VietNamNet Bridge - Hoang Anh Gia Lai Group (HAGL) is facing many challenges: The core businesses are not performing well, while the debt burden is up to tens of trillions of VND.

Cattle breeding is a new and key source of HAGL, contributing more than 41% of the group's total revenue in the first nine months of 2015.

2015 was not a good year for HAGL boss Doan Nguyen Duc as his group had to cope with many difficulties and scandals.

The price for the HAG share of HAGL Group fell deeply in the past year, up to over 60.5% and it is now at the lowest level since the group listed its shares in 2008.

According to the HVS Vietnam Securities Company, the main reason leading to the significant decline of HAG shares is the huge debt of HAGL, as the group is expanding its business fields.

By the end of the third quarter of 2015, HAGL’s debt was more than VND30,700 billion (over $1.36 billion), accounting for over 64% of its total assets. The debt continued to increase over the quarters.

Although the majority of HAGL’s debt is in medium and long term (more than VND16,800 billion), the huge debt puts high pressure on the group.

In the first three quarters of 2015, HAGL had to pay nearly VND750 billion ($33.3 million) of interest money, nearly double the same period of 2014.

This group is also facing many long-term loans that are turning into short-term loans, including the convertible bond loans worth VND1,100 billion, swap bonds VND1,130 billion, and due long-term bond debt of over VND2,850 billion. In addition, according to the VPBS Securities Company, 50% of long-term debt of HAGL will come due in 2016-2017.

HAGL has sought to restructure the debt. For example, the issuance of corporate bonds in 2015 is a way for the Group to turn short-term debts at banks into long-term debt.

HAGL has also negotiated to change the terms for the issuance of convertible bonds for Northbrooks Investments Pte Ltd (issuance period starting in 2010 and the deadline of payment is the end of August 2015) in the direction of extending the payment deadline by additional two years and fixing the interest rate at 3 percent a year.

Late last year, the resolution of HAGL Board of Directors said that the group said would work with the bondholders and credit institutions to have the loan restructuring plans with suitable terms.

HAGL officials were worried about the debt repayment and asked for the State Bank of Vietnam’s (SBV) support. In order to understand the situation to be able to help HAGL, the central bank sent a written request to the banks that granted loans to HAGL asking them to submit detailed reports on their loans to HAGL and the measures to collect the debt.

Because of this written request, it was rumored that HAGL was inspected by the SBV. The SBV Deputy Governor dismissed the rumors in an interview.

The prices for HAG shares have rebounded slightly thanks to the information given from the SBV official, who said that the debt-asset balance of HAGL is good; its loans have collateral, and long and medium-term debts are rated in group 1 (debts can be recovered with principal and interest on time).

At the same time, the SBV promised to help HAGL and its lenders to deal with the loans in a reasonable way.

Future of HAGL

An official from a large securities firm in Ho Chi Minh City who wanted to be anonymous said it was difficult to say whether the HAG share can recover this year because the market has yet to see the rally in HAGL debt settlement. The debts restructured in 2015 account for only part of the total debt of this group.

HAGL may have to sell its assets to handle the debt. In fact, in 2015, HAGL negotiated to sell 50% of its shares in Hoang Anh House (a HAGL's subsidiary that holds 100% stake in HAGL Myanmar) for Rowsley, a Singaporean real estate firm.

But the deal failed because HAGL did not allow Rowsley to directly invest in Myanmar as Rowsley’s wish.

The reason is that the tax rate on profits from capital transfer in Myanmar is too high (40%). HAGL will continue to look for other partners to promote the sale of the shares.

For other assets like rubber, palm, sugar plantations, it is difficult to sell them at high prices, especially when the prices for sugar, palm oil, and rubber latex are falling. Thus, debt settlement will be a big problem for HAGL.

HAGL’s future depends on its business prospects. Currently, its revenue comes from many sources, of which cattle breeding is a new and key source, contributing more than 41% of total revenue in the first nine months of 2015.

Thus, the Group has planned to boost investment in cows by increasing the total cow herd to more than 200,000 heads by 2016, from about 100,000.

However, Vissan, a big food processing company in Vietnam, stopped buying cattle from HAGL after their first transaction.

Currently, every day HAGL sells 300 cows for meat, two-thirds of which are for Hanoi and the remaining supplied to other provinces and for export.

In the long run, HAGL beef will have to compete with beef imported from the US, Australia, and New Zealand, the countries with advantages in quality of beef and quantity of cows. These countries will also benefit more from the Trans-Pacific Partnership (TPP). This will be a challenge for cattle raising activities of HAGL in the coming period.

Sugar, which was expected to be HAGL’s business advantage, is also in a worrying situation because the sugar price is falling and the inventory in Vietnam is on the rise. HAGL sugar has to compete with imported products in the local market. And for its exports, sugar product of other countries, particularly Thailand, is very competitive for the price and output.

In the January-September period of 2015, revenue from sugar of HAGL declined compared to the same period of 2014 and lagged behind cattle and real estate. Two years earlier, sugar took the lead and contributed over 30% to the group’s turnover. So far, HAGL has not released any new strategy on the sugar business and it seems to largely depend on the adjustment of the market price.

HAGL also faces difficulty in the rubber business because the price for rubber latex has fallen from more than $5,000 per ton at the time the group began investing in rubber to around $1,500 per ton at present. This situation has lasted for three years. With production costs per ton of rubber at $1,200-$1,400, HAGL is exploiting rubber latex at the break-even price, while investment for the planting and care of 42,500 hectares of rubber is huge.

According to the group's annual report 2014, part of the huge loans worth thousands of billion VND from the issuance of bonds and bank loans was invested in rubber. Therefore, even HAGL’s strategy in 2015 was to stop investing in rubber, the pressure of interest and principals till weighs heavily on the group.

In the field of hydropower, HAGL has two major projects - Nam Kong 2 and Nam Kong 3 in Laos. According to a report by the Saigon Securities (SSI) released late last year, the Nam Kong 2 project is expected to bring in cash for the Group since 2016 and it is estimated to contribute VND270 billion in the group’s 2015 revenue. The Nam Kong 3 is scheduled to finish in 2017.

In real estate business, HAGL’s project in Myanmar will create revenue to the group in 2016-2017. It is good news for the group that the occupancy rate can reach up to 95 percent. With a prime position, it is easy to lease retail space in the buildings at high rent.

But in this area, HAGL has some worries because it has to seek capital to implement investment activities in Myanmar and it joins this market at the time of the fever on the real estate market and political upheaval in this country, which can easily put the group in the unexpected situation.

It seems that HAGL has not been lucky in capturing the growth cycle of the industries in which the group participated in. Expectation on revenues and profits from rubber, palm oil, sugar cane ... has derailed more or less. In the past three years, HAGL was under stress and its leaders’ talent was shown.

Many investors spent hundreds of billion VND to purchase HAGL shares because they believed in the leadership of HAGL officials. The VPBS also said that the profit of HAGL will reach a turning point in the period of 2018-2019 when its rubber, palm plantations ... are fully exploited.

However, confidence will increase significantly if the situation supports HAGL and it is backed by external resources.

US$1 = VND22,500

NCDT/VNN