The valuation for Goldsun Packaging Joint Stock Company = Đánh giá cho công ty cổ phần bao bì Goldsun

The chosen model is Free Cash Flow Model which is most suitable, in author’s view, to evaluate the intrinsic value of a business like Goldsun.. The most usable method in valuation, appli

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Thi Dieu Thuy

THE VALUATION FOR GOLDSUN PACKAGING

JOINT STOCK COMPANY

MASTER OF BUSINESS ADMINISTRATION THESIS

Hanoi – 2010

VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF BUSINESS

Nguyen Thi Dieu Thuy

THE VALUATION FOR GOLDSUN PACKAGING

JOINT STOCK COMPANY

Major: Business Administration

Code : 60 34 05

MASTER OF BUSINESS ADMINISTRATION THESIS

Supervisor: Dr Nguyen Thi Thu Hang

Hanoi – 2010

vi

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENTS vi

LIST OF FIGURES viii

LIST OF ABBREVIATIONS ix

INTRODUCTION 1

CHAPTER 1: COMPANY VALUATION – A LITERATURE REVIEW 4

1 Basics of company valuation 4

1.1 Valuation concepts 4

1.2 Valuation steps 4

2 A review of valuation models 5

2.1 Discounted Cash Flow Model (DCF) 6

2.2 Residual Income Model 13

2.3 Market – based valuation: price multiples 15

3 Valuation in emerging market 24

3.1 Risk associated with emerging market 24

3.2 Country risk premium and cost of equity 26

CHAPTER 2: THE BUSINESS OF GOLDSUN 27

1 Vietnam economic development overview 27

1.1 Recent economic conditions and implications 27

1.2 Economic performance 28

1.3 Economic prospect 34

2 Characteristics of packing industry 36

vii

3 Goldsun Packaging Joint Stock Company business and financial

performance 38

3.1 Goldsun business and financial performance 38

3.1.1 History 38

3.1.2 Product Offerings 38

3.2 Financial performance of Goldsun 54

CHAPTER 3: VALUATION OF GOLDSUN PACKAGING JOINT STOCK COMPANY 64

1 Valuation for Goldsun packaging JSC 64

1.1 Choosing the model 64

1.2 The valuation of Goldsun 65

2 Recommendations 85

2.1 Recommendation on valuation for potential investors 85

2.2 Recommendations for Goldsun 86

REFERENCES 87

viii

LIST OF FIGURES

Figure 1: Vietnam real GDP growth 29

Figure 2: Vietnamese GDP growth position among Asian Countries in 2008 and 2009 29

Figure 3: Vietnamese average inflation 31

Figure 4: GDP structure by sector in 2009 32

Figure 5: Export and Import growth 33

Figure 6: Revenue composition by product category 40

Figure 7: Shipper Carton Manufacturing Process 42

Figure 8: Offset Manufacturing Process 42

Figure 9: Design capacity 44

Figure 10: Average capacity 44

Figure 11: Quality control process 45

Figure 12: Main suppliers 47

Figure 13: Top 10 biggest customers 2009 49

Figure 14: Organization structure 52

Figure 15: Workforce by Function 53

Figure 16: Workforce by educational level 53

ix

LIST OF ABBREVIATIONS

IPO Initial public offering

WACC Weighted average cost of capital

Research IFRS International Financial Reporting Standard

1

INTRODUCTION

Objectives and Structure of the Thesis

The goal of the thesis is to apply a model to estimate the intrinsic value

of Goldsun Packaging Joint Stock Company, providing a reference for both the company and strategic investors in price decision

Different popular valuation models will be discussed to select the most appropriate model, according to the author’s view Its is also necessary to understand the company’s economic and industry context as well as the management’s strategic responses to come to the valuation of the business For that purpose, the thesis is structured in three parts as following

Chapter 1: Company Valuation – A Literature Review

The first chapter gives a general view about the current valuation models with focus on the most common used ones 2 main valuation models including discounted cash flow valuation (DDM, FCF, residual Income) and market-based multiples (P/E, P/B, P/S, P/CF, EV/EBITDA), which are popular in most of the industries are discussed

Chapter 2: The Business of Goldsun JSC

This chapter focuses on Goldsun’s business, its performance and the environment, including the economic and industry context that it is operating

in An analysis of the economy and the packaging industry is presented to give an insight about the opportunities and threats to company’s profitability and future prospects Then, an analysis of its internal operation, infrastructure, strategy and capability as well as financial statements is conducted to assess its past performance and future growth of the business, which reflects the true value of the company

