Kirin Views is the second series of Kirin Capital towards the goal of “Know Vietnam, Long Vietnam”. This column provides Kirin’s observations and opinions on Vietnamese market through in-depth research driven by an expert team with decades of experience, assisting investors at home and abroad in better understanding the potential opportunities of Vietnam and join hands with “Know Vietnam, Long Vietnam”.
When it comes to the richest person in Vietnam, most of us will think of billionaire Pham Nhat Vuong. However, recently, after the trading session on June 23rd, the game changed. Hoa Phat Group’s (HPG) stock recorded four consecutive increases, raising the total assets of Mr. Tran Dinh Long, Chairman of Hoa Phat, to 38.514 trillion dong (equivalent to 1,6 billion USD), surpassing Mr. Pham Nhat Vuong to become Vietnam’s wealthiest person.
In this article, we will discuss Hoa Phat Group – the company behind the “national stock” HPG.
01 Venturing into different fields
In the beginning, Hoa Phat Group was not involved in steel production but rather in trading, specializing in second-hand construction equipment imported from Russia.
According to Mr. Tran Tuan Duong, General Manager of Hoa Phat and also a close friend who accompanied Chairman Tran Dinh Long for over 30 years, when they initially found the company, they didn’t have grand ambitions, just simply wanted a better life.
In 1992, Hoa Phat Equipment and Components Co., Ltd was officially operated. The name “Hoa Phat” signifies harmony and development.
Subsequently, the two comrades continued to establish furniture trading and steel pipe manufacturing companies in 1995 and 1996, respectively. The reasons for these establishments were simple: they sell whatever they needed. Hoa Phat Equipment and Components Co., Ltd.’s new office needed desks and chairs, and at that time, furniture imported from Taiwan, China was rare and expensive. Thus, they started a business selling office furniture.
Initially, they mainly imported from various suppliers in Taiwan, Malaysia, Singapore, and others. During that time, Hoa Phat Equipment and Components Co., Ltd. frequently had to buy steel pipes from external sources for scaffolding. The process of buying steel pipes was quite complex and time-consuming. As a result, Hoa Phat established a steel pipe production plant in Ha Nam to meet the company’s needs.
Once steel pipe production became stable, Hoa Phat gradually recognized the golden opportunity in this industry. Since 2001, the company has continued to strengthen and expand its supply chain and set up several steel production plants. In addition, Hoa Phat also ventured into the refrigeration and real estate industries. However, until now, the refrigeration industry accounts for less than 1% of total revenue, and real estate accounts for 1% of total revenue and 3% of profit. At the same time, steel production has become the core pillar of the group, contributing over 70% of total revenue.
02 Igniting the dream of a giant steel factory
It can be said that the strategy of going abroad is one of the key factors contributing to Hoa Phat’s success today.
The story begins in the winter of 2002 when two leaders had the opportunity to visit Japan and tour Kobe Steel – one of the country’s most famous steel mills with an average annual production capacity of 6 million tons. This plant had ideal conditions, being located near the sea with a large port and a modern conveyor system that directly transported raw materials to the warehouse and then to the factory for production. This experience planted the idea of building a billion-dollar steel factory in Vietnam in the leaders’ minds.
Currently, Hoa Phat owns several large industrial complexes, including the Hoa Phat Hai Duong Iron & Steel Production Complex, with a construction steel output of more than 2 million tons per year (estimated at $300 million); the Hoa Phat Dung Quat 1 Iron & Steel Production Complex, with a total capacity of 6 million tons of construction steel per year; and the Dung Quat 2 Complex, with a total capacity of 56 million tons of hot-rolled coils (HRC) per year (estimated at $360 million). With a total value of up to $1 billion, Hoa Phat has realized this ambitious dream after 20 years.
Continuing with the principle of vertical integration of the supply chain, Hoa Phat Group started investing in mining and processing iron ore – the main raw material for steel production – in 2007.
In 2012, Hoa Phat’s iron ore demand for steel production was about 1.35 million tons of concentrate per year, of which the group could produce about 40% internally and the rest was sourced from domestic and foreign partners. However, the current iron ore demand has risen to 12-15 million tons, while Hoa Phat only produced 365,000 tons in 2022, leading to increased dependence on suppliers. On the other hand, the group has been able to self-produce the secondary raw material, coking coal, and also owns a thermal power plant that utilizes the heat generated during the steelmaking process to meet part of the energy demand for the steel complexes.
On the downstream side, Hoa Phat Group has established a distribution network covering 63 provinces and cities in Vietnam. The group collaborates closely with agents and distributors, providing them with high discounts, good warranties, effective advertising, and marketing support, promoting unified development among the agents.
Though not a pioneer, Hoa Phat has gradually gained market share and become the industry leader today, with 34.8% in construction steel and 28.5% in steel pipes.
This can be attributed to three main reasons:
- Effective expansion of distribution channels, attractive agent policies, and synchronized management.
- Proficiency in price wars: Hoa Phat can proactively source some raw materials and, due to having river and sea ports capable of accommodating vessels up to 200,000 tons, they can import large quantities of raw materials at prices of 3-5 USD/ton cheaper than their competitors. As a result, their prices have consistently remained low within the industry.
- Advanced production technology: Hoa Phat adopted the oxygen top-blown converter for steelmaking early on, which consumes less energy compared to electric arc furnaces and requires less scrap steel.
