(Luận văn HV chính sách và phát triển) determining the intrinsic value of common stock – the case of DHG pharmaceutical joint stock company

With a desire to find reasonable valuation methods for stocks on Vietnam's stock market and then make recommendations to improve the financial position of a particular enterprise, help t

INTRODUCTION

1 Rationales of the research

Vietnam's stock market has been born for 22 years since 1998 but has made a strong development, making an important contribution to the country's economic development Vietnam's stock market is happening very vibrant and growing quite fast Contributing to the success of the stock market is the participation of its members: government, financial intermediaries, listed companies and investors

Securities investment is a new investment channel for our country's financial market, bringing a lot of profits for domestic and foreign investors However, it also contains great risks In order to make the stock market more stable and professional, when deciding to invest, investors must analyze and revalue stocks Valuation is absolutely necessary It helps listed companies determine the fair price when issuing stocks, determining the cost of equity as well as the cost of merger and acquisition

Besides, stock valuation helps commercial banks to determine stock value before deciding to lend Valuing stocks is also an indispensable stage in all decisions of individuals as well as organizations, help investors know the real value of stocks, find investment opportunities and make appropriate investment decisions

Supply and demand activities in the market are often sentimental and follow the

“herd mentality” so the stock price is raised, far exceeding its real value Therefore, many investors have made the wrong decision They have suffered heavy economic losses from those mistakes On the one hand, the stock valuation methods have its own advantages and disadvantages This is a challenge for analysts: How to choose the right and most appropriate valuation methods for Vietnam's stock market and for each type of business? On the other hand, stock valuation carry subjective views

as well as depending on the qualifications of the analysts As a result, it still has multi – dimensional perspectives, positive and negative sides of the valuation results

With a desire to find reasonable valuation methods for stocks on Vietnam's stock market and then make recommendations to improve the financial position of a particular enterprise, help the intrinsic value of shares of that enterprise increase in

the future, I decided to choose the research topic: DETERMINING THE

INTRINSIC VALUE OF COMMON STOCK – THE CASE OF DHG PHARMACEUTICAL JOINT STOCK COMPANY.

 Particular objectives

- Systematizing the theory of common stock analysis and pricing

- Analyzing the financial ratios of DHG Pharmaceutical Joint Stock Company

- Applying valuation methods to value DHG stock

- Describing the difficulties in the process of valuing DHG stock

- Making recommendations for investors and business managers

3 Subjects and scope of the research

 Research subject: Determining the intrinsic value of DHG stock

 Research scope:

- Space: DHG Pharmaceutical Joint Stock Company

- Time: Statistics collected from 2015 to 2019

4 Research methodology

 Secondary data collection

 Literature review

 Alternative valuation methods such as FCFF, FCFE, DDM, P/E, P/B Details

of methods will be explained clearly in chapter 1

5 Organization of the graduation thesis

Apart from Introduction, Conclusion, Recommendations and References; contents

of the graduation thesis are organized into 4 chapters:

 Chapter 1: Literature review of stock valuation

 Chapter 2: Analysis of macroeconomic environment and pharmaceutical industry

 Chapter 3: Financial situation analysis through financial ratios

 Chapter 4: Valuation for stock of DHG Pharma – Recommendation for stakeholders

CHAPTER 1 LITERATURE REVIEW OF STOCK VALUATION

1.1 Introduction of some theoretical issues about stock valuation

1.1.1 Stock market

Stock market is a place where shares of pubic listed companies are traded (Frederic

S Mishkin, 2010, p 8) Buying and selling securities can take place in the primary market, secondary market, stock exchange, over – the counter market, spot market

or future market It help stockholders earn profits from selling securities and its price depends on the supply and demand of the market at that time Securities are issued for the purpose of raising capital for businesses/ companies or the government

1.1.2.2 Characteristics of common stock

The two most important characteristic of common stock as an investment are its residual claim and limited liability features

 Residual claim means that stockholders are the last in line of all those who have a claim on the assets and income of the corporation In a liquidation of the firm’s assets, the shareholders have a claim to what is left after all other claimants such as the tax authorities, employees, suppliers, bondholders, and other creditors have been paid For a firm not in a liquidation, shareholders have claim to the part of operating income left over after interest and taxes

have been paid Management can either pay this residual as cash dividends to shareholders or reinvest it in the business to increase the value of the shares

 Limited liability means that the most shareholders can lose in the event of failure of the corporation is their original investment Unlike owners of unincorporated businesses, whose creditors can lay claim to the personal assets of the owner (house, car, furniture), corporate shareholders may at worst have worthless stock They are not personally liable for the firm’s obligations

1.1.3 Corporation

1.1.3.1 Definition

A corporation is a business owned by stockholders, or shareholders A business becomes a corporation when the state approves its articles of incorporation 1and the first stock share is issued Unlike a proprietorship and a partnership, a corporation is legal entity distinct from its owners (Horngren, Harrison & Oliver, 2012, p 6)

1.1.3.2 Advantages and disadvantages of a corporation

Advantages:

