Construct a Portfolio report

PORTFOLIO THEORY AND INVESTMENT ANALYSIS PROJECT REPORT December, 2015 INTERNATION UNIVERSITY VIETNAM NATIONAL UNIVERSITY HCMC Lecturer Ms Le Hong Nhung Group members Nguyen Thi Phuc An – BAFNIU12135 Le Thi Ngoc Anh – BAFNIU13155 Hoang Bao Han – BAFNIU12108 Tran Thanh Truc – BAFNIU12038 1 Contents INVESTMENT POLICY STATEMENT 2 FUNDAMENTAL ANALYSIS 6 MACROECONOMIC ANALYSIS 6 STOCK MARKET ANALYSIS 8 INDUSTRIES AND COMPANIES ANALYSIS 9 METHODOLOGY 13 STOCK PICKING PROCESS 13 HISTORICAL PERFORMANCE.

PORTFOLIO THEORY AND INVESTMENT ANALYSIS

PROJECT REPORT

December, 2015

INTERNATION UNIVERSITY VIETNAM NATIONAL UNIVERSITY - HCMC

Lecturer: Ms Le Hong Nhung

Group members:

Nguyen Thi Phuc An – BAFNIU12135

Le Thi Ngoc Anh – BAFNIU13155 Hoang Bao Han – BAFNIU12108 Tran Thanh Truc – BAFNIU12038

Contents

INVESTMENT POLICY STATEMENT 2

FUNDAMENTAL ANALYSIS 6

MACROECONOMIC ANALYSIS 6

STOCK MARKET ANALYSIS 8

INDUSTRIES AND COMPANIES ANALYSIS 9

METHODOLOGY 13

STOCK PICKING PROCESS 13

HISTORICAL PERFORMANCE 14

STOCKS’ WEIGHTS 16

PERFORMANCE EVALUATION 17

CONCLUSION 21

REFERENCE 22

APPENDICES 23

Word counts of main contents: 4, 708 (not including Cover page, References and Appendices)

2

INVESTMENT POLICY STATEMENT

Basic information

Fund VND 100 billion Asset allocation 100% stocks Stock Exchange Ho Chi Minh Stock Exchange (HOSE)

Criteria

Investment objective Capital appreciation and Income generation

Risk tolerance Moderate relative to Vietnam stock market

Expected return 20 – 25%

Target investors College students and fresh graduates

Time horizon 1 - 3 years

Performance benchmark VN Index

a) INVESTMENT OBJECTIVES

The portfolio’s primary objective in the long term is to achieve capital appreciation through changes in the market price of the stock We also have a secondary emphasis on earning income generated mainly by dividends With a budget of VND 100 billion, we invested

in a diversified portfolio of Vietnamese companies’ stocks listed mainly in HOSE The portfolio’s aim is to bring the investors the highest rate of return within a moderate level of risk The characteristics of this portfolio are suitable for senior college students and fresh graduates, whose ages range from 20 – 25 years old When constructing the portfolio, we also take into accounts many other factors that affect the risk and return of the portfolio

Expected return

To meet the goal of capital appreciation, we expect to achieve the long-term return of 35% We will use the return of VN Index as the benchmark However, we are aware that for a short period of time, the stock market can be fluctuating with numerous unexpected events

30-Thus, in the short-term, the rate of return can equal to the bank interest rate In this case, we choose the interest rate offered by Vietcombank (VCB) as a benchmark

Risk tolerance

The target customers of this fund are college students and fresh graduates who are passionate about stock investing On the one hand, this group of investors does not have too much financial responsibilities such as raising children or preparing for retirement period Thus, this group is often seen to have nothing to lose and is willing to take more risk On the other hand, as they do not have much experience, they are very careful in their choices and do not want to lose it all Combining both aspects, a moderate level of risk is suitable for them

b) CONSTRAINTS

Beside the investment objectives that sets limit on risk and return, there are several other constraints that influence the investment plan such as liquidity needs, time horizon and legal and regulatory issues

This fund is for investors who are young and have few immediate liquidity needs Thus, instead of choosing only blue chip companies, we invested in some highly potential SMEs (small and medium enterprises) The time horizon of the fund is set as medium-term investment with a time frame from 3 to 5 years

With regard to total return strategy, taxation is the main concern to individual investors The stock market in Vietnam is not very well-regulated Transparency and information asymmetry are still major problems facing investors Additionally, Vietnamese investors have a tendency to overact with rumors and decisions are made with little rational consideration

c) ASSET ALLOCATION

A powerful portfolio will own a selection of investment types, called asset classes, and rotate among them periodically Before choosing particular stocks for the portfolio, it is

or strictly manipulated by Government Hence, to match with the moderate adjusted risk return

we choose at the beginning, the portfolio should not include any portion of Government bonds, gold and foreign currencies

