013, 88.85% of total natural rubber’s production of the world comes from

6 countries including: Thailand (34.41%); Indonesia (25.6%); Vietnam (7.89%); China

(7.11%); India (6.99%) and Malaysia (6.85%). Last year, Vietnam surpassed Malaysia

and India to make it to the top 3 of the largest rubber producers of the world.

By the end of 2013, Indonesia owned the largest rubber plantation of the world

accounting for 3.49 million tons with Thailand ranking the second (3.43) and China;

Malaysia holding the third and the fourth place (1.16 and 1.06 respectively). The fifth

and sixth position belong to Vietnam and India (955,700 ha and 776,000 ha

respectively).

About 68.7% of total NR demand of the world consumed by China (36.65%), India

(8.46%), US (8.06%), Japan (6.23%), Indonesia (4.72%) and Thailand (4.59%). In

particularly, China occupied about 32% of total NR consumption and 25% of total NR

export value of the world for the last 5-year.

Approximately 87-94% of total NR export volume of the world belongs to Thailand (3.66

million tons), Indonesia (2.72 million tons), Malaysia (1.38 million tons) and Vietnam

(1.07 million tons).

Top 4 of Natural rubber exporters in 2013

Source: The Rubber Economist

Source: ANRPC

Natural rubber production’s structure

by country in 2013

Natural rubber consumption’s

structure by country in 2013

Country 1,000 Ton % Proportion

Thailand 4,141 34.4

Indonesia 3,081 25.6

Vietnam 950 7.89

China 856 7.11

India 842 6.99

Malaysia 825 6.85

Cote d'Ivoire 275 2.29

Brazil 173 1.44

Myanmar 147 1.22

Sri Lanka 131 1.08

Philippines 111 0.92

Others 26- 4.20

Country 1,000 Ton % Proportion

China 4,150.0 36.65

India 958.2 8.46

USA 913.0 8.06

Japan 705.4 6.23

Indonesia 534.0 4.72

Thailand 520.0 4.59

Malaysia 434.1 3.83

Korea 396.0 3.50

Brazil 395.3 3.49

Germany 249.5 2.20

Vietnam 154.0 1.36

Others 1,718.5 16.91

Country 1,000 ton % Proportion

Thailand 3,664 40.5%

Indonesia 2,719 30.1%

Malaysia 1,380 15.3%

Vietnam 1,076 11.9%

Others 201 2.2%




Natural Rubber price volatility based on the economic events of 2008-2014

Based on the structure of global NR consumption and production as described above and the events that happened in the past, we could see that the NR price is always influenced by economic and social events, disasters, etc. in developed countries which has a great effect on the demand and supply of NR from countries like US, Japan, China, Thailand, Malaysia, etc.

Natural Rubber price forecast

According to the data of The Rubber Economist and IRSG, it shows that the supply surplus will continue until the end of 2016. Massive influx of countries joining rubber plantation in the period 2007-2009 (the positive price uptrend period) results in the current oversupply. The supply will increase quickly from 2013 to 2016 when all rubber in the period of 2007-2009 is tapped. From 2013-2016, the production is estimated to grow 2% per year lower than the 3% of consumption. It would narrow the gap between supply and demand for the next 3 years. However, it shows that the motivation for price increase is quite low. Hardly can any factor apparently promote price increase in the years to come.

Source: The Rubber Economist Report

Supply-Demand of Global Natural Rubber of 2012-2016

0

1000

2000

3000

4000

5000

6000

7000T

1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

T9

T1

1

T1

T3

T5

T7

2008 2009 2010 2011 2012 2013 2014

Thailand Malaysia Vietnam

Source: VRG, AFET, Malaysia Rubber

Natural Rubber price’s performance in the period of 2008 - 2014

Global financial

crisis

Flood in Thailand Tsunami in Japan

Debt crisis in Europe

QE in US, Japan,

China The highest rubber inventory in China

Crisis in China US reduced QE

Thailand, Malaysia, Indonesia together reduce supply volume for supporting the natural rubber price

-

100

200

300

400

500

600

700

10,000

10,500

11,000

11,500

12,000

12,500

13,000

2012 2013 2014 2015 2016

Production Consumption Supply Surplus




1. The Global Rubber Value chain

a.1 Materials: This is the most critical part of the value chain with capital and land

investment being demanded on a long-term basis. This, accordingly, builds a

major barrier for any would-be entrepreneurs in this industry. Natural rubber trees

grow well primarily in tropical regions that feature the 4 factors as follows:

temperature of higher than 260C, an annual 1,800 mm of rain, humidity range of

well above 80%, 1-metre soil layer and elevation of lower than 300m. Business

efficiency is subject to the tapping productivity. At the present, 88.85% of the

world’s total natural rubber production comes from the 6 countries namely:

Thailand, Indonesia, Vietnam, China, India and Malaysia. These countries also

have the dominant acreage constituting 80-90% of the total globe’s land area.

a.2 Purchasing: This involves the transporting natural rubber from the plantations to

processing factories with profit margin being quite modest. Natural rubber are also

known to be a popular commodity frequently traded at world-renowned

commodities exchanges such as Tocom, Sicom, AFET, Malaysia, to name just a

few. Therefore, purchases will be made via these commodities exchanges with

intermediate traders taking part in or otherwise paid for by processing factories in

those countries. In addition, the Government of such countries will make purchase

of natural rubber and keep it in reserve as following their national policy to

stabilize prices.

Large holder (State-owned

corporation,

Government)

)

International

merchant Technical

rubber (block,

sheet)

Latex

processing

(liquid)

Processing Manufacturers Materials

Imported rubber

Smallholder (Private

companies,

households)

Purchasing

Collectors

Processing

companies

State-owned

corporation,

Government

Others

International

producers

Domestic

merchant

Domestic

producers

Synthetic rubber (Raw Oil)

Synthetic

rubber

(Butadiene,

Styrene,...)

Retails/Distribution

Distributors/St

ores

Retails chain

Import –

Export

companies

Industrial

manufacturers

Consumer petrochemical




a.3 Processing: after being tapped, latex will be sent to processing factories to

manufacture mid-stream products available for related industries in the value

chain. Profit margin yielded from this stage secures a significant proportion of 21-

40% with the percentage varying depending on rubber’s seasonal prices.

However, experience shows that large-scale businesses are often owners of a

chain of materials and processing. Such profit margin is higher than that earned

from each segment of the chain separately. Typical products are latex concentrate

(for manufacture of pillows, mattress, and medical gloves); block rubber (for

manufacture of tires, conveyor belts, etc.)

a.4 Industrial manufacture: the added value is greater than that of the processing

segment. Processed rubber is used in this segment to produce consumer

products like: tires, gloves, mattress, condoms, conveyor belts, seat belts, shoes

and sporting equipment. This segment features some giant corporations namely

Michelin (France), Bridgestone (Japan), Top Gloves (Malaysia), Kossan

(Malaysia), Durex (USA), Trojan (USA), Bata Shoes (Thailand, Aquatex (USA),

etc.

Currently, tire industry is proved to be the largest consumption of natural rubber,

accounting for 65% of global consumption. Molding products and mattresses

occupy 17% and 11% respectively. With tire production playing the dominant role

in consumption of natural rubber, this industry is given top priority in this report.

Besides natural rubber, synthetic rubber is also known to be well consumed

worldwide (14.8 million tons) with consumption sometimes exceeding that of

natural rubber (11.1 million tons). As for synthetic rubber, the disparity in supply

and demand within the past 5 years has been so modest that it has managed to

sustain the supply and demand balance. Synthetic rubber is generated by

refineries and used together with natural rubber to manufacture tires and other

products.

Global natural rubber consumption’s

structure by product

Source: VRA

Global consumption Structure Global production Structure

Source: ANRPC, The Rubber Economist

36.7

8.5

8.1 6.2

4.7

4.6

31.3

China

India

US

Japan

Indonesia

Thailand

Others

34.4

25.6

7.9

7.1

7.0

6.9

11.2 Thailand

Indonesia

Vietnam

China

India

Malaysia

Others

65%

17%

11%5%

1% 1%

Tires

Molding products

Foam, Pillow, Packaging

Rubber tubes & Conveyor Belt

Shoes

Others




a.5 Retailing: Finished products will be distributed to consumers or other

manufacturing factories as their input materials to make conveyor belts, curoa

bando or assembling automobiles.

As depicted above, the segments can be divided into 2 main groups with the Upstream group including materials and processing and the Downstream group involving manufacturing and consuming. Evidently, the Upstream group proves to earn more added value than the Downstream group.

2. Vietnam’s Natural Rubber Industry

Total rubber area reached 955,700 ha at the end of 2013, increasing by 4.1% yoy

(equivalent to 37,800 ha). The tapping area occupied 57% of total rubber area

equivalent to 545,600 ha. In the last 10 years, the CAGR of Vietnam’s rubber area

achieves 8.0% per year higher than the 7.4% of tapping area.

Besides, there is the new rubber area planted in Cambodia (89,000 ha) and Laos (28,000 ha) of Vietnam Rubber Group (VRG). In particular, Hoang Anh Gia Lai Corporation (HAG) planted by around 36,130 ha in these countries and about 29,500 ha rubber is underway in Gemadept Co. (GMD) in Cambodia. Moreover, there are a lot of unofficial statistic rubber areas planted by many other Vietnam’s companies across of Cambodia and Laos.

In 2013, total of rubber production of Vietnam is 949,100 tons, increasing by 8.2% yoy.

Last year, the Vietnam’s rubber yield reached the highest rate for the past 10 years of 1.74 tons/ha marking the 5 successive years having the yield above 1.7 tons/ha. Therefore, Vietnam officially surpassed India to make it to the top 3 of highest yield on the world.

Source: ANRPC, FPTS

Rubber plantation and Tapping Area Tapping volume and Tapping yield

483 522

556

631 678

749

834

911 956

334 356 373 399 422 439 472

506 546

-

200

400

600

800

1,000

1,200

2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Plantation Tapping Area

29

1

31

3

29

8

36

4

41

9

48

2

55

5

60

2

66

0

72

4

75

2

81

2

86

4

95

0

1,25

1,30

1,23

1,36 1,39 1,44

1,56 1,61

1,65

1,72

1,71

1,72 1,71

1,74

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

-

100

200

300

400

500

600

700

800

900

1,000

2000 2002 2004 2006 2008 2010 2012

Tapping Volume Yield




Natural Rubber plantation in Vietnam

South East area is considered as the largest rubber

region of Vietnam, occupying 56% of total rubber area

in Vietnam. It is followed by Highland, Central Coast

and the North.

Binh Phuoc and Binh Duong provinces have the

highest rubber yield in Vietnam. Binh Phuoc province

occupies about 22% of total nationwide rubber area

and nearly 36% of total rubber plantation of the South

East area.

Binh Duong province holds 18%, Tay Ninh province

takes up 10%, followed by Gia Lai and Dong Nai with

the rate of 11% and 6%, respectively. The highest

yield belongs to Binh Phuoc, Tay Ninh and Binh

Duong which reaches the average of 2 tons/ha higher

than the nationwide average yield of 1.74 tons/ha.

At the end of 2013, total rubber area of Vietnam

planted in Laos and Cambodia is 28,000 ha and

89,000 ha, respectively. In Laos, total rubber area

of Vietnam is located in the South region adjacent

to Quang Nam province, KonTum city, Hue city,

etc. Vietnamese enterprises and VRG in

particularly make an effort to plant rubber to reach

the area of 30,000 ha as permitted by Laos’s

Government before. In Cambodia, we plan to finish

planting a total of 100,000 ha in 2014.

Structure of Natural rubber plantation

Source: VRA, FPTS

Currently, HAGL is the private enterprise of Vietnam has the

largest rubber plantation in Laos and Cambodia with total area

of 36,130 ha located in Attepeu, Sekong and Ratanakiri

province.

(More details)

8.000 ha

5.000 ha

36.000 ha

25.300 ha

8.000 ha

7.600 ha

19.000 ha

38.400 ha

South East 535,514 ha 1.86 ton/ha

Central 140,775 ha 1.28 ton/ha

Highland 258,396 ha 1.56 ton/ha

North 25,102 ha

Kampongthom

SiemRiep

Ratanakiri

Kratie

Savanakhet

Sekong

Champasak

Attapeu

56%27%

15%3%

South East Highland Central Coast North

-

0.50

1.00

1.50

2.00

2.50

BinhPhuoc

Tay Ninh BinhDuong

DongNai

Gia Lai Daklak Averageof

Vietnam

Tapping yield by provinces in Vietnam

Source: VRA

Rubber area of VRG’s members and Hoang Anh Gia Lai Group




317 364

422

490 522

560 604

612

667

714

796

-

100

200

300

400

500

600

700

800

900

1,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Supply Demand Supply Surplus

Production and consumption of Natural rubber in Vietnam

In period 2003-2013, the CAGR of consumption is 12.6% per year. The consumption

volume reaches about 135,000 ton/year equivalent to 17% of production. The figure

was 100,000 tons in 2008 and up to 154,000 tons in 2013.

Natural rubber in Vietnam is 70-80 % mainly used for tire production, medical gloves,

pillow, etc.

In addition, a major contribution to the consumption of natural rubber in Vietnam is

thanks to operation of temporary import for re-export of raw materials. We can attribute

the low consumption of rubber in the country to (1) low scale of industrial production,

(2) exportation being given priorities for higher profits and efficiency. Domestic

consumption is in the form of buying and selling among natural rubber producers and

commercial companies in the country. Products are then exported by these companies.

Reality shows that a quick look at the consumption proportion of listed natural rubber

enterprises reveals that 40-50% of the products are consumed in the country while the

majority of this percentage is exported overseas via commercial companies. Thus

basically, consumption of rubber in the country only occupies 15-16% of the total supply.

This entails the fact that the abundant supply of rubber is also beneficial to those

producing products using rubber as well as FDI corporations basing in Vietnam that

specialize in producing some rubber products namely tires, mattresses, conveyor belts,

gloves, condoms, etc.

CAGR 10,1%

CAGR 12,6%

Source: Agroinfo

Unit: 1,000 ton




3. Value chain of Natural rubber industry of Vietnam

Materials and processing (Upstream) (Click here for more further details)

High profit margin: Dong Nai Rubber Corporation (26.8%), PHR (31%), DPR (41%), TRC (36%), Kuala Lumpur Kepong (20.6%); HwaFong Thai Rubber (24.5%).

Materials and processing: Natural rubber industry of Vietnam as well as the global is categorized into 2 groups namely Upstream and Downstream with the former including planting, exploiting and processing companies and the latter involving companies with industrial products such as tires and tube, gloves, mattresses, conveyor belts, etc. The downstream group, as comparable to the world’s, yields a greater number of products with higher added value than that of the upstream group. Reality shows that in Vietnam, large holder farmers and smallholder farmers takes up the share of rubber planting area of 53% and 47% respectively. On an annual basis, large corporations have to purchase rubber from these farmers for (1) the sufficiency of input rubber for processing and (2) the economic support for the local farmers as a policy implemented by the Province and the Government.

Nguồn: FPTS tổng hợp

Source: FPTS collected

Industrial products:

Chemical products:

Condom

Gloves

Others Consumer product: Balloon, Foam, Pillow, Toys, Shoes, ball, etc.

Rubber plantation

Distribution:

Direct export

Traders

Manufacturers

Others

SVR

Latex

Automobile

kits

Rubber band Rubber belt Curoa bando

Typical companies: Vu Minh, Vuong Hung, Giai Phong, Ruthimex

Tires

Tires for bicycle, motorcycle, truck, agriculture vehicle,OTR,etc.

Typical companies: DRC, CSM, SRC

Construction

materials

Rubber floor

Glue, rubber tubes, etc.

Typical companies: Giai Phong, Rubber No.75, Rubtechco

Conveyor belt

Rubber cover of Wire Conveyor belt, etc.

Typical companies:

BenThanh rubber,

Rubber No.75,etc.

Others

Rubber shoes Sport tools Others Typical companies: Doc Lap Co., GeruSport, Dong Luc Co., Ruthimex, etc.

Smallholder (individual-owned plantation, small private companies). Large holder (VRG, Joint stock Co.: Dau Tieng, Dong Nai, Hoang Anh Gia Lai Group, Phuoc Hoa, Dong Phu, Tay Ninh,etc.)

Materials Processing Industrial

Manufacture




Large corporations in this upstream group are Dong Nai Rubber Corporation, Dau Tieng Rubber Co. Ltd., Phu Rieng Co. Ltd. and the 5 listed rubber companies namely PHR, DPR, TRC, HRC, TNC, etc. Besides, HAGL Corporation (HAG) also makes an investment of around 44,500 ha across the 3 countries of Vietnam – Laos – Cambodia. It is also known to have the largest privately owned rubber area in Vietnam up to now.

Distributing and commercial trading (Midstream) (Click here for more further details)

This group is reported to yield a rather modest and unstable profit margin of 1-5% with

the majority of money procured from production.

There are 2 basic procedures with (1) rubber processing and exploiting companies (Dau Tieng, Dong Nai, PHR, DPR, TRC, HAGL, etc.) selling their product directly to domestic customers or overseas and (2) commercial companies specializing in purchasing processed rubber to export thus making profit from price errors as well as typical companies among the top 50 in the industry (Binh Phuoc General Import and Export JSC, Viet Phu Thinh, Trung Chinh, Hoa Sen Vang, etc. ) Due to their typical commercial trading, corporations of group (2), without their own rubber plantations, are facing the risk of a heavy dependence on the market. Profits by and large are not stable.

Industrial production (Downstream)

A good amount of gross profit.

Purchased natural rubber is the input of manufacturing industrial products. In Vietnam, its main purpose is for production of tires (60-70% or production) with the remaining share going to medical gloves, mattresses, conveyor belts, etc. There are 29 tire manufacturing companies, 15 glove manufacturing companies and 6 mattress manufacturing companies and other miscellaneous products such as shoe soles, rubber bands, sporting balls, etc… within the nation. In terms of proportion of natural rubber production as well as industrial production corporation, tire manufacturing takes up the largest share. We, therefore, carried out an in-depth analysis of the tire industry in this report.

Gross profit margin by sectors

Company Tires Conveyor Belt Gloves Rubber shoes Condom

Domestic DRC: 21%; CSM: 19%; SRC: 14% BRC:23% NA NA NA

Foreign Michelin: 30.5%

Bridgestone: 33.6%

Apollo: 21-25%

Doublecoin:14.3%

Chengshin:20%

Kenda: 20-28%

Titan International: 14.3%

Somi Conveyor: 29%

Nippon conveyor: 16.3%

Top Glove: 17.6%

Kossan: 27-33%

Hartalega: 34.45%

Supermax: 20-30%

BataShoe

Thailand: 35%

Durex: 35%

Karex: 20.6%

Source: Bloomberg

Source: Vietnam Rubber Business Directory

Number of rubber product manufacturers in Vietnam Domestic Typical companies:

1. Tires: DaNang Rubber JSC. (DRC), Casumina

(CSM), Sao Vang Rubber JSC. (SRC),etc.

2. Conveyor Belt: Ben Thanh Rubber JSC.(BRC),

Rubber 17/05 Co,etc.

3. Gloves: VRG Khai Hoan, Showa Glove (Japan),

Nam Cuong, Nam Long,netc.

4. Condom: Merufa, Laprodex,etc

5. Foam, piilow: KymDan, Dong Phu Rubber (DPR),

Van Thanh, Lien A, etc.

6. Sports: Geru Star Sport, Dong Luc,etc.

0

5

10

15

20

25

30

35




4. The position of Vietnam Natural rubber industry

In 2013, Vietnam was ranked the 5th all over the world with rubber planting area of

955,700 ha and surpassed Malaysia, India and China to take the third place in the world

in terms of rubber exploiting (949,100 tons). Exploiting productivity was 1.71 and 1.74

ton/ha in 2012 and 2013 respectively beating India to be among the top countries of

rubber exploiting worldwide.

Global natural rubber in 2013 was 11.5 mil tons with 88.85% acquired from the 6

following countries: Thailand (1.14 mil tons); Indonesia (3.08 mil tons), Vietnam (0.95

mil tons), China (0.86 mil tons), India (0.84 mil tons), Malaysia (0.83 mil tons). Vietnam,

together with the 3 neighboring countries Thailand, Indonesia, Malaysia is among the

top 4 leading exporter of natural rubber the world over with the total export volume being

85-93% of the global export volume (Thailand (3.66 mil tons), Indonesia (2.7 mil tons),

Malaysia (1.38 mil tons), Vietnam (1.07 mil tons). As for Vietnam, export volume

increases by 24.4% yoy. Favorable climate, soil and agricultural advantages as well as

seed researching projects also enable the 6 countries to secure the leading positions in

the world in terms of area, exploitation and export volume over the decade.

