ITA GROUP sent an official correspondence to State Securities Commission of Vietnam (SSC), HOSE and HSC for respond to HSC’s distorting informations on ITA shares

To: – State Securities Commission of Vietnam (SSC);
– Ho Chi Minh Stock Exchange (HOSE);
– President and the Members of the Board of Directors of Ho Chi Minh City Securities Corporation (HSC);

We (Tân Tạo Investment and Industry Corporation – ITACO) have received a written reply from HSC’s Managing Director. With regard to this reply, we hereby bring out a brief account to SSC and HOSE of what has happened since we sent our official letter to HSC:

After learning the situation caused by Mr. Phạm Cao Đức’s report, the Management Board of ITACO got themselves involved in working out a solution and sent an official statement to HSC’s Managing Director. The statement says, if HSC finds there are any unclear points left, they should give us a written notice so that we could process an appropriate reply. However, up till now, we have not received any such notices from them. Instead, what we have is just a paper signed by HSC’s top-level management with a view to guarding the misleading points in Mr. Đức’s analysis about the ITA stocks.

Below are our in-depth analyses of HSC’s biased and unfounded answers.

1. As for Mr. Cao Đức’s claim that he did have a phone talk with me: If Mr. Đức had ever telephoned our office, we would have answered him, and any other interested investors, that all the information about our Corporation is always published on our official corporate website. In case of further inquiries from any shareholders, investors, or individuals, they must be formally written and sent to our headquarters, and we shall consider providing necessary information in such a procedure as properly required by Vietnam’s laws. A company like ours cannot (and must not) let any important and worthy sources leaked to anyone about whom the public do not know. Nevertheless, we never received any inquiries from Mr. Đức.

2. As for Mr. Đức’s mentioning my name in his misleading report: After the report was widely spread, a lot of investors contacted and even put investigative questions to our Corporation. I myself dealt with those questions. Mr. Đức also admitted that he had used the figures published on our website, and that he had never discussed the contents of the analysis with me. The act of mentioning my name and claiming that he had talked to me at the beginning of the report, if not serving the purpose of increasing the report’s credibility in shareholders’ and investors’ eyes, is proof of deliberately creating false supporting arguments. It is Mr. Đức’s report that caused a strong conflict between me and ITA’s management and shareholders, for I, as member of the Board of Directors and Chief Accountant, was thought to have provided inaccurate figures about our Corporation’s revenue and profits, about the completion progress of our 2008 plan, which resulted in extensive damage that can never be compensated for. In spite of this perspective, HSC still did not admit their irresponsibility and shortcomings. I myself protect my point of view: Mr. Đức’s act of including my name in the report is of calculating nature, with all the implications as I write above. I strongly demand that Mr. Đức apologize for this act.

3. As for the points that HSC mentioned: We would like to have the following explanations.

3.1. Points 2.1, 2.2, 2.3 (concerning the revenue and profits of FY2008): ITACO’s 2008 plan was prepared while we used the old standards of accounting. When an analyst studies the overall business operations of a company, and knows that company has undergone a big change in the ways of revenue recording, he or she should understand that there must be a difference in the figures recorded. But in the report, the writer makes a comparison between the 2008 plan (built according to the old accounting standards) and the actual FY2008 revenue, and then makes conclusions about our incompletion of the plan, our decreased revenue and profits. He even writes that “Its [sic] important to remember that the issue here is revenue booking according to accounting rules and actual cash flow from projects won’t change that much.” I wonder how many readers can understand the writer’s implications in this statement, and I also want to know if the writer understands the change in revenue recording methods, if he himself meets the standards of a senior expert, if there are any other reasons or not.

3.2. Point 2.4 (concerning the receivables): In his report, Mr. Đức considers the account receivables and the advance to suppliers and other parties as one single sum, and thinks that it is an “alarming” doubling. This is an inaccurate interpretation. In the review report prepared by Ernst & Young (E&Y), the 1-H figures of FY2008 reflect the new accounting principles; the account receivables increase by VND62 billion. The reason for that increase has been explained in my previous letter, but HSC still thinks that Mr. Đức’s comment is not at all incorrect. Please refer again to the FY2007 auditing report and the 1-H review report of 2008. (As for the advance to suppliers, we have a more detailed analysis in 3.3.2.)

