General information about Hoa Phat Group Joint Stock Company
Company overview
Hoa Phat is Vietnam's leading industrial manufacturing group, originally established in August 1992 as a trading company for construction machines and equipment Over the years, it has successfully diversified its operations to include the trading and production of furniture, showcasing its growth and adaptability in the manufacturing sector.
Founded in 1995, Hoa Phat has expanded its operations across various sectors, including Steel Pipe (1996), Construction Steel (2000), Refrigeration (2001), Real Estate (2001), Agriculture (2015), and Steel Sheet (2016) In 2007, the company transitioned to a Group model, with Hoa Phat Group Joint Stock Company serving as the Parent company overseeing its member companies.
Hoa Phat Group dominates Vietnam's steel industry, generating over 80% of its total revenue and profit from steel production As of March 2021, it holds significant market shares of 33.8% in construction steel and 30.19% in steel pipes, making it the largest manufacturer in the country.
Hoa Phat Group's core value is centered around the philosophy of Harmony for Joint Development With a vision to be a top-tier industrial manufacturer, particularly in the steel sector, Hoa Phat is committed to delivering high-quality products that enhance living conditions and foster customer trust.
Hoa Phat has consistently been acknowledged as a National Brand and ranks among the Top 50 largest and most effective enterprises in Vietnam It is also listed as one of the Top 10 largest private companies and is recognized as one of the Top 50 most valuable brands in the country.
Shares and shareholders information
Hoa Phat Group Joint Stock Company was listed on the Ho Chi Minh Stock Exchange (HOSE) in November 2007 The company's fiscal year runs from January 1 to December 31, and KPMG served as its independent auditor for the years 2018, 2019, and 2020.
As of September 20, 2021, HPG has a total of 3,313,282,659 shares, with the largest shareholders, Mr Long Tran and his wife, holding a combined stake of 32.5% Additionally, foreign ownership in HPG is recorded at 37%.
Tran Dinh Long Vu Thi Hien Deutsche Bank AG Dragon Capital Other Ownership
Figure 1.1 Hoa Phat Group’s shareholder structure 1.3 Corporate structure
Mr Tran Dinh Long serves as the chairman of the group, guiding the business strategy for each subsidiary His leadership is crucial to Hoa Phat, as he is responsible for making all significant decisions for the company.
Figure 1.2 Hoa Phat Group’s corporate structure download by : skknchat@gmail.com
Products and Services
Hoa Phat Group operates through five key segments: iron and steel, steel pipes and galvanized steel, other industrial production, agriculture, and real estate The company specializes in manufacturing various forms of steel and cast iron, including sheets, bars, rolls, and pipes, alongside steel-making materials and machinery In its industrial segment, Hoa Phat Group also produces and trades construction and mining equipment, as well as household appliances and furniture The agriculture segment focuses on pig and poultry farming, meat processing, and the production of animal feeds, fertilizers, and agricultural supplies Lastly, the real estate segment is dedicated to the development and construction of residential and office buildings for lease and sale.
Market analysis
The market in general
Steel is an essential global industry, with its products being widely traded commodities Recently, a slowdown in global economic growth has adversely affected steel demand across various consuming industries, creating particularly tough market conditions for steel manufacturers.
In 2018, the steel industry experienced significant growth driven by increased global demand and production levels, leading to a rise in the global capacity utilization rate compared to 2017 This surge in steel demand was fueled by favorable economic conditions that positively impacted both developed and developing countries alike.
In 2019, the steel industry faced significant challenges, with steel production declining across most regions, except for Asia and the Middle East This downturn was primarily driven by a decrease in global steel demand, largely due to a slump in Europe's manufacturing sector Furthermore, the industrial decline is not limited to Europe; it has become a worldwide issue, exacerbated by escalating trade tensions and uncertainty, which continue to hinder business investment.