Top 6 countries of Natural rubber in the world in 2013

Top 5 of natural rubber producers in the world Top 5 of natural rubber exporters in the world

Source: ANRPC

Source: ANRPC

3.428 3.492

1.167

1.057 956

776

4.170

3.180

856 826 949

849

1,72

1,10 1,25

1,40

1,74

1,64

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Thailand Indonesia China Malaysia Vietnam India

To

n/h

a

Th

ou

san

d t

on

-h

a

Rubber area

Tapping Volume

Tapping Yield

36%

27%

7%

7%

8%

14%

Thailand

Indonesia

Malaysia

India

Vietnam

Others

41%

30%

15%

12%2%

Thailand

Indonesia

Malaysia

Vietnam

Others




5. The difference in the natural rubber operating process among Vietnam and

the 3 neighboring countries Thailand, Malaysia and Indonesia

Management

Currently, the rubber industry of Vietnam has yet to be under any direct management

of the State, which reflects the difference from other neighboring countries. Meanwhile,

the rubber industry of the 3 aforementioned countries is governed by the General

Department of Rubber or other institutes for this industry of its own. In Vietnam, it is

misunderstood that Vietnam rubber group (VRG) is the representative organization of

the State while in truth, VRG is only a state-owned corporation as well as a holder of

the majority of shares. VRG does not constitute a governmental management of the

domestic rubber industry. The natural rubber industry of Vietnam is in fact just under

the Ministry of Agriculture and only by the Department of Agricultural and Forestry

Products Processing has the natural rubber industry of Vietnam as well as other

produce been governed so far. Consequently, there exists no separate structural

governance of the industry itself which inevitably leads to the lack of harmony in

planning areas of rubber plantation nationwide as well as distributing and assessing

rubbery products within regions and overseas. (Click here for more details)

Quality

Smallholder farmers, known to constitute a hefty 47% of total rubber plantation

nationwide, fails to closely observe every regulation and standard of rubber processing

workflow and sustain the required quality. Reality shows that, privately-owned

organizations are prone to cut out the quality control stage to lower cost unless there is

a request of quality certificates from their foreign importers. Consequently, the inequality

of quality of domestic and exported rubbery products, to some extent, has destroyed

the reputation of Vietnam’s Rubber Industry, thus bringing down the price of exported

rubber which is usually lower than that of Thailand, Malaysia and Indonesia.

(Click here for more details)

Natural Rubber structure by owner of Top 4 countries

Source: FPTS’s data

0 0.2 0.4 0.6 0.8 1

Thailand

Indonesia

Malaysia

Vietnam

Largeholder (state-owned or private)

Smallholder




Unit: 1,000 ton

Flag Country Production Consumption Export Import

Thailand 4,170 519 3,664 0.9

Indonesia 3,180 603 2,719 26

Malaysia 826 456 1,380 955

Vietnam 950 155 1,076 280

India 849 953 26 292

China 856 4,150 15 3,701

Others 675 4,293 - -

Global 11,505 11,128 - -

Source: ANRPC

Exploiting productivity

One more favorable feature of the natural rubber industry of Vietnam than the other 3

countries is the fair balance in ownership between smallholder and large holder farmers

(47%-53%). The percentage of smallholder farmers is by contrast 85% and 90% for

Indonesia and Thailand, irrespectively. Vietnam is also ranked among the top 3 in the

world for the invention of new seeds of high quality every year.

What’s more, large rubber plantation of VRG corporation also fosters the pilot planting

of new seeds and popularizes it to smallholder farmers. This, if successful, can shorten

the usual time spent of new seed pilot planting and simultaneously enhance the

productivity over the country. Today, Vietnam is still among the group of countries with

the highest rubber’s exploiting productivity all over the globe (the average figure is

above 1.7 ton/ha for the past 3 years). (Click here for more details)




Exported rubbery products from the 4 countries aka the 4 largest manufacturers of rubber

Geographical features together with agricultural traditions make a distinction in the structures of processed rubbery products from the aforementioned countries. With supply being always subject to demand and 65-70% of natural rubber production all over the world, especially block rubber being used in manufacturing tires, block rubber is always the major products in many countries.

In Vietnam, thanks to an impressive number of large holder farmers and close supervision, large corporations and VRG specialize in high-quality rubber such as SVR 3L and SVR 10, 20 for the insatiable demand for tires. Vietnam is therefore known to be a dominant manufacturer of these products.

As for Thailand, the inherent majority of smallholder farmers and their long-ago ability of processing RSS leads to the quite high percentage of RSS production (25%) while the figure is only 1-5% for other countries. In addition, there are a lot of companies in Thailand manufacturing rubbery products such as tires, gloves, medical equipment, sporting equipment, conveyor belts, etc. There is thus a good variety of demands and the equal proportion of products also meets the domestic and overseas demands.

For Malaysia and Indonesia, block rubber takes up a dominant share with major products being SMR 10, 20 (Malaysia) and SIR 20 (Indonesia) that are both used for tire making. Besides, Malaysia is also well-known for latex (used for manufacturing medical equipment, mattresses, rubber pipes, etc.) with some world-leading companies including Top Glove, Supermax. Therefore, latex accounts for 8-13% of Malaysia’s rubber production, 80% of which is consumed within the country; 4% for export volume.

Thái Lan

Indonesia

Malaysia Indonesia

Thailand Vietnam

Source: FPTS

Exported rubbery products from Vietnam, Thailand, Malaysia, Indonesia

76%

5%

5%

14%

Technical Rubber

RSS

Latex

Other

37%

25%

17%

21%

Technical Rubber

RSS

Latex

Other

93%

6%

1% 1%

Technical Rubber

RSS

Latex

Other

94%

1%

4%

1%

Technical Rubber

RSS

Latex

Other




6. Exporting – Importing of natural rubber of Vietnam

Among key exported produce of Vietnam, natural rubber has ranked third in export

value over the years (19%) acquiring USD 2.49 bn in 2013, an increase of 5.2% yoy.

The figure is lower than that of Rice and Coffee but contributes about 2% of the total

export value of the country. Vietnam is a net exporter of NR; however, due to dramatic

fall in prices of NR over the past 3 year, export value has declined accordingly but its

volume achieve an impressive growth of 14.7%/year. For the first half of 2014, export

volume declines by 8.7% and the total export value drops by more than 32% yoy.

Export market, main export rubber products

Unit: USD

Export structure of Vietnam’s rubber product Export volume and value of Vietnam’s Natural rubber

Export market structure by value of Vietnam’s

natural rubber of 2013

Export market structure by value of Vietnam’s natural

rubber of 1H2014

Source: Vietnam Custom, VRA

Source: FPTS

Ton Unit: USD

23%

19%

21%

13%

8%

7%

8%2% Rice

Rubber

Coffee

Cashew

Cassava

Pepper

Vegetables

Tea -

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2007 2008 2009 2010 2011 2012 2013

Import Value

Export Value

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

SVR 3L

SVR 10

SVR CV60

Latex

RSS 3

Mixed rubber

SVR CV50

SVR 20

SVR 5

Others 6M2014

2013

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2008 2009 2010 2011 2012 2013

Export volume Export Value

46%

21%

9%

3%3%

3%3%2% 7%

China

Malaysia

India

Taiwan

Korea

Germany

US

Turkey

Others

38%

17%4%4%

4%

8%

4%2%

19% China

Malaysia

India

Taiwan

Korea

Germany

US

Turkey

Others




In 2013, NR of Vietnam has been exported to more than 72 markets, 97,6% of which are major markets including the leading market in China (511,448 tons) accounting for 47.5% which is of the same volume in 2012 but a slight decrease compared to the 61% market share in 2011. Export value of NR in China also reduced from 59% in 2011 to 46% in 2013. Malaysia market ranks the second (acquiring 227,159 tons, a proportion of 21.1% higher than the figure of 19.6% in 2012) followed by India with a volume of 88,178 tons, attaining 8.2% compared to 7% in 2012. What caused the decrease of export market share to China is the restructuring and diversification of export markets of VRG for the sake of being less dependent upon the China market. This approach has enabled Vietnam NR industry to keep the output risk to a minimum and to encourage the flexibility needed in exporting practices and at the same time extending the customer base. Such was a great global demand for rubber that not resorting to a few particular markets will surely improve export volume and growth.

Export market of Natural rubber of 1H2014

Market 6M2014 % YoY

Volume (Ton)

%Proportion Value (1,000 USD)

Volume Value

China 138,542 39.7% 247,840 -23.6% -42.6%

Malaysia 64,624 18.5% 112,296 -13.4% -41.3%

India 24,998 7.2% 49,658 +23.9% -10.4%

Korea 14,921 4.3% 28,960 -0.4% -23.8%

US 12,987 3.7% 24,194 +19.1% -9.3%

Germany 11,618 3.3% 24,870 -12.3% -32.9%

Taiwan 10,935 3.1% 23,013 -18.4% -40.6%

Turkey 8,398 2.4% 16,154 +18.8% -9.4%

Others 61,584 17.8% 125,255 - -

Total 348,607 100% 652,241 -8.7% -32.2%

Adopting such an approach, VGR have experienced a dramatic change in export NR for the first 6 months of this year with export volume to China dropping by 23.6% and export value reducing by 42.6%. Export value to China now takes up a proportion of only 39.7% whereas the percentage substantially increases in some markets like India (by 23.9%), USA (19.1%), and Turkey (18.8%) yoy.




Vietnam’s import market of Natural rubber (NR) and its products

It is known by far that Cambodia and Thailand are the two biggest exporter of NR to

Vietnam. According to the statistics of the General Department of Customs, in 2013,

imported NR was 321,000 tons with 59% of the volume supplied by Cambodia (46,790

tons) – a decrease of 19.6% yoy and 17% by Thailand.

Imported NR from Laos has rapidly grown, 3.3 times as much as the volume in 2012, acquiring 12,098 tons. The result is attributed to the good harvest of Vietnam’s rubber plantations in Laos to satisfy domestic demand and export. In the first half of 2014, Vietnam has imported about 44,557 tons of NR with a value of USD 82.9 mil, a decrease of 12.1% yoy in quantity and 35.4% yoy in value. In terms of output, imported NR market has experienced a drastic change with volume from Cambodia decreasing from 59% in 2013 to 44% in the first 6 months of 2014. Import volume from Laos and Thailand is increased to 15% and 12%, respectively, much greater than 4% and 2% in 2013 because of the reduction of import volume from Malaysia, Myanmar and the Philippines and so forth.

CSR L

RSS3

SKIM

CSR 10

CSR5

STR20

SIR20

SMR20

SLR3L

MSR20

0% 2% 4% 6% 8% 10% 12% 14% 16%

CSR L

RSS3

SKIM

CSR 10

CSR5

STR20

SIR20

SMR20

SLR3L

MSR20

Import Natural rubber product of Vietnam Import volume and value of Natural rubber of Vietnam

Import market structure by volume of 1H2014 Import market structure by volume of 2013

Source: ANRPC, VRA

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2008 2009 2010 2011 2012 2013

Import volume Import Value

59%

2%4%

1%

34%Cambodia

Thailand

Laos

Malaysia

Others

44%

12%15%

5%

24% Cambodia

Thailand

Laos

Malaysia

Others




7. Analysis of the 5-Forces model of Vietnam Natural Rubber Industry

Items Explanation

New Entrants

There is quite an enormous obstacle to entering the industry with the

requirement of a vast area for planting rubber trees. Currently, rubber

area in Vietnam is being narrowed down posing a lot of difficulties for

new or would-be enterprises.

Additionally, as it often takes at least 5-6 years to exploit rubber trees,

it is asked that there should be a handsome starting capital for long-

term investment to sustain the initial planting phase.

Minimum requirement of technology because it does not go beyond

rubber processing and crude exports.

Bargaining

Power of

Supplier

There is a great number of domestic companies growing and

supplying rubber. The density is not high.

There is a marked discrepancy in rubber area owned by different

enterprises. However, their lists of products are almost similar.

Whether business efficiency is high or low depends heavily on these

two factors.

As there are a great number of suppliers, the cost of switching

suppliers would be relatively low. Accordingly, oligopoly is not very

possible.

Bargaining

Power of

Customers

The number of customers within the country and overseas is

substantial.

The information is well received because these enterprises in the

industry are quite explicit in providing information on their products

and business activities. Especially, listed enterprises have been

giving very clear data so that customers and investors can be well-

informed.

Customer density is not high. Most of enterprises in the industry

produce similar products, which enables customers to weigh their

choices and make comparison at ease.

Besides the price factor, quality is also of critical importance. Natural

rubber is not only the input material for other industries, but also

export products. The quality is thus an important factor in the

customers’ decision-making.

Substitute

Products

With superior features, typical usage value and its popularity in

medical and household products, tires, natural rubber is hardly

replaceable by any alternative product.

Other than natural rubber, synthetic rubber has similar features.

However, its price is always subject to the world’s oil price. Usually,

it is used to mix with natural rubber to produce tires so that it can be

a better alternative to natural rubber.

Cost of switching material is low because the price of synthetic rubber

is lower than that of natural rubber.




Intensity of

Rivalry

Added value of the industry is still low with most of it being yielded

from crude rubber export.

There is a minor difference in the products of various corporations in

the industry because the manufacturing process is similar so that it

is each company’s technology and experience that could make a

difference.

The selecting process is now going on mainly among smallholder

farmers. Because of large investment but low sales price, some

smallholder farmers have got rid of rubber trees to grow other

produce. However, this happens only in a small scale with little harm

to the industry.

Regulations on the floor price: the possibility of floor price imposition

is quite high and this depends on the decisions of VRG for the

purpose of maintaining a profitable margin and avoiding dumping

products among members in the industry. As for the price, most of

Vietnam’s rubber products are charged according to the world’s price

especially Malaysia, Thailand and Indonesia.

8. Policies related to Natural Rubber

Decision No. 1003 / QD-BNN-CB by the Ministry of Agriculture and Rural

Development Ministry of Finance decided to reduce export taxes for rubber products. Exemption from corporate income tax for individuals, households and rubber Establishment of rubber triangular area in Indochina

Decision 1003/QD-BNN-CB by the Ministry of Agriculture and Rural Development According to Decision 1003 / QD-BNN-CB by the Ministry of Agriculture and Rural

Development, signed on dated 13th May, 2014, government decided to raise added

values of agricultural, forestry and fisheries sector in processing and reduce post-

harvest losses. (More details)

Ministry of Finance decided to reduce export taxes for rubber products

The Ministry of Finance issued Circular No 111/2014 / TT-BTC in order to amend the

export tax rate for some rubber goods in group 40.01, 40.02, 40.05, stipulated in the

Export Tariff issued together with Circular No. 164/2013 / TT-BTC to 0 percent, and has

been applicable since 2nd, October 2014. (More details)

Exemption of personal income tax for rubber households and individuals

Deputy Minister of Finance, Mr. Tuan Hoang Anh Do has sent documents to Taxation

Department of the province or city, which is under Central Government to conduct about

income tax exemption for families and individuals, who plant rubber trees.

(More details)

Establishment of rubber triangular area in Indochina

To ensure sustainable development for the sector, Vietnam Rubber Group (VRG) has

been developed to promote cooperation of rubber plantation in Laos (30,000 hectares)

and Cambodia (100,000 hectares), in order to form triangular zones Indochinese with

development orientation becoming the world's largest rubber area. (More details)




9. Natural rubber industry outlook (NR)

Up to now, Natural Rubber Industry has observed a gradual decrease of rubber

price. From early this year, many supportive measures made from Thailand,

Malaysia and Indonesia such as export output cuts; limit of tapping volume in order

to reduce the supply volume. Vietnam reduce the export tax of rubber from 3% and

5% down to 0%; reschedule and restructure debt of NR export companies in trouble.

However, there is no prosperity of the rubber industry in nationwide and worldwide. At present, there is an inconsistency of the rubber master planning all over the world. So it is the reason for a strong oversupply of natural rubber from now to 2016.

In the period of 2007-2009, a lot of countries all over the world plant rubber because of very high rubber price. It makes the rubber plantation increase quickly. All of them are matured from now to 2016 and it will dramatically increase the supply. This is the main reason for price decline over the past 2 years and it puts the global rubber industry into trouble.

Global market

Under forecast of The Rubber Economist Ltd., the supply surplus will be 651,000 ton higher than the 640,000 tons of 2013 (+1,7%yoy) whereas forecast consumption volume increases about 2% yoy. It shows that the recovery for rubber price is unlikely to happen this year. In addition, the gap between supply and demand continues tobe high until 2016: 483,000 tons (2015) and 316,000 tons (2016).

Besides, according to the forecast of global HSBC, the demand of truck tires increases by 5.5% yoy (2014) and 5.7% (2015) higher than the rate 3.8% of PC and light truck tires (2014) and 4% (2015). This suggests that there is a recovery in demand for tires production. Nevertheless, the high supply surplus until 2016 will control the rising of rubber price. So it will be a slow recovery.

In addition, the global rubber storage reserves continue to increase. By the Rubber Economist Ltd., the reserve will reach 3.79 million tons at the end of 2014 and up to 4.33 million tons in 2015. The number of reserve month will rise from 2 months (2013) up to 4 months in 2016. We consider that the natural rubber industry continue to get into trouble for the next 2 years.

Domestic market

In our opinion, Vietnam is not out of difficult situation of the world. Because rubber is the commodity type so every country in the world will be affected similarly. Under the direction of the State and Vietnam Rubber Group (VRG), we have been diversifying the structure of export market to avoid depending on unique market like China before. It helps to reduce the risk for export activities of Vietnam rubber industry. Recently, VRG has been entering into a partnership with Japanese partners including: JTC Corporation and Shinichi Kato Officer to purchase natural rubber of Vietnam annually. Those partners are professional rubber trader for many famous Japan tire manufacturers such as: Bridgestone, Yokohama, etc. This is the positive factor to export natural rubber of Vietnam for the next years.

However, the efficiency is still the price of rubber. As discussed above, it completely depends on supply and demand of the world. We think that the rubber companies continue to face to the industrial difficulty for this year and 2015.

Domestic Consumption Forecast: We consider that the domestic demand of natural rubber will increase when VRG invest to expand the capacity of glove




factory of VRG Khai Hoan Company from 1.2 billion units/year to 3.2 billion units/year. In addition, two all-steel radial tire factories of DRC and CSM came into operation with the capacity of the 1st phase are 300,000 units/year and 350,000 units/year, respectively and up to 600,000 units/year and 1,000,000 units/year several next years. Moreover, in 2015, the factory of Kumho Tire (capacity of 3.15 million units/year up to 6.3 million unit/year) and the factory of Bridgestone (capacity of 24,700 – 49,000 units/day) will be in operation. The fact that the tires and gloves manufacture uses about 70-80% of total domestic consumption of NR shows that the aforementioned new factories will help to boost the local demand of NR in coming years. According to our estimation, total increased volume of NR will be around 433,000 tons. It helps Vietnam’s rubber companies increase the sale volume for domestic market and improve the added value for Vietnam rubber products. That the reason why we focus to analyze the tire segment which is one of the sectors of rubber industry’s value chain.

II. Tire Industry

1. Overview of global tire industry

The global tire industry is divided into 2 types of tires for Original Equipment Manufacturer (OEM – occupies 25-27%) and Replacement tires (around 73-75%).

The famous tire companies always research and develop new products with high technology, extreme quality and high profit margin such as semi-steel and all-steel radial tires for trucks, aircraft, luxury passenger car, etc. The small companies focus on niche market with lower profit margin such: motorcycle tires, bicycle tires, rubber’s spare parts, etc.

In tire industry, the product is divided into 3 types basing on quality and brand. Tier 1 is about famous brand, high-quality such as: Bridgestone, Michelin, Goodyear, Continental, Pirelli, etc. ; Tier 2 is middle-class brand such as: Kumho, Yokohama, Hankook, Apollo, etc. Tier 3 is acceptable products such as: Inoue, Chengshin, Double Coin, Kenda, etc.

Tires market share by country Tires market share by brand

Source: Tire Business, FPTS

23.9%

14.2%

13.5%13.1%

6.0%

5.8%

5.2%

4.5%3.6%

1.0% 9.2%Japan

France

China

US

Korea

Germany

India

Italy

Taiwan

Finland

Others

15.3%

14.2%

10.1%

5.8%4.1%4.1%

3.3%

3.0%

2.5%

2.4%2.2%

1.9%

1.5%

30%

Bridgestones

Michellin

GoodYear

Continental

Sumitomo

Pirelli

Hankook

Yokohama

Maxxis

HangZhou Zhongce

Cooper Tire

Kumho

Toyo

Others




The revenue of tier 1 group occupies 53% of global market share. Accordingly,

Bridgestone achieve the best seller for 5 consecutive years with the market share of

15%, followed by Michelin (14%) and Goodyear (10%), 60% of remains.

70% of market share is occupied by Japan (23.9%); France (14.2%); USA (13.1%);

China (13.5%).

Production and consumption

As categorized by regions: according to the statistics from LMC, China is now topping

the world in production of tires for passenger cars, light trucks and heavy trucks making

up for 27% of the total production of tires globally equal to 501 mil tires in 2013. The

USA and Japan are the second and the third largest producers with market share of

11% and 10% respectively. China also tops the list of countries with the highest

consumption of tires for heavy trucks with 34% equal to 51 mil tires in 2013, followed by

the USA (16%), Japan (5%), Germany (6%). The USA, on the other hand, dominates

the market of tires for passenger cars and light trucks with 22% equal to 316 mil tires in

2013, followed by China (14%) and Japan (8%).

