8.

Analyze Hoa Phat Group’s liquidity

Items 31/12/2019 31/12/2018 Difference % change

Total assets 101.776 78.223 23.553 30,11
Total liabilities 53.989 37.600 16.389 43,59
Short-term assets 30.437 25.309 5.128 20,26
Short-term
26.984 22.636 4.348 19,21
liabilities
Cash and cash
4.545 2.516 2.029 80,64
equivalents
1. Overall liquidity
1,8851 2,0804 (0,1953) (9,39)
ratio
2. Current ratio 1,1280 1,1181 0,0099 0,88
3. Quick ratio 0,1684 0,1112 0,0573 51,54
Items 2019 2018 Difference % change
Interest expense 1.181 478 703 147,07
EBIT 10.278 10.549 (271) (2,57)
EBITDA 12.918 12.853 65 0,51
Net cash flow from
7.715 7.642 73 0,96
operating activities
4. Interest
8,7028 22,0690 (13,3662) (60,57)
coverage ratio
5. EBITDA
10,9382 26,8891 (15,9509) (59,32)
coverage ratio
6. Cash payment
0,2859 0,3376 (0,0517) (15,31)
ratio
  General Analysis:

Hoa Phat Group's liquidity position during the 2018-2019 period presents a mixed
picture. Hoa Phat Group’s liquidity position during 2018-2019 was mixed. While
the overall liquidity and current ratios remained above accepted thresholds,
indicating adequate liquidity, they both declined, hinting at potential liquidity
strain. Positively, the quick ratio improved significantly, suggesting better
immediate liquidity without relying on inventory sales.

However, ratios related to debt servicing and cash flow generation, such as the
interest coverage ratio, EBITDA coverage ratio, and cash payment ratio, declined
sharply. This raises concerns about the group’s ability to service its debt and meet
short-term obligations.

These trends would most likely be due to Hoa Phat's aggressive expansion and
investment strategies over the period, which would place growth over short-term
liquidity. These strategies, again, involved significant debt financing and capital
expenditure, elevated interest obligations, and pressured cash flow. For further
analysis, a detailed analysis of each liquidity and solvency ratio will be provided.

 Detailed Analysis:

- Overall liquidity ratio:

Overall liquidity ratio shows how much of the group's total assets can cover its
total liabilities. This ratio represents the bankruptcy risk, which assesses whether
the liquidation of a corporation’s total assets would be sufficient to settle its debts
in the event of bankruptcy. The higher the ratio, the higher is the safety margin that
the business possesses to meet its current liabilities. An overall liquidity ratio
above 1 is preferred as it indicates the group has more assets than liabilities.

The overall liquidity ratio in 2019 was 1,8851 times, down 9,39% from 2,0804
times in 2018. In both years, the indicator was above 1,3, which means that such a
level of the indicator ensures an acceptable level of risk within the safety threshold.
However, the downtrend is a concern because it suggests that Hoa Phat's asset base
is growing more slowly compared to its total debt load. Specifically, in the period
of 2018-2019, both the total assets and total liabilities of Hoa Phat Group
increased. However, the growth rate of total assets stood at 30,11%, while the
growth rate of total liabilities was higher, at 43,59%.

This is because in 2019, the group embarked on several major projects, including
the construction of a new steel complex in Dung Quat Economic Zone and the
acquisition of a real estate project in Ho Chi Minh City. These investments
required substantial capital expenditures, leading to an increase in total liabilities at
a faster rate than the growth in total assets. Therefore, the decline in the overall
liquidity ratio in 2019 can be attributed to Hoa Phat's aggressive expansion and
investment strategies during this period.

- Current ratio:

The current ratio is a key financial metric that measures a group’s ability to cover
its short-term liabilities with its short-term assets. A ratio above 1 indicates that the
group’s current assets exceed its current liabilities, suggesting a positive liquidity
position. However, a ratio just over 1 provides a thin safety margin, implying
potential short-term liquidity constraints.
In 2019, Hoa Phat’s current ratio was 1,1280 times, a slight increase from 1,1181
times in 2018. This means that for every dong of short-term liability, there was
1,1280 dong of short-term assets. The marginal 0,88% increase suggests that the
group maintained an adequate level of liquidity to cover its short-term debts with
its short-term assets during this period.

Hoa Phat’s stable current ratio of around 1,12 in both 2018 and 2019 reflects its
effective management of working capital and inventory levels. Given that the
group’s core steel production business typically requires high levels of inventory,
maintaining a current ratio above 1 suggests effective management of inventory
turnover and accounts receivable collection.

