Topic research on risk management of vietnam airlines assignment 2 quantitative risks impact on business value

TOPIC: RESEARCH ON RISK MANAGEMENTOF VIETNAM AIRLINES ASSIGNMENT 2: QUANTITATIVE RISKS IMPACT ON BUSINESS VALUE MINISTRY OF EDUCATION AND TRAINING UEH UNIVERSITY COLLEGE OF BUSINESS SCH

TOPIC: RESEARCH ON RISK MANAGEMENT

OF VIETNAM AIRLINES ASSIGNMENT 2: QUANTITATIVE RISKS IMPACT

ON BUSINESS VALUE

MINISTRY OF EDUCATION AND TRAINING

UEH UNIVERSITY COLLEGE OF BUSINESS SCHOOL OF MANAGEMENT

ENTERPRISE RISK MANAGEMENT

Lecturer: Dr Tran Thi Thanh Phuong

Member’s contribution

Table of Contents

I CURRENT STATE OF THE BUSINESS 1

II KEY RISK SCENARIOS 4

 Debt Management Risk 4

 Equity Management Risk 4

 Profit and sales risk 4

 Featured aviation industry risk 4

 Business environment risk 5

III ASSUMPTIONS FOR CRITICAL RISK SCENARIOS 6

IV FCF FOR EACH RISK SCENARIO 10

 Main assumptions 10

 Cash flow forecast 10

 Business valuation 10

 Individual risks 10

V SIMULATION ANALYSIS 12

1 Scenario analysis 12

2 Crystal ball analysis 12

R1 - Debt management risk 12

R2 - Featured aviation industry risk 14

R3 - Equity management risk 15

R4 - Profits & Sales risk 16

R5 - Business environment risk 17

I CURRENT STATE OF THE BUSINESS

Vietnam Airlines was the aviation industry's "giant" before the Covid epidemic Thiscompany has a substantial capital, workforce, fleet, and a lengthy history of development.Like other airlines, Vietnam Airlines is also heavily affected by the Covid-19 pandemic Thepoint is, in the overall difficult scenario, many airlines incur large losses, planes are lying onthe ground, and flight numbers are at an all-time low, but when it comes to losses or the risk

of bankruptcy, public opinion and management agencies always name Vietnam Airlines first Vietnam Airlines' pre-tax loss in 2020 is 8,743 billion VND If only passenger transport iscounted, the loss is 10,975 billion VND Meanwhile, according to the audited financial report

2020 that Vietjet Air announced that this company lost 1,780 billion VND (before tax);passenger transport efficiency (excluding revenue outside passenger transport) loss of 4,311billion VND

Understandably, VNA's financial indicators in the period of 2019-2020 are below safe, evenalarming levels as the following table:

0.610.5024.0515.17

0.250.2017.7120.61

0.763.11

0.909.30

-0.28-0.18-1.840.58

When air transport is making losses and the financial situation is severely strained, VietnamAirlines' best option is to borrow debt to compensate, including debt from the government,leading the debt scale to balloon and the burden to become unbearable Even if the aviationsector returns to regular functioning, Vietnam Airlines will be saddled with debt for manyyears to come

Comparison table of business performance between Vietjet and Vietnam Airlines

7 Average profit per

II KEY RISK SCENARIOS

During its operation in 2018-2020, Vietnam Airlines seems to face a lot of disadvantagesfrom the market, competitors as well as the heavy devastation of the COVID pandemic,especially in the period of 2019-2020 The repercussions they leave for VNA are extremelydifficult to recover from Thus it is extremely likely that in the future, when the economy hasgradually recovered, VNA will face the aforementioned risks

 Debt Management Risk

The airline business is a service industry that uses its earnings to pay down debt This putsairline firms under a lot of stress because they are continually under pressure to producebusiness and thus cash in order to pay off their debt Currently, the amount of overdue debthas reached VND 6,240 billion and is falling into an extremely difficult situation, on thebrink of bankruptcy while commercial banks have not received the Government's VND12,000 billion rescue package so Vietnam Airlines are not allowed to have further disburse orextend or grant credit limit