 Separate legal entity

A corporation is a distinct entity from a legal perspective It is an entity that exists apart from its owners However, the corporation has many of the rights that a person has Items that the business owns (its assets) and those items that the business has to pay later (its liabilities) belong to the corporation and not the individual stockholders

 Transferable ownership rights Stockholders may transfer stock as they wish by selling or trading the stock to another person, giving the stock away, bequeathing it in a will or disposing of the stock in any other way The transfer of stock is entirely at the discretion of

1 The articles of incorporation are the rules approved by the state that govern the management of the corporation

the stockholder It does not require the approval of either the corporation or other stockholders

 Continuous life The life of a corporation is stated in its charter The life may be perpetual, or it may be limited to a specific number of years If it is limited, the company can extend the life through renewal of the charter

 Limited liability of stockholders Since a corporation is a separate legal entity, creditors have recourse only to corporate assets to satisfy their claims The liability of stockholders is normally limited to their investment in the corporation Creditors have no legal claim on the personal assets of the owners unless fraud has occurred

 Ability to acquire capital

It is relatively easy for a corporation to obtain capital through the issuance of stock Buying stock in a corporation is often attractive to an investor because a stockholder has limited liability and shares of stock are readily transferable

Disadvantages:

 Separation of ownership and management Stockholders legally own the corporation However, they manage the corporation indirectly through a board of directors they elect Thus, stockholders do not have to disrupt their personal affairs to manage the business

 Additional taxes Corporations are separate taxable entities First, corporations pay their own income tax on corporate income Then, the stockholders pay personal income tax on the earnings that they receive from corporations

 Government regulation

To protect persons who loan money to a corporation or who invest in its stock, states monitor the actions of corporation Corporations are subjected to more governmental regulation than other form of business

1.1.4 Intrinsic value versus market price

The intrinsic value of an asset is the present value of expected future cash flows earning from that asset, discounted to the present with the investor’s appropriate required rate of return

The market value of an asset is its price when it is traded in the market This value

is determined by supply and demand in the market

If the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market price, the stock is considered undervalued and a good investment If the intrinsic value is lower than the market value, this stock is overpriced in the market If the stock market works effectively, market value and real value of securities would be equal Anytime, when the intrinsic value of a security is different from its current market value, the competition between investors seeking profit opportunities will quickly push market prices back to their intrinsic values Therefore, an effective market is one in which the value of all securities at any time fully reflects all publicly available information In such a market, the market value and the intrinsic value are the same

1.1.5 Definition of stock valuation

Stock valuation is a method of determining the intrinsic value of a stock The importance of valuing stocks evolves from the fact that the intrinsic value of a stock

is not attached to its current price By knowing a stock’s intrinsic value, an investor may determine whether the stock is overvalued or undervalued at its current market

price

If the intrinsic value is greater than the market price, the stock is considered undervalued At that time, investors will buy this stock because the price of the stock will increase to return to its intrinsic value In contrast, investors will not buy

stocks being sold at prices higher than their intrinsic value because after a while, the stock price will decline to return to its intrinsic value

In addition, the macroeconomic picture affects stocks in different ways with varying degrees In conclusion, analyzing the economy including the global economy and the domestic economy to identify the factors that positively and negatively affect the company, and then make forecasts for the valuation of the company's stock

1.2.1.2 Domestic macroeconomic

Volatility of the stock market is closely related to the domestic macro economy

The analysis of the macro economy is to assess the business environment and the impact of the business environment on the operation and business results of the company, and then impact on the company's stock price There are many basic macro factors that directly affect stock analysis and stock valuation

 Gross domestic product (GDP): is the market value of all final goods and services produced within a country in a given period of time (N Gregory Mankiw, 2011, p 494) During the flourishing period, GDP increases and vice versa during the recession, GDP decreases

 Inflation: is a situation in which the economy’s overall price level is rising (N

Gregory Mankiw, 2011, p 514) The inflation rate is the percentage change in the price level from the previous period Inflation is often accompanied by economic growth and an increase in the number of jobs Inflation itself is not bad because Inflation could encourage economic development Moderate increases in price level tend to stimulate investment, including domestic investment and foreign investment, maintaining high employment rate and increase in GDP In contrast, high inflation would reduce growth and limit investment

 Interest rate: is the cost of borrowing, or the price paid for the rental of funds (Frederic S Mishkin, 2012, p 38) Interest rates are probably the most important macroeconomic factors to consider in investment analysis The increase in interest rates could be bad news for the stock market Although there are many different interest rates in the economy, these interest rates tend

to vary in the same direction, so economists often discuss at a representative interest rate

1.2.2 Industry analysis

Industry analysis is the analysis of a specific industry (production, service, trade), which helps enterprises and analysts understand the industry's competitive advantage, including: supply and demand statistics, the level of competition in the industry and with other emerging industries, future prospects and the influence of external factors on the industry Industry analysis is important for the same reasons

as macroeconomic analysis; similarly, it is unusual for a firm in a troubled industry

to perform well

1.2.3 Company analysis

1.2.3.1 Financial ratio analysis

Ratio analysis expresses the relationship among selected items of financial statement data A ratio expresses the mathematical relationship between one quantity and another The relationship is expressed in terms of either a percentage, a rate, or a simple proportion

of the enterprise If current ratio is less than 1, enterprises cannot afford to pay short-term debts However, if this ratio is too high, it means the company has invested too much in short-term assets beyond what it needs

