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Final Review Memorandum

Newco JSC (‘Newco')

Background

PENM is seeking approval to invest up to DKK 115 m (USD 22 m), and minimum DKK 78 m (USD 15 m), in Newco, a fast growing, consumer orientated holding company with investments in Techcombank and Masan Food, with new, related, business areas to be added over time. With a 20% holding in Techcombank, Newco's assets are dominated by its bank investment, measured at current OTC prices, 2/3's of the market value of Newco relates to Techcombank. The investment represents PENM's only opportunity to invest, indirectly, in one of Vietnam's most attractive unlisted bank, Techcombank.

1. Update since CRM

Since writing the CRM, PENM has performed the following due diligence activities:

- Interviewed senior management of Techcombank, including the CEO, COO, Deputy Executive and Head of Treasury

- Interviewed some of Techcombank's advisors, including McKinsey & Co, a consulting company assisting the bank with product and branch development strategies

- Interviewed PwC auditors, auditors of the two largest publically traded joint stock banks (ACB and Sacombank) as well as the largest of the state-owned banks (Vietcombank).

- Interviewed the CEO of Masan Food

- Performed additional financial analysis on Techcombank, Masan Food and the new business areas

- Signed a detailed term sheet and started contract negotiations

This FRM incorporates the most significant findings from this due diligence and provides an update on the deal structures as well as PENM's valuation.

As noted in the CRM, as a successful result of our close cooperation with Masan Food and Eurowindows, PENM has been presented with a unique opportunity to invest in Newco before other local funds have access to the deal. In order to take advantage of this access, the transaction needs to be closed by 15 September, subject to normal Board approvals.

2. Deal structure

The establishment of Newco will follow the below steps:

  1. Establishment of Newco though a share swap of Techcombank and Masan Food shares
  2. PENM's investment
  3. Investment by foreign funds, reportedly Carlisle and TPG

Newco will be established by owners of Techcombank and Masan Food shares, principally Masan Investment, Dr Quang (Masan Food Chairman) and Mr Ho Hung Anh (Techcombank Chairman), swapping their holdings for shares in Newco. Upon completion of the swaps Newco will have a direct holding of 20% in Techcombank (with an option for a further 10% direct investment, when the law allows, and indirect control of 40% of the bank's share capital) and a minimum 55% holding in Masan Food. PENM will initially invest up to USD 22 m in new share capital for a 5.61% stake in the company.

Furthermore, in order to: (1) protect PENM's investment in Masan Food from the risk of not being part of the company that is setting its strategy; and (2) enhance PENM's exit opportunities in the Masan Food, should Newco be listed in the future, PENM has obtained an opportunity to swap its shares in Masan Food for shares in Newco in 2 tranches. In order to have the opportunity to put our Masan Food shares, it has been necessary to give Newco a corresponding call option. The valuation of PENM's Masan Food shares under this arrangement will be a minimum USD 375 m, which compares favourably to PENM's entry price of USD 250 m (up 50%) and Mekong Capital's entry price from March 2009 of USD 320 (up 17%). The terms of the swap arrangement:

Duration

Masan Food Valuation (USD m)

Newco Valuation (USD m)

First put

12 months from closing

375

375 + 1,000 - net debt

First call

12 - 24 months after closing

375

Market price on stock exchange

Second call

15 months from closing

- 400 within 12 months

- 415 from 12 - 15 months

Market price on stock exchange

Second put

15 - 21 months from closing

450

Market price on stock exchange

The swap gives rise to the following ownership interest scenarios for PENM in Newco, before any dilution for additional capital raising activities:

Investment / Share swap

PENM's ownership interest in Newco

Initial cash investment

Up to USD 22 m

5.61% #

1st Option

PENM swaps 3,150,000 shares in Masan Food

10.07%

2nd Option

PENM swaps the remainder of its shares in Masan Food

14.23% *

#: At an initial pre-money valuation of USD370 m (55% x $400 m + 20% x $1,000 m - $50 m net debt)

*: Assumes valuation of Newco is the same as entry

Swap arrangement:

Masan Food Valuation

(USD m)

Newco Valuation

(USD m)