3.3. About the cash flow: Our Corporation’s reports clarify this issue. Except for four companies of which most stocks are owned by ITACO, some twenty joint ventures do not have consolidated financial statements. Why does Mr. Đức draw a conclusion about the lack of cash based on the cash and advance reports of those four companies? We can provide you with deeper analysis. At the end of 2005, the cash and deposit balance was VND29 billion; in 2006, this amount was 57 billion; and in late 2007, the figure was 1,005 billion. The sharp change in the 2007 figure can be accounted for by our successful share issue, so we received a large amount of cash.

3.3.1. Thus, to an expert, it is easy to understand that our company’s cash balance recorded as at June 30, 2008 is normal if compared to the previous years. This can also be seen in our financial reports: Short-term investments rose to VND283.6 billion from 188.7 billion; the receivables due from the affiliates increased from VND114 billion to 374 billion. All this amount of money is what we contribute to the affiliates for ground clearing and land compensation, or use as short-term deposits to bring the highest value to our Corporation.

3.3.2. Moreover, the analysis of the payment in advance to material suppliers and contractors proves: In early 2007, the amount in this account was VND109 billion, and at June 30, 2008 it was 444 billion. For the past twelve years, we have always asked our contractors to advance part of their capital to spend on construction projects. Even though these months the inflation rate and the costs of construction materials have been continuously rising high, we still accept to pay the contractors exactly the amount of money they have spent before so as to keep the prices the same as quoted in the ratified plan. If the analyst is meticulous, knowledgeable and responsible, he or she will realize this kind of decision is highly flexible. In fact, while a lot of companies cannot continue their construction projects, ITACO keeps going with infrastructure development like road and water drainage systems, water plants, to make sure that the Tân Đức Industrial Park Phase 2 will be put into good use at the right time as planned.

3.3.3. Within three months, we cleared and compensated for more than 500 hectares of land for industrial parks and E-city, which increased our total assets from 5,300 billion to 6,252 billion. This increase was due to our use of 952 billion for land compensation and clearing and for infrastructure development. Meanwhile, the FY2007 debt/asset ratio dropped from 11% to 7% in the first half of 2008. It was because we paid more than VND64 billion for short-term loans with high interest rates; we do not pay for long-term loans that have reasonable interests. Besides, we have the long-term credit limit of 100 billion that we have not spent. This further affirms that the use of cash by our Corporation is for good purposes and healthy for our normal operations.

3.4. As for the EPS calculations: The rigid application of the formula by Mr. Đức led him to a conclusion: “The stock is currently trading at which values the company at VND41,600 which values the company on a forward P/E of 28x based on our revised EPS estimates of VND1,513.” HSC says, “in the whole report, the writer always advises investors to notice that what is written in reports may be very different from the business plan that ITA proposed.” What are such warnings for?

3.5. “The main revenue driver was the last tranche of income from the Tan Duc phase 1 development with 10ha leasing land and 30 factories for lease, and Tan Duc phase 2 with 26 ha leasing land.”

We do not know the source from which Mr. Đức quotes these figures. The truth is: The Tân Đức Industrial Park Phase 1, which was started in 2005, covers an area of 272 hectares. After two years, it was filled with 23 factories, which are currently operating, and more than 80 are being designed and built. In the second phase, this project is rapidly built with the surface of 263 hectares of land, and 50% of the surface has been arranged to be transferred after customer’s deposits were received. It is estimated that the land plots will be gradually transferred from late 2008 till 2009. The revenue will be recognized at the time of land transferring. In the reports, the customers have deposited 350 billion VND, a double against early 2007. This means the business activities are under good progress. However, because the Tân Đức Industrial Park Phase 2 is under the stage of infrastructure development, we are not able to transfer land to customers; as a result, we cannot record the revenue from contracts signed, but from the customers’ deposits.

Another statement from Mr. Đức’s report:

“The second factor is that demand for industrial park has fallen off more sharply than expected. 1-H earnings were mainly driven by the new contracts to lease land from 10ha remaining from Tan Duc phase 1 from a total of 273 ha plus 30 factories for leasing and 26 ha of Tan Duc phase 2 from a total of 262 ha.”