In contrast, equity asset like common stocks, despite the volatility of price, is considered

as high liquidity asset and generate significant return and helpful for our diversifying goal to minimize unsystematic risk Hence, we intend to invest in companies that do business in our interested industries, that are believed to be feasible and whose shares are listed in a stock exchange Most of the stocks in our portfolio come from Ho Chi Minh Stock Exchanges (HOSE)

d) PORTFOLIO INVESTMENT MANAGEMENT

Management Strategies

To the belief that macro-economic factors will effect almost industries and companies in the market, we use Top-Down Approach which includes the economy, industry and individual company analysis to find out the good and potential companies in each industry to buy stocks

Passive strategy is applied for this portfolio Investors will buy stocks and keep them for

a specific period of time The main reasons for this choice is that it is an economical but still effective method for young people, especially for those who lack the experience These investors

do not have much expertise to receive information, analyze the market and make quick decisions

to buy and sell stocks regularly as in active strategy

Monitoring and Review

Take VN-index as the benchmark, the Investment performance will be monitored, reported and compare to VN-index on a quarterly basis to figure out whether it outperform or not The investment program will be reviewed if needed to assure that it continues to achieve your stated investment objectives and is within your tolerance for risk

Rebalancing

Despite the historical returns, there are some inconsistences between the past and the future If necessary, the weight of each stock in the portfolio would be adjusted every quarter to ensure the return and minimize the loss If the fluctuations happen too frequently, the adjusting basis can be narrow down to one month

6

FUNDAMENTAL ANALYSIS MACROECONOMIC ANALYSIS

GDP AND INFLATION

In the first 9 months of 2015, Vietnam’s macro economy has been stable despite the downward trend of globally emerging economies GDP has increased significantly and reached 6.81% in quarter 3 of 2015, with the average growth of 6.5% It is estimated that GDP will increase above 6.5% (exceeding the target of 6.2% for this year) and become the highest GDP growth rate for the last 8 years This growth can be attributed to in industry and construction, especially processing and manufacturing industry GDP growth for 9M2015 in industry and construction sector was 9.57%, almost doubled the rate of last year’s same period (5.75%) The Index of Industrial Production (IIP) for 9M2015 also rose 9.8%, much higher than 6.3% of last year’s same period; in which, processing and manufacturing industry went up 10.2%

In September 2015, inflation rate dropped to nearly 0%; however, basic inflation was still 2.4%, a stable rate for the last 7 months August CPI fell 0.07% vs July as a result of falling fuel prices Besides, housing and construction material will continue to stay on a downtrend, as the rainy season is not over; prices for food and foodstuff as well as household goods basket are

lạm phát lạm phát cơ bản

Source: Stock market

Figure 1: IIP (9/2014-9/2015), % increase

Source: National Financial Supervisory Commission

Figure 2: Inflation & Basic Inflation 9/2015), % CPI increase

(9/2014-Whole

industry

Processing and manufacturing Inflation Basic Inflation

anticipated to be stable because most retailers will keep the annual promotion unchanged in September

Vietnam’s economy will benefit considerably from TPP – A Free Trade Agreement aiming to eliminate 18,000 different tariffs among 12 member countries In the next decade, thanks to TPP, Vietnam’s GDP is likely to grow by 11% (USD 36 million) Export is also expected to grow by 28% since many factories will be moved to Vietnam Reduced tariff from the U.S and Japan will benefit Vietnam’s textile companies Along with cheaper labor cost, Vietnam has competitive advantage compared with China Seafood is another industry that benefits from TPP since tariff applicable on shrimps, squids and tuna currently at 6.4 – 7.2% will

be abolished Moreover, due to duty-free imported products from Vietnam, TPP will attract more foreign-invested capital into our country VN Index has risen by 4.9%, while foreign investors are purchasing more shares in logistics, industry, seafood and textiles groups However, the agricultural sector of Vietnam is expected to encounter fierce competition from foreign corporations having advantage of scale and operation efficiency The elimination of tariff on imported pharmaceuticals (currently at 2.5%) also makes the market more intense Besides, TPP will strengthen intellectual property rights, making the accessibility to new products as well as new drug manufacturing become limited

MONETARY POLICY

In the year 2015, international macroeconomic policies have a significant impact on over the entire world and Vietnam is not outside of this influence Therefore, State Bank of Vietnam (SBV) tried to adjust exchange rate and interest rates to stabilize the market SBV adjusted