However, the current ratio also underscores the need for careful management of
short-term assets and liabilities. It highlights the group’s exposure to short-term
liquidity risk, which is the risk of being unable to meet short-term financial
obligations. This risk is influenced by the group’s financing policy, which
determines how it raises capital. During the 2018-2019 period, Hoa Phat’s
financing policy appeared to be geared towards aggressive expansion and growth.
This had an impact on its current ratios. To fund several major projects during this
period, the group likely took on significant additional debt, as evidenced by the
increase in short-term liabilities from 22.636 billion VND in 2018 to 26.984 billion
VND in 2019, a 19,21% increase. This suggests a potential shift towards a higher
reliance on shorter-term borrowings to finance its expansion plans.

The combination of increased debt financing, a potential shift towards shorter-term

borrowings, and the need to manage working capital efficiently underscores the
importance of Hoa Phat’s financing policy in managing its short-term liquidity risk
during this period of rapid growth and expansion.
Moving forward, Hoa Phat may need to reassess its financing policy to strike a
better balance between growth objectives and liquidity management. This could
involve diversifying funding sources, optimizing the maturity profile of debt, and
continuing to focus on efficient working capital management practices.

- Quick ratio:

The quick ratio measures a group’s ability to quickly react and pay off its short-
term liabilities using its most liquid assets (cash, marketable securities, and
accounts receivable). It provides a more conservative look at short-term liquidity
than the current ratio, as it excludes inventory, which may take time to convert into
cash.

In the case of Hoa Phat, the quick ratio improved significantly from 0,1112 times
in 2018 to 0,1684 times in 2019, representing a 51,54% increase. This suggests that
the group’s liquidity position improved during this period. Specifically, it indicates
that for every dong of current liability, Hoa Phat had 0,1684 dong of the most
liquid assets (cash, marketable securities, and accounts receivable) in 2019, up
from 0,1112 dong in 2018.

The significant improvement in the quick ratio in 2019 can be attributed to Hoa
Phat's strategic cash management initiatives. During this period, the group
implemented measures to optimize its cash conversion cycle, leading to an increase
in cash and cash equivalents from 2.516 billion VND in 2018 to 4.545 billion VND
in 2019. This improved cash position, combined with effective accounts receivable
management, contributed to the higher quick ratio, providing a stronger buffer to
meet immediate obligations without relying on inventory sales, which can be
uncertain and time-consuming.
However, while the increase in the quick ratio is a positive sign, a ratio of 0,1684
times is still relatively low. Typically, a quick ratio below 1 could indicate a group
would struggle to meet current liabilities if unable to sell inventory. Therefore,
despite the improvement, Hoa Phat still may face challenges in quickly converting
its assets into cash to meet immediate obligations.

- Interest coverage ratio:

This ratio shows how many times over a group could pay its interest expenses with
operating profits (EBIT). A higher ratio is preferable.

The interest coverage ratio fell sharply from 22,0690 times in 2018 to just 8,7028
times in 2019 - a 60,57% decline. This sharp decrease raises a red flag, indicating a
diminished ability of Hoa Phat to cover its interest expenses with operating profits.
If this downward trend continues and the ratio falls below the 1,5 – 2,0 range, it
could signal an increased risk of defaulting on interest payments.

The sharp decline in the interest coverage ratio from 22,0690 in 2018 to 8,7028 in
2019 can be attributed to two primary factors:

a) Increased interest expenses: Hoa Phat's aggressive expansion plans required

significant debt financing, leading to a substantial increase in interest expenses
from 478 billion VND in 2018 to 1.181 billion VND in 2019.

b) Temporary decline in profitability: The steel industry faced a slowdown in

2019 due to global trade tensions and raw material price fluctuations.
Consequently, Hoa Phat’s operating income (EBIT) slightly decreased from 10.549
billion VND in 2018 to 10.278 billion VND in 2019, contributing to the lower
interest coverage ratio.
The sharp decline in the interest coverage ratio suggests that Hoa Phat’s ability to
service its debt has weakened, potentially raising solvency and default risk
concerns. This could serve as a warning signal for lenders and creditors, as it may
indicate that the group is struggling to generate sufficient operating profits to cover
its interest expenses, which could potentially lead to covenant breaches or credit
rating downgrades.

Therefore, it is crucial for Hoa Phat to closely monitor this ratio and take necessary
steps to improve its earnings, reduce its debt, or both, to ensure its long-term
financial stability.

