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 ContentsI. INTRODUCTION...............................................................................................................................4

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

II. STRATEGIC ANALYSIS...................................................................................................................7

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. Risks..............................................................................................................................................12

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

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

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

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

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

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

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

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

IV. 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

V. VALUATION....................................................................................................................................30

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

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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%.

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3. The Organization

Company Charter capital

(mill)

Percentage of

ownership

Subsidiaries 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%

Association 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.

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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

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

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4. Products

DHG specialize in development, making and sales of pharmaceutical products, cosmetic and

functional foods with over 11 brands.

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

growth.

5. Markets

99%

1%

Sale value

Domestic Export

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.

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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.

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 factorsThe 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 factorsVietnam'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.

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1.4. Social and cultural factorsThe 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.

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 factorsProduction 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)

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- Vietnamese companies mainly concentrate on ordinary products without much

differentiation; compete severely in a small segment market.

- 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.

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

2.3. 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

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- Professional and efficient Marketing

- Clear strategic orientation, modern and effective management methods

- 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

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- Medical price strictly controlled by the Government while the price of input material

increased constantly

- 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

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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

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

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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

order to timely prevent and promptly overcome difficulties; apply modern management methods,

innovate production organization, continuously invest in more intensive scientific thesis for long-

term 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.

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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.

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 2011Current ratio

2.32 2.13

2.52

3.06

2.74

Quick ratio 1.53

1.29

1.88

2.32

1.79

Cash liquidity 0.63

0.58

1.25

1.36

0.86

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1.2. Solvency ratio

2007 2008 2009 2010 20110

10

20

30

40

50

60

44.6

55

48.7

41.543.6

3135

3329 30

1.45 1.55 1.5 1.42 1.44

Debt-Equity Ratio (%)Debt-Assets Ratio (%)Leverage Ratio

Figure 3. Solvency ratios from 2007-2011

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Table 2. Liquidity ratios from 2007 to 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

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

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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 = Net sales

Average account Receivables

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).

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 = Cost of goods soldAverage Inventory

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

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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).


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.

Payables turnover = Cost of goods sold

Average Account Payables

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).


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

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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 = Sales

Average ¿assets¿

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.


Fixed asset turnover 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

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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.

DHG TRA MKP IMP OPC DMC DCL

ROE 30.38% 22.7% 18.9% 10.9% 16.5% 13.9% -13.4%

Table 9. Return on equity of pharmaceutical companies in 2011

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.

22

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.

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.

23

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

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.

2012 2013 2014 2015 2016

Effect of manufacture &

distribution

10% 14% 16% 11% 9%

Table 10. Investment activities growth contribution

24

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

years)

14%

Effect of market share (-) 3%

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)

2012 2013 2014 2015 2016

Growth rate of sales 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

25

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.

2011 2012 2013 2014 2015 2016

Exchange rate average (VND) 20587 20828 21926 22363 22838 23323

% change 1.2% 5.3% 2.0% 2.1% 2.1%

Inflation rate average (%) 18.9 11.9 8 7.5 6.1 5.3

% change -37.0% -32.8% -6.3% -18.7% -13.1%

Rate of COGS 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.

26

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.

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

27

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 turn-

over in 2011 which is 5.32.

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.

28

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

Gross (profit)/loss 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

SG&A 30% of sales 841,396,824,371 989,783,885,523 1,189,276,807,218 1,318,393,022,347 1,428,311,403,800

Operating income 427,755,786,888 410,400,230,726 405,145,722,793 665,063,578,937 767,668,047,780

Financial income 10% of cash 28,987,983,070 35,332,444,285 43,861,995,948 59,545,332,518 63,239,251,089

Financial expenses0.2% of sales plus interest expenses

25,319,327,406 30,216,580,684 36,992,402,578 44,173,092,991 39,554,529,479

Results from other activities

(2,804,656,081) (3,299,279,618) (3,964,256,024) 4,394,643,408 4,761,038,013

Share of losses/gains in associates

(1,002,567,109) 329,927,962 1,585,702,410 1,757,857,363 1,904,415,205

Earnings before tax 427,617,219,362 412,546,742,670 409,636,762,548 686,588,319,234 798,018,222,607

Income tax 14.5% of EBT 62,004,496,807 59,819,277,687 59,397,330,570 99,555,306,289 115,712,642,278

Net income 365,612,722,554 352,727,464,983 350,239,431,979 587,033,012,945 682,305,580,329

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.