Normally, that surplus will not make a profit, so that investment will be less effective

they came due immediately If this ratio is less than 1, the enterprise cannot afford to pay all the short-term debts immediately

 Asset management ratios

The management ratios measure how effectively the firm is managing its assets

1 Inventory turnover

Inventory turnover =

Inventory turnover measures the number of times, on average, the inventory

is sold during the period Its purpose is to measure the liquidity of the inventory (Weygandt, Kimmel & Kieso, 2014, p 724) It should be noted that inventories are of a business nature, so not every low inventory level is good, high inventory level is bad

 Days’ sales in inventory (DOH)

Days’ sales in inventory =

This measures the average number of days inventory is held by the company

2 Receivables turnover

if this ratio is low, the amount of cash in business appropriated would increase, the amount of cash will decrease, which reduces the initiative of enterprises in financing working capital in production and businesses may need to borrow from banks to finance this working capital

 Days of sales outstanding (DSO)

Days of sales outstanding =

3 Fixed assets turnover

Fixed assets turnover =

Fixed assets turnover measures how effectively the firm uses its plant and equipment (Brigham & Houston, 2019, p 113) This ratio help answer this

question: How much is net revenue for every Vietnam dongs spent on fixed assets?

4 Total assets turnover

Total assets turnover =

Total assets turnover measures how effectively the firm uses its total assets

Total assets turnover shows: How much is net revenue for every Vietnam dongs spent on total assets? The higher this ratio proves that the assets are moving quickly, contribute to increasing of sales and is a condition to improve profits of the business In contrast, this low ratio indicates that the assets are moving slowly

 Debt management ratios

Debt management ratios are a set of ratios that measure how effectively a firm manages its debt

1 Total debt ratio

Total debt ratio =

Total debt ratio shows the proportion of assets financed with debt (Horngren, Harrison & Oliver, 2012, p 738) If this ratio is low, it shows that the enterprises borrow less This implies that businesses have high financial autonomy But it can also imply that businesses do not yet know how to exploit financial leverage, it means enterprises do not know how to raise capital in the form of borrowing In contrast, this ratio is too high, implying that enterprises do not have financial capacity but mainly borrow

to get business capital This shows a higher level of corporate risk

2 Debt – equity ratio

Debt – equity ratio =

Debt – equity ratio shows the proportion of total liabilities relative to the proportion of total equity that is financing the company’s assets Thus, this ratio measures financial leverage If the debt to equity ratio is greater than

1, then the company is financing more assets with debt than with equity If the ratio is less than 1, then the company is financing more assets with equity than with debt The higher the debt to equity ratio, the higher the company’s financial risk (Horngren, Harrison & Oliver, 2012, p 738)

3 Interest coverage ratio

Interest coverage ratio =

Interest coverage ratio is a measure of the firm’s ability to meet its annual interest payments It measures the number of times EBIT can cover interest expense A high interest coverage ratio indicates ease in paying interest expense; a low ratio suggests difficulty (Horngren, Harrison & Oliver,

The net profit margin measures net income per Vietnam dongs of revenue

This ratio is positive, it means that the business is profitable The higher the ratio, the hìgher the profit This ratio is negative, meaning that the business enterprise is at a loss

2 Return on assets (ROA)

Return on assets measures a company’s success in using assets to earn a profit (Horngren, Harrison & Oliver, 2012, p 739) This ratio is greater than 0, it means that the business is profitable The higher the ratio, the hìgher the profit This ratio is samller than 0, meaning that the business enterprise is at a loss

3 Return on equity (ROE)

The rate of return on common stockholders’ equity shows how much income is earned for each one Vietnam dong invested by the common shareholders This ratio is positive, it means that the business is profitable

This ratio is negative, meaning that the business enterprise is at a loss

 Market value ratios

Market value ratios are ratios that relate the firm’s stock price to its earning and book value per share

1 Earnings per share (EPS)

P/E =

The price/earnings (P/E) ratio shows how much investors are willing to pay per Vietnam dong of reported profits

1.2.3.2 Using financial ratios to assess performance

Although financial ratios help us evaluate financial statements, it is often hard to evaluate a company by just looking at the ratios

 Comparision to industry averages

 Benchmarking The company could compare itself with a subset of top competitors in their industry This is called benchmarking, and the companies used for the comparison are called benchmark companies

 Trend analysis The company could compare its ratios to its own past levels Trend could give clues as to whether a firm’s financial condition is likely to improve or to deteriorate To do trend analysis, simply plot a ratio over time

1.2.3.3 Dupont equation analysis

ROE = profit margin x Total assets turnover x Equity multiplier

Dupont equation is a formula that show the rate of return on equity can be found as the product of profit margin, total assets turnover and the equity multiplier It show the relationships among asset management, debt management and profitability ratios (Brigham & Houston, 2019, p 124)

