VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

THE INTERNATIONAL UNIVERSITY

SCHOOL OF BUSINESS

Advisor: Mr. ROBERT T. CONNOLLY

Student name: TRAN THI THANH THUY (BA070150)

Ho Chi Minh city, Vietnam

2011

APPLICATION OF CAPM (Capital Asset Pricing Model) IN VIETNAM STOCK MARKET

APPROVED BY Advisor APPROVED BY: Committee,

Mr. Robert T. Connolly, MBA Dr. Le VinhTrien, Ph.D., Chair

________________________________

Ms. Le Hong Nhung, MBA

________________________________

Ms. Hoang Thi Anh Ngoc, MBA

________________________________

Mr. Robert T. Connolly, MBA

________________________________

Ms. Le Thi Kim Chi, MBA

THESIS COMMITTEE

(Whichever applies)

ii

ACKNOWLEGEMENT

It is with deep gratitude and appreciation that I acknowledge the professional

guidance of Mr. Robert T. Connolly. His constant encouragement and support help

me to achieve my goal.

My gratitude also goes to Mr. John Harackiewicz and Mr. Hua Chia Yee for their

generous support. Their practical advice and comments help me a lot in improving

this paper. I am also grateful to the faculty of the School of Business Administration

of the International University. Gratitude is also expressed to the members of my

reading and examination committee, Dr. Le VinhTrien, Ms. Le Hong Nhung, Ms.

Hoang Thi Anh Ngoc and Ms. Le Thi Kim Chi.

iii

LIST OF TABLES

Table 1: VN Index annual return 2001 – 2010, calculated from data source................6

Table 2: Country bonds rating........................................................................................7

Table 3: VN Index’s return demonstration..................................................................16

Table 4: Balance sheet of VNM in 2008 and 2009......................................................18

Table 5: Income statement of VNM in 2008 and 2009................................................19

Table 6: FCFE 2009 of VNM......................................................................................20

Table 7: VNM’s FCFE.................................................................................................22

Table 8: Investment decision result of VNM when using CAPM 1............................23

Table 9: Investment decision result of VNM when using CAPM 2............................23

Table 10: Test result.....................................................................................................25

Table 11: Test result for buy stock only.......................................................................26

Table 12: Analyze the sensitivity of cost of equity on the changing of Beta...............27

Table 13: Analyze the sensitivity of cost of equity on the changing of market return 28

Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate..28

Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity

......................................................................................................................................29

Table16: LIST OF 31 SAMPLE STOCKS..................................................................37

Table 17: TABLE OF RESULT – CAPM 1................................................................39

Table 18: TABLE OF RESULT – CAPM 2................................................................42

Table 19: TABLE OF PROFIT/LOSS.........................................................................45

Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM

APPLICATION............................................................................................................47

Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM

APPLICATION............................................................................................................49

Table 22: TABLE OF BETA AND COST OF EQUITY............................................51

Table 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS........52

Table 24: TABLE OF VIETNAM INFLATION RATE.............................................52

iv

Table 25: TABLE OF VIETNAM GDP GROWTH RATE........................................52

v

LIST OF FIGURES

Figure 1: Security Market Line (SML).....................................................................................4

Figure 2: VN Index Time period.............................................................................................13

Figure 3: The sensitivity of cost of equity on the changing of Beta........................................26

Figure 4: The sensitivity of cost of equity on the changing of market return..........................27

Figure 5: The sensitivity of cost of equity on the changing of risk free rate...........................27

Figure 6: The sensitivity of estimated price on the changing of cost of equity.......................28

vi

TABLE OF CONTENTS

LIST OF TABLES......................................................................................................IV

LIST OF FIGURES.....................................................................................................V

CHAPTER 1: INTRODUCTION..............................................................................1

CHAPTER 2: LITERATURE REVIEW..................................................................3

A - CAPITAL ASSET PRICING MODEL (CAPM)......................................................................3

B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)........................................5

C - CAPM APPLICATION FOR EMERGING MARKET...........................................................7

D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD.............91 - Dividend Discount Model (DDM):................................................................................................92 - Discounted Free Cash Flow to Equity (Discounted FCFE)..........................................................10

CHAPTER 3: METHODOLOGY...........................................................................11

A - TRADITIONAL CAPM APPLICATION..............................................................................12BETA CALCULATION...................................................................................................................12MARKET RETURN CALCULATION............................................................................................14

B - CAPM APPLICATION FOR EMERGING MARKET..........................................................15

C - FREE CASH FLOW TO EQUITY (FCFE)...........................................................................16

D - INTRINSIC PRICE CALCULATION AND DECISION MAKING......................................22

CHAPTER 4: RESULT............................................................................................24

A - TEST RESULT...................................................................................................................... 24

B - SENSITIVITY ANALYSIS RESULT.....................................................................................26

CHAPTER 5: DISCUSSION / IMPLEMENTATION..........................................29

A – RESULT EXPLANATION....................................................................................................29

vii

B – LIMITATION OF THE TEST...............................................................................................30

C – IMPLEMENTATION IN PRACTICE..................................................................................30

CHAPTER 6: CONCLUSION & RECOMMENDATION...................................32

LIST OF REFERENCES..........................................................................................33

APPENDIX.................................................................................................................34

viii

CHAPTER 1: INTRODUCTION

CAPM – Capital Asset Pricing Model is the most famous model used to estimate

the cost of equity. However, this beautiful and easy-to-apply model has met lots of

criticism (CFA curriculum). The reason is because the assumptions are difficult to

meet and the result is difficult to test. Theoretically, CAPM is proven to be not a

correct measurement, especially in emerging markets like Vietnam. The questions are:

Does CAPM actually work in Vietnam market? Can investors use CAPM as an

effective investment tool? Therefore, the purpose of this paper is to test whether

investors can use CAPM to make profit in the Vietnam stock market.

This paper has no interest in testing the accuracy of CAPM, but testing the

potential profitability of using CAPM in making investment decisions in the Vietnam

stock market, specifically in HOSE – Ho Chi Minh stock exchange. The test was

constructed in 31 random stocks of HOSE, which are listed before 2008 and the time

range of the test is from 2008 to 2010.

The idea is to estimate an intrinsic price of each stock at the end of 2009 based on

cost of equity calculated by CAPM, assuming that present time is the end of 2009.

Then, compare with market price at the end of 2009 and make buy/sell decisions. For

example, if the intrinsic price calculated based on CAPM is higher than the market

price on Dec 2009, a buy decision will be made and vice versa. After that, those

buy/sell decisions will be checked whether they were profitable decisions based on

the historical price data available in 2010.

Again, CAPM – Capital Asset Pricing Model is a standard and available model

built from Markowitz portfolio theory in order to estimate cost of equity, the name

itself demonstrate the objective of CAPM. The main purpose of this paper is to test

the investment profitability when using the cost of equity, calculated by a popular and

world wide accepted model. In other words, this paper do not test whether the value

1

of cost of equity calculated by CAPM is correct or not; instead, this paper want to test

whether the buy/sell decision based on that cost of equity is profitable. The reason

why I do not test the accuracy of CAPM is because cost of equity is an estimated

number and there is no factual one for comparison.

2

CHAPTER 2: LITERATURE REVIEW

A - CAPITAL ASSET PRICING MODEL (CAPM)

For any investment decision, it is very important to estimate the intrinsic value or

the correct price of the investment. By estimating the correct price, investors can see

whether that asset is underpriced or overpriced so that he or she can make a buy or

sell decision.

CAPM – Capital Asset Pricing Model is the most well-known and accepted

pricing model. CAPM is used to estimate cost of equity, also called as investor’s

expected return which is an important component to determine intrinsic price of a

stock or intrinsic value of a firm.

Capital Asset Pricing Model (CAPM) was built from Harry Markowitz’s portfolio

optimization Model.

According to Markowitz’s portfolio optimization Model, when the portfolio is

well diversified, it will eliminate all unsystematic risk (diversifiable risk) and only

systematic risk (undiversified risk) is left. Market return accounts for all risky assets

trading in market, so there is no unsystematic risk such as industry risk, company risk,

etc but only systematic risk, the risk that all market suffers like country risk, interest

rate risk,… (Those are macro factors which affect the whole economy) The line that

shows the relationship between expected return and systematic risk (β) is called

Security Market Line (SML)

3

Figure 1: Security Market Line (SML)

Even when there is no systematic risk, the expected return still equals to Risk free

rate of return (Rf) – the expected rate of return of risk-free asset. SML slopes upward

because of “higher risk, higher return”. In fact, CAPM is the formula of SML, which

is a regression line:

E(R)=R f +β ( RM−R f )

The logic is to estimate expected return based on the return investor can earn

without risk and the equity risk premium, which is the difference between the whole

economy return and that non-risky return. Beta is the slope of the SML, which show

the level of risk. Since SML slopes upward, risk and return has a positive relationship,

“higher risk, higher return”. There is no negative Beta. Indeed, the expected return

itself always contains the risk in it.