29

Table 13. Forecast balance sheet from 2012 to 2016

2012 2013 2014 2015 2016TOTAL ASSETS Sales divided by

Asset turnover2,243,724,864,989 2,639,423,694,729 3,171,404,819,249 3,515,714,726,260 3,808,830,410,132

CURRENT ASSET Retain at quick ratio 1.2 - 1.35

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

Cash and cash equivalents

289,879,830,703 353,324,442,850 438,619,959,485 595,453,325,179 632,392,510,887

Accounts receivable Sales/ AR turnover (5.32)

527,190,992,714 620,165,341,807 745,160,906,778 826,060,790,945 894,931,957,268

Inventories 25% of total Assets 560,931,216,247 659,855,923,682 792,851,204,812 878,928,681,565 952,207,602,533Other current assets 1% of Total Assets 22,437,248,650 26,394,236,947 31,714,048,192 35,157,147,263 38,088,304,101NON-CURRENT ASSET

843,285,576,675 979,683,749,443 1,163,058,699,981 1,180,114,781,309 1,291,210,035,343

Fixed asset Increase 797,725,186,438 934,123,359,206 1,117,498,309,744 1,134,554,391,072 1,245,649,645,106Long-term financial investments

Constant 17,473,451,017 17,473,451,017 17,473,451,017 17,473,451,017 17,473,451,017

Other non-current assets Constant 28,086,939,220 28,086,939,220 28,086,939,220 28,086,939,220 28,086,939,220

LIABILITIES 757,814,358,374 891,460,982,988 1,071,136,727,031 1,187,426,828,075 1,217,789,314,804Current liabilities Note 4 699,590,060,056 833,236,684,670 1,012,912,428,713 1,129,202,529,757 1,159,565,016,486Long-term Liabilities Constant 58,224,298,318 58,224,298,318 58,224,298,318 58,224,298,318 58,224,298,318

OWNERS' EQUITY Total asset divided by leverage

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

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

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

30

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 = Cov(Rm ,Rf )

Var (Rm)

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

31

http://www.Moodys.com/

= 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 = D

D+ E x rd x (1-t) +

ED+ E

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 = 30

100 x 0.1 x (1 – 0.11) +

70100

x 0.1551 = 13.53%

32

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

33

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

V=∑t=0

∞FCFF

(1+WACC )t

2012 2013 2014 2015 2016NI Assumed

IS 365,612,722,554

352,727,464,983

350,239,431,979

587,033,012,945

682,305,580,329

Depreciation Note 3 87,749,770,508

102,753,569,513

122,924,814,072

124,800,983,018

137,021,460,962

Interest expenses *(1-T) Note 4 16,852,063,033

20,193,408,338

24,849,626,403

30,253,154,280

25,677,747,703

Capital expenditure 338,270,695,797

136,398,172,768

183,374,950,538

17,056,081,328

111,095,254,034

Change in working capital

Note 5 53,096,550,509

90,528,305,751

123,097,732,743

99,926,849,131

75,940,839,122

FCFF 78,847,309,790

248,747,964,315

191,541,189,173

625,104,219,785

657,968,695,838

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.

34

Terminal value 4,673,629,560,507

Enterprise value 5,445,636,870,852Market value of debt 58,224,298,318Market value of equity 5,387,412,572,534Share outstanding 65,166,299Estimate price 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

35

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

unchanged)267,531,752,927 284,368,523,553 254,498,957,261 395,619,770,805 365,663,148,990


Present value (Sales ↑ 1%) 271,359,821,043 287,968,943,058 258,036,501,418 399,763,873,280 369,734,214,042








From the above tables, the estimate price does not fluctuate significantly (82528:84383), so the

forecast can be reliable.

36

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.

37

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.

