Business analysis & valuation

VIETNAM NATIONAL UNIVERSITY – HO CHI MINH CITY INTERNATIONAL UNIVERSITY SCHOOL OF BUSINESS

A COMPANY ANALYSIS AND VALUATION OF HAUGIANG PHARMA A report submitted to The School of Business Administration in partial fulfillment of the requirement for the course in “Business analysis and valuation”

Group members:

Supervised by

Nguyễn Thị Ngọc Quỳnh

Ms. Nguyen Canh Tien

Bùi Nữ Yến Ngọc

Ho Chi Minh, Jan 12th, 2013

Nguyễn Trâm Anh Nguyễn Hoàng Lâm

Table of Contents INTRODUCTION ................................................................................................................................ 4

I. 1.

History............................................................................................................................................... 4

2.

Economy ........................................................................................................................................... 4

3.

The Organization .............................................................................................................................. 5 3.1.

Concentric diversification subsidiaries: .................................................................................... 5

3.2.

Distribution subsidiaries: .......................................................................................................... 5

4.

Products............................................................................................................................................. 6

5.

Markets ............................................................................................................................................. 7 STRATEGIC ANALYSIS .................................................................................................................... 7

II. 1.

PEST analysis ................................................................................................................................... 8 1.2. Political factors .............................................................................................................................. 8 1.3. Economical factors......................................................................................................................... 8 1.4. Social and cultural factors .............................................................................................................. 8 1.5. Technological factors ..................................................................................................................... 9

2.

Porter’s five forces ............................................................................................................................ 9 2.1. The threat of new entrants into the market – MEDIUM ................................................................ 9 2.2. The threat of increased competition from rivals within the industry - HIGH ................................ 9 2.3.

The bargain power of buyers - LOW ...................................................................................... 10

2.4. The bargain power of suppliers - HIGH ...................................................................................... 10 2.5. The threat of substitute products - LOW...................................................................................... 10 3.

SWOT analysis ............................................................................................................................... 10 3.1. Strengths ...................................................................................................................................... 10 3.2 Weaknesses ................................................................................................................................... 11 3.3 Opportunities................................................................................................................................. 11 3.4. Threats.......................................................................................................................................... 11

4.

5.

Risks................................................................................................................................................ 12 4.1.

Economic risk: ........................................................................................................................ 12

4.2.

Risks on the fluctuations of input price: ................................................................................. 12

4.3.

Exchange rate risk: .................................................................................................................. 13

4.4.

Industry risk: ........................................................................................................................... 13

Objectives – Strategies for 2012 - 2016 .......................................................................................... 13 2

FINANCIAL ANALYSIS .............................................................................................................. 15

III.

Key figure analysis ......................................................................................................................... 15

1.

1.1.

Liquidity .................................................................................................................................. 15

1.2.

Solvency ratio ......................................................................................................................... 16

1.3.

Efficiency ratio........................................................................................................................ 16

1.4.

Profitability ratio ..................................................................................................................... 20

1.5.

Cash flow analysis .................................................................................................................. 21

1.6. IV.

Sub conclusion ............................................................................................................................ 22 FORECASTING ............................................................................................................................. 22

1.

Forecasting of future sales .............................................................................................................. 22

2.

Costs................................................................................................................................................ 24

3.

Financial posts ................................................................................................................................ 25

4.

Investment and depreciation ........................................................................................................... 26

5.

Taxes ............................................................................................................................................... 26

6.

Other assumption ............................................................................................................................ 26

7.

The estimated future income statement and balance sheet ............................................................. 28 VALUATION ..................................................................................................................................... 30

V. 1.

Weighted average cost of capital (WACC)..................................................................................... 30

2.

Discounted cash flow (DCF)........................................................................................................... 31

3.

Sensitivity analysis.......................................................................................................................... 33

Sub conclusion ........................................................................................................................................ 35 VI.

CONCLUSION ............................................................................................................................... 35

VII.

REFERENCES ............................................................................................................................... 37

VIII.

APPENDIX ..................................................................................................................................... 38

APPENDIX A: DHG Balance Sheet from 2007 to 2011 ........................................................................ 38 APPENDIX B: DHG Pharma’s Income Statement from 2007 to 2011 .................................................. 42 APPENDIX C: DHG Pharma’s Cash flow Statement from 2007 to 2011 .................................................. 43 APPENDIX D: DHG Pharma’s Key figures from 2007 to 2011 ................................................................. 46 APPENDIX E: Notes for estimation of Income statement and Balance sheet from 2012 to 2016 ......... 47

3

I.

INTRODUCTION

1. History Precursor of Duoc HauGiang Pharma (DHG) was “2/9 Pharmaceutical Factory” and was founded on September 2, 1974 at Ca Mau Province. In 1982, Hau Giang Pharmaceutical United Factory was founded base on the consolidation of three units: “2/9 State-owned Pharmaceutical Factory”, “Pharmaceutical Company Level 2” and “Herbal Medicine Station”. Twenty eight years later, on 2 September 2004, the Company was changed into “Hau Giang Joint-stock Company”. At the end of 2007, DHG made their first investment in another company when investing in SH Pharma, a company that distributes DHG products. SH Pharma is also first step to form DHG Pharma Group. Today, DHG have thirteen subsidiary companies and two associated companies. DHG was listed on HOSE on 21 December 2006, 8,000,000 shares of DHG Pharma posted on Ho Chi Minh Stock Exchange (HOSE) under the securities code DHG at the price of VND 320,000 per share. The company issued shares to the public on July 2007, collecting nearly VND 399 billion, of which VND 379 billion is the share premiums. At the very first time of the start-up, the company only had around 50 people. Number of staffs at DHG Pharma increase year by year, today the total number of employees at the company is 2485 in which university level is 19%; colleges and secondary 43%; high schools 38%. During its business, DHG has achieved several honored titles, such as; Labor Medal 1988, 1993 and 1998; Independence Medal 2004 and 2010, Hero of Labor 1996, etc.

2. Economy The market value of DHG’s ordinary shares just exceeded VND 3,649 billion at the end of December 2011, as the share closed at VND 56,000, significantly reduced from the all-time high notation of VND 120,000 in December 2010. At the end of 2011 the company had a net debt of 135,1billion. DHG’s shareholder equity, that is the company’s total assets minus its total liabilities, is estimated to VND 1,393.4 billion at the end of 2011, which makes of a shareholder equity ratio around 69.8%.

4

3. The Organization

Company

Subsidiaries

Association

Charter capital

Percentage of

(mill)

ownership

DHG Nature

5000

100%

DHG PP

5000

100%

DHG Travel

3000

100%

DHG Pharma Ltd.

50000

100%

SH Pharma

5000

51%

CM Pharma

5000

100%

DT Pharma

5000

100%

HT Pharma

5000

100%

AG Pharma

5000

100%

ST Pharma

5000

100%

TG Pharma

5000

100%

TOT Pharma

5000

100%

BALI Pharma

5000

100%

SPIVIHA

12000

31%

VIPACO

50000

20%

Table 1. Subsidiaries and Associations DHG controls over 13 subsidiaries and 2 association companies. DHG classifies its subsidiaries into 2 categories:

3.1.

Concentric diversification subsidiaries:

This category includes DHG Nature, DHG PP, DHG Travel, and DHG Pharma Ltd. All of these companies are full consolidatedand focus on manufacturing pharmaceuticals and related products.

3.2.

Distribution subsidiaries:

The most significant companies in this category are CM Pharma, DT Pharma, HTPharma, AG Pharma, ST Pharma,… these companies are also full consolidated (except SH Pharma) and 5

engage in distributing DHG product to 64/64 provinces. Over the last two decades, the distribution network has been expanded with 09 sub-companies, 28 branches , and 67 drugstores at hospitals.

Figure 1. Distribution system

4. Products DHG specialize in development, making and sales of pharmaceutical products, cosmetic and functional foods with over 11 brands. 6

DHG products are under constant development, within the industry having the fast technology growth.

5. Markets

Sale value Domestic

Export

1%

99%

Figure 2. Sales markets

In 2011, 98.8 percent total sales of goods self-produced came from the domestic market; the last 1.2 percent is from exporting activities. Despite of that fact that foreign market contributes a small amount into total sales, exporting revenue has increased in value in recent years. For instant, the export revenue in 2011 gains 27 billion VND, increase 27% compared to 2010.In many years, DHG have built a strong relationship with familiar exported markets like Moldova, Ukraine, Myanmar, Russia, Mongolia, Cambodia, Nigeria, Laos, and Singapore. Lately, DHG have also set their feet on many new trading markets, include: Jordan, Taiwan, Malaysia, Czech Republic, Belarus, Kazakhstan, Hong Kong, Indonesia, Sri Lanka, Ghana, France, Pakistan.

II.

STRATEGIC ANALYSIS

In this report, we use the PEST analysis with an aim to analyze the macro environment that affects DHG’s activities. Besides, we also employ the Porter’s Five Forces which helps to determine the competitiveness of the industry DHG is in. 7

To conclude the strategy analysis we construct the SWOT model which consists of internal factors (strengths, weaknesses) and external factors (opportunities, threats) affecting to DHG business.