Speaking of tire production, Asian countries supply up to 60-61% of the total volume

globally equal to 1.02 bn tires in 2013. The European countries, by comparison, only

account for 19%, equal to 317 bn tires, followed by North America, the USA and the

Africa with 11.5%, 6.5% and 1.5%, respectively.

Top 20 of tires manufacturers of the world (by sales)

Source: Tire Business, FPTS

Unit: million USD

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000




As categorized by consumption volume: Consumption volume of Asia, Europe and

North America takes up a share of 86% of global consumption with Asia consuming

540 mil tires (36%), Europe using 383 mil tires (25%), North America consuming 192

mil tires (24%). The remainder of 14% is distributed to South America, Africa and the

Middle East.

As categorized by products: According to the statistics, the segment for passenger

cars, light trucks constitutes about 87-89% of global volume with the remaining 11-

13% is of tires for heavy trucks and buses.

Car tires production

Heavy truck proportion

Light truck and passenger car tires (< 9 seats)

Source: HSBC Global

Source: FPTS

60%25%

15%

Light Truck and Passenger Car (< 9 seats)

Heavy Truck and Passenger Car (> 9 seats)

Others




Based on the scale of global tire sales, tires for passenger cars (<=9 seats) and light

trucks takes the share of up to 60%, the remainder is divided into the group of heavy

trucks, buses and passenger cars (>9 seats) (25%) and that of specialty tires such as

agricultural tires, aircraft tires, solid tires (15%).

As categorized by purposes of usage: Replacement market achieves a dominant

proportion of 73-75% whereas OEM only occupies 25-27% of consumption products.

Supplies of tires for passenger cars (<=7 seats), light trucks have always exceeded

demands by 5% for the past 5 years. For tires for heavy trucks and buses, supplies are

outstripping demand by 17%.

As categorized by types – Bias vs Radial:

Radial tires are now dominating global demands being used by 92% of passenger cars

and light trucks; 53% of heavy trucks. Especially in North America, 96% of vehicles use

Radial tires, 72% in Africa and Middle East, and 79% in Europe. Particularly in Asia

Pacific including frontier and developing countries, the need for switching from Bias to

Radio tires is on the increase. The current proportion of them both is 52% (Radial) and

48% (Bias). In the near future, Radial tires are expected keep exceeding Bias tires and

Tires production and consumption for

light vehicle

Tires production and consumption for

heavy vehicle

Source:: LMC

Source: HSBC Global

23% 23%36%

24%14%

77% 77%64%

76%86%

0%

20%

40%

60%

80%

100%

120%

Europe North ofAmerica

Asean South ofAmerica

Africa

Replacement OEM

OEM27%

Replacement73%

-

200

400

600

800

1,000

1,200

1,400

1,600

2009 2010 2011 2012 2013

Production Consumption

-

20

40

60

80

100

120

140

160

180

200

2009 2010 2011 2012 2013

Production Consumption




maintain the stable growth corresponding with the economy well-being and the

infrastructure development in such countries.

2. The Tire industry in Vietnam

According to the statistics from Vietnam Rubber Association, our country has 830

entrepreneurs specializing in the tire industry including 30 tire-manufacturing

companies, 17 large-scale tire-manufacturing factories, 170 tire-trading companies, 170

exporters and 460 importers of all size. In 2013, there were 23.3 mil tires for bike, 30

mil tires for motorbikes and 6.3 mil tires for automobiles of all types manufactured.

Noticeably, there were well above 5.4 mil car tires exported from FDI companies like

Kumho, Chengshin, Kenda, Yokohama, etc.).

The domestic consumption of tires is now obviously heavy with 24 mil tires for bike, 37.5

mil for motorbikes and 5 mil for automobiles. Statistics show that there is a stable

balance between supply and demand with the market being saturated. Tires for

motorbike, on the other hand, are insufficient considering its capacity to satisfy only 80%

of the demand. With the segment of tires for motorbikes, domestic entrepreneurs are

only able to share the market of replacement tires rather than OEM which is almost

monopolized by FDI companies or imported brand-new motorbikes. As for automobile

tires, despite the massive domestic production volume, 80-90% of the products are for

exportation. Thus, the remaining production volume only satisfies 20-27% (radial) and

67% (Bias) of the domestic market. This suggests the unfulfilled potential of the

domestic tire market.

Additionally, as stated by many analysts, the rate of cars owned per 1,000 people in

Vietnam is still modest (17.8 cars/1,000 people) as compared to neighboring countries.

The rate is 77.7 in Thailand, 48.3 in Indonesia, 341 in Malaysia, 30 in the Philippines.

As said by AFTA convention, import tax rate for automobiles will plunge to 0% in 2018

onwards. With improved living standard and better transport infrastructure, more

Vietnamese consumers are believed to be more accessible to automobiles, thus

increasing the rate of owned automobiles. In the long run, it is firmly believed that there

is an ensured growth in replacement tires in supply for the increased number of cars

and current ones within the country.

Bias and Radial tires consumption structure by continents

Source: LMC

52%

96% 95%

65%

100%

80%72%

48%

4% 5%

35%20%

28%

0%

20%

40%

60%

80%

100%

120%

Asean Pacific North ofAmerica

South ofAmerica

Latin America West ofEurope

East ofEurope

Africa andCentral

Bias Radial




Domestic tire market share

In the domestic market, the 5 corporations namely Bridgestone (import), Michelin

(import), Danang rubber, Casumina, and Yokohama account for 61% of the market of

automobile tires. The remaining percentage is shared by other private domestic

entrepreneurs, FDI and other importers. Speaking of tires of all kinds consumed,

Casumina dominates the domestic market with 33% followed by DRC (25%), and SRC

(10%) and other companies (31%).

-10,000

-

10,000

20,000

30,000

40,000

50,000

60,000

-100 0 100 200 300 400

19%

15%

13%

8%6%

5%

5%

2%

3%

4%

20%

Bridgestone

Michelin

DRC

CSM

Yokohama

Maxxis

Double Coin

Chengshin

Kumho

SRC

Others

33%

25%

10%

32%CSM

DRC

SRC

Others

Vehicle consumption per 1,000 people Vehicle ownership per 1,000 people

Vehicle ownership per 1,000 people

and GDP per capita

Number of large-scale tire

factories in the world

Source: WorldBank, Asean Automobile Federation, FPTS

Source: Tyre Business, FPTS

Truck-tire market share in Domestic Tires market share in Domestic market

158

59

22 21 17 15 9 6 2

0

20

40

60

80

100

120

140

160

180

- 10 20 30 40

Thailand

Indonesia

Malaysia

Phillipines

India

Vietnam

Singapore

Car

Motorcycle

0 100 200 300 400

Thailand

Indonesia

Malaysia

Phillipines

India

Vietnam

Singapore

Car

Motorcycle




For Radial tires, FDI and importers claim to have 90% of market share. From 2014

onwards, all-steal Radial tires, however, are also manufactured by DRC and CSM with

their 2 factories with capacity of 600,000 tires/year and 1,000,000 tires/year,

respectively. At present, the two factories are having their phase 1 in progress which

expects to yield 300,000 tires/year and 350,000 tires/year. This segment is projected to

promise quite intense competition in the years to come.

Tire importation-exportation in Vietnam

In 2013, Vietnam’s tire export value is 363 mil USD, increasing by 8.1% yoy (335.7 mil

USD in 2012). For the past 3 years, export value has a CAGR of 8%/year. 2013 is the

fourth consecutive year when Vietnam has experienced exportation in surplus.

According to the statistics for the first 6 months of 2014, export value is 217 mil USD,

rising by 12.9% yoy. Net surplus in the first 6 months is 76.7 mil USD, 2.5 times as much

as the figure in the whole 2013 year. There is, thus, a tendency for exportation to

prosper this year.

Reality shows that the largest exporters of tires are still FDI corporations namely Kumho,

Chengshin, Chinh Tan, Kenda, Yokohama with 65% of export value. The three major

manufacturers of tires in Vietnam are DRC, CSM and SRC with 14% of export value.

As always, CSM is the largest exporter among the 3 listed corporations and ranks 67th

in revenue in the world scale according to 2013 statistics of Tire business.

Importation: For the past 3 years, export value has the CAGR of 18%. In the first 6 months of this year, tire export value of Vietnam is 140.57 mil USD, decreasing by 16% yoy.

Import – Export value of Tires in Vietnam

Source: VRA, Vietnam Custom, FPTS

309

336

363

217.25

239

327 332

140.57

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

300

350

400

2011 2012 2013 6M2014

Export Import Net Export




Export market: in 2013, Vietnam’s rubbery products were exported to 115 countries.

The USA topped the export market with 62.5 mil USD (17.2%), followed by China with

39.2 mil USD (10.8%), Malaysia with 27.2 mil USD (7.5%), Japan with 19.6 mil USD

(5.4%), Arab with 17.1 mil USD (4.7%) and other 110 countries with 197 mil USD. These

percentage figures, however, went through some slight changes in the first 6 months

this year with Japan climbing to the highest of 11.2% (24.38 USD) and USA (10.4%)

and Malaysia (7.9%).

In terms of production volume, Brazil has the most imported capacity of 2.3 mil tires, most of which are tires for bikes and motorbikes with rather modest value.

Import market: In 2013, Vietnam imports a majority of tires from Thailand (43%), China

(12%), HongKong (12%), Indonesia (4%), and India (3%). Interestingly, the ranks of

these countries remained the same in the first 6 months this year with 40% of import

value equivalent to 78 mil USD from Thailand and 16% from China. Tires imported from

Thailand and China are mostly for automobiles with popular brands like Double Coin,

Transking, Chengshin (China-Taiwan) and Bridgestone, Michelin (Thailand). Besides,

the majority of tires for motorbike are also imported from Thailand with common brands

like Inoue, Vee Rubber, Deestone, etc. Products from Japan, also, are mostly tires for

trucks and passenger cars (<9 seats) with famous brands like Bridgestone, Yokohama,

etc. with import value of 13.7 mil USD, a 31% decrease yoy.

Tires export-market structure by value of

Vietnam in 2013


Tires export - market structure by value of

Vietnam of 6M2014

(*): excluding the data of China

Tires import-market structure by value of

Vietnam of 6M2014

Tires import - market structure by value of

Vietnam in 2013

US, 17%

China, 11%

Malaysia, 8%

Japan, 5%

Saudi Arabia, 5%

Brazil, 4%Thailand, 3%Egypt, 3%

UAE, 2%

Cambodia, 2%

Others, 38%

Thailand, 43%

China, 12%

Hongkong, 12%

Japan, 17%

Indonesia, 4%

India, 3%Others, 9%

Thailand, 40%

China, 16%

Hongkong, 13%

Japan, 10%

Indonesia, 4%

India, 3%Others, 15%

US, 10.4%

Malaysia, 7.9%

Japan, 11.2%

Saudi Arabia, 5.6%

Brazil, 2.8%

UAE, 2.5%Egypt, 2.6%

Cambodia, 4.1%

Korea, 9.9%

Others, 42.9%




In 2013, exported products with the highest export value are tires for passenger cars

(<9 seats), constituting 44% (159.47 mil USD), followed by tires for truck (26% - 93.7

mil USD), tires for motorbikes (19% - 68 mil USD), tires for bikes (5% - 18.2 mil USD),

and other tires (6.5% - 23.5 mil USD).

Export value structure by enterprises of 1H2014

Vietnam’s tires export structure in 2013


Vietnam’s tires export structure in 6M2014

Vietnam’s tires import structure in 2013

Vietnam’s tires import structure of 6M2014

Source: VRA, Vietnam Custom

Passenger Tires, 48%

Truck tires, 22%

Motorcycle tires, 19%

Bicycle tires, 4.8%Industrial

tires, 3.7%OTR , 1.4%

Agriculture tires, 0.7%

Solid tires, 0.4%

Others, 0.04%

Car tires, 32%

Truck tires, 62%

Others, 6.00%

Passenger Tires, 29.8%

Truck Tires, 64.0%

Industrial Tires, 1.5%Aircraft Tires,

0.5%

Others, 6.2%

Passenger Tires, 44%

Truck tires, 26%

Motorcycle tires, 19%

Bicycle tires, 5%Industrial

tires, 4%OTR , 2%Agriculture tires, 0.7%

Solid tires, 0.5%

Others, 0.1%

Kumho Vietnam, 31.4%

Chinh Tan, 13.0%

Kenda, 9.3%

Casumina, 8.7%

Bridgestone VN, 7.30%

Sailun VN, 4.40%

Yokohama Vietnam, 3.7%

DRC, 3.5%

Lien Phuc, 2.5%

Thoi Ich Rubber Co., 2.4%

SRC, 0.9%

Others, 12.9%




In the first 6 months of 2014, the top three tires of export volume are still tires for

passenger cars (<9 seats) (104.5 mil USD – 48%), tires for trucks (46.8 mil USD – 22%),

tires for motorbike (41.9 mil USD – 19%). Noticeably, tires for passenger cars (<9 seats)

are mostly exported to Japan, USD and Korea accounting for 30% of export value in

the first 6 months.

It is Kumho Tires (Korea) corporation that has the most export volume of 31.4% of the

market share in the first 6 months of 2014. The second largest export volume belongs

to Chinh Tan (13%) followed by Kenda (Taiwan) (9.3%) and DRC, CSM, SRC (13%

altogether).

Regarding importation in the first 6 months this year, tires for trucks and passenger cars

(<9 seats) has the largest import volume with 64% and 29.8%, respectively. Almost 50%

of import value of Vietnam goes to the 7 corporations as follows: Bridgestone Vietnam

Ltd. Co., Michelin Vietnam Ltd. Co., Coalimex JSC, Viet Tire JSC, P&T Ltd. Co., Toyota

Vietnam, Hanoi Jaguar International Ltd. Co.

Imported tire brands of Vietnam

No. Types Imported market Border gate

1 Sover Stone Malaysia Hai Phong city

2 Annaite China Cat Lai

3 Michelin Thailand Hai Phong city

4 Toyo Japan Tan Cang

5 Triangle brand types China Hai Phong city

6 Belaz Belarut Hai Phong city

7 Gold Tire China Hai Phong city

8 Bridgestone tires Japan Hai Phong city

9 Kumho tires Korea Hai Phong city

10 MRF tires India Cang Viet

Source: VRA




3. Tire industry value chain in Vietnam

Materials Industrial

manufacture Distribution

FO-R oil Black coal Crumb Rubber Modifier (CRM) Rubber particles, rubber carpet Others

Export

Car driver, enterprises,

transportation companies,…

Trading companies

Importers

Materials Product structure Distribution

OEM

Replacement

Consumer

Recycling

Materials Natural rubber Synthetic rubber Chemical, Steel, Text tile, Black Coal, etc.

FDI’s enterprises Kumho, Yokohama, Inoue,

Kenda, etc.

Domestic manufacturers

Private companies Chinh Tan, Dai Thanh Cong, Lien

Phuc, etc.

Vinachem DRC, CSM, SRC Exported manufacturers

Main distributors, Car Care

Center

Private car salon, car repair

stores

For 3 tire listed companies

30%

20%13%

2%

23%

12%

Natural rubber Synthetic rubberBlack coal SteelTextile Others

69%

12%

19%

Replacement OEM Export

39%

50%

11%

Bicycle Tyre Motorcycle Tyre Automobiles Tyre




Materials

Currently, domestic tire industry is self-sufficient in natural rubber with a large volume

and reasonable price. Synthetic rubbers are almost imported by Korea, China and

Taiwan,… with the value of USD 500 bil. Two biggest producers of synthetic rubber of

the world are Lanxess (Germany) and Sinopec (China). Chemicals, fabric, black coal

which is used in tire production are almost imported from China. Especially, steel is

partly imported, the remaining is domestic products.

Production

Production capacity and demand of domestic market

Based on the statistic of 2013, total volume of tires production nationwide reaches 59.6

bn units in which motorcycle tires is 30 bn units (50%); the remaining 11% is of 6.3 bn

units. During the past 5 years, the product structure maintains stable.

Tires Supply – Demand in Vietnam

Items (million units/year)

2011 2012 2013

Consumption

Bicycle - - 24.00

Motorcycle 35.78 38.02 37.50

Automobiles 4.32 4.58 5.00

Production

Bicycle 21.30 22.28 23.30

Motorcycle 28.40 29.19 30.00

Automobiles 3.08 3.08 6.30

Source: MOIT, Vietnam Register, FPTS

At present, the domestic production of bicycle tires is enough quantity to meet the annual demand. In particular, automobile tires are still imported with a high volume. Motorcycle tires and automobile tires satisfy about 80% and 67-70% of total demand, respectively. The current domestic production of Radial tires has yet to meet the demand with about 70-80% of Radial tires being imported until now.

Source: FPTS

Tires manufacturing structure in

Vietnam

Tires capacity in Vietnam

39%

50%

11%

Bicycle Tire

Motorcycle Tire

Automobiles Tire

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013

Bicycle Tire Motorcycle Tire Automobiles Tire




Demand and Supply of Radial Tires in Vietnam

Currently, based on the appearance of Radial tires of DRC and CSM, we forecast that

the domestic supply will not meet about 60-62% of total Radial demand nationwide

until 2015. Supposed that DRC and CSM hit their maximum capacity of 600,000 and

1,000,000 tires/year in 2020, respectively and that demand growth for Radial tires

keeps soaring as it is now, it is likely that domestic supply can merely satisfy 65-67%

of demand within the country.

It shows that there is a stable basement for the strong growth of Radial tires. It brings

a positive highlights for local tire companies such as DRC, CSM when these tires are

put into the market. However, it also is the challenge for local tire companies without

ensuring the quality. It is very easy to lose the blooming market for the foreign tire

brands producing, importing and consuming in Vietnam. (More details)

In Vietnam, there are a lot of FDI companies operating in this industry besides DRC,

CSM and SRC (domestic companies) such as: (More details)

Enterprises Capacity (1,000

unit/year)

Radial Tires

Bias Tires

Car Tires

Light truck Tires

Bus Tires

Motorcycle Tires

Industrial Tires

Yokohama 800 x x x x

Chengshin Rubber

18.570 x x x x x

Kumho Tire 3.150 x x x

Kenda Rubber

2.000 x x x

Inoue

Rubber - x x

Sailun Tire 12.000 x x x

Source: TireBusiness, FPTS

Distribution

Up to now, tire industry of Vietnam could compete in the replacement segment (70-

80%), the OEM segment is dominated by famous foreign brands. They are import tires

and many kind of tires manufactured by FDI enterprises in Vietnam for instance:

motorcycle tires (Kenda, Inoue, Chengshin, etc.), passenger car tires (< 9 seats,

Michelin, Bridgestone, Kumho, Continental, Pirelli, Maxxis, etc.), truck tires

(Bridgestone, Kumho, Continental, Yokohama, Chengshin, etc.).

Furthermore, a specific analysis of the 3 listed tire companies reveals that the revenue

structure includes replacement sector (69%) followed by OEM sector (10-12%) and the

remaining 19% of export.

Radial Tires 2011 2012 2013 2014 2015

Domestic supply (*) 1,755 1,755 1,770 2,085 2,595

Demand (**) 2,879 3,118 3,376 3,656 3,960

Source: FPTS

(*) All-steel Radial tires accounts averagely for 73%

(**) Radial tires for truck accounts for 76-78%




Besides doing outsourcing for automobile assembly companies such as: Truong Hai

Auto, Vinaxuki, Chengshin, Continental, Honda, Yamaha, Suzuki, etc.; a great number

of tires are consumed in domestic market by tier 1 distributors, authorized shops around

the country, for instance:

Enterprises Domestic distributors

CSM 159

SRC 119

DRC 107

Yokohama 124

Inoue 47

Kumho 222 (Tier 1 agencies)

Source: FPTS

In addition, there still exist many commercial streets specializing in buying, selling and repairing tires, namely: Ho Chi Minh city (Ly Thai To street); DaNang city (from the Airport to Nguyen Huu Tho Street and CMT8 roundabout).

(More details)

Recycling sector

After using, a lot of tires will be put into recycling for reuse. Based on the research in

Thailand, the recycled tires could likely reach about 60-90% of quality compared to new

tires and will be used for additional 50,000-70,000 km.

Moreover, used tires could be processed for many useful ingredients for instance: FO-

R Oil for steel production, boiler; black coal for tire production; asphalt additives; rubber

seed and rubber carpet for sports, etc. (More details)

Products recovered from recycling tires

Types Oil Carbon Steel Gas

Heavy truck 45%-50% 25%-30% 10% 10%-15%

Passenger car 40%-45% 30%-35% 10% 10%-15%

Motorcycle, Bicycle 30%-35% 35%-40% 15%-25%

Source: ttmindustry

4. Era of Radial tire

It is the duration, safety, less heat and fuel efficiency that help Radial tires gain the

popularity as it is now in the global scale. In Vietnam, however, consumption of Radial

is rather low, occupying only 10% and falls mostly in the segment of passenger car and

light trucks.

