Luận văn stock valuation in vietnam theory practice and recommendation the case sacom

Stock market and SAM at early stage 31 2.4.1, Applied Advantageous valuation method to value SAM quarterly stock prices in 3.2.. In Vietnam stock market, the situation is much more

VIETNAM NATIONAL UNIVERSITY, HANOI

HANOI SCHOOL OF BUSINESS

Ngo Viet Duc

STOCK VALUATION IN VIETNAM THEORY, PRACTICE AND RECOMMENDATION

THE CASE SACOM

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi - 2007

VIETNAM NATIONAL UNIVERSITY, HANOT

HANOI SCHOOL OF BUSINESS

Ngo Viet Duc

STOCK VALUATION IN VIETNAM THEORY, PRACTICE AND RECOMMENDATION

THE CASE SACOM

Major: Business Administration

1.1.STOCE_ DEFTNITION, TYPES AND FEATURES od

APPLIED VALUATION METIIODS IN EVALUATING CABLES AND

TELECOMMENICATION MATERIALS JOINT-STOCK COMPANY (SAM) 22

2.1 OVERVIEW OE VALUATION METHODS IN VIETNAM 22

2.3.1 Stock market and SAM at early stage 31

2.4.1, Applied Advantageous valuation method to value SAM quarterly stock prices in

3.2 RECOMMENDATION TO APPLY VALUATION MODELS IN VIETNAM 4

APPENDIX

‘APPENDIX 1 Beta of SAM over 280 week:

APPENDLX 3 SAM’s historical Income Statements - - 62

LIST OF FIGURES

Table 2.1, Number of joint stock companies 2000-2004 22

Table 2.2 SAM Fundamental Financial Indicies 2000-2005 28

Table 2.4.1 SAM 3 years Fundamental Iinancial indicies 35

Tuble 2.4.4 (a) Historical RCFE for 05 years (2002-2006) 37

Yable 2.4.4{b} Cashflow projection until the end of high growth period (2008) Table 2.4.4{c) Cashflow projection until the end of high growth period (2008).

TNTRODUCTION

1 Necessify of the thesis

The activity in stock market exchanges has increased much in Vietnam nowadays Consequently, the stock market is playing a growing important role to the society

Many instilulions as well as mdividuals are ticavily mvested im the stock market In

order for the stock market to develop normally and stably, understanding valuation

techniques of firms is very important Without some sorts of model to estimate

value, mvestors would nol be able to anive al conclusions ou whal price to bu

sell an asset

When rescarching different valuation results of a specific fim, the value often differs we can see the sample in SAM case discuss in next chapter, Different in valuation may come from different views of the future or assumption or technique and, hence, different recommended values We can’t know which of these values is the most accurate and this is only one of the many difficulties involved in valuation

In Vietnam stock market, the situation is much more difficult since it’s an emerging market and to some aspecl, there’s no rule for markel like this in its carly stage

This study will focus on several valuation models that mostly use in firm valuation

in Vietnam: Multiples (P/E), ABV, DDM and DCF in order to show the different of each method and their resuits, through understanding of those model and try to find

the possible adjustment to make il accuracy

conducted to tind solutions of these problems This will be accomplished by a

literature study and a subsequent case study

3 Methodolugy

The Thesis uses quantitative and qualitative approach and includes statements that will give the reader an insight in, how the research arca was approached, why it was conducted in this way, how the work progressed, and, finally, the authors own critical opinions of the study

‘The intention is to introduce the reader to how the study was conducted as well as a give the opportunity to develop a personal perception conceming the

trustworthiness of the study

4, Outline of the Study

Tu the second part of this (hesis the literature study will be conducted The study helps to understand the core concepts and the basic theories of valuation as well as

the basic umderslanding of stock market and value of a thing It also conlains a bref

intoduction of the development of Vietwam stock market and valuation lustory in

Vietnam, ‘That information is necessary for the discussion to valuation in practice

‘The third part of the thesis is the case study of SAM company In this we try to use different approach of valuation to find solutions for value of SAM By understanding different methods, we can understand difficulties with each valuation

we applied and can work out to find ways to increase the accuracy of valuation,

The final part of the thesis is concemed with recommendations and conclusions of how the valuation process can be improved and what should be adjusted to increase the usefulness and accuracy of the valuation process involved in Vietnam stock