- EBITDA coverage ratio:

The EBITDA coverage ratio, which measures a group's ability to service debt from
operating cash flow, declined significantly for Hoa Phat Group, dropping from
26,8891 times in 2018 to 10,9382 times in 2019 - a 59,32% decrease. While Hoa
Phat's EBITDA increased marginally by 0,51%, its interest expense more than
doubled from 478 billion VND to 1.181 billion VND, driven by additional debt
taken on to fund major expansion projects like a new steel complex and real estate
acquisitions.

The lower 2019 ratio indicates Hoa Phat's operating cash flow was not keeping
pace with increased interest obligations, straining its ability to service debt and
fund growth. Although still positive, the smaller buffer compared to 2018
heightened vulnerability to potential cash shortfalls. Moreover, the declination in
EBITDA coverage ratio also reveals an increased default risk. This ratio further
reinforces the potential challenges in servicing debt obligations from the group's
operating performance.
This sharp decline likely raised concerns among lenders about the group's
creditworthiness and long-term debt servicing ability. However, the ratio remained
above 10, suggesting interest was still coverable from operations albeit with less
flexibility.

To address this issue, Hoa Phat Group should closely monitor its capital structure
and debt levels to ensure that its interest obligations remain manageable relative to
its operating cash flow generation. The group may consider exploring debt
restructuring options, such as extending maturities or negotiating more favorable
interest rates, to alleviate the burden of interest expenses. Improving operational
efficiency, cost management, and working capital optimization could also help
boost EBITDA and strengthen the group's ability to service its debt obligations. If
necessary, the group could consider divesting non-core assets or raising additional
equity capital to reduce its reliance on debt financing and improve its financial
flexibility.

- Cash payment ratio:

This ratio shows the group's ability to repay short-term debt with the cash
generated from its operating activities.

The cash payment ratio of Hoa Phat dropped from 0,3376 times in 2018 to 0,2859
times in 2019 - a 15,31% decrease. While still below 1, the declining trend
suggests the group's operations generated progressively less cash relative to its
short-term obligations over this period. The decline in the cash payment ratio can
be attributed to the increased short-term liabilities associated with Hoa Phat's
expansion plans. In particular, while the group's net cash flow from operating
activities increased from 7.642 billion VND in 2018 to 7.715 billion VND in 2019,
the faster growth in short-term liabilities resulted in a lower cash payment ratio.

The decreasing ratio could indicate potential challenges for Hoa Phat in meeting its
debt obligations using internally generated cash flows. This could result in a
greater dependence on external financing sources or necessitate the restructuring of
existing debt, particularly as Hoa Phat undertakes major projects such as the Hoa
Phat Dung Quat new steel complex. However, it is crucial to note that the ratio
remained above 0,2 during this period. This suggests that Hoa Phat’s operating
cash flows were still capable of covering a substantial part of its short-term debt
obligations.

 Conclusion:

In summary, while the Hoa Phat Group was able to maintain adequate liquidity to
cover the short-term debt by the current ratio, several other ratios depicted a
worsening liquidity and debt service position in 2019 as contrasted with 2018. The
sharp declines in the interest coverage, EBITDA coverage, and cash payment ratios
are particularly concerning, signaling a higher chance of potential defaults risk or
liquidity shortfalls if these trends continued.

These trends can be explained by the group's aggressive expansion and investment
approach in this period, which was financed by significant debt and capital
expenditures. The attempt to capture the growth opportunities, however, boosted
the group's interest obligations and strained its ability to raise sufficient cash flow
to service its debt effectively.

 Solutions:
- Debt restructuring: Hoa Phat could restructure its debt by extending maturities
or negotiating lower interest rates. This would reduce interest expenses,
improve cash flow, and ease liquidity pressures, thereby enhancing the interest
coverage ratio and EBITDA coverage ratio.
- Operational efficiency: By implementing cost reduction measures and
optimizing working capital, Hoa Phat could increase profitability and cash flow,
improving its ability to service debt and maintain a healthy current ratio.
- Asset divestment: Selling non-core assets could generate cash, focus operations,
and improve liquidity. The proceeds could be used to reduce debt, improving
the two coverage ratios.
- Capital raising: If needed, Hoa Phat could raise additional equity or secure
long-term debt to strengthen its capital structure and improve liquidity. This
would also help rebalance its maturity profile.

- Balanced financing policy: Hoa Phat should reassess its financing policy to
balance growth and liquidity management. Diversifying funding sources and
optimizing debt maturity could mitigate liquidity risks and contribute to
healthier ratios.

By implementing the solutions, Hoa Phat Group will be able to solve the problems
of liquidity and debt service challenge as highlighted by the declining ratios, while
ensuring long-term financial stability and maintaining a healthy balance between
growth ambitions and prudent risk management.