Due to the wrong figures, Mr. Đức has made negative comments about our Corporation, making the readers have a bad view of ITACO’s business operations as we discuss above.

3.6. “The company’s current problems then stem mainly from the lack of new contracts signed rather than from actual cash flow from contracts signed last year which is still coming in. Earnings for FY2008 will be limited to how much sale ITA can make from Tan Duc Phase 2, but the slow development and sluggish demand means we will fall short this year.”

How can Mr. Đức make such subjective statements? We can infer that this kind of writing is just based on “intuition” and infused with individual purposes, because the actual business activities of ITACO do not reflect the situation described in Mr. Đức’s sentences. We have received VND350 billion in deposits for signed contracts, while in early 2007 we just got 195 billion. We cannot put this year’s figures into the records until we have completed all the procedures of land transferring.

3.7. “For FY2009, results will depend mainly on sales from Tan Duc industrial park phase 2.”

This sentence is the direct consequence of not grasping the true view of our Corporation’s business. ITA Group has always been pioneering in the role of putting forward pilot policies in order to bring benefits to investors and the whole country. We are totally different from other industrial park development corporations, which sell out all their land plots after building industrial parks or zones. This step leads them back to the status of having no assets at all. ITA’s Management Board set a policy that we must keep 30% of the land plots for lease. Thus, our Corporation is possessing 200,000 square meters of land (in the form of plants and offices for lease, with the rates of $3-6 per square meter in a month), more than 52 hectares in downtown area, which joint ventures assess at $400-1000/m2) to construct ITA Mart, ITA Bank, restaurants, hotels, and apartments for lease. This source of revenue is absolutely stable. In addition, 28% of our revenue comes from a lot of services we provide: electricity and water supply; industrial food portions; waste water processing; pure water supply; health clinics; restaurants; rubbish collecting fees; infrastructure fees; workers’ housing compounds; return on land and plant leasing, etc.

3.8. “Going forward, ITACO Holding and its affiliates have a number of huge projects which will require them to raise a lot of capital which of course leads to potential heavy dilution risk. In the meantime they need to sort out their balance sheet and reorganize themselves.”

3.8.1. HSC is a securities company who advertises themselves as professional but gives themselves the privilege of making bad comments on ITA. ITA has been granted the right of being the proprietor of Kiên Lương Power Plant, Vietnam’s largest thermo-electricity plant. All the items in this big project, including land clearing and compensation, water and electricity supplies development, water drainage systems building, are very much like industrial zone development, which ITA has always been spearheading. In order to develop 443-hectare Tân Tạo Industrial Park, it took as long as five years to invite 300 investors to fill the whole park. But in the 636-hectare Kiên Lương project, which has only one group of investors, we will need one year to get back 100% of the investment after we have transferred the land to the power plant. Energy industry leading partners are rapidly designing, preparing the contract portfolio, and arranging to get loans under the guarantee of Vietnam’s Government, because this is a national major project that will be started in 2009. Up till now, ITACO has finished the overall plan and is now in the stage of land clearing, compensation, and infrastructure building to meet the deadline of transferring land to partners.

This is an advantage and special benefit that ITA brings to its shareholders. ITA can allocate one part of its profits, which are made from infrastructure development and land leasing, as a contribution to 10% of the capital of the power plant. In exchange, ITA benefits from one commitment: the continuous electricity supply to ITA’s investors. Therefore, prospective investors are more and more attracted to ITA’s industrial zones, while other investors suffer from immense losses because of weekly power cuts exercised by EVN.

3.8.2. As for urban area projects: ITA never develops urban areas prior to industrial parks. With the top advantage of developing industrial parks all over Vietnam, an average of 30,000 workers are working every day in each zone. The demand for services and utilities is increasing quickly. Though we have built housing compounds and leased them to thousands of workers, the demand is not met. So the idea of building new urban areas around industrial parks, for which the demand is being created by ourselves, is a guarantee for our investments. It can be seen a unique advantage which not all realty investors have. A great number of investors in our industrial parks have registered to lease or buy housing complexes or apartments for their own firms.