In the world, Radial tires have been of great use for a very long time. With their superior

features, Radial tires appeal to a great number of users in the world. Especially in

developed regions like North America, Radial tire consumption goes up to 96-100%,

Africa and Middle East (72%), Europe (79%), Asia – Pacific (52%). Interestingly, in USA

and Japan the figure is 100% and Malaysia (90%), China (50%).


http://ttmindustry.vn/default.asp?prod=120&view=244



Source: Michelin, Apollo, FPTS

Radial tires are best fit for road of excellent quality at high speed. If it is used properly,

Radial tires will bring a lot more outstanding features compared to bias tires. They

provide greater longevity of more than 50%, fuel efficiency of 11%, better safety and

usage efficiency of up to 30%. (More details)

In Vietnam, many roads and highway of high quality are under construction so that there is a good chance that more and more users will switch from Bias tires to Radial tires in the near future.

Currently, in Vietnam, DRC and CSM are known to have operated the 2 all-steel radial

tire factories with capacity of up to 600,000 tires/year and 1,000,000 tires/year,

respectively. Products from these 2 plants will serve as an incentive for growth of these

2 companies in the subsequent years. Also, the introduction of all-steel radial tires will

help boost the market share of DRC and CSM in this product segment which is known

to be a potential demand in the country. This will help enhance the prestige and value

of Vietnam’s tires and at the same time minimize imported products of the same type.

Remarkable features of Radial tire versus Bias tire

106%

106%

111%

150%

130%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Time performance

Fuel saving for 1 more litre

Fuel saving for car load

Lifetime

Efficiency per 1 hour

Radial Bias




Radial production process

5. SWOT Analysis of Tire industry in Vietnam

SWOT Analysis

Strengths

With the large population and the industrialization-modernization as well as the development of road infrastructure, demands for motorbikes and automobiles will be on the long-term increase because there is a strong need for commuting to work and downtown areas or factories, companies. It is certain that the demand for tires, both OEM and replacement is insatiable.

With natural rubber abounding in Vietnam and being the major component in the pricing of tire manufacturing, the domestic tire industry has a huge advantage in the competitive market.

In addition to cheap labour cost and export tax for tires of 0%, there is a very promising potential growth of tire products.

On geographical terms, it is very favorable for our country to export tires to some of the largest tire consuming markets in the world namely China, India and Japan. Besides, some domestic enterprises have managed to gain access to some emerging markets like the Africa, Bangladesh, Srilanka, Cambodia, Laos and Myanmar. This is also seen as a competitive advantage of Vietnam tires compared to some expensive brands in the world.

Materials

processing Semi-Product Product

Source: FPTS




Weaknesses

Regarding to the manufacturing scale, our domestic enterprises are still inferior to other foreign corporations. (Economics of scale).

The technology in current use is imported from China and Taiwan and is certainly less competitive than that of Europe, France, the USA, Korea and Japan.

Vietnam has yet to set up a national standard for rubber products or create barriers to imported low-quality tires that also causes strong competition to domestic enterprises. Worse still, Vietnam has to face the problem of trade protection when exporting products to other countries.

Incompetent staff have yet to penetrate the market of passenger cars. Domestic corporations are not self-reliant in tire materials and thus have to resort to imported products like synthetic rubber, black coal and chemicals, etc…

Opportunities

Domestic market:

According to the statistics, the rate of car ownership in Vietnam is lower than the average rate of some neighboring countries like Indonesia, Thailand and Malaysia. This suggests a potential consumption growth in the country in the years to come.

All of the tire manufacturers in the country including FDI corporations only satisfy 70-80% of the total demand. As for Radial tires, only 10% of the demand is met and the rest is reliant on importation. There is, there for a promising outlook for the tire industry. Besides, automobile import tax from ASEAN countries will fall down to 50% and hit a low of 0% in 2018 onwards. The growing number of cars imported in Vietnam will increase the need for replacement tires accordingly.

According to the provisions of Circular No. 06 of the Ministry of Transport, truck weight limit will prohibit the current practice of overloading. Carriers, consequently, are left with no choice but to invest in more trucks and lorries to respond to the insatiable need. If we strictly abide by this Circular, there is a strong likelihood that tire consumption will increase in the years to come.

Moreover, according to the annual vehicle inspection regulations on tire origins and official documents of buying and selling tires. The inspection, in one way or another, can help get rid of unauthorized and low-quality tires or tires with no clear origins, and at the same time, benefits domestic tire manufacturers.

Export market :

Agreement on ASEAN Trade in Goods (ATIGA) specifies the decision on lowering and abolishing tax for a number of products till 2018. In addition, the upcoming Trans-Pacific Strategic Economic Partnership Agreement, when imposed, will open up many opportunities for Vietnam in the tire industry especially Radial tires to penetrate larger markets in the world.

Currently, in terms of scale, Vietnam’s tire industry is just about 0.4% of the world’s. As surveyed by Reseach and markets, global auto production in the next 12 yeaers will proliferate espcially in China (11%/year), India (12%/year), Southeast Asia (5%/year), South America (5%/yeaer). These are known to be large consuming markets of Radial tires, which can foster the production of Radial tires for exportation in Vietnam in the near future.




Challenges

We are up against the fierce competition from neighboring countries. With the adjacent China market, its inexpensive and low-quality tires are imported to domestic market every year.

Vietnam’s tire enterprises are faced with the cut-throat competition not only from foreign corporations and imports but also from their fellow internal enterprises. These days, there are more and more world-renowned brands establishing their representative offices in Vietnam. Worse still, Bridgestone’s new plant with capacity of 9 mil tires/year will go into operation in late 2016 in Hai Phong. Yokohama is maintain its capacity of 400,000 tires/year. Kumho will also increase its capacity from 3.15 mil tires/ year up to 6.3 mil tires/year. Other brandnames like Chengshin, Maxxis, Sailun, to name just a few, are also strong competitors. Foreign corporations will respond to the domestic market, beating our domestic enterprises. Undeniably, this is a real threat that should never be overlooked.

6. Policies related to tire industry

Import duties for car tires

Challenges of TPP for Vietnamese Tires and Tubes Industry

Process of tax reducing for imported automobiles

Circular 06/VBHN-BGTCT, regulated about vehicle weight and road size limit.

Development Planning for Automobile Industry to 2020, vision to 2030

Import duties for car tires (More details)

Under the provisions of Circular No. 156/2011 / TT-BTC published on 14th November, 2011 of the Ministry of Finance and Import Tariff Special of Vietnam to implement The Free Trade Area ASEAN- China period sections 2012-2014, issued with Circular No. 162/2011 / TT-BTC on date 17th, November 2011 of the Ministry of Finance: If imported items are rubber truck tires, unused, and width not exceeding 450 millimeters (less than or equal to 18 inches), import tax rates are:

- 25 percent - products are imported from China - 5 percent - products are imported from ASEAN

If imported items are rubber truck tires, unused, and width exceeding 450 millimeters (bigger than 18 inches), import tax rates are:

- 10 percent - products are imported from China - 0 percent - products are imported from ASEAN

Challenges of TPP for Vietnamese Tires and Tubes Industry

With the pace of infrastructure development in Vietnam today, the trend of bias tire

consumptions will gradually switch to radial tires. Simultaneously with the WTO, AFTA

agreements and the upcoming ATIGA TPP, Radial products from overseas will overflow

into Vietnam with more attractive prices. (More details)

Process of tax reducing for imported automobiles

According to the commitments in Agreement on Trade in Goods of ASEAN (ATIGA)

formerly known as CEPT / AFTA, Vietnam have to reduce and remove tax for import

goods in the ASEAN region until 2018, including cars and motorcycles. Imported

automobiles duties had been maintained at a very high level of 100-150 percent in the




past two decades to protect domestic automobile industry. Implementation of

commitments ATIGA, import tax has cut since 2012 to 70 percent in 2012, to 50 percent

in 2014 and will cut completely to 0 percent in 2018. (More details)

Circular No.06/ VBHN-BGTCT, regulated on vehicle weight and road size limit

Circular No. 06 / VBHN-BGTVT applies to organizations and individuals related to the

loading weight, size limits of the highway; circulation of over-load vehicles, and over-

sized vehicles, tracked vehicles on roads; over-size and over-load transportation, and

loading limits on vehicles while in traffic. (More details)

Development Planning for Automobile Industry to 2020, vision to 2030

Vietnam Automobile Industry has the aim of developing automotive industry Vietnam

becoming an important industry of the country, achievement needs of domestic market

in all kinds of trucks, passenger cars and some common types of specialist vehicles,

also endeavor to become suppliers of components, parts and assemblies for details

some of the production chain in the world automotive industry.

(More details)

7. Tire industry Outlook

With the rapid pace of infrastructure development these days, a series of highways

have been put into use since 2013. This encourages and accelerated the switch

from Bias to Radial tires. The two domestic corporations namely DRC and CSM,

therefore, have begun penetrating this type of product’s segment through the

operation of the two all-steal Radial factories. According to the assessment of

Vinachem, these projects are of critical importance to the development of tire

industry of Vietnam in the future as they can help minimize imported products and

diversify the supply of tires, thus increasing the value of natural rubber material of

the country. Reality shows that domestic demand for such tire is so great that it

should be a promising future for domestic rubber corporations.

2014 is believed to be the start for DRC and CSM to make the introduction of Radial

tires to the market. Also, these both companies can carefully finalize preparations

for products’ quantity, quality and their export certification so as to launch a

VietNam product in such a competitive international market. The current sale

volume of 3,000 – 5,000 tires/month of CSM and 10,000 tires/month of DRC is not

as great as expected given the maximum capacity of the factory and the huge

demand of the market. However, these figures should prove a positive feedback

from the market. Based on such good reputation, it is highly likely that consumption

volume and revenue will leap in the 2015-2016 phase, thus increasing the market

share for DRC and CSM.

It is a long-standing problem that our domestic market has encountered contraband

tires of low quality, 60-70% of which have their origin traced back to China.

Moreover, local corporations specializing in contraband tires from China with their

frauds of offering wrong prices, 25-30% lower than the actual ones to evade import

and VT taxes. Only half of the prices of tires for sale are invoiced, the other half is

incurred in cash. This alerting problem entails potential losses of the Government

and at the same time poses an unhealthy competition among manufacturers of

auto tires and domestic high-quality tires.




With an effort to preclude all these frauds, the General Customs Department has

issued a Dispatch No. 10934/TCHQ-TXNK dated 09/06/2014 specifying that

Customs Departments of every province and city are obliged to monitor and control

the importing procedures of auto tires so as to issue an appropriate tax as for

particular products. This serves as a warning for the government to make

necessary adjustment to the importing processes and therefore encourage a sound

competition. This would be a positive sign of better production for the 3 corporations

namely DRC, CSM and SRC in the next months and years.

B. UPDATED TIRE & RUBBER COMPANIES

I. Overview of listed companies in the industry

DPR

PHR

TRC

HRC

TNC

Dong Nai Rubber

Phu Rieng Rubber

Dau Tieng Rubber

Loc Ninh Rubber

Tan Bien Rubber

Binh Long Rubber

HAG




Exchange Sector Ticker Share outstanding

Price 30/09/2014

Market Capital (VND)

(Billion VND)

Owner Equity

(06/2014) (Billion VND)

Total Asset

(06/2014) (Billion VND)

HOSE Natural Rubber

PHR 78,490,047 29,000 2,339 2,092 3,177

HOSE Natural Rubber

DPR 42,125,000 43,200 1,841 2,201 3,330

HOSE Natural Rubber

TRC 29,125,000 32,000 958 1,375 1,521

HOSE Natural Rubber

HRC 17,260,976 39,000 675 486 656

HOSE Natural Rubber

TNC 19,250,000 11,900 229 295 322

HOSE Tire DRC 83,073,849 61,000 5,109 1,368 3,244

HOSE Tire CSM 67,292,000 46,600 3,135 1,199 3,294

HOSE Tire SRC 18,224,216 29,900 539 290 542

Source: FPTS

In these two field, DRC has the biggest market capitalization which is up to VND 4,776 billion. In terms of owner equity, the DPR is now the leader with VND 2,201 billion. In terms of total assets, PHR, DPR, DRC and CSM are similar to each other.

Natural rubber companies

Company name Rubber plantation area

(hectare)

Tapping area (hectare)

Productivity

(Ton per hectare)

Tapping production (Ton)

Dong Nai Rubber Corporation - Donaruco

43,822 22,240 1.69 35,000

Dau Tieng Rubber Corporation - DRC 28,820 19,377 1.59 30,800

HAGL Joint Stock Company 44,500 6,136 1.32 8,110

Phu Rieng Rubber Company Limited 18,850 12,661 2.02 26,100

Phuoc Hoa Rubber Joint Stock Company - PHR (**)

22,728 10,708 2.02 19,196

Binh Long Rubber Company Limited 14,737 10,958 2.01 21,400

Kontum Rubber Company Limited (*) 10,233 8,763 1.28 12,500

Dong Phu Rubber Joint Stock Company– DPR (**)

16,933 7,502 2.25 16,323

Loc Ninh Rubber Company Limited 10,800 6,952 2.02 12,700

Chu Păh Rubber Company Limited 9,000 5,693 1.23 8,300

Ba Ria Rubber Company Limited 8,546 3,250 1.85 6,000

Chu Se Rubber Company Limited 7,744 6,000 1.50 9,300

Mang Yang Rubber Company Limited 7,607 6,612 1.14 8,000

Tay Ninh Rubber Joint Stock Company – TRC (**)

9,412 5,015 2.14 10,722

Tan Bien Rubber Company Limited 6,162 6,050 2.21 12,200

Hoa Binh Rubber Joint Stock Company – HRC

5,102 2,224 1.11 1,639

Thong Nhat Rubber Joint Stock Company – TNC

2,074 1,364 0.95 1,257

Source: VRG, VRA, Enterprises

(*): Data is updated in 2011, the rest are up to date in 2013 (**): Including planning area in Cambodia and Laos




According to industry statistics, rubber plantation area has reached 956,000 hectares

in all over the country, production reached 950,000 tons. In particular, VRG reached

392,000 hectares (41 percent), production reached 266,800 tons (28 percent).

Currently, Dong Nai Rubber Corporation now has the largest rubber plantation area in

the country, while reaching 43,822 hectares. In listed rubber companies that are belong

to VRG, PHR now is still the leader about planning area and production. In the private

sector, considering about acreage in three countries: Vietnam - Cambodia – Laos,

HAGL Group has largest rubber plantation area, reaching 44,500 hectares. In terms of

mining productivity, DPR is considered as the leader in this indicator over the years

through scientific management and strictly tending and exploiting in order to help

keeping yields stable garden at a high level. HRC and TNC has less planning area

compare to others in the field, low extraction efficiency, extraction yield only around 1

ton / hectare. About HRC, due to many old orchards rate (about 50 percent) resulted in

low extraction efficiency, forcing the company to purchase latex exterior for processing

and sale, and lead to reduce the effectiveness of the company business.

Plantation structure of natural rubber of listed companies

DPR

a DPR

TRC

PHR

a DPR

HRC

a DPR

TNC

a DPR

Source: Enterprises, FPTS

36%

10%

51%

3%

0-6

7-10

11-25

>2559%

10%

27%

4%

0-6

7-10

11-25

>25

16%

71%

13%

7-10

11-25

>25

16%

71%

13%

7-10

11-25

>25

32%

11%

39%

18%

0-6

7-10

11-25

>25

88%

12%

0-5

> 5

HAG

a DPR




Currently in the listed companies, HRC has highest rate of old rubber plantation. Rubber plantation areas that are over 24 years and currently replanting are about 47 percent of the rubber plantation area. This has reduced exploiting efficiency and increased cost of HRC, compared to other companies in the industry.

PHR has 3 percent of forest area that are more than 25 years old, 51 percent are between 11-25 years old, and about 36 percent of the area are under the basic construction to replace the old forest. DPR has 4 percent rubber forests that are over 25 years old, 37 percent are high efficient. Almost 0-to 6 years old area is located in Cambodia in Dong Phu – Kratie project.

TRC has 13 percent of planning area over 25 years of age, and 71 percent of the area that is prime ages for higher mining latex (from 11 to 25 years old). TNC has about 18 percent of older than 25 years rubber plantations, 39 percent were between the ages of 11-25. Furthermore, company is liquidating 36 percent, and replanting extensively more than 32 percent in aged 0-6 years of area.

HAGL rubber’s acreage has planted only since 2007, and only about 6,136 hectares were put into operation so far. Much of the remaining areas are under 5 years old.

The Product Structure of natural rubber of listed companies

PHR

TRC DPR

Source: Listed companies and VRG

HRC

PHR

TNC

54%

14%

21%

11%

SVR CV 50,60 SVR 3L, 5

SVR 10,20 Latex

5%

43%

20%

32%

SVR CV50,60 SVR 3L, 5

SVR 10,20 Latex

70%

30%

Latex SVR

56%37%

7%

SVR CV 50,60 SVR 3L, 5 SVR 10

71%

24%

5%

SVR 3L RSS Impurity rubber




Looking at the product structure of listed companies in the industry, we can see that

most of the enterprises are producing block rubber (SVR) and latex (liquid rubber). In

that, SVR is predominate, and also is favorable product of Vietnam. In the exporting

structure of natural rubber products, this product line accounts from 75 to 80%. PHR

and HRC focus on high-value product lines such as SVR CV 50, 60; while DPR focuses

on line SVR 3L, 10, 20; TRC has their own strengths in latex (accounted for about 70%

of the company's annual output and they also have additional product RSS latex (a type

of latex used in the manufacture of tires) to make a difference for that two companies in

the industry for the remaining listed companies. HAGL also focuses on producing SVR

5, 10, 20 to supply for tire and tube manufactures. However, because mining production

in the early stages is low, the proportion of latex product structure has not been specific

published.

Tire companies

Company Unit 2012 2013

DRC CSM DRC CSM

Factory output 1,000 unit/year

Bicycle tire 6,000 5,000 8,000 6,200 5,000 8,000

Motorcycle tire 2,000 6,000 2,500 2,000 6,000 2,500

Car and truck tire 780 1,200 500 780 1,200 500

Radial tire 300 350

Consumption 1,000 unit/year

Bicycle tire 7,686 9,044 7,896 8,045 9,941 7,877

Motorcycle tire 3,944 23,391 5,796 4,354 25,956 6,104

Car and truck tire 1,221 1,204 455 1,371 1,512 445

Radial tire 15

Productivity 1,000 unit/year

Bicycle tire 57% 56% 45% 60% 72% 45%

Motorcycle tire 56% 70% 22% 57% 65% 21%

Car and truck tire 100% 62% 56% 95% 72% 55%

Radial tire - - - 5% - -

Source: FPTS, Enterprises

In these three tire listed companies, DRC has strength in manufacturing tires for trucks

and special vehicles (with capacity about 780,000 tires per year), CSM focuses on

motorbike tires and light truck tires (capacity about 6 million tires per year and 1.2 million

tires per year, respectively), SRC focuses on bicycle tires (capacity about 8 million tires

per year).

In recently, both DRC and CSM have operated two full-steel radial tire factories that

specialize in manufacturing truck tires with first stage‘s capacity respectively 300,000

units per year and 350,000 tires per year. In 2013, the DRC has sold 15,000 radial tires,

about for 5 percent of their factories’ output. In the first 6 months of 2014, sale volume

increased sharply, reaching approximately 42,500 radial tires. For CSM, the factory has




only operated from May 2014, so consumption rate was not high, about 3,000-5,000

tires per month.

In terms of factory’s efficient operation, according to statistics, DRC had very good

extraction capacity of car and truck tires production (about 95-100 percent); CSM had

highest extraction rate of motorcycle in these three (65 percent). Although, SRC has

their own strength in bicycle tires but their factory extracting capacity was still low (about

45 percent), and bicycle tires sale volume annually was even lower than DRC and CSM.

This indicates that SRC’s competitiveness was very low compared to DRC and CSM.

II. Opposite Business Performance between Natural rubber and Tire

Revenue – Gross margin – Net margin

In the rubber industry value chain, natural rubber is a product that belongs to

Upstream group, while tires and tubes are belongs to Downstream group. In addition,

natural Rubber is the input material of tire manufacture. These factors indicate the

opposite business performance of 2 sectors of the value chain the industry.