Chapter 3: The Valuation of Goldsun JSC

2

This chapter presents the rationale of choosing one valuation model among the discussed models in chapter to estimate Goldsun’s value The chosen model is Free Cash Flow Model which is most suitable, in author’s view, to evaluate the intrinsic value of a business like Goldsun The chapter includes all the works on the Free Cash Flow Model including calculating the Free Cash Flow, Terminal Value, Weighted Average Cost to come to recommended valuation for Goldsun Recommendation is also made to both the company and the potential investors on the reference price

Methodology

The gathering of information/data will primarily be focused on sources, which are available such as the Audited Report of Goldsun 2005 – 2009, different external articles, statistics and management interview, theoretical articles and additional information concerning the industry, in which Goldsun operates

The theory and models applied in this thesis will briefly be described in the following A more profound evaluation of the model/theory will be presented in the sections, in which they are applied

Scope of works

The target group of this research is set to being a potential investor of Goldsun Packaging Joint Stock Company The gathering of information/data will therefore primarily consist of material available and allowed to be provided

The dissertation is based on the application of certain models/theories This means that chosen/given parameters and subjective evaluations are used to determine the end results Other possible models/theories are

The period before 2007 will not be looked into as the business was in much smaller different scale, which doesn’t represent the current situation and future possibility The focus will be on the period of 2007 – 2009 and on future forecasts/prospects of Goldsun

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CHAPTER 1: COMPANY VALUATION – A LITERATURE REVIEW

1 Basics of company valuation

1.1 Valuation concepts

Every asset, financial as well as real has a value The key to successfully investing in and managing those assets lies in understanding not only what the value is, but the sources of the value Any asset can be valued, but some assets are easier to value than others, and the details of valuation will vary from case to case

There is uncertainty associated with valuation Often that uncertainty comes from the asset being valued, though the valuation model may add to that uncertainty

Every day thousands of participants in the investment profession – investors, portfolio managers, regulators, researchers – face a common and often perplexing question: what is the value of a particular asset? The answers

to this question usually determine success or failure in achieving investment objectives To determine value received for money paid, to determine the relative value – the prospective differences in risk-adjusted return offered by different stocks at current market prices – the analyst must engage in valuation

Valuation is the estimation of an asset’s value based on variables perceived to be related to future investment returns or on comparisons with similar assets

1.2 Valuation steps

The valuation for a particular company is a task that requires an analyst

to undertake the following steps:

Step 1: Understanding the business

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This involves evaluating industry prospects, competitive position, and corporate strategies Analyst use this information together with financial statement analysis to forecast performance

Step 2: Forecasting company performance

Forecasts of sales, earnings, and financial position (pro forma analysis) are the intermediate inputs to estimating value

Step 3: Selecting the appropriate valuation model

Step 4: Making the investment decision

2 A review of valuation models

Nowadays, there are several methods of company valuation in theory & practice They can be classified in 5 groups:

Multiples PER or P/E Sales or P/S EV/EBITDA Other

multiples

EVA Economic profit Cash value added

CFROI

Black & Scholes Investment option

…

The most usable method in valuation, applied in most of the industries

is Discounted Cash Flow (DCF), Residual Income (which also originated from Discounted Cash Flow model) and Market based valuation or Multiples

6

(Price to Book value, Price to Earning, ) The thesis focuses on these 3 models and choose Discounted Free Cash Flow model to apply for the valuation of Goldsun

2.1 Discounted Cash Flow Model (DCF)

60 years ago, the economists Irving Fisher and John Burr Williams, answer the question of “ what’s a stock worth” as the value of a stock is equal

to the present value of its future cash flows

In valuation theory, the discounted cash flow is used to seek for the intrinsic value of a stock or a company This method estimates the cash flow

it will generate in the future and then discount them at a discount rate matched

to the flow’s risk Nowadays, the discounted cash flow method is generally used as it is the conceptually correct valuation method In this method, the company is viewed as a cash flow generator and the company’s value is obtained by calculating these flows’ present value using suitable rate

Discounted cash flow methods are based on the detailed, careful forecast, for each period, of each financial item related with the generation of the cash flows corresponding to the company’s operation