The logic of CAPM is that: In order to estimate the expected return (cost of

equity) of a single stock, we just have to compare it with SML by calculating a new

Beta - the sensitivity of that stock’s return with the market return. In other words,

market return is used as a benchmark and we adjust stock return – cost of equity of

4

Risk-free rate of return

Expected return

Systematic risk (β)

Security market line (SML)

each stock – according to market return by calculating the sensitivity of stock return

to market return, and this sensitivity is expressed by Beta:

β=Cov(R A , Rm)

σm2 (CFA curriculum, level 1 – 2010)

Then, we apply the CAPM formula: costofequity=ke=R f +β ( RM−Rf )

ke is the cost of equity, the return of the stock that we are looking for.

Rf is the return of risk free assets or it is the interest rate of government bond since

government bond is considered to have no credit risk. In the U.S., 10 year Treasury

bond is used.

RM is the market return. If what we are looking for is stock return then the market

return is the index return. In US market, we use S&P 500’s return, which accounts for

75% of U.S. market capitalization (standardandpoors.com).

Since market return is used as benchmark, the Beta of the market will be 1 and the

stock’s Beta will fluctuate depending on their sensitivity to market return. Different

stock has different Beta because they have different risk relative to market Beta. If a

stock’s Beta is less than one, we say it is a defensive stock and if more than one, it is

an aggressive stock. As a result, an investor will have different expected return over

different stock. In a corporation, equity is owned by stock holders so that expected

return over a stock is also called cost of equity.

Therefore, CAPM is actually very easy to apply. However, when applying CAPM

in Vietnam market, there are many obstacles and many assumptions are required.

B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)

Assume that current year is 2009. It is now the end of 2009 and we are calculating

the expected return to make investment decisions. The original CAPM formula is:

k A=R f +β A ( RM−R f )

5

If we apply CAPM to HOSE similarly to U.S stock market then we have:

kA: Cost of equity, expected return of stock A (what we are looking for)

Rf: risk free rate – interest rate of Vietnam government 10 year term bond

βA: systematic risk based on stock A return covariance with VN-Index return

RM: VN-Index return in 2009

Reasons why the original CAPM might be expected to fail:

1- CAPM was built from Markowitz portfolio theory so it has a same assumption,

market return must consist of all risky assets of the whole economy, not only stocks

but also real estate, gold, currency, etc. However, there is no published market return

in the real world that can satisfy that assumption. As the result, we take the Index

return as RM. For example, in U.S they use S&P 500 return for calculation. However,

the S&P 500 accounts for only 75% U.S. market capitalization

(standardandpoors.com) so can not fully represent “the Market”. In Vietnam, there is

still no consensus on how much total market capitalization is represented by VN

Index. In my estimation, VN Index is not even 50% of Vietnam market capitalization.

The reason is that stock is just one investment channel along with gold and foreign

currency, which attracts lots of investors’ attention. Besides, the VN Index is just the

Ho Chi Minh stock exchange; there is another HNX Index for Hanoi stock market.

Thus, using the VN Index as a benchmark for Beta calculation may not give the

correct Beta value.

2- VN Index annual return change annually with very high volatility. Moreover,

the VN Index was just established since 2001 so the size of VN Index is small and

does not compose of all industries. Hence, VN Index is not representative of a

diversified economy and the market liquidity is focused on a few high-capitalized

stocks. (Table 1)

Table 1: VN Index annual return 2001 – 2010, calculated from data source

VN Index annual return

6

2010 -2.04%2009 56.78%2008 -65.95%2007 23.30%2006 144.49%2005 28.50%2004 43.38%2003 -8.95%2002 -22.13%2001 13.83%

3- U.S. government bond may not have credit risk but Vietnam government bonds

do have risk. Due to country risk, Vietnam bonds are rated Ba3 by Moody and BB- by

S&P, both ratings are below investment bonds (Table 2). The fact that Vietnam

government may not be able to pay debt is possible. In other words, Vietnam

government bonds are not risk free assets. Besides, the quality and length of data on

bond are not suitable for making long-term assumption. Moreover, it is difficult to

find long term Vietnam bond actively traded in market.

Table 2: Country bonds rating

As a result, cost of equity will change every year with high volatility, if we use

that cost of equity to discount long term cash flows, it could yield undesired result.

7

C - CAPM APPLICATION FOR EMERGING MARKET

The formula used is still the standard formula of CAPM but the numbers applied

are different to solve problem stated above

k A=R f +β A ( RM−R f )

Beta: VN Index is not diversified enough to be a correct benchmark. Therefore,

Beta should be calculated relative to global index (CFA curriculum, level 2- 2010). In

this paper I use S&P Global 1200

Market return: Global index return. This is a good benchmark in term of market

diversification and market capitalization

Risk free rate: Since the Vietnam government bond is not a risk free asset and

with the unavailability of information, we should use the bond rate of developed

country and then adjust it with inflation difference between the two countries (CFA

curriculum, level 2 - 2010). In this paper I use the U.S. 10 year bond.

As a result, by using this method of application, cost of equity should have lower

volatility and would be presumed to give more correct cost of equity for discounting

long term cash flows.

There might be a concern that using global index is inappropriate since it may not

be composed of Vietnam capitalization. However, many published models looking at

emerging markets use a global index in calculation. The first reason is that Global

index composes of all industries that Vietnam listed companies are operating. The

second reason is because of the effect of globalization and that S&P 1200 consist of

all big markets that have big effects on the world economy and world market price.

For example, the financial crisis in the U.S. in 2008 affected the whole world

economy. U.S. stock market went down, Global index also went down, VN Index

certainly also went down and reached the bottom even though many companies’

performance was growing and they had good financial report. There was no place to

8

hide in stock market at that time. The third reason is that there is no conflict with

other components of CAPM formula. If RM is Global index return then my Beta is

calculated relative to Global Index and my Rf is US bonds rate adjust with Vietnam

inflation.

In summary, the application of CAPM for emerging market logically should

perform better than the traditional application of CAPM, which is used for developed

market. However, we need to do the test to see which one actually works better.

D - STOCK VALUATION METHOD – THE DISCOUNTED CASH FLOW METHOD

When we know that CAPM is used to calculate cost of equity - k e, it is also

important to know what valuation methods use ke to estimate stock price. In order to

value intrinsic price of stock, we might use 2 types of discounted cash flow method,

the dividend discount model (DDM) and Discounted Free cash flow to Equity

(Discounted FCFE)

The general idea is to discount future cash flow to present time, the general

formula is: PV=∑t=1

∞ [ CFt

(1+r )t ] . PV is the present value of expected cash flow. The

difference is the type of Cash Flow that we use.

1 - Dividend Discount Model (DDM):

In DDM, dividend per share is the cash flow and cost of equity is used as the

discount rate. Then, when we discount future dividends per share to expected return,

we will have the price per share, which is:

V 0=∑t=1

∞

[ ¿t

(1+ke )t ]

9

This dividend technique is used to estimate the intrinsic price of a stock. However,

this technique is not appropriate to such young and primitive market like Vietnam.

In Vietnam, dividend data is difficult to measure under some reasons below:

-There are high rate of return investment alternatives available so that

limited dividend is paid out

-Most of listed companies are in supernormal growth period that they do

not pay out dividend

-The assumption of relatively constant growth for the long term is

inappropriate due to spontaneous dividend payment policy without long term

strategic plan

- The data of dividend per share is unavailable and difficult to calculate

2 - Discounted Free Cash Flow to Equity (Discounted FCFE)

FCFE is a measure of how much cash can be paid to the equity shareholders of

the company after all expenses, reinvestment and debt repayment.

In this method, we calculate the present value of future FCFE. Then, that

discounted FCFE will be divided by the number of shares outstanding to get the price

of stock.

FCFE is cash flow available to shareholders. Thus, the appropriate discount rate is

cost of equity

PV of FCFE=∑t=1

∞ [ FCFE t

(1+ke )t ]Price per sh are= PV of FCFE

Number of sha res outstanding

Advantages of the discounted FCFE method:

10

- Whether the company decision is to pay out cash for equity in form of

dividend or to keep cash for reinvestment, FCFE is not affected.

- Growth rate of FCFE is more stable and easier to estimate than dividend

per share.

- FCFE can easily be computed based on financial statement.

As the result, based on advantages and disadvantages of 2 methods, this paper

uses the Discounted FCFE for valuation.

11

CHAPTER 3: METHODOLOGY

The objective of this paper is to test whether investors might make profitable

investment decisions by applying CAPM in valuation.

The research is constructed on a portfolio of 31 stocks trading in HOSE (Ho Chi

Minh stock exchange). Those stocks are chosen randomly. Stocks must be listed

before 2008 because the examined time period is from 2008 to 2010.

In order to construct the test, we assume that time 0, present time, is the end of

2009. The investor makes buy/sell decisions and holds the investment for one year.

Transactions will be closed at the end of 2010. The idea is to calculate the how much

the stock price should be at time 0 and then compare with current price to make a

buy/sell decision. After that, we will see whether those buy/sell decisions are

profitable when the investor closes transactions at the end of 2010.

The purpose of this test is to answer the questions below:

1) Is CAPM an effective tool with high successful rate?