TrarketL

CHIAPTER 1:

LITERATURE REVIEWS: STOCK AND STOCK VALUATION

“Valuation: the determination, through prior analysis, of a price for a

business that might be paid by an investor “ (Tlervé, 1993-95)

In this chapter relevant theories connected to our problem discussion will be discussed

‘The chapter begins with definitions and some possible discussions about some concepts that will be important when the analysis is conducted Thereafter, basic

theories of models are imroduced This is to give the reader insight how valuation

models work Lately, history of Vietnam stock market is presented for setting up a

scenario For valuation im early slage

1.1 STOCK— DEFINITION, TYPES AND FEATURES

Stock, also referred to as a share, is commonly a share of ownership in a joint stock

company (Copeland et al, 2000) ‘The owners and financial backers of a company aay desire addilional capital to invest in new projocis wilhin the company If they were to sell the company it would represent a loss of control over the company It may be represented by a certificate and can be common or preferred, voting or non- voling, redeemable, convertible, cle

There are kinds of stocks:

1.1L Common stock

Common stock, also referred to as common shares, is the most usual and commonly

held form of stock in a corporation (DeAngelo, 1990) The other type of shares Oat

the public can bold in a corporation is known as preferred stock, Common stock that bas been re-purchased by the corporation is known as treasury stock and is available

for a varicly of corporate uses

Common Stockholders are not guaranteed dividends, buy they expect to receive higher dividends during the company’s prosperous periods If a company [ails or lignidates, common stockholders are paid, after bondholders and prefered stockholders

Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation The terms common stock and capital slock are often used interchangeably when the company has no preferred stock

Holders of common stock have voli powers in the corporation and participate in the profits of the corporation by way of dividends, but only after preferred stockholders have been paid their dividends (DeAngelo 1990)

1.1.2 Preferred stock

Preferred stock is a security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation (Copeland et al, 2000) Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend This stock does not usually carry voting rights Preferred stock has characteristics of both common stock and debt

A preferred stock shareholder forfeits his voting rights, but receives dividends (which are set at a specified rate) before the common stock shareholder In the event

of liquidation, bankruptcy preferred stock sharcholders are paid before common stock shareholders

It can be considered that a preferred stock is a hybrid between a share and a bond which, as opposed to ordinary shares, has a fixed yield, providing the issuer

achieves a iminium profit (DeAngelo, 1990) The fixed come stream of preferred

stock makes it similar in many ways to bonds

1.1.3 Rights

Options granted to shareholders to purchase additional shares directly from the company concerned Rights are issued to shareholders in proportion to the securities

they may hold ina company (Fama and French, 1992)

Rights allow existing shareholders of a corporation to subscribe to shares of a new

issue of common stock befure thal stock is offered lo the public on the stock market

A right usually has a life of 2 to 4 weeks, is transferable, and entitles the holder to buy the new common stock below the Public Offering Price Rights are often

gtanted to protect existing sharcholders from the effects of dilution,

1.14 Warrants

A warrant gives investors the right, but not the obligation, to buy a share at a certain, price (the exercise price) by a certain date in the future (I'ama and French, 1992) Warrants often accompany a share issue and they can be traded in the stock market

in their own right I'he value of warrants is likely to be more volatile than the underlying shares, and this can be a high-risk area of investment Because of this it

1§ a regulalory requirement to sign a warrarils risk warring prior lo trading.

1.2.VALUATION

1.2.1 Valuation

Much of the literature has been written on corporate stock valuation approaches Damodaran (2002) provides extensive description of different stock vahration models He reviews the four models: Capital Asset Pricing Model (CAPM),

Arbitrage Pricing Model (APM), Multi-Factor Model (MIM), and Repression

Model (RM) This mentioned thal all models have lwo common assumptions: hey

define nsk im terms of variance of retums and argue that investment should be

viewed from the standpoint of the marginal investor

Valuation is the process of "estimating." the value of an asset or liability The value

is the price of the asset or liability times the quantity held Valuation puts a value on

a securily in relation La other sccunilies Tt is used to estimate the value of a picee of

property usually by considering its replacement cost or its actual cash value Taotored into the estimate is any depreciation or wear and tear

Valuation is the estimated or determined market value of a stock

1.2.2 Value

Valuation of firms can be done for mary reasons, such as to find a fair price to o[Ttr

an acquisition target, appraise an acquisition offer, or to find out the value of owning a firm There are several different ways lo look at value and, furthermore, thore are several opinions on what creates value in a firm