There are two broad challenges we face in approaching company valuation as a present value of future cash flow The first challenge is to define exactly the future cash flows and forecast what they will be in the future Normally, we take the perspectives that Dividends and Free Cash Flow are the appropriate definitions of cash flows When applied to dividends, the DCF model is the discounted dividend approach or dividend discount model (DDM) When applied to Free Cash Flow, the DCF model is the Free Cash Flow Model The second challenge is to estimate the appropriate rate of return

to use for discounting cash flows back to the present, the discount rate Determining the suitable rate for discounting cash flow is one of the most

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important task and take into account the risk, historic volatilities Today, expert generally use Weighted Average Cost of Capital (WACC) for discounted rate

The different discounted cash flow start with the following expression:

CF1 CF2 CFn+Vn

V= + + … +

1+k (1+k)2 (1+k)n

Where CFi = cash flow generated by company in period i

Vn = residual value of the company in the year n

k = appropriate discount rate for cash flow’s risk Cash flow can be dividend flow or free cash flow of the company in period I depending on which strategy investors concern While residual income can be horizon value with estimation from year n CFn may be fixed or grow at constant growth rate (g)

• Theoretically, the DCF is arguably the soundest method of valuation

• The DCF method is forward-looking and depends more future expectations rather than historical results

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• The DCF method is more inward-looking, relying on the fundamental expectations of the business or asset, and is influenced to a lesser extent by volatile external factors

• The DCF analysis is focused on cash flow generation and is less affected by accounting practices and assumptions

• The DCF method allows expected (and different) operating strategies

to be factored into the valuation

• The DCF analysis also allows different components of a business or synergies to be valued separately

• The accuracy of the valuation determined using the DCF method is highly dependent on the quality of the assumptions regarding FCF, TV, and discount rate As a result, DCF valuations are usually expressed as a range of values rather than a single value by using a range of values for key inputs It

is also common to run the DCF analysis for different scenarios, such as a base case, an optimistic case, and a pessimistic case to gauge the sensitivity

of the valuation to various operating assumptions While the inputs come from a variety of sources, they must be viewed objectively in the aggregate before finalizing the DCF valuation

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• The TV often represents a large percentage of the total DCF valuation Valuation, in such cases, is largely dependent on TV assumptions rather than operating assumptions for the business or the asset

• This model is not suited to short-term investing DCF focuses on term value Moreover, focusing too much on the DCF may cause you to overlook unusual opportunities

long-Depending on what the analyst believe about how a company will operate and how the market will unfold, DCF valuations can fluctuate wildly

Key components of DCF model

• Free cash flow (FCF) – Cash generated by the assets of the business

(tangible and intangible) available for distribution to all providers of

capital FCF is often referred to as unlevered free cash flow, as it

represents cash flow available to all providers of capital and is not affected by the capital structure of the business

• Terminal value (TV) – Value at the end of the FCF projection period (horizon period)

• Discount rate – The rate used to discount projected FCFs and terminal

value to their present values

In this thesis, we concentrate to two methods of discounted cash flow as their popular use and effective:

- Discounted Free Cash Flow (FCF)

- Discounted Dividend

2.1.1 Discounted Free Cash Flow

Analysts like to use free cash flow as return whenever one or more of the following conditions are present:

- The company is not dividend paying

Following the same formula of DCF method:

FCF1 FCF2 FCFn + Vn

1+k (1+ k)2 (1+k)n

Where CFCi = free cash flow generated by company in period i

FCFi = profit after tax + depreciation – investment

Vn = residual value of the company in the year n

k = appropriate discount rate (after tax WACC) The advantages and disadvantages are like DCF

2.1.2 Discounted Dividend Model (DDM)

The DDM is the simplest and oldest present value approach to valuing stock

In a survey of AIMR members by Block (1999), 42 percent of respondents viewed DDM as “very important” or “moderately important” for

determining the value of individual stocks Beginning in 1989, the Merrill

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valuation factors and methods among a group of institutional investors From 1989 to 2000, the DDM has ranked as high as fifth in popularity Besides its continuing significant position in practice, the DDM has an important place in both academic and practical equity research The DDM is, for all these reasons, a basic tool in equity valuation

From the perspective of a shareholder who buys and holds a share of stock, the cash flows he or she will obtain are the dividend paid on it and the market price of the share when he or she sells it The future selling price should in turn reflect expectations about dividends subsequent to the sale therefore, the DDM formula is shown as below:

