Project Appraisal — HBK Steel

Duong Thai Quang Truong

16 min readMar 9, 2023

Chaper I: Introduction to Investors

Owner: HBK STEEL STRUCTURE COMPANY

Company Name: HBK Steel Structure Company

Business name in foreign language: HBK. Steel Structure Co., Ltd

Business code: 3502270157

Legal form: Two-member Limited Liability Company

Established: 30/4/2020

Legal Representative: Hung Binh Khang

Head office address: No. 10, Street 3, Hai Thanh Residential Area, Tan Tao A, Binh Tan District

Factory Address: Lot 18 Industrial Zone, No. 10 Street, Hai Son Industrial Zone, Duc Hoa Dong Commune, Duc Hoa District, Long An Province

Project Information

Project name: HBK Steel Structure Factory

Location : OFFICE, WORKSHOP Lot J18, Street 10, Hai Son Duc Hoa Industrial Complex, Duc Hoa Dong Commune, Duc Hoa District, Long An Province Vietnam.

Operations management

HBK has the management team as follows:

In Departments, there are different teams, such as:

· The engineering department will have the design department, the management department

· The financial accounting department will have the estimation department, the purchasing department, the personnel accounting, general accounting

· Sales department and marketing department

· Personnel administration department will have recruitment department, staff inspection

· Production team consists of management department of employees and construction staff of production

HBK project description

Images of projects under construction in Hai Son Duc Hoa industrial complex

Scale of the project: HBK designed a steel factory on a land plot at OFFICE, Lot J18 Workshop, Road №10, Hai Son Duc Hoa Industrial Cluster, Duc Hoa Dong Commune, Duc Hoa District, Long An Province, Vietnam with an area of 6000 m2 . With the factory area of 3800 m2, 300 m2 is used for offices. The remainder of the area is used for transport infrastructure.

Initial investment

HBK company purchased land area of 6000 m2 with the price of 20 billion of deposit paid in full. The cost of building the factory (including surcharge) by the contractor is HBK Mechanical Construction Co., Ltd. to design and build:

· Factory price: 3 million VND/m2

· Office building price: 5 million VND/m2

· Transport infrastructure: 1 billion

· Auxiliary works: 1.5 billion.

· Water power system: 2.5 billion

· Fire protection system: 600 million.

HKB equipment to be purchased is 100% imported from Japan. Equipment for production includes: The above imported equipment is charged with CIF price, because the above items are all in the categories with tax rates equal to 0% (refer to the import tariff special preferences of Vietnam to implement the agreement economic partnership Vietnam — Japan).

The total initial investment was VND 50,215 billion.

Operational costs

· The annual cost of materials (100% capacity) is calculated as the following table and they expect to increase with the rate of inflation:

· Other direct production costs: running water for employee activities, workers are charged at the rate of 20m3 a day, water price is 9969 VND/m3, use 24 days / month. Electricity consumption is calculated at 700kWh/ton. The price of electricity is 3000 VND/kWh.

· The cost of corporate personnel, with a salary increase of management level of 10% per year, and the salary of the remaining personnel is 5% per year.

· Obligatory social insurance costs then join company at the rate of 19.5% of salaries for all employees in the company.

· Routine maintenance costs (including machinery, equipment, infrastructure) are estimated at 350 million VND per annum.

· Contingency cost (reduced inventory, employment benefits, other costs, etc.): VND 300 million/year.

· In addition, because this is a steel production, the production process will generate waste to the environment, so HKB company will have to pay the environmental cost is estimated 1,480,000 VND / ton of products.

Production

In Year 1, HKB company expects to produce 6,000 tons of finished steel, and the capacity will increase by 10% each year, by the fifth year the capacity will reach 100% and will maintain this level of production until the 10th year. The eleventh year when the company will not make production, which in this year will sell out the remaining inventory and will move on to other projects at the end of the year. During the last year of the project, only management of the company will continue to work normally.

Sale price

The selling price of finished steel is 30000 VND/kg (including 10% VAT). Selling prices are expected to increase at the rate of inflation.

Inventories

In order to ensure business is run normally, inventory is kept at 15% of manufacturing output over a year. Five inventory liquidations will be sold out. We will use a first-in, first-out inventory method (FIFO).