 Equity Management Risk

In the period 2019-2020, the prolonged epidemic situation and difficult business activitiesmade Vietnam Airlines fall into a difficult situation, leading to the inevitable consequences of

a cash flow deficit and a decline in equity

In addition, the financial income also decreased by 84% due to the reduction of interest onexchange rate differences Interest on deposits and loans equal 1/5 of the same period TheCorporation also no longer recognized income from the liquidation and sale of fixed assets as

in the same period

 Profit and sales risk

Vietnam Airlines Corporation has just released its consolidated financial statements for thefourth quarter of 2020 with net revenue of VND 8,200 billion but still down 65% compared

to the same period last year due to flight routes Besides, Vietnam Airlines has a gross loss ofnearly 7,200 billion dongs, making a net loss from business activities of 11,600 billion dongs,losses before tax and after-tax are 10,881 billion dongs and 11,097 billion dongs,respectively This result caused Vietnam Airlines to end 2020 with a cumulative loss of VND9,260 billion

 Featured aviation industry risk

Featured risks are unavoidable risks in the operation of Vietnam Airlines For the aviationindustry, airport technical infrastructure and air traffic control are still limited, leading to alimited number of train stations at domestic airports; Scarcity of high-end resources,especially resources for pilots, and technical engineers

 Business environment risk

With the outbreak of the COVID-19 epidemic, the recovery ability of international flightswas almost zero In addition, fluctuations in the cost of aircraft materials will directly affectthe results of production and business activities of Vietnam Airlines

III ASSUMPTIONS FOR CRITICAL RISK SCENARIOS

Risk Description Financial impact Debt management risk ● High debt may be the result of slow growth, while increasing

debt and reducing growth To partially address this issue, R&R(2012) has complemented their analysis of the relation betweendebt and growth by considering prolonged periods of high debt

The results suggest that, during periods of debt overhangs,growth tends to be considerably lower

● During the pandemic isolation, most of the flight was cut, whichled to the volume of purchase decreasing This factor directlyaffected COGS and NOWC growth rate to increase companydebt

● The above factors had pointed out that the company’s financemanagement is quite poor, which needs improving the quality ofresource management

Growth rate decrease to -17% COGS increase to 110%

NOWC growth rate decrease to -10%

Increase Enterprise Cost Management to 5%

Featured aviation industry risk ● Airport technical infrastructure and air traffic control are still

limited, not keeping pace with development, leading to a limitednumber of train stations at domestic airports

● State policy on access to the right to take off/landing at majorinternational airports Meanwhile, with the rapid pace oftechnology research and development, alternative technology

COGS increase to 128%

Increase Enterprise Cost Management to 6%

products and solutions for aviation services such as conferencing and high-speed trains are creating manycompetitive challenges for airlines.

video-● Scarcity of high-end resources, especially resources for pilots,technical engineers

● To ensure and limit the risks of the aviation industry mentionedabove, the company should invest resources in addition toperiodic quality management, which will cause an increase inEnterprise Cost Management

Equity management risk ● Since the pandemic crisis happened and the airline industry was

affected heavily, VNA did not prepare well to face it andwitnessed a huge loss in tangible assets This factor directlyaffected COGS and NOWC growth rate to raise equity debt

● Poor equity management had led the enterprise cost management

to increase since they needed to control and manage the capitalmore efficiently and carefully

COGS increase to 108%

NOWC growth rate fell to -16% Increase Enterprise Cost

Management to 5%

Profit & Sales risk ● During the pandemic, most flights were cut but the company still

had to cover raw materials, maintenance costs, transportationcosts, and the regularity of sales or business operations… Thoseexpenses affect directly and heavily to their Profit & Sales

● Despite the government's recovery, the company still couldn't

● COGS increase to 115%

● NOWC growth rate decrease to -14%

stand up after the economic crisis

Business environment risk ● Due to the strong outbreak of the COVID-19 epidemic in Europe

again with a new variant, the recovery ability of internationalflights was almost zero in Q1/2021 At the same time, IATA didnot change its opinion on the cash flow of airlines whencontinuing to evaluate airlines, which will start to be profitablefrom Q4/2021

● Fluctuations in the cost of aircraft materials will directly affectthe results of production and business activities of VietnamAirlines

● The number of bookings decreases

IV FCF FOR EACH RISKS SCENARIO

 Main assumptions

In general, the revenue growth rate has slowed down significantly in the period from 2018.This is the common result of most businesses due to the impact of the pandemic 2020 is theyear VNA faces a profound decrease of nearly 60% It is forecasted that in the coming years,this problem will be improved and the index will be average (-13.5%)

Cost of goods sold (% of revenue) and general and administrative expenses (% of revenue)are in balance before 2020 2020 is still the year where the indexes are most volatile.gradually more stable In terms of net fixed asset growth and NOWC growth, 2020 is still ayear causing many difficulties for VNA, and when the pandemic is over, these factors willimprove