38

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

39

VIII. APPENDIX

APPENDIX A: DHG Balance Sheet from 2007 to 2011

BALANCE SHEET 2007 2008 2009 2010 2011ASSETSCURRENT ASSET 673,787,101,408 783,527,449,374 1,212,468,335,434 1,442,034,118,769 1,490,691,786,181Cash and cash equivalents 129,951,448,720 211,742,360,663 584,128,534,956 642,519,118,992 467,084,218,098

Cash 129,951,448,720 207,156,022,223 162,206,364,906 286,505,741,815 343,614,925,745 Cash equivalents 4,586,338,440 421,922,170,050 356,013,377,177 123,469,292,353Short-term investments 51,955,112,420 2,263,289,093 16,037,166,667 - - Short-term investments 51,955,112,420 3,740,843,513 16,037,166,667 - - Provision for diminution in the value of short-term investments

- (1,477,554,420) - - -

Accounts receivable 257,381,961,730 255,126,101,647 296,978,172,666 446,197,923,622 489,939,062,124

Accounts receivable - trade 235,438,777,884 216,770,420,198 250,454,852,730 306,719,736,511 340,585,766,770 Prepayment to suppliers 2,562,339,891 28,788,144,725 26,407,748,971 28,193,510,841 79,032,748,156 Other receivables 19,380,843,955 28,270,272,234 23,553,146,919 117,510,052,422 73,173,069,305 Provision for doublful debts - (18,702,735,510) (3,437,575,954) (6,225,376,152) (2,852,522,107)Inventories 230,278,977,520 308,236,380,352 306,731,856,718 347,099,608,749 515,191,425,774 Inventories 230,278,977,520 308,236,380,352 311,576,681,540 350,125,465,504 519,861,087,569 Provision for inventory decline in value

- - (4,844,824,822) (3,025,856,755) (4,669,661,795)

Other current assets 4,219,601,018 6,159,317,619 8,592,604,427 6,217,467,406 18,477,080,185

Prepaid expenses 980,030,489 769,600,676 533,511,176 1,283,164,897 1,431,601,904 Deductible VAT amount - 150,917,973 - 408,648 4,301,209,672 Taxes and other receivables from the State Budget

- 55,887,090 130,507,156 439,785,275 4,108,142,811

40

Other current assets 3,239,570,529 5,182,911,880 7,928,586,095 4,494,108,586 8,636,125,798

NON-CURRENT ASSET 268,421,463,379 298,254,793,437 309,504,424,142 377,700,975,901 505,014,880,878Non-current receivables 114,269,612 71,669,612 - - - Long-term account others receivables 114,269,612 71,669,612 - - - Provision for long-term doubful debts - - - - -Fixed asset 228,781,351,908 225,956,126,148 237,015,139,115 303,438,987,167 459,454,490,641

Tangible fixed assets - net 111,294,945,868 106,798,422,791 118,833,144,230 167,840,794,676 255,330,772,673 Tangible fixed assets - Cost 168,877,796,585 191,417,499,083 231,889,301,477 310,198,804,023 443,230,788,716 Accumulated depreciation (57,582,850,717) (84,619,076,292) (113,056,157,247) (142,358,009,347) (187,900,016,043) Intangible fixed assets - net 105,272,542,979 117,155,148,926 112,919,647,760 127,878,195,760 157,377,310,396 Intangible fixed assets - Cost 105,546,304,679 117,804,527,066 113,634,980,185 131,894,976,812 163,249,725,488 Accumulated amortisation (273,761,700) (649,378,140) (715,332,425) (4,016,781,052) (5,872,415,092) Construction in progress 12,213,863,061 2,002,554,431 5,262,347,125 7,719,996,731 46,746,407,572Investment property - net - - - 6,456,882,120 -

Investment property - Cost - - - 7,784,646,717 - Accumulated amortisation - - - (1,327,764,597) -Long-term financial investments 38,224,890,200 66,838,622,533 31,255,356,135 39,979,249,420 17,473,451,017 Investments in subsidiaries 2,550,000,000 - - 32,592,080,669 10,086,282,266 Investment in affiliates - 3,741,772,333 23,868,187,384 - - Other long-term investments 35,674,890,200 70,096,850,200 11,901,050,200 11,901,050,200 11,901,050,200 Provision for a decline in value of long-term investments