Working capital

Additional working capital for the project is estimated at VND 10 billion.

Depreciation of an asset

All assets, including infrastructure and machinery, are accounted for using straight-line depreciation. Manufactured machinery has a life cycle of 10 years, infrastructure has a useful life cycle of 25 years. Simply put, the depreciation will start when the plant becomes operational. After the life of the project is over, the plant is moved to a different workshop of the company and used for other operations. The plant will also be used by the company for other projects in the company’s future.

Funding

HBK will borrow VND 30 billion from Techcombank at a nominal interest rate of 8.48% a year. The method of payment for principal and interest is equal for 5 years, to be paid from year 1 of the project.

Tax

The corporate income tax rate is 25%, but in the first 2 years when the factory starts production, the rate of 20% is preferred.

A 10% VAT rate will apply to the raw material and selling price of steel.

The construction VAT of 3% will apply to factory construction items.

When purchasing land, taxes and purchase fees are incurred, the estimated 2.5% of the value of the land administration.

Personal income tax will be charged to management at 10%, and the remaining employees are exempted from tax due to circumstances.

Economic price and profit margin

For the construction items of the workshop, when construction will have the use of unskilled workers, the economic cost of these workers will be 0. The economic profit margin of the construction contractor will equal 20% of the profit on the financial price.

Similarly, for unskilled workers at the steel buildings (including seasonal workers, laborers), the economic value of these laborers would be 0.

It is estimated that economic cost of using electricity will be 50% of market value.

Standards of investment evaluation

The financial discount rate of the project depends on the investment capital use structure of the project. The required rate of return of equity of 15%, of which. The ownership capital represented 40.26% of the initial investment. The social discount rate was set at 10% (see Ministry of Planning and Investment circular).

Inflation and exchange rates

The forecast for inflation in Vietnam is expected to be 3,221% (based on reference data from World Bank)

Externalities

The production of steel is capable of generating pollution and non-benign wastes after production. However, due to the project within the zone, the annual environmental costs have already been paid and the government will use these costs to offset the environmental impact, so externalities are not required in the analysis. In addition, the project is small-scale so that the waste treatment area in the industrial zone is fully capable of dealing with the tahri pollution generated by the factory. Given these arguments, the report does not consider externalities in the analysis.

Vision and goals of the project

Looking at the pace of investment and the projects being promoted in recent times, it is possible to forecast a new trend in foreign direct capital investment (FDI). There are many comments that are happening “second wave of investment” in Vietnam and this is completely grounded when looking at investment projects in the steel sector. Fierce competition for the steel sector, investments by the world’s leading steel corporations, on a large scale, are happening quite quietly. This amount of billet is mainly used in the need of rolling steel plate, steel foil.

The project helped to recalibrate the current steel industry capacity of hot-rolled steel products, mainly construction steel (steel) with extra capacity, while the capacity of producing billet was not much. This is also the cause of the construction steel fever, when the price of steel billet increased, decreased, upped in the past. The demand for steel plates in Vietnam is growing sharply. Currently, Vietnam has to import steel plate about 3.5 million tons/year. It is expected that by 2010 demand will be about 4.7 million tons; in 2015 it will need 7.2 million tons and by 2020 it will need 10.2 million tons. Currently, the domestic capacity of steel plate production is very small, only one factory in Phu My has come into operation with a capacity of 400,000 tons/year. In addition, the capacity of the embryo is also very low. Thus, foreign investors have realized that Vietnam is having many opportunities to invest efficiently in this area. With the high demand for steel plate and steel plate of the mechanical industry of machine building, making hydraulic equipment for the hydropower industry, shipbuilding export … surely the projects will operate effectively, meet the needs of use in the coming years.

Domestically, the production and sales of steel products in the first 5 months of 2021 increased significantly compared to the previous expectations, as follows: Steel production of all kinds reached more than 13.4 million tons, up 38.7% over the same period in 2020. Sales of steel of all types reached more than 11.9 million tons, an increase of 38.2% over the same period last year; Of these, steel exports of all types reached nearly 2.8 million tons, an increase of 80% over the same period in 2020.