The corporate financial situation is a holistic one So there is a close relationship between financial ratios Use the Dupont equation to see the factors affecting return

on equity The above analysis shows that the return on equity of a business can be increased in 3 ways:

 Businesses can increase their competitiveness to increase revenue and at the

 Businesses can improve their business efficiency by generating more revenue from existing assets, through increasing the scale of net sales and using total assets economically and reasonably

 Enterprises can improve business efficiency by improving financial leverage

or in other words, borrowing more capital to invest in production and business

However, the return on assets of the enterprise is higher than the lending interest rate so that borrowing cash for investment would be effective

When applying Dupont equation to ROE analysis, analysts will compare enterprise’s ROE with previous years And then, they will consider the growth or decline of this ratio over the years from which of the three causes From there, analysts will make comments and predict the trend of ROE in the following years

The SWOT analysis model is a useful tool for capture and decision making, which includes financial decisions in any situation with any enterprise The data is organized in SWOT format in a logical order that is easy to understand, easy to present, easy to discuss and make decisions, which can be used in any process of decision making The SWOT analysis sample is presented as a 2 – column, 2 – row matrix, which is divided into 4 parts: Strengths, Weaknesses, Opportunities and Threats

 Strengths include internal capabilities, resources and positive situational

factors that may help the company serve its customer and achieve its objects

 Weaknesses include internal limitations and negative situational factors that

may interfere with the company’s performance

 Opportunities are favorable factors or trends in the external environment that

the company may be able to exploit to its advantages

 Threats are unfavorable external factors or trends that may represent

challenges to performance

The SWOT analysis model is suitable for assessing the current state of the enterprise through analyzing the internal situation (Strengths and Weaknesses) and external situation (Opportunities and Threats)

 Internal factors to be analyzed may be: corporate culture, corporate image, organizational structure, key personnel, ability to use resources, available experience, operational efficiency, brand reputation, market share, financial sources, copyright and trade secret

 External factors to be analyzed may be: customers, competitors, market trend, suppliers, partners, social changes, new technology, economic environment, political and legal environment

The goal of SWOT analysis is to match the company’s strengths to attractive opportunities in the environment, while eliminating or overcoming the weaknesses and minimizing the threats (Philip Kotler & Gary Armstrong, 2014, p 78)

1.4 Discount rate

There are two common ways to determine discount rates, including: Capital Assets Pricing Model (CAMP) is used to determine the cost of equity and Weighted Average Cost of Capital (WACC) is used to determine the enterprise’s cost of capital

1.4.1 Capital Assets Pricing Model

Cost of equity is extremely important, because just the difference from 1% - 2%

also makes the firm value change significantly The most common way to identify

is to apply Capital Assets Pricing Models (CAMP) CAMP is a model based on the proposition that any stock’s required rate of return is equal to the risk free rate

of return plus a risk premium that reflects only the risk remaining after diversification (Brigham & Houston, 2019, p 283)

= + β x ( – )

Where:

 is the cost of equity

 is the risk – free rate

 β is systematic risk of equity

 is the market return

 – is the market risk premium

- Risk free rate is the interest rate at which the risk of assets is close to 0 (No credit risk and absolutely not affected by economic fluctuations) Normally, the interest rate of government bonds is chosen as the risk-free rate, especially the interest rate

of Treasury bills Becasue when investing in these securities investors will surely get back the amount of money they bought securitites and the amount of interest that has been determined

- Beta is a measure of the volatility of a stock compared to the general market

- Market risk premium is the difference between the expected rate of return from the market portfolio and the risk-free rate This is the rate of return that the investor hopes to get beyond the risk-free rate, to compensate for the higher risk that investors have to bear when investing in the stock market

1.4.1.1 Beta coefficient

β =

Where:

 Covar ( , ) is the covariance between the return on Asset i and the return

on the market portfolio

 Var ( ) is the variance of the market

Systematic risk coefficient estimate the degree of stock price volatility compared to the volatility of the entire market β = 1 indicates that the company's stock price moves in the same direction as the entire market, risk is equal to market average β

> 1: Stock prices are more volatile than the market, the risk is higher than the market average β < 1: stock prices are less volatile than the market, the risk is lower than the market average It is rare for a company to have a negative β coefficient If that happens, the stock price of the company tends to move in the opposite direction with the market

1.4.1.2 The Security Market Line

This expected return – beta relationship is the most familiar expression of the CAPM The expected return – beta relationship can be portrayed graphically as the security market line (SML)

Figure 1.1: SML – Stock Market Line and a negative – alpha stock

The security market line is considered a standard criterion for evaluating each investment option Given the risk of an investment (as measured by its beta), the SML tell us how much the required rate of return on the investment plan must be to compensate for the risk that investors have to bear

From the meaning of the security market line, fairly – priced assets plot exactly on the SML Points above or below the SML are all indicative of a price situation that does not reflect the equilibrium value in the market If the point is above the SML, that security is undervalued In this case, you should buy that stock In contrast, for

points below the SML, it is not recommended to buy such securities because their prices are higher than their real values

The difference between the fair and actually expected rates of return on a stock is called the stock’s alpha, denoted by α