DIV1 DIV2 DIVn + Vn

V = + + … +

1+k (1+k)2 (1+k)n

Where DIV = Dividend in period i

Vn = residual value of the stock in the year n

k = required rate of return on stock

A dividend discount model is a valuation that relies on one of two assumptions In one common scenario, the assumption is that the dividend payments are fixed and are not likely to change in the near future In that case:

DIV1

DIV1 = DIV2 = …… = DIVn In that case: Vo =

k

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The second scenario is expected that the dividend payments may grow forever at a constant rate (g) With this second approach, the equity of the company is considered to be a perpetuity The formula becomes:

• Versatile and flexible, readily facilitating amendments to their data inputs

• The model’s flexibility extends to allowing us to test market assumptions by reversing the underlying calculation

Disadvantages

• Dividend at year 1 is not representative for Dividend in future when the growth of company change or the main shareholder can be replaced

• The growth rate of DIV is estimated by historic DIV growth rate

• Despite their perceived advantages over fixed growth techniques such

as the Gordon growth model, multistage dividend growth models remain vulnerable to relatively minor inaccuracies in source data

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• Multistage models are particularly prone to errors in calculating resulting from poor cash flow estimates during the high- growth phase of a company’s development At this relatively early stage, estimates of the constant dividend growth rate to be used in the maturity phase can be very difficult to make

2.2 Residual Income Model

Residual income models of equity value have become widely recognized tools in both investment practice and research Conceptually, residual income is net income less a charge (deduction) for common shareholder’s opportunity cost in generating net income As an economic concept, residual income has a long history As far back as the 1920s, General Motors employed the concept in evaluating business segments More recently, residual income has received renewed attention and interest, sometimes under names such as economic profit, abnormal earnings, or economic value added

The appeal of residual income models stems from a shortcoming of traditional accounting Specifically, although a company’s income statement includes a charge for the cost of debt capital in the form of interest expense,

it does not include a charge for the cost of equity capital A company can have positive net income but may still not be adding value for shareholders

if it does not earn more than the cost of equity capital In the long term, companies that earn more than the cost of capital should sell for more than book value and companies that earn less than the cost of capital should sell for less than book value The residual income model (RIM) analyses the intrinsic value of equity into two components:

- The current book value of equity, plus

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- The present value of expected future residual income

Then, the intrinsic value of common stock can be expressed as follows:

∞ RIt ∞ Et – rBt-1

V0 = Bo + ∑ = Bo + ∑

t=1 (1+r)t t=1 (1+r)t

Where Vo = value of a share of stock today (t=0)

B0 = current per-share book value of equity

Bt = expected per-share book value of equity at any time t

r = required rate of return on equity (cost of equity)

Et = expected EPS for period t

RIt = expected per-share residual income, equal to Et - rBt-1

Advantages

• Terminal values do not make up a large portion of the total present value, relative to other models

• The RI models use readily available accounting data

• The models can be readily applied to companies that do not pay dividends or to companies that do not have positive expected near-term free cash flows

• The models can be used when cash flows are unpredictable

• The models have an appealing focus on economic profitability

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• The models require that the clean surplus relation holds, or that the analyst makes appropriate adjustments when the clean surplus relation does not hold

Therefore, a residual income model is most appropriate when

- A company does not pay dividends, or its dividends are not predictable;

- A company’s expected free cash flows are negative within the analyst’s comfortable forecast horizon; or

- There is great uncertainty in forecasting terminal values using an alternative present value approach

2.3 Market – based valuation: price multiples

Among the most familiar and widely used valuation tools are price multiples Price multiples are ratios of a stock’s market price to some measure

of value per share The intuition behind price multiples is that we cannot evaluate a stock’s price-judge whether it is fairly valued, overvalued, or undervalue – without knowing what a share buys in terms of assets, earnings,

or some other measure of value Obtained by dividing price by a measure of value per share, a price multiple gives the price to purchase one unit of value, however value is measured