In 2020, the global steel industry faced significant challenges due to the COVID-19 pandemic, leading to a sharp decline in steel production during the first half of the year However, a recovery began in the latter half, primarily driven by China's impressive growth of 9.1% The World Steel Association reported that China's share of global crude steel production rose from 53.3% in 2019 to 56.7% in 2020, while steel usage in China increased even as it fell elsewhere This highlights the critical role of China and its economy in shaping the demand-supply dynamics of the steel industry.
In a post-pandemic world, structural changes are reshaping steel demand, presenting significant opportunities for steel companies through advancements in digitization, automation, and infrastructure initiatives As urban centers reorganize and energy transformations occur, steel production is on the rise; however, prices remain stable or increase, indicating that demand is outpacing production globally.
Vietnam's steel industry has experienced significant growth in recent years, enhancing its influence in both the regional and global steel markets The production and consumption trends of steel in Vietnam over the past three years illustrate this upward trajectory.
Vietnam Steel Production & Consumption in the period 2018 - 2020
M ill io n to nn es
Figure 2.1 Vietnam steel production and use in the period 2018 – 2020 download by : skknchat@gmail.com
Between 2018 and 2019, Vietnam's steel industry experienced significant growth despite intense competition in both local and global markets The surge in steel exports prompted several importing nations to implement trade remedies to safeguard their domestic industries Additionally, Vietnam encountered challenges such as a mismatch between domestic demand and production capacity, a downturn in the real estate sector, and the impact of international trade tensions.
In 2020, despite the global economic downturn caused by the COVID-19 pandemic, Vietnam's steel industry thrived, emerging as a leader in Southeast Asia and ranking 14th among the world's top 50 crude steel producers The Vietnam Steel Association reported that the country also positioned itself as the 6th largest steel importer globally The recovery of Vietnam's steel market is significantly influenced by the Chinese market, the largest steel producer and consumer China's efforts to cut steel output for carbon emission reductions have created an opportunity for Vietnam to boost its steel production for export, resulting in substantial profits.
Vietnam's domestic steel prices have remained high yet stable, primarily due to the market's robust growth and the dominance of large enterprises that control a significant share.
Effective vaccination campaigns and public investment policies worldwide have significantly boosted global steel demand, particularly in the US, China, and the EU, where large stimulus packages have prompted steel manufacturers to optimize their production capacity The World Steel Association projects continued growth in steel demand; however, this growth is expected to moderate alongside a slowing global economy.
Vietnam's steel demand is expected to experience stable growth over the next three years, driven by the rapidly growing economy and government investments in infrastructure and housing The increasing urban population will further boost the demand for urban housing Despite challenges such as rising trade restrictions, electricity costs, and a slowing real estate market, the Vietnamese steel industry is poised for growth due to its currently low per capita steel consumption and consistent foreign direct investment (FDI) inflows.
The industry
The EVFTA Agreement has significantly boosted the export of various product categories to the EU market, with iron being a key focus As per the commitments outlined in the EVFTA, most EU import tax rates on goods from Vietnam have been reduced to zero percent.
The Ministry of Industry and Trade aims to establish a Vietnamese-brand steel manufacturer that matches regional and global standards It encourages new investments in iron and steel production complexes located in coastal areas with deepwater ports to ensure a steady supply of hot-rolled coil (HRC) steel for domestic consumption.
Vietnam is poised to attract significant foreign direct investment (FDI) due to its successful pandemic management and competitive labor costs The influx of new FDI enterprises will drive the demand for factories and industrial zones, consequently increasing the need for construction steel and creating valuable sales opportunities for the steel industry.
As Vietnam's export turnover continues to rise, its export firms face a growing risk of investigations and trade remedies Notably, Vietnamese steel products have frequently been the focus of trade remedy lawsuits in various export markets in recent years.
In response to the economic challenges posed by the COVID-19 pandemic, governments worldwide have implemented substantial economic stimulus packages totaling trillions of dollars, leading to increased raw material prices This surge in demand has resulted in a heightened supply within the global economy, while steel production largely relies on imported raw materials.