2) Between 2 methods of CAPM applications, the traditional application for

developed market and the application recommended for emerging market, which one

has a higher success rate?

The sensitivity analysis is also constructed in order to give a better view on the

effects of each component RM, Rf, on cost of equity and the effect of cost of equity on

price estimation.

All the computations are constructed in Excel worksheet. The following provides

explanation and method of computation. Since it is too much to show all calculations

of 31 stocks, one single stock is chosen for demonstration and I choose VNM

12

The result of the test and further discussion on CAPM implementation in the

Vietnam stock market will be mentioned in chapter 4 and 5

A - TRADITIONAL CAPM APPLICATION

k A=R f +β A ( RM−R f )

kA: Cost of equity, expected return of stock A

Rf: risk free rate – interest rate of Vietnam government 10 year term bond

βA: systematic risk based on stock A return covariance with VN-Index return

RM: VN-Index annual return 2009

According to Duetche Bank’s research, the risk free rate of Vietnam in 2009 is

10.4%. I use this number because there is no data on Vietnam long term bond rate in

2009. Beta and market return are not available so we need to calculate them from

available daily price data.

BETA CALCULATION

Now we know that Beta is computed based on covariance with VN-index, the

problem left is which period of time we should choose to compute beta. I divide VN-

Index time line in 3 periods. (Figure 2)

Period 1 is from the date VN index is establish to 2005, this is the start up period

and market movement is unstable. Period 2 is from 2005 to 2007, this period has an

abnormal return that only happens once in 60 years (Hua Chia Yee, CFA). Thus, I

choose the period from October 2008 to December 2009, where market movement is

in a cycle. The purpose of this is to minimize Beta error (Hua Chia Yee, CFA)

Beta is calculated by dividing the covariance of stock A return (RA) and VN Index

return (RM) by the variance of VN Index return (σ m2)

β=Cov(R A , Rm)

σm2 (CFA curriculum)

13

Figure 2: VN Index Time period

The source we have is daily price of VN Index and other 31 stocks, which are

available and can be downloaded from internet (www.cophieu68.com). In order to

have Beta value of individual stocks, these following steps need to be taken.

Step 1: From source data, extract weekly end price, the closing price of final

transaction day in a week from October 10, 2008 to December 25, 2009. Friday is

usually the final transaction day of a week.

Step 2: Calculate weekly return. For an individual stock, there are 63 weekly

returns from 10 Oct 2008 to 25 Dec 2009.

14

Period 1: start up Period 2: abnormal returnInvestigate time trend Oct

2008 – Dec 2009

Weekly return= ending price of week 2−ending price of week 1ending price of week 1

Step 3: Calculate individual stock’s Beta. After having weekly return of VN

Index and other 31 stocks, Beta of an individual stock is calculated by dividing

covariance between VN Index weekly return and Stock A’s weekly return to variance

of VN Index weekly return.

β=Cov(R A ,Rm)

σm2 (CFA curriculum, level 1-2010, portfolio management)

The result of those calculations is showed in Appendix (Table 21)

The reason why I do not use daily data for Beta calculation is because it is not

necessary to do so. In order to minimize Beta error, 25 weekly returns is

recommended (CFA curriculum, level 1-2010) and my period is 63 weeks already.

Besides, by skillfully taking only beginning and ending price of the week, I can

eliminate error and inconsistency of raw price data.

MARKET RETURN CALCULATION

Next component in CAPM formula is market return. From VN-Index price data

sources, we have closing price of each transaction day. What is needed is VN Index

return of 2009

Step 1: Calculate daily return.

Daily return=Closing price∈day 2−Closing price∈day 1Closing price∈day1

Step 2: Plus 1 to daily return, then we got table 3

15

Table 3: VN Index’s return demonstration

CODE DATEClosing

priceDaily

return(1 + daily

return)VN INDEX 12/31/2009 494.8 -0.0012 0.9988VN INDEX 12/30/2009 495.4 0.0227 1.0227VN INDEX 12/29/2009 484.4 -0.0166 0.9834VN INDEX 12/28/2009 492.6 -0.0050 0.9950VN INDEX 12/25/2009 495.1 0.0334 1.0334VN INDEX 12/24/2009 479.1 0.0176 1.0176VN INDEX 12/23/2009 470.8 0.0120 1.0120VN INDEX 1/6/2009 314 0.0067 1.0067

…. .… …. …. ….VN INDEX 1/2/2009 313.3 -0.0073 0.9927

Step 3: Calculate 2009 return.

VN Index 2009 return = [the product of (1 + daily return)] - 1 = (0.9988 x 1.0227

x… x 0.9927) – 1 = 0.5678

As the result, we have RM = VN Index 2009 return = 0.5678 = 56.78%

Since we have all three component of CAPM, just apply CAPM formula we will

have cost of equity of each stock. The result of cost of equity from those computations

are showed in Appendix (Table 21)

B - CAPM APPLICATION FOR EMERGING MARKET

k A=R f +β A ( RM−R f )

Risk-free rate (Rf) = 10-year U.S government bond yield + (VN inflation – U.S.

Inflation)

10 year U.S. bond yield in 2009 is taken from federalreserve.com, which equals to

3.26%.VN inflation and U.S. inflation in 2009 are retrieved from IMF’s website

16

(International Monetary Fund), which equal to 6.717% and -0.4% respectively.

Hence, Rf = 3.26 + [6.717-(-0.4)] = 10.38%

Market return (RM) is a global index return instead of VN Index return and I

choose S&P Global 1200. S&P Global 1200 captures approximately 70% of world’s

market capitalization. This index is a composite of seven headline indices: S&P

500(United States), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60

(Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.

Daily price data of S&P Global 1200 is available on standardandpoors.com.

Apply the computation similar to VN Index return calculation we have S&P Global

1200’s 2009 return is 27.8%

Beta (β) is computed similarly to Beta calculation of traditional CAPM

application, but instead of VN Index return, we use S&P Global 1200.

Since we have all three components, cost of equity will be easily calculated and

the table of result is showed in Appendix (Table 22)

C - FREE CASH FLOW TO EQUITY (FCFE)

Step 1: Calculate FCFE in 2009

The Free cash flow to equity in 2009 is computed based on financial statement.

The FCFE formula that I used is:

FCFE = Net Income + NCC– FCInv – WCInv + Net borrowing

(CFA curriculum, level 2 – 2010)

NCC: Non-cash charges like depreciation expense, deferred tax are not real cash

outflows. Thus, they should be added back.

FCInv: Fixed capital investment is the difference of total value of fixed assets in

2009 comparing to 2008. This is a cash outflow but is not deducted in Net Income so

we have to deduct it from Net Income.

17

WCInv: Working Capital Investment is the change of Working capital. This is a

cash outflow so it needs to be subtracted from Net Income. The formula of WCInv I

used is:

WCInv = change in Account Receivable + change in Inventory – Change in

Account Payable

Net borrowing: since FCFE is cash available to equity (shareholders) only, we

have to adjust for cash flow to debt holders.

Net borrowing = New debt – Debt repayment

= Change in long term liability + change in Note payable

The Future FCFE is estimated based on inflation rate, GDP growth rate and

historical FCFE

VNM stock is taken as an example to show details of those calculations. VNM’s

financial statements in 2008 and 2009 can be found in table 4 and 5, and calculation

result is in table 6.

Table 4: Balance sheet of VNM in 2008 and 2009

Column1 2009 2008

Current Assets 5,069,157 3,187,605

Cash and Cash Equivalents 426,135 338,654

Short term financial investment 2,314,253 374,002

Short term Account Receivables 728,634 646,385

Inventory 1,311,765 1,775,342

Other Current Assets 288,370 53,222

Non-current Assets 3,412,879 2,779,354

Long term Account Receivable 8,822 475

Fixed assets 2,524,964 1,936,923

Real Estate Investment 27,489 27,489

Long term Financial Investments 602,479 570,657

Other long term assets 249,125 243,810

TOTAL ASSETS 8,482,036 5,966,959

18

Liabilities 1,808,931 1,154,432

Short term Liabilities 1,552,606 972,502

Long term Liabilities 256,325 181,930

Owners equity 6,637,739 4,761,913

Expenditures and Other Funds 182,265 96,198

TOTAL DEBT & EQUITY 8,482,036 5,966,959Source: www.cophieu68.com

Table 5: Income statement of VNM in 2008 and 2009

Column1 2009 2008

Gross Sale Revenues 10,820,142 8,380,563

Deduction revenues 206,371 171,581

Net Sales 10,613,771 8,208,982

Cost of goods sold 6,735,062 5,610,969

Gross profit 3,878,709 2,598,013

Financial activities Revenues 439,936 264,810

Financial Expenses 184,828 197,621

Selling Expenses 1,245,476 1,052,308

Managing Expenses 292,942 297,804

Net Profit from Operating activities 2,595,399 1,315,090

Other incomes 143,031 130,173

Other Expenses 7,072 0

Other profits 135,959 130,173

Total profit before tax 2,731,358 1,371,313

Corporate Income Tax Expenses 355,291 119,771

Profit after Corporate Income Tax 2,375,692 1,250,120

EBITDA 1,000,000 1,000,000

EPS 13,531 7,113

P/E 6.1 23.3

Last Price of Quarter 83 166

VOLUME 351,228,150 175,297,500

Book value 18.9 27.2Source: www.cophieu68.com

19

Table 6: FCFE 2009 of VNM

Net Income 2,375,692

Non cash charge 7,072

Fixed Capital Investment 588,041

Change in Account Receivables 82,249

Change in Inventory -463,577

Change in current liability 580,104

Working Capital Investment -961,432

Change in long-term debt 74,395

Note payable 0

Net borrowing 74,395

FCFE 2,830,550

Notes:

Net Income 2009 is the number of “Profit after corporate Income tax” taken from

Table 5

Non cash charge 2009 is other expense from Table 5

Fixed Capital Investment 2009: 2,524,964 - 1,936,923 = 588,041

Working Capital Investment2009: 82,249 + (-463,577) – 580,104 = -961,432

Net borrowing: 74,395 + 0 = 74,395

FCFE 2009: 2,375,692 + 7,072 – 588,041 – (-198,776) +74,395 = 2,830,550

Step 2: Estimate FCFE from 2010 to 2020

We assume that the company will exist and keep growing forever.