First put

12 months from closing

- 350 before listing of Newco

- 300 after listing of Newco

350 + 1000 - net debt

First call

12-18 months from closing

350

Market price on stock exchange

Second call

15 or 18 months from closing upto First put excersied before or after listing

- 400 within 12 months

- 415 from 12 - 15 months or 12 - 18 months

Market price on stock exchange

Second put

15-18 or 18-24 months from closing upto Second call period

450

Market price on stock exchange

Following ownership interest scenarios for PENM in Newco:

Investment/Shareswap

PENM's ownership interest in Newco

Initial cash investment

Up to USD 22 m

5.57% #

First put

PENM swaps 4,410,000 shares in Masan Food

11.49%

First call

PENM swaps 4,410,000 shares in Masan Food

11.11% *

Second call

PENM swaps remaining shares in Masan Food

13.62% * or 13.70% *

Second put

PENM swaps remaining shares in Masan Food

13.88% *

#: At an initial pre-money valuation of USD3 71.6 m (54.7%x $400m + 20%x$1,000 m - $47.2 m net debt)

*: Assumes valuation of Newco is the same as entry

Following the completion of its transaction with PENM, Newco will look to raise an additional USD 30 - 40 m from foreign based financial investors - Newco is currently in discussions with Carlisle and TPG. Negotiations with these parties are ongoing and we understand that the entry valuation of Newco will be approximately 15% higher than PENM's entry valuation, reflecting a 25% premium to the value attributed to Masan Food. Should the additional USD 40 m be raised at the above mentioned valuation, PENM's ownership interest, should all shares in Masan Food be swapped, will be diluted to 13.17%.

3. Financial performance

The financial performance of Newco is based on the underlying financial performance of the businesses in which it has invested, including:

- Techcombank

- Masan Food

- New business areas

3.1 Financial performance - Techcombank

Balance sheet - Techcombank

USD m

2008 Actual

June 2009

2009 Estimate

2010 Forecast

2011 Forecast

Cash on hand

87.0

56.6

101.4

123.5

161.2

Balance with the state bank

127.6

104.6

157.8

191.1

248.5

Balances with financial institutions

869.3

912.3

1,199.7

1,299.9

1,712.2

Investments

638.1

635.1

857.6

1,043.8

1,362.7

Net loans and advances to customers

1,445.5

1,829.2

1,940.8

2,523.0

3,279.9

Fixed assets

32.0

35.3

43.1

52.4

68.4

Other assets

82.1

185.0

110.4

134.4

175.4

Total Assets

3,281.6

3,757.9

4,410.8

5,368.1

7,008.3

Balances with other financial institutions

498.3

476.7

529.3

644.2

841.0

Deposits from customers

2,367.3

2,811.3

3,349.5

4,058.5

5,277.4

Other liabilities

103.4

93.2

137.4

163.8

249.4

Total Liabilities

2,969.1

3,381.2

4,016.2

4,866.5

6,367.8

Share capital

261.4

261.4

261.4

261.4

261.4

Retained earnings

35.4

57.1

96.2

187.2

305.3

Reserves

15.8

58.1

37.0

53.0

73.9

Total Liabilities & Equity

3,281.6

3,757.9

4,410.8

5,368.1

7,008.3

YTD June 2009, Techcombank's net loans increased by 29%, compared to 2008, which outstripped market growth of 17% across the sector. Loan growth is expected to be lower in the second half of 2009 as a result of the expiration of the 4% government interest rate subsidy program, expected increases in base rates to curb increasing inflationary concerns and government efforts to limit national annual credit growth to 30%. As a result we expect full year loan growth to be 35% in 2009. In 2010 and 2011 we forecast annual growth in loans of 30%, which will be supported by network expansion, with the number of branch / transaction offices to increase by 45% from 2008 to 2010.

In June 2009 non-performing loans (NPLs), decreased from 2.56% in 2008 to 2.54%, reflecting improved economic conditions. We forecast NPLs to remain at around 2.5% of the gross loan portfolio, while increasing the provision coverage of those loans to 70%, up from current levels of around 50%.

Techcombank's solid balance sheet, at 2008 loans represented 66.5% of deposits, which was among the lowest of all top tier Vietnamese banks, has allowed it to capitalise on other bank's demand for funding, driven by loan growth by being a significant net lender in the interbank market. Historically, this has been a very profitable asset pool for the company. We expect that the company will continue to be an active player in the interbank market and forecast that 70% of its deposit base will be used for customer loans.