3.8.3. As for the construction of office blocks and trade centers inside industrial zones: Thanks to a giant workforce concentrated in a single area, a big market with great potentials for commercial activities has been formed. In each industrial zone, we have branches of at least four well-known banks providing complete financial and banking services. And a lot of important names in this field have cooperated with ITA to develop ITA Mart, ITA Bank. Obviously, it is a great benefit that just the investors and their shareholders can enjoy.

3.8.4. ITA is also active in establishing positive relationships with State-owned Corporations that are owning valuable land plots located inside the city, and building for them industrial parks to serve the plan of moving works to the suburbs as required by the City’s strategy. ITA also works in joint with them to build office blocks, trade centers, housing complexes and hotels. All these operations bring ITA a double benefit: (i) sale of plant plots in industrial plants, (ii) increase of profits made from projects at the top-value (“gold and diamond”) locations inside the city.

Thus, if HSC is responsible and capable enough, they cannot write a sentence like this: “Looking forward however the company has a very ambitious pipeline and they seem to be struggling to mobilize capital for some huge industrial park and realty projects expected to drive earnings from FY2010 onwards. Part of the problem lies in having too many projects and too broad a focus.”

Is the act of transforming an advantage into a bad policy, as Mr. Đức wrote, a devastating attack that is aimed at our Corporation? We require that HOSE and SSE clarify this issue.

3.9. “We also understand that the company has delayed its plan to issue a convertible bond to overseas investors because of the unfavorable market and tough conditions. Domestic banks would need to guarantee the issue according to the current rules on overseas issuance and apparently this may also have been a sticking point. So with the source of funding a little unclear at the moment it would appear that the company will have to delay much of its project pipeline until it can sort out alternative financing.”

Actually, although the global financial market is in a serious crisis, we have received a lot of offers from second and third level funds in the world to buy our convertible bonds. These offers are seen as very good by top analysts. However, our Management Board do not think it is the right time to issue convertible bonds because the prices of the stocks tend to drop sharply. Besides, the investors themselves say that they agree to wait for the sound decision of ITACO’s Management Board, as they completely believe in the analytical abilities and leadership of ITACO’s managers, as well as the Corporation’s business model and development potentials. We have also had working sessions with the State Bank of Vietnam and have been thoroughly guided: Upon the overseas issue of convertible bonds, we only need to register the total value that is to be issued, which will be the basis to return the profits and capital when necessary.

Though the writer of the report is an expert in a securities company, he does not know and understand the procedures and protocol of convertible bond issue. Who requires that the convertible bond issue be guaranteed by domestic banks? Mr. Đức mentions the international law. We here expressly ask a question: what law and what article, and applied in what countries? Such a lack of knowledge about domestic and foreign laws has caused serious damage to investors, especially those who do not have broad analytical visions.

3.10. “At the end of the 1-H ITA had contributed VND1,200 billion in joint ventures up from VND900 billion in FY2007 and also had about VND1,600 billion in both long and short term financial investment up from about VND400 billion in FY2007.”

3.10.1. In the report, Mr. Đức inserted a table of figures about our affiliates and joint ventures. This table shows very clearly that ITACO is investing in other businesses to expand its territories. But the writer deliberately creates ambiguous implications about our corporation’s investments in our core business activities, and makes the readers think we are making financial and securities investments in such a context that any companies that are involved in the stock exchange must be faced with detrimental losses. ITACO’s Board of Managers are wise enough to use just one steadfast strategy: only focus on the Corporation’s core business activities. Are Mr. Đức’s statements to stain ITA’s reputation?

3.10.2. “Besides risk of further provisioning for its securities portfolio, the company is exposed to some risk due to the VND500 billion which has been entrusted to an individual to invest in securities on their behalf. There is also the matter of a long term loan totaling VND300 billion made to an individual. The details of both are somewhat unclear and we are seeking more clarification.”