Bouk Value - The book value of a finn is obtained from the balances sheel by

taking the adjusted historical cost of the firm’s assets and subtracting, the

liabilities (Copeland et al, 2000)

‘As an accounting term, book value of a stock is determined from a company's records, by adding all assets then deducting all debts and other liabilities, plus the liquidation price of any preferred issues The sum arrived al is divided by the number of common shares outstanding and the result is book value per common share Book value of the assets of a company or a security may have little relationship to market value Book value often differs substantially from market price It is also used to determine the ultimate value of securities in liquidation Book value is calculated by the following

‘Total assets minus (-) intangible assets (goodwill, patents etc) minus (-) any long- term liabilities EQUALS (=) total net assets This figure, divided by the number of

shares of preferred and/or common stock , gives the Nel Asset Value - or Book

Value - per share of preferred or common stock Book Value is often used as an indicator for selecting undervalued stocks

Market value - ‘this is the price at which the property would change hands between

a willing seller and a willing buyer (Copeland et al, 2000)

‘The market value of a security is the amount one would reasonably expect to pay

for it on the open market The market value of a porlfoho is the sum of the market

values of the individual securities comprising the portfolio In particular, the market value of a debt instrument is the present value of its future cash flows The market value of debt is negative because the cash flows are negative (interest and maturity payments made by the province to the investor) Market value may be different from the price a property could actually be sold for at a given time

Economic value - the economic value is the value of the expected eamings from using the item discounted at an appropriate discount rate to give the present-day value (Copeland, 2000)

Lconomic and intrinsic value is the amount by which the option is in the money or the amount by which the price ofa warrant or vall option excveds the price at which the warrant or option may be exercised For a call, this is the current underlying price minus the exercise price For a put, this is the exercise price minus the current underlying price An oul of the money bas no intrinsic value An in the meney option, has some intrinsic value It can be known as the portion of an options premium that is attributed to the value that could currently be realized by exercising

and simultaneously closing out the position in the open markel

1.2.3 Price

Trice is the amonnt of money needed to purchase something or the amount of

amoney, or other goods, that you have to give up to buy a good or service In economics and business, the price is the assigned numerical monetary value of a

good, service or assel The concept! of price is central to microeconomics where iL is

one of the most important variables in resource allocation theory (also called price theory) Price is also central to marketing where it is one of the four variables in the

marketing mix that business peopls usc lo develop a markeling plan

The lowest price a security or commodity has reached in a certain period of time such as a daily low or annual low This can be expressed daily, weekly, monthly, or for a 52 week period ‘he price of a market-based security is stated as a percentage

of face value

1.2.4, Time value of money

The time value of money or the present discounted valve is one of the basic comcepls of finance Time value of noney is the value derived fram the use of money over time as a result of investment and reinvestment (Fama and French, 1992) ‘This term may refer to either present value or future value calculations ‘the

resent valuc is the value Loday of an amount (hal would cxist in the future with a

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stated investment rate called the discount rate For example, with a 10% annual discount rate, the present value today of $110 one year from now is $1 00

‘The principle that money received in the present is worth more than the same amount received in the future, The concept, used as the basis for discounted cash

flow calculations that cash received carlicr is worth more than a similar sum

received later, because the sum received earlier can be invested to eam interest in the intervening period For the same reasons, cash paid out later is worth less than a similar sum paid al an earlier date

1.2.5 Present value

Cash flow

Cash flow is the amount of cash camed afler paying all expenses and taxes Cash flow is calculated by adding: net after-tax income plus any bookkeeping expenses

that resull in ems being deducted but nol paid out in cash Such bookkeeping

entries include amounts charged off for depreciation, depletion, amortization, and charges to reserves Cash flow is a measure of a company's worth and its ability to

pay dividends on its slock (DeAngelo, 1990)

It is also an analysis over a period of time revealing the availability, or lack, of cash

More simply put the difference between cash in (income) vs cash ont (expenses)

Since money does not flow in and out at an equal rate, in most businesses, an analysis of cash flow is important, especially of businesses that are cyclical in

nature, or subject lo external forces The stalement of cash Mows included in annual

reports analyzes all changes affecting cash in the categories of operations,

investments, and financing

Cash flow forecast

Cash flow forecast is an estimate of when and haw much money will be received

anid paid out ofa business Tt usually records cash flow on a ionth-hy-month basis,

