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CFA Institute Research Challenge hosted in Vietnam Foreign Trade University, HCMC

Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge 2015 Date: 07 November 2014 Ho Chi Minh City Stock Exchange Market Profile 20 Week Price Range 47,941 – 117,000 (VND/share) Average Daily 58,899 Volume (VND) Share Outstanding (shares) Market Capitalization (VND million) Institutional Holdings Book Value per Share (VND) Debt to Total Capital Return on Equity P/E P/B

106,625,661

Retailing Industry

Mobile World Investment Corporation

Ticker: MWG Price: VND 103,000

Recommendation: BUY (16.93% Upside) Target price: VND 120,434

MWG: Taking the Lead We issue a BUY recommendation on Mobile World Investment Corporation (MWG) with a target price of VND 120,434 per share. This implies a 16.93% holding period return, exclusive of dividend payment. MWG is currently a leading retailer of mobile phones in Vietnam with a network of up to 306 stores nationwide and also possesses a highly recognized brand name.

10,982,443

Healthy financial position: MWG is expected to enjoy ample cash, low leverage and highs margin together robust sales growth. MWG still has good performance despite increasing outlays for store expansion plan and tough competition. In particular, debtto-equity ratio equals to 0.18 in 2014 and 0.16 in 2018. CFO/CAPEX of 3 times in 2014E and of 4.6 times in 2018E.

72.65% 12,150 14.55% 41.01% 25.92 8.48

Source: Bloomberg, team estimates

Shareholder Structure CDH Bee Electric Limited

15.84%

Mekong Enterprise Fund II

14.32%

Tri Tam Co., Ltd Retailing World Investment Consulting Co., Ltd Board of Directors

10.87%

Others

38.29%

14.49% 6.19%

Source: Bloomberg, MWG

Share Price Movement

Main revenue growth drivers: (1) Aggressive store expansion plans: in 2014-2018, Mobile World stores increase at 19.3% CAGR, reaching 525 stores in 2018, raising market share to 40% and dominating all 63 provinces in Vietnam. Consumer Electronic stores increase at 38.7% CAGR, reaching 63 stores in 2018, seizing 10% market share and spreading in all provinces from Khanh Hoa to Mekong River Delta. (2) Stable annual revenue per shop growth at 5% for new stores and 3% for old stores. (3) Complete ERP system and modified business model of 5 fundamental product lines for Consumer Electronic stores chain. Healthy financial position: MWG is expected to enjoy ample cash, low leverage together with robust sales growth. MWG still has good performance despite increasing outlays for store expansion and tough competition. In particular, debt-to-equity ratio equals to 0.18 in 2014 and 0.16 in 2018. CFO/CAPEX increases from 3 times in 2014 to 4.6 times in 2018.

140 640

120

620

100

600

80 60

580

40 560

Investment risks: MWG has to confront a wide range of risks including market risks, operational risks and valuation risks. Unfavorable market conditions accompanied with new foreign rivals could affect MWG’s revenue performance. Risk of obsolete inventories requires MWG to continuously upgrade its IT system and work closely with suppliers. Valuation risk is insignificant to our main target price.

20

540 14-Jul

0 14-Aug

14-Sep

^VN-Index

14-Oct MWG

Source: Bloomberg

2012A

2013A

2014F

2015F

2016F

2017F

2018F

Net Revenue

7,374.97

9,498.85

15,102.85

20,709.58

26,191.17

30,724.18

34,944.48

COGS

6,180.43

8,091.48

12,757.39

17,486.84

22,105.47

25,939.15

29,511.79

Gross Profit

1,194.54

1,407.37

2,345.46

3,222.74

4,085.70

4,785.02

5,432.69

Net Income

126.18

258.47

613.55

874.66

1,139.85

1,356.21

1,542.67

EPS

-

24,294

5,754

8,203

10,690

12,719

14,468

BVPS

43,407

73,041

13,368

17,470

21,746

26,834

32,621

ROE

32.94%

40.70%

55.13%

53.20%

54.52%

52.37%

48.67%

ROA

7.99%

13.36%

21.69%

21.98%

22.78%

22.58%

21.97%

Source: Company data, team estimates

1

Figure 1. MWG business model Mobile World Investment Corporation Mobile World Corporation

Overview

Electronic World Trade Corporation

Source: Company data

10.99%

14.59%

24.15%

80% 60% 89.01%

40%

85.41%

75.85%

Mobile World Investment Corporation was established in March 2004 named Mobile World Co. Ltd. Initially, its core business included retailing and providing reparation services for mobile phones and digital equipment. In 2007, it transferred into a joint stock company and welcomed its first investor, Mekong Enterprise Fund II (MEF II). The company was listed on HCM Stock Exchange in July 2014 with the sticker MWG.

