Chance for growth for Dam Ca Mau

Thursday, 20/11/2014
PetroVietnam Camau Fertilizer Company Limited (PVCFC) has been poised for its initial public offering (IPO).

The Vietnam Oil and Gas Group (PVN)’s decision to float PVCFC gives the fertilizer manufacturer plenty of opportunities for growth.
PVCFC’s leaders at the IPO event held in Hanoi on Nov.18

In April 2012, the fertilizer factory of PVCFC, known for the urea brand Dam Ca Mau, was officially inaugurated even though it was then not the most opportune time to enter the market.

In the world, as the fertilizer market was reaching the stage of oversupply, fertilizer prices started a cyclical downturn expected to last up to five years. At home, with two new players—Dam Ca Mau and Dam Ninh Binh—launched their products almost simultaneously, the fertilizer market shifted from undersupply to oversupply.

Earlier, in February 2011, the central bank decided to devalue the Vietnam dong by 9.3%. For a new business like PVCFC whose investment loans amounted to US$500 million, the forex decision exerted a huge pressure on its production prices. In addition, in the context of high global oil prices for most of the time during the past two and a half years, while the price of gas (the main input for fertilizer manufacturing) was calculated using the formula based on the price of fuel oil, Dam Ca Mau encountered yet another difficulty.

Despite many unfavorable objective conditions at the same time, Dam Ca Mau still got off to a good start, even beyond expectations. “Our business results for almost three years have been a lot better than our expectations when studying and planning our projects,” said Bui Minh Tien, general director of PVCFC. “The rate of return on equity reached 22.5% in the first year and 16% last year.”

As a latecomer, Dam Ca Mau was given the opportunity to obtain the latest technology from the leading suppliers of Japan and Europe, a considerable advantage. In addition, like PetroVietnam Fertilizer and Chemicals Corporation (Dam Phu My), the fact that PVCFC is a member of PVN has helped boost confidence among farmers in the company’s products, which is yet another advantage.

The most important factor contributing to the impressive start of Dam Ca Mau is nonetheless the careful preparation of resources for the operational phase when its plant was still under construction. It is the experience PVN has drawn from Dam Phu My.

With the support of PVN and the helping hand of Dam Phu My, the staff of PVCFC had undergone systematic and intensive training since the project got off the ground, said Bui Minh Tien. The preparation of a distribution system, a sales team and branding programs had also been done over a year before the factory started operation. “With thorough and elaborate preparations for human resources and market, the plant of Dam Ca Mau quickly achieved an operational efficiency equal to 98-100% of the designed capacity and has been able to maintain it over the past three years,” Tien said.

Moreover, the efficiency of the investment process, particularly a saving worth US$200 million from the estimated cost of the factory construction, and the ideal location of its production facility in the nation’s largest fertilizer outlet, the Mekong Delta, are important “luggage” for PVCFC to advance ahead with its business.

A bright future

The IPO event of PVCFC held in Hanoi on Nov.18

It is unlikely that the fertilizer market in the next three years will change significantly from now. Analyses and reports show that oversupply will continue on at least until 2017. The demand for urea at home is almost stable at 2.1 to 2.2 million tons per year. Thus, the price of this fertilizer will hardly rise in the next three years, which will directly affect the profit margins of fertilizer manufacturers in Vietnam, including PVCFC.

Bui Minh Tien said that before approving the flotation plan for PVCFC, PVN had pledged to offer the fertilizer maker input gas at a reasonable price so that the latter would achieve a rate of return on equity of at least 12% within four years. Still, that is just a prerequisite. The other determinant is the competitiveness of the company.
For all businesses, market is vital. In this regard, PVCFC is having quite an upper hand.

PVCFC is the only maker of granular urea in Vietnam. This is the first advantage of the company. Granular urea is popular in Cambodia and some other Southeast Asian countries. Also, it is one of the three components to produce NPK fertilizer using bulk blending technology.

The second advantage of PVCFC is the location of its factory in the Mekong Delta where the annual demand for fertilizer is as much as 700,000 tons.

Furthermore, the extensive network of waterways in the Mekong Delta and its passage to the delta in Cambodia brings the company a significant advantage in transport costs, giving Dam Ca Mau a competitive edge in prices on the market.

For nearly three years now, PVCFC has been utilizing such advantages well enough to expand its market share. The company is now holding a 55% share in the Mekong Delta market, 25% in the country’s southeastern region and 35% in the urea market of Cambodia. As regards the supply for domestic NPK fertilizer manufacturers, Dam Ca Mau accounts for over 70%. “Currently, our production doesn’t meet the demand,” Tien said.

The solid market foundation is a favorable condition for PVCFC to successfully go public. However, since urea price remains low, how attractive the shares of Dam Ca Mau are depends on the company’s ability to improve its business performances. Although this proves to be a formidable challenge, Tien believed flotation would open up new development opportunities.

PVCFC has a smooth cash flow and able to address its working capital needs on its own. In addition, the company has actively repaid part of its loans before they fall due. The remaining loans are worth only US$380 million, most of which were borrowed when interest rates stayed high. Now, as interest rates are falling rapidly, PVCFC is taking advantage of this opportunity to restructure its lending profile and has been successful with a loan agreement of US$100 million. That is an immediate solution to cut financing costs, which will surely help the company improve its business performance.

In the early stage after flotation, PVCFC will focus on investment in a bid to optimize production and achieve an operational efficiency 5% higher than the designed capacity. “The percentage is not high, but once we succeed in achieving it, our business efficiency will significantly grow,” Tien asserted.

As for the development strategy, the company practices prudence and will only make investment after clarifying the issue of efficiency. Its main orientation in investment is to study new products with high added value and invest in the projects which will help the company effectively join the value-added chain of agricultural products.

Initially, PVCFC will increase the capacity of its NH3 workshop and consider manufacturing NPK fertilizer and some types of fertilizer with medium- and micro-element contents as well as microbial organic fertilizer. In the long term, PVCFC expects to expand its operations in the chemical sector based on the existing technology of the company. This sector still has vast room for growth.

The development opportunities Tien mentioned above is that flotation will provide PVCFC with a new channel for capital mobilization to implement its investment and business strategies. In addition, flotation will offer the company a chance to switch to a new governance model that is more dynamic and more efficient. Therefore, immediately after its IPO, PVCFC will undergo necessary procedures for immediate listing of its shares on the stock market.

Theo Saigon Times

Disclaimer: The above information is collected from independent sources outside the company and should be best considered a reference only. VCBS does not bear responsibility for any unwanted consequences arising from its use.