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for a period of two yoars It is an estimate of the timing and amount of a company's inflows and outflows of money measured over a specific period of time typically

taonthly for one lo we years then anally for an additional one to three years

Cash flow per share

Cash flow per share is Fartings aller taxes and depreciation, divided by the number

of a finm’s shares Cash flow from operations divided by average common shares outstanding (DeAngelo, 1990) Cash flow from operations is the income for the year before extraordinary items plus non-cash expenses (such as asset write-downs)

It shows how much money from operations is available for such things as new

equipment, debt repayment and dividends

Free cash flow

This shows the cash generation, including the change in working capital and

inveshnanis in langible/inlangible assets and shareholdings

Cash earings + Change in working capital = Cash flow fram operating activities

| Cash flow from investing activities — Free cash flow

Free cash flow measures a finn's cash flow remaining after all expenditures required

to maintain or expand the business have been paid off for example, interest

payments and investments in "property, plant and equipment" (PP&R)

This is an accounting presentation showing how much of the cash generated by the business remains aller both expenses (including interest) and principal repayment

on financing are paid A projected cash flow statement indicates whether the business will have cash to pay its expenses, loans, and make a profit Cash flows can be calculated for any given period of time, normally done on a monthly basis

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In finanes, cash flow refors to the amounts of cash being received and spent by a business during a defined perid of time, usually tied to a specific project In accounting, a cash [low projection sets oul all the expected payments and receipls in

a given period Managers use cash-flow projections to arrange for employees and

creditors to be paid at appropriate times

1.3 VALUATION MODELS

When deciding which model to use, the demands of the forecasting situation has to

be matched with the forceasting methods characteristics in the best, way Before

deciding which model to use one should ask the following questions (Copeland et

al, 2000)

« What is the purpose of the model — how are the results supposed to be used?

« Which variables and connections are in the system for which the forecast is

conducted?

«Tlow important is the historical development in order to predict the future

development?

Some of the most important factors to consider in the choice of forecast model are

according 1o Copeland el al (2000):

The time horizon of the forecast

« The pattern of the data

The sclection of appropriate valuation methods has been the subject of extended debate over the last few years and will probably continue to be for many years to come,

In almost all cases, a balance sheet will be prepared utilizing a variety of valuation

methods—the selection is normally based on the nature of the item and the

relevance and reliability of the method of accounting, for that item ‘the different methods give the same value at initial recognition The most common valuation models are:

Model group A: group of Net Asset Value: For an asset: the amount of cash, or its equivalenl, paid lo acquire the ilem, commonly adjusted for depreciation or other allocation, For a liability: the amount of cash, or its equivalent, received when the

obligation was incirred—sometimes adjusted for amortization or other allocations

Model group B: group of Intrinsic Value: ‘The amount of cash, or its equivalent,

that could be oblained by selling an asset in an orderly liquidation,

Model group C: group of Discounted Cash Flow: For an asset: the present value of future cash inflows inlo which am asse! is expected to be converted in the due course

of business, less present values of cash outflows necessary to obtain those inflows Tor a liability: the present value of future cash outflows expected to be required to satisfy the liability in the due course of business (Kaplan & Ruback, 1995)

Model group D: group of Multiple Devices: The amount of cash, or its equivalent,

info which an assel is expected to be converted in the dus course of business, less

any direct costs necessary to make that conversion

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Rather than force the selection of a single method for all valuations it is more important to acknowledge that utilization of different methods will contime in practice, and the purpose of this thesis is developing recommendations on how to select the appropriate method ‘The key issues in determining the appropriate method are J Relevance and 2.Reliability

Relevance: Yo be relevant, information about an item must have feedback value and/or predictive value for users and must be timely Information is relevant if it has

the capacity lo make a difference in the decisions of owners, investors, creditors, or

other interested parties

Rehability: To bo reliable, information about an ilem rush be representation ally faithful, verifiable, and neutral Information is reliable if it is sufficiently consistent

in its representation of the underlying resource, obligation, or effect of events, and sulTicienlly free of error and bias to be uselul to owners, investors, eredilors, and

others in making decisions

TẾ tve methods are cqually relevant and reliable, then the method with the lowest

cost to the preparer would probably be chosen

1.3.1 Internal Rate of Return (RR)

Internal Rate of Return (RR) is the discount rate at which the present value of the

future cash flows of an investment equals the cost of the investment (Copeland et al, 2000) Tt is found by a process of trial and error, when the net present values of cash outflows (the cost of the investment) and cash inflows (retums on the investment) equal zero, the rate of discount being used is the IRR IRR indicates the business