1. PEST analysis 1.2. Political factors The pharmaceutical industry is one of the sectors affected strongly by the management of the state. The government has issued many legal documents to manage the pharmaceutical industry including documents related to the matter of state policy in the field of medicine, management of state on drug prices, drug testing facility, management of the drug subjecting to special control. Since 01/07/2008, producers not qualifying GMP standard as recommended by the World Health Organization (WHO GMP) and business importing, exporting, trading pharmaceutical storage system does not meet GSP standard would have to stop production. There are also regulations such as "GDP" good practice on drug distribution, "GPP" good practice on the management of the pharmacy ". Only the business meeting the new standards may exist and develop. These rules will help create conditions for Vietnamese small pharmaceutical company merger or acquisition, promote domestic enterprises to improve, focus in depth development to be able to compete with multinational companies.

1.3. Economical factors Vietnam's economic growths over the years are stable, creating favorable conditions for economic development. However, the global financial crisis had a strong impact on the economy. High inflation causes people to be more cautious in their investment and consumption. Nevertheless, in comparison with other industries, the pharmaceutical industry is one of the few industries influenced least by the crisis, because this is one of the essential goods to the people.

1.4. Social and cultural factors The majority of Vietnamese people concentrate in rural areas with low living standards, high demand for cheap drugs. This is favorable conditions for domestic pharmaceutical businesses extend markets.

8

Moreover, Vietnamese consumers’ living standard has gradually improved; health status is increasingly concerned resulting in a high demand for drugs in order to ensure health. Therefore, this is also a favorable condition for the development of Vietnam pharmaceutical industry.

1.5. Technological factors Production technology is at low level. Most drug manufacturing enterprises only focus on simple pharmacy leading to duplication of product line, not focus on the development of specific remedy or special preparation. Therefore, domestic supply only meets 40% of market demand. To compete with foreign companies, domestic pharmaceutical firms are now upgrading modern production line according to international standards.

2. Porter’s five forces 2.1. The threat of new entrants into the market – MEDIUM -

The Pharmaceutical industry has experienced the average high growth rate of 16- 18%

-

The pharmaceutical companies is tightly controlled by government polices

-

The pharmaceutical companies need to meet the GSP standard provided by WHO (and GDP, GLP, PPP standards) in order to stay in this industry.

-

Capital requirement is low due to the fact that most of companies focus on simple production, low technology, unspecialized.

2.2. The threat of increased competition from rivals within the industry HIGH -

The Pharmaceutical industry has experienced the average high growth rate of 16- 18%

-

From 1/1/2007 foreign firms will be allowed to open branches in Vietnam in the form of joint venture or 100% foreign capital. The number of foreign companies increased rapidly from 300 in 2007 to nearly 500 enterprises in 2010. (Annual report 2010)

-

Vietnamese companies mainly concentrate on ordinary products without much differentiation; compete severely in a small segment market.

9

-

Pharmaceutical corporations with big names such as Sanofi-Aventis (France), GSK (UK), Servier (France), Pfizer (USA), … has appeared in Vietnam and dominated the domestic market in specific remedy segment. (Annual report 2009)

-

Although at current time, the foreign pharmaceutical firms cannot produce and distribute in the domestic market, as of the time of protection expiring, the pharmaceutical industry will have a fiercely competitive environment. At that time the domestic pharmaceutical enterprises will have to cope with the multi-national corporations with modern technology and high productivity.

-

2.3.

High switching costs when customer can freely switch from this product to another

The bargain power of buyers - LOW

-

Low buyer concentration versus firm concentration

-

Drug is an essential products that can not be replaced by any other product

2.4. The bargain power of suppliers - HIGH -

Manufacturing activities depend on more than 90% imported materials from India, China, Holland…

-

High concentration of suppliers

-

Low differentiation in suppliers

-

Low present of substitute input

2.5. The threat of substitute products - LOW -

Drug is an essential products that can not be replaced by any other product

-

Demand for pharmaceuticals is a necessity so possible substitutes for this item is nearly zero.

3. SWOT analysis 3.1. Strengths -

Having a largest and deepest distribution network in Vietnam pharmaceutical industry

-

Professional and efficient Marketing

-

Clear strategic orientation, modern and effective management methods 10

-

Investment in key core competence and skilled professionals, concentric diversification

-

Being leader in term of market share, production capability and business performance in Vietnam pharmaceutical industry from the year 1996

3.2 Weaknesses -

Most products are under generic form, but no many specific drugs to replace the foreign ones using in hospital system

-

Must be import about 80% raw materials (in prior time: 90%)

-

The production capacity does not meet the market demand due to the slow progress of new factor construction

-

The management ability does not keep pace with the development of the company because of its excessive growth

-

The data processing system is still simple, does not satisfy the demand, ERP is deploying, so work stuff is increased double

3.3 Opportunities -

Significant potential of population, which will grow to almost 100 million by 2019. Healthcare awareness of Vietnamese improved, leading to the increase in average per capita consumption on medicines

-

The growth rate of Vietnam pharmaceutical industry expects to be from 17%- 19% in 2010 – 2014. Domestically produced medicines only meet 50% Vietnamese demand

-

Following the government policy, domestically produced medicines have to make up 70% Vietnamese market share in the year 2015

-

In addition to the available competitive advantages, domestic pharmaceutical companies hold the rights to distribute products directly

-

The barrier to entry the industry is still high because of the requirement to meet GPs standards

3.4. Threats -

Vietnam’s economy growth rate is lower than previous years

-

Medical price strictly controlled by the Government while the price of input material increased constantly

11

-

full WTO membership creates a severe competition between the Company and other domestic pharmaceutical enterprises as well as with the foreign ones

-

Investor’s high expectations have put a heavy pressure on corporate management team in term of making profits, increased corporate value and creating a balance of benefit among shareholders, the company itself and employees.

-

Lack of human resource for pharmacy field, particularly the pharmacists having ability to use English language well creators a limitation on approaching advance technology from developed countries.

4. Risks 4.1.

Economic risk:

IFM estimates Vietnam GDP growth rate will recover in the period 2012-2017 ( GDP growth rate can reach 7.5% in 2017). The development of economy combined with the increased awareness and demand of health care will have good effect on the overall pharmaceutical industry as well as the business and producing activities of DHG. Therefore, to DHG, economical risk may not be a considerable risk in the next period. Legal risk: law and sub-law document are not totally completed. Policy and guidelines for tax are changed constantly and asynchronous with other related regulations. Therefore, the corporation has to update, collate and adjust its regulations frequently to be proper to current laws and practical context.

4.2.

Risks on the fluctuations of input price:

Electricity, petroleum and basic salary all have upward tendency following the state policy. Imported pharmaceutical material prices are also predicted to increase. The input price increases while output one is controlled strictly by the Government. Thus, the corporate profit may suffer negative affect from these risks. To deal with this problem, DHG must have good forecast of the input price from the beginning of the year through supports from consultancy of friendly suppliers and its own experiences. DHG has to be active in importing materials so as to bring best benefits in price, currency exchange rate, opportunity cost and inventory cost. It is necessary for DHG to improve labor productivity, renew production line, save fuel and diminish production loss. Risks on the dependence of imported raw materials 12

Imported active pharmaceutical ingredients make up 80% of DHG’s production demand. This long-term dependence will cause difficulties in making the products, which have outstanding features. As a result, the competitive capacity compared with foreign enterprises has been reduced a lot. So, the imported materials should be gradually replaced by self-producing ones or those of home country.

4.3.

Exchange rate risk:

DHG’s material is mainly from import. Hence, the price of material can be influenced sharply by the fluctuation of exchange rate. Unfavorably, the rate tends to be increased during the next time. Because the exchange rate between USD/ VND is affected by several elements, it is difficult to forecast due to the raise of abnormal fluctuations. Exchange rate risk is somewhat significant to DHG Pharma.

4.4.

Industry risk:

The entry of new companies has increased competitive pressure on the domestic market. To reduce this significant risk DHG should speed up investing in technology innovation and increasing productivity and products’ quality.

5. Objectives – Strategies for 2012 - 2016 DHGI’s aim for 2012 – 2016 period is to increase employees’ income based on production and business efficiency by rising productivity, saving costs. Aside from that, the company would like to reduce cost prices, improve production system and company management; which ensured not to affect benefit earnings; dividend policy for shareholders and customer policy. In order to achieve these objectives, DHG has given some specific strategies. First of all, the company will standardize the organizational structure of management according to product categories; continuously implement the subject namely “improving production efficiency” and “improving sales system efficiency”. Secondly, DHG will have a right policy to promote education, training, control; select staffs to ensure fairness and maintain cultural implementation in the company; arrange human resources for the new factory. Developing and applying effectively ERP system with BFO solution in Company management administration system is also one of its strategies to reach the objectives. Moreover, the firm starts the program “If I was DHG Pharma’s CEO” for seeking inappropriate points potentially affecting to future business in 13

order to timely prevent and promptly overcome difficulties; apply modern management methods, innovate production organization, continuously invest in more intensive scientific thesis for longterm effects. The company will also invest in R&D and exploit key major of human resources, exploit the relationship with institute, investors and suppliers. Finally, Board of Director and Board of Leadership continue to actively seize opportunities, overcome challenges, conserve strength and enhance the value of DHG brand. They also provide groups of solution for some departments in the company: 





For marketing and sales department:  Creating a efficient plan base on values of potential growth of brands. Continue to build 11 brands and new brand of NattoEnzym product.  Exploiting the strong point of the distribution system by trading the other products (imported and exclusive goods). Expand the sales system of functional food and cosmetic products.  Customer service is the most concentration. Improve the communication activities and emotional care to people as well.  Increasing the number of social activities and keep on building a stand of DHG as a company for community. For research & development, production, quality management departments:  Sorting products according to the segmentation of therapeutic group, treatment with prescription, OTC; actively investing in researches of new products with high technology application, creating their own competitive advantage.  Predicting the market demands, creating the plan for supply savings, reducing the cost, lost and the production cost.  Investing to the new technology with high efficient, operating the system follows these several purposes: saving, productivity, effected and useful.  Create the operation plan and preparing the human resources, equipment for the new GMP WHO factory. For administration and management system:  Implementing financial statements and consolidated reports clearly, transparently and timely.  Planning the budget, properly and timely reflect the results of business in order to support functional departments and consult the Board of Executive Directors in overall strategy.  Checking and adjusting all charters, regulations, policies, etc. related to the employees in order to create a friendly environment, enhance working spirit and creation of employees. 14

 Training human resources at all level timely and appropriately to inherit alternative requirements of any changes in positions.  Implementing the project of 4D salary adjustment according to 07 levels of complexity of each position and reality.  Continuously researching and improving software in hospitals and pharmacies GPP to satisfy the customers’ needs, create competitive advantages and contribute further customer relationship.  Deploying the internal communication port system for ideas of innovation, working process…; ensuring centralized information storage and convenient access for all departments to access, use and share data.