Business Model

Figure 2. Revenue structure 100%

Business Description

20%

As of February 2014, MWG held 99.35% equity share in Mobile World Joint Stock Company and 99.95% equity share in Electronic World Trade Corporation. The company is operating under two retail chain formats: “thegioididong.com” or so-called Mobile World (MW) and “dienmay.com” or so-called Consumer Electronic (CE). While the MW chain was launched in 2004, the CE chain has just newly been introduced at the end of 2010. Mobile World Chain - thegioididong.com

0% 2011

2012

MW chain

2013 CE chain

Source: Company data Figure 3. Vietnam mobile retail market share

25%

50% 8%

17% Mobile World Chain FPT Retailing Other modern mobile retail chain Mom and pop shop Source: GFK

12% 10% 5% 6% 9%

Mobile handset Tablet Electronics

58%

Laptop Accessories Other

Source: Company data

Table 1. Store formats of the Mobile World chain

Shop C

The MW chain took full advantage of a pioneer in modern channel The MW chain, launched in 2004, has established strong brand recognition compared to competitors. Mobile phone, laptop and tablet are products considerably purchased in the MW chain, accounting for 59%, 20% and 6% respectively of MWG’s total revenue. As of May 2014, the MW chain represents around 28% market-share in smart-phones and 30% market-share in tablets sold legally in Vietnam. There are three main formats of Mobile World store The MW chain has successfully expanded its store network over 34-fold since the time of MEF II's investment in 2007, when the company had only 7 store locations, all in Ho Chi Minh City. Stores of MW chain are divided into 3 main formats: shop A, shop B and shop C. Shop A (Flagship store) is characterized by great area size, impressive revenue and favorable location. Despite considerable revenue generated from flagship stores per month, the percentage of flagship stores contributes to MW’s revenue is insignificant because of small number of stores. Obviously, most of MW’s revenue comes from shop B since most of MW stores are standard ones located throughout Vietnam. Shop C is a newly launched format, and still in pilot period. Consumer Electronic Chain - dienmay.com

Figure 4. MWG’s revenue by segments in 2013

Flagship store Standard store

The Mobile World chain is the leader in mobile retail market in Vietnam The MW chain specializes in the retail of digital mobile devices including mobile phone, tablet, laptop and accessories. It is the leader in Vietnam’s mobile retail market in terms of store coverage and market share. As of October 2014, MW is the only retailing system in Vietnam covering all 63 provinces with more than 290 stores. The MW chain also leads over competitors with its market share of 25%.

Location

Revenue/store (billion/month)

Large cities

8 - 14.5

Nationwide

2.5 - 4.5

Rural or provincial areas

0.2 - 0.5

Source: Company data

The initial launch of CE chain was not a success The CE chain specializes in the retail of major and small household appliances and all digital products sold in the MW chain. The CE chain was launched at the end of 2010 and expanded extensively to reach 12 stores in 2012. The CE chain seemed to have no clear competitive advantage compared to current dominants like Nguyen Kim or Cho Lon. At that time, each CE store stocked many products manufactured by various brand. This made CE stores looked like a discount center rather than a modern CE retail chain. Reformation of business model results in potential successes The CE chain stopped expanding for almost two years as it needed to restructure its business model. It has dramatically reduced product ranges; only stock the most popular brands in each product range. Since January 2014, management teams of the 2 retail chain the CE chain were merged. The MW and CE chain now share the same ERP system.

