Advanced in Finance K50

Hanoi

I. Company Introduction

1. General Information

Vietnamese name Công ty Cổ phần Dược Hậu Giang

English Name DHG Pharmaceutical Joint-Stock CompanyAbbreviation DHG PHARMAStock code DHGHead office 288 Bis Nguyen Van Cu, An Hoa Ward, Ninh Kieu District, Cantho

CityMarket capitalization VND 3,909.98 billionOutstanding shares 65,166,299 sharesListed date 01/12/2006Website http://www.dhgpharma.com.vn

2. Brief History

₋ Establishment: Precursor of DHG Pharma was 2/9 Pharmaceutical Factory and was founded on September 2nd 1974. On 02 September 1974, the Company was changed into a Joint-stock Company with the initial charter capital was 80 billion VND.

₋ Increase in charter capita

Time Charter capital before increased

Added amount Charter capital after increased

Aug/2007 80.000.000 20.000.000 100.000.000Dec/2007 100.000.000 100.000.000 200.000.000Dec/2009 200.000.000 66.629.620 266.629.620Dec/2010 266.629.620 2.500.000 269.129.620

₋ Milestones 1996: The first year that DHG Pharma’s products was elected as “Vietnam High Quality

Goods” by customers. (15 years consecutive).The first year that the factories complied with the GMP standard.The first year that DHG Pharma being the leader of Vietnam pharmaceutical industry until now.

2004: Equitization 2006: “DHG” being listed on HOSE

3. Business Scope₋ Pharmaceutical products manufacturing

₋ Export of pharmaceutical materials and pharmaceutical products 

₋ Import of drug manufacturing equipment, pharmaceutical products and medical equipment 

₋ Production and export of processed food items

₋ Printing packages

₋ Trading of foreign currencies

₋ Resembling, installing and repair of electrical products

₋ Travel services and inbound transportation 

II. Financial Performance

1. Business Performance

2008 2009 2010 2011 2012FRevenue (bil VND) 1,518.4 1,770.3 2,052.2 2,491.0 2,842.3% change 19.6 16.6 15.95 22.4 14.1Net income (bil VND) 130 362.3 383.3 433.8 460% change 1.3 178.7 5.7 13.1 13.0EPS 6,443.4 13,392 5,872.1 6,602 7,500PE (x) 10.1 4.85 11.07 9.0 10.1ROE (%) 19.1 41.7 33.2 32.2 35.1

For more financial ratios: look at appendix

Despite the financial downturn recently, DHG enjoyed a consistently increasing revenue and net income.in 2011, DHG had impressive growth in revenue and net profit for the shareholders of the parent company with an increase of 22.4% and 13.1%. The company’s impressive revenue growth is due to 1) increase production capacity to 406 billion product units, up 23% over the same period last year; 2) sales promotion strategy was launched earlier than usual and 3) increased average selling prices by 11.3%. DHG has improved productivity and cost savings in 2011 effectively by improving production processes. Specifically, the company has focused on reducing bottle neck production stages and concentrated on production line running certain product at each stage, therefore, reducing waiting time. This change increased the production volume by 23%. The increased production along with sales volume up by 10% and average selling prices increased by 11.3% has increased sales revenue by 22.4%, its highest level in the most recent four years.Although fluctuated, both PE and ROE are expected to increase in 2012. This is a good sign showing the improvement of the company.

2. Comparison With Other Companies In The Industry

Stock Code Gross Profit Margin ROE ROADHG 49.3% 31.1% 22.8%DMC 32.9% 16.8% 11.7%IMP 48.8% 12.0% 9.8%OPC 51.8% 16.4% 11.6%TRA 33.2% 24.1% 13.5%Industry 40.1% 25.8% 16.7%

Revenue growth rate of DHG was high (17-18% / year), and profit growth was even higher (2 times faster than revenue growth). This shows that revenue growth of DHG is accompanied by outstanding increase in operating efficiency. This is also reflected in gross margin which was always maintained at 52% / year, along with indicators of ROE, ROA increased continuously from 19.1% and 12.7% in 2008 increased to 31.1% and 22.8% of 2011, and highest among pharmaceutical companies listed and nearly double the industry average.

III. Macroeconomic Factors’ Influence On The Firm’s Performance

1. Government PoliciesPharmaceutical industry is one of the strongest sectors affected by the administration of the state. The government has issued many legal documents to manage the industry including documents related to issues such as state policy in the field of pharmacy, state management of drug prices, requirements of trading drugs, management of special drugs, drug quality standards, drug-testing facility, etc.