III.

FINANCIAL ANALYSIS

1. Key figure analysis 1.1.

Liquidity

DHG’s liquidity is highly secure, especial when comparing to other listing companies of the same industry. Liquidity ratios are always over 1 (for quick ratio) and 2 (for current ratio) over the period 2007 - 2011; such high ratio is resulted from the large cash amount, which made up a high rate of the structure. The high level of cash is a signal for the expanse in the future. In 2011, those ratios tended to decrease because DHG made efforts to enhance the debt collection efficiency, which cause trade receivables’ growth to be slower than that of short-term debts. With the need of cash for investment in the next few years, the cash liquidity tends to move downward since 2011. However, in general, the ratios are still high and at highly secure level. 2007

2008

2009

2010

2011

2.32

2.13

2.52

3.06

2.74

1.53

1.29

1.88

2.32

1.79

0.63

0.58

1.25

1.36

0.86

Current ratio Quick ratio Cash liquidity

Table 2. Liquidity ratios from 2007 to 2011

15

1.2.

Solvency ratio

60 55 50

48.7 44.6 41.5

40 35 30

31

43.6 Debt-Equity Ratio (%)

33 29

30

Debt-Assets Ratio (%) Leverage Ratio

20 10 0

1.45 2007

1.55 2008

1.5 2009

1.42 2010

1.44 2011

Figure 3. Solvency ratios from 2007-2011 DHG has the ratio of owner’s equity at around two times higher than its liabilities. Especially, its long term liabilities make a low proportion in total assets. This reflects that the company has never had to finance much by debts and the liabilities of company are so safe, especially in the situation of high inflation and high interest rate. However when the economy returned to be stable, this structure will not be suitable anymore. In term of accounting aspect, the company’s profit appears to be increased because it does not have to spend for borrowings interest; however, if calculated the efficiency from financial activities, DHG has missed benefit from financial leverage, it also bear the pressure on dividend and profitability due to its high level of owner’s equity. Therefore, we can expect that in future the capital structure will changes towards the increasing trend of liability per owner’s equity. In the situation of decrease tendency of interest, launching to use financial leverage will support significantly to the efficiency of business operation.

1.3.

Efficiency ratio

This section is intended to describe how efficiently a firm uses its assets to generate sales since firm invest considerable resources, using them productively is critical to overall profitability. The 16

measures in this part are sometimes called asset utilization ratios, which can be interpreted as measures of turnover. 2007

2008

2009

2010

2011

Receivables turnover

5.99

5.80

6.32

5.48

5.32

Days receivables outstanding

60.94

62.97

57.71

66.66

68.59

Inventory turnover

3.42

2.58

2.67

3.11

2.97

Days inventory outstanding

106.82

141.52

136.46

117.45

122.74

Payables turnover

16.21

11.26

11.83

12.89

12.22

Day payables outstanding

22.52

32.43

30.87

28.32

29.88

Fixed asset turnover

5.55

6.57

7.37

6.70

5.42

Table 3. DHG’s efficiency ratios 1.3.1. Receivables Turnover Receivables turnover ratio is the ratio of net credit sales to account receivables. This ratio measures how soon sales will become cash. The lower the amount of uncollected cash from its operations, the higher this ratio will be. In contrast, if a company has more of its revenues awaiting receipt, the lower the ratio will be. However, if this ratio is too high, it will affect consumption because it means that the maturity is short-term, which will not attract more customers. Receivables turnover = As we can see in the table 3, DHG’s receivables turnover ratios from 2007 to 2009 do not fluctuated much. However, DHG recorded erosion in its receivable turnover, from 6.32 in 2009 to 5.48 in 2010; and this ratio continued to decline to 5.32 in 2011. It is because the account receivables are increase faster than the rise of net sales, it means that the company may have problem in collecting its receivables. Thus, on average, DHG collected on its credit sales in 69 days in 2011. In general, DHG’s account receivables were managed at an effective level compared to its peers; its ratio is only lower than OPC and MKP’s ratio (table 4).

17

DHG

OPC

MKP

DMC

TRA

IMP

DCL

Receivables turnover

5.32

7.71

8.32

5.31

4.20

3.89

2.03

Days receivables outstanding

68.59

47.34

43.87

68.74

86.90

93.83

179.80

Table 4. Receivable turnover of pharmaceutical companies in 2011 1.3.2. Inventory Turnover Inventory turnover is the ratio of cost of goods sold to inventory. This ratio indicates how many times during the period that inventory can be sold out. Inventory turnover = The table of DHG’s efficiency ratios shows that during 2007 – 2009, the company’s inventory turnover reduced from 3.42 to 2.67; it leads to the increase of days inventory outstanding from 107 days to 136 days. The rise in days inventory outstanding is usually due to raw materials inventory and products inventory. The reasons for raw materials inventory are fluctuation in price of raw materials, exchange rate or cheaper price for large volume of raw materials. Products inventory increase is mainly because of the increase in distribution system of DHG; in order to meets customer demands across the country; and to reduce costs. However, this ratio was improved in 2010, which was 3.11 times. It shows that the company had a effective policy to improve inventory. In 2011, this figure reduced slightly; as changes in production plan, increase in prices of raw materials and the manufacture of new products. Nevertheless, in overall, DHG’s inventory turnover is at an average when compared to other companies’ ratio (table 5). DHG

OPC

MKP

DMC

TRA

IMP

DCL

Inventory turnover

2.97

1.44

3.65

3.91

2.58

1.97

2.17

Days inventory outstanding

122.74

253.47

100

93.35

141.47

185.28

168.20

Table 5. Inventory turnover of pharmaceutical companies in 2011

1.3.3. Payables Turnover Payables turnover uses a liability in the equation rather than an asset, as well as an expense rather than revenue. Account payables turnover is important because it measures how quickly a company paying its own bills. 18

Payables turnover = In 2007, DHG’s payables turnover was 16.21; this is a high ratio, which leads to a short-term payment, the days payable turnover outstanding is just 22 days.

High accounts payable

turnover may be a signal that a firm isn't receiving very favorable payment terms from its own suppliers or the company buys raw materials based on the method of immediate or within seven days payment to have favorable price. However, the payables turnover had decline sharply to 11.26 in 2008, this figure tended to increase from 11.83 in 2009 to 12.22 in 2011 which is an acceptable ratio. Normally, DHG has the day’s payables outstanding around 30 days. To compare with its peers, DHG is efficient in managing the payment to its suppliers (table 6). DHG

OPC

MKP

DMC

TRA

IMP

DCL

Payables turnover

12.22

8.04

20.49

16.16

5.25

8.14

5.88

Days payables outstanding

29.88

45.39

17.81

22.59

69.52

44.84

62.07

Table 6. Payables turnover of pharmaceutical companies in 2011

1.3.4. Fixed Asset Turnover Fixed asset turnover measures the relation between sales and investment in PPE. The higher this ratio is, the more efficiently the firm uses its assets to generate sales. However, if the fixed asset turnover ratio is too high, then the business firm is likely operating over capacity and needs to either increase its asset base (plant, property, equipment) to support its sales or reduce its capacity. Fixed asset turnover =

From 2007 to 2009, the fixed asset turnover tended to increase, from 5.55 to 7.37, which means that the company is more efficient in using its asset to generate sale during the time. Nevertheless, this ratio started to fall from 7.37 in 2009 to 5.42 in 2007, which is a bad sign. The company should have policies in managing and using its assets to increase the fixed asset turnover. According to table 7, DHG has a good ratio when compared to other pharmaceutical companies. 19

Fixed asset turnover

DHG

OPC

MKP

DMC

TRA

IMP

DCL

5.42

2.19

9.75

4.29

7.84

2.99

2.46

Table 7. Fixed asset turnover of pharmaceutical companies in 2011 Generally, based on analysis of those ratios, DHG is more efficient in using its assets to generate sales than its peers.

1.4.