Telưm according to alternate retum thal may be gained on (he same investment,

‘The internal rate of retum is the discount rate that will create a zero net present

value In other words, the discount rate that we should enter in the Net Present

Value (NPY) formula in order Lo gel aresultof NPV 0

1.3.2 CAPM

Different from the existing cost of capital models (Arbitrage Pricing Model-APM,

TuskMetnes Model- RM CAPM uses variable of market premium and bela lo

calculate cost of capital

The Capital Asset Pricing Model (CAPM) is a model describing the relationship between expected risk and expected retum for financial assets (Ross Stephen, 1977) At its simplest, it takes the form of a linear relationship

Rj = sf + Bj Rm — rf)

Ry is the expected relum of a sevurily

By) is the beta of the secwity

Rm is the expected return of "the market", e.g the stock market

if is the return on risk fice assets

The rate of retum on any asset consists of two components - the pure time value of tnoney and the riêk premimm relleoting the sensilivity of the asset to changes in market retums The beta value of an asset measures its sensitivity to general market movements A model in which the cost of capital for any security or portfolio of

securities equals the risk free vale plus a risk premium (hat is proportionate (o the

amount of systematic risk of the security or partfolio

A model that promotes a basis for pricing risk associated with holding sccuritics Its essence is that rates of return are directly related to a single common factor: namely,

the retum on the market porUolio adjusted for non-diversifiable risk

16

Figure 1.1, Securities Market Line

The Secunty Market Line (Figure 1.2) describes a relalion between the beta and the

assct's expected rate of return

Assumptions of CAPM (Ross Stephen 1977)

- All investors have rational expectations

- There are no arbitrage opportunities

- Returns are distributed normally

- Fixed quantity of assets

- Perfect capital markets

- Ssparation of financial and production sectors

- Thus, produetion plans are fixed

- Risk-free rates exist with limitless borrowing capacity and universal access

‘The capital asset pricing model is by no means a perfect theory But the spirit of CAPM is correct It provides a usable measure of risk that helps investars determine

what return they deserve for pulling their money al tisk

1.3.3 Book Value (BY)

Book value as generally calculate as a company’s common stock equity that appears

on a balance sheet (Copeland et al, 2000) Book value equals Lo total assels minus

Habilitios, preferred stock, and intangible asscts such as goodwill

This is how much the company would have left over in assets if it went out of

business immediately Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most

companies

Since book value is a more accurate measure of valuation for companies which

aren't growing quickly, book value is of more interest to value investors than growth

investors (Markowils and Harry, 1999)

1.3.4 P/E rativ (P/E)

The P/E muttiple is one of the most popular multiples This multiple is calculated

by dividing the price paid for unil ta carnings por share generated by the company

The price used to calculate a P/E ratio is usually the most recent price The earrings figure used is the most recently available, but thus figure is often a year old and docs

not necessarily reflect the current position of the company Because of that, experts prefer to choose a trailing P/E, P/E that involves taking earnings from the last four quarters It is possible, however, to use the eamings estimate for the next four quarters When doing so, the ratio is referred to as a projected PAT, or forward PE

(French CW, 2003)

It is usually not enough to look at the P/E ratio of one company and determine its

status Usually, an analyst will look ala company's P/E ralio compared to the

industry the company is in as well as the overall market Only after a comparison

with the industry, sector, and market can an analyst determine whether a D/E ratio is

18

high or low with the above mentioned distinctions (i.c., undervaluation, over

valuation, fair valuation, etc)

Table 1.1 Pi facts

N/A A company withno earnings has an undefined P/E ratio

Fither the stock is undervalued or the company's carnings ara thought to be it

910 dectine

10-17 For many companies a P/E ratio in this range may be considered fair value

17.95 Hither the stock is overvalued or the company's earnings have decreased sines

“> the last earnings figure was published

A company whose shares have a very high P/E either really does have an

251 exceptionally rosy future or the stock may be the subject of a speculative

bubble

(Source: Bloomberg, 2001)