To respond to changing market requirements, many steel companies also have to accelerate their innovation and investment in technology and quality management systems to improve productivity and quality.
Consolidated financial statements
Balance sheet
BALANCE SHEET Year 2018 Year 2019 Year 2020
II Short-term financial investments 3,724,563 1,374,340 8,126,993
4 Provision for short-term doubtful
5 Assets awaiting resolution 1,236 1,337 1,422 download by : skknchat@gmail.com
2 Provision for decline in value
2 Value added tax to be reclaimed 2,357,339 2,506,178 2,645,433
3 Taxes and other receivables from
IV Long-term assets in progress 6,247,214 4,335,907 6,289,235
1 Long-term production in progress 918,471 943,713 1,257,341
VI Other long-term assets 6,247,214 4,335,907 6,289,235
VII Goodwill 43,110 41,613 40,116 download by : skknchat@gmail.com
1 Short-term trade accounts payable 10,915,753 10,002,432 23,727,790
3 Taxes and other payables to state
9 Provision for short-term liabilities 5,847 5,431 4,850
7 Provision for long-term liabilities 26,001 38,838 53,726
2 Share premium 3,211,560 3,211,560 3,211,560 download by : skknchat@gmail.com
Income statement
INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2020 INCOME STATEMENT Year 2018 Year 2019 Year 2020
3 Net revenue from selling goods
5 Gross profit from sales and service 11,670.832 11,185,372 18,904,050 provision
8 Profit/loss in joint ventures and
11 Net profit from business activities 10,072,089 9,030.980 15,292,304
Part of profit/loss from joint venture company
15 Total accounting profit before tax 10,071,073 9,096.662 15,356,967
16 Current CIT expenses 1,506,320 1,603,308 1,784,568 download by : skknchat@gmail.com
18 Profit after corporate income tax Minority shareholder benefits
Profit after tax of shareholders of the parent company
19 Profit after tax of shareholders of the parent company
Statement of Cash flow
STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2020
CASH FLOW Year 2018 Year 2019 Year 2020
Depreciation of fixed assets and properties investment
Foreign exchange (gain)/loss from revaluation of monetary items denominated in foreign currencies
Loss/(profit) from investment activities
3 Operating profit before changes in working capital (Increase)/decrease in receivables
Increase/(decrease) in payables (other than interest, corporate income tax)
(Increase)/decrease in prepaid expenses
Other payments for operating activities
-611,768 -867,276 -2,027,572 - 1,416,438 -1,552,893 -1,716,803 -304,001 -352,058 -328,363 download by : skknchat@gmail.com
1 Payment for fixed assets, constructions and other long-term assets
2 Receipts from disposal of fixed assets and other long-term assets
3 Loans, purchases of other entities' debt instruments
4 Receipts from loan repayments, sale of other entities' debt instruments
5 Payments for investment in other entities
6 Collections on investment in other entities
7 Dividends, interest and profit received
1 Receipts from equity issue and owner's capital contribution
4 Dividends paid, profits distributed to owners
FINANCING ACTIVITIES Net cash flows during the period
Cash and cash equivalents at beginning of the period
Exchange difference due to re- valuation of ending balances
Cash and cash equivalents at end of the period
Financial Analysis
Trend Analysis
2,515,617 4,544,900 13,696,099 download by : skknchat@gmail.com
4.1.1.1 Gross Profit Margin, Operating Profit Margin & Net Profit Margin
All the three ratios Gross Profit Margin, Operating Profit Margin, and Net Profit Margin in the period 2018 - 2019, have a down-up trend Hoa Phat's sales revenue in
In 2019, Hoa Phat's production reached 63,658,193, marking a 12.3% increase from 2018 However, profits were negatively impacted due to a significant rise in production costs driven by two key factors: a sharp increase in iron ore prices, which averaged 100 USD/ton in Q2 2019—nearly 30 USD/ton higher than the same period in 2018—resulting from supply disruptions in Brazil and Australia, including the Brumadinho dam collapse and the Veronica cyclone Additionally, the commencement of Phase 1 of the Hoa Phat Dung Quat Complex in Q4 2019 led to the incorporation of depreciation expenses into production costs Consequently, despite higher sales, the company's profitability ratios declined sharply due to the increased input material costs and production expenses.