Investments are mainly bonds and other debt instruments issued by Vietnamese financial institutions, the government and corporations, a large number of which were acquired at heavily discounted prices in 2008.

Through network expansion and offering innovative products, Techcombank has been able to develop customer deposits, which are mainly from individuals, into its dominant finding source, accounting for 85% of total funds mobilisation at June 2005, up from 80% in 2008. We expect this to continue going forward, to be supplemented with funding from interbank borrowing and by issuing bonds.

Techcombank's capital adequacy ratio (CAR) stood at 14% at the end of 2008, falling to 10.7% at June 2009, we forecast it to remain at around 11 - 13% in the forecast period, significantly above the 8% recommended by Basel and required by the SBV.

Profit and loss - Techcombank

USD m

2008 Actual

June 2009

2009 Estimate

2010 Forecast

2011 Forecast

Interest income

345.5

n.a.

354.9

442.5

563.3

Interest expenses

(247.7)

n.a.

(228.4)

(290.9)

(366.8)

Net interest income

97.8

61.2

126.5

151.6

196.5

Net fee and commission income

26.8

25.7

36.0

46.8

60.9

Trading, treasury and other income

58.1

16.3

44.1

53.7

70.1

Total operating income

182.8

103.2

206.6

252.1

327.4

Operating costs

(48.2)

(29.1)

(62.0)

(75.6)

(98.2)

Depreciation

(2.3)

(1.7)

(3.2)

(3.8)

(5.0)

Net operating income before provisions

132.2

72.4

141.5

172.6

224.2

Provisions

(42.4)

(15.1)

(32.0)

(30.0)

(39.0)

PBT

89.8

57.3

109.5

142.6

185.2

Tax

(24.0)

n.a

(27.4)

(35.7)

(46.3)

PAT

65.7

n.a

82.1

107.0

138.9

PAT %

36.0%

n.a

39.7%

42.4%

42.4%

Note: USD 1 = VND 18,000 (different from the change rate in the info memo)

n.a. - Not available

At June 2009 the bank's net interest margin was 3.6%, down from 4.1% in 2008. Over the forecast period we estimate that this will fall to 2.55% as the market becomes more competitive, leading a CAGR increase in net interest income of 19% from 2008 to 2011 to USD 563 m.

Techcombank will continue its concerted efforts to increase per customer revenue by pursuing fees and commission income from letters of credit, guarantees, FX and commodity futures as well as developing new products.

In 2008 Techcombank booked USD 63 m in realised gains from the sale of bonds purchased in the high inflation environment that existed in mid-2008, a further USD 30 m has been booked in the year to June 2009. While the size of these gains are not expected to be recurring, at December Techcombank had USD 590m of bonds on its balance sheet included in investments, a large portion of which were purchased at heavily discounted rates. In accordance with VAS (Vietnamese Accounting Standards) no gains relating to these bonds have been booked to the income statement. The bank's strong balance sheet mean that it should be able to take advantage of such opportunities, should they appear in the future, however, in the forecast period, we expect income from these investments to be at half the current level and together with treasury, investment and trading income, represent 20% of total operating income.

We expect the write-off of bad debts to be lower in 2009, compared to 2008 as a result of an improvement in economic conditions. As noted above, we forecast the provision balance will cover 70% of the total NPL balance, which is significantly higher than the historical rate of around 50%.

Historically, Techcombank has had a low operating cost ratio, accounting for 26.4% of total operating income in 2008, the lowest of all its peers. Our forecasts, conservatively, include an increase in these costs to 30% of income as competition for staff intensifies in the increasingly competitive environment. As a result of this low cost base we expect PAT to double from 2008 to 2011 to USD 139 m.