‘This multiple can be used for IPO valuations, for assessment of the overall

performance of the market, as well as for relative comparison between two firms’

profitability

1.3.5 Dividend Discount Model (ODM), Discounted Cash Flow (DCF)

Valuation models, where all the future profits of the firm are specified, are called

fundamental valuation models Tn different fundamental valuations models, the

common factor is that the value of the stock is determined by the present value of

the future cash flows that the firm’s activities give rise to These valuation models

are usually divided into two categories, Dividend Discount Models (ODM) and

Discounted Cash Flow models (DCF) ‘The difference is that the first discounts the

dividends thal the firm is expected to pay its slockholders, while the second

discounts the free cash flow that the firm’s activities are expected to rise (Copeland

etal, 2000)

‘The DCF models calculate the value of a business using, its future benefits which

will generate by the owners Barings are forecast from a historical performance

base in some number of future years, usually five to ten years and then discounted

19

back to present using a discount factor specifically for that business (Damodaran, 2002)

Damodaran (2002) defines free cash flow (FC¥) as a net income after reinvestments

and net debt paymemts that is a net cash flow available to equity holders FCF importance arises from the facl that FCF polentially represents cash [ows that

should be paid to investors in terms of dividends Because net income is often

manipulated by different accounting procedures, Damodaran discusses ways to

adjusl operaling income, wilh emphasis giver to adjusting for and armorlivation of

operating leases, managed earnings, and long-term expenses

Damodaran also cited two approaches to caloulate terminal value using in DCF models: liquidation value and stable growth value When the liquidation value

approach is used, it is assumed that a company will cease its existence and its assets

will bo sald al market prices al a given point of dime Under the stable growth approach it is assumed that a company will grow forever at a constant rate, and

Gordon’s stock valuation formula is ultlized to find a company’s worth,

‘the mainly problem of using the DCI* model has identified two areas that are importanl when conducting a valuation, (1) How to lint the subjectivily of the assumptions and estimations behind the valuation, and, (2) How to make an

accurate forecast of the future sales revenue

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Sununary of Chapter 1

Based on generalization about concepts of value, price and assessment of stock as

well as the role and significance of stock price assessment for individual

participating im the slock market, this chapter preserls basic principles thal uced to

take into consideration about stock price assessment

Thal is the basis of common slock price assessmerl methods that widely use in the

world presented in the following chapters ‘hese methods also have advantages and disadvantages and basically originated from enterprise assessment systems that have specific characteristic of stock Tr the next chapter, there will be a briefing aboul valuation practice in Vietnam, laws and regulation that closely related to valuation

methods and a study case of SAM stock with different calculation models will be applied to find out the differences of cack

21

CHIAPTER 2:

APPLIED VALUATION METHODS IN EVALUATING CABLES AND TELECOMMLNICATION MATERIALS

JOINT-STOCK COMPANY (SAM)

2.1 OVERVIEW OF VALUATION METHODS IN VIETNAM

Since 1986, the “Renovation” period has created a momertum for the development

of State-Owned Enterprises (SOES) from district to central level, everywhere and in

every field In early 1990s, there were more than 12.000 SQEs in operation, among

which many made little profit duc to small capital

In 1990, under the policy for multi-sector economy development of the State and Party, with the publication of Company Taw, joint stock companies were established, creating the primary securities market in Vietnam for the first time In late 1990, there were nearly 300 joint stock companies in operation with a very

small capital and issued mainly internal stocks

Enterprise Law promulgated in 1999 created a new development opportunity for all

economic sectors Table 2.1 shows the growth vale of joint siock companies from

2000 2004 (before the promulgation of Lnterprise Law 2005)

Table 2.1 Number of joint siock companies 2000-2004

(Source: Central Institute of Economic Managemend)

Simultancously, to achieve a comprehensive renovation and cllieiency improvement of the economy, the State has carried out many rearrangements of

22

SOEs, among which cquitization is of the most importance This aims at ercating an enterprise model with many owners in order to make an effective use of capital, property of the Stale and mobilize [imther social capital for the development of production, business, creating a strong motivation and a dynamic, effective

mechanism for enterprises

New requirements [or enterprise valuatian

‘the rapid growth of joint stock companies speeds up the demand for initial stock

issuance and securities transaction However, due to poor knowledge of securities

and a newly bom sccurilics market, cnlerprise value before cquitization is usually assessed in a subjective way, depending much on relevant normative documents