Profitability ratio

Return on equity (ROE) is a comprehensive indicator of a firm’s performance because it provides an indicator of how well managers are employing the funds invested by the firm’s shareholders to generate returns. It is defined as: ROE = ROA x Financial Leverage 2007

2008

2009

2010

2011

Profit margin (%)

9.07%

8.75%

20.78%

18.84%

16.85%

Assets turnover

1.35

1.37

1.15

1.12

1.25

Return on assets (%)

12.22%

12.02%

23.84%

21.07%

21.03%

Financial leverage

1.45

1.55

1.50

1.42

1.44

Return on equity (%)

17.67%

18.68%

35.65%

29.94%

30.38%

Table 8. Profitability ratios from 2007 to 2011 The table shows that DHG’s ROE experienced a slight growth of 1.01% in 2008, and it also got double in 2009 before started to decrease from 2009 to 2011, from 35.65% to 30.38%. However, in comparison with other listing companies of the same field, DHG still take the lead.

ROE

DHG

TRA

MKP

IMP

OPC

DMC

DCL

30.38%

22.7%

18.9%

10.9%

16.5%

13.9%

-13.4%

Table 9. Return on equity of pharmaceutical companies in 2011

20

From the calculated ratios, it is suggested that substantial change in ROE of DHG is mainly caused by ROA, rather than financial leverage. The ROA of DHG in 2011 remained at a high extent as in 2009 and 2010, due to the efficiency of activities, which was proved by the improvement of the net income over total assets ratio of the year 2011.

1.5.

Cash flow analysis

The objective of a statement of cash flows is to provide information about the cash receipts and cash payments of a business entity during the accounting period. Cash flow analysis gives analysts further insights into the firm’s operating, investing, and financing policies by examining its cash flows. In also provides an indicator of the quality of the information in the firm’s income statement and balance sheet (Appendix C). As cash flows from operating activities is directly related from its core operating rather than other activities and it shows the cash effects of revenue and expense transaction generated from its core operation rather than other activities. DHG reported a small cash flow from operating activities in 2007 by 51,317,300,703 VND; however, this figure was increase around four times in 2008, which is 195,108,449,759 VND. This cash flow had doubled in 2009 and then started to decrease by 25.5% from 2009 to 2011. The cash flows from investing activities present the cash effects of transaction involving plant assets, intangible assets, and investment. DHG recorded negative cash flow from investment in the last five year. After decreasing dramatically 93% in 2008, DHG’s cash flow from investing activities started to increase during 2008-2011 period. Last year, the investing cash flow of the company negatively increase to 188,292,295,008 VND, which increase by 154% from 2010, due to the significant growth in payments for additions to fixed assets and other long-term assets. Thus, DHG used much investment to expand its business. The cash flow from financing activities during 2007 – 2011 was very volatile, which decreased from 235,265,123,160 VND in 2007 to -250,587,007,649 VND in 2011, due to the decrease in proceeds from equity issued and short-term borrowings. In general, the company recorded a positive cash flow at the end of the year during the last five year.

21

1.6.Sub conclusion Besides many sound financial numbers, DHG till face with many issues like high inventories value and low inventory turnover, which if not be noticed and control in the future will impact severely on the revenue as well as the ability to raise cash. From 2012, the disbursement effect of new investment results in the spending of large amount of cash, which leads to arises of short term borrowings to aid working capital. Thus, the company in the next few years will experience an in crease in total assets while the capital structure changes.

IV.

FORECASTING

In DHG valuation, the forecasts for the budget in the next five years are necessarily prepared by employing findings from previous analysis as well as current information of the company. The estimated period will be from 2012 to 2016. The forecasts will focus on some items in the financial statement such as: net sales, total assets, total equity. Most of the assumption will be based on these items proportionally. Besides, some other items will be supposed directly from the policies of the company and the government.

1. Forecasting of future sales After analyzing the economy, pharmaceutical industry and the strategy of the company, the hypothesis that the net revenue of DHG should be affected by following factors can be concluded: population, product spending per capita, manufacture and distribution system, and market share. Thus, any change in these factors will take influence on the revenue of DHG. From that point of view, a formula to forecast the revenue is constructed based on variables (change in population, change in product spending per capita, development in manufacture and distribution, expanse or shrink of market share): Growth rate of sales

=

Effect of manufacture & distribution x [1 + Growth rate of population] x [1+ Growth rate of product spending per capita] ± Effect of in market share

The forecast growths will take the estimated growth effected by the improvement and development of manufacture and distribution system as the base rate. This factor indicates the 22

ability of the company to meet the need of the market. The rate for each year is different due to the strategic plan of company and their efficiency in using assets. From DHG’s annual report 2011, the plan of constructing plans, houses ... are clarified specifically. In this report, the assumption that DHG investment in the above fixed assets will expand significantly in 2012 and increase gradually in the following years. However, the fact is that DHG may not be able to get 100 percent of production capacity of the new assets that it invests in that year, but on the followings. Another assumption is that the capacity can be achieve around 50% in the first year and 100% in the next year. This assumption has to be made due to the lack of information from the company. On the other hand, the company can not grow significantly forever, thus, it is believed that the investment in assets will reduced from 2015.

Effect of manufacture &

2012

2013

2014

2015

2016

10%

14%

16%

11%

9%

distribution Table 10. Investment activities growth contribution Then, the growth of sales will be adjusted by the growth rate of population and product spending which are constant over 5 years. The Vietnamese population growth rate is said to be stably 10.5% per year according to General Statistics Office (GSO). In addition, GSO also announced that the pharmaceutical product spending per capita will be double in the next 5 years. Statistically, the growth rate of product spending will be 14% per year. Besides, DHG recently has captured a big part of the market pie and this hardly increases in the next three years (2012-2014). However, the effect of market share contributes to the growth of sales minus around 2-3% per year in 2015 and 2016 due to the shrink of market share. This mentions about the threat of new entries which is believed to be increase since 2012 when the government reduce the privilege on company and allow foreign entities to enter the industry. That is the reason why in 2015 and 2016, the foreign companies with their advantages in capital, technology will capture a part of market. Growth rate of population (constant over 5 years)

10.50%

Growth rate of product spending per capita (constant over 5 14% years) 23

3%

Effect of market share (-) Sub conclusion

DHG will experience pretty high growth rates in the next five years, especially in 2013 and 2014 when most of its investment in factories and distribution start to operate with their full capacity. In addition, the growth will be stable down in 2015 and 2016. However, the decrease in rate does not mean the sales is low, in fact, the DHG’s revenue will be at a high level in the future. (Appendix E, Note 1)

Growth rate of sales

2012

2013

2014

2015

2016

12.4%

17.4%

19.9%

10.7%

8.2%

Table 11. Growth rate of sales from 2012 to 2016

2. Costs 2.1.

Cost of production

In the income statement, there are specific costs. This paper will focus on the production cost which is affected by two factors: exchange rate and inflation. Growth rate of COGS = Rate of sales *[0.8*0.5( 1+ Exchange rate Inv) +0.6*(1+ Inflation rate Inv)]

As can be seen from previous financial statements, the cost of good sold (COGS) often equal 50% of net sales, however, the COGS will change a bit from 50% every year. The rate of COGS will take the growth rate of sales as based rate due to the fact that the increase in sales accompanied with the rise in COGS. Then, this rate is adjusted with the change in exchange rate and inflation. In one unit cost of product, 50% of cost is raw material and the other fifty is come from factory overhead expenses. The reason for this adjustment is more than 80% of raw materials are imported from foreign countries in term of USD and the other expenses will be influenced by the increase in consuming price embodied by inflation rate.

Exchange rate average (VND)

2011

2012

2013

2014

2015

2016

20587

20828

21926

22363

22838

23323

24

% change Inflation rate average (%)

18.9

% change Rate of COGS

1.2%

5.3%

2.0%

2.1%

2.1%

11.9

8

7.5

6.1

5.3

-37.0%

-32.8%

-6.3%

-18.7%

-13.1%

0.067

0.098

0.120

0.062

0.049

(source: Investor News published by Sacombank) Finally, the COGS for each year will be calculated by take 50% of sales multiplied with the growth rate of COGS. (Appendix E, Note 2)

2.2.

Selling, general and administrative expenses

With attempting to expand distribution system, DHG will experience a rise in SG&A expenses. However, by implementing project “improving sales system efficiency”, DHG recently has successfully in saving SG&A costs. Thus, the SG&A expenses should account for around 30% of net sales in the next five year.

3. Financial posts 3.1. Financial income The financial income, mainly comes from the interest gain, contributes around 10% to the EBT of the company. However, in the next five year, when DHG need large amount of money to invest in assets, the amount of cash keep by the company will reduce significantly. Thus, the financial income will tend to be low in the future.

3.2. Financial expenses As said above, DHG are using cash to invest in new assets which leads to the shortage of working capital for the whole years. This is the reason why in the next few years, DHG begin to employ short term debt to finance their business which results in the increase in future financial expenses. The main loans issued by DHG are held by the employees of the company, and these are unsecured loans. Thus, the cost of debt is about 13.8%, which is higher than the interest rate announced by State bank.