- (7,000,000,000) (4,513,881,449) (4,513,881,449) (4,513,881,449)

Other non-current assets 1,300,951,659 5,388,375,144 41,233,928,892 27,825,857,194 28,086,939,220

Long-term prepayments - 263,252,983 36,189,123,770 22,430,416,454 20,446,170,185 Defferred tax assets - 3,670,562,947 3,413,954,004 3,785,465,288 5,509,693,831 Other non-current assets 1,300,951,659 1,454,559,214 1,630,851,118 1,609,975,452 2,131,075,204

41

Goodwill - -TOTAL ASSET 942,208,564,787 1,081,782,242,811 1,521,972,759,576 1,819,735,094,670 1,995,706,667,059

LIABILITIES 290,631,417,938 382,657,609,230 496,158,280,749 530,696,724,099 602,248,423,265Current liabilities 289,817,842,651 367,464,442,596 481,915,971,070 471,555,878,347 544,024,124,947 Short-term borrowings 43,429,861,416 8,455,297,698 73,979,662,132 12,802,412,973 21,115,601,324 Accounts payable - trade 55,642,007,085 67,745,795,916 71,352,673,093 86,290,700,781 123,618,564,257 Advances from customers 293,206,185 529,770,010 1,094,516,164 1,413,080,380 720,929,252 Taxes and obligations to the State budget

2,354,571,301 18,862,882,369 35,634,035,125 40,019,223,841 28,297,625,312

Payables to employees 40,455,717,787 58,330,510,155 84,118,277,067 100,633,206,342 125,958,570,389 Accrued expenses 108,584,441,430 190,187,076,367 199,865,337,012 168,781,105,434 165,931,042,238 Other payables 39,058,037,447 23,353,110,081 15,871,470,477 32,127,453,214 33,834,092,563 Bonus and welfare funds - - - 29,488,695,382 44,547,699,612Long-term Liabilities 813,575,287 15,193,166,634 14,242,309,679 59,140,845,752 58,224,298,318 Other long-term payables 46,792,342 17,143,692 - - - Long-term borrowings - - - - - Deferred tax liabilites - 28,354,467 53,099,844 - - Provision for severance allowance 766,782,945 15,147,668,475 14,189,209,835 21,163,637,977 33,818,985,521 Accrued revenue - - - 119,417,273 - Funds for R&D - - - 37,857,790,502 24,405,312,797

OWNERS' EQUITY 651,577,146,849 695,939,887,206 1,018,033,631,792 1,280,322,125,140 1,381,546,863,475Capital Contribution 635,748,308,139 701,139,112,562 1,010,375,905,079 1,280,322,125,140 1,381,546,863,475

Share Capital 200,000,000,000 200,000,000,000 266,629,620,000 269,129,620,000 651,764,290,000 Capital surplus 378,761,392,824 378,761,392,824 378,761,392,824 378,761,392,824 - Treasury stocks - (292,500,000) (410,400,000) (455,850,000) (455,850,000)

42

Investment and development funds 33,805,735,625 38,460,772,279 4,658,004,486 204,329,442,743 286,384,048,884 Financial reserve funds 21,962,409,519 21,962,409,519 29,744,900,881 64,215,412,933 66,541,621,663Other funds - - - - -Retained profits (losses) 1,218,770,171 62,247,037,940 330,992,386,888 364,342,106,640 377,312,752,928Other sources and funds 15,828,838,710 (5,199,225,356) 7,657,726,713 - -

Bonus and welfare funds 15,828,838,710 (5,199,225,356) 7,657,726,713 - -

MINORITY INTEREST 3,184,746,375 7,780,847,035 8,716,245,431 11,911,380,319

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

942,208,564,787 1,081,782,242,811 1,521,972,759,576 1,819,735,094,670 1,995,706,667,059

43

APPENDIX B: DHG Pharma’s Income Statement from 2007 to 2011Income Statement 2007 2008 2009 2010 2011