3.2 Financial performance - Masan Food

Profit and loss - Masan Food

USD m

2008Actual

YTD June 2009

2009FRM

2009 Estimate

2010Forecast

2011 Forecast

Sales

108.6

83.3

210.1

210.8

296.2

362.5

COGS

(71.9)

(56.0)

(139.5)

(141.2)

(200.3)

(245.4)

Gross profit

36.7

27.3

70.6

69.6

95.8

117.0

Gross Margin

33.8%

32.8%

33.6%

33.0%

32.4%

32.3%

Sales expenses

(8.5)

(9.4)

(27.3)

(23.8)

(34.1)

(42.4)

Admin expenses

(5.1)

(3.1)

(6.3)

(7.9)

(10.4)

(12.7)

EBITDA

23.1

14.8

37.0

37.9

51.4

61.9

EBITDA %

21.3%

17.8%

17.6%

18.0%

17.4%

17.1%

Depreciation

(2.9)

n.a.*

(3.0)

(2.0)

(5.9)

(7.0)

EBIT

20.2

15.0

34.0

35.9

45.5

54.9

Interest

4.4

(0.9)

(3.0)

(2.0)

(2.6)

1.1

Other income

-

2.1

-

2.1

0

0

Tax

(3.1)

(1.4)

(6.2)

(6.8)

(8.6)

(11.2)

PAT

21.5

14.7

24.8

29.2

34.3

44.8

PAT %

19.8%

17.7%

11.8%

13.8%

11.6%

12.4%

Note: YTD June 2009 only includes domestic income, no income from export sales are recorded

*: Depreciation not disclosed at June 2009

YTD June revenue, USD 83.3 m is 120% higher than the corresponding period in 2008, largely due to growth in fish sauce (up 218%), due to the introduction of a mass market label/brand in Q4 2008, and instant noodles, up USD 15 m, following the successful nation-wide launch of Tien Vua, a mass market offering in March 2009. YTD PAT, USD 14.7 m, is 165% higher than 2008, due to improved gross margins (YTD 2009: 34% vs YTD 2008: 31%), as a result of lower raw material prices, which is slightly offset by higher sales costs for fish sauce and instant noodles. Other income of USD 2.1 m is income earned on the interest rate differential arising from the government's interest rate subsidy program.

Based on the particularly strong June results, we have increased our initial outlook (from November 2008) for 2009, increasing our PAT estimate from USD 24.8 to USD 29.3 m, representing a 36% increase on 2008. Our change in outlook reflects lower than expected increase in sales costs as a result of deeper penetration of Tam Thai Tu, Masan Food's mass market fish sauce, in rural and provincial areas. Privately, management expect that 2009 PAT will be USD 35 - 38 m.

Consistent with what we have previously reported, in 2010 and 2011 sales as expected to increase by 40% and 22%, respectively, driven by growth in the following segments:

- fish sauce -Masan Food is focused on increasing market share in this large segment by increasing distribution in provincial and rural areas and offering an even more inexpensive line for those customers. By 2011 Masan Food hopes to have around 50% market share.

- instant noodles - similar to fish sauce, Masan Food will continue to broaden its distribution to rural and provincial areas and offer line extensions of its mass-market noodle line. In doing so Masan Food's estimated market share will increase to around 15% in 2010, from around 8% in 2009 and account for 30% of total revenue.


Currently the revenue forecast does not include any sales from new categories, including granules, frozen food or beverage (refer to Masan Food due diligence for further details). Nor does it include possible changes in distribution as a result of new activities in Newco.

The increased contribution of instant noodles, the gross margin for which (30%) is less than that earned on other sauces (40%), will have a negative impact on profitability going forward as will higher depreciation as a result of investments in additional capacity in 2009 and 2010. Conversely, savings in financing costs in 2011 help improve the PAT%.

Balance Sheet - Masan Food


USD m

2008 Actual

2009 Estimate

2010 Forecast

2011 Forecast

Assets

Cash & Cash Equivalents

5.5

2.1

3.0

42.5

Accounts & Notes Receivable

6.4

23.1

32.5

39.7

Inventories

10.4

17.4

24.7

30.3

Other receivables

44.6

32.8

21.5

11.6

Net Property, Plant & Equipment

14.7

45.6

54.2

61.0

Other long term assets

15.1

10.6

10.6

10.6

Total Assets

96.6

131.5

146.3

195.6

Liabilities

Short Term Borrowings

16.8

35.7

5.4

-

Accounts Payable

9.0

19.3

27.4

33.6

Other Current Liabilities

11.9

12.1

13.0

16.6

Long Term Debt

1.9

0.5

0.5

0.5

Other Long Term Liabilities

0.1

0.1

0.1

0.1

Shareholders' Equity

56.9

63.8

99.9

144.7

Minority Interest

-

-

-

-

Total liab. & shareholders' equity

96.6

131.5

146.3

195.6

The increase in net debt from USD 26.1 m in 2008 to USD 34.1 m in 2009, is a result of capex is in the region of USD 30 m. The majority, USD 24 m, of the spending is to be allocated to additional noodle capacity, both in HCMC and in Hanoi, with the remainder being spent on Vietnam's fished fully automated fish sauce line, USD 5.5 m, in Q4, and moving of the chilli sauce line from the old factory to the new facility in Binh Duong. The capex forecast for 2010 and 2011 does not include expenditure for new facilities in new business areas, including beverage.