In reality, the entrusting of an individual to make investments is to contribute to the capital of banks and financial institutions, which has been written in the Resolution of the shareholders’ meeting. These banks open their branches in ITA’s industrial parks, and this is one of the financial services that ITA has instigated and successfully provided for the past twelve years. The yearly return on land and plant leasing reaches the mark of $10m. Currently, ITA allows the investors in the IP’s to pay installments, which total $280m, within five years. It is this service that assists investors to develop together with ITA. When starting to lease land and plants in ITA’s industrial zones, many investors were just small enterprises. And now they have become big names inside and outside Vietnam. They also lease land and plants in ITA’s newly built industrial parks.

3.11. “Going forward, ITACO Holding and its affiliates have a number of huge projects which will require them to raise a lot of capital which of course leads to potential heavy dilution risk.”

As we have fully analysed, it can be seen that all the statements and assessments by Mr. Đức and HSC are not based on facts. If HSC has studied ITA’s business and funding models, they might have understood that, whenever developing a new project, ITA is always loyal to the following model:

§ Capital owned: 5-10%

§ Purchase registration and customers’ deposits: 40-50%

§ Capital borrowed: less than 30%

§ Contractors’ advance capital: 10-15%

Furthermore, ITA’s Board of Management decide on one strategy: no investments in projects of which the internal rate of return (IRR) is less than 35%. Indeed, all ITA’s projects have the IRR of 60-80%. Therefore, with the initial equity capital of just $1.2m, the total assets calculated at the original prices have gone over VND6,500 billion; if re-calculated with the current prices, the assets should be about $1b, more than 900 times after twelve years of our Corporation’s foundation and development.

3.12. “Sentiment in the stock has been also hurt recently by news that two large investors, Richland International and Vietnam Infrastructure Strategic have both registered to sell 5 million and 375,000 shares respectively to reduce their holdings.”

In fact, there is only one fund, namely Richluck, that has registered to sell 711,480 shares. But Mr. Đức has “changed” the name and put the figure to 5 million! The shareholders and investors are misled as to the existence of even another fund. Mr. Đức’s act has caused deep uncertainty and inquietude among domestic and foreign shareholders and investors. Why did Mr. Đức and HSC spread false news and not correct it and claim responsibilities? We ask for a fair judgment from HOSE and SSE.

3.13. In the report, there is a comparison between the decline of VN-INDEX and that of the ITA stocks. It is an inappropriate comparison in the area of financial analysis. It is because VN-INDEX is the common index reflecting the average decline of all stocks, while ITA is one of the blue chip stocks. The ITA stock’s decline, if compared with other blue chip stocks, must be smaller. Such a comparison must have created a bad image in investors’ mind about the ITA stock when they are informed that this decline is much greater than the average of the market.

All of Mr. Đức’s subjective and distorting assessments affirm the truth in one Vietnamese folklore story about five blind fortune-tellers. One day they go to “see” an elephant. One of them thinks the elephant must be a big fan. Another thinks it is a pillar in the communal hall... The only reason for this ridicule is they never can see a real elephant in their own eyes.

In our opinions, securities corporations need a fair and broad view as well as good intent when analyzing a company’s business operations. It is also necessary that they act as friends to investors and companies listed. This kind of philosophy is certain to lead to stable development and trust from investors.

We now formally request that

§ HSC immediately correct the distorted information, post apologies to the public media and all of the investors to whom they have sent Mr. Đức’s report;

§ HSC prove themselves to be a professional and responsible securities company, both to investors and listed firms, by applying adequate punitive measures upon Mr. Đức, who has deliberately and purposely spread shocking news and distorted truths about our Corporation;

§ SSE and HOSE organize a working session to bring about preventive measures to stop any bad intentions and purposes from securities companies, so that Vietnam’s stock market should develop in a positive orientation;

§ SSE and HOSE impose appropriate sanctions on those companies which, out of their own interests, spread scandalous contents in their analyses, because extensive damage can be caused to small investors, especially Vietnamese young entrepreneurs.

ITACO is a public company that is always open to all securities firms, funds, and investors. We are willing to establish long-term cooperative relationships with HSC. However, due to a non-fact-based jug dement and a biased viewpoint, HSC may make these grave mistakes again, and thus lose their own prestige in investors’ eyes.

Yours sincerely,

NGUYỄN THỊ SƯƠNG,

ITACO
Deputy Managing Director,