Total revenue 1,285,209,755,529 1,518,436,877,452

1,770,344,687,033

2,052,247,764,0602,510,825,145,928

Sales deductions 15,929,830,148 32,973,054,953 24,322,485,821 17,722,522,132 19,945,210,196 Net sales 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 Cost of goods sold 600,777,608,975 694,444,594,610 822,445,899,741

1,015,992,884,3071,282,117,010,705

Gross (profit)/loss668,502,316,406 791,019,227,889 923,576,301,471

1,018,532,357,6211,208,762,925,027

Selling expenses 469,323,783,194 521,504,942,048 409,533,239,836 483,629,769,106 558,862,870,510 General and administration expenses

59,818,592,144 103,918,190,916 113,700,825,796 134,944,063,183 185,188,217,125

Operating Income 139,359,941,068 165,596,094,925 400,342,235,839 399,958,525,332 464,711,837,392 Financial income 5,789,057,861 22,329,305,076 31,294,906,087 40,566,222,890 48,895,136,206 Financial expenses 17,290,702,891 38,495,242,865 23,597,231,238 3,408,205,843 7,182,687,737

Interest expenses 15,393,878,923 5,216,001,248 3,389,443,987 2,010,709,744 2,038,850,925 Other financial

expenses1,896,823,968 33,279,241,617 20,207,787,251 1,397,496,099 5,143,836,812

Other income 1,351,104,741 1,530,843,862 14,224,585,302 9,233,695,237 9,934,185,563 Other expenses 897,430,430 6,077,378,067 12,571,248,709 8,223,688,183 15,391,090,405 Share of losses/gains in associates

- 141,772,333 (103,584,949) (3,981,996,715) (10,025,671,093)

Profit/loss before tax 128,311,970,349 145,025,395,264 409,589,662,332 434,144,552,718 490,941,709,926 Current Corporate Income Tax expenses

13,166,372,825 18,673,010,121 46,967,925,678 51,233,929,515 72,903,779,886

Deferred Corporate Income Tax expenses

- 3,642,208,480 281,354,320 424,611,128 1,724,228,543

Net (profit)/loss after tax 115,145,597,524 129,994,593,623 362,903,090,974 383,335,234,331 419,762,158,583 Attributable to:

44

Minority interest - 1,132,234,375 5,269,591,254 2,172,986,662 4,235,578,682 Equity holders of the Co 115,145,597,524 128,862,359,248 357,633,499,720 381,162,247,669 415,526,579,901

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

STATEMENT OF CASHFLOW 2007 2008 2009 2010 2011

CASHFLOW FROM OPERATING ACTIVITIESProfit before tax 128,311,970,349 145,025,395,264 409,589,662,332 434,144,552,718 490,941,709,926Adjustments for Depreciation and amotisation 24,054,099,284 28,520,127,892 29,778,717,342 41,463,499,111 53,597,351,298 Allowances and provisions (1,000,000,000) 27,180,289,930 (14,384,007,705) 3,059,549,639 (1,012,042,080) Gain on disposal of fixed assets - - - (1,279,976,595) (1,759,732,840) Gain on disposal of investments in an associate

- - - - (1,546,692,690)

Dividends and interest income - - - (36,691,910,145) (42,396,733,860) Profit/Loss on unrealized foreign exchange difference

- - (16,361,965) - -

Interest expense 15,393,878,923 5,216,001,248 3,389,443,987 2,010,709,744 2,038,850,925 Share of losses in associates (1,631,854,735) (2,484,341,832) (14,804,882,568) 3,981,996,715 10,025,671,093Operating profit before changes in working capital

165,128,093,821 203,457,472,502 413,552,571,423 446,688,421,187 509,888,381,772

Change in receivables and other current assets

(90,459,115,058) (18,626,421,841) (44,624,486,304) (135,931,407,222) (4,747,452,261)

Change in inventories (108,425,593,484) (77,957,402,832) (3,340,301,188) (38,548,783,964) (169,735,622,065) Change in payables and other liabilities

107,292,255,117 138,189,481,332 48,088,931,657 74,342,048,312 71,282,343,851

45

Change in prepayments 5,299,961,168 (52,823,170) (19,218,178,770) (749,653,721) (148,437,007)78,835,601,564 245,010,305,991 394,458,536,818 345,800,624,592 406,539,214,290