25

Besides, the depreciation of VND compared to USD in the future also creates foreign exchange losses which are considered as financial expenses. The researchers assume this loss account for 0.2% of net sales. (Appendix 4)

4. Investment and depreciation In the next three years, investing in factories and storages continue being pushed up by the company. In 2011, 70 billion VND had been used in distribution systems. In addition, many items are completed in 2012, including three subsidiaries: B&T pharmacy, DHG Nature 1, DHG Printing & Packing. The other incomplete items will be carried out in 2013 and 2014. However, the company may not growth forever, thus, the researcher find it reasonable to the slow down of investment in 2015 and 2016. The depreciation rate used in this calculation will take the previous rate of 2011 which account for 11% of total fixed assets (Appendix 3)

5. Taxes It is hard for the outsider to predict the future tax expenses for a company. However, based on the historical rate as well as the taxing policy of the government on pharmaceutical company, the prediction is getting more reliable. DHG has obligation to pay the income tax at rate of 20% of taxable profit from 2005 to 2014, and 25% for the followings. Nonetheless, the investment in new subsidiaries receive reduction of 50% of taxable profit, thus, the more DHG invests in new subsidiaries, the more it exempt from tax. That is the reason why in the last five years, the tax rate were ranged from 10-14.5%. From this point of view, the forecast of tax expenses for the next five years will take the highest historical rate which is 14.5%

6. Other assumption Inventories account for 20-25% of the total assets. This number is quite high due to the fact that company need to keep high level of raw materials so as to meet the demand of production and avoid the price increase in the future. In this report, the inventories will apply the rate of 25%. Due to the influence of policy on salary payment for sales based on received money, the receivable turn-over tend to reduce in the last 5 years and slightly change in the future. Thus, the account receivable in the next five years will be retained at the rate of account receivable turnover in 2011 which is 5.32.

26

As said above, from 2012, the company need to cash to invest in new assets, thus, the level of cash and equivalent will be low in the next few years and recover in 2016 due to the slow down of investment. The stable of level of accounts receivable and inventories in the future accompanied with the significant decrease in cash and equivalent makes the total current asset tighten to a lower level. However, this level needs to be limit at least 1.2. Besides, this rate is still high compared to other companies in the same industries. Nevertheless, this rate will pop up in 2016 when the level of cash is recovered. The capital structure of the company is quite stable at ratio 30:70 for debt and equity respectively. Nonetheless, the high level of short term borrowings in the future will make this ratio slightly change. The assumption for this ratio will be 34:66 from 2012 – 2015 and 32:68 in 2016.

27

7. The estimated future income statement and balance sheet Based on the above discussion and estimation, the forecasting income statement and balance sheet are developed as followed Table 12. Forcast income statement from 2012 to 2016 2012

2013

2014

2015

2016

Net sales

Note 1

2,804,656,081,236

3,299,279,618,411

3,964,256,024,061 4,394,643,407,825 4,761,038,012,666

Cost of goods sold

Note 2

1,535,503,469,978

1,899,095,502,161

2,369,833,494,050 2,411,186,806,541 2,565,058,561,086

1,269,152,611,259

1,400,184,116,250

1,594,422,530,011 1,983,456,601,284 2,195,979,451,579

841,396,824,371

989,783,885,523

1,189,276,807,218 1,318,393,022,347 1,428,311,403,800

427,755,786,888

410,400,230,726

405,145,722,793

665,063,578,937

767,668,047,780

28,987,983,070

35,332,444,285

43,861,995,948

59,545,332,518

63,239,251,089

25,319,327,406

30,216,580,684

36,992,402,578

44,173,092,991

39,554,529,479

(2,804,656,081)

(3,299,279,618)

(3,964,256,024)

4,394,643,408

4,761,038,013

(1,002,567,109)

329,927,962

1,585,702,410

1,757,857,363

1,904,415,205

427,617,219,362

412,546,742,670

409,636,762,548

686,588,319,234

798,018,222,607

62,004,496,807

59,819,277,687

59,397,330,570

99,555,306,289

115,712,642,278

365,612,722,554

352,727,464,983

350,239,431,979

587,033,012,945

682,305,580,329

Gross (profit)/loss SG&A

30% of sales

Operating income Financial income Financial expenses

10% of cash 0.2% of sales plus interest expenses

Results from other activities Share of losses/gains in associates Earnings before tax Income tax Net income

14.5% of EBT

From the estimation we can see that the net sales of the company rise steadily from 2012 to 2016. Especially, the sales soar significantly in 2013, 2014, and 2015 when most of the investment begins to generate returns efficiently. However, the net income tends to reduce slightly in 2013 and 2014 due to the increase greatly in financial expenses in these years.

28

Table 13. Forecast balance sheet from 2012 to 2016 TOTAL ASSETS CURRENT ASSET Cash and cash equivalents Accounts receivable Inventories Other current assets NON-CURRENT ASSET Fixed asset Long-term financial investments Other non-current assets LIABILITIES Current liabilities Long-term Liabilities OWNERS' EQUITY

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Sales divided by Asset turnover Retain at quick ratio 1.2 - 1.35

2012 2013 2,243,724,864,989 2,639,423,694,729

2014 2015 3,171,404,819,249 3,515,714,726,260

2016 3,808,830,410,132

1,400,439,288,314 1,659,739,945,286

2,008,346,119,268 2,335,599,944,951

2,517,620,374,790

289,879,830,703

353,324,442,850

438,619,959,485

595,453,325,179

632,392,510,887

Sales/ AR turnover (5.32) 25% of total Assets 1% of Total Assets

527,190,992,714

620,165,341,807

745,160,906,778

826,060,790,945

894,931,957,268

560,931,216,247 22,437,248,650 843,285,576,675

659,855,923,682 26,394,236,947 979,683,749,443

792,851,204,812 878,928,681,565 31,714,048,192 35,157,147,263 1,163,058,699,981 1,180,114,781,309

952,207,602,533 38,088,304,101 1,291,210,035,343

Increase Constant

797,725,186,438 17,473,451,017

934,123,359,206 17,473,451,017

1,117,498,309,744 1,134,554,391,072 17,473,451,017 17,473,451,017

1,245,649,645,106 17,473,451,017

Constant

28,086,939,220

28,086,939,220

Note 4 Constant

757,814,358,374 699,590,060,056 58,224,298,318

Total asset divided by leverage

28,086,939,220

28,086,939,220

891,460,982,988 833,236,684,670 58,224,298,318

1,071,136,727,031 1,187,426,828,075 1,012,912,428,713 1,129,202,529,757 58,224,298,318 58,224,298,318

1,217,789,314,804 1,159,565,016,486 58,224,298,318

1,485,910,506,615 1,747,962,711,741

2,100,268,092,218 2,328,287,898,185

2,591,041,095,328

2,243,724,864,989 2,639,423,694,729

3,171,404,819,249 3,515,714,726,260

3,808,830,410,132

29

28,086,939,220

V.

VALUATION

1. Weighted average cost of capital (WACC) 1.1.Cost of equity (re) Using CAPM approach to obtain re: re = Rf + β(Rm-Rf) First, we use Damodaran’s research on country default spread and risk premium to define market risk premium. As identified in his research, the starting point for estimate long-term country risk premium is the country rating from Moody’s (www.Moodys.com) and then estimate the default spread for that rating over a default free government bond rate. This becomes a measure of the added country risk premium for that country. He then added this default spread to the historical risk premium for a mature equity market (estimated from US historical data) to estimate the total risk premium. In this period, he have used historical premium for matured market of about 6% to get the total risk premium. In this report, the country risk premium is identified as 6%. Therefore, total market risk premium is assumed to be 12%. Second, we chose Vietnam government 10-year of maturity bond’s rate as risk free rate. Based on Treasury bond news number 41 of Bao Viet Security Corporation (16/11/2012), this rate was 10.1%. Last, we calculate beta from the following formula: β= In which: Rf is the weekly return of DHG Rm is the daily return of VN index Thus, the beta for DHG is calculated as 0.45 Putting these inputs together, the cost of equity is estimated as: Cost of equity = Risk-free rate + Beta × Market risk premium 30

= 10.1% + 0.45× 12% = 15.51% 1.2.Cost of debt: The cost of debt is the required return on company’s debt. As DHG has not planned to issue bond, the cost of debt is calculated based on the deposit rate of the company. According to annual report 2011, the company had loans from their employees with the rate of 9.5% to 10%. Thus, the cost of debt is estimated at 10%, which remain constant for the next five years. 1.3.Weighted Average Cost of Capital (WACC): WACC is an important component in DCF model. It is the require return on all the asset of the company, based on the market’s perception of the risk of those assets. WACC =

x rd x (1-t) +

x re

In which: D is the market value of debt E is the market value of equity rd is the cost of debt re is the cost of equity t is tax rate The company has stated in the annual report 2011 that, DHG’s equity is accounting for 70% of the total capital. Thus, the deb – equity ratio is 30/70 Therefore, the WACC is calculated as following: WACC =

x 0.1 x (1 – 0.11) +

x 0.1551 = 13.53%

2. Discounted cash flow (DCF) In this model, the free cash flow for firm will be discounted at weighted average cost of capital (WACC) to come up with the present value of expected cash flow. WACC includes cost of 31

equity and cost of debt. Under the assumption of constant costs the general DCF model will be summed up as following formula:

∑

2012 NI Depreciation Interest expenses *(1-T)

Assumed IS Note 3

2013

2014

2015

2016

365,612,722,554

352,727,464,983

350,239,431,979 587,033,012,945 682,305,580,329

87,749,770,508

102,753,569,513

122,924,814,072 124,800,983,018 137,021,460,962

16,852,063,033

20,193,408,338

24,849,626,403

338,270,695,797

136,398,172,768

183,374,950,538 17,056,081,328

111,095,254,034

53,096,550,509

90,528,305,751

123,097,732,743 99,926,849,131

75,940,839,122

78,847,309,790

248,747,964,315

191,541,189,173 625,104,219,785 657,968,695,838

Note 4 30,253,154,280

25,677,747,703

Capital expenditure Change in working capital FCFF

Note 5

Present value 69,521,059,639 193,383,110,331 131,295,755,951 377,807,384,423 350,632,966,554 In order to employ DCF model, the terminal value of the company need to be determined by using Gordon formula to calculate future value based on estimated growth rate. In this calculation, the assumption of growth rate is 5.5% which is the GDP growth rate in the future. This is the minimum rate the company has to achieve in the next few years.