FCFE 2010-2020 is estimated based on FCFE 2009 and expected growth rate

My expectation of FCFE growth rate in period 2010 – 2020 is 20% per year. The

reasons are:

20

- The usually FCFE growth rate used for analysis in emerging market is

from 10% to 30% and I take 20% in the middle. The reasons are because 30%

is too high for Vietnam and 10% is too low due to high inflation rate

(Appendix – Table 23) and high bank rate of 14% - 20%.

- Vietnam use 2020 as time marker for economic goals. From 2011 to

2020 GDP growth rate per year is 6.5%-7% in average. In 2020, Vietnam goal

is to become an industrial economy. Thus, I take 2020 as the turning point.

- Due to the characteristic of emerging market, FCFE growth rate of each

company goes wildly. In period of 2006-2009, the range of average growth

rate of 31 sample stocks is enormously huge, fluctuate from -1,989% to

1,097% (Table 20). Hence, the historical growth rate can not be used for

estimation. Also, re-evaluation of FCFE is required at the end of every year,

after closing transaction.

As the result, FCFE 2010 = FCFE 2009 + |FCFE2009|x0.2 = 2,830,550 x 1.2 = 3,396,660

FCFE 2011 = FCFE 2010 + |FCFE2010|x0.2 = 4,075,992 and so on (Table 7)

Step 3: Estimate FCFE from 2021 to infinity and discount those cash flows to 2020

From 2021 to infinity, I expect the growth rate of FCFE is 5% per year.

In order to discount FCFE from 2021 to infinity back to 2020, I use formula:

FCFE 2020 part 2=FCFE 2020 part 1×(1+0.05)

(ke−0.05)=59,710,641.06

ke is cost of equity calculated above.

FCFE 2020 part 1 = FCFE 2019 + |FCFE2019|x0.2 = 21,031,223.44

21

Table 7: VNM’s FCFE

VNM

2010 3,396,660.00

2011 4,075,992.00

2012 4,891,190.40

2013 5,869,428.48

2014 7,043,314.18

2015 8,451,977.01

2016 10,142,372.41

2017 12,170,846.90

2018 14,605,016.28

2019 17,526,019.53

2020 80,741,864.49

2020 - part 1 21,031,223.44

2020 - part 2 59,710,641.06

Step 4: Plus FCFE 2020 part 1 and FCFE part 2 to get FCFE 2020

FCFE 2020 = 21,031,223.44 + 59,710,641.06 = 80,741,864.50

Step 5: Calculate value of FCFEs at 2009

PV of FCFE=∑t=1

∞ [ FCFE t

(1+ke )t ]Then we have PV of FCFE of VNM will equal to 14,285,829.19 (Table 8). ke is the cost of equity, which equals 41.98% by CAPM 1 and 17.52% by CAPM 2

22

D - INTRINSIC PRICE CALCULATION AND DECISION MAKING

Table 8: Investment decision result of VNM when using CAPM 1

No.COD

E

Price at 31

Dec 2009

Price at 31 Dec

2010

BUY/SELL

CAPM 1 - TRADITIONAL CAPM APPLICATION

DISCOUNTED FCFE

Cost of equity

(%)

Calculated price Decision Result

1 VNM 71.7 86 B 14,285,829.19 41.98 40.67 S LOSS

From table 5, we have VNM number of shares at the end of 2009 is 351,228,150.

By dividing 14,285,829.19 to 351,228,150, we got the intrinsic price equals to 40.67.

Compare 40.67 with the price at 31 Dec 2009 we make the decision is “S”

meaning sell decision.

However, the actual price at 31 Dec 2010, the time of closing transaction, is 86.

Hence, to make profit, investor should make buy decision. This is presented as letter

“B” in column “BUY/SELL”

As the result, if investor uses traditional CAPM application, he or she will have a

loss because of the mismatch between column “BUY/SELL” and column “Decision”.

In contrast, investor will have a gain if he/she uses CAPM application for

emerging market (CAPM 2), which is showed below:

Table 9: Investment decision result of VNM when using CAPM 2

No. CODE

Price at 31

Dec 2009

Price at 31 Dec

2010

BUY/SELL

CAMP 2 - CAPM APPLICATION FOR EMERGING MARKET

DISCOUNTED FCFE

Cost of equity

(%)

Calculated price Decision Result

1 VNM 71.7 86 B 65,218,670.55 17.52 113.99 B GAIN

23

This process is applied similarly to the other 30 stocks. In both cases of CAPM 1

and CAPM 2, the “GAIN” result is counted as successful result. The result

comparison between CAPM 1 and CAPM 2 is showed in next chapter.

24

CHAPTER 4: RESULT

A - TEST RESULT

With the assumption that short – selling is allowed in Vietnam, the table of result is:

Table 10: Test result

CAPM 1 - TRADITIONAL

CAPM APPLICATIONCAPM 2- NEW CAPM

APPLICATION

Number of trials 31 stocks 31 stocksNumber of success

(Number of “GAIN” counted)23 20

Successful rate 74.19% 64.52%Successful rate of the whole market with 95% confidence

intervalFrom 58.79% to 89.56% From 47.68% to 81.36%

PROFITABILITY 12.89% 7.62%

Although CAPM 2 logically should perform better than CAPM 1, the result is

quite surprising. Traditional CAPM application actually works better then new one,

with 74.19% successful rate compare to 64.52%. The result is for a random sample of

31 stocks. By applying statistical analysis on confidence interval of population

proportion, 95% that the successful rate of CAPM 1 in the whole HOSE’s stock

population is from 59% to 90% and of CAPM 2 is from 48% to 81%. The formula

applied is: p̂ ± zα /2 √ pqn

(Complete business statistics)

Which is shown in the test result is that CAPM 2 is an effective tool, 74.19%

successful rate is a very high number in investment world. However, this result is for

1 time testing only. To ensure 99% that the successful rate of CAPM 1 is 75%, the

minimum number of testing times is:

25

n=zα /2

2 pq

B2 =¿¿

Hence, in order to have 99% confidence that CAPM 1 will give 75% successful

rate, the test should be conducted in at least 3 years. Therefore, 2 more year of testing

is recommended.

PROFIT/LOSS and PROFITABILITY are calculated with the assumption that the

capital is distributed equally to 31 stocks. Details can be found in Appendix- Table 19

– Table of PROFIT/LOSS

We can only achieve 12.89% return only if short selling is available. Since stock

price fluctuation is too high, more than 10%, maintaining short sell in one whole year

is not possible. Moreover, short selling has never been allowed in Vietnam stock

market. Thus, if we only consider stocks that have buy decision only, then the result

will be as table 11

When the total value of 31 stocks went down -10%, 4.72% of return can be earned

instead of 12.89%, which means 14.72% higher than portfolio performance instead of

22.89% and 5.76% higher than index performance instead of 14.93% (VN Index

return in 2010 is -2.04% from table 1)

Table 11: Test result for buy stock only

CAPM 1 - TRADITIONAL

CAPM APPLICATIONCAPM 2- NEW CAPM

APPLICATION

Number of BUY stocks 10 out of 31 stocks 19 out of 31 stocksNumber of success

(Number of “GAIN” counted)6 out of 10 9 out of 19

Successful rate 60.00% 47.37%

PROFITABILITY 4.72% -1.82%

26

The purpose of table 11 is to show that not all the chances available in the

market can fully be taken because of some other constraints. In this case, the

constraint is legal issue. The result of table 11 can be helpful in further research about

short selling issue in Vietnam market.

B - SENSITIVITY ANALYSIS RESULT

VNM data is taken as sample. This analysis help us have a good imagination on

how each components is related and their effects on final result

Among Beta, risk free rate, and market return, Beta has biggest effect on intrinsic

price. 0.1 changes in Beta will cause up to 4.64% change in cost of equity which

equal to nearly 10 unit difference in intrinsic price, in the case of VNM. 10 unit

differences in intrinsic price is a huge number and that can change the whole result

from buy to sell and vice versa.