In practice, analysts use price multiples in two ways: the method of comparables and the method based on forecasted fundamentals The method

of comparables involves using a price multiple to evaluate whether an asset is relatively fairly valued when compared to a benchmark value of the multiple Many choices for the benchmark value of a multiple have appeared in stock valuation, including the multiple of a closely matched individual stock as well

as the average or median value of the multiple for the stock’s company or

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industry peer group The economic rationale underlying the method of comparables is the law of one price – the economic principle that two identical assets should sell at the same price This method is perhaps the most widely used approach for analyst reporting valuation judgments on the basis

of price multiples

The method based on forecasted fundamentals involves forecasting the stock’s fundamentals rather than making comparisons with other stocks Expressions for price multiples in terms of fundamentals permit analysts to examine how valuation differences across stocks relate to different expectations concerning fundamentals such as earnings growth rate We can relate any price multiple to the entire future stream of expected cash flows through its DCF value by taking the present value of the stream of expected future cash flow and divide that by the fundamental

The most popular method is method of comparables, used for the common price multiples include price to earnings (P/E), price to book value (P/B), price to cash flow (P/CF), price to sales (P/S) and Enterprise value to EBITDA (EV/EBITDA)

2.3.1 Price to earnings (P/E)

In the first edition of Security Analysis, Benjamin Graham and David L

Dodd (1934, p 351) described common stock valuation based on P/Es as the standard method of that era, and the price to earnings ration is doubtless still the most familiar valuation measure today

A company’s value under the P/E business valuation method is based

on the assumption that the company value should be similar to companies whose shares are traded in the stock market The company’s value is calculated according to the future net income (Earning) of the business and

• Simple for calculation & widely accepted

• Proxy for cash flow

• Broadly articulated

• Executive compensation

Disadvantages

• Exclude risk & time value of money

• Exclude capital needs

• EPS can be manipulated

2.3.2 Price to book value (P/B)

The ratio of market price per share to book value per share (P/B), like P/E, has a long history of use in valuation practice In Block’s 1999 survey of AIMR members, book value ranked distinctly behind earnings and cash flow,

but ahead of dividends , of the four factor surveyed According to the Merrill

The Price/ book value is best applicable to companies that have many tangible assets such as factories and other production facilities Additionally, P/B is well applicable with such entities as banks and insurance companies The company’s value is normally calculated according to the book value of equity and the industry average P/B ratio or the P/B ratio of another firm with

a similar business profile

Equity value = P/B*Book value Where Book value = Book value of equity at year i

P/B = Price to Book value of equity of industry average or business company similar

Advantages

• Simple to calculate as based on historical numbers

• Book value is a cumulative amount that is usually positive even the P/E multiple is negative because of negative earnings

• Book value is more stable than EPS, so it may be more useful than P/E when EPS is volatile

• For market to market firm assets, P/B is more useful than the P/E multiple

• Book value doesn’t reflect the current market value, which leads to a lack of precision in measurement

• P/B is misleading when there are significant differences in the asset intensity of production methods among the firms

• Differences in accounting methods can lead to different asset value That makes the comparison harder

• P/B ignores future so that when inflation and technological change can cause the book and market value of assets to differ significantly

2.3.3 Price to Sales (P/S)

Certain types of privately held companies, including investment management companies and companies in partnership form, have long been

valued as a multiple of annual revenues According to the Merrill Lynch

than one-quarter of respondents consistently used the P/S in their investment process

P/S is calculated as price per share divided by annual net sales per share (net

sales is total sales less returns and customer discounts

• Because sales are generally more stable than EPS, which reflects operation and financial leverage, P/S is generally more stable than P/E P/S may be more meaningful than P/E when EPS is abnormally high or low

• P/S has been viewed as appropriate for valuing the stock of mature, cyclical, and zero-income companies

• Differences in P/Ss may be related to differences in long-run average returns, according to empirical research

Disadvantages

• A business may show high growth in sales even when it is not operating profitably as judged by earnings and cash flow operations To have value as a going concern, a business must ultimately generate earnings and cash

• P/S does not reflect differences in cost structures among different companies

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• Although relatively robust with respect to manipulation, revenue recognition practices offer the potential to distort P/S

2.3.4 Price to cash flow (P/CF)

Price to cash flow is widely reported valuation indicator In Block’s

1999 survey of AIMR members, cash flow ranked behind only earnings in importance According to the Merrill Lynch Institutional Factor survey, price

to cash flow on average saw wider use in investment practice than P/E, P/B, P/S, or dividend yield in the 1989-2001 period, among the institutional investors surveyed

In practice, analyst use simple approximations to cash flow from operation in calculating cash flow in price to cash flow A representative approximation specifies cash flow per share as EPS plus per-share depreciation, amortization, and depletion