Interest paid (15,977,165,302) (4,653,771,048) (3,628,334,868) (2,182,859,688) (1,967,602,123) Corporate income tax paid - (24,404,149,782) (30,681,344,976) (57,225,908,675) (86,291,647,569) Other receivements from operating activities

1,406,343,924 3,464,074,611 2,987,628,237

Other payments for operating activities

(12,947,479,483) (24,308,010,013) (9,241,078,958) (28,167,068,454) (54,835,562,835)

Net cash generated from operating activities

51,317,300,703 195,108,449,759 353,895,406,253 258,224,787,775 263,444,401,763

CASHFLOW FROM INVESTING ACTIVITIES Payments for additions to fixed assets and other long-term assets

(105,302,355,943) (26,118,453,207) (57,436,448,175) (124,759,054,121) (256,260,211,277)

Proceeds from adjustment of purchase price of land use rights

- - - 5,491,223,499 -

Proceeds from disposal of fixed assets and other long-term assets

792,417,144 306,671,431 122,895,970 6,110,475,532 5,487,880,667

Loans given to other entities (50,000,000,000) (42,812,720,503) (26,377,492,867) (5,095,308,180) (1,035,537,465) Loans collected from other entities - 56,677,029,410 41,100,115,293 - 5,999,720,820 Term deposit received - - - 16,037,166,667 - Payments for investments in other entities

(48,103,898,757) (3,600,000,000) (230,000,000) (13,615,000,000) -

Proceeds from disposal of associates 9,532,696,137 - - 157,550,000 13,500,000,000 Receipts of interest and dividends 1,448,040,137 2,459,449,143 26,070,547,994 41,441,782,023 44,015,852,247

46

Net cash used in investing activities (191,633,101,282) (13,088,023,726) (16,750,381,785) (74,231,164,580) (188,292,295,008)

CASHFLOW FROM FINANCING ACTIVITIES Proceeds from equity issued 398,761,392,824 - - 2,591,350,000 2,500,000,000 Payments for shares repurchases - (292,500,000) (117,900,000) (136,800,000) - Proceeds from short-term borrowings

674,327,196,404 177,133,581,082 203,434,614,489 39,476,967,542 48,180,001,906

Payments to settle debts (798,767,466,068) (212,108,144,800) (137,910,250,055)

(100,654,216,701) (39,866,813,555)

Payments of dividend (39,056,000,000) (69,962,450,372) (30,018,344,628) (66,880,340,000) (261,400,196,000)Net cash used in financing activities 235,265,123,160 (105,229,514,090) 35,388,119,806 (125,603,039,159) (250,587,007,649)

Net cashflow during the year 94,949,322,581 76,790,911,943 372,533,144,274 58,390,584,036 (175,434,900,894)Cash and cash equivalents at the beginning of the year

35,002,126,139 134,951,448,720 211,742,360,663 584,128,534,956 642,519,118,992

Effects of Changes in Foreign Exchange Rates

- - (146,969,981) - -

Cash and cash equivalents at the end of the year

129,951,448,720 211,742,360,663 584,128,534,956 642,519,118,992 467,084,218,098

NON-CASH INVESTING ACTIVITIESBonus shares issued by capital surplus and investment and development funds

- - - 380,134,670,000

Receivable from cancellation of land - - 13,848,944,240 -

47

lease contract

48

APPENDIX D: DHG Pharma’s Key figures from 2007 to 20112007 2008 2009 2010 2011

LiquidityCurrent ratio 2.32 2.13 2.52 3.06 2.74Quick ratio 1.53 1.29 1.88 2.32 1.79Cash liquidity 0.63 0.58 1.25 1.36 0.86

Solvency ratioLong term debt to equity 0.001 0.022 0.014 0.046 0.042Liabilities to assets 0.31 0.35 0.33 0.29 0.30CFO to current liabilities 0.18 0.53 0.73 0.55 0.48CFO to CAPEX 0.27 14.91 21.13 3.48 1.40Interest to coverage (CF

basis) 4.21 48.1

7 106.9

9 145.5

1 178.7

5

Efficiency ratiosReceivables turnover 5.99 5.80 6.32 5.48 5.32Inventory turnover 3.42 2.58 2.67 3.11 2.97Payables turnover 16.2