The most significant other receivable is USD 17.4 m is a convertible bond owed by Masan Investment. The majority of this exchangeable bond was distributed to shareholders as a dividend from 2008 profits. According to our investment agreement, PENM transferred our rights to most of these bonds to Masan Investment (parent company) for the shares purchased in the initial transaction, the remainder will be part of any swap arrangement.

Masan Food maintains relatively lean working capital levels, offering 40 days credit to its customers (distributors) and maintaining relatively low levels of finished goods such that total raw material and finished goods represents a little over a month of production.

3.3 Financial performance -New business areas

Below is PENM's very early estimate for the earnings potential of the new business areas. These business areas are closely related to Techcombank and Masan Food activities and it is envisaged that there will be close cooperation within the group to ensure that these business areas realise their full potential. We have not included earnings from these businesses in our forecasts or our valuation.

3.3.1 - New business areas - logistics

Logistics - financial highlights

USD m

2010 Estimate

2011 Estimate

2012 Estimate

Revenue

8.3

17.8

21.3

EBITDA %

5%

5%

5%

PAT

(0.4)

(0.6)

0.4

CAPEX

8.0

7.0

-

Newco will partner with Dubai-based Gulf Agency Company (‘GAC') (www.gacworld.com), a leading provider of provider of shipping, logistics, marine and related services, to establish a full scale logistics operation in Vietnam. Initially, the new joint venture, which Newco expects to own a 70% stake in, will distribute Masan Food products. The above estimate assumes that the new venture will carry 40%, 70% and 80% of Masan Food's outbound volume in 2010, 2011 and 2012, respectively. We have not included any new, third party business.

3.3.2 - New business areas -branded rice

Branded rice - financial highlights

USD m

2010

2011

2012

Revenue

2.0

7.0

15.0

Gross profit

0.6

2.1

4.5

Gross margin

30%

30%

30%

PAT

(0.5)

0.25

1.45

CAPEX

8.0

-

-

Newco will invest between USD 3 - 5 m in a joint venture with Olam International (http://www.olamonline.com/), a Singapore-based global leader of supply chain management for agricultural products, for a new factory to produce branded rice. Olam, based partner will assist with processing technology and the development of export markets while Newco will provide an arms-length distribution agreement with Masan Food.

3.3.3 - New business areas -commodity exchange

Newco will team up with Financial Technologies Group (www.ftindia.com), one of the world's largest providers of IT platforms for equity and commodity exchanges, with operations in India, the Middle East, SE Asia and Africa, to establish a local commodity exchange in Vietnam. The exchange will initially focus on the trading some of Vietnam's largest agricultural exports: rice; coffee; and cashews and will use Techcombank's back office as well as leverage from its corporate customer base, a quarter of which are agriculture traders and processors. Currently, there is no financial forecast for this business area.

4. Newco - Opening balance sheet and consolidated P&L

Newco - estimated opening company balance sheet

USD m

2009

Investments

420

Total assets

420

Debt

50

Share capital

370

The opening balance sheet reflects the 2 investments in Masan Food and Techcombank as well as the USD 50 m in debt, which has used in acquiring some of the shares.

Newco - consolidated profit and loss

USD m

2009 Estimate

2010 Estimate

2011 Estimate

Revenue

Masan Food

210.8

296.2

362.5

Branded Rice

2.0

7.0

Logistics

17.8

21.3

Commodity exchange

n.a.

n.a.

Total revenue

210.8

315.9

390.8

PAT before minorities

29.2

33.4

44.5

Elimination of minorities

(13.1)

(15.2)

(20.1)

Techcombank

16.4

21.4

27.8

PAT after minorities

32.5

39.6

52.2

n.a. - not available

The above is our estimate of Newco's consolidated income statement for the forecast period. It includes the full earnings of Masan Food as well as the new business areas, with minority holdings being eliminated after PAT. Techcombank, an associate of Newco, is equity accounted.