Steel imports to Vietnam in April 2021 totaled 1.34 million tons with a turnover of US$1.08 billion, down 5.81% in volume but up 0.58% in value compared to the previous month; compared with the same period the previous year increased by 17.7% in volume and 52.15% in value, respectively. Import steel from major markets like China is more than 2.62 million tons, the value of which imports more than US$1.82 billion, accounting for 52.33% of total steel imports and 49.01% of the total import turnover in the country.

In April 2021, Vietnam’s steel exports reached more than 1.02 million tons, down 17.04% from the previous month, but up 75.22% from the same period in 2020 in terms of output. Export value reached more than US$769 million down 14.39% from March 2021 but up 142% over the same period in 2020. In the first four months of 2021, Vietnam exports steel reached 3.9 million tons, with a value of 2.79 billion USD to more than 30 countries and regions in the world, of which, the main export markets are ASEAN, EU, the United States, China, …

Seeing the potential on HBK Steel Structure Co., Ltd decided to proceed to build steel workshop.

Due to the current situation of covid-19 stress has greatly affected HBK, the prime minister issued a decision on July 9 to implement Directive 16 in HCMC, the company could have faced many difficulties.

Difficulties in sourcing and input due to high import rate of steel in Vietnam, HRC steel prices in Vietnam are quite high, which greatly affects HBK enterprises.

In addition, there are occupational accidents in the production process, HBK company has equipped full knowledge, safe ways when production and has insurance for employees so currently no occupational accidents occurred.

Chapter II: TOTAL INVESTMENT CAPITAL — SOURCES OF REALIZED CAPITAL AND PROJECT PERFORMANCE

Capital structure table

The primary investment capital source of the project

Total investment of the project: 50,125 billion.

Projected revenue for the project, mainly from semi-finished steel.

The project input costs are expected, see Appendix 6.

Analyze the financial performance of the project

Debt Security Ratio : The project will use the following income from tax to repay the loan:

Debt Security Coefficient = Net Depository After Tax (TIPV) / Debt Borrowing

According to the Debt Sustainability Analysis (Annex), the average figure for debt security is 3.78 times, indicating that for every 1 dong of debt invested, the figure for debt security is 3.78 dong of income. The project has high income generating capacity to ensure debt servicing. At the same time, the figure for ensuring debt service at year 1 was negative, the net annual performance was negative, but in the years after debt service coverage was high. If possible to apply for a grace period, the investor should make the agreement with the bank to extend the 1 year debt will be better.

Payback period discounted: According to the (Table of Calculated Annex), it is observed that by the 4th year the payback has been paid and there is a surplus, therefore it is necessary to determine the number of months of the 4th year to determine the exact payback period:

Number of months = (-PV_NCF cumulative year 3 / PV_NCF year 4)*12

Thus, the payback period from the Gross Investment’s point of view is 3 years and 6 months from the operation date. Payback period from the investor’s point of view is 3 years and 1 month from the operation date.

Cost-benefit ratio

According to the project calculation annex with BCR= 1.22 > 1.0, the project is expected to provide a positive net present value (NPV) and will have an internal rate of return (IRR) higher than the discount rate used in the calculations. This suggests that the NPV of cash flow from the project is greater than the NPV of cost and the project should be considered.

Analysis by net present method (NPV)

r: The expected discount rate is 12.6% per year from the project and total investment viewpoint and 18.7% (nominal yield) from the investor perspective.

n: Project lead time of 10 years.

Financial efficiency

Project NPV = 298.131.88 million VND,

NPV (TIPV) = 175.456.19 million VND

NPV (EPV) = 118,550.26 million VND

So in just 10 years of project analysis, the net income achieved after subtracting from the investment value stipulated in the current NPV net worth is > 0, indicating that the project has a high return.

Economic efficiency

According to the Annex calculated NPV project = 502,750 million VND

Analysis by internal rate of return (IRR)

According to the analysis shown in the table of analyzes of the calculated annex, IRR projects = 66 % > 12.60% , IRR (TIPV) = 47% > 12.60% and IRR(EPV)= 63% > 18.70% , economic IRR = 101%>10%. This makes it the ideal indicator, showing that the project is profitable.