Figure 4.1 Hoa Phat’s Profitability Ratios, 2018 – 2020 download by : skknchat@gmail.com
By 2020, Hoa Phat Group successfully stabilized its operations, achieving profitability ratios similar to those of 2018 and significantly surpassing the fluctuating figures from 2019 Despite high iron ore prices, the company's sales volume and market prices for steel products surged, resulting in increased sales revenue and profits Hoa Phat's total steel product consumption reached an impressive 6.3 million tons in 2020, representing a 69.30% year-over-year growth To address rising raw material costs, the company began implementing price increases in September 2020, culminating in five price hikes for bar steel in December, raising prices by 2,500 VND/kg This strategic adjustment helped Hoa Phat mitigate the impact of increased production costs due to ore price hikes.
The recovery of Hoa Phat's profitability ratios can be largely attributed to the Hoa Phat Dung Quat Complex Since the operational launch of blast furnaces No 1 and 2 at the complex in late 2019, HPG has consistently enhanced its production capabilities.
In August 2020, the completion of No 3 in phase 2 of the KLH project boosted the group's raw steel capacity to 8 million tons annually This output increase, coupled with the rising market prices for Hot Rolled Coil (HRC) from the Hoa Phat Dung Quat Complex, which reached approximately 700-770 USD per ton, contributed to a gradual improvement in gross profit margins throughout 2020.
4.1.1.2 Return on Asset & Return on Equity
The Dupont model indicates that both Return on Assets (ROA) and Return on Equity (ROE) are affected by Net Profit Margin, which exhibited a downward trend from 2018 to 2019, leading to similar movements in ROA and ROE A significant factor contributing to the decline in ROA was the Total Asset Turnover ratio, as Hoa Phat's total assets surged from 78,223,008 in 2018 to 101,776,030 in 2019, an increase of over 23.5 trillion This rise was primarily due to the commencement of operations at phase 1 of the Hoa Phat Dung Quat Complex in Q4 2019, which boosted the company's fixed assets Additionally, to finance the second phase of the Dung Quat Complex, Hoa Phat sought to raise capital through loans and equity, further inflating its total assets in 2019 Consequently, the combination of increased fixed assets and a declining Net Profit Margin resulted in a notable decrease in Hoa Phat's ROA.
Figure 4.2 Hoa Ph at’s ROA & ROE, 2018 – 2020
A decrease in Return on Assets (ROA) typically leads to a decrease in Return on Equity (ROE); however, significant growth in total assets can enhance ROE, even if it doesn't fully counterbalance the decline in ROA In 2020, Hoa Phat experienced a sharp increase in total assets due to the operational launch of Phase 2 of the Dung Quat Complex Despite the negative impact on ROA, the company's ratio improved significantly from 8.36% to 11.53% due to increased net revenue and Net Profit Margin Consequently, Hoa Phat's ROE stabilized at 25.14% in 2020, reflecting an 8.11% increase from 2019, similar to the levels seen in 2018 Furthermore, the consistent ratio of equity to total assets, at 46.95% in 2019 and 45.03% in 2020, facilitated Hoa Phat's swift recovery post-2019.
4.1.2 Liquidity Ratios download by : skknchat@gmail.com
Figure 4.3 Ho a Phat’s Liquidity Ratios, 2018 – 2020
Regarding the current ratio, current assets are enough to cover the short-term liabilities of HPG However, this ratio was at a low level and tended to decrease in
In 2020, Hoa Phat's current ratio decreased from 1.12 in 2018 to 1.09, yet it remained above 1, indicating a strong ability to meet short-term liabilities and convert assets into cash Additionally, HPG significantly increased its financial investments and cash equivalents to nearly 16 trillion VND, representing over 38% of its current assets, which ensured robust liquidity.