Hoa Phat’s steel has experienced robust growth, with a high CAGR (Compound Annual Growth Rate) of 29.5% in revenue from 2015 to 2022, and an average annual growth of 15.5% in after-tax profits. In 2022, revenue and profit after tax were VND 132.9 trillion and VND 8.1 trillion respectively. However, there was a significant year-on-year decline, mainly due to the impact of the frozen real estate market.
03 Stepping into the controversy of agriculture
In 2015, at the Hòa Phát Group Shareholders’ Meeting, more than 20 questions were raised to the board of directors, focusing solely on why a steel manufacturing and trading company would venture into husbandry and animal feed production.
Answering questions from shareholders, Chairman Trần Đình Long stated that the livestock industry and animal feed processing hold great potential. Other giants have ventured into this field, and the company had thoroughly researched it before, but now is the appropriate time to proceed. With strong financial resources and experience in distribution, the HPG leadership believed that this industry would contribute significantly to the Group’s revenue and profit, on par with the steel business. However, at that time, these assurances from the HPG leadership did not alleviate shareholders’ concerns.
Despite receiving controversy, Hòa Phát Group decided to pursue the agricultural sector with the principle of “slow but steady,” just as the HPG captain had asserted, “Hòa Phát always tries its best at any industry it sets foot in.” Recognizing the importance of a closed-loop supply chain, Hòa Phát was determined to excel in the 3F model (Feed – Farm – Food, Kirin Views 01). However, since the final link in the model, Food was relatively specific, the company could not implement it immediately and instead focused on the livestock and animal feed processing sectors.
In the animal feed processing sector, Hòa Phát currently operates two feed factories in Hưng Yên and Đồng Nai, with a total capacity of nearly 600,000 tons per year. The company developed diverse product lines suitable for livestock and poultry. Hòa Phát’s customer network covers a wide range of provinces in the North, Central, and South regions. In the coming years, the company plans to invest in building another factory in Phú Thọ to supply additional materials for internal farms and expand distribution channels.
As for the pig farming sector, 100% of the breeding pigs are imported from Denmark, with advantages in reproductive performance, waste ratio, lean meat ratio, and meat quality. The Group owns 10 pig farms in 9 provinces and cities nationwide, with a production of 404,000 pigs in 2022, reaching a high level in the industry. Hòa Phát currently does not have its own brand and directly supplies fresh meat to distributors for sale.
Regarding the cow farming sector, for five consecutive years, Hòa Phát has been the largest importer of Australian cows in Vietnam. Mr. Trần Đìng Long proudly declared at the 5th-anniversary celebration of Hòa Phát Agriculture Development JSC: “Currently, for every two Australian cows in Vietnam, one belongs to Hòa Phát.”
Lastly, we cannot overlook egg production, which is the most successful aspect of Hòa Phát Agriculture. In 2022, the company produced about 850,000 eggs per day, holding the number one market share for egg supply in the Northern region. In Hanoi, Hòa Phát currently supplies eggs to over 100 supermarkets and stores, delivering around 50,000 to 60,000 eggs per day to retailers like WinMart, Coop Mart, BRGMart, and K.Mart.
The agricultural revenue of Hoà Phát from 2015 to 2022 achieved a CAGR of 27.1%, slightly lower than the steel manufacturing and trading sector. However, considering it is a new venture, this is still a commendable result. The post-tax profit in the first year of 2015 was negative VND 45 billion, with a CAGR of 21.7% during the 2016-2022 period. The revenue and post-tax profit in 2022 were VND 7,070.5 billion and VND 84.4 billion, respectively. In reality, in 2020, the price of pork surged due to the African swine fever’s impact, leading to a significant increase in revenue, as pork accounted for 60-70% of the total. However, in the following two years, revenue declined following the downward trend of pork prices.
04 Can agriculture help Hòa Phát overcome its difficulties in the steel industry?
In terms of scale, it’s unlikely.
Compared to steel, which contributes to 94% of revenue and 96% of profits, agriculture only accounted for 12% of total revenue during its peak in 2020 and typically represents only 5-8% of revenue and 1-2% of profits.
Considering the profitability, the possibility is not high. The profit margins in the feed and livestock sectors are generally lower than those in the steel industry, and Hòa Phát is no exception, except for 2020 when the surge in pork prices significantly increased profit margins.
From a business risk perspective, both sides are equally challenging. While the steel industry is influenced by the international economy and real estate market, the feed and livestock sector is affected by uncontrollable and unpredictable factors such as weather and epidemics.
The fate of Hòa Phát Group still and will always depend on its steel business.
Kirin Capital is a research-driven equity investment company headquartered in Hanoi, Vietnam. Its core members have more than 20 years of financial experience in China and more than 10 years of financial and industrial investment experience in Vietnam. The investment covers TMT, large consumption, manufacturing, health care and financial services, and other fields, and spans all stages of equity investment such as seed investment, venture capital, private equity investment, listed company investment, and M&A investment.
Our vision is “Know Vietnam, Long Vietnam”. Through rich financial experience and local resources, we will be a guide for investors at home and abroad to invest in Vietnam and share Vietnam’s rapid growth development dividends.
If you have any needs related to the Vietnam market or would like to participate in our Kirin Views program and share your insights into the local market, please feel free to contact us HERE