On 19.04.2007, the Ministry of Health issued Decision No. 27/2007/QD- BYT on the schedule about practicing the principles of "Good Manufacturing Practice" (GMP) and "Good Storage Practice" (GSP). According to this decision, since 01/07/2008, businesses which do not meet GMP and pharmaceutical import and export enterprises whose warehouse systems do not meet the GSP standard will have to stop production, import and export. There are also the regulations as Good Laboratory Practice (GLP), Good Distribution Practice (GDP), Good Practice Pharmacy (GPP). Only companies meeting the these standards of business can survive and grow. These rules will help create conditions for merger and acquisition of small pharmaceutical companies, promoting domestic businesses to improve, focus on developing in depth and to be able to compete with other multinational companies.

2. Exchange RateExchange rate fluctuations directly affect the company since the active pharmaceutical ingredients (API) for manufacturing tablets of the company are mostly imported from Spain, America, Italy, etc…and account for as much as 40-60% of the selling prices. VND depreciation against other foreign currencies increases the costs for imported inputs. According to calculations, if exchange rate increases 3.36%, the cost of DHG will increased 1.344 - 2.016%. However, thanks to the government’s effort to stabilize exchange rate at 20,828 VND/USD with a small margin of +/-1% recently, the effect was somehow reduced.

3. InflationHigh inflation makes people more cautious in their investment and consumption. This makes many industries become more difficult. However, compared to other industries, the pharmaceutical industry is one of the less affected industry by the crisis, because this is one of the essential items for people.

IV. Industry Analysis

Vietnam Pharmaceutical And Healthcare Industry SWOT

Strengths ₋ Significant growth potential, given a large and growing population.₋ The government’s commitment to developing the health sector.₋ Sizeable local generic drugs sector encouraged by the government.₋ Strong traditional medicines segment

Weaknesses ₋ Under-developed market with low per capita spending on drugs.₋ Counterfeit drugs account for a significant amount of market consumption.₋ Little distinction made between prescription and over-the-counter (OTC) drugs,

with most medicines available without a prescription.₋ Complex drug pricing policy biased towards local drug producers.

₋ Import-reliant market, especially in terms of high-tech products and active pharmaceutical ingredients (APIs), which makes it vulnerable to international currency movements.

₋ Underdeveloped primary care services, infrustructure and a shortage of trained pharmacists hamper access to medicines and product market penetration.

Opportunities ₋ The Association of South East Asian Nations (ASEAN) harmonization initiative, including the adoption of Western regulatory standards such as International Conference on Harmonization (ICH) and WHO guidelines.

₋ Introduction of five-year exclusivity for clinical dossier data encouraging research based multinationals.

₋ If investment can be found for technological improvements, then there is great potential in the traditional Chinese medicine (TCM) market, in addition to fledging biotechnology.

₋ WTO membership improves the trading climate and in the longer term, redresses pharmaceutical trade issues.

Threats ₋ Government resistance to aligning patent law fully with international standards deterring multinational sector expansion.

₋ Pharmaceutical price inflation threatens to put medicines out of reach of poor and therefore limit market volume growth.

₋ Legalization of parallel imports negatively impacting performance of patented drugs.

₋ New health insurance legislation decreasing patients’ access to medicines.

V. Stock Valuation

Applying Earning model in DHG’s stock and firm valuationUsing CAPM to observe required rate of return k for DHG:

k = rf + β [E(rM) – rf]

Input data: rf = 12,89 % ( 5 year bond yield in 2012) β = 0.34 (source: cafef.vn) E(rM) – rf = RMP = 12.1%

We have the required rate of return: k = 12.89% + 0.71 * 12.1% = 21.481%

₋ In 2012, DHG has a dividend policy with 20% payout ratio, so the reinvestment rate = b =80%

ROE2012 = Expected Net income

Totalequity =

460×109

1,923×109 = 23.9%

₋ The fair value PE

of DHG:

PE

expected = (1−b )(1+ROE×b)k−ROE×b

=20 %∗(1+23.9%×80 % )21.481 %−23.9 %×80 %

= 10.1x

EPS = 6,830 VND Expected or fair value of DHG = 6,830 *10.1 = 68,983 VND /share

The market value PE

of OCH in current is 8.64 x (cafef)

The market price at 25/5/2013 is VND 59,000.0

We have conclusion here

PE

fair > PE

of DHG currently in the market .

The fair price > the current market price.

Decision: So, DHG stock has been underestimated in the market. This can conclude that in current, DHG has been undervalued and is a potential stock. Investors should hold or even buy the stocks.

Appendix

Financial Ratios Stock price over 2011 -2012