Table 12: Analyze the sensitivity of cost of equity on the changing of Beta

Beta VNM Cost of equity (%)

41.98

0.1 15.040.2 19.680.3 24.310.4 28.950.5 33.590.6 38.230.7 42.870.8 47.500.9 52.141 56.78 SLOPE 46.38

1.1 61.42 For every 0.1 change in Beta, cost of equity change1.2 66.06 4.64%

1.3 70.69

27

0 0.5 1 1.5 2 2.50.00

20.00

40.00

60.00

80.00

100.00

120.00

Figure 3: The sensitivity of cost of equity on the changing of Beta

1.4 75.331.5 79.971.6 84.611.7 89.251.8 93.891.9 98.522 103.16

Table 13: Analyze the sensitivity of cost of equity on the changing of market return

RmCost of equity

41.985 6.72

10 10.1315 13.5320 16.9425 20.3430 23.7535 27.1540 30.5645 33.9650 37.37 SLOPE 0.6855 40.77 For every unit change in market

return, cost of equity change60 44.18 0.68%

Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate

RFR Cost of equity

41.981 38.982 39.303 39.624 39.945 40.266 40.587 40.908 41.229 41.54

28

0 10 20 30 40 50 60 700.005.00

10.0015.0020.0025.0030.0035.0040.0045.0050.00

0 5 10 15 20 2534.00

36.00

38.00

40.00

42.00

44.00

46.00

Figure 4: The sensitivity of cost of equity on the changing of market return

Figure 5: The sensitivity of cost of equity on the changing of risk free rate

10 41.8611 42.1712 42.4913 42.8114 43.1315 43.45 SLOPE 0.3216 43.77 For every unit change in market return,

cost of equity change17 44.09 0.32 %18 44.4119 44.73

Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity

Figure 6: The sensitivity of estimated price on the changing of cost of equity

In average, when 1% change in cost of equity will cause

- 31.6 change in price. The sensitivity of intrinsic price

on the changing of cost of equity (figure 6) is a

parabolic line. If the cost of equity is low, the effect will

be more serious. High cost of equity may not have as

much impact as low cost of equity but ke change about

5% for 0.1 change in Beta of different stock and more

than 7% for more than 10% change in RM every year.

In summary, if analyzing in the same year then Beta has high effect on cost of

equity, 0.1 change in Beta cause 4.64% change in cost of equity, and 4.64% change in

cost of equity cause huge different in intrinsic price. If in different year then market

return have biggest impact on intrinsic price. 1% change in RM cause 0.68% change in

cost of equity but every year, RM changes more than 10% (Table 1) which cause more

than 7% change in cost of equity and certainly intrinsic price will be affected heavily.

29

Cost of equity

Estimated price

41.98 40.676 3,513.37

10 595.8715 250.6220 145.0625 96.9730 70.6535 54.5540 43.9245 36.5050 31.0855 26.9960 23.81

Therefore, re-valuation every year is necessary. The risk free rate (R f) does not have

much impact since it does not change much every year (less than 1% every year).

30

CHAPTER 5: DISCUSSION / IMPLEMENTATION

A – RESULT EXPLANATION

Possible reasons why CAPM 1 perform better than CAPM 2

1. Traditional CAPM application might be used in many funds in Vietnam with

high capitalization

2. The accuracy of CAPM can not be tested. Although CAPM has limitations and

logically it will not give the correct result, no one can know for sure what the correct

result is. To get cost of equity the input numbers are based mostly on analysts’

personal expectation and judgments. In other words, cost of equity is no more than an

estimated number and there is no factual one for comparison since it deals with future

matters. Besides, there is no better pricing model has been developed.

3. Vietnam market is inefficient. Market price does not fully reflect market

information. Therefore, even if CAPM 2 gives the correct price of stock, the market

will not move accordingly so investors will suffer loss.

Based on the result of this paper’ test, CAPM is still a very promising valuation

tool.

There might be a concern that beside CAPM, there is another variable that affect

the result, which is the FCFE. It is true that FCFE does have effect on the result.

However, the effect of FCFE is minimized because:

- The FCFE 2009 (at time 0) is real and calculated based on real performance

(financial statement) by a standardized method. Thus, only the growth rate is the

concern.

- I assume that all 31 sample stocks have the same FCFE grow rate. By that, I

ignore the different growth rates caused by micro factors, and only focus on the

31

growth rate caused by macro factors. In other words, I minimize the effect of FCFE

growth rate by keeping the constant growth for all 31 stocks and only cost of equity is

counted.

- In order to test the effect of FCFE growth rate, a sensitivity analysis is

constructed (Appendix, table 23). The result shows that, when g fluctuates from 15 to

30%, the growth rate range usually used in emerging markets, the successful rate of

CAPM 1 has very small volatility of 1 success, from 74-77%

B – LIMITATION OF THE TEST

The result might not be reliable in different years since the test is constructed in 1

year price only. In order to increase the reliability of the test result 5 to 20 years of

testing is recommended, 3 years of testing at a minimum.

The portfolio of 31 stocks is chosen randomly without careful research. When

implementing, we can take only stocks that have Buy decision or more analysis of

individual stock valuation should be taken for better portfolio performance.

The FCFE’s growth rate should be tailored to specific stock and industry.

Different company has different characteristics that there should be different

estimation on FCFE’s growth rate. By considering micro factors on FCFE growth

rate, we may have better result, higher successful rate.

C – IMPLEMENTATION IN PRACTICE

For implementation, revaluation is needed at the end of holding period, after

closing all transactions and before doing new series of transactions. The reason is

because CAPM components and FCFE change every year with high volatility.

Implementation of this paper need to be flexible and adjustments should be made

to match investors’ strategy and investment objectives. Adjustments also depend on

analyst’s trading styles. Specifically, 1 year holding can be suitable for mutual fund

but it is not suitable for hedge fund. 12% return might be able to meet objectives of

32

middle age investors but might not be a desired number of young investors. The

adjustments can be made on the following factors:

The time line: The time line is the time period for Beta calculation, the time of

opening and closing transaction. The adjustments in time line is the most important

because they has to match investment strategy and investment style of analyst. The

time of T-bond, risk free rate… are also needed to be adjusted to tailor analyst’s

judgment.

FCFE growth rate: This growth rate is varied based on company characteristics

and analyst judgment.

Capital distribution: In order to meet required return of aggressive investors,

more money should be put in high return stocks, stocks that have big difference

between intrinsic price and current price. Capital distribution is varied by analyst

judgment.

33

CHAPTER 6: CONCLUSION & RECOMMENDATION

CAPM is a promising fundamental analysis tool to earn profit in Vietnam stock

market. The test results show that using a CAPM model can have a positive impact on

Buy/Sell decisions.

Although the CAPM application for emerging markets should theoretically work

better than the traditional CAPM application, the result shows the contradiction.

Therefore, CAPM 1 is recommended for application in Vietnam stock market.

There are 3 possible explanations for the better performance of traditional CAPM

application, which are the popularity of traditional CAPM, the inability of testing

CAPM accuracy and the inefficiency of Vietnam market. Further research on those

possible reasons should be constructed for better conclusion.

Investor’s suitability has to be taken into account to make suitable adjustments for

better implementation.

In order to increase the reliability of this paper result, more testing on different

years is recommended. Since there might be other models or other buy/sell signals

(technical analysis) that can perform better than CAPM, comparison between them is

also recommended. My recommendation is that fundamental analysis give a picture of

what will happen in future and technical analysis tell us when it will happens by

buy/sell signals. Thus, by combining those two, we can eliminate the limitation of two

analysis styles and achieve even higher return.

34

LIST OF REFERENCES

1. (2009). Cost of Equity in Asia. Hong Kong: Duetsche Bank.

2. (2009). Complete Business Statistics, 7th edition. In J. S. Amir D.Aczel, Complete Business Statistics (pp. 235-245). McGraw Hill.