In the period 2010-2013, rubber prices experienced a mixed trend between 2010-

2011 period (Natural Rubber prices has the highest prices in the historical record, up

to 6,000 USD/ton) and 2012 to present period (natural rubber‘s price has decreased

in long term). In fact, it led to negatively impacts on business performance of natural

rubber companies, and decreased efficiency continuously since 2012 until now. In

Source: Listed Companies, FPTS

Gross margin of 2009 - 2013 Gross margin of the 1st half

Sector Code Revenue growth

rate of 2010-2013

EAT growth rate

of 2010-2013

Gross margin of

2010-2013

Net margin of

2010-2013

Revenue

of 2013

EAT of

2013

1H2014

Revenue

1H2014

EAT

1H2014

Net

margin

Natural Rubber PHR -2.00% -8.60% 33.00% 26.50% 1.912 387 726,6 119,3 16.40%

Natural Rubber DPR 2.30% 0.70% 43.20% 38.60% 1.1 369 314,2 75,5 24.00%

Natural Rubber TRC -4.00% -5.80% 37.10% 38.60% 675 230 232,4 68,2 29.40%

Natural Rubber HRC -0.50% -11.90% 14.80% 18.90% 406 65 88,8 30,4 34.20%

Natural Rubber TNC -7.80% -13.00% 30.90% 34.70% 142 34 30,9 11,3 36.60%

Tyres DRC 9.10% 24.20% 20.20% 10.40% 2.803 375 1.545,6 184,9 11.90%

Tyres CSM 5.40% 36.70% 18.50% 6.70% 3.133 360 1.468,4 169,3 11.50%

Tyres SRC 8.80% 49.50% 13.00% 2.50% 982 48 477,4 36,9 7.70%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

2009 2010 2011 2012 2013

Natural Rubber Tires

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1H2013 1H2014

Natural rubber Tires




fact, both growth rate of revenue and net profit of almost companies in the filed were

negative.

Profit rate of the Natural Rubber group fell under latex devaluation, and decreased

from the average of 36.6 percent (2010) to 21.9 percent (2013). In this group, the

highest gross margins were belonging to PHR, DPR and TRC (higher than 33

percent). About profit after tax, DPR and TRC had the highest efficiency (higher than

38 percent), because TRC always focus on latex which has a stable gross margin,

and low impact by price fluctuations of the market; and DPR has mix product

diversification in order to focus on SVR 3L, 5; SVR 10, 20 and Latex. This group of

product has high demand for high-efficient consumption, and mostly use their own

latex, so it helps to improve business efficiency of these products. Meanwhile PHR

focuses on SVR 50 and 60 (54 percent) – the type of latex has lower demand than

SVR group of 10 and 20. In addition, large amount of external purchasing latex,

which are collecting and processing from external sources each year about 9,000-

10,000 tons per year, leads to lower efficiency than two companies above.

On the other side, the tire industry was beneficial greatly from this situation. From

2011 to the present, this sector of business performance has been improving welly.

Revenue and net profit consistently achieved high growth over the year as indicating

in the table above figures. Gross profit margin improved from the average of 13.6

percent in2010 to 23.5 percent in 2013. This was also the first time in 5 years,

exceeding average gross margin of 5 listed natural rubber companies.

In listed tires companies, DRC was the company that had efficiency including highest

gross margin and net profit with average rate of 2010 to 2013 reached respectively

20.2 percent and 10.4 percent. The factors that made DRC to have highest number

was product structure based on automotive and truck tires (80 percent of revenue,

and 72 percent gross profit). In addition, this segment had highest earnings,

compared to motorcycle tires and bicycle tires. At the present time, DRC has the

third biggest market share of truck tires in the field with 13 percent.

In addition, CSM was ranked 67th worldwide by tire sales and ranked 4th in the tires

exporting structure of Vietnam (accounted for 9.2 percent of total tires exports) while

exports reached 43 million dollars in 2013. Because of high performance in

exporting activities and product diversity, CSM had higher growth than DRC in the

period 2010-2013 with 36.7 percent

According to operating results in the first 6 months of 2014, gross margin of the

natural rubber group was reduced from 21 percent (6 months of 2013) to 14 percent

(6 months of 2014). Meanwhile, tire industry has been maintaining a high level of

gross margin at 24 percent. We believe that this situation can be last at least until

the end of 2015 while the world's supply of Natural Rubber is still quite high

compared to demand and price of Natural Rubber has not recovered sharply by the

end of 2015 yet.




Selling cost on Revenue

Natural rubber companies: Average selling cost accounted for 1.2 percent of revenue.

In particular, PHR, DPR and HRC have high COGS proportion. These companies mostly

produce technical rubber SVR (blocks), so they should have high cost of packaging and

transporting. On the other hand, TRC is specializing in producing latex (70 percent of its

volume), so they don’t need to pay selling cost because customer will purchase product

in their factory. Therefore, the selling cost of TRC is usually only from 0.7 to 0.8 percent

of revenue. In the first 6 month, PHR and HRC’s selling cost were somehow higher while

the 3 remaining companies declined over the same period in 2013 due to sales of HRC

slumped by 53.6 percent while selling cost only decrease by 33.8 percent over the same

period. With a PHR, selling cost increased due to subsidiaries woodworking and

manufacturing rubber mattresses branch.

Tire companies: selling cost are usually quite high, with average about 2.5-3.5 percent

of revenue. Due to industry‘s characteristics, the companies must invest and maintain

dealer network over nationwide in order to sales their products to consumers. Besides

that, they also have cost of packaging, printing labels, advertising marketing year. These

requirements force them to maintain the higher selling cost compared to revenue over

the years. In the first 6 months of this year, this costs of all three firms were higher than

the same period last year due to the price of rubber dropped by these enterprises had to

increase the discount to agents leading to higher selling cost.

Administration Cost on Revenue

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

PHR DPR TRC HRC TNC DRC CSM SRC

2012 2013

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%


2012 2013

Source: Listed Companies, FPTS

Source: Listed companies, FPTS

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


1H2013 1H2014

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%


1H2013 1H2014




Natural rubber companies: costs of operation have averaged at 4.6 percent of

revenue. DPR now has the highest rate was mainly due to salary costs at DPR

managers department that are relatively high compared to the average of the listed

companies in the natural rubber field. In the first 6 months of this year, because of

rubber‘s price fell sharply, revenues reduce deeplier than cost, therefore the

cost/revenue ratio in most businesses this group increased compared with the same

period of 2013. In particular, TNC has the highest increase due to revenue of 6 months

of TNC dramatically decreased (down 58% with the same period last year) because the

company had no revenue from the sale of cashew nuts, raw cashew production and

furniture production. Meanwhile, cost of operation increased because companies had

to pay for layoff cost due to rubber price‘s reduction. Therefore, cost of operation

increased 52% over the same period.

Tire companies: SRC, CSM had high administration cost (more than 5 percent of

revenue), while this ratio of DRC was only at 2.6 percent of revenue. This numbers

indicated that management ability; cost control and cost savings of the DRC were good

and stable. In addition, difference in headquarters‘ location among DRC and CSM, SRC

led to difference in salary costs for staff management in each company, and caused a

big difference in cost among them.

Net profit and net profit margin

Because of characteristics the industry, natural rubber business group had higher

gross margin than tires and tubes business group. At the same time, cost of goods

sold plus cost of operation over revenue took lower percentage rate, and would lead

to higher profit after tax than tires and tubes business groups. However, if we

considered separately each group, we could realize that natural rubber business

group‘s efficiency in the past 2 years was falling while tires and tubes business

groups improved efficiency significantly.

Profit after tax rate of three tire companies in 2013 increased at least 15% compared

to 2012. Furthermore the effective rate of profit after tax over sales of this group was

somehow mitigated from 10.78 percent (first 6 months of 2013) was 10.4% in the

first 6 months of this year (6 months of 2014), mainly because these firms cut prices


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000


1H2013 1H2014

Net margin of 1H2013 Net margin of 1H2014

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000


2012 2013

Net margin of 2012 Net margin of 2013




by 5-7% and increased the discount to dealers due to te strongly decreasing of

natural rubber material’s prices.

About group of natural rubber business, Gross profit margin in the first six months of

this year mostly declined over the same period. Particularly with HRC and TNC

improvement over the same period. The reason was HRC strongly liquidated their

old rubber forest area in order to help other profits rose more than 10 billion VND

more over the same period in the first 6 months. For TNC, Profit After Tax (PAT)

improved; however, this was not derived from core business activities but came from

financial operations and liquidation of the plantation area. Specifically, in the first 6

months because rubber prices fell sharply (down 28 percent compared to last year)

led to the company achieved a gross profit of VND 568 million (same period in 2013

to reach VND 9.8 billion). Meanwhile, more than VND 8.7 billion from financial

activities and VND 8.6 billion from disposals of TNC garden helped net income to

reach VND 11.26 billion in the corresponding ratio of Gross Profit Margin was 36

percent higher than the 34 percent for the same period in 2013.

III. Financial Analysis

Asset and Equity structure

Short-term and Long term Asset – Asset Turnover

Among group of natural rubber businesses, asset structure has remained largely not

consistent. Mainly because companies were making long-term investment plans in

different time leads to different in long-term assets ratio. In particular, PHR and DPR

are two leading companies in investing in Cambodia's rubber plantations, so long-term

assets accounts for a higher proportion of asset structure, respectively, 62 percent and

55 percent. After that TRC following invested, short-term assets were taking high

proportion due to the cash items, cash equivalents and short-term investments. For

HRC, long-term assets accounted for the majority (83 percent) such as fixed assets and


62% 55% 41% 83% 37% 59% 50% 25%

0.59

0.36

0.39

0.60

0.39

1.03

1.33

1.86

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

0.00

0.20

0.40

0.60

0.80

1.00

1.20


Long-term Asset Current Asset Asset Turnover




long-term receivables from the company's staff for housing loans. In fixed assets,

orchards and processing factory (total 14 percent), long-term financial investments in

other rubber companies to share profits (about 47 percent) were mainly apart. At the

same time, there was an additional construction in progress that the company has spent

to plant replanting the old and newly planted trees in 2013 added about VND 225 billion

(about 38 percent). At TNC, short-term assets accounted for a higher proportion of

mainly cash and cash equivalents amount in companies (40 percent of total assets).

The company also had capital expenditure for rubber plantation until the end of June

2014 with a value of about VND 37 billion, beside long-term investments were worth $

VND 26.8 billion in of agro-forestry export companies and Baria Serece fertilizer from

the previous year.

In the group of tires and tube business, DRC and CSM had similar structures properties.

In additional, investments in full- steel radial tire factory increased the percentage of

assets in both companies over the last year. About SRC, in recent years the company

had no plans to invest in fixed assets investment and long-term financial assets, led to

decreases in asset because of depreciation. TSNH had large proportion of structural

properties primarily because of inventories (accounted for 53.6 percent of total assets,

which finished inventories are nearly 50%) and trading receivables (about 16 percent).

In term of total asset turnover: tires and tubes group had faster rotation. In that, SRC

had the highest turnover, but we did not value this provision because of the SRC

property values were declining, while DRC and CSM had invested heavily in Radial

factory, led to differences between DRC, CSM and SRC. The asset turnover of this

natural rubber group were falling due to weakened in sale performance since 2011. In

addition, PHR were remaining total asset turnover.

Debt structure

Short-term debt – Long-term debt – Leverage

Group of tires and tubes business generally have higher leverage than group of

Natural Rubber business with average about 2.2 compared with 1.1 of Natural Rubber

group. In three tires and tubes manufacture companies; DRC and CSM had high

leverage especially in 2013, because these two companies need capitals to invest in


19.7%

36.4%

0.3%

67.2%

0.0%

48.3%

50.4%

7.3%

1.6

1.4 1.3

1.4

1.1

2.3

2.4

1.8

-

0.5

1.0

1.5

2.0

2.5

3.0

0.00

0.20

0.40

0.60

0.80

1.00

1.20


Long-term debt Short-term debt Leverage




all-steel radial factories. PHR had highest leverage in 5 natural rubber listed

companies with the average at 1.7x, while other four are around 1.3x.

Inventory – Inventory Turnover

Group of Natural Rubber business have inventory turnover averaged at 4.8 cycles per year. Companies in this field have familiar inventory, reaching an average of 3.1 cycles per year.

HRC now had the highest inventory turnover in-group of Natural Rubber business, and then PHR and TRC. HRC’s inventory turnover was the highest, because selling prices and sales dropped sharply forcing companies to actively reduce the amount of inventory, especially finished inventories by the end of the year (time that rubber ‘s prices fall by exploiting season), led to company‘s inventory in period from 2011 to 2013 fell 40 percent in order to increase the turnover. PHR had lower turnover than the TRC, because the company recorded charges unfinished products of Phuoc Hoa Industry Zone (over 52 billion VND) in order to increase the inventory of company. If excluding this category, inventory turnover of PHR and TRC were similar, around 5 cycles per year.

Receivable Turnover– Payable Turnover



-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000


1H2014 2013 Inventory Turnover

-

2

4

6

8

10

12

14

16

18

20

-

50.0

100.0

150.0

200.0

250.0

300.0


Receivable Turnover Payable Turnover

Days of receivable Days of payable




Most companies in Natural Rubber and Tires and tubes sectors maintains number of paying days higher than number of receiving days. About Natural Rubber group, most of companies receive money before delivery, so there are almost no receivables. On the other hand, tires and tubes companies often maintain receivables in 3 to 5 days in in order to support customers and maintain market share.

Dupont analysis

According to the industry data, we can realize that tires group achieved higher ROE

than Natural Rubber group. Because of effectively business combinations by using

reasonable leverage to help businesses improve their tires mining assets. Moreover,

rubber‘s prices had been falling continuously in the past 3 years to help reducing

production materials. These advantages helped these companies to maintain their

ROE at high rate, averaged over 20 percent.

Cash flow

CFO CFI CFF

2013 6M2014 2013 6M2014 2013 6M2014

PHR 102,836 (609) (240,090) 19,489 181,652 (47,068)

DPR 595,641 (24,274) (269,505) (154,186) (215,184) (37,309)

TRC (62,205) (81,403) (18) 126,173 72,756 (395.900)

HRC (16,280) (6,231) (16,538) 14,460 22,811 (55.539)

TNC (30,525) 6,743 10,827 15,646 (38,453) (26,960)

DRC 148,754 419,656 (561,845) (126,638) 391,978 (119,090)

CSM 333,407 521,597 (916,185) (485,792) 587,657 6,943

SRC 126,802 12,684 (2,008) 247,288 (112,452) (33,526)

Source: Audited financial statement

Cash flow from operation of SRC plummeted as the company increased dealer

support account receivables to maintain sale volume. Cash flow from operation of

DRC and CSM increased strongly due to highly consumption of market in first six

months of this year; led to increase in sale over the same period and decrease cost

of goods sold because of natural rubber price reduction approximately 30 percent

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%


ROE Leverage EAT margin Asset turnover




over the same period. These advantages helped both companies improve their cash

flow significantly.

With the large investment for full-steel Radial factories, both of DRC and CSM had

large negative investment cash flow in 2013. In 2014, both DRC and CSM have been

operating their 2 factories, so investment cash flow in 6 months of 2014 have been

sharply decreased, compared to earlier of the year. In the other hand, SRC currently

has no plans to invest, but their investment cash flow increased mainly from loan

interest and dividends.

In contrast, cash flow from operation of Natural Rubber group in the first 6 months of

year were all negative because of decreasing in sale due to price reduction of natural

rubber.

DPR is in the final stages of rubber plantation in Dong Phu Cambodia – Kratie

project, planted area is 6,335 hectares, and while the remainder primarily in

progressing investment costs so the investment cash flow decreased, compared to

earlier of the year. Therefore, DRC has disbursed loan financing for investment

projects in Cambodia to make financial cash flow lower than a year earlier. PHR had

finished planting about 7,583 hectares in Cambodia in 2013, so investment cash flow

was back to positive within the first 6 months of this year.

TRC’s investment cash flow increased strongly in the first 6 months because they

paid back reciprocal capital (amount of loan guarantees for division in Cambodia).

This fund was financed by short-term loans. Therefore after revocation, TRC had

used this money to repay short-term borrowings and led to financial cash flow

decreased strongly compared to earlier of the year.




C. Investment Recommendation

Code Recommendation

Market

price

30/09/2014

Target

price % +/-

EPS 2014 %Foreigner’

s own

PE

2013 2014E Trailing Forward

PHR Neutral 29,000 30,300 +4.4% 4,744 2,154 19.77% 6.2x 11.0x

DPR Reduce 43,200 35,400 -18.0% 8,706 4,723 26.21% 6.3x 7.5x

TRC Neutral 32,000 33,200 +3.7% 7,893 5,088 21.42% 4.7x 7.5x

HRC Sell 39,000 22,000 -43.5% 3,739 3,110 5.30% 9.6x 7.0x

DRC Neutral 61,000 60,300 -1.1% 4,519 4,850 36.82% 13.6x 11.5x

CSM Neutral 46,600 48,200 +3.4% 5,351 4,820 25.23% 8.7x 10.0x

SRC Add 29,900 30,600 +2.3% 3,592 4,081 6.76% 7.8x 7.2x

Source: FPTS

PHR NEUTRAL – Target price 30,300 VND/share

In the first 6 months of 2014, PHR produced 12,349 tons, an increase of 17.5% yoy

(10,511 tons in 2013), and achieved 43% of the plan for the whole year (28,500

tons).

The average sales price in the first 6 months is VND 45.7 mil per ton, reducing

by 25% yoy (VND 61 mil per ton in the first 6 months of 2013).

After the first 6 months, total revenue is VND 691.6 bn, increasing by 8.7% yoy,

achieving 46% of the 2014 plan. This growth is attributed to the increased activities

of collecting, processing and exporting. However, as the collected rubber has a

lower profit margin compared to self-exploited rubber as well as selling price

decreases by 25.1% yoy, the total profit margin is only 18.8%, lower than the figure

of the same period last year (26.7%). EBT of the first 6 months is VND130 bn, a

decrease of 23.5% yoy, achieving 49% of the plan.

Recommendation:

According to our projection, with the current price being around 40-43 mil

VND/ton, it is very likely that 2014 revenue of PHR will be VND 1,527 – 1,583

bn, exceeding 0.7-4.4% of the plan, decreasing by 16-20% yoy. EBT is

estimated to be VND 221-245 bn, being 8-17% lower than 2014 plan and

decreasing by 49-54% yoy.

With such estimations, EPS 2014 will be 2,154-2,388 VND/share. Accordingly,

with the current trading price dated Oct 3rd of 29,800 VND, PHR is trading with

PE forward of 11x, relatively high compared to the average (7.0x). Target price

according to FCFF is 30,300 VND. We recommend staying NEUTRAL for this

stock.

(Turn back)




DPR NEUTRAL – Target price 35,400 VND/share

DPR had an accumulated value of the first half of 2014 of 6,411 tons, an

increase of 18.9% yoy (5,393 tons in 2013), achieving 33.7% as planned for the

year (19,000 tons).

Average selling price of the first 6 months was 43.6 mil VND/ton, a decrease of

26.0% yoy (59.7 mil VND/ton).

For the past 6 months, total revenue was 339 bn VND, an increase of 4.6% yoy,

achieving 33.8% as planned for 2014. This improvement is attributed to the

increased volume from the collect-process-sell process (twice as much as the

figure of 2013). However, collected rubber has profit margins lower than those

of in-house tapped rubber, not to mention the fact that selling price reduced by

26.9% yoy leading to total profit before tax margin of the company acquiring

only 27% compared to 53% yoy. Therefore, profit before tax of the first 6 months

were 91.5 bn dong, a decrease of 46.7% yoy and met 36.7% as planned for the

whole year.

Recommendation: Our forecast is that, with the current selling price of around 36-40 mil

dong/ton, the whole year’s revenue will be around VND 925-940 bn, reaching 92% of the

plan. PBT 2014 is projected to be VND 211-221 bn, achieving 85-89% of the 2014 plan,

a decrease of 46% yoy.

Based on the estimation above, EPS 2014 will achieve 4,565 – 4,723

VND/share. PPR is accordingly traded with PE forward ratio of 9.1x (at 43,100

VND/share on Oct 3), which is higher than the average industry PE ratio of 7.0x.

Dong Phu Rubber has finalized its decision to buy treasury stock of 2,000,000

shares at lower than 50,000 VND/share scheduled from Oct 1 to Oct 30, 2014.

Supposed that all these shares are purchased, the total number of treasury

shares will go up to 2,875,210 shares (6.68% of total shares). I should suggest

that the purchasing of treasury shares will benefit DPR stock in a short time with

volatility ranging from 40,000 to 50,000 VND.

However, with the aforementioned target price based on P/E method, it is

advisable to remain NEUTRAL for this stock. (Turn back)

TRC NEUTRAL – Target price 33,200 VND/share

For the first half of this year, total selling volume is 4,773 ton (+11.9% yoy), reaches

34.9% of the plan (13,670 ton).

The average selling price (ASP) reaches 45.3 million VND/ton, decreases 26.1% yoy

(the price of 1H2013 is 61.4 million VND/ton).

1H2014, total revenue is VND 232.8 bn, declines 2.5% yoy, reaches 32.2% of 2014

plan. As a result, rubber sector reaches VND 217 bn, rises 11.8% yoy thanks to the

sharp increase of selling quantity (+51% yoy). In addition, financial revenue

contributes VND 19.2 bn and about VND 49.9 bn from liquidating of rubber tree.

Profit before tax (PBT) of the first half of 2014 is VND 83.1 bn. It falls 19.9%

compared to the same period of 2013 and achieves 60% of the plan. However,

51%of PBT comes from liquidating of rubber tree and only 23% contributed by core

business (rubber latex business). In the last years, the contribution between

liquidation and rubber latex business is highly balanced whatever it is a big difference




between these sectors this year. It reflects the difficulties of the company at present.