 Cash flow forecast

The analysis shows that Net Operating Working Capital has an average of10,417,487,770,387 VND Largely leading to this figure is the effect of 2020 In terms of freecash flow, we will see a decline in the period from 2019 to 2022, the average of these yearswill be 1,807,092,091,383 VND The current value will be in the middle of more than 1.7thousand VND

 Business valuation

VNA is an enterprise applying the steadily increasing pricing model Elements like Free Cashflow after 2023 will be around 1.8 thousand VND The value of the business is alsodetermined and valued at about 72.8 thousand VND The intrinsic value of a share isdetermined at a price of about VND 29,150

 Individual risks

In terms of risk analysis, the excel sheet has shown many indicators of factors that are likely

to have many potential risks This report will present some important profitability metricssuch as ROA, ROE, Liquidity Ratios, and Leverage Ratios We do not see too muchdifference between 2020 and 2021 in 2 ROA (3.15% and 3.32%) and ROE (13.92% and13.64%), however, in 2022, it is forecasted that ROE will decrease more 184% and ROAwill also decrease (-17.87%)

Next, the Liquidity ratios recorded a significant decrease when predicted in 2022 in each ofthe indicators such as Current Ratio and Quick Ratio In general, these indicators will tend todecrease by more than 50% compared to the previous year.

Finally, another important stat is the Leverage Ratios This ratio in detail includes asignificant increase in Total Debt/Total Equity in 2022 (90%) Another factor is that Totallong-term debt/loss has a year-on-year decrease between 2020 and 2021, and an increase in

2022 compared to 2021 On the other hand, total debt/equity has a similarity between 2020.with 2021 (77% and 76%) In 2022, it will increase to more than 10%, so this indicator isaround 90%

 Perform 1-way analysis

Cost of goods sold (% of revenue)

Based on the results of the 1-way Sensitivity Analysis table, the cost of goods sold affectsFCF, company value, value per share, and ebit which is large compared to the remaininginputs This means that the company is likely to suffer huge losses over the next few yearsbecause the safety margin of this input is virtually nonexistent

Revenue growth every year

VNA's revenue growth in the next few years is bound to be negative because its growthmomentum slows down over time Therefore, we must definitely take measures to improvethe growth momentum

Net fixed asset growth

If the net fixed asset growth percentage goes above -4%, then ebit, company value, and valueper share all exceed the margin of safety

Enterprise administration expenses (% of revenue)

The percentage of administrative costs increased but only had a significant impact on ebitbecause our base already has a high management cost range compared to the currentsituation, so we can't push the costs out of control So we should use other methods toimprove Ebit We can manage the remaining outputs, which are in the safe zone

Growth NOWC

NOWC growth has no significant effect on output values

In conclusion: When we sort the risk by value from largest to smallest, which will harm thebusiness and cause loss, we get the following list:

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1 Cost of goods sold (% of revenue)

2 Revenue growth every year

3 Net Fixed Asset Growth

4 Business administration expenses

5 Growth NOWC

In order to help the company avoid losses, we can suggest some solutions such as combiningtechnology and improving supplier contracts in a lean manner or examining items that requirenon-routine maintenance in order to reduce the cost of goods sold

V SIMULATION ANALYSIS

1 Scenario analysis

In this report, we have analyzed possible scenarios and given forecast numbers on therevenue growth rate, cost of goods sold (% of revenue), G&A expenses (% of sales), net fixedasset growth, and NOWC growth, all figures are updated and shown in the Scenario Analysistable

After giving the forecast results (percentage for each factor), we applied andcalculated the results of EBIT, Free Cash Flow, Total corporate value, and Intrinsic value pershare of the current value After completing the calculation, we have given the results on 5scenarios equivalent to 5 potential risks: Debt management risk (142.29%), Featured aviationindustry risk (114.74%), Equity management risk ( 145.16%), Profits and sales risk(125.80%), Business environment risk (134.56%) Overall, we see that Equity managementrisk and the Featured aviation industry account for the highest and lowest proportions of theselected risks, respectively The above figures also clearly show the probability of risks thatVNA may face in the future

2 Crystal ball analysis

R1 - Debt management risk

After having specific analysis in the above sections, in this part, this report willcontinue to use a tool to provide the possibilities and parameters of the 5 mentioned risks, thetool we use here is the Crystal ball program

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