3. Board of Governors of the Federal Reserve System. (n.d.). Retrieved May 10, 2011, from Federal Reserve Web site: http://www.federalreserve.gov

4. CFAinstitute. (2010). CFA program curriculum. New York: Pearson Custom publishing.

5. Data and Statistic. (n.d.). Retrieved April 20, 2011, from International Monetary Fund Web site: http://www.imf.org

6. Indices. (n.d.). Retrieved May 10, 2011, from Standard and Poor's Web site: http://www.standardandpoors.com/indices/sp-global-1200/en/ap/?indexId=SPGCMP1200USDFF--P-RGLL--

7. Stocks' data source. (n.d.). Retrieved April 15, 2011, from Co phieu 68 Web site: http://www.cophieu68.com/export.php

8. Listed Securities. (n.d.). Retrieved April 5, 2011, from Ho Chi Minh Stock Exchange Web site: http://www.hsx.vn

35

APPENDIX

LIST OF 31 SAMPLE STOCKS

TABLE OF RESULT OF CAPM 1 – TRADITIONAL CAPM APPLICATION

TABLE OF RESULT OF CAPM 2 – NEW CAPM APPLICATION

TABLE OF PROFIT/LOSS

TABLE OF STOCK PRICE CALCULATION USING CAPM 1

TABLE OF STOCK PRICE CALCULATION USING CAPM 2

TABLE OF BETA AND COST OF EQUITY

TABLE OF FCFE GROWTH RATE SENSITIVITY ANALYSIS

TABLE OF VIETNAM INFLATION RATE

TABLE OF VIETNAM GDP GROWTH RATE

Table16: LIST OF 31 SAMPLE STOCKS

(List of 31 stocks taken as sample and their listing date)

NO.SYMBOL

CODE LISTED ORGANIZATION LISTING DATE

1 ABT BENTRE AQUAPRODUCT IMPORT AND EXPORT JOINT STOCK COMPANY 6-Dec-2006

2 AGF Angiang Fisheries Import & Export Joint Stock Company 26-Apr-2002

3 BBC BIBICA CORPORATION 17-Dec-2001

4 DHA HOA AN JOINT STOCK COMPANY 4-Dec-2004

5 DHG HAU GIANG PHARMACEUTICAL JOINT STOCK COMPANY 12-Jan-2006

6 DIC DIC INVESTMENT AND TRADING JOINT STOCK COMPANY 22-Nov-2006

7 DTT Do Thanh Technology Corporation 12-Jun-2006

8 FMC Sao Ta Foods Joint Stock Company 20-Oct-2006

9 FPT FPT Corporation 21-Nov-2006

36

10 GIL BinhThanh Import Export Production and Trade Joint Stock Company 28-Dec-2001

11 GMD Gemadept Corporation 3-Aug-2002

12 HAP Hapaco Group Joint Stock Company 8-Feb-2000

13 HAS Ha Noi P&T Construction & Installation Joint Stock Company 18-Dec-2002

14 HPG HoaPhat Group Joint Stock Company 31-Oct-2007

15 KDC Kinh Do Corporation 18-Nov-2005

16 KHA Khanh Hoi Import Export Joint Stock Company 14-Aug-2002

17 PAC Dry Cell and Storage Battery Joint Stock Company 11-Sep-2006

18 PVD Petrovietnam Drilling and Well Services Joint Stock Company 15-Nov-2006

19 SAM Sacom Development and Investment Corporation 18-Jul-2000

20 SAV Savimex Corporation 26-Apr-2002

21 SCD Chuong Duong Beverages Joint Stock Company 11-Dec-2006

22 SFC SaiGon Fuel Company 16-Jun-2004

23 SSC Southern Seed Corporation 29-Dec-2004

24 TAC Tuong An Vegetable Oil Joint Stock Company 12-Jun-2006

25 TCR Taicera Enterprise Company 26-Dec-2006

26 TMS Transforwarding Warehousing Joint Stock Corporation 8-Feb-2000

27 TNA Thien Nam Trading Import Export Corporation 5-Apr-2005

28 TRI SaiGon Beverages Joint Stock Company 21-Dec-2001

29 TS4 Seafood Joint Stock Company No4 7-Jan-2002

30 VNM Viet Nam Dairy Products Joint Stock Company 28-Dec-2005

31 VTB Viettronics Tan Binh Joint Stock Company 12-Aug-2006

Source: Ho Chi Minh Stock Exchangewww.hsx.vn

37

Table 17: TABLE OF RESULT – CAPM 1

No. CODENumber of

shares at the end 2009

Price at 31 Dec

2009

Price at 31 Dec 2010

PRICE CHANGE

BUY/ SELL

CAPM 1 - ORIGINAL CAMP

DISCOUNTED FCFE

Cost of equity (%)

Calculated price

Decision

price difference with 2009

price

Result

1 VNM 351,228,150 71.7 86 14.30 B 14,285,829.19 41.98 40.67 S 31.03 LOSS

2 ABT 8,099,999 40.2 38.4 1.80 S 205,803.16 45.07 25.41 S 14.79 GAIN

3 AGF 12,859,288 32.7 22.8 9.90 S (3,761.83) 52.23 (0.29) S 32.99 GAIN

4 BBC 15,371,192 28 21.7 6.30 S 59,804.87 64.05 3.89 S 24.11 GAIN

5 DHG 26,653,842 116 112.7 3.30 S 2,391,507.62 39.59 89.72 S 26.28 GAIN

6 DTT 5,200,000 11.6 8.8 2.80 S 2,559.68 48.41 0.49 S 11.11 GAIN

7 FMC 7,200,000 13.4 12.9 0.50 S 913,074.22 56.90 126.82 B 113.42 LOSS

8 FPT 142,649,197 58.1 63.5 5.40 B 11,259,180.65 54.27 78.93 B 20.83 GAIN

9 GIL 9,839,818 28.3 23 5.30 S 420,155.33 50.51 42.70 B 14.40 LOSS

10 GMD 48,212,500 60.9 33.2 27.70 S 1,276,316.27 79.09 26.47 S 34.43 GAIN

11 HAP 18,496,208 18 12.7 5.30 S (17,788.89) 69.05 (0.96) S 18.96 GAIN

12 HAS 8,000,000 13.1 9.1 4.00 S 10,485.55 54.60 1.31 S 11.79 GAIN

13 KDC 78,513,073 48.6 51 2.40 B 4,537,218.09 53.70 57.79 B 9.19 GAIN

14 KHA 14,120,300 21.6 16.5 5.10 S 331,205.96 54.56 23.46 B 1.86 LOSS

38

15 PAC 20,176,362 65.5 54 11.50 S 520,018.63 46.43 25.77 S 39.73 GAIN

16 SAM 64,199,216 26.8 18.2 8.60 S (94,383.76) 69.83 (1.47) S 28.27 GAIN

17 SAV 9,660,230 40.3 33.2 7.10 S 29,349.47 44.44 3.04 S 37.26 GAIN

18 SSC 9,999,020 36 25 11.00 S 238,116.64 49.78 23.81 S 12.19 GAIN

19 TRI 27,548,360 9.5 6 3.50 S (127,817.28) 47.05 (4.64) S 14.14 GAIN

20 TS4 8,470,350 36.6 21.6 15.00 S 44,568.37 71.86 5.26 S 31.34 GAIN

21 TMS 10,102,626 27 28.4 1.40 B 406,203.78 36.35 40.21 B 13.21 GAIN

22 TNA 8,000,000 16.8 26.8 10.00 B 271,994.14 48.08 34.00 B 17.20 GAIN

23 DHA 10,040,937 29.1 21.8 7.30 S 77,144.00 52.51 7.68 S 21.42 GAIN

24 SFC 8,109,000 34.5 28.9 5.60 S 550,683.16 32.27 67.91 B 33.41 LOSS

25 DIC 8,200,000 15.6 18.4 2.80 B (22,441.90) 52.78 (2.74) S 18.34 LOSS

26 HPG 196,363,998 35.7 38.7 3.00 B 6,624,158.63 62.93 33.73 S 1.97 LOSS

27 PVD 26,617,000 65.3 50.9 14.40 S 84,929.14 51.17 3.19 S 62.11 GAIN

28 SCD 8,477,640 22.3 27.5 5.20 B 239,356.58 46.15 28.23 B 5.93 GAIN

29 TAC 18,980,200 22 25.5 3.50 B 145,033.56 80.59 7.64 S 14.36 LOSS

30 TCR 37,007,997 8.3 8.9 0.60 B 317,234.99 46.90 8.57 B 0.27 GAIN

31 VTB 11,022,660 13.4 13.1 0.30 S (18,514.53) 40.10 (1.68) S 15.08 GAINSUM 1066.9 959.2 204.9 794.94 731.38 NO. OF SUCCESS 23SUCCESSFUL RATE 74.19%PROFIT 124.70PROFITABILITY 12.89%PORFITABILITY OF BUY STOCKS 4.72%

39

NOTE: _ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010

_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010, taken from www.cophieu68.com

_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010

_ the calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology

_ 'Decision' is what investor make based on 'Calculated price'

_ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price

_ 'NO. OF SUCCESS' is number of Gain result counted

_ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31

_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19

40

41

Table 18: TABLE OF RESULT – CAPM 2

No. CODENumber of

shares at the end 2009

Price at 31 Dec

2009

Price at 31 Dec 2010

PRICE CHANGE

BUY/ SELL

CAMP 2 - NEW VERSION OF CAPM FOR EMERGING MARKET

DISCOUNTED FCFE

Cost of equity

(%)