32

4,673,629,560,507

Terminal value Enterprise value Market value of debt Market value of equity Share outstanding Estimate price

5,445,636,870,852 58,224,298,318 5,387,412,572,534 65,166,299 82,672

3. Sensitivity analysis There is great uncertainty about the estimated input factors: sale over the next 5 years. This figure affects many other figures such as: expense, cost of goods sold, and taxation in the forecast. As a result net income, an important figure in calculating estimate stock price using FCFF model, will be affected significantly. We have therefore made a sensitivity analysis, focusing on how changes in sales will affect the per share value of DHG in the FCFF model. The sensitivity analysis is based on changes up to +/- 4 % and the results are illustrated in the two tables below: Net Income sale

2012

2013

2014

2015

2016

436,499,272,240

469,211,876,042 525,712,986,098 701,883,271,469 786,067,869,390

-4%

419,052,468,996

450,515,151,596 504,781,960,624 673,945,269,866 754,796,340,914

-3%

423,414,169,807

455,189,332,708 510,014,716,992 680,929,770,267 762,614,223,033

-2%

427,775,870,618

459,863,513,819 515,247,473,361 687,914,270,667 770,432,105,152

-1%

432,137,571,429

464,537,694,931 520,480,229,730 694,898,771,068 778,249,987,271

%

436,499,272,240

469,211,876,042 525,712,986,098 701,883,271,469 786,067,869,390

1%

440,860,973,051

473,886,057,154 530,945,742,467 708,867,771,870 793,885,751,509

2%

445,222,673,862

478,560,238,265 536,178,498,836 715,852,272,270 801,703,633,628

3%

449,584,374,674

483,234,419,377 541,411,255,204 722,836,772,671 809,521,515,747

4%

453,946,075,485

487,908,600,489 546,644,011,573 729,821,273,072 817,339,397,866

33

2012

2013

2014

2015

2016

Present value (Sales ↓ 4%)

252,219,480,464

269,966,845,531

240,348,780,634

379,043,360,902

349,378,888,782

Estimate price

82,528

Present value (Sales ↓ 3%)

256,047,548,580

273,567,265,037

243,886,324,791

383,187,463,378

353,449,953,834

Estimate price

82,760

Present value (Sales ↓ 2%)

259,875,616,696

277,167,684,542

247,423,868,947

387,331,565,854

357,521,018,886

Estimate price

82,992

Present value (Sales ↓ 1%)

263,703,684,812

280,768,104,048

250,961,413,104

391,475,668,329

361,592,083,938

Estimate price

83,224

284,368,523,553

254,498,957,261

395,619,770,805

365,663,148,990

287,968,943,058

258,036,501,418

399,763,873,280

369,734,214,042

291,569,362,564

261,574,045,575

403,907,975,756

373,805,279,094

295,169,782,069

265,111,589,731

408,052,078,231

377,876,344,146

298,770,201,575

268,649,133,888

412,196,180,707

381,947,409,198

Present

value

(Sales

unchanged)

267,531,752,927

Estimate price

83,456

Present value (Sales ↑ 1%)

271,359,821,043

Estimate price

83,688

Present value (Sales ↑ 2%)

275,187,889,159

Estimate price

83,919

Present value (Sales ↑ 3%)

279,015,957,275

Estimate price

84,151

Present value (Sales ↑ 4%)

282,844,025,391

Estimate price

84,383

From the above tables, the estimate price does not fluctuate significantly (82528:84383), so the forecast can be reliable.

34

Sub conclusion The model results in the price of DHG Pharma’s stock which is around 82,000 VND/share. This is higher than the actual price of share today which equals 73,500 VND/share (posted on HOSE, 11/01/2012). In other words, the stock is undervalued, thus, it recommends to hold or to buy more.

VI.

CONCLUSION

In this section, the findings from the different parts of this paper will be summarized. DHG Pharma was founded in 1974 and when public on Ho Chi Minh Stock exchange in 2006. The company is now the largest pharmaceutical companies in Vietnam and includes 15 subsidiaries and associations. DHG have a distribution system scattered all over the Vietnam and some foreign countries like France, Indonesia, Hong Kong, etc. By using PEST analysis, DHG turn out to get benefit from political regulation and policies, accompanied with the development of economy increases the living standard of Vietnamese. In addition, DHG have good control and investment in R&D is likely to make it advantage in production. In the Five forces analysis, the risk of new entry is quite low in the last few years but potentially turn out to be medium from 2012. This is based on the fact that the strict regulation for new comer will have loosened since 2012. The threat from competition is high due to the fact that pharmaceutical products are still generic and not isolated among firms. Bargaining power of buyers is low because of the high concentration of firm versus buyer concentration. In addition, the bargaining power of supplier is high due to the large contribution of raw material in product value. To sum up the strategy analysis, the SWOT analysis is employed. The company has several advantages in reputation, good marketing and wide and deep distribution system. However, most of DHG products are in generic form and depend significantly on the imported materials. Besides, DHG will get the great opportunities from the growing of population, the development of economic and technologies. Nevertheless, the biggest threat to DHG in the future is the competition from the foreign companies. In the financial analysis the accounting measurement and consolidation method are presented since 2007 accompanied by the development of key figures, focusing on profitability, solvency and liquidity. These figures were kept at satisfying level with low level of debts, high level of liquidity, and the high growth in revenue. However, some other figures should be noted such as the decrease in profit margin and the increase in inventories. Overall, theses number indicates the company is in the upward growing trend. 35

The forecasts were base on the strategy analysis and financial analysis as well as other assumption and findings. The results were illustrated in the forecast income statement and balance sheet sections. The result from employing DCF model accompanied with Sensitivity analysis makes it more reliable. The stock price is calculated at 82,000 VND and considered to be undervalued. This is a good new for investors who follow the fundamental strategies to outperform.

36

VII.

REFERENCES



General Statistic Office Website. (2012, 10 29). Retrieved 11 21, 2012, from http://www.gso.gov.vn/default.aspx?tabid=403&idmid=2&ItemID=13397



Drake, P. P. (2010). Dividend valuation models. pp. 2-10.



Krishma G. Palepu, P. M. (2004). Business Analysis and Valuation.



MHB-securities. (2010). Analysis report of Pharmaceutical Industry.



Pharma, D. (2007). DHG Pharma Annual report.



Pharma, D. (2007-2011). DHG Pharma Annual report.



Pharma, D. (n.d.). DHG Pharma website. Retrieved 11 21, 2012, from http://www.dhgpharma.com.vn



Sacombank. (2012). The exchange rate of VND/USD and future forecasts. Investor News.



SME-securities. (2011). Analysis report of Pharmaceutical Industry.



Vietnam Pharmaceutical Companies Association. (n.d.). Retrieved 11 21, 2011, from http://www.vnpca.org.vn



Vietstock. (n.d.). Vietstock Website. Retrieved 11 21, 2012, from http://vietstock.vn/2012/06/trien-vong-cua-cong-nghiep-duoc-viet-nam-768-211500.htm

37

VIII.

APPENDIX

APPENDIX A: DHG Balance Sheet from 2007 to 2011

BALANCE SHEET

2007

2008

2009

2010

2011

673,787,101,408 129,951,448,720 129,951,448,720 51,955,112,420 51,955,112,420 -

783,527,449,374 211,742,360,663 207,156,022,223 4,586,338,440 2,263,289,093 3,740,843,513 (1,477,554,420)

1,212,468,335,434 584,128,534,956 162,206,364,906 421,922,170,050 16,037,166,667 16,037,166,667 -

1,442,034,118,769 642,519,118,992 286,505,741,815 356,013,377,177 -

1,490,691,786,181 467,084,218,098 343,614,925,745 123,469,292,353 -

257,381,961,730 235,438,777,884 2,562,339,891 19,380,843,955 230,278,977,520 230,278,977,520 -

255,126,101,647 216,770,420,198 28,788,144,725 28,270,272,234 (18,702,735,510) 308,236,380,352 308,236,380,352 -

296,978,172,666 250,454,852,730 26,407,748,971 23,553,146,919 (3,437,575,954) 306,731,856,718 311,576,681,540 (4,844,824,822)

446,197,923,622 306,719,736,511 28,193,510,841 117,510,052,422 (6,225,376,152) 347,099,608,749 350,125,465,504 (3,025,856,755)

489,939,062,124 340,585,766,770 79,032,748,156 73,173,069,305 (2,852,522,107) 515,191,425,774 519,861,087,569 (4,669,661,795)

4,219,601,018 980,030,489 -

6,159,317,619 769,600,676 150,917,973 55,887,090

8,592,604,427 533,511,176 130,507,156

6,217,467,406 1,283,164,897 408,648 439,785,275

18,477,080,185 1,431,601,904 4,301,209,672 4,108,142,811

ASSETS CURRENT ASSET Cash and cash equivalents Cash Cash equivalents Short-term investments Short-term investments Provision for diminution in the value of short-term investments Accounts receivable Accounts receivable - trade Prepayment to suppliers Other receivables Provision for doublful debts Inventories Inventories Provision for inventory decline in value Other current assets Prepaid expenses Deductible VAT amount Taxes and other receivables from the State Budget