Company Strategies Maximize coverage in urban areas with mass store expansion At present, MWG has finished building its ERP system before its competitors. MWG determines that this is the prime time for their aggressive store expansion plan to increase its presence and seize market share. MWG intends to increase mobile market share to 30-40% and lead the consumer electronics market with a market share of 10-15% in the next 5 years. For MW shops, MWG intends to open more flagship stores with revenue over VND 10bn per month in key cities, especially Ho Chi Minh City and Ha Noi. Shop B (standard shops) will be opened approximately 1 shop every 2 days until December 25, 2014 until reaching saturation in urban areas. Meanwhile CE stores will open in suburban areas and tier 2 cities to avoid direct competition with large players as Nguyen Kim and Dien may Cho Lon. Enhance online retailing MWG determines e-commerce is a profitable playground. Online shopping is a modern trend that comes with urbanization. Thus, MWG is improving its online service by several ways as increasing the speed of its website to be as fast as an online newspaper, enhancing the delivery, payment and service system. MWG intends to raise online sales to 15% of total revenue in the next 5 years. Penetrate the rural market Accounting for 70% of the population, rural areas only consume 27% of the national retail sales in 2013. Seeing this potential, MWG intends to expand its stores in rural areas. MWG is piloting the Mobile World

2

Figure 5. MWG shareholder structure

17%

11%

16% 17% 14% 14% 11% Co-founders CDH MEF II Tri Tam Co.Ltd Retailing World Investment Consulting Other corporations Other individuals Source: Company data, team estimates Figure 6. MWG’s number of shops

2011 2012 2013 2014E 2015F 2016F 2017F 2018F

MW Flagship stores 0 0 1 4 7 10 13 13

MW Standard shops 211 232 216 321 401 461 508 513

Shop C specially designed for this market. Around 1000 shop Cs are intended to open to seize 50% of the rural market share. For Consumer Electronics stores, rural market will be its important playground as MWG realizes the lack of modern consumer electronics retailers in this market. High quality products and good service will be the key strength for MWG to take the market share from mom-and-pop shops.

Shareholder Structure Successful expansion thanks to foreign funds. MWG continues to be a lucrative investment for foreign investors Four major shareholders include two foreign funds and two domestic companies. After two partial divestments, MEF II’s equity share has decreased from 32.5% to 14.32%. The two divestments have brought MEF II lucrative turnovers which were respectively 11x and 20x higher than its initial investment. CDH is holding 15.84% of MWG’s equity. This fund has invested successfully in many Asian enterprises specializing in consumer electronic retailing and telecommunication. Most of MWG’s equity shares are manipulated by co-founders Two of the co-founders (Mr. Tai and Mr. Quan) are representatives of the other 2 domestic companies holding 25.36% equity share. In addition, MWG’s co-founders are holding 10.64% of outstanding shares without intentions of divestment. As showed in Appendix 8, more than 44% of MWG’s equity is holding by co-founders and their stakeholders (their own company or family members). This implies that internal ownership of MWG would be stable in the future.

Corporate Management CE Stores 4 12 12 17 27 37 49 63

Source: Company data, team estimates

Figure 7. Vietnam macroeconomic forecasts

USD mn 20%

8,000

15%

6,000

10%

4,000

5%

2,000

0%

0

Pro-active and open-minded co-founders made a successful launch of MWG MEF II highly appreciated pro-activeness and visionary leadership of 5 co-founders. Potential and excellent management team was a strong motivation behind MEF II’s investment. In 2012, one of the cofounders, Mr. Huan, resigned as a director of the CE chain. Despite rumors of internal conflicts, the other co-founders continued to improve MWG’s operating efficiency. They have greatly established strong corporate culture of integrity and responsibility within its corporation. Known as the founder and Chairman of MWG, Mr. Tai became CEO since Mr. Quan resigned his directorship in May 2014. Although Mr. Quan no longer operates MWG directly, he still manipulates all MWG’s activities. Also, he continues to dedicate valuable contribution in shaping MWG’s strategy when becoming an independent member of the Board. MWG’s growth strategy has been greatly supported by global expertise and network The 2 representatives from 2 foreign funds have been associated with MWG from the early days of cooperation in 2007. Thanks to their experiences and deep knowledge in global retailer, they always assist and add great values to the company. In addition, MWG’s Board also pleased to have Mr. Robert Willett, the former CEO of BestBuy International. He has provided strategic expertise and connected MWG’s management team with leading international retailers of electronic devices. This helped MWG to learn industry best practices and apply those to its business. Mr. Robert Willett also played a key role in inspiring MWG’s customer-centric culture MWG.

