Vietnam Investment Review had an interview with Mr. Le Cu Tan, Chairman of PVFCCo’s Board of Management regarding questions from shareholders.

Mr. Chairman, many shareholders say that oil and gas prices fluctuate but PVFCCo’s retail prices keep steadily increasing. However, 2016 and 2017 business performance declined. Apart from fluctuations in oil and gas prices, are there any other reasons affecting PVFCCo’s profits over the years?

Natural gas prices for production of Phu My Urea are based on 46% of average monthly FO fuel prices in Singapore and tariff.Gas cost of Phu My Urea was VND 3,001 billion and VND1,848 billion in 2014 and 2015, respectively (down by VND1,153 billion from 2014), VND 1,657 billion in 2016 (down by VND 191 billion from 2015), VND 2,082 billion in 2017 (up by VND 425 billion as compared to 2016).

For selling prices, Phu My Ureais a commodity whose prices must be declared in accordance with regulations of the Ministry of Finance at the set price formula, based on international and domestic market prices. Selling prices of Phu My Urea have fluctuated over years (see Box 1), not just increased.

The average selling price of Phu My Urea was VND 7,398,318/ton in 2014, and VND 7,306,854/ton in 2015 (downby VND 91,465/ton compared to that of 2014), the average price in 2016 was VND 6,040,021/ton, the average selling price in 2017 was VND 6,735,459/ton (upby VND 396,310 per ton compared to that of 2016).

 In comparison, payable gas cost of 2016 was VND 191 billion lower than that of 2015; However, due to the sharp fall of selling prices in 2016, PVFCCo’s revenues in 2016 were down by VND 1,042 billion as compared to 2015. In 2017, payable gas cost for Phu My Urea increased by VND 425 billion from 2016, although the output was lower than 2016 (due to plant downtime for maintenance for more than 1 month). Phu My Urea’s revenues only rose by VND 238 billion despite its price increases.

On both international and domestic markets, and especially for PVFCCo, oil prices, gas prices and fertilizer prices do not always move at the same pace, in the same direction, there is some lag or they might even move in the opposite direction. Gas price payable by PVFCCo is based on the monthly average price, ie when oil price increases, price of stock gas for urea production immediately goes up accordingly, but fertilizer prices do not immediately follow the trend of oil or gas prices but they depend on market situation and crop season ...

From 2015, VAT of fertilizer was not deductible, resulting in increase of costs over years. VAT cost was VND 290 billion, VND 258 billion and VND 371 billion in 2015, 2016 and 2017, respectively. This is also one reason why profits fell.

Mr. Chairman, what measures has PVFCCotaken to deal with profit slump such as cost cutting, speeding up of the project, diversifying products over years?

Previously, Vietnam had only Ha Bac UreaPlant with production output of 160,000 tons/year and Phu My Urea of 800,000 tons/year. From 2013 onwards, Vietnam had two new plants in Vietnam and expanded Ha Bac Fertilizer Plant, hence, the supply has exceeded demand (the demand of about 2,000,000 tons and production capacity was about 2,600,000 tons). In addition, because of signed international trade agreements, urea import tax is 0% in Vietnam. It is convenient to import Indonesia"s and Malaysia"s urea into Vietnam, with shipping costs ranging from USD 15-20/ton and it takes only 1 week for goods to arrive at Vietnam ports.

Facing with this situation, PVFCCohas promoted marketing activities in order to maintain its brand name awareness and market share. Currently, Phu My Urea is still the No. 1 brand in Vietnam, as a result, selling prices of Phu My Urea are higher than similar products. On the other hand, PVFCCo has also built Phu My Fertilizer product portfolio including: Phu My MOP, Phu My NPK, Phu My DAP, chemical products and these products have shared the cost of management with Phu My Urea and have contributed positively to the shared revenue and profits (see Box 2).

