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Case: Valuing Hoa Phat (HPG)

Hoa Phat Group (HPG) is Vietnam’s largest steelmaker, a heavy-industry producer with revenue of approximately VND 140 trillion (FY2024). Steel is a cyclical commodity, so a single recent year is a poor base and a naive DCF off peak or trough margins misleads. This case applies through-the-cycle normalized margins, builds base, best and worst scenarios with a sensitivity check on the swing inputs, and validates the result against an EV/EBITDA cross-check. The discipline turns a volatile earnings stream into a defensible mid-cycle valuation rather than an extrapolation of whichever phase the cycle happens to occupy today.

Why it matters

A commodity producer earns fat margins at the top of the cycle and thin or negative ones at the bottom, which is precisely when a careless DCF goes wrong. Capitalise a boom margin into a perpetuity and the value balloons just as the stock looks cheapest on trailing earnings. The cure is to forecast from a normal year. Average the operating margin across a full cycle, apply it to a sustainable volume, then test how far the answer moves as steel prices and spreads flex. A relative cross-check on EV/EBITDA guards against a DCF that has drifted away from where the market prices comparable producers.

Formulas

Through-the-cycle normalized operating profit
m‾=1n∑t=1nEBITtSalest,EBITnorm=m‾×Salesmid\overline{m} = \dfrac{1}{n}\displaystyle\sum_{t=1}^{n} \dfrac{\text{EBIT}_t}{\text{Sales}_t}, \qquad \text{EBIT}_{\text{norm}} = \overline{m} \times \text{Sales}_{\text{mid}}
Average the operating margin over a span n that covers a full cycle, then apply that mid-cycle margin to a sustainable sales level rather than to peak or trough volumes.
EV/EBITDA cross-check
Implied EV=(EVEBITDA)peer×EBITDAnormalized\text{Implied EV} = \left(\dfrac{\text{EV}}{\text{EBITDA}}\right)_{\text{peer}} \times \text{EBITDA}_{\text{normalized}}
Apply a peer EV/EBITDA multiple to normalized, mid-cycle EBITDA, never to a boom-year figure, then compare the implied enterprise value with the DCF output.

Worked examples

Scenario

Hoa Phat reported revenue of approximately VND 140 trillion (FY2024). For illustration only, assume operating margins of 16, 10, 4 and 6 percent over four years that span a cycle, with a latest boom-year margin of 16 percent. Why is forecasting off 16 percent dangerous, and how would a scenario and cross-check discipline this case?

Solution

These margins are illustrative and anchored only to the real revenue scale of about VND 140 trillion. The four-year average margin is sixteen plus ten plus four plus six over four, which is 9 percent. Capitalising the 16 percent peak, especially inside a terminal value, would bake an unrepeatable boom into the valuation and overstate Hoa Phat badly. A through-the-cycle base instead applies the 9 percent mid-cycle margin to a sustainable sales level. The scenario layer then frames a base case around that mid-cycle margin, a best case nearer the peak and a worst case nearer the trough, while a sensitivity test flexes the steel spread that drives margin. Finally, applying a peer EV/EBITDA multiple to normalized EBITDA gives an independent enterprise value. If the DCF and the multiple agree, confidence rises. If they diverge sharply, the cyclical assumptions need another look.

NoteAll margins, multiples and any enterprise value here are illustrative and exist to show the through-the-cycle method, not to state Hoa Phat’s actual margins or valuation. Only the VND 140 trillion revenue scale is a reported figure.

Common mistakes

  • ✗The most recent year is the best forecast base for a steelmaker. For a cyclical producer the latest year may be a peak or a trough, so a through-the-cycle base is more representative.
  • ✗A cyclical firm is cheapest when its trailing P/E is lowest. Trailing earnings peak at the top of the cycle, so the lowest trailing multiple often coincides with the most overvalued point, not the cheapest.
  • ✗Scenario analysis and sensitivity analysis are the same thing. Sensitivity flexes one input at a time, while scenario analysis moves a coherent set of inputs together into base, best and worst states of the world.
  • ✗An EV/EBITDA cross-check should use the latest reported EBITDA. For a cyclical firm the multiple must be applied to normalized, mid-cycle EBITDA, or it simply repeats the peak-or-trough error.

Revision bullets

  • •Hoa Phat (HPG) is a cyclical steelmaker, revenue about VND 140 trillion (FY2024)
  • •Forecast from a through-the-cycle margin, not a peak or trough year
  • •Build base, best and worst scenarios around the mid-cycle base
  • •Sensitivity-test the steel spread and volume that drive margin
  • •Cross-check the DCF with a peer EV/EBITDA on normalized EBITDA
  • •The lowest trailing multiple can mark the top of the cycle, not a bargain

Quick check

For a cyclical steelmaker such as Hoa Phat, the safest base for a long-run margin forecast is

When using EV/EBITDA to cross-check a cyclical DCF, the EBITDA the multiple is applied to should be

Connected topics

Scenario AnalysisNormalizationThrough the CycleEV/EBITDAEnterprise DCF

Sources

  1. Hoa Phat (2024)
    Hoa Phat Group JSC. FY2024 Annual Report.
    Source for the revenue scale of approximately VND 140 trillion. All margins, multiples and valuations in this case are illustrative.
  2. Titman & Martin, Ch. 6
    Titman, S., & Martin, J. D. Valuation: The Art and Science of Corporate Investment Decisions. Pearson.
    Cautions against forecasting cyclical firms from a single peak or trough and grounds scenario and sensitivity analysis.
  3. Damodaran on cyclical and commodity firms
    Damodaran, A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
    Recommends normalized through-the-cycle earnings and a relative cross-check for commodity producers.
How to cite this page
Dr. Phil's Quant Lab. (2026). Case: Valuing Hoa Phat (HPG). Derivatives Atlas. https://phucnguyenvan.com/concept/sabv-case-hoa-phat
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