However, guiding documents themselves are nol consislenl and do not follow close

‘behind the actual situation, market information is not transparent, therefore almost all securities issuance periods have been conducted under the method of internal

issnance with par value Generally, staff and partners of enterprises can buy

securities at a very preferential price (equal to 70% of par value) 1n that context, the

unification of methods of enterprise valuation is necessary to be done in order to:

« Help stake-holders understand the real value of the enterprise to which they are contributing capilal, avoiding investment into an unprofitable but over praised

Enterprise valuation was mentioned only afier the presence of enlerprise

cquitization policy Valuation in this period was not considered to be a valuation

23

method for financial asscts, but only an enterprise valuation phase — part of

enterprise equitization process

Before 1996, under the implementation of Decision No 202/Cl, value of equitized enterprises is determined according to re-assessed assets value (tangible) method Following this method, value of cquitived enterprises meludes only asscls value

after inventory and re-valuation and initial cost of land use rights (if any)

1 mechonicel TSC 10,681 16,017 149,96%

4 Long An exports processing JSC

(Source: E quitization Board — Ministry of Finance)

‘The principle for determining enterprise value after inventory is the State price system and the actual depreciation of assets Ilowever, this method often fails to Dring about an actual enterprise value Some reasons to be named clude depreciation rate of assets is usually assessed to be higher than the actual one Moreover, profit-making advantages of enterprises are not taken into consideration;

Staic price sysiem ia unstable and docs not follow close behind the markel valuc

2.1.2 Valuation 1996 — 1998

On May 7" 1996, Decree Na 28/CP was issued by the Governmenl, which stipulates that value of any cquitized enterprise is determined by the actual value of tangible assets, simultaneously taking into consideration advantageous value of that

cutcrprise regarding some aspects such as: patcuis, proslige, mark, geographical

position According to the regulation set forth in Circular No 50/IC-I'CDN dated

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30/08/1996 by Ministry of Finance guiding the implementation of Decres No 28/CP, the determination of equitized enterprise value is carried out in 3 steps:

Step 1: Determine the actual assets value (the assets value after inventory re- assessment)

Step 2: Determine advantageous value of enterprise

Step 3: Calculate equitization cost and enterprise value according to the farmuia

Enterprise value = Post-inventory enterprise value +/- Enterprise advantageous

value | Equitization cost

‘To coneretize, Minister, Head of quitization central steering committee issued Decision No O1/CPH dated 04/09/1996 providing procedure for converting SOFs

into joimt stock companics The real situation of many enterprises shows that: this

procedure results in the three-time valuation: first time by the equitized enterprise itself, second lime by independent audil agency and last hme by Government agency with its assessment and certification Valuation procedure has some repeated

steps with a project approved by many levels

In this period, advantageous value is introduced into enterprise value by comparing profit rate of an enterprise with other ones of the same industry

2.1.3 Valuation 1998 — present

- Decree 44/1998: Pursuant to Decree No 14/1998 on converting SOEs into joint

stock companies, the determination of enterprise value is guided by Ministry of

Finance in Circular No 104 TT/TCDN dated 18/07/1998 Basically, method and.

content of enterprise valuc determination are the same as those set forth in Circular

No S50PC/TCDN dated 30/08/1996, which is mentioned above Llowever, Circular

no 104TT/TCDN clarifies some conlenls im conerele (reatment such as: external

leased assets, materials and goods kept or processed by others; assets having no use demand, irrecoverable debt, on-progress construction projects Due to pressure from enterprises, the actual crlerprise value stipulated includes only no more thar 30% of the advantageous value coming from geographical position and commodity prestige The participation of mdependent audit agencies in the determination of

enterprise value, which is stipulated in Decree No 28/CP mentioned above, is a

positive element, especially in the context that many enterprises consider it to be “a

complicated valuation method” However, due to the low valuation quality of audit and the lack of legal value in Gindings, the parbeipation of independenL audiL agencies is required for only enterprises which do not comply with laws on

accounting and statistics Following this decision, almost SOEs converting inta joint

stock eompanics pursuant lo Decree no 44/1998 recently do not comduel any audits

during the of enterprise value determination

Formula to calculate advantageous value according to Cưcular 104TT/TCDN,

Advantageous State capital basing on Super

value indudedin | =) average account book — | x | threshold of x 30% enterprise value of 03 consecutive years profit rate