α = E(r) – { + β x [ – ]}

 α > 0: Buy securities

 α < 0: Sell securitites

1.4.2 Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital is a very important quantity to discount cash flow to the present The nature of cost of capital is the opportunity cost to use capital sources, which is invested in the business operation of the enterprise The capital of the enterprise includes equity and debt Each type of capital has different usage costs

Formula for WACC:

WACC =

x

x x (1 - ) Where:

 D is the value of debt, is the cost of debt (pre – tax)

 E is the value of equity, is the cost of equity

 V = E + D: Total debt and equity

 D/V, E/V is called the capital structure, corresponding to the ratio of debt and ratio of equity over the total capital of the enterprise

The weighted average cost of capital is used to discount the cash flow of the enterprise, not to discount the cash flow of equity

1.5 Stock valuation methods

1.5.1 Dividend Discount Model (DDM)

The Dividend Discount Model is built on the view that stock prices are determined

by the present value of all future dividends Suppose a stock is held until the year n, dividends paid from the first year to year n are respectively Knowing that the stock price in year n is and the investors’ required rate of return is r (constant) The formula for calculating the stock value using DDM method is as follows:

Where:

 : Current stock price

 : Dividend in year t

 r: required rate of return/ cost of equity

If the stock is held indefinitely by the investor, the formula becomes:

1.5.1.1 The zero – growth DDM

In the case: the company does not grow, the annual dividend will be fixed, it means that = = = … = Then, the stock price is calculated by the formula:

1.5.1.2 The constant – growth DDM

When dividends grow steadily, it means that dividends grow annually at a fixed rate

g

= , = = =

Assume that r > g > 0, the stock price is calculated as follows:

The above formula is only true when r > g This is perfectly reasonable because g is growth rate in the long run, while r is the required rate of return in the short run and

is frequently changed

1.5.1.3 Multistage dividends growth

In reality, no company has had a constant growth rate during its life In their life cycle, each company will have different growth stages Therefore, this is the most realistic case It is common for dividends to grow unevenly for a number of years, before entering the stable period

To determine the stock price, first, we must divide the development process of the company into different stages of development, mainly two stages The first stage is the period of unstable growth During this period, investors need to base on earnings estimates and dividend policy to determine annual dividends The second stage is the long – term development period and assume that it is a period of constant growth

To calculate the stock price, we combine the formula of the two cases above:

Suppose in the first year, the dividend value is estimated to be , ,… From the year (n + 1) onwards, dividend growth rate is g (constant)

The stock price is calculated as follows:

1.5.2 Discounted Cash Flow Model (DCF)

Free Cash Flow (FCF) is the amount of cash that could be withdrawn without harming a firm’s ability to operate and to produce future cash flows (Brigham &

Houston, 2019, p 81)

The stock value of the DCF model is calculated by discounting all future free cash flows to the present value at an appropriate discount rate Therefore, when the free cash flow was determined with an appropriate discount rate, the 2 method calculating stock value of DCF model is as follows:

1.5.2.1 Free Cash Flow to Firm (FCFF)

Free cash flow to firm is the total cash flow of income for all stakeholders in the enterprises (include: creditors and owners (shareholders))

FCFF = EBIT x (1 – ) + Depreciation – Capex – Change in NWC

Where:

 EBIT: Earnings before interest and taxes

 The corporate tax rate

 Capex: Capital expenditures

 NWC: Net working capital The firm value is calculated by the formula:

Case 1: The FCFF of enterprises grow steadily at a rate of g Assume that: g < WACC, firm value will be calculated by:

PV=

Case 2: FCFF of enterprises grow unsteadily Assume that: FCFF of enterprises has different growth rates between periods Stage 1: from the first year to year t Stage 2: from year (t + 1), growing steadily at a rate of g

A free cash flow to the firm valuation model discounts year-by-year cash flows plus some estimate of terminal value The constant-growth model is used to estimate terminal value and discount at the weighted-average cost of capital

The stock price is calculated using the FCFF method:

The intrinsic value of one share =

1.5.2.2 Free Cash Flow to Equity (FCFE)

Free cash flow to equity is the total after-tax cash flow for business owners

FCFE = FCFF – Interest expense x (1 – tax rate) + Net borrowing

Where:

 Net borrowing: principal repayments – proceeds from issuance of new debt

Equity value is calculated by discounting free cash flow to equity at the cost of equity The general formula is as follows:

Case 1: FCFE of enterprises grow steadily at a rate of g Equity value is calculated as follows:

Case 2: FCFE of enterprises grow unsteadily

We can discount free cash flows to equity (FCFE) at the cost of equity,

The intrinsic value of one share =

1.5.3 Comparable model

1.5.3.1 P/E method

Step 1: Determining average industry P/E

To calculate average industry P/E, we need to select businesses in the industry with the same size, same market capitalization or same level of risk We calculate the P/E ratio of each enterprise, and then calculate industry P/E by the average method with a weight of market capitalization

Step 2: Determining stock price

At that time, we will determine the stock price by taking forward EPS of the company whose price need to be valued multiply by industry P/E