Effective Target Group

After calculating the benefits and allocative costs for the target groups (annex). We can get the following result.

In general, the project benefited the large majority of the parties, at SDR.’s discount rate = 10%, we were able to see that two groups suffered from the project were Techcombank and the consumers were taxable. However, it should be noted that SDR.’s discount rate is for reference and theory purposes only for Techcombank, whose real discount rate is the real interest rate on a loan: 5.09%. At this level, Techcombank’s NPV is 2861 million VND. In the presence of a number of taxes related to projects for which the taxable is a consumer, the next group to suffer from the project is the taxable consumer. All other groups shown in the table above received benefits.

For a more general view, we can observe the graph below: the graph represents the NPV of perspectives at different discount rates

Chapter 3. CRYSTABALL USE RISK ANALYSIS

Important variables

Assumption

For an economy that is full of turbulence, having business failures at risk is inevitable. Therefore, before making business investment decisions a project, it is advisable to give the analysis of the volatility of the inputs and outputs to have a more multidimensional view of the effectiveness of the resulting project.

In this project risk analysis, a number of risk variables are assumed by the team to help project investors and other stakeholders review the benefits and costs of the project. Since it is a risky industry project, the following variables are assumed to analyze which of the best options to choose and then propose risk management for the most important variables. The table below is a list of variables which the group will assume simulation analysis.

The most important variables

After running the simulation, the change rate of materials prices, the change rate of steel prices and the finished steel price level will be the three main variables that impact the NPV target of the project on the point of view.

Project Financial Indicators Forecast Result

The results of the data table can be found in the negative NPV risk finance perspectives below 30%, while the average NPV value is both positive and very high. Although the annual budget can be quite high (see annex for a moment), the first year of activity had very low repayment capacity, thereby increasing the chance of default by more than 26%.

Results of economic analysis and target group analysis are equal, as almost all groups receive mainly domestic net benefits, the risk of economic damage is as low as 12%. Thus, based on the above analysis, if the investor is able to negotiate with the bank the grace period, the project is feasible.

Proposing a risk management solution for the most significant variables and comparing that proposal result with a no risk proposition?

The risk management solution for the most important variables in this project can be found to include the change rate of steel price, finished steel price — price (not VAT) and change rate of materials. The most common way is to pass the contract. For finished steel price and price change rate, risk can be prevented by delivery contracts after customers at a predetermined price.

As a result of the data sheet and the two graphs above can be seen in the contracting options, option B is the first to be eliminated due to the higher negative NPV risk than the other and lowest average NPV.

Option A, without risk control, produces the best average NPV result but a considerable amount of risk.

Finally, looking at options C and D, when there is control over the price of input materials, it is possible to see that these two options control the risk of the project having the best negative NPV but the lower risk then the benefits are also lower. If the investor wants the highest security, it is recommended to choose option D. But in fact nothing is absolute, the risk persists. Hence the best contractual choice was option C.

CONCLUSION

The results of the analysis are as above, showing the economic efficiency of the project, while contributing to the development of the steel sector in the province, solving the employment for idle workers. In particular, the following:

+ Financial indicators of the project such as NPV > 0, IRR > WACC, etc. indicate that the project is financially and economically efficient.

+ Another problem to be solved is the financing of investment capital, which needs to be examined carefully and negotiated with the bank over the forms of debt and repayment.

+ Today, the steel industry is one of the sectors expected to create more conditions to fully facilitate production and export to new markets. In the context of increasingly demanding markets, fierce competition in price, quality, requires steel industry enterprises to be aware of the importance of improving productivity, technology, improving the level, skills workers, working environment, market,.. The HBK steel factory project was implemented to meet the needs of society. The absolute investment in facilities, labor teams and modern technology aims to help the steel industry develop and meet the needs of the market.

+ The project will contribute to addressing a subset of employment in rural areas, generating an income for investors and contributing to the state budget.

Contribute to “Promoting the local potential and strengths; promoting the speed of economic development”

SUGGESTIONS AND RECOMMENDATIONS:

Given the project feasibility, we are looking forward to seeing and supporting us so that we can take steps to implement them as scheduled. Make the project work soon.