Business performance of PVFCCo’s fertilizers and other chemical products other than Phu My Urea in 2014-2015-2016-2017 were as follows: the revenues reached VND 3,312 billion, VND 3,661 billion, VND 2,955 billion VND 2,960 billion respectively and the profit hit VND 274 billion, VND 177 billion, VND 409 billion and VND 313 billion respectively.

In addition, PVFCCo has also optimized production costs, management and sales costs aiming at efficiency and in general, although business output rises and there are new products, total costs of PVFCCotended to fall over the years. Apart from this, PVFCCohas been actively implementing the NH3 revamped project and construction of chemical technology NPK plant since 2015. Both NH3 and NPK products produced by the Plants are sold well in the market once put into operation due to a good preparation for the market.

Mr. Le Cu Tan- Chairman of PVFCCo

At the previous Shareholders" meetings, investors were only told of how much revenue and profit they could earn a year once NPK and NH3 projects came into operation; however this project incurred losses in 2018. Would you mind telling us if these losses are included in the plan?

Normally, an investment project incurs losses during the first 2-3 years from the date of commercial operation (as depreciation rates and loan interests are high in the initial years and gradually reduced in subsequent years.). The NPK project is no exception, losses in 2018 is included in the original plan. Annual revenue and profit will rise (the project’s profit is annually averagely calculated) after the project is put into commercial operation. In addition, financial information and plans have been publicly announced by PVFFCo in accordance with regulations and we have repeatedly responded and provided information to the shareholders.

The fact that many internal shareholders and leaders of PVFCCo have sold out their ESOP shares makes it difficult for external shareholders to understand. Does it mean that ESOP conditions are so loose that it lacks cohesion between shareholders and PVFCCo for long term?

Like any other listed companies, PVFCCo"s ESOP condition is to restrict transactions during 12 month period. Total number of issued shares is 11.4 million shares equivalent to 3% of the Charter capital, with only one issuance in 10 years. In that number, the shares for the 15 members of PVFCCo management are only 920,000 shares, accouting for 8% of total ESOP, on average only 60,000 shares for each member.

After the expiry of the restriction period, several internal shareholders when selling ESOP shares have complied with the regulations, informed and reported the transaction fully, in order to meet the legitimate financial needs of each individual.

Shares though as ESOP is also an investment, buyers also have to take risk of this investment. Purchase price of PVFCCoESOP share is VND10,000/share and the market price at the expiry of restriction period is about VND22,000/share. Compared to other companies" ESOP, price incentive rate and 12-month transaction restriction period of PVFCCo’s ESOP program is reasonable and lower than those of most other companies.

The fact that Phu My Urea adjusted its plan at the end of the year when it was almost possible to estimate the performance of the whole year, in the shareholders’ opinions, is to yield benefits to the bonus fund. What comments does Phu My Urea have on this unreasonable point?

PVFCCo’s annual General Meeting of Shareholders approving PVFCCoannual plans does not set the bonus target for the Board of Management and Board of Directors based on the profits attained. Therefore, bonus policy for target accomplishment or plan exceeding will not be applicable for the Board of Directors and the Board of Management.

As the Board of Directors and Board of Management of PVFCCo are mostly representatives for state capital and representatives of PVN, total cost estimates for the Board of Directors and the Executive Board are approved by the General Meeting of Shareholders annually. When paying salaries, we must follow the Group’s regulations which require salaries to be divided into fixed salaries and bonuses. Hence, PVFCCo usually declares details of incomes of the Board of Management, Board of  Directors including the two items as mentioned above.

The adjustment of PVFCCo’s plan based on actual situations, subjective and objective conditions and production and business management requirements are usually considered after the first 6 months of the year and in the third quarter of each year. However, the review of plan adjustments, if any, must go through a very strict reporting and approval process by state-owned shareholders and this will depend on the timing of the planned crude oil price adjustment (as PVFCCo’s plans are based on oil prices), usually the approval will only be made until the end of the fourth quarter of the year. This is the main reason why the Board of Management made the decision to adjust the plans nearly at the end of the year.

Thu Huong- Vietnam Investment Review

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