 Determining ROE and P / B ratio of each selected business

 Drawing a chart showing the relationship between ROE and P/B

The above diagonal line shows the correlation between the P/B and ROE ratio of the stock The lower part of the diagonal line represents the undervalued stocks

That is, the stock deserves a higher value, commensurate with its ROE In contrast, the upper part of the diagonal line shows that the stocks are overvalued by the market Stocks that are near the diagonal line represent: stock prices reasonably reflects its intrinsic value

 The ROE ratio of companies with stocks to be valued at a reasonable P/B (in the diagonal line)

 Intrinsic value of stock by P/B method = Reasonable P/B x BVPS

1.6 Advantages and disadvantages of stock valuation methods

Advantages Disadvantages

DDM

Accurately reflecting the benefits that investors receive in the future when investing in a financial asset

Cannot be used in case the enterprise does not pay dividends, or dividend policy does not reflect future profitability of the business

FCFF

Not affected by changes in the capital structure of the business such as stock issue, dividends payment, or using high financial leverage

Unusable when the projected FCFF cash flow is negative

FCFE

Applicable to businesses which

do not regularly pay dividends, or paying dividends but not clearly related to the company's profit growth

Unusable when the projected FCFE cash flow is negative

P/E P/B

- Very simple and easy to use, requires less assumptions and is much faster than DCF

- Reflecting the situation of the market better

- It is not always possible to identify same enterprises

- Because there is a price factor in the formula – market price of stocks,

so if the stock market does not work stably, stock prices are affected by speculative factors, market manipulation2, P/E ratio will be false, thereby affecting the calculation results

- Almost ignoring the basic elements

of the business such as operational risk or growth rate

2 Market manipulation is the intentional act to influence the market by applying the law of supply and demand or other acts, which impacts on stock prices, in order to achieve their own beneficial goals

CHAPTER 2 ANALYSIS OF MACROECONOMIC ENVIRONMENT AND

PHARMACEUTICAL INDUSTRY

2.1 Analysis of macroeconimc environment

2.1.1 Overview of Vietnam's economy in 2019

In the context of the world economic situation, there are many instabilities such as

US – China trade war, Brexit, Hong Kong's economy is in decline due to protests…, Vietnam's economic growth still achieved impressive results of 7.02%, ranked among the top growth economies in the region and the world and exceeded the target set by the Parliament from 6.6% to 6.8% This is the second consecutive year Vietnam has completed all 12/12 targets set by the Parliament; in which trade surplus reached a record of 9.94 billion USD, registered FDI reached 38 billion USD - the highest level in 10 years, foreign exchange reserves increased to 80 billion USD, budget deficit was low In addition to high GDP growth, Vietnam's macro economy has remained stable Although there are many factors, the cause of rising inflation index such as increasing consumer prices for some food products, catering services, beverages, public transport services, tourism, fuel prices, medical service prices, labor costs, Vietnam can still ensure the consumer price index as well as the annual inflation are under control Specifically, inflation below 3% and this is also the fourth consecutive year Vietnam controls inflation below 4% The population continues to increase by 0.9%, reaching 96.9 million, becoming the 14th most populous country in the world, ranked 3rd in Southeast Asia after Indonesia and the Philippines The per capita income is currently nearly 2,800 USD but if we take into account the size of the economy that is omitted, the per capita income is over 3,000 USD More specifically, in October 2019, the World Economic Forum released its Global Competitiveness Report (GCI), Vietnam ranked 67 out of 141 economies with 61.5 points, improved by 10 grades and increased by 3.5 points

This is the largest increase in the world This proves Vietnam's reform efforts in recent years 2019 is also the year Vietnam witnessed many important and

prominent events such as the signing of the Free Trade Agreement, Investment Protection Agreement between Vietnam and the European Union, 18 banks in the system met Basel II standards

2.1.2 Prospects of Vietnam economy in 2020

In 2020, the Government sets a target of 6.8% GDP growth, equivalent to 2019

However, such growth is quite challenging as Vietnam mainly produces and exports low value-added products, while the international environment is volatile and the situation of covid-19 pandemic is increasingly complicated On April 9, 2020, Fitch Solutions forecasts that Vietnam's GDP growth will decrease to 3.3% by 2020 This will be the lowest annual growth rate since the mid-1980s Forecast for 2020 is uncertain, depending on the course of the pandemic, both in Vietnam and in major export markets In addition, the Asian Development Bank (ADB) forecasted that Vietnam's economic growth will be more positive (4.8%) According to ADB experts, Vietnam will be affected by the initial supply shock, due to the outbreak of the Covid-19 pandemic and subsequent drastically reduced impacts on demand If the pandemic is controlled in the first half of 2020, growth will recover to 6.8% by

2021 and remain strong in the medium and long term ADB argues that the drivers

of economic growth - a growing middle class and a dynamic private sector, notably, household economy and domestic private enterprises – remain strong Similarly, the business environment continues to improve The large number of bilateral and multilateral trade agreements that Vietnam participates in promises to increase market access for Vietnam This is an essential factor for the economic recovery after Covid-19 China's control of Covid-19 and the ability of the Chinese market to return to normal will revive global value chains and create favorable conditions for economic recovery in Vietnam