1 11.2

6 11.8

3 12.8

9 12.2

2Fixed asset turnover 5.55 6.57 7.37 6.70 5.42Days receivables

outstanding 60.9

4 62.9

7 57.7

1 66.6

6 68.5

9Days inventory

outstanding106.82 141.52 136.46 117.45 122.74

Day payables outstanding 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 ratioProfit margin (%) 9.07% 8.75% 20.78% 18.84% 16.85%Assets turnover 1.35 1.37 1.15 1.12 1.25Return on assets (%) 12.22% 12.02% 23.84% 21.07% 21.03%Financial leverage 1.45 1.55 1.50 1.42 1.44Return on equity (%) 17.67% 18.68% 35.65% 29.94% 30.38%

49

APPENDIX E: Notes for estimation of Income statement and Balance sheet from 2012 to 2016

Note 1FormulasGrowth 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 (%)

Growth rate of population (constant over 5 years) 10.5%Growth rate of product spending per capita (constant over 5 years) 14%Effect of in market share (+/-) 3%

2012 2013 2014 2015 2016Rate of sales 12.6% 17.6% 20.2% 10.9% 8.3%

50

Note 2FormulaGrowth rate of costs = Rate of sales*[0.8*0.5*( 1+ Exchange rate Inv) +0 .6*(1+ Inflation rate Inv)]

2011 2012Exchange rate average (VND) 20587 20828

1.2%Inflation rate average (%) 18.9 11

-41.8%Rate of COGS 0.095

Note 3 2012 2013 2014 2015 2016

Depreciation 11% of Fixed assets 87,749,770,508

102,753,569,513

122,924,814,072

124,800,983,018

137,021,460,962

51

Note 4 2012 2013 2014 2015 2016

Short-term borrowings 142,826,197,4

14 171,145,082,9

53 210,607,902,39

2 256,404,392,5

77 217,626,474,29

9

Accounts payable - trade Cogs/11.5 118,115,651,5

37 146,084,269,3

97 182,294,884,15

8 185,475,908,1

95 197,312,197,00

7

Advances from customers 0.05%*Total assets 1,121,862,4

32 1,319,711,8

47 1,585,702,41

0 1,757,857,3

63 1,904,415,20

5Taxes and obligations to the State budget 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 134,623,491,8

99 158,365,421,6

84 190,284,289,15

5 210,942,883,5

76 228,529,824,60

8

Accrued expenses 8%*Total assets 179,497,989,1

99 211,153,895,5

78 253,712,385,54

0 281,257,178,1

01 304,706,432,81

1

Other payables 2%*Total assets 44,874,497,3

00 52,788,473,8

95 63,428,096,38

5 70,314,294,5

25 76,176,608,20

3

Bonus and welfare funds 2%* Total assets 44,874,497,3

00 52,788,473,8

95 63,428,096,38

5 70,314,294,5

25 76,176,608,20

3

Total current liabilities 699,590,060,0

56 833,236,684,6

70 1,012,912,428,71

3 1,129,202,529,7

57 1,159,565,016,48

6

Interest expenses* 13.8%*ST borrowings 19,710,015,2

43 23,618,021,4

48 29,063,890,53

0 35,383,806,1

76 30,032,453,45

3

52

Note 5 2012 2013 2014 2015 2016

Working capital(CA- Cash & Equivalents) - (CL - ST debts)

553,795,594,969

644,323,900,720

767,421,633,462

867,348,482,593

943,289,321,715

Change in working capital 53,096,550,5

09 90,528,305,7

51 123,097,732,

743 99,926,849

,131 75,940,839,

122

Note 6 2012 2013 2014 2015 2016Dividend % of Nominal value 20% 20% 20% 30% 35%

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

53

Risk- free rate 0.101 Beta (β) 0.45Market risk premium 0.12Cost of equity (CAPM) 0.155

Total debts 30Cost of debt 0.1Total equity 70Cost of equity 0.155Tax rate 0.145WACC 0.13415

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