38

Other current assets NON-CURRENT ASSET Non-current receivables Long-term account others receivables Provision for long-term doubful debts Fixed asset Tangible fixed assets - net Tangible fixed assets - Cost Accumulated depreciation Intangible fixed assets - net Intangible fixed assets - Cost Accumulated amortisation Construction in progress Investment property - net Investment property - Cost Accumulated amortisation Long-term financial investments Investments in subsidiaries Investment in affiliates Other long-term investments Provision for a decline in value of long-term investments Other non-current assets Long-term prepayments Defferred tax assets

3,239,570,529

5,182,911,880

7,928,586,095

4,494,108,586

8,636,125,798

268,421,463,379 114,269,612 114,269,612 228,781,351,908 111,294,945,868 168,877,796,585 (57,582,850,717) 105,272,542,979 105,546,304,679 (273,761,700) 12,213,863,061 38,224,890,200 2,550,000,000 35,674,890,200 -

298,254,793,437 71,669,612 71,669,612 225,956,126,148 106,798,422,791 191,417,499,083 (84,619,076,292) 117,155,148,926 117,804,527,066 (649,378,140) 2,002,554,431 66,838,622,533 3,741,772,333 70,096,850,200 (7,000,000,000)

309,504,424,142 237,015,139,115 118,833,144,230 231,889,301,477 (113,056,157,247) 112,919,647,760 113,634,980,185 (715,332,425) 5,262,347,125 31,255,356,135 23,868,187,384 11,901,050,200 (4,513,881,449)

377,700,975,901 303,438,987,167 167,840,794,676 310,198,804,023 (142,358,009,347) 127,878,195,760 131,894,976,812 (4,016,781,052) 7,719,996,731 6,456,882,120 7,784,646,717 (1,327,764,597) 39,979,249,420 32,592,080,669 11,901,050,200 (4,513,881,449)

505,014,880,878 459,454,490,641 255,330,772,673 443,230,788,716 (187,900,016,043) 157,377,310,396 163,249,725,488 (5,872,415,092) 46,746,407,572 17,473,451,017 10,086,282,266 11,901,050,200 (4,513,881,449)

1,300,951,659 -

5,388,375,144 263,252,983 3,670,562,947

41,233,928,892 36,189,123,770 3,413,954,004

27,825,857,194 22,430,416,454 3,785,465,288

28,086,939,220 20,446,170,185 5,509,693,831

39

Other non-current assets Goodwill TOTAL ASSET

1,300,951,659

1,630,851,118 1,521,972,759,576

1,609,975,452

2,131,075,204

942,208,564,787

1,454,559,214 1,081,782,242,811

1,819,735,094,670

1,995,706,667,059

LIABILITIES Current liabilities Short-term borrowings Accounts payable - trade Advances from customers Taxes and obligations to the State budget Payables to employees Accrued expenses Other payables Bonus and welfare funds Long-term Liabilities Other long-term payables Long-term borrowings Deferred tax liabilites Provision for severance allowance Accrued revenue Funds for R&D

290,631,417,938 289,817,842,651 43,429,861,416 55,642,007,085 293,206,185 2,354,571,301

382,657,609,230 367,464,442,596 8,455,297,698 67,745,795,916 529,770,010 18,862,882,369

496,158,280,749 481,915,971,070 73,979,662,132 71,352,673,093 1,094,516,164 35,634,035,125

530,696,724,099 471,555,878,347 12,802,412,973 86,290,700,781 1,413,080,380 40,019,223,841

602,248,423,265 544,024,124,947 21,115,601,324 123,618,564,257 720,929,252 28,297,625,312

40,455,717,787 108,584,441,430 39,058,037,447 813,575,287 46,792,342 766,782,945 -

58,330,510,155 190,187,076,367 23,353,110,081 15,193,166,634 17,143,692 28,354,467 15,147,668,475 -

84,118,277,067 199,865,337,012 15,871,470,477 14,242,309,679 53,099,844 14,189,209,835 -

100,633,206,342 168,781,105,434 32,127,453,214 29,488,695,382 59,140,845,752 21,163,637,977 119,417,273 37,857,790,502

125,958,570,389 165,931,042,238 33,834,092,563 44,547,699,612 58,224,298,318 33,818,985,521 24,405,312,797

OWNERS' EQUITY Capital Contribution Share Capital

651,577,146,849 635,748,308,139 200,000,000,000

695,939,887,206 701,139,112,562 200,000,000,000

1,018,033,631,792 1,010,375,905,079 266,629,620,000

1,280,322,125,140 1,280,322,125,140 269,129,620,000

1,381,546,863,475 1,381,546,863,475 651,764,290,000

40

Capital surplus Treasury stocks Investment and development funds Financial reserve funds Other funds Retained profits (losses) Other sources and funds Bonus and welfare funds

378,761,392,824 33,805,735,625 21,962,409,519 1,218,770,171 15,828,838,710 15,828,838,710

MINORITY INTEREST TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

942,208,564,787

378,761,392,824 (292,500,000) 38,460,772,279 21,962,409,519 62,247,037,940 (5,199,225,356) (5,199,225,356)

378,761,392,824 (410,400,000) 4,658,004,486 29,744,900,881 330,992,386,888 7,657,726,713 7,657,726,713

378,761,392,824 (455,850,000) 204,329,442,743 64,215,412,933 364,342,106,640 -

(455,850,000) 286,384,048,884 66,541,621,663 377,312,752,928 -

-

-

3,184,746,375

7,780,847,035

8,716,245,431

11,911,380,319

1,081,782,242,811

1,521,972,759,576

1,819,735,094,670

1,995,706,667,059

41

APPENDIX B: DHG Pharma’s Income Statement from 2007 to 2011 Income Statement Total revenue Sales deductions Net sales Cost of goods sold Gross (profit)/loss Selling expenses General and administration expenses Operating Income Financial income Financial expenses Interest expenses Other financial expenses Other income Other expenses Share of losses/gains in associates Profit/loss before tax Current Corporate Income Tax expenses Deferred Corporate Income Tax expenses Net (profit)/loss after tax Attributable to: Minority interest Equity holders of the Co

2007

2008

2009

2010

2011

1,285,209,755,529 1,518,436,877,452 1,770,344,687,033 2,052,247,764,060 2,510,825,145,928 15,929,830,148 32,973,054,953 24,322,485,821 17,722,522,132 19,945,210,196 1,269,279,925,381 1,485,463,822,499 1,746,022,201,212 2,034,525,241,928 2,490,879,935,732 694,444,594,610 822,445,899,741 1,015,992,884,307 1,282,117,010,705 600,777,608,975 668,502,316,406 791,019,227,889 923,576,301,471 1,018,532,357,621 1,208,762,925,027 521,504,942,048 409,533,239,836 469,323,783,194 483,629,769,106 558,862,870,510 59,818,592,144

103,918,190,916

113,700,825,796

134,944,063,183

185,188,217,125

139,359,941,068 5,789,057,861 17,290,702,891 15,393,878,923

165,596,094,925 22,329,305,076 38,495,242,865 5,216,001,248

400,342,235,839 31,294,906,087 23,597,231,238 3,389,443,987

399,958,525,332 40,566,222,890 3,408,205,843 2,010,709,744

464,711,837,392 48,895,136,206 7,182,687,737 2,038,850,925

1,896,823,968

33,279,241,617

20,207,787,251

1,397,496,099

5,143,836,812

1,351,104,741 897,430,430

1,530,843,862 6,077,378,067

14,224,585,302 12,571,248,709

9,233,695,237 8,223,688,183

9,934,185,563 15,391,090,405

-

141,772,333

(103,584,949)

(3,981,996,715)

(10,025,671,093)

128,311,970,349

145,025,395,264

409,589,662,332

434,144,552,718

490,941,709,926

13,166,372,825

18,673,010,121

46,967,925,678

51,233,929,515

72,903,779,886

-

3,642,208,480

281,354,320

424,611,128

1,724,228,543

115,145,597,524

129,994,593,623

362,903,090,974

383,335,234,331

419,762,158,583

115,145,597,524

1,132,234,375 128,862,359,248

5,269,591,254 357,633,499,720

2,172,986,662 381,162,247,669

4,235,578,682 415,526,579,901

42

APPENDIX C: DHG Pharma’s Cash flow Statement from 2007 to 2011

STATEMENT OF CASHFLOW CASHFLOW FROM OPERATING ACTIVITIES Profit before tax Adjustments for Depreciation and amotisation Allowances and provisions Gain on disposal of fixed assets Gain on disposal of investments in an associate Dividends and interest income Profit/Loss on unrealized foreign exchange difference Interest expense Share of losses in associates Operating profit before changes in working capital Change in receivables and other current assets Change in inventories Change in payables and other liabilities Change in prepayments Interest paid

2007

2008

2009

2010

2011

128,311,970,349

145,025,395,264

409,589,662,332

434,144,552,718

490,941,709,926

24,054,099,284 (1,000,000,000) -

28,520,127,892 27,180,289,930 -

29,778,717,342 (14,384,007,705)

41,463,499,111 3,059,549,639 (1,279,976,595) -

53,597,351,298 (1,012,042,080) (1,759,732,840) (1,546,692,690)

-

-

-

(16,361,965)