Source: Netdania

Figure 3: Currency depreciation/devaluation

against the US dollar of TPP countries

8

the exchange rate in two days, namely 12/08/2015 (adjust exchange rate volatility from 1% to 2%) and 19/08/2015 (devaluate 1% more and expand volatility from 2% to 3%) However, comparing to the overall rate policies of 12 countries in the TPP, VND has devaluated approximately 5%, which is still more advantageous in terms of exchange rate stability

Moreover, the dollar is still taken into account despite the fact that inflation in the US is below 2% of Fed expectations To deal with this case, SBV tried to protect VND by two main policies on USD and domestic interest rate

SBV issued Decision No 1938 / Decree-SBV dated 09/25/201 which change some regulations for interest rate applied to the deposits of organizations (except organizations credit, foreign bank branches) was 0%/year (old rate is 0.25% / year) On the tandem with SBV policies, most of commercial banks compete to increase deposit rates from late September to now approximately 0.2%/year As a result, the spread between interest rates in VND and USD savings up to nearly 6%/year Meanwhile, the appreciation of the dollar against the dong last few years is always lower than 4%/year These two factors prove that deposit VND into banks is more effective than foreign currencies, especially USD The increase in US interest rates is very important This will make Vietnam's stock market and other areas will react negatively Companies in the financial sector (banks), or the company based on large credit debt (housing, utilities, construction) will be hurt by the higher interest rate environment

STOCK MARKET ANALYSIS

Figure 4: Supply and Demand of Vietnam Stock Market

26,854

33,134

42,400

0 10,000 20,000 30,000 40,000 50,000

According to officially statistics on 30/9/2015, the amount of margin debts of 10 leading stock companies was VND 12,458 billion Since these firms account for 65% market share, using interpolation method can estimate the total outstanding margin debt of market was VND 19,166 billion

Trading liquidity now is much more than in September, which makes the margin rate higher; the estimated level around 15%, as VND 22,400 billion

In 2016, VN Index will bottom around 560-570 in Dec 2015 and reach 670 in 1H16 before declining to 600 at year-end on stronger economic growth, rising FII inflow after following TPP, potential upgrade to MSCI emerging in June 2017 However market risks remain with rising interest rate, VND devaluation and further CNY devaluation

Three key investment rationales: higher top-line growth due to rising trade post TPP, FTA (port, residential property, textile), profit margin expansion due to lower input cost (chemical, oil gas downstream), cyclical recovery due to higher economic growth (bank, residential property, IT)

 Large-caps (bank, insurance, real estate) to lead the growth Oil gas to bottom in 2016

with a potential pick-up or turn around

 Port: Benefit from rising trade from TPP, FTA Supply shortage expected for port in the

North in 2018 while low utilization still persist for Southern port

 Residential real estate: share price correlates more with EPS growth rather than cash

flow Decline in 9M profit (-40%) with high dilution due to new share issue (+25%) Profit growth expected low in 2016 and strong only in 2017 when most of property sold today can be handed over

INDUSTRIES AND COMPANIES ANALYSIS

This year, some of the most outstanding and promising industries include food producing, construction, real estate, logistics, basic materials and mining

10

Food and beverages are basic necessities and the demand remains stable regardless of the economic condition Thus, food industry are able to maintain steady growth rates and it is safe to invest in this industry For the first nine months of 2015, food industry enjoyed a slight increase

of 6.1% Within the industry, milk, confectionery and fishery are the fastest growing sectors However, it is noticeable that consumption growth was quite modest compared to inventory growth Specifically, Food Production & Processing Index increased by only 7.7% while the inventory increased sharply by 16.4% since the end of last year

Logistics stocks are also attractive to investors From 1999-2014, container cargo volume has been increasing steadily over the years, with the average of 17.43% per year Goods quantity transported through sea port continued to increase with 204 million tons of goods thanks to the signing of the FTAs, attracting FDI and the recovery of the economy Infrastructure is being completed with the construction of Hanoi - Hai Phong Highway, so vehicles can travel straight to Hai Phong’s ports, the travel time will halved Good business performance, especially the stocks

in Hai Phong area such as VSC, HAH, DVP

Real estate market is showing signs of recovery with increased consumption especially in

Ho Chi Minh City In first quarter of 2015, the number of apartments sold rose 40% on a quarterly basis, the highest increase since 2011 In the first two quarters, the number of successful transaction in real estate market in Hanoi and HCMC increase 150% yoy and 180% yoy, respectively