The quick ratio declined from 0.49 in 2018 to 0.41 in 2019, primarily due to limited growth in current assets as the company invested heavily in completing the Dung Quat project Additionally, inventory rose by 37.5% to meet operational demands of the Dung Quat plant, particularly with the upcoming activation of the large-capacity blast furnaces 1 and 2.
In 2019, the company operated continuously 24/7, facing an increase in current liabilities rather than a decrease However, by 2020, there was a notable improvement, with the ratio rising to 43.9% following the operational launch of the Dung Quat iron and steel complex During this period, inventory represented only 46% of current assets, a significant reduction from over 63% in 2019 This change was attributed to Hoa Phat's increase in current assets, as the company took on more short-term debt to fund financial investments.
4.1.3.1 Debt to total assets ratio and Debt to equity ratio
From 2018 to 2020, Hoa Phat's debt ratios, including the debt to total assets and debt to total equity ratios, showed a significant upward trend due to increased borrowing for the construction of the Dung Quat iron and steel complex This strategy is typical for companies aiming to expand their production capacity Furthermore, the company bolstered its equity by 18% in 2019 and 24% in 2020, enhancing its capital structure and maintaining a healthy debt to equity ratio below 1, indicating that the majority of the company’s assets were financed through equity rather than debt.
In 2020, despite all four Dung Quat blast furnaces being operational by year-end, the company's debt surged by 47.6% compared to 2019, leading to a significant rise in the debt-to-equity ratio This increase was primarily driven by two factors: the need for investment capital for various projects and the company's treasury operations, which involved investing in short-term capital to enhance profitability By leveraging its strong creditworthiness, the company was able to borrow at low-interest rates, further contributing to its financial strategy.
In 2020, the company utilized its debt to invest in financial institutions offering higher interest rates, leading to short-term debts more than double those of 2019 This surge in current debts resulted in an increase in cash and cash equivalents, as well as short-term financial investments Consequently, the net debt to equity ratio for 2020 stood at 0.54, indicating that only 54% of the company's equity was financed through debt.
Figure 4.5 Hoa Phat’s Times Interest Earned, 2018 – 2020
From 2018 to 2020, the times interest earned ratio for Hoa Phat decreased primarily due to a significant rise in interest expenses, particularly in 2019 with the operational launch of Furnace No 1 and No 2, followed by Furnace No 3 and No 4 in 2020 As the Dung Quat iron and steel complex commenced full commercial operations, interest expenses transitioned from being capitalized to being recognized as financial expenses in the Income Statement Despite this, Hoa Phat is not expected to encounter major challenges in meeting its interest obligations, as both profit and revenue have shown substantial growth compared to previous years Looking ahead, the profitability of Hoa Phat's core business is poised for continued expansion, driven by the extensive capacity of the Dung Quat iron and steel complex.
4.1.4.1 Inventory Turnover download by : skknchat@gmail.com
Figure 4.6 Hoa Phat ’s Inventory Turnover, 2018 – 2020
From 2018 to 2019, inventory turnover ratios experienced a significant decline, with inventory representing 56% of total goods on December 31, 2018, and rising to 64% by December 31, 2019 However, by December 31, 2020, this percentage dropped to 46%, indicating a decrease in inventory management efficiency during 2018-2019, followed by a recovery in the business's sales activities in 2020.
The significant decrease in the inventory turnover ratio in the period of 2018-
In 2019, a substantial 60.01% increase in inventory was observed, while sales and service revenue rose by 44.6%, largely due to the high volume of raw materials needed for the expanded capacity at Dung Quat Complex during its second phase Consequently, inventory turnover saw a notable decline compared to 2018, aligning with the average ratio over the past four years However, this ratio began to stabilize in 2020 following the completion of the first phase of the Dung Quat Complex project, leading to a significant reduction in the average inventory proportion.