5. Valuation

The negotiated valuation for PENM's cash investment in Newco has been based on:

  1. an equity value of Techcombank of USD 1,000 m
  2. an equity value of Masan Food of USD 400 m
  3. net debt of USD 50 m

Giving rise to the following pre-money valuation:

USD m

Pre-money negotiated valuation

PENM cash flow valuation

PENM multiple valuation (PER)

Techcombank (20%)

200

200 - 240

245 - 410

Masan Food (55%)

220

220 - 248

250 - 320

Net debt

(50)

(50)

(50)

Pre-money equity value

370

370 - 438

445 - 680

No value has been assigned to the new business areas.

5.1 Valuation of Techcombank

An equity value of USD 1,000 m for Techcombank, equates to a PE (2009) of 12.2 x (2008 - 14.1 x) and a P/B (2009) of 2.5 x (2008 - 3.1 x). In the context of other listed banking companies in Vietnam, the Techcombank valuation is lower than its peers:

Techcombank Peer Group Analysis

PER

P/B

2008

2009

2008

2009

Local

Vietcombank

27.0 x

20.9 x

5.0 x

4.6x

Vietinbank

24.6 x

24.8 x

3.6 x

3.3 x

ACB

16.9 x

14.9 x

3.8 x

4.0 x

Sacombank

19.7 x

16.2 x

2.4 x

2.6 x

Regional (Indonesia)

Bank Mandiri

16.0 x

14.7 x

2.8 x

2.5 x

Bank Negara

24.3 x

12.3 x

1.9 x

1.7 x

Bank Rekyat

12.9 x

16.0 x

4.1 x

3.4 x

Bank Danamon

9.8 x

21.9 x

3.5 x

2.5 x

Our cash flow analysis, which is based on the above financials and assumes average loan growth of 22% from 2008 - 2014, a net interest margin of 2.5% and a terminal value of 8 x 2014 PAT, discounted at 20% p.a., supports an equity value of between USD 1,000 - 1,250 m.

5.2 Valuation of Masan Food

The valuation of USD 400 m for Masan Food equates to an EV/sales of 1.9 x 2009 (2008 - 3.0 x), EV/EBITDA of 10.2 x (2008- 14.1 x) and a PE of 14.5 x 2009 (2008 - 19.1 x). Compared to local and regional peers, the above valuations appear reasonable, particularly given the current growth rate of the company.

Masan Food Peer Group Analysis

PER

EV/EBITDA

2008

2009

2008

2009

Local

Vinamilk

29.4 x

15.5 x

11.5 x

9.6 x

Regional

China Foods

28.6 x

20.1 x

11.5x

14.1 x

Nestle (Malaysia) Berhad

22.9 x

21.2 x

13.3 x

12.7 x

Fraser & Neave Holdings Berhad

20.3 x

16.2 x

8.9 x

8.3 x

An equity value for Masan Food of USD 400 m is significantly higher than PENM's original entry value of USD 250 m (60%) and than the reported USD 320 m (25%) that Mekong Capital paid in March 2009.

Our cash flow analysis, which is based on the above financials, forecast until 2018, with a perpetual growth rate of 5% p.a. and an annual discount rate of 20%, supports an equity value of between USD 400 - 450 m.

6. Limited due diligence results

6.1 Limited due diligence results - Techcombank

Our due diligence findings were based on interviews, with the assistance of David Hexter, Advisory Board Chairman, with senior Techcombank management (CEO, COO, Head of Treasury and Deputy Executive), as well as McKinsey Consulting, who are currently advising the bank, the CEO of Masan Investment and PwC, the auditor of the largest state-owned and listed joint stock banks in Vietnam. Those interviews confirmed that Techcombank is a well managed bank, strongly positioned to take advantage of the growth potential in the under-developed Vietnamese banking sector.