Following the recovery of the real estate market, construction industry also enjoys higher demand By the year 2020, 33.6 million m2 of housing is needed to support 4.2 million people Additionally, the Housing Law 2014 which allows foreigners to buy houses in Vietnam will create a huge demand for luxury housing segment Industrial construction is expected to manufacturing and processing industry, which accounts for 76.2% of total FDI in Vietnam, due

to the increasing needs on building industrial and civil infrastructure

Moreover, when more houses and buildings are built, the production of construction materials and fixtures will be boosted as well Price of building material products remained stable in 6 months, while cost of goods sold of building material manufacturers was affected by mixed factors The regulation of transport load made delivery more costly However, the decline

of oil and gas price helped firms in the industry somehow sustain Besides, along with the oil price decrease, the price of derived products from crude oil, which are also the inputs of many building material sub-industries dropped

Power industry is regarded as the strong and potential industry influencing national economy due to electricity demand growing to serve the process of industrialization - modernization of the country Since 6M2015, the production targets and business power outperformed to the targets To be more specific, the production of electricity system reached 13.9 billion kWh month 6M2015 increases of 13% over the same period last year

Vietnam ranks 10th among the countries that are most attractive for software outsourcing with respect to cost, risk, and operation condition Information system service is growing again after a difficult stage as domestic companies, especially banks, are paying more attention to their information system and are willing to pay to improve the system’s quality Broadband telecommunications is being invested to improve infrastructure in order to creating competitive advantage

GDP growth together with free trade agreements push retail sales and thus benefit related industries such as packaging Outputs in various goods manufacturing industries, especially among seafood, textiles are expected to rise, leading to strong growth in demand for packaging items Not just the outputs, but the inputs also provide many advantages for the packaging industry Specifically, the price of printing paper (made from waste paper) reduced because of the reducing demand for industrial paper storage of China as Chinese economy is in the stage of growth slowed As for the group of plastic packaging, the decline in prices of raw plastic

be a potential market for automobile retail industry in the future

In the context of steady economic growth and increasing domestic consumption, some general manufacturing industries such as textile and battery have certain prospects Additionally, irradiation industry, though new, is attracting intention from the investors

METHODOLOGY STOCK PICKING PROCESS

From the above macroeconomic and the industry analysis, the stocks of 30 potential companies were identified We choose the stocks according to both historical performance and future prospects 30 companies is a good number that allows us to diversify our portfolio and reduce unsystematic risk to the lowest level as possible A company chosen must satisfy most the following requirements

 Not subject to a warning, controlled, suspended from trading within the previous 1 year

in HOSE

 Medium to large sized stocks (Vietnam context)

 ROA and ROE in 2014 should be higher or at least equal to that of the industry

 Net income showed a constant growth in the last 4 consecutive years

 Current ratio should be at least 1 and Long-term debt should not exceed working capital

 However, those requirements are flexible for some companies that are new-listed or

possessing high growth potentiality

Table 1: Major financial ratios and information of chosen companies in 2014

Share Names ROA (%) ROE (%) Current Ratio Long-term

Debt

Working Capital

Table 2: Historical performance of chosen companies

Stock Name Mean of

daily return

Standard deviation

Coefficient of variance Beta

A Food and Beverage

1 HVG -0.01% 2.00% -277.31 1.411

2 MSN -0.12% 0.92% -7.71 0.229

16

STOCKS’ WEIGHTS

By using Solver analysis, we came up with the following stocks in our portfolio to

achieve target return while having minimum variance Eventually, 14 out of 30 stocks would be

invested to get an optimal portfolio

No Share

Names

Weights (W) Value (VND)

Closing price (VND - 20/11/2015)

Share volume

1 VSC 7.735%

7,735,323,480 76,500

101,115

2 KSB 5.324%

5,324,262,556 35,800

148,722

3 SVC 11.977%

11,976,693,260 33,100

361,834

4 TCL 6.324%

6,324,010,363 31,700

199,496

5 CLL 3.137%

3,136,561,889 27,700

113,233

6 DHC 6.009%

6,009,052,754 28,800

208,648

7 NAF 25.787%

25,787,373,286 31,900

808,382

8 MSN 3.932%

3,931,632,047 72,500

54,229

9 VCF 2.974%

2,974,066,431

152,000

19,566

10 VNM 5.927%

5,927,065,744

131,000

45,245

11 MSR 4.132%

4,132,198,101 12,200

338,705

12 STK 2.262%

2,261,659,571 33,000

68,535

13 NT2 5.863%

5,863,176,701 27,300

214,768

14 SKG 8.617%

8,616,923,818 89,500

96,278

Total 1.00 100,000,000,000