Distribution Channel Online store MWG is the leading retailer in Vietnam in boosting online shopping. It is also the only retailer that develops 2 versions of online shops: for computers and for smartphones. From 2011-2013, online sales accounts for around 4.7% total revenue, growing with CAGR of 8.5. Comprehensive assistance for online shoppers is provided, such as prompt delivery in 30 minutes, maintenance at home, delivery of more than 2 models for consideration. These selling strategies ensure that MWG maintains its leading position in catching new trends in the mobile and consumer electronics market.

Consumer Electronics Demand Real GDP VN Inflation Source: World Bank, IMF, team estimates

Offline stores Approximately 95% sales of MWG are from offline shops. MWG has a very strong distribution network with an aggressive shop expansion plan. In 2014, there are over 300 Mobile World shops present in all provinces and 15 Consumer Electronics shops spreading from Khanh Hoa to Mekong River Delta. From Figure 8. Household final consumption per capita 2009-2013, the number of Mobile World shops increases with the CAGR of 52.62%. After coming up with the suitable operational model for Consumer Electronics stores, MWG plans to open a substantial 10% number of Consumer Electronics shops in the next 3 years. The increasing number of shops is the main driver for revenue and market share growth. Thanks to this robust store network, MWG rises to be the 8% largest mobile retailer in Vietnam. 6% 4%

Industry Overview and Competitive Positioning

2%

Vietnam Economic Performance

0%

Stable macroeconomic outlook

Household final consumption expenditure/capita GDP / capita Source: World Bank, IMF, team estimates

3

Figure 9. Mobile handset demand in Vietnam USD mn 3,000

mn 40

30 2,000 20 1,000 10 0

0

Value of Feature phone Sales Value of Smartphone Sales

After the global crisis, in 2012, Vietnam’s economy started to stabilize. The real GDP growth rate grows at 5.5% in 2014. IMF forecasts this number will rise gradually to 5.9% in 2018 while unemployment rate stays at 4.42%. Thanks to the constraints in monetary policies, inflation decreased sharply from nearly from 19% in 2011 to 5.2% in 2014. This rate is forecasted to decrease gradually ti ll 2018 (Figure 7). A stable economy sets a favorable condition for the growth of the consumer electronics market. BMI forecasts the CAGR of 8.9% for the industry from 2014-2018. A positive correlation between the economy and the consumer electronics market can be found. Encouraging signs from the economy and the electronics market is the motivation for the MWG’s growth. Motivation for retail industry from the Growth of Household final consumption expenditure per capita Household final consumption expenditure (HFCE) per capita grew 4.91% in 2013, calculated based on constant 2005 price. Historically, HFCE per capita tends to exaggerate the movement of GDP/capita. According to IMF, real GDP per capita will continue its growth rate of 4.7% to 4.9% until 2018, reaching VND37Mn calculated based on 2010 price. Gross national savings will reduce gradually from 32.15% of GDP per capita in 2013 to 20.77% in 2018. Thus, we expect a greater growth momentum for HFCE per capita in the next 3 years, reaching 6.6% in 2018. This growth gives a promising outlook for the retail industry. As Vietnamese become richer and spend more, the demand for luxury products as high price smartphones, tablets and consumer electronics goods is expected to grow.

Volume of Smartphone sales Source: BMI

Vietnam mobile and IT product retailing sector Vietnam’s mobile market experiences robust growth thanks to smartphone sales From 2011-2013, the mobile market grows robustly at a CAGR of 19.9%. The main driver of the growth is smartphone sales with the CAGR of 45.8% in value and 166.1% in volume. In the next 5 years, the mobile market continues to be the most dynamic sector of the consumer electronics market. The growth momentum comes from the low smartphone penetration rate of Vietnam (20% - figure 12) in comparison with other countries’. As the phone penetration in Vietnam is very high (156.1% in 2013, according to BMI), the main contribution in smartphone growth is the transition from feature phone to smartphone. However, we expect the future growth rate of smartphone to be slower than in 2011-2013 due to r...