The profit for rubber business is very slow based on the current selling price.

In the first half of 2014, TRC has just reached about 32.2% by quantity of the year

plan. In order to achieve the plan, the average selling quantity must be 1,453

ton/month in the second half, 24.6% higher than the average quantity of 2013. It is a

big challenge for TRC.

In the first week of Sep 2014, the price of latex and SMR10 is 30.3 million VND/ton

and 33.4 million VND/ton, respectively. The price of SVR10 and SVR3L at the Mong

Cai border gate is only 33.2 million VND/ton and 33.8 million VND/ton, respectively.

These are the main products and occupies 95% of total selling volume of TRC. In

the fact that, the tapping volume will highly rise for the remain of the year by season.

In the past, the price often has the downtrend, it is so difficult for TRC to achieve the

target selling price (45 million VND/ton). We predict that the probability for TRC to

meet the year plan is so slow.

Recommendation:

The revenue of rubber latex business of the second half could be VND 314 bn basing on the ASP of 36-40 mil VND/ton. We forecast that total revenue of TRC will reach VND 573 bn equivalent to 80% of the plan. Therefore, the total revenue of rubber latex business will be about VND 532 bn. The estimated PBT is VND 168 bn, 23% higher than the plan but decrease by 37% compared to the result of 2013. Consequently, the EPS will be 4,740 VND/share. The target price for this year of TRC is VND 33,200/share by PE method with the PE ratio of 7.0x.

We recommend staying NEUTRAL for this stock. (Turn back)

HRC SELL

In August 2014, the company exploited 168.9 tons and an accumulated volume of

the first 8 months of 449.7 tons equal to 28.1% of the plan (1,600 tons). Also, the

company collected and purchased an accumulated volume of 1,799 tons.

Consumption volume of the first 8 months of 2014 is 2,436 tons (42% of the plan)

with revenue being VND 107.7 bn which is equal to 41% of the whole year

Currently, HRC is going through an intense process of replanting about 50% of the

rubber tree area. Therefore, the latex yielded in the current phase is rather low with

most of its being collected from smallholder farmers before processed and exported.

This makes an adverse impact on the sales performance of the company. An

example is that after the second quarter the year, without the clearance sales of the

rubber plantation, the company would have suffered losses. As encountered by

many difficulties, rubber prices reduce continuously (about 30% yoy) with more and

more exploiting areas being reduced causing a hindrance to HRC and other

companies in the industry. In this case, HRC has made investment in the four rubber

companies namely Viet Lao Rubber Co. (15% of chartered capital); Binh Long

Rubber Co. (7.1% of chartered capital); Ba Ria-Kamphongthom Co. (13.5% of

chartered capital), Lai Chau Rubber Co. (4.1% of chartered capital) to earn some

shared profits, thus saving the company through this difficult time.

To maintain the current pace, HRC will have to consume 841 tons every month for

the last 4 months to finish the plan of 5,800 tons. Revenue for the last 4 months is

expected to be around VND 123 bn. The projected revenue of this year is thus

around VND 230.7 bn achieving 88% of the plan. The company is forecast to

liquidate over 1,100 ha. For the past 8 months, 814 ha has been liquidated, leaving

the remaining 300 ha for the last 4 months. Revenue and profit are expected to be




approximately VND 21 bn and VND 20.7 bn accordingly. EAT this year is thus around

VND 53.7 bn, achieving 77% of the plan.

Recommendation: Based on the above forecast, EPS 2014 is likely to achieve 3,110

VND/share. With the current 40,100 VND/share (Oct 3, 2014), HRC is trading at a PE

forward rate of 12.9x, which is higher than the average in the industry (7x). We,

therefore, recommend SELLING HRC shares. (Turn back)

TNC SELL

Despite being a corporation specializing in planting, processing and selling rubber,

TNC has some parts of its annual revenue traced back to the selling of cashew and

fodder and woodwork. In the first 6 months of the year, let alone a hard time of the

rubber business reducing its revenue to only VND 22.9 bn (50% yoy), the other

business of cashew, woodwork is no longer yielding profits. The fodder business is

also in the decrease with revenue being one-third of than in 2013.

EAT of the first 6 months is not yielded from the core business but from financial

activities and liquidation of the rubber plantation. In other words, with rubber price

decreasing during the first 6 months (28% yoy), the company only acquired gross

profit of 568 mil VND (compared to VND 9.8 bn in 2013). However, with more than

VND 8.7 bn from financial activities and VND 8.6 bn from liquidation of the rubber

plantation, EAT of TNC bounced back to VND 11.26 bn.

Recommendation:

According to the Resolution of the board in April 2014, the company has adjusted its

plan of EBT from VND 27 bn to VND 15 bn (Link). Therefore, the business result of the

first 6 months reveals that the company has achieved 75% of the adjusted plan.

However, we do not highly appreciate the results due to the fact that the profit is hardly

earned from its core business.

Because of its modest scale, quite unproductive and unstable business, TNC is still

rather far from being of the same rank as other listed companies. EPS 2014 is expected

to be 694 VND/share. On Oct 3, 2014, the price was 12,100 VND/share, and this reflects

that TNC is trading at a PE forward rate of 17x, which is extremely greater than the

average of 7.0x. Therefore, we recommend SELLING this stock in the near future.

(Turn back)

DRC HOLD – Target price 60,300 VND/share

In the first 6 months of 2014, DRC had net revenue of VND 1,545 bn (achieving

45.3% of the 2014 plan, increasing by 12.1% yoy). In particular, domestic

sales accounted for 90%, equivalent to a growth of 14%; export revenue

growth is 12%. EBT is VND 287 bn (55.3% of the 2014 plan, decreasing by

5.8% yoy). EBT has reduced due to the fact that the company had to incur the

depreciation cost and loan interest for the Radial project.

Despite little profit yielded from Radial tires, what matters most is the high

consumption of DRC’s products in the market. In the first stage, the consumption

progress of radial tires, rather than their profits, is of greatest concern. In the first 6

months of the year, the company has produced more than 42,500 Radial tires with


http://images1.cafef.vn/download/150714/20140715%20-%20TNC%20-%20Nghi%20quyet%20HDQT.pdf



monthly volume boosting from 6,000 to 10,000 tires. This proves the recognition of

DRC’s tires in the market and helps increasing the market share for this segment.

In the long run, impressive growth is predicted once produced volume is also in the

increase.

Revenue of the third quarter of 2014 is expected to achieve VND 894 bn, an

increase of 42% yoy. EBT of the third quarter of 2014 is estimated to be around

VND 90 bn, reducing by 25% yoy. This is due to the fact that DRC had to incur the

depreciation cost and loan interest for the Radial project, which accumulate up to

VND 48 bn in the third quarter of 2014.

In spite of the reduced EBT, it should be noticed that the consumption of DRC

proves to be very promising, which makes DRC being among the top 3 listed tire

enterprises with the most impressive growth. This will help lay a solid foundation

for DRC to maintain and improve the production of Radial tires for the rest of the

year and the following years. (Turn back)

Recommendation: It is estimated that EBT of DRC will be around VND 473-491 bn.

EPS 2014 is expected to be around 4,450 – 4,615 VND/share, achieving 96-98% of the

plan. Target price according to PE will be 54,000 VND/share and according to FCFF, it

will be 60,300 VND/share (from now to mid-2015). We recommend HOLDING this stock

for middle-long term investment.

CSM HOLD – Target price 48,200 – 51,500 VND/share

Accumulated during 6 months of 2014, net profits of CSM reached VND 1,468 bn,

achieving 43.8% of 2014 plan and reducing 3.8% yoy. In particular, export revenue

reached VND 435 bn, securing 43.5% of the year plan. EAT also reached VND 217 bn,

achieving 72% of 2014 plan, a decrease of 2.7% yoy.

The consumption of all-steal Radial tires: During the first 6 months of the year, CSM

has yet to record depreciation and interest expense of the Radial project into the general

business results. Then these figures will be excluded in the business result of the first

6 months. The company sold about 1,500 tires this June and 7,000 tires this July and

August. This year plan is 50,000 tires. Therefore, for the remaining 7 months, there

should be 6,928 tires sold each month. With the current pace of consumption, CSM is

expected to sell about 35,000 tires/month and earn VND 170 bn for the revenue of the

year. The company is going to send their samples to the USA, Japan and some

European countries requesting for some export certificates like DOT (the USA), JIS

(Japan) and E-mark (Europe). These certificates are likely to be offered by the 4th

quarter of 2014.

The sharp decrease in price of rubber material (from 43 mil VND/ton early 2014 to 33

mil VND/ton currently) would help improve profit margin of the last 6 months and

simultaneously partly cover the expense of depreciation and loan interest of the Radial

project. Hence, EAT this year is forecasted to be around VND 325-347 bn, which would

be 3.6-9.7% lower yoy. The loss here could be attributed to the Radial business which

has yet to yield money making a negative influence on the overall profit of the company.




Information on the transfer of real estate project

Project No. 09 Nguyen Khoai, District 4, Ho Chi Minh City:

Casumina is divesting itself of this project and transfer it to Novaland (this is a joint

venture project with Tan Thuan Viet). The total proceeds are about VND 225 bn with

VND 100 bn being paid to Casumina and the outstanding VND 125 bn being equally

divided for the next 6 quarters. Accordingly, the company will receive 20.8 bn

VND/quarter. This project transfer is expected to yield a profit of VND 75 bn with the

profit being subject to the payment schedule). For this year, estimated profit is about

VND 28-37.5 bn.

Project No. 504 Nguyen Tat Thanh, District 4, Ho Chi Minh City: the company will

withdraw its invested funds and receive a reimbursement of VND 20 bn and other

related cost. The company is current doing the paperwork so that there is no official

written proof for this. Until then, this should not be included in this year’s business

performance.

Recommendation:

This year, despite the decrease in profits compared to that of the previous year

2013, it should be taken as an inevitable outcome of the operation of Radial

factory. On the contrary, it should be highlighted that with the above forecasted

consumption, it is highly possibly that the company could achieve 10-11% of

productivity in phase 1.

EAT 2014 is predicted to be around VND 325-347 bn with EPS 2014 achieving

4,820 VND/share (excluding the profit from the project transfer) and 5,150

VND/share (including the profit from the project transfer). Target price at the end

of the year is 48,200 – 51,500 VND, we recommend staying HOLD this stock

(Turn back)

SRC ADD - Target price: 30,600 VND/share

SRC is considered that has the lowest competition among 3 listed tires companies

(DRC, CSM, SRC). Specifically, bicycle tires market now meets saturation. The low

potential growth of the market limits the future growth of the company. The revenue

of the first half decreases by 1.4% yoy, it is very difficult for SRC to push the tire

sales of the company.

The export market is seen as the bright chance remain of the company. However,

the export revenue of 2Q2014 declines by 4.5% yoy, it shows that the export sector

is struggled. Although the natural rubber price fell by 20-25% yoy, the gross profit

margin of SRC also declines slightly yoy, including: the gross profit margin of the

first 6 months is 19.3% compared to the 19.9% of the same period of last year.

Recommendation:

This year, we expect that the business result will be more positive than the last year

thanks to the high growth of demand on almost of tires of the market in general and

SRC in particular. As the data we collected, the sale volume of the first 8 months

grows quickly such as: bicycle tires increases by 10% yoy; motorcycle tires

increases by 40% yoy. Therefore, we forecast that the revenue of 2014 will reach

VND 959 bn (-2.5% yoy); profit before tax (PBT) will be VND 95.3 bn (+ 9.2% yoy).




Consequently, EPS of 2014 will be 4,081 VND/share. The target price for 12-month

basing on PE method is 30,600 VND/share which is higher than 9% compared to

the current market price (28,000 VND/share 29/09/2014). We recommend

ADDING for short-term investment.

For long-term period, the potential growth of SRC is very poor because the

company has no plan to develop new product or expand production. If there is no

strong and suitable changes in production, it is very difficult for SRC to have the

high growth in future.

(Turn back)




D. APPENDIX

Area, Volume, Tapping yield of Vietnam natural rubber by province in 2013

Location Area Tapping area Volume Tapping yield

North 25,102

Ha Giang 1,105 - - -

Lao Cai 1,516 - - -

Yen Bai 1,291 - - -

Phu Tho 188 - - -

Đien Bien 4,257 - - -

Lai Chau 10,168 - - -

Son La 6,577 - - -

North Central and Coast Central

140,775 62,216 79,525 1,283

Thanh Haa 18,326 6,402 5,960 931

Nghe An 9,501 3,987 4,651 1,167

Ha Tinh 10,722 2,601 2,301 885

Quang Binh 14,821 4,566 4,461 977

Quang Tri 18,542 10,906 14,265 1,308

Thua Thien Hue 9,270 5,897 6,782 1,150

Quang Nam 12,880 2,684 3,355 1,250

Quang Ngai 1,231 506 416 822

Binh Đinh 68 4 5 1,400

Phu Yen 4,376 2,000 2,675 1,338

Binh Thuan 41,038 22,664 34,954 1,542

Highland 114,687 178,920 1,560

Kontum 72,870 24,270 37,866 1,560

Gia Lai 105,064 58,019 89,930 1,550

Dak Lak 39,985 20,383 31,365 1,539

Dak Nong 31,739 12,015 19,759 1,645

Lam Đong 8,738 - - -

South East 535,514 371,298 690,355 1,856

Binh Phuoc 232,051 142,981 264,902 1,853

Tay Ninh 98,170 76,969 165,526 2,151

Binh Duong 133,155 108,484 194,849 1,796

Đong Nai 44,514 27,289 42,125 1,509

Ba Ria VungTau 23,624 12,175 15,953 1,310

Ho Chi Minh city 4,000 3,400 7,000 2,059

Total 959,787 548,835 949,100 1,729 Source: VRA, VRG, MARD

Area, volume and tapping yield by business sector in Vietnam in 2013

(Turn back)

Types Plantation Area Volume Tapping yield

ha % Ton % Ton/ha

Large holder 503,061 52.4 261,953 47.2 1.71

State-owned 424,194 44.2 251,566 45.8 1.71

Private 78,867 8.2 10,387 1.9 1.64

Smallholder 456,726 47.6 286,882 52.3 1.75

Total 959,787 100 548,835 100 1.73




(Turn back) The differences between Vietnam and other South East countries in Rubber Industry

Management

According to the statistics of the distribution area about big four countries in rubber

industry including Thailand, Vietnam, Indonesia and Malaysia, we can recognized that

different from Vietnam, most of rubber areas in 3 other countries are belongs to

smallholdings (over 85 percent). Therefore, mechanism for management, operation and

coordination of the rubber industry are different from Vietnam. Currently, Rubber

Industry is operating without direct management of the State. On the other hand, rubber

industry in Malaysia, Thailand and Indonesia are managed directly by the State through

the Bureau of Rubber or other authorities responsible for the rubber industry. In

Vietnam, there are misunderstandings that Vietnam Rubber Group (VRG) is

representative of State’s management for Vietnam’s Rubber Industry. In deep, VRG is

just a business owned by the State, operates and holds dominant shares in the

members of the group. VRG has no management function for the Natural Rubber

Industry in the country. In Vietnam, there is no state agency that is specialized for the

rubber industry, but it is under management of the Ministry of Agriculture, subject to the

general management along with other agricultural commodities such as rice, cassava,

etc. through the Department of Agriculture and Forestry products processing. Therefore,

in Vietnam, there is no separation, no mechanism for the rubber industry. This situation

leads to the lack of uniformity in scheme of rubber area, product distribution between

the regions in the country. It is very weak and asynchronous in control of rubber quality

in domestic and exported rubber products.

In three other countries, government policies often support smallholder about seeds,

initial investment cost for planting rubber trees. About financial problem, smallholder

farmers receive support from the purchasing enterprises (similar to deposits) to invest

in their rubber plantation and also ensure output for production and price, whereby

mutually beneficial for both sides. However, financial pressures to maintain long-term

garden has always been a difficult problem for Malaysia, Indonesia, Thailand and

Vietnam, especially in current rubber price situation at low level.

(Turn back)

Consolidated for VRG Source: FPTS

Operating structure of VRG




Quality

Domestic rubber products are tested and certified according to the Vietnamese

Standard (TCVN 3769: 2004, TCVN 6314: 2007, etc). Currently, in domestic market,

although VRG‘s rubber products (accounting for 41 percent of production and 28

percent of the country) is well qualified for Vietnamese standards and International

standards for through cross-checking programs among members within the Group and

standards of national laboratories pretty tough for each laboratories of division

members. However, private sector and smallholders which accounts for 47 percent of

area and more than 55 percent of rubber products in domestics market haven’t ensure

their goods to meet the standards. Furthermore, if import parties do not suggest quality

certificates, private sectors also eliminate quality control to reduce costs. This is the

main factor that causes to downgrade exported quality of rubber products and influence

to the whole Vietnamese natural rubber industry from past to present. It makes a

decrease in reputation and export price of Vietnamese rubber products always lower

than Thailand, Malaysia and Indonesia.

Featuring in three countries, planting area mostly are owned by smallholders and have

large scale even comparable to member of VRG, so the nation has to establish

specialized sections as co-operatives to manage and support about breeding, farming

techniques, purchasing management and quality control in every location. Trading latex

auction will be held through the centralized auction in each location. Furthermore,

Malaysia, Indonesia and Thailand have technical standards department for latex

collection process at every auction and additional verification at factories before being

into production. These factors help to create strict management and quality assurance

input of purchased latex from smallholders in order to ensure for them similar price to

the market and control quality right from the beginning stages. This is also the weakness

of Vietnamese rubber industry. Procurement mechanism still quite fragmented,

depending on each factory. Most of rubber manufacturing companies purchases latex

by their own. On the other hand, smallholder farmers usually owns small orchards with

less output, forced them to sell through dealers before being sold to the factory. From

there arise two problems: (1) lower selling price than the market price due to the low

quantity of smallholdings; (2) reduction of latex quality by mixing to make more profit

from dealers.

Export quality is a matter for serious consideration by the fact that in all four countries,

the production of rubber created mostly for export, domestic consumption rate is not

high such as 13 percent in Thailand, 19 percent Indonesia, 55 percent in Malaysia, and

about 15-16 percent in Vietnam. In Thailand, Indonesia and Malaysia are very strict in

management of product quality from input to output of finished products. Typically in

Malaysia, rubber products must be examined by the Rubber Research Institute before

certified rubber products originated from Malaysia prior sale. It is the key that helps to

build great reputation of rubber products quality for these 3 countries on the global

market. The rubber quality management in Vietnam is not really tight and inconsistent

(mostly affected by the private sectors, smallholders). It led to the situation that the

rubber qualities are not ensured to create reputation on the global market, and

decreases competitive abilities on price in the market, and usually have to consult these

3 countries’ prices. (Turn back)




Tapping Yield issues (Turn back)

The positive point of Vietnam rubber industry compared to 3 other countries above

(Thailand, Indonesia, Malaysia) is rubber garden‘s proportional that owners fairly

between the smallholder sector and the state sector corresponding 47 percent and 53

percent. In these 3 countries, smallholders usually have large scale (even the equivalent

to divisions of VRG), this group accounts for a very high proportion (over 85 percent).

In fact that the rubber plantation area of Thailand, Indonesia are 3.5 times larger than

in Vietnam led to conditions for testing and deployment in large area have many

difficulties and asynchronism. It makes a reduction in the general productivity of the

whole industry. In Vietnam, the Breeding Research Institute is considered in the top 3

in the world with a lot of new breeds and high quality research published every year.

That advantage and large planting area of VRG are favorable conditions for

experimenting new seeds. If it is successful, it can be done instantly on a large scale,

and then recommended for smallholder farmers to apply. This helps to shorten

application time of new seeds, and improve productivity on nationwide area. Thus,

Vietnam today is a country that has highest yield of rubber exploitation in the world.

During the past 3 years, tapping productivity is always higher than 1.7 ton per hectare.

This is the advantage of Vietnam's rubber industry than other countries.

Based on evaluations and analysis above, we can realize current problem of Vietnam's

rubber sector is that policies to allocate rubber products suitable for domestic

consumption and export. It needs a management agency for Rubber Industry.

Moreover, Vietnam needs to be aggressive in the management process of rubber

products quality; there should be mechanisms and policies as well as the technical

standards with strict quality control steps through input to output, especially for export.

If we can accomplish these works, reputations and competitiveness of Vietnam Rubber

products will be greatly enhancing on the international market, in order to motivate work

strategic planning and development of domestic rubber.

(Turn back) Policies related to Vietnam’s Natural rubber industry

Decision 1003/QD-BNN-CB by the Ministry of Agriculture and Rural Development

According to Decision 1003 / QD-BNN-CB by the Ministry of Agriculture and Rural

Development signed on 13th March, 2014 about raising the added value of

agricultural, forestry and fisheries sector in processing and reducing losses after

harvesting.

In particular, natural rubber products will focus on improving the manufacturing

proportion of high value rubber such as SVR 50, SVR 60 and reducing SVR 3L,

according to the following structure: SVR CV 50, 60 (rubber tube, buffer in

automobiles, high-class automobile tires, etc.) accounts for 25 percent; SVR 3L

accounts 20 percent; latex accounts for 20 percent; and RSS, SVR 10 and SVR

20 accounts for 35 percent remaining.