The key findings from those meetings include:

  1. The cooperation with HSBC has been successful to date - through the staff seconded to Techcombank (currently approx. 20) and representations in all Boards and committees, HSBC is very active in both the day-to-day management as well as at strategic levels in the bank. It appears that the cooperation has been particularly effective in improving/strengthening internal systems and staff development. Having just received its full banking licence, there could be concern that there is a conflict between HSBC's own activities and that of Techcombank, however, HSBC remain focused on providing services to locally based multi-nationals (MNCs) and foreign companies and individuals and not in Techcombank's of affluent local individuals and local Small Medium Enterprises (SMEs).
  2. Management is strong by local standards, although challenges remain - By local standards, Techcombank's management and staff are strong, however, there is still a gap when compared to regional competitors. Recognising the gap, the bank has recently recruited a number of experienced foreigners (in addition to the secondments from HSBC) to the senior management team, including the roles of COO, Head of Treasury, Head of Sales and Head of Marketing. Despite this, remaining challenges include improving branch productivity, staff training and staff retention as still present.
  3. The Vietnamese banking sector is tightly regulated by the State Bank of Vietnam (SBV) - As previously noted, the SBV's control is wide reaching, regulating everything from maximum loan rates banks can charge to loan growth and foreign ownership rules. Its control has the ability to significantly influence the development of the market, as evidenced during the high inflationary period during 2008, however, the development of a stable financial sector appears to be one of the government's focus areas.
  4. One of the key risks for the sector is the devaluation of the VND- as evidenced by Moody's recent downgrading of a number of Vietnam's banks (including Techcombank and ACB, the leading listed joint stock bank) credit ratings, the devaluation of the VND is one of the greatest near-term risks in the banking sector. Techcombank, well aware of the risk, does not trade FX and limits inter day FX positions as part of its arbitrage services to 5 - 10% of its capital.
  5. Techcombank's level of collateralisation is high -Consistent with other local bank's, Techcombank's loan portfolio is highly collateralised. At June 2009 99% of the bank's loan portfolio was secured by collateral. By Vietnamese standards, it applies a conservative appraisal policy, and at June 2009 the appraised value represented 2.2 x the total loan portfolio, with the majority of the collateral being held in real estate and land use rights. This high level of collateralisation is also reflected in the bank's credit processes, which appear to be more asset based than cash flow based.
  6. Techcombank has a low level of NPLs with adequate provisioning-Techcombank's proportion of NPLs to total loans is currently at 2.5%, showing a downward trend, this compares local competitors, Eximbank (4.7%) and Vietcombank (3.5%) who have a similar loan portfolio structure, with a high proportion of loans to corporations, who generally are slower in making interest payments. To cover potential losses in excess of the collateral held against those loans, at June 2009, Techcombank recorded provisions (specific and general) equivalent to 53.7% of its total NPL's, up from 48.7% at December 2008. Based on historical trends, these provisioning levels appear to be adequate to cover any write-off exposure.
  7. We do not believe that Techcombank's NPL level would be significantly higher if recorded under IFRS - the classification of loans under Vietnamese regulations (VAS) is based on outstanding repayment of interest. This differs from IFRS, which uses an impairment based approach, taking into account such factors as the financial state of a company and the industry it is in. This difference allows Vietnamese companies to distort the allocation of loans into various categories by rescheduling repayment dates. However, the bank's management has repeatedly attested that it does not undertake rescheduling and insisted that loans are classified automatically in its banking system.

A recent survey by Fitch, a credit ratings agency, found significant differences in the level of NPLs under IFRS and VAS for the state-owned banks due to legacy loans to state-owned corporations. Although it did not have access to the joint stock banks accounts, Fitch concluded that such differences did not plague the joint stock banks, who were focused on SMEs and retail customers. Our discussions with PwC, auditor for 2 of the largest listed joint stock banks and largest state-owned bank, corroborated these findings and lead us to believe that the bank's NPL level would not be significantly higher if IFRS was applied.

It has not been possible to interview the Head of Risk Management or Techcombank's auditors, KPMG. We have, however, discussed risk management with Newco's Techcombank responsible (author of the Techcombank info memo) and PwC, the leading bank auditor in Vietnam.