2.2 Analysis of Pharmaceutical Industry

2.2.1 Global Pharmaceutical Industry

2.2.2.1 The group of pharmerging countries continues to grow strongly

The world pharmaceutical industry began to develop in the 1920s of the last century Switzerland, Germany and Italy were the first countries to develop the pharmaceutical industry, followed by the United Kingdom, the United States, Belgium and the Netherlands Over the decades, pharmaceutical production and business environment has changed, M&A activities on a global scale has made a number of giant pharmaceutical corporations dominate the world pharmaceutical market and control the global pharmaceutical industry

Unit: Million people

Figure 2.1: The development of population over 60 years old in the world

(Source: Deloitte, Global Life Sciences and Health Care Industry Group analysis of IMF Health)

In recent years, the world population has increased rapidly, especially over the age

of 60, and the living environment is increasingly polluted This has spurred an increase in the need for pharmaceuticals in public health care and a strong impact

on the total value of drug consumption worldwide Currently, up to 50% of global drug spending is spent on five major disease groups: diabetes, cancer, asthma, blood fat control, immune system

Major pharmaceutical companies are continuing to research and invent biological drugs, which are the main development trends in the future because of large growth

potential and high profitability Operating profit margin of biopharmaceutical corporations is up to 70%, compared to the level of 10% - 20% of traditional pharmaceutical corporations The profitability of the pharmaceutical industry remains stable at a high level, average gross profit is around 70%, net profit margin

is about 15% - 20% ROE of leading corporations is still over 20%

The total value of drug consumption in the world increased from 731 billion USD in

2007 to over 1,400 billion USD in 2019

Unit: Billion USD

Figure 2.2: Global market spending and growth 2011 – 2019

(Source: IMS Market Prognosis 2019)

Unit: Billion USD

Figure 2.3: Worldwide total prescription drug sales (2018 – 2022)

(Source: Evaluate, May 2018)

The sales of prescription drugs in the world in 2019 reached 860 billion VND Sales

of prescription drugs will continue to grow strongly in the next 5 years with a compound annual growth rate (CAGR) of 6.5% and reach 1.06 trillion USD in

2022 In particular, 32% of the increased sales came from Orphan drugs3 (+95 billion USD)

In 2019, the United States was the leading country in terms of total drug consumption in the world, accounting for 41% China ranked second, accounting for 11% The total drug consumption value has grown sharply in countries with a developing pharmaceutical industry

Group of developed countries and advanced economies, good health care system has a relatively high level of spending on medicines per capita Forecasting in 2020, the US, China and Japan will have the highest spending in the world, in the order of

892, 644 and 420 USD / person / year, meanwhile, the average spending on medicine per capita worldwide is only about 186 USD / person / year Only these three leading countries account for 58% of global drug consumption Among

countries in the developing pharmaceutical industry, India is the country with the lowest spending on medicine in the world (33 USD / person / year)

However, at present, when the pharmaceutical industry in developed markets (accounting for over 63%), such as Japan and the US, European countries have slowed down, making the global pharmaceutical industry no longer grow as strongly as before and gradually entered the saturation stage with annual growth rate of 4% - 7% The driving force of growth mainly come from the group of 22 pharmerging countries, including Vietnam, although this group only accounts for about 24% of total consumption value The average growth rate of this group in the period of 2015-2020 is 8.4% per year Per capita consumption of this group is only approximately 1 dose per day, compared to 4 doses in developed countries

The life cycle of the pharmaceutical industry is highly dependent on investment in research and discovery of new drugs In recent years, mergers and acquisitions (M&A) activities among pharmaceutical groups across the globe have been strong, partly helping the global pharmaceutical industry maintain growth

2.2.2.2 The trend of global pharmaceutical market

The global pharmaceutical market is expected to surpass 1.5 trillion USD by 2023, from 1.2 trillion USD in 2018 with an annual growth rate of 3 - 6% Biological competition is also expected to triple, especially when the rate of drug spending will reach 50% by 2023

The US markets are expected to grow faster (4 – 7%) than the top 5 European countries (1-4%) and Japan; Emerging countries will also play an important role (5 – 8%) The Chinese market will reach a value of 140 - 170 billion USD, even when its growth is falling to 3-6% Turkey, Egypt and Pakistan are expected to have the largest growth in the next 5 years, while China, Brazil and India are sustained by higher drug spending

The launch of new, innovative pharmaceutical products will be the main driver for the developed pharmaceutical market, along with improved accessibility for emerging products Biological drugs will play an increasingly important role

especially in the US, while in Europe it is governed by policies to curb the cost of health care systems

M&A activities among businesses with new drugs or among pharmaceutical corporations across the globe will continue to increase to maintain growth and effectively utilize resources and cut costs

In the future, the pharmaceutical market in Southeast Asia will be promising

Singapore will be a country with an annual growth of about 9.3% This will be an important pharmaceutical trade center in the world, connecting this region with the west