According to our evaluation, this project will help to standardize the structure of

latex products in Vietnam as well as a way to categorize groups of rubber

enterprises producing in the country, and create competitive advantages for

Vietnam rubber in the region and the world. Specifically, in listed rubber




companies, PHR has strength of latex SVR 50, 60; DPR specializes in SVR 3L,

10, 20; TRC has 70 percent of output that is latex, etc.

In addition, the project also will improve oriented investment of processing for

rubber products such as tires, gloves, mattress, etc. to increase rubber domestic

consumption from 17 percent to 30 percent in 2020. The project will raise demand

for rubber in domestic market in order to ensure output for domestic

manufacturing companies.

Decision of reducing exports tax for rubber products by Ministry of Finance

The Ministry of Finance issued Circular No 111/2014 / TT-BTC to amend the

export tax rate for some rubber goods in group 40.01, 40.02, 40.05 stipulated at

the Export Tariff issued together with Circular No. 164/2013 / TT-BTC to 0

percent, applicable from 02 rd Oct, 2014.

Previously, natural rubber latex have piece shape such as SVR 10, 20, L, 3L;

RSS; crepe latex, and mixtures rubber not vulcanized subject to export tax of 3

percent and synthetic rubber of 5 percent. However, these taxes were reduced to

1 percent in 2013, and now reduced to 0 percent for all items.

As an objective assessment, the tax reduction has a positive impact that

businesses promote product diversification to reduce outlet risk for rubber

products. However, considering about supporting levels for the industry, this is

not big enough because of strong reduction of rubber price in global market.

Furthermore, the important issue is the global rubber supply is relatively high

compared to demand. As estimated in 2016, new demand-supply gap will be

shortened. Therefore, this is only technical measure in the current difficult

situation.

According to our assessment, reducing export tax has only short-term effects. In

long- term consideration, it is more important to have flexibility in applying export

duty based on different market, on different prices at specific period time and on

clearly identical purpose of using tax revenues from exporting rubber products to

contribute in improving rubber products quality of Vietnam.

Exemption Personal Income Tax for rubber household

Deputy Minister of Finance, Mr. Tuan Hoang Anh Do has written documentation

for Taxation Department of the province or city under State‘s management to

conduct about personal income tax exemption for families and individuals who

plants rubber trees. Accordingly households and individuals who directly involve

in production of unprocessed rubber into other products or preliminarily

processed, they will be exempt from personal income tax.

According to our assessments, this is a measure of supporting and sharing with

rubber farmers in the difficult situation of the whole industry in Vietnam today to

help stabilizing psychological as well as guaranteed income for rubber farmers.

This will also be the motivation for households to maintain rubber plantation area

to ensure the area planted and mining production in the country.




Establishment of Triangle Rubber Area in Indochina

Rubber Association, ministries and agencies are studying ways to establish rubber-

trading platform in 2015 in order to achieve transparences and fair prices for buyers

and sellers. In order to ensure sustainable development of as well as ensure

abundant commodity trading floor, VRG has been promoting cooperation rubber

development in Laos (30,000 hectares) and Cambodia (100,000 hectares) to form a

triangular Indochinese area with oriented development as the world's largest rubber

area. This is considered as a well long-term development for the rubber industry of

Vietnam. If successful, this establishment will help to enhance position as well as the

voice of Vietnam in the global rubber industry, and bring many benefits to businesses

and smallholder in the industry.

Business performance of Tires enterprises in the World

Brand Country ROE Gross margin PBT margin

2012 2013 2012 2013 2012 2013

Bridgestone Japan 13,69 12,70 33,64 36,45 8,82 9,53

Yokohama Japan 17,72 14,74 32,53 34,26 9,25 9,28

Michelin France 17,92 12,68 31,25 31,64 10,18 8,41

Goodyear USA 37,90 63,70 18,24 21,07 2,10 4,16

Cooper USA 33,00 12,70 15,57 15,01 8,77 6,19

Pirelli Italia 17,27 12,88 - - 9,71 8,41

Kumho Korea 14,43 5,56 18,92 20,12 2,19 3,35

Nokian Finland 25,23 12,99 44,14 46,09 24,04 20,57

Source: Bloomberg

(Turn back) Analysis of the value chain of Vietnam tire industry

Materials

At present, the tire industry of Vietnam is taking advantage of the natural rubber

material abounding in our country at a very reasonable price. Synthetic rubber, on

the other hand, has to be imported from Korea, China and Taiwan with annual

imported value being up to USD 500 mil. The two world-renowned manufacturers of

synthetic rubber are Lanxess (Germany) and Sinopec (China). Chemicals, fabric and

black coal used in making tires are largely imported from China. As for metal, though

domestically made, the production is not great enough to satisfy the demand leading

to importation from other countries.

Materials structure in tires production (% on quantity)

Materials Passenger car

tires Light truck tires OTR tires

Natural Rubber 47% 45% 47%

Coal 21.50% 22% 22%

Steel 16.50% 25% 12%

Textiles 5.50% - 10%

Chemicals, other materials 9.50% 8% 9%

Source: FPTS




Sources of Materials

No. Materials Suppliers

1 Natural rubber Domestic

2 Synthetic rubber Taiwan, Korea, Japan, Thailand

3 Black coal India, Korea, Japan, Australia

4 Chemicals Taiwan, Viet Nam, Japan, Thailand

5 Steel Malaysia, Korea, Viet Nam, Japan, Thailand

6 Textile China, US, Japan, Thailand

Source: FPTS

Production (Turn back)

Production capacity and consumption demand within the country.

According to the statistics up to 2013, the total number of produced tires of the whole

country is 59.6 mil tires with tires for bikes accounting for 39% (23.3 mil tires), tires for

motorbikes constituting about 50% (30 mil tires) and auto tires taking up the remaining

11% (6.30 mil tires). For the past 5 years, these percentage figures have remained

quite stable.

Supply – Demand of domestic market

Items (million units/year)

2011 2012 2013

Consumption demand

Bicycle tires - - 24.00

Motorcycle tires 35.78 38.02 37.50

Automobile tires 4.32 4.58 5.00

Production

Bicycle tires 21.30 22.28 23.30

Motorcycle tires 28.40 29.19 30.00

Automobile tires 3.08 3.08 6.30


Source: MOIT, FPTS

Structure of domestic tires

production

Domestic capacity of tire

production

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013

Bicycle Tire Motorcycle Tire Automobiles Tire

39%

50%

11%

Bicycle Tire

Motorcycle Tire

Automobiles Tire




Currently, production capacity for bike tires is able to cover annual consumption. However, auto tire production is still inadequate leading to bulk importation from other countries every year. Motorbike tires production now can meet 80% of demand whereas with auto tires, only 67-70% of demand is satisfied. Especially, up to 70-80% Radial tires have to be imported yearly. Production capacity of Radial tires is still far behind the increased consumption in the country.

Domestic Supply and Demand of Radial tires

Currently, with the production of Radial tires of DRC and CSM, it is projected that by

2015, the local supply can only meet 60-62% of Radial demand in the whole country.

Even provided that DRC and CSM improve their production capacity up to 600,000

and 1,000,000 tires/year, respectively, only 65-67% of the demand will possibly be

met beside the increasing pace of Radial need currently. After all, this shows us a

very promising future for both local corporations like DRC and CSM when they finally

decided to go for such Radial tires. However, it would be very ignorant to downplay

the competition of other imported Radial tires because they will get DRC and CSM

out of the game if the quality is proved unqualified.

Figures of production capacity of the 3 listed tire enterprises

Types (Unit: 1,000 unit) DRC CSM SRC

Bicycle tires 6,200 5,000 8,000

Bicycle tubes 5,000 8,000 10,000

% Exploitation rate 62% 72% 45%

Motorcycle tires 2,000 6,000 2,500

Motorcycle tubes 2,000 22,000 7,000


Automobile tires 780 1.200 500

Automobile tubes 800 800 500



Radial tires 2011 2012 2013 2014 2015

Domestic supply (*) 1,755 1,755 1,770 2,085 2,595

Demand (**) 2,879 3,118 3,376 3,656 3,960

Source: FPTS

(*) All-steel Radial tires accounts averagely for 73% (**) Radial tires for truck accounts for 76-78%




Overview Capacity of Tire manufacturers in Vietnam

Foreign tire manufacturers like Bridgestone, Michelin, Kumho, Yokohama and

Goodyear are investing in Vietnam in the hope of turning Vietnam intro a new tire

manufacturing and consuming market of the world. With low labor cost, abundant

rubber material and export tax of 0% (compared to 8% of China), Vietnam proves itself

an advantageous destination for investment in tire manufacturing. As surveyed by

tirebusiness.com, Vietnam’s tire market is still very modest in scale compared to the

global scale (USD 800 mil vs USD 235 bn). However, those foreign manufacturers

hold the opinion that Vietnam is a fertile land to yield enormous profit with growth rate

of 20-25%/year. Currently, the segment for passenger cars is in the hand of foreign

corporations. Kumho (Korea), a typical example, has announced its investment of

another USD 100 mil in Vietnam for construction of a tire manufacturing factory in Ninh

Binh with the initial investment fund of USD 200 bn. The factory is projected to be

launched in 2015 with production capacity of 6.3 mil tires/year, a twofold volume

compared to this year of 3.15 mil tires/year. Bridgestone (Japan) has been given

investment license to invest more in the factory in Northern Hai Phong (from USD 574

bn to USD 1.2 bn) The expected capacity is about 9 bn tires/year, 5 to 6 times as many

as the productivity of the 2 Radial factories of Casumina and DRC combined in 2017

(equivalent to 49,000 tires/day). Kumho and Bridgestone, with their state-of-the-art

technique, are currently focusing on manufacturing Radial tires for passenger cars

and in the near future, for trucks as well. 95% of the production volume will be exported

to the North America, Middle East, Asia and Australia.

Source: FPTS

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Bridgestone Kumho CSM DRC SRC Yokohama Others

Capacity

Domestic supply

Export




In Vietnam, there are 3 local tire corporations with impressive business performance

namely: Da Nang Rubber JSC, Casumina and Sao Vang Rubber. Da Nang Rubber

JSC has the highest tire production volume in the industry and specializes in tires for

trucks, OTR trucks. Casumina is a popular brand name for motorbike or light-truck

tires. Sao Vang Rubber specializes in bike tires. Besides them, there are some FDI

corporations in Vietnam as follows:

Enterprises Capacity (1,000

unit/year)

Radial tires

Bias tires

Automobile tires

Light truck tires

Bus tires

Motorcycle tires

Industrial tires

Yokohama 800 x x x x

Chengshin Rubber

18,570 x x x x x

Kumho Tire 3,150 x x x

Kenda Rubber

2,000 x x x

Inoue

Rubber - x x

Sailun Tyre 12,000 x x x

Source: TireBusiness, FPTS

Effective performance by product

EBIT Margin Light truck and passenger car tires (< 9 seats)

Heavy truck tires Motorcycle tires

Bicycle tires

Global 9-15% 5-7% 6-7% -

Typical companies

Michelin, Continental, Pirelli, Bridgestone

Michelin, Continental

Falcon Tyres -

Viet Nam 19% 13% 14% 4,9%

Typical companies

DRC, CSM DRC CSM SRC

Source: Bloomberg, FPTS

There are various types of tires for the corresponding vehicles. However, the main

categories are: tires for light trucks and passenger cars (<9 seats), passenger cars (>9

seats), heavy trucks, motorbikes and bikes.

Among these categories, tires for trucks have the highest profit margin, followed by tires

for motorbikes and bikes. In the world, most of tire companies cater for the segments of

tires for passenger cars (<9 seats) and trucks because of their high profit margin. In

particular, 53% of the market share is held by large corporations like Michelin,

Bridgestone, Goodyear, Continental, Pirelli, etc. Tires for motorbikes and bikes are

mostly produced in frontier and developing markets like Vietnam, Sri-lanka, Brazil and

Malaysia. Interestingly, China which caters for every kind of tires with large-scale

production to supply global need has 27% of market share globally.

Distribution (Turn back)

Distribution of tires in Vietnam focuses mainly in the replacement tire segment (70-

80%). As for OEM tires, large corporations with well-known brands take over the

distribution of imported tires and tires manufactured by FDI companies operating in

Vietnam namely: motorbike tires (Kenda, Inoue, Chengshin, etc.), passenger car tires

(Michelin Bridgestone, Kumho, Continental, Pirelli, Maxxis, etc), truck tires

(Bridgestone, Kumho, Continental, Yokohama, Chengshin, etc.)




It is inconclusive which of the OEM channel and replacement tire channel has higher

profit margin because the result is subject to the consumption scale of each channel as

well as the actual consumption percentage in sales proportion of each corporation. For

global corporations, the price was brought down by assembling companies making the

profit margin lower than that of Replacement channel. However, this price squeeze is

offset by the bulk distribution of tires resulting in relatively high overall profit. On the

other hand, with a small scale of OEM distribution, tire manufacturers can maintain a

good enough profit margin to secure their profitability ratios (in this case, profitability

ratios are higher than those of replacement tires of the same kinds). Another reason

why profit margin of the OEM channel is often lower than that of replacement channel

is the lower sales price offered by assembling companies given the fact that tires are

sold directly and money can be saved from advertising and sales activities. Reality

shows that with OEM channel, a profit margin of >5% is feasible however with

replacement channel, the figure is much higher (>15%).

In Vietnam, there still exist many commercial streets specializing in buying, selling and repairing tires, namely: Ho Chi Minh city (Ly Thai To Street); Ha Noi (Giang Vo, Lang Ha); DaNang city (from the Airport to Nguyen Huu Tho Street and CMT8 roundabout). Especially on Ly Thai To, district 10, HCMC from Ngo Gia Tu – Le Hong Phong roundabout to Nguyen Van Cu – Nguyen Thi Minh Khai roundabout, there are more than 20 stores specializing in fixing cars, selling, buying or replacing automobile tires. There are also official distributors of the worlds’ largest tire company such as Michelin, Yokohama, Bridgestone, to name just a few.

Recycling process and renewable products from used tires (Turn back)

After consumed, tires will be recycled for continued use in the future. According to a

study in Thailand, if done with effective techniques, the quality of renewed tires can be

of 60-90% quality of brand-new ones and can be used for another 50,000 – 70,000 km.

In addition, used tires can be made to create beneficial products for related industries

like: FO-R oil used as fuel for boilers or steel furnaces; black coal used as additional

material to make tires and asphalt; rubber particles and rubber mats used in sports.

Currently, there are some large domestic enterprises that recycle rubber such as Green

Industrial Environment Company Ltd. Co. in Hanoi, South East Tay Ninh Technology

and Investment Joint Venture of Thailand-Malaysia-Laos-Vietnam. In addition,

Renewable Energy DVA JSC has been constructing a rubber and plastic recycling

factory in Tan Thanh District, Ba Ria–Vung Tau. The plant has a processing capacity of

2,400 tons rubber every month, manufacturing well above 1,000 tons FO-R oil and 1000

tons Carbon Black, etc. In Thailand, the proportions of recycled products are Fuel Oil

(35%), Carbon Powder (33%), Steel (12%), and Natural Gas (20%). Below is the

percentage of a machine supplier in Vietnam.

Recycled rate of Used Tires

Types Oil Carbon Steel Natural gas

Heavy truck 45%-50% 25%-30% 10% 10%-15%

Passenger car 40%-45% 30%-35% 10% 10%-15%

Motorcycle and

Bicycle

30%-35% 35%-40% 15%-25%

Source: ttmindustry


http://ttmindustry.vn/default.asp?prod=120&view=244



Features comparison between Bias and Radial Tires (Turn back)

Because of preeminent structure improvement and important innovation in the tire

industry, Radial tires gave users many practical benefits and enhanced safety for car

users.

The biggest difference between bias tires and radial tires as follows: (1) bias tires before

are made by overlapping fabric wrapping based on angle of 60 degrees. Radial tires

use steel or semi-steel tires (both medium steel fabric) instead of fabric to woven into

each tire overlap with the radial angle of 90 degrees. This structure makes the tire

definitely more reliable and creates balance from within inside as well as reduces the

heat of tire during operation. (2) Bias tires have surface and sidewalls as one unity, but

radial tires have 2 independent parts. For radial tires, sidewall now is seen as part of

the transmission frame. The force will be distributed evenly between both the surface

and sidewall, and make better under pressure ability; better gripping road ability, and

less vehicle vibration during circulation.

For bias tire, both the surface and the sidewalls are generally affected, fabric wraps

under pressure will slide over one another, and resulting in reduced ability to transmit

force from the surface to sidewall. So Bias tries has better road traction and higher heat,

lead to faster attrition and less security. The table below is a general comparison

different criteria between Bias and Radial Tires that we have collected:

Bias tire Radial tire

Lifetime

Used in rough and off-the-road 40,000 – 80,000 km

Specializing for high speed Life expectancy is longer from 50 to 100 percent in same operating condition 60,000 km to 120,000 km

Attrition

Faster attrition About 30 to 50 percent slower

Traction control

Less traction control makes.

Higher control, speed and more

secure.

Traction surface

Smaller Bigger

Fuel saving

Higher 11% lower than




Heated level

Higher Lower

Quality

Lower because the pyrogenic

status and quick atrophy

Higher than bias tires through

better road traction and less

pyrogenic. However, it can be

easily damaged if loading over

capacity

Performance

Less due to the low road traction than Radial tires.

Easily causing concussions for

car, driver and passengers in the

car.

Safe, convenient and comfortable driving feeling.

Good traction, reducing vibration

to the vehicle, driver and

passengers in the car.

Price and repair

Easier to repair

Lower price

Complicated to repair

More Expensive

(Turn back) Policies for Tires industry

Car Tires import Duties

Under the provisions of Circular No. 156/2011 / TT-BTC published on 14th November, 2011 of the Ministry of Finance and Import Tariff Special offers Vietnam to implement the Free Trade Area ASEAN-China period sections 2012-2014, issued Circular No. 162/2011 / TT-BTC dated 11/17/2011 of the Ministry of Finance: If imported items are rubber truck tires, unused, with width not exceeding 450 millimeters (less than or equal to 18 inches), import tax rates are: - 25 percent - products are imported from China - 5 percent - products are imported from ASEAN

If imported items are rubber truck tires, unused, of a width exceeding 450 millimeters (bigger than 18inch), import tax rates are: - 10 percent - products are imported from China - 0 percent - products are imported from ASEAN

The provisions shall be considered as a trade barrier to limit tire import products to protect and keep the domestic market for the tires produced domestically. However, in the longer-term consideration, tax rates will be almost 0 percent in 2018; then there will be no regardless about imported or domestic tires so all must compete fairly. At that time, the quality will decide it all. From now until then, it will be the improving technologies time for the domestic tire enterprises in order to enhance quality to maintain domestic market and expand exports, also enhanced growth rate for domestic tire industry in general and manufactures in particular.

(Turn back)




TPP challenges for Vietnam tires and tubes industry

Based pace of infrastructure development in Vietnam today, a consumer trend of

bias tire will gradually switch to radial tires. Simultaneously with the WTO, AFTA,

and the upcoming ATIGA TPP, Foreign Radial products will overflow into Vietnam

with more attractive prices. Compared with domestic enterprises, foreign enterprises

have advantages in terms of scale, brand and manufacturing experience with high

quality radial tires and low cost based on large-scale production (economics of

scale). Specifically, Kumho Tires has expansion plant in Pacific with capacity of 6.3

million tires per year. In addition, Bridgestone, which is of the giants in the tire

industry, is also building tire factory in Dinh Vu Industrial Zone (Hai Phong) with

capacity 49,000 tires per day.

With the advantage about the large rubber materials supply in Vietnam and Korea

and Japan are two of the countries participating in the TPP Agreement, these two

factories will benefit greatly in import of raw materials for production and export of

finished products. Initially, the product of these two firms will serve for export

demands for the activities of these groups overseas, but if needs change, both

Kumho and Bridgestone are able to enter Vietnam market. In addition, domestic

enterprise cedes passenger vehicles tire segment for foreign brands in domestic

market. However, the truck tire segment is considered at low level of competition, so

domestic enterprise such as DRC and CSM can compete fairly about price and

quality in this segment. (Turn back)

Process of tax cutting for imported automobiles

According to the commitments in the Agreement on Trade in Goods of ASEAN

(ATIGA) formerly known as CEPT / AFTA, Vietnam have to reduce and remove tax

of import goods in the ASEAN region until 2018, including cars and motorcycles.

Imported automobiles duties have been maintained at a very high level of 100-150

percent in the past two decades to protect domestic automobile industry.

Implementation of commitments ATIGA, import tax has cut since 2012 to 70 percent

(2012), to 50 percent in 2014 and will cut completely to 0 percent in 2018.