6.2 Limited due diligence results - Masan Food

Our due diligence was limited to a discussion with Masan Food CEO, Mr Than, who was upbeat about the future of the company and reaffirmed his commitment to developing Vietnam's leading a consumer-focused food and beverage company by entering new markets and defending its dominant position in existing markets. The main conclusions from those discussions were:

  1. The company's near term food strategy has been finalised - In 2010 Masan Food will focus on marketing a new Vietnamese granule to be used in combination with fish sauce. While granules are currently available in the market, Masan Food's new marketing push is aimed at changing consumer behaviour. Furthermore, the company intends to enter the frozen food market in 2010, starting with an acquisition of a frozen seafood company - a category for which no strong brand exists and where Masan Food can continue its food safety message adopted previously.
  2. The company's beverage strategy is in advanced stages of development, but not yet in place - Masan Food has a vision of being a large food and beverage company and is currently exploring opportunities within beer, ready-to-drink (RTD) tea, water and fruit juices. Of these the most advanced is beer, where the company is considering a partnership with Deer Chang of Thailand in a joint venture that would require an investment of USD 40 - 50 m. Senior management strongly believe that, due to lack of focus consumer from the major local players, SABECO and HABECO, there are significant opportunities in building a new Vietnamese mid-market brand, focusing on the take-home market (which accounts for over 65% of consumption). Entry into this new category will be a significant challenge for the company and will require a new team to be hired into the company.
  3. Management's biggest near term challenge is remaining focused - key to the company's success and profitability, has been its ability to derive value from very few stock keeping units (SKUs). As new markets are added Masan Food needs to ensure that its marketing competencies are not spread too thinly.
  4. The market is increasingly competitive - Asian food suppliers are considered a greater threat than the international players, Unilever and P&G, as a result of their ability to localise recipes and consumer insight. Masan Food's scale, particularly in fish sauce, and local marketing expertise, should help it in defending its position in the market.
  5. Operational issues still exist - consistent with what we noted in our original due diligence, Masan Food continues to have a few operational issues including a poor production set-up (even the new factories are too cramped), an over-complicated internal supply chain and lack of support (operations and finance) from a strong IT system. A new ERP system should be in place by the start of 2010, however, the remaining operational issues still need to be addressed.

7. Key terms

Transaction

Up to USD 22 m in new capital (VND 394,727,571,000), representing an expected ownership interest of 5.5761%.

Use of proceeds

Repayment of debt, investment in new business areas and further capital increases in Techcombank.

Conditions to subscription

Receipt of all relevant evidencefor the ownership structure and approval of the transactions, including Business Registration Certificates, Share Certificates and excerpts of Shareholders Register Books,GSM resolutions, Board resolutions,and due diligence conclusions, accounts etc. satisfactory to PENM and PENM Board approval.

Key covenants, reps and warranties

Standard covenants, representations and warranties found in this type of transactions in Vietnam.

Shareholder rights

PENM's minority rights will be limited to normal rights included in the company charter, we will, however, received 1 Board position for a 2 year period after PENM exercises its first put option and as long as PENM holds 8% of the outstanding equity in Newco, excluding any dilution from the issuance of new shares.

Restrictions

Lock-up of 1 year after closing.

Right of first refusal (one-sided) relating to PENM's shares in Newco gained from the swap arrangement, during the swap period.

Indemnity

Maximum liability, thresholds and Gross-up of Payable Amounts (gross up to ensure that theindemnified party receives and retains a net sum equal to the financial loss actually suffered).

Exit

Through listing or trade sale.

8.Key risks

Key risks

Comments

Mitigation

Limited influence in Newco

Medium: The presence of a dominant majority owner and the possibility of future capital raising may mean that, despite Board representation, PENM has limited influence in the decision making process of Newco

Use close contacts already forged with owners and align interests with other funds. An eventual listing would make Newco an easy exit

Listing of Newco

Low / medium: If Newco is listed, it is uncertain how the market will react to a group that combines banking and food assets.

Diversified conglomerates are not unusual in the Asian context so no significant discount is expected

Bank collapse similar to Europe / US

Low: Despite being unaffected by the recent turbulence, there is a risk that the Vietnamese banking sector experiences similar issues as has been seen in Europe and the US

Complex derivative instruments are not widely used in Vietnam, banking sector is strictly regulated by the SBV and has little financing on the international interbank market

Masan Food not maintaining earnings momentum

Low: The valuation of Masan Food requires the company to maintain its momentum in earnings growth

The same risk exists on our current investment in Masan Food. The company also has a strong pipeline

9. Proposal

PENM is seeking approval to make up to DKK 114,975,0005 m (USD 22 m), and minimum DKK 78 m (USD 15 m), investment in Newco for a 5.5961% stake.

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