Development strategy
Well–managed inventory and keeping track of the price of raw material
Table 5.1 The amount of inventory of steel industry by the end of 2020
Material Inventory by the end of 2020
In 2020, the COVID-19 pandemic significantly disrupted economic activities, leading to a decline in steel consumption and increased inventory levels A representative from Hoa Phat attributed this situation to the complex progression of the epidemic in Ho Chi Minh City and the southern regions of Vietnam.
With the onset of the rainy season across 28 provinces, demand has been impacted To meet operational requirements, blast furnaces must run continuously, 24/7, leading to a significant increase in Hoa Phat's inventory compared to other large enterprises.
Currently, the large amount of inventory will be a two-edged knife to Hoa Phat.
As steel prices rise, businesses stand to benefit from increased profits, while declining prices may necessitate inventory restructuring To enhance inventory management, Hoa Phat is set to implement a new technological system called BRAVO Additionally, prioritizing steel exports and developing strategies to protect steel from natural elements will be key focuses for Hoa Phat in 2021.
Be cautious with the serious change of the Covid-19 pandemic in 2021
The COVID-19 pandemic led to a decline in domestic steel consumption due to decreased construction demand and preparations for the rainy season However, Hoa Phat Steel Products Joint Stock Company experienced a significant increase in the export volume of its galvanized sheets and steel pipes, primarily driven by a resurgence in demand from the US and Europe as they recover from the pandemic.
Despite the ongoing spread of the Covid-19 pandemic in Vietnam, Hoa Phat must strategically plan for the future to mitigate potential risks In the short term, the company should maintain a balanced production level to satisfy local demand while navigating the challenges posed by the pandemic If the situation persists longer than anticipated, exploring investments in sectors like medical equipment and vaccines could provide new profit avenues Additionally, expanding export efforts to countries with effective pandemic control, such as the United States, Japan, and China, will be crucial for sustaining growth during these uncertain times.
During periods of slow manufacturing, it is an opportune time to enhance employee training and elevate their academic and skill levels Recognizing human resources as the cornerstone of success, Hoa Phat Group prioritizes the development of its workforce through ongoing training initiatives The subsidiaries actively collaborate with universities, colleges, and vocational schools in mechanical engineering to attract skilled workers that meet business development needs The Group implements balanced development policies focused on both quality and quantity Additionally, Hoa Phat has established a rating system to standardize its human resource management, which is systematically applied to salary calculations and payments, thereby motivating employees.
Investing digital technology in business administration
Over the past decade, Hoa Phat Group has implemented comprehensive management solutions, particularly utilizing the upgraded Bravo software, which serves as a master administration tool tailored to the Group's needs This software is now employed by nearly all affiliated companies, facilitating seamless monitoring and management of production, business, and accounting activities across the organization As a result, Boards of Directors, Chief Accountants, and Heads of Sales Departments can effortlessly generate reports and reviews as requested by the Group’s leadership.
This solution also can optimize the work efficiency of employees, provide exact data, and resolve financial problems especially the management of cash flow, production, inventory, and so on.
Hoa Phat Dung Quat Steel Integrated Complex has invested over 100 billion dongs in two essential facilities: one for iron and steel quality analysis and the other for mechanical and physical testing The quality analysis area is designed to assess the quality of fluid cast iron, slag from blast furnaces, and steel throughout various production stages, including desulfurization, conversion, refining, degassing, and casting Notably, this facility features one of the most advanced automatic sampling systems globally Despite being located 1.5 to 1.7 km from the factories, samples can be transported to the analysis area in just 30 to 70 seconds via modern sample conduits powered by compressed air An ABB robot from Switzerland then receives the samples, processes them through analyzers, and efficiently transmits the results.
Hoa Phat employs an automated system to deliver results to senders, with transmission times of 2 minutes and 30 seconds for steel samples, 5 minutes for cast iron samples, and 7 to 10 minutes for slag samples Utilizing robotic analysis, Hoa Phat can efficiently diversify its steel grades, ensuring the availability of high-quality products in the market.