That means Vietnam automobile industry has very little time to raise the

competitiveness under pressure of imported vehicles from ASEAN when imported

automobiles tax turns to 0 percent. It will be pressured on the automotive industry of

Vietnam. However, in term of automobile tire consumption, it would be positive

aspects about replacement tire segment (replacement) for cars and trucks. Once

taxes are reduced to 0 percent according to the schedule, the amount of cars

imported into Vietnam will increase and lead to increase of replacement tire

consumption; but it is the story the future after 2018.

The time between now and 2018 is an important period for the domestic tire industry

in order to refine and improve quality to compete fairly with imported tires. However,

under our view of point, domestic tire industry only can compete in the segment tires

for trucks (especially radials), agricultural vehicles, bicycles, motorcycles bicycles

while the line of car tires (less than 9 seats) would be very difficult to compete in

long-term consideration.

In fact, from observation in the market most of the cars (less than 9 seats) use

product line imported as Michelin, Bridgestone, Dunlop, Goodyear, and Continental,




instead of CSM and DRC; because this is a unique product segment with popular

sentiment foreign products as well as the level of used tires under the car, so both

conditions about quality and brand are considered to compete.

(Turn back)

Circular 06/ VBHN-BGTVT regulations on vehicle weight and size limits of road

As before, when Circular 06 of the Ministry of Transport unreleased, the majority

carriers were carrying excess weight, and this situation is the lasted long in the past.

However, the introduction of Circular 06 is entirely consistent with economic

conditions and the current infrastructure. With the aim of reorganizing executives in

matters properly load will cause difficulties for the majority of carriers operating

today, also indirectly affect business and manufactures in the country. In fact, that

not many large manufacturing firms in the country have their own vehicle team to

transport goods, so have to use outsourced. Therefore, since Circular 06 has

released, many carrying firms had to increase charges, led to increase cost for

domestic firms. The circular has impacts on the business that uses of transportation

services.

For transportation companies, Circular 06 will be a barrier for their existing operation

businesses. Now, in order to transport the same volume of goods, transportation

companies needs additional investment for truck team. Meanwhile, consumption of

light trucks, heavy trucks in domestic market will rise because a large amount of

truck, which is manufactured locally, only use domestic tires and tubes. Accordingly,

because the consumption of trucks increase, demand for new tires will also increase

correspondingly. Indeed, DRC and CSM have been outsourcing for large domestic

automobile manufacturers such as Truong Hai Auto, Vinaxuki, etc.

Look at positive sides, we can see Circular 06 helps to strictly regulate compliance

with transport regulations, also indirectly helps tires industry to has basic conditions

for growth in the future, it is a positive outlook for the domestically tire producers,

typically DRC and CSM. In addition, under Bureau of Vehicle Registration‘s

provisions, vehicles can be registered annually only when the parts are assembled

to meet the new standard registration certificate. These factors will eliminate cheap

and low quality tires that imports from China and other neighboring countries, and

helps to standardize regulations on tires and create local surplus growth for the

domestic tire market. (Turn back)

Development plan for Vietnam Automobiles Industry to 2020, vision to 2030

According to the plans of the Prime Minister for the automotive industry and further to

2020-2030, Government will concentrate in developing supporting industries that

provides raw materials for the manufacture of automobiles in domestics. In particular,

products will certainly have automobile tires. In addition, our country development plan

will focus and develop on trucks and vans which has more than 10 seats, so demand

for parts assembly for these 2 car segments will be significant, especially tires and

tubes.




Percentage of domestic production

Type 2020 2025 2030

Car has <= 9 seats 30-40 40-45 50-55

Car has >= 10 seats 35-45 50-60 70-75

Truck 30-40 45-55 65-70

Special Vehicles 25-35 40-45 55-60

Source: Decision 1211/QD-TTg

In order reach 60 percent by 2025 and 55 percent of parts supply for assembling

vehicles more than10 seats and trucks in domestic, growth for automotive tire products

for these two vehicle segments are very high. Thus, automobile tires and tubes in these

two segments have basis conditions for growing in these 2 segments; both tire

replacement (Replacement) and the new car tire assembly (OEM).

Volume of domestic manufacturing vehicles

Type 2020 2025 2030

Car has <= 9 seats 114,053 237,900 451,512

Car has >= 10 seats 14,154 29,102 51,288

Truck 97,952 197,017 356,115

Special Vehicles 1,336 2,356 3,846

Total 227,495 466,375 862,761

Assembling percentage compare to domestic consumption

Type 2020 2025 2030

Car has <= 9 seats 60 65 70

Car has >= 10 seats 90 92 92

Truck 78 78 80

Special Vehicles 15 18 20

Source: Decision/1211/QD-TTg

If this plan is implemented aggressively and basically followed the process, it can create

a good foundation for automobile assembly supporting industries including tires to have

better conditions for sustainable growth in the long run. This also an opportunity for

businesses in same sector such as DRC and CSM to maximize capacity of steel radial

tire factories, and soon raise capacity to 600,000 and 1 million tires per year for long-

term growth of the industry in general and these two firms in particular.

However, tires and tubes are only one of many parts that make up the value chain of

vehicle production, so in order to rise the long-term growth, we need to develop groups

of uniform product together to create growth for the whole industry. Meanwhile, auxiliary

products will basis conditions for growth. Otherwise, FDI enterprises will limit

investment, and they can use imported products to assemble vehicles instead of

investment in Vietnam. Then our ancillary products will hardly compete.

(Turn back)




Group of Companies in the value chain of rubber industries

Unlisted Natural Rubber Companies

DONG NAI RUBBER CORPORATION - DONARUCO

Established in 2009, and has the largest area in VRG with 43,822 hectares, divided

to 13 farms. In that, mining area has reached 22,240 hectares, and exploiting

production reaches 30,000-35,000 tons. In addition, the company also invested in

Cambodia about 6,293 hectares, and processing factory that has capacity of 12,000

tons per year expected operation in March 2015

Productivity: 1.69 tons/ha.

Total assets was about VND 4,224 billion, owner equity was VND 2,579 billion,

Authorized Capital was VND 1,707 billion.

Revenue in 2013 was VND 1,834 billion; EBT was VND 759 billion, equivalent to

41.4% EBT margin (down from 43.4% in 2012). In that, export accounted about 46

percent of total revenue. The Company is in the top 50 of domestic Natural Rubber

exporters; major export markets are Singapore, Taiwan, Malaysia, Germany, Italy.

Strengths: has largest rubber area in the industry, products are certified to ISO 9001:

2008; especially FSC created favourable conditions for the company's products to

export around the world.

Weaknesses: Many old rubber area leads to low productivity (about 1.69 tons /per

hectares). The company is investing in rubber replanting orchards with large unfinished

investment cost at VND 929 billion.

DAU TIENG RUBBER CORPORATION

Having second biggest rubber area in VRG) with 28,820 hectares distributed into 11 farms. In that, the exploiting area is 19,377 hectares

Authorized Capital is VND 1,283 billion. Productivity area in 2013 reached 30,800 hectares. Favourable products of Dau

Tieng are SVR CV50, SVR 3L 60. In addition, the company also produces other types of latex such as SVR L; SVR10, 20; SVR 5; centrifugal rubber latex. Products are processed through three factories. The Company is also ranked in the top 50 of domestic Natural Rubber exporters.

Revenue in 2013 reached VND 2,388 billion (down 20 percent compared to 2012). EBT in 2013 reached VND 663.9 billion, equivalent to EBT / sales ratio reached 27.8%.

Strengths:

- Having Large rubber area, diversity of product range, and quality of CV50,60 SVR are the best in the VRG and in the region.

- Factories and products have been certified ISO 9001: 2008; ISO 14001: 2004; FSC / FM-CoC; ISO / IEC 17025: 2005. Therefore, the export turnover of the company accounts for a large proportion, approximately 70 percent of total company revenue annually. The main export markets are Europe, Korea, Japan and Taiwan.

Weaknesses: many old rubber orchards lead to low productivity of about 1.59 tons per hectares.




PHU RIENG RUBBER CORPORATION

Established in 1978, the company locates in Binh Phuoc, now is the 3rd largest in the group with a rubber area of 18,850 hectares, allocated to 14 farms. Mining area reached 12,661 hectares. Mining production in 2013 reached 26,100 tons, and productivity is 2.02 tons per hectares. Main products are SVR 3L, 10; SVR CV60. The Company is in the top 50 of domestic Natural Rubber exporters. Export turnover accounts for 49 percent of the total revenue of the company. The main export markets are Europe, South Korea, Taiwan, China, etc.

LOC NINH RUBBER CORPORATION Established in 1978, located in Binh Phuoc province. The company currently has a

total area of 10,800 hectares, including mining area about 7,000 hectares, allocated to 07 farms. Mining production in 2013 reached 12,700 tons. Productivity is 2.02 tons per ha.

Favourable products are SVR 3L, SVR 5, and accounted for 39 percent of the processing yield.

There are also SVR 10, 20 accounted for 24 percent; latex accounted for 25 percent, the remaining is RSS.

Export turnover is about 11 percent of the total revenues; the main export markets including Europe, America, and Asia.

TAN BIEN RUBBER CORPORATION Established in 1985 and located in Tay Ninh province. Total rubber area reached

6,161 hectares. The company currently is planting 17,000 hectares in Cambodia through its division, Tan Bien - Kampongthom.

The company manufactures almost all kinds of rubber, about 70 percent is SVR and 30 percent is latex.

The Company is in the top 50 of domestic Natural Rubber exporters. Export sales accounted for 20% of total revenue. The main export markets are Singapore, Russia, the US, Taiwan, Malaysia, Indonesia, France.

BINH LONG RUBBER CORPORATION Established in 1976, located in Binh Phuoc province. The total rubber area reached

14,737 hectares, and divided to 8 farms. Mining area is about 10,958 hectares. Averaged productivity is about 2.01 tons hectares. The company has two processing factories.

In 2013, the company mined 21,354 tons of rubber. The Company is in the top 50 of domestic Natural Rubber exporters. Annual exports accounted for 35 percent of total revenue of the company. Major export markets are China, Taiwan, Korea, Europe, and South America.

Main product is CV50, SVR 60; SVR 10, 20 and latex. Products of the company are achieved the ISO 9001-2008 quality; ISO 17025-2005.

BA RIA RUBBER CORPORATION Founded in 1994, located in Ba Ria - Vung Tau. The total plantation area reached 8,546 hectares, including 3,250 hectares of mining.

Mining production in 2013 reached 6,000 tons. Currently the company is investing about 10,400-11,400 rubber hectares in Cambodia by its division, Ba Ria – Kampongthom.

Total assets reached VND 1,279 billion, owner equity reached VND 1,025 billion.




Revenues in 2013 reached VND 385.9 billion, EBT was VND 67.8 billion, equivalent to 17.6 percent of EBT margin. Business performance of the company is relatively low compared to other companies in the sector, only 1.6% of ROE.

Main products include: SVR CV50,60, SVR 3L, SVR 10. Main export markets are Singapore, Japan, Korea, Russia, Europe.

(Turn back)

Commercial Enterprises in the Natural Rubber Industrial Chain

Binh Phuoc General Import Export Joint Stock Company

Established in 1997, and published in 2006. The headquarters is located in Binh Phuoc province.

The Company specializes in the manufacture and export of rubber (SVR 10, 3L); tapioca starch, and also produces medical gloves, furniture.

The company owns 06 factories manufacturing tapioca starch (total capacity is about 15,000 tons/month) and 10 rubber-producing factories (total capacity is about 10,000 tons/month).

Annually, the company produces around 71,000 tons of rubber and 75,000 tons of tapioca starch.

Main export markets include China, Taiwan, Malaysia, the Philippines, India, Japan, South America, ... Repeatedly in the past 3 years, the company has always ranked No. 01 in the nation for export value of rubber products for than VND 5,000 billion.

VIET PHU THINH RUBBER JOINT STOCK COMPANY

Founded in 2003. Headquarters is located in Binh Phuoc province, and has factories with capacity about 18, 000 tons per year.

Key activities: Manufacture and export most rubber products such as SVR CV50,60; SVR 3L; SVR 10.20; SVR 5, RSS, ... For latex production, the company only does business commerce. Trading Chemicals: Formic Acid, Acetic ACIC, etc.

Viet Phu Thinh is a now ranked 2nd biggest rubber exporter in domestic today. Is a reputation company in production and export of natural rubber with large

quantities, and full category, also being as leader of manufacturer in Vietnam. In addition, Viet Phu Thinh has the ability to offer rubber products that are manufactured from Thailand, Malaysia, Indonesia, Cambodia with large volume up to 1,000 tons per shipment via import – export channel that the company has built to date.

GOLDEN LOTUS TRADING AND MANUFACTURING COMPANY LIMITED

Established in 2005, and the main business activity is the production, sales and exports of most natural rubber products such as SVR 10.20; SVR 3L; SVR CV 50.60, Latex, ...

Having enterprise value belongs top 3 largest rubber exporters in country today. Main markets include the USA, Europe, China, India, Southeast Asia,...The value

of exports reached more than VND 3,300 billion (USD 162 million).

(Turn back)




The “major players” in the industry

Sri-Trang Agro - Industry – Natural rubber

This is rubber manufacturing and processing company that has largest value chain in

the world today. Headquarters is located in Thailand, and has 23 factories including 21

factories in Thailand and 2 in Indonesia, beside 61 latex supply sources destinations

including in 40 points in Thailand and 21 points in Indonesia. In addition, the company

also owns more than 6,000 hectares of rubber in Thailand. These are large supple

source to ensure proactively latex input source.

Rubber production annually is up to 1.3 million tons (mainly rubber blocks (TSR), RSS

and latex). The company supplies accounts about 10% of the global rubber demand,

and accounts 21% of Thailand market's supply and about 15% of China’s total import

demand.

Sri-Trang is also currently producing gloves (ranked 4th largest in the world, and 1st in

Thailand). Output is of about 14 billion pieces per year. In addition, Sri-Trang is also the

biggest manufacturer of rubber tube (high pressure) in Thailand with an output about

42.5 million meters per year.

Total assets reached USD 1.37 billion, and ROE was USD 621 million.

Revenues in 2013 reached USD 2.86 billion. PAT margin was about 2 percent; ROE was 9.3 percent.

Alliance Rubber Net – Natural Rubber

It is a multinational company based in Singapore, and owned by Japan's Itochu Corporation, which specializes in import and export goods, and Thailand Southland Rubber Co.Ltd, which specializes in manufacturing and processing rubber. This alliance is considered as biggest production and distribution of rubber products in the world.

The annual output was 1 million tons of production and sales about 800,000 tons.

The company has 16 processing factories including twelve in Thailand, one in Malaysia, two in Indonesia and one in India. All factories is owned by Southland Rubber Co.Ltd. In addition, the Company also indirectly owns the factories of PT Aneka Bumi Pratama - a division of Itochu Corporation and 3 factories of Thaitech Rubber Corporation Ltd., which is a joint venture between Itochu Corporation (33%), Southland Rubber Co.Ltd (33.5%) and Sri-Trang (33.5%).

Astlett Rubber Inc – Distribution

Founded in 1885, headquarters is located in Canada. It is well known as top 10 distributors of natural rubber and synthetic rubber in the world today. Their rubber supplies are from Thailand, Indonesia, Malaysia and Vietnam. Synthetic rubber is mostly from the Russia and Kumho (Korea).

Lanxess – Synthetic Rubber

It is well know as the world's leading chemical producers, and world's biggest synthetic rubber production with more than 1.6 million tons per year. The company is located in Germany, and revenue in 2013 was about EUR 8.3 billion. In that, synthetic rubber and elastic products, plastics accounted for 54 to 57 percent. The biggest part of revenue was from the European market (47 percent) and Asia – Pacific Ocean (26 percent). The company's total assets reached EUR 6.8 billion; ROE was EUR 1.9 billion. EBITDA margin of synthetic rubber and plastics segments reached 15.8 percent in 2012 and 8.7 percent in 2013.




Sinopec – Synthetic rubber

Founded in 1998, and belonged to Chinese Chemical Corporation. Sinopec is an

enterprise, which specializes extraction and processing of petroleum products such as

gasoline, LPD, CNG, crude oil, synthetic rubber, other chemicals. Sinopec now is

leading Asia's synthetic rubber production with output in 2013 reached 1.33 million tons.

Total assets reached USD 233 billion. Revenue in 2013 reached USD 7.1 billion; including chemical sales accounted for 38 percent; petroleum products accounts for 28 percent, and the rest are other products.

FDI Tire manufacturing companies in Vietnam

Inoue Tires Vietnam

The company was founded in 1997, and has factory located in Vinh Phuc. The

shareholder structure includes: 76 percent of foreign and 24percents of the

Vietnam National Chemical Group (Vinachem). In 76 percent of foreign

shareholders including Asian Inoue Rubber Pte. (Japan); Inoue Rubber

(Thailand) Public Co., Ltd.; Inoue Rubber Singapore Pte.; Bridgestone

Corporation.

As far as we know, this is the only company in Vietnam was officially signed a

contract to transfer technology from INOUE Rubber Company of Japan. This

factory is the most advanced in Southeast Asia.

Currently the company has 50 dealers across the country, and their main

products: motorcycle tires, bicycle tires and stroller tires.

Inoue is seen as a direct competitor to 3 companies in the VRG (DRC, CSM,

SRC) in segment motorcycle tires including tires for new vehicle assembly (OEM)

and replacement tires.

With modern technology along with the brand from Japan, Inoue tires and tubes

are official supplier for manufacturers and famous local assemblers such as

Yamaha, Honda, SYM, etc. bicycle tires and trolley that serves exports.

Particularly in motorcycle tires product line, the company has introduced new tires

that is made from 100 percent synthetic rubber (butyl) with 4 times higher air tight

than normal tires, this is seen as a unique product of companies compared to

other local firms.

Yokohama Tyre Vietnam Limited Company

The Company was founded in 2006, with 100 percent of capital from Japanese.

Before the company was founded, it has a joint venture between Yokohama

(56%), Casumina (30%) and Mitsubishi (14%) born late in 1997. However, this

venture was dissolved in 2012 due to business ineffectiveness.

Main product: Motorcycle tires, light truck, forklift.

The company has two factories: the factory located in Binh Duong has capacity

of 800,000 tires per year; Factory located in Nhon Trach has capacity of 180 tons

per month.

The company's motorbike tires are supplied to popular manufacturers and

assemblers in Vietnam such as Honda, Yamaha, SYM, Suzuki, Piaggio.

Yokohama Tyre is seen as a direct competitor to the 3 companies in VRG (DRC,

CSM, SRC) in the tire segment of OEM motorcycle tires and tire replacement.




Kumho Tires Viet Nam

Company was founded in 1993 with 100 percent owned by Korea investor.

Main products are passenger car tires and light truck radial tires.

The factory is located in Binh Duong Province with a capacity of 3.15 million tires

per year, and is planning to raise up to 6.3 million tires per year. Most of

company‘s are used exports; approximately 945,000 tires are sold in the domestic

market. Kumho Tires are considered direct competitors to the DRC and

Casumina in passenger car tires and light truck tires (including OEM segment and

replacement tires). Passenger car tires mostly are belong to Kumho Tires. In truck

replacement tires segment, DRC still dominates with 13 percent market share,

Casumina has 8 percent, and Kumho has 5 percent.

Sailun Viet Nam

This is a company with 100 percent capital of the Group's capital Sailun – China.

In 2013, the company has operated semi-steel radial tire factory in Tay Ninh

The main products are: Steel Radial tires sold for passenger cars and trucks; and

OTR tires .

The Company’s factory has a total investment of USD 597 million, divided into 3

stages. The first stage was completed with an expected capacity about 7.8 million

PCR tires and 15,000 tons OTR per year. The second stage will begin in 2015 in

order to increasing capacity to 12 million PCR tires; while the final stage will be

conducted in 2017 to increase capacity up to 50,000 tons OTR. Thus by the time

of 2017, Sailun Vietnam factory will have a total capacity of 19.8 million PCR tires

and 65,000 tons OTR.

Products from the factory will be exported to Europe and the US (about 70

percent) , exported to the Middle East and Southeast Asia (about 25 percent) ,

used for domestic consumption in Vietnam (about 5 percent). In the coming

years, the proportion of domestic consumption will be increased gradually

depending on the level of economic development and Vietnam's automobile

market.

Chengshin Viet Nam Rubber

Company was founded in 2005.

Specialized in manufacturing tires for truck, passenger car, motorcycle.

Factory’s capacity in Nhon Trach, Dong Nai reaches 63,380 tires per day. Like

Kumho and Yokohama, Chengshin is also a direct competitiors to local

manufacturers in motorcycle tires, truck and passenger car segments.

(Turn back)




INTERPRETATION OF RECOMMENDATION

This assessment aims to determine the share’s value representing the corporate valuation, in order to find each share’s potential value and provide the useful information to investors during the 12-month investment. The rate of 18% is based on the rate of 12-month Vietnamese Government Bond adjusted by the risk premium of Vietnamese market.

Recommendation Interpretation

12 months

Buy Target price > Market price more than 18%

Add Target price > Market price between 7% and 18%

Neutral -7% < Target price - Market price < 7%

Reduce The Target price < Market price between -7% and -18%

Sell The Target price < Market price more than -18%

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Tire and Natural rubber Industry - FPTS

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