‘The reality shows that under Circular 104, the valuation process of equitized

enterprises, in general, is hastened thanks to no audits, but the valuation quality,

Dasically, is slill unchanged, sometimes even more irrational

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Decree No 64/2002; By 19/06/2002, Decree No 64/2002 was issued and brought

T

open policy for valuation differont enterprise in different economic sector can choose different valuation process to best suit their situation but the process should keep track with Ministry of Finance guideline The Decree helped push up the

equilization process specd and linked cquitization process closely te the stack

market

Decree No 187/2004: By 16/11/2004, Decree 64 was replaced by Decree 187 - afler

2 years in effect ‘The new Decree 187 was guided by Ministry of I’mance in Circular No 126-TIVBTC dated 24/12/2004 2 years later, on 01/11/2006, Circular

No 95-TT/BTC was issued to replace Circular ne 126 The importanes change Oval Decree 187 and its guiding documents made to valuation process is the way to

calculate enterprises’ advantageous value:

Average of 3 years after-tax average of 3 consecutive years after-tax profit

Profit rate with state capital = — x 1808 basing, on account hook average of 3 consecutive years state capital

2.1.4 Pros and cons of valuation methods in Vietnam

The fact of applying net book value method in combination with profits surplus issued by decrev 28/CP/1998, 64/2002 and lately 187/2004 was an advanced juncture against previously pure property value method ‘the method mentioned to two major components creating business value are visible asset value and invisible

assct value and simultancous concemed with a fixed oxtent profitable ability to correlate with industry in general Another advantage was this method is simple,

easy to apply imo practice in Vietnam, when almost privatized enlerprises had nol

large actual value However, the simple method leads to different issues:

Valued assessment method is apart from factors creating enterprise values

Because of simple and executed depending on each enterprise, so the curent enterprise assessment method often leads to evaluate low enterprise value, losing

state capital On the other side, the method alsa did not count all risks of enterprise

that cause the assessment to consider too high ‘rhe reasons are

The major basis to specified enterprise value according lo this method is statement

of accounts (balance sheet) — document reflected on assets in general Scheduled

figures in balance sheet were often reflected according to original price and put on

subjeptive manners of cach cnlerprise Even some largely valued fixed assels were land still not reflected on statement of assets of Vietnam enterprises yet because

of inconvenient facts in law on Jand For this reason, much financial information

sull did not reflected though balance shect as invisible values, the cwtent market

price and particularly, prospective values of index in balance sheet Meanwhile, investor need evaluate how is this index m the future because invest in slock is

invest in future

Advantageous values calculated according to the previous methad are based on

average return rate within 3 past years, then are compared to State bond interest

rate It is not sure that the advantageous values will reflect enterprise’s profitability

in the future Thus, the advantageous values are valued under, sometimes as

“negative number” for fresh enterprises or temporarily lost enterprises but prospective in the future Moreover, government bond market has not developed in

Vioinam so far Tk has nol, bee pul bonds out to contract periodically 10 year

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bond's interest is not considered as a standard figure for the economy sometimes it

is much higher/lower than banking interest as well as average return rate of economy For example, 10 year-government bond on 8eplember 2006 thai was tendered through Ho Chi Minh Stock market centre was 7%/year whereas banking deposit interest was about 9-9.2%/year

‘he method is not also mentioned to profitability in the future via business targets, quality of technology as well as other invisible values (or potential risks) that

enterprises currently have They are really important factors for investors Lo decide

to buy stocks

Rating method is not suitable for all kinds of enterprise

Tach sector, each field has typical technical economic features Enterprises ranning

in different sectors have different technical economic features, even complete dilleront, Newly regutalion brings chances lor enerprises lo apply a suttable value

process, but in fact, it’s difficult for them to prove its suitability

For cxampls, in case, an insurances company or an advertisement company, we all

‘mow that their asset value is not large, most of them are hired assets In term of

potential sales, profil in the lature, if just applying raling method under the current

regulation of State, the business value is very low in comparison with its real value

Valuation process is under administrative decision

Up to now, the process and results of valuation has been strongly affected by valuation committee including mostly state officials, but not everyone understand