 Group of developed countries (USA, Europe, Japan, OECD countries ): are gradually entering the saturation phase and there is little room for growth and profitability due to: population growth is slow, fertility rate is low, the proportion of the elderly population is high, and drug consumption is at a very high level

 Group of developing countries (22 pharmerging countries, accounting for 70%

of the world population, including Vietnam): are in the growth phase, approximately 2 digits In these countries, in general, drug consumption per capita is still low, average income is increasing with consciousness, demand for health care is increasing, the aging population is dominating and the spending on health and pharmaceutical products will continue to increase

These are the main drivers of revenue and profit growth in the pharmerging group, which will be the key factors driving the growth of the global pharmaceutical industry

 Group of underdeveloped countries: accounting for a small proportion in terms

of both consumption value and population size and are in the early stage of pre-development

2.2.2 Pharmaceutical industry in Vietnam

2.2.2.1 Reasons for the inevitable development of Vietnam's pharmaceutical industry

The current population of Vietnam is about 97 million, the population is entering an

"aging" period (World Bank warns that Vietnam is experiencing the fastest period

of population aging, the proportion of the population aged 65 and older was 6.5% in

2017, and is expected to reach 21% by 2050) Besides, the level of willingness to pay for health services tends to increase due to the increase in per capita income and improved educational level, while the living environment is increasingly at risk of pollution, increasing the number of diseases are the main factor leading to the inevitable development of the pharmaceutical industry

2.2.2.2 Looking back at Vietnam's pharmaceutical industry in recent years Vietnam is one of the countries with the highest pharmaceutical growth in the world

Figure 2.4: Drug consumption per capita in Vietnam

(Source: International Journal of Environmental Research and Public Health)

In 2005, the average spending on medicines per capita was 9.85 USD, in 2010 it was 22.25 USD and in 2015 it was 37.97 USD The average growth rate in the period of 2010-2015 was 14.6% The average growth rate will maintain at least 14%

by 2025, reaching 85 USD in 2020 and 163 USD in 2025

Unit: Billion USD

Figure 2.5: Revenue of Vietnam’s pharmaceutical industry from 2015 to 2021

(Source: BMI, Pharmexec.com)

Vietnam's pharmaceutical market is ranked 13th in the world in terms of growth

According to estimates of IQVIA, Vietnam's pharmaceutical market in 2019 reached 6,382 billion USD, increased by 10.6% over the previous year This helps Vietnam become the second largest pharmaceutical market in Southeast Asia

Vietnam is one of 21 countries ranked by IQVIA as the group with the highest pharmaceutical growth This group is considered a growth engine for the world, it is expected to account for about 1/3 of global drug consumption compared to the current 1/4 The group of Pharmerging Markets is divided into 3 smaller groups

Vietnam is ranked in the third group of 12 countries - with a growth rate of 14%

Pharmerging Markets

Group 1 Group 2 Group 3

China Brazil, India,

Russia

Poland, Argentina, Turkey, Mexico, Venezuela, Romania, Saudi Arabia, Colombia, Vietnam, South Africa, Algeria, Thailand,

Indonesia, Pakistan, Nigeria, Ukraine and Egypt

Pharmaceutical enterprises depend largely on imports

Although the domestic pharmaceutical industry has grown strongly, domestic pharmaceutical production is still limited, meeting only about 52.5% of domestic pharmaceutical demand, the rest depends on imports In 2019, Vietnam's pharmaceutical exports reached about 150 million USD while pharmaceutical imports reached 3,363 billion USD

Generic drugs 4 dominate the pharmaceutical market

In Vietnam market, generic drugs accounts for 51% and proprietary medicines accounts for 21%, which is mainly distributed in hospitals, private clinics and single pharmacies

Figure 2.6: Structure of Vietnam's pharmaceutical market

(Source: OD CLCIK)

A statistic showed that there are nearly 180 Vietnamese enterprises currently engaged in drug production, 80 enterprises produces western medicines and 300

4

Generic drug means a copy of an invention drug after the expiration of copyright protection

enterprises produces oriental medicines Statistics of Drug Administration showed that 224 domestic production facilities and factories meet GMP5 standards

Revenue from pharmaceutical industry mainly comes from ETC 6 channel

Regarding market share of drug distribution, the revenue scale of 2019 from the ETC channel accounted for 75.1% of the total revenue of Vietnam's pharmaceutical industry and growing at 13% / year compared to 2018, only the remaining 30% was for retail pharmacies (OTC7 channel), while the whole country had about 57,000 pharmacies and drugstores

Figure 2.7: Revenue growth of pharmaceutical industry from 2015 to 2020F

(Source: BMI)

The development of the ETC channel is due to:

 The proportion of health insurance in Vietnam increased from 28% to 90% of the population in the period 2005-2019 thanks to measures to promote universal health insurance such as assistance to farmers and increase in the price of outpatient services

 The number of hospitals and clinics increased thanks to the 0% tax subsidy policy for the first 4 years and 10% thereafter

 Increased health awareness will make more people come to the hospital

5

Good Manufacturing Practice

6 Ethical Channel – Prescription drug sales channel, through hospitals and clinics