(36,691,910,145) -

(42,396,733,860) -

15,393,878,923 (1,631,854,735) 165,128,093,821

5,216,001,248 (2,484,341,832) 203,457,472,502

3,389,443,987 (14,804,882,568) 413,552,571,423

2,010,709,744 3,981,996,715 446,688,421,187

2,038,850,925 10,025,671,093 509,888,381,772

(90,459,115,058)

(18,626,421,841)

(44,624,486,304) (135,931,407,222)

(4,747,452,261)

(108,425,593,484) 107,292,255,117

(77,957,402,832) 138,189,481,332

(3,340,301,188) 48,088,931,657

5,299,961,168 78,835,601,564 (15,977,165,302)

(52,823,170) 245,010,305,991 (4,653,771,048)

(19,218,178,770) 394,458,536,818 (3,628,334,868)

43

-

(38,548,783,964) (169,735,622,065) 74,342,048,312 71,282,343,851 (749,653,721) 345,800,624,592 (2,182,859,688)

(148,437,007) 406,539,214,290 (1,967,602,123)

Corporate income tax paid Other receivements from operating activities Other payments for operating activities Net cash generated from operating activities

1,406,343,924

(24,404,149,782) 3,464,074,611

(30,681,344,976) 2,987,628,237

(57,225,908,675)

(86,291,647,569)

(12,947,479,483)

(24,308,010,013)

(9,241,078,958)

(28,167,068,454)

(54,835,562,835)

51,317,300,703

195,108,449,759

353,895,406,253

258,224,787,775

263,444,401,763

(26,118,453,207)

(57,436,448,175) (124,759,054,121) (256,260,211,277)

CASHFLOW FROM INVESTING ACTIVITIES Payments for additions to fixed (105,302,355,943) assets and other long-term assets Proceeds from adjustment of purchase price of land use rights Proceeds from disposal of fixed 792,417,144 assets and other long-term assets Loans given to other entities (50,000,000,000) Loans collected from other entities Term deposit received (48,103,898,757) Payments for investments in other entities Proceeds from disposal of associates 9,532,696,137 Receipts of interest and dividends 1,448,040,137 Net cash used in investing activities (191,633,101,282) CASHFLOW FROM FINANCING ACTIVITIES Proceeds from equity issued

-

-

5,491,223,499

-

306,671,431

122,895,970

6,110,475,532

5,487,880,667

(42,812,720,503) 56,677,029,410 (3,600,000,000)

(26,377,492,867) 41,100,115,293 (230,000,000)

(5,095,308,180) 16,037,166,667 (13,615,000,000)

(1,035,537,465) 5,999,720,820 -

2,459,449,143 (13,088,023,726)

26,070,547,994 (16,750,381,785)

157,550,000 13,500,000,000 41,441,782,023 44,015,852,247 (74,231,164,580) (188,292,295,008)

-

-

398,761,392,824 44

2,591,350,000

2,500,000,000

Payments for shares repurchases Proceeds from short-term borrowings Payments to settle debts Payments of dividend Net cash used in financing activities Net cashflow during the year Cash and cash equivalents at the beginning of the year Effects of Changes in Foreign Exchange Rates Cash and cash equivalents at the end of the year

674,327,196,404

(292,500,000) 177,133,581,082

(117,900,000) 203,434,614,489

(136,800,000) 39,476,967,542

48,180,001,906

(798,767,466,068) (212,108,144,800) (137,910,250,055) (100,654,216,701) (39,866,813,555) (39,056,000,000) (69,962,450,372) (30,018,344,628) (66,880,340,000) (261,400,196,000) 235,265,123,160 (105,229,514,090) 35,388,119,806 (125,603,039,159) (250,587,007,649) 94,949,322,581 35,002,126,139

76,790,911,943 134,951,448,720

372,533,144,274 211,742,360,663

-

-

(146,969,981)

-

-

129,951,448,720

211,742,360,663

584,128,534,956

642,519,118,992

467,084,218,098

-

-

-

380,134,670,000

-

-

13,848,944,240

-

NON-CASH INVESTING ACTIVITIES Bonus shares issued by capital surplus and investment and development funds Receivable from cancellation of land lease contract

45

58,390,584,036 (175,434,900,894) 584,128,534,956 642,519,118,992

APPENDIX D: DHG Pharma’s Key figures from 2007 to 2011

2007

2008

2009

2010

2011

2.32 1.53 0.63

2.13 1.29 0.58

2.52 1.88 1.25

3.06 2.32 1.36

2.74 1.79 0.86

0.001 0.31 0.18 0.27 4.21

0.022 0.35 0.53 14.91

0.014 0.33 0.73 21.13

0.046 0.29 0.55 3.48

0.042 0.30 0.48 1.40

48.17

106.99

145.51

178.75

5.99 3.42

5.80 2.58

6.32 2.67

5.48 3.11

5.32 2.97

16.21 5.55

11.26 6.57

11.83 7.37

12.89 6.70

12.22 5.42

60.94 106.82

62.97 141.52

57.71 136.46

66.66 117.45

68.59 122.74

22.52

32.43

30.87

28.32

29.88

Net days financing required

145.24

172.06

163.30

155.79

161.45

Profitability ratio Profit margin (%) Assets turnover Return on assets (%) Financial leverage Return on equity (%)

9.07% 1.35 12.22% 1.45 17.67%

8.75% 1.37 12.02% 1.55 18.68%

20.78% 1.15 23.84% 1.50 35.65%

18.84% 1.12 21.07% 1.42 29.94%

16.85% 1.25 21.03% 1.44 30.38%

Liquidity Current ratio Quick ratio Cash liquidity Solvency ratio Long term debt to equity Liabilities to assets CFO to current liabilities CFO to CAPEX Interest to coverage (CF basis) Efficiency ratios Receivables turnover Inventory turnover Payables turnover Fixed asset turnover Days receivables outstanding Days inventory outstanding Day payables outstanding

46

APPENDIX E: Notes for estimation of Income statement and Balance sheet from 2012 to 2016 Note 1 Formulas Growth rate of sales = Effect of manufacture & distribution x [1 + Growth rate of population] x [1+ Growth rate of product spending per capita] ± Effect of in market share (%)

10.5 % 14% 3%

Growth rate of population (constant over 5 years) Growth rate of product spending per capita (constant over 5 years) Effect of in market share (+/-)

2012 12.6%

Rate of sales

47

2013 2014 2015 17.6% 20.2% 10.9%

2016 8.3%

Note 2 Formula Growth rate of costs = Rate of sales *[0.8*0.5*( 1+ Exchange rate Inv) +0 .6*(1+ Inflation rate Inv)] Exchange rate average (VND) Inflation rate average (%)

2011

2012

2013

2014

2015

2016

20587

20828 1.2%

21926 5.3%

22363 2.0%

22838 2.1%

23323 2.1%

18.9

11 -41.8% 0.095

8 -27.3% 0.151

7.5 -6.3% 0.196

6.1 -18.7% 0.097

5.3 -13.1% 0.078

Rate of COGS

Note 3 Depreciation

2012 11% of Fixed assets

87,749,770,508

2013 102,753,569,513

48

2014 122,924,814,072

2015 124,800,983,018

2016 137,021,460,962

Note 4

2012

Short-term borrowings

2013

2014

2015

2016

142,826,197,414 171,145,082,953

210,607,902,392

256,404,392,577

217,626,474,299

118,115,651,537 146,084,269,397

182,294,884,158

185,475,908,195

197,312,197,007

Accounts payable - trade

Cogs/11.5

Advances from customers Taxes and obligations to the State budget

0.05%*Total assets

1,121,862,432

1,319,711,847

1,585,702,410

1,757,857,363

1,904,415,205

1.5%* Total assets

33,655,872,975

39,591,355,421

47,571,072,289

52,735,720,894

57,132,456,152

Payables to employees

6%*Total assets

134,623,491,899 158,365,421,684

190,284,289,155

210,942,883,576

228,529,824,608

Accrued expenses

8%*Total assets

179,497,989,199 211,153,895,578

253,712,385,540

281,257,178,101

304,706,432,811

Other payables

2%*Total assets

44,874,497,300

52,788,473,895

63,428,096,385

70,314,294,525

76,176,608,203

Bonus and welfare funds

2%* Total assets

44,874,497,300

52,788,473,895

63,428,096,385

70,314,294,525

76,176,608,203

Total current liabilities

Interest expenses*

699,590,060,056 833,236,684,670 1,012,912,428,713 1,129,202,529,757 1,159,565,016,486

13.8%*ST borrowings

19,710,015,243

23,618,021,448

49

29,063,890,530

35,383,806,176

30,032,453,453

Note 5

2012 (CA- Cash & Equivalents) (CL - ST debts)

Working capital

2013

2014

2015

2016

553,795,594,969 644,323,900,720 767,421,633,462 867,348,482,593 943,289,321,715

Change in working capital

53,096,550,509

90,528,305,751 123,097,732,743

99,926,849,131

75,940,839,122

Note 6 Dividend

2012 20%

2013 20%

2015 30%

2016 35%

% of Nominal value

2014 20%

Nominal value

651,662,990,000

651,662,990,000 651,662,990,000 651,662,990,000 651,662,990,000

Dividend paid out

130,332,598,000

130,332,598,000 130,332,598,000 195,498,897,000 228,082,046,500

Note 7 Risk- free rate Beta (β) Market risk premium Cost of equity (CAPM)

0.101 0.45 0.12 0.155

Total debts Cost of debt Total equity Cost of equity Tax rate WACC

30 0.1 70 0.155 0.145 0.13415

50