Calculated price Decision

Price difference Result

1 VNM 351,228,150 71.7 86 14.30 B 65,218,670.55 17.52 185.69 B 113.99 GAIN

2 ABT 8,099,999 40.2 38.4 1.80 S 1,360,052.31 15.31 167.91 B 127.71 LOSS

3 AGF 12,859,288 32.7 22.8 9.90 S (7,837.97) 16.25 (0.61) S 33.31 GAIN

4 BBC 15,371,192 28 21.7 6.30 S 271,534.89 24.77 17.67 S 10.33 GAIN

5 DHG 26,653,842 116 112.7 3.30 S 9,949,670.55 17.52 373.29 B 257.29 LOSS

6 DTT 5,200,000 11.6 8.8 2.80 S 15,790.99 16.79 3.04 S 8.56 GAIN

7 FMC 7,200,000 13.4 12.9 0.50 S 5,012,938.07 20.31 696.24 B 682.84 LOSS

8 FPT 142,649,197 58.1 63.5 5.40 B 45,723,094.77 23.08 320.53 B 262.43 GAIN

9 GIL 9,839,818 28.3 23 5.30 S 2,049,031.85 19.69 208.24 B 179.94 LOSS

10 GMD 48,212,500 60.9 33.2 27.70 S 8,128,082.07 24.05 168.59 B 107.69 LOSS

11 HAP 18,496,208 18 12.7 5.30 S (40,468.45) 20.10 (2.19) S 20.19 GAIN

12 HAS 8,000,000 13.1 9.1 4.00 S 70,499.39 17.64 8.81 S 4.29 GAIN

13 KDC 78,513,073 48.6 51 2.40 B 22,365,613.18 20.57 284.86 B 236.26 GAIN

14 KHA 14,120,300 21.6 16.5 5.10 S 1,924,135.66 19.06 136.27 B 114.67 LOSS

15 PAC 20,176,362 65.5 54 11.50 S 3,168,265.34 16.35 157.03 B 91.53 LOSS

16 SAM 64,199,216 26.8 18.2 8.60 S (197,122.95) 23.64 (3.07) S 29.87 GAIN

17 SAV 9,660,230 40.3 33.2 7.10 S 129,543.82 18.70 13.41 S 26.89 GAIN

18 SSC 9,999,020 36 25 11.00 S 1,189,718.44 19.21 118.98 B 82.98 LOSS

42

19 TRI 27,548,360 9.5 6 3.50 S (217,876.46) 20.24 (7.91) S 17.41 GAIN

20 TS4 8,470,350 36.6 21.6 15.00 S 254,581.63 23.80 30.06 S 6.54 GAIN

21 TMS 10,102,626 27 28.4 1.40 B 1,683,724.48 16.33 166.66 B 139.66 GAIN

22 TNA 8,000,000 16.8 26.8 10.00 B 1,375,313.53 18.56 171.91 B 155.11 GAIN

23 DHA 10,040,937 29.1 21.8 7.30 S 365,430.96 20.64 36.39 B 7.29 LOSS

24 SFC 8,109,000 34.5 28.9 5.60 S 2,156,039.34 15.19 265.88 B 231.38 LOSS

25 DIC 8,200,000 15.6 18.4 2.80 B (39,896.19) 21.71 (4.87) S 20.47 LOSS

26 HPG 196,363,998 35.7 38.7 3.00 B 35,599,302.81 22.23 181.29 B 145.59 GAIN

27 PVD 26,617,000 65.3 50.9 14.40 S 278,933.97 24.77 10.48 S 54.82 GAIN

28 SCD 8,477,640 22.3 27.5 5.20 B 1,222,899.27 17.85 144.25 B 121.95 GAIN

29 TAC 18,980,200 22 25.5 3.50 B 901,978.83 24.72 47.52 B 25.52 GAIN

30 TCR 37,007,997 8.3 8.9 0.60 B 2,931,596.13 13.35 79.22 B 70.92 GAIN

31 VTB 11,022,660 13.4 13.1 0.30 S (33,534.22) 15.03 (3.04) S 16.44 GAINSUM

1066.9 959.2 204.9 3,972.54 3403.89

NO. OF SUCCESS 20SUCCESSFUL RATE 64.52%PROFITABILITY 7.62%PORFITABILITY OF BUY STOCKS -1.82%

NOTE: _ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010

_ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010and taken from cophieu68.com

_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010

43

_ Calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology

_ 'Decision' is what investor make based on 'Calculated price'

_ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price

_ 'NO. OF SUCCESS' is number of Gain result counted

_ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31

_ ‘Profitability’, ‘Profitability of buy stocks’ are taken from Table 19

44

Table 19: TABLE OF PROFIT/LOSS

NO. CODEPrice at 31 Dec 2009

Price at 31 Dec 2010

CAPM 1 CAPM 2

Amount of money

Number of shares can buy

within 1,000 thousand VND

Amout of profit/loss

Amount of money

Number of shares can buy within

1,000 thousands VND

Amount of profit/loss

1 VNM 71.7 86 1,000 13.9470 (199.4421) 1,000 13.9470 199.4421

2 ABT 40.2 38.4 1,000 24.8756 44.7761 1,000 24.8756 (44.7761)

3 AGF 32.7 22.8 1,000 30.5810 302.7523 1,000 30.5810 302.7523

4 BBC 28 21.7 1,000 35.7143 225.0000 1,000 35.7143 225.0000

5 DHG 116 112.7 1,000 8.6207 28.4483 1,000 8.6207 (28.4483)

6 DTT 11.6 8.8 1,000 86.2069 241.3793 1,000 86.2069 241.3793

7 FMC 13.4 12.9 1,000 74.6269 (37.3134) 1,000 74.6269 (37.3134)

8 FPT 58.1 63.5 1,000 17.2117 92.9432 1,000 17.2117 92.9432

9 GIL 28.3 23 1,000 35.3357 (187.2792) 1,000 35.3357 (187.2792)

10 GMD 60.9 33.2 1,000 16.4204 454.8440 1,000 16.4204 (454.8440)

11 HAP 18 12.7 1,000 55.5556 294.4444 1,000 55.5556 294.4444

12 HAS 13.1 9.1 1,000 76.3359 305.3435 1,000 76.3359 305.3435

13 KDC 48.6 51 1,000 20.5761 49.3827 1,000 20.5761 49.3827

14 KHA 21.6 16.5 1,000 46.2963 (236.1111) 1,000 46.2963 (236.1111)

15 PAC 65.5 54 1,000 15.2672 175.5725 1,000 15.2672 (175.5725)

16 SAM 26.8 18.2 1,000 37.3134 320.8955 1,000 37.3134 320.8955

17 SAV 40.3 33.2 1,000 24.8139 176.1787 1,000 24.8139 176.1787

45

18 SSC 36 25 1,000 27.7778 305.5556 1,000 27.7778 (305.5556)

19 TRI 9.5 6 1,000 105.2632 368.4211 1,000 105.2632 368.4211

20 TS4 36.6 21.6 1,000 27.3224 409.8361 1,000 27.3224 409.8361

21 TMS 27 28.4 1,000 37.0370 51.8519 1,000 37.0370 51.8519

22 TNA 16.8 26.8 1,000 59.5238 595.2381 1,000 59.5238 595.2381

23 DHA 29.1 21.8 1,000 34.3643 250.8591 1,000 34.3643 (250.8591)

24 SFC 34.5 28.9 1,000 28.9855 (162.3188) 1,000 28.9855 (162.3188)

25 DIC 15.6 18.4 1,000 64.1026 (179.4872) 1,000 64.1026 (179.4872)

26 HPG 35.7 38.7 1,000 28.0112 (84.0336) 1,000 28.0112 84.0336

27 PVD 65.3 50.9 1,000 15.3139 220.5207 1,000 15.3139 220.5207

28 SCD 22.3 27.5 1,000 44.8430 233.1839 1,000 44.8430 233.1839

29 TAC 22 25.5 1,000 45.4545 (159.0909) 1,000 45.4545 159.0909

30 TCR 8.3 8.9 1,000 120.4819 72.2892 1,000 120.4819 72.2892

31 VTB 13.4 13.1 1,000 74.6269 22.3881 1,000 74.6269 22.3881 TOTAL 31,000 1,332.8066 3,997.0277 1,332.8066 2,362.0498

PROFITABILITY

12.8936% 7.6195%

TOTAL OF BUY STOCK 10,000 484.9180 471.8663 19,000 699.6567 (345.6226)PROFITABILITY OF BUY STOCK 4.7187% -1.8191%

46

Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION

CODECost of

equity _ CAPM1

No. of shares

Price at 31 Dec 2009

FCFE 2009

Average growth rate of

FCFE 2006-2009

DISCOUNTED FCFE

CALCULATED PRICE

1 VNM 41.98 351,228,150 71.7 2,830,550 -626.43% 14,285,829.19 40.67

2 ABT 45.07 8,099,999 40.2 45,546 44.20% 205,803.16 25.41

3 AGF 52.23 12,859,288 32.7 -3,394 -14.51% (3,761.83) (0.29)

4 BBC 64.05 15,371,192 28 22,201 156.67% 59,804.87 3.89

5 DHG 39.59 26,653,842 116 431,736 36.06% 2,391,507.62 89.72

6 DTT 48.41 5,200,000 11.6 632 -1771.83% 2,559.68 0.49

7 FMC 56.90 7,200,000 13.4 286,434 104.19% 913,074.22 126.82

8 FPT 54.27 142,649,197 58.1 3,296,460 96.36% 11,259,180.65 78.93

9 GIL 50.51 9,839,818 28.3 110,622 -217.61% 420,155.33 42.70

10 GMD 79.09 48,212,500 60.9 630,778 1097.20% 1,276,316.27 26.47

11 HAP 69.05 18,496,208 18 -19,797 47.30% (17,788.89) (0.96)

12 HAS 54.60 8,000,000 13.1 3,098 -94.05% 10,485.55 1.31

13 KDC 53.70 78,513,073 48.6 1,307,935 475.97% 4,537,218.09 57.79

14 KHA 54.56 14,120,300 21.6 97,742 161.76% 331,205.96 23.46

15 PAC 46.43 20,176,362 65.5 120,498 203.16% 520,018.63 25.77

16 SAM 69.83 64,199,216 26.8 -105,969 -935.22% (94,383.76) (1.47)

17 SAV 44.44 9,660,230 40.3 6,356 35.62% 29,349.47 3.04

47

18 SSC 49.78 9,999,020 36 61,325 72.29% 238,116.64 23.81

19 TRI 47.05 27,548,360 9.5 -107,005 -152.70% (127,817.28) (4.64)

20 TS4 71.86 8,470,350 36.6 19,382 -0.02% 44,568.37 5.26

21 TMS 36.35 10,102,626 27 63,874 -163.61% 406,203.78 40.21

22 TNA 48.08 8,000,000 16.8 66,484 288.59% 271,994.14 34.00

23 DHA 52.51 10,040,937 29.1 21,520 759.55% 77,144.00 7.68

24 SFC 32.27 8,109,000 34.5 71,091 748.05% 550,683.16 67.91

25 DIC 52.78 8,200,000 15.6 -20,404 83.05% (22,441.90) (2.74)

26 HPG 62.93 196,363,998 35.7 2,398,760 -1989.35% 6,624,158.63 33.73

27 PVD 51.17 26,617,000 65.3 22,797 -16.76% 84,929.14 3.19

28 SCD 46.15 8,477,640 22.3 54,946 129.35% 239,356.58 28.23

29 TAC 80.59 18,980,200 22 73,478 126.18% 145,033.56 7.64

30 TCR 46.90 37,007,997 8.3 74,661 79.70% 317,234.99 8.57

31 VTB 40.10 11,022,660 13.4 -13,879 -104.37% (18,514.53) (1.68)

48

Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION

CODECost of

equity _ CAPM 2

No. of shares at the end of

2009

Price at 31 Dec 2009 FCFE 2009

Average growth rate of FCFE 2006-2009

DISCOUNTED FCFE

CALCULATED PRICE

1 VNM 17.52 351,228,150 71.7 2,830,550 -626.43% 65,218,670.55 185.69

2 ABT 15.31 8,099,999 40.2 45,546 44.20% 1,360,052.31 167.91

3 AGF 16.25 12,859,288 32.7 -3,394 -14.51% (7,837.97) (0.61)

4 BBC 24.77 15,371,192 28 22,201 156.67% 271,534.89 17.67

5 DHG 17.52 26,653,842 116 431,736 36.06% 9,949,670.55 373.29

6 DTT 16.79 5,200,000 11.6 632 -1771.83% 15,790.99 3.04

7 FMC 20.31 7,200,000 13.4 286,434 104.19% 5,012,938.07 696.24

8 FPT 23.08 142,649,197 58.1 3,296,460 96.36% 45,723,094.77 320.53

9 GIL 19.69 9,839,818 28.3 110,622 -217.61% 2,049,031.85 208.24

10 GMD 24.05 48,212,500 60.9 630,778 1097.20% 8,128,082.07 168.59

11 HAP 20.10 18,496,208 18 -19,797 47.30% (40,468.45) (2.19)

12 HAS 17.64 8,000,000 13.1 3,098 -94.05% 70,499.39 8.81

13 KDC 20.57 78,513,073 48.6 1,307,935 475.97% 22,365,613.18 284.86

14 KHA 19.06 14,120,300 21.6 97,742 161.76% 1,924,135.66 136.27

15 PAC 16.35 20,176,362 65.5 120,498 203.16% 3,168,265.34 157.03

16 SAM 23.64 64,199,216 26.8 -105,969 -935.22% (197,122.95) (3.07)

17 SAV 18.70 9,660,230 40.3 6,356 35.62% 129,543.82 13.41

49

18 SSC 19.21 9,999,020 36 61,325 72.29% 1,189,718.44 118.98

19 TRI 20.24 27,548,360 9.5 -107,005 -152.70% (217,876.46) (7.91)

20 TS4 23.80 8,470,350 36.6 19,382 -0.02% 254,581.63 30.06

21 TMS 16.33 10,102,626 27 63,874 -163.61% 1,683,724.48 166.66

22 TNA 18.56 8,000,000 16.8 66,484 288.59% 1,375,313.53 171.91

23 DHA 20.64 10,040,937 29.1 21,520 759.55% 365,430.96 36.39

24 SFC 15.19 8,109,000 34.5 71,091 748.05% 2,156,039.34 265.88

25 DIC 21.71 8,200,000 15.6 -20,404 83.05% (39,896.19) (4.87)

26 HPG 22.23 196,363,998 35.7 2,398,760 -1989.35% 35,599,302.81 181.29

27 PVD 24.77 26,617,000 65.3 22,797 -16.76% 278,933.97 10.48

28 SCD 17.85 8,477,640 22.3 54,946 129.35% 1,222,899.27 144.25

29 TAC 24.72 18,980,200 22 73,478 126.18% 901,978.83 47.52

30 TCR 13.35 37,007,997 8.3 74,661 79.70% 2,931,596.13 79.22

31 VTB 15.03 11,022,660 13.4 -13,879 -104.37% (33,534.22) (3.04)

50

Table 22: TABLE OF BETA AND COST OF EQUITY

NO. CODECAPM 1 CAPM 2

Beta (β) Cost of equity (%) Beta (β) Cost of equity (%)

1 VNM 0.68 41.98 0.41 12.63

2 ABT 0.75 45.07 0.28 11.94

3 AGF 0.90 52.23 0.34 12.23

4 BBC 1.16 64.05 0.83 14.92

5 DHG 0.63 39.59 0.41 12.63

6 DTT 0.82 48.41 0.37 12.40

7 FMC 1.00 56.90 0.57 13.51

8 FPT 0.95 54.27 0.73 14.39

9 GIL 0.86 50.51 0.53 13.32

10 GMD 1.48 79.09 0.79 14.70

11 HAP 1.26 69.05 0.56 13.45

12 HAS 0.95 54.60 0.42 12.67

13 KDC 0.93 53.70 0.58 13.59

14 KHA 0.95 54.56 0.50 13.12

15 PAC 0.78 46.43 0.34 12.26

16 SAM 1.28 69.83 0.76 14.57

17 SAV 0.73 44.44 0.48 13.01

18 SSC 0.85 49.78 0.51 13.16

19 TRI 0.79 47.05 0.57 13.49

20 TS4 1.33 71.86 0.77 14.61

21 TMS 0.56 36.35 0.34 12.26

22 TNA 0.81 48.08 0.47 12.96

23 DHA 0.91 52.51 0.59 13.62

24 SFC 0.47 32.27 0.28 11.90

25 DIC 0.91 52.78 0.65 13.96

26 HPG 1.13 62.93 0.68 14.12

27 PVD 0.88 51.17 0.83 14.92

28 SCD 0.77 46.15 0.43 12.74

29 TAC 1.51 80.59 0.82 14.91

30 TCR 0.79 46.90 0.17 11.32

31 VTB 0.64 40.10 0.27 11.85

51

Table 23: TABLE OF FCFE GROWTH RATE’S SENSITIVITY ANALYSIS

FCFE growth rate 2010 – 2020 (%)

RESULT (successful rate)

CAPM 1 CAPM 2

10 61.29% 67.74%

15 74.19% 67.74%

20 74.19% 64.52%

25 77.42% 61.29%

30 74.19% 54.84%

Table 244: TABLE OF VIETNAM INFLATION RATE

Year Inflation rate (consumer prices)

Rank Percent Change

Date of Information

2003 3.90% 91.00 2002 est.2004 3.10% 115.00 -20.51% 2003 est.2005 9.50% 189.00 206.45% 2004 est.2006 8.30% 175.00 -12.63% 2005 est.2007 7.50% 166.00 -9.64% 2006 est.2008 8.30% 175.00 10.67% 2007 est.2009 24.40% 211.00 193.98% 2008 est.2010 7.00% 167.00 -71.31% 2009 est.2011 11.80% 205.00 68.57% 2010 est.

Source: CIA World Factbook

Table 255: TABLE OF VIETNAM GDP GROWTH RATE

YearGDP - real growth

rate RankPercent Change

Date of Information

2003 6.00% 22.00 2002 est.2004 7.20% 23.00 20.00% 2003 est.2005 7.70% 27.00 6.94% 2004 est.2006 8.50% 23.00 10.39% 2005 est.2007 8.20% 29.00 -3.53% 2006 est.2008 8.50% 28.00 3.66% 2007 est.2009 6.20% 55.00 -27.06% 2008 est.2010 5.30% 26.00 -14.52% 2009 est.2011 6.80% 32.00 28.30% 2010 est.

52

Average 7.16%

Definition: This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent.

Source: CIA World Factbook

53