Equity value = P/CF*cash flow Where Cash flow = Earning plus depreciation, amortization, and

depletion P/CF = market price to cash flow of industry average or company

Advantages

in the quality of earnings)

• Differences in price to cash flow may be related to differences in run average returns, according to empirical research

long-Disadvantages

• When the EPS plus noncash charges approximation to cash flow from operations is used, items affecting actual cash flow from operations, such as noncash revenue and net changes in working capital, are ignored

• Theory vies free cash flow to equity (FCFE) rather than cash flow as the appropriate variable for valuation We can use P/FCFE ratios but FCFE does have the possible drawback of being more volatile compared to cash flow, for many businesses FCFE is also more frequently negative than cash flow

2.3.5 Enterprise value to EBITDA (EV/EBITDA)

Enterprise value (EV) is total company value (the market value of debt, common equity, and preferred equity) minus the value of cash and investments Because the numerator is enterprise value, EV/EBITDA is a valuation indicator for the overall company rather than common stock If the analyst can assume that the business’s debt and preferred stock (if any) are

or company

Advantages

• EV/EBITDA may be more appropriate than P/E for comparing companies with different financial leverage (debt), because EBITDA is

a pre-interest earnings figure, in contrast to EPS, which is post-interest

• By adding back depreciation and amortization, EBITDA controls for differences in depreciation and amortization across businesses For this reason, EV/EBITDA is frequently used in the valuation of capital-intensive businesses (for example, cable and steel companies) Such businesses typically have substantial depreciation and amortization expenses

• EBITDA is frequently positive when EPS is negative

Disadvantages

• EBITDA will overestimate cash flow from operations if working capital is growing EBITDA also ignores the effects of differences in revenue recognition policy on cash flow from operations

• Free cash flow to the firm (CFFF), which directly reflects the amount

of required capital expenditures, has a stronger link to valuation theory than does EBITDA Only if depreciation expenses match capital

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expenditures do we expect EBITDA to reflect differences in businesses’ capital programs This qualification to EBITDA comparison can be meaningful for the capital-intensive businesses to which EV/EBITDA is often applied

3 Valuation in emerging market

As the valuation process come through the same steps from understanding the business to forecasting performance, make the valuation and recommendation, valuation is more difficult in the context of emerging market as compared to developed markets The reason is that in emerging market there is lack of transparency and more risks than developed market Besides, most of emerging countries have their stock market for not quite a long time For example, Vietnam stock market was just in existence since the year 2000; and for the first several years, transactions and liquidity were very low This leads to the lack of statistical information for valuation

I, therefore, think that the factors: risk associated with emerging market and how to determine country risk premium and cost of capital should be discussed before coming to valuation for Goldsun

3.1 Risk associated with emerging market

Emerging markets are countries that are beginning to emerge with increased consumer potential driven by rapid industrial expansion and economic growth Risks are associated with emerging markets just as there are in established markets, but because they are new or emerging markets, new challenges exist in assessing those risks including language and cultural barriers, differing business practices and business requirements, becoming knowledgeable of regulations and laws governing business, and many other

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new challenges Emerging market risk assessment is the assessment of the risks of doing business in locations that are considered emerging markets These differences often come with increased risk of exposure to an existing organization and in order to minimize those risks, assessments must be completed by the organization wishing to expand into those markets The investors may perform their own risk assessments, hire individuals who are knowledgeable in risk assessments as well as knowledgeable of the emerging markets to perform the assessment, hire an outside firm to perform the risk assessments, or rely on reports and data from research organizations dedicated

to risk assessments of emerging markets as a guide to associated risks

The emerging market is normally characterized by wide fluctuation of exchange rate, inflation and interest rate from year to year We have seen this situation quite clear in the case of Vietnam All these factors could have their impact on valuation process, with exchange rate applicable to foreign investors In emerging market, the investors could barely have any instruments to hedge against those risks Even a forward-exchange market could be very illiquid Therefore, if possible, those risks should be incorporated in the valuation model

Accounting standards in emerging markets also can be very different from those applied in more mature countries (which are IFRS) Frequent changes in taxation policy could also be a problem for forecasting performance

Regulation over the stock market is not fully in place and reinforcement

is not tight enough Insiders trading is much more than other markets, or trading of larger investors without making public announcement is frequently observed in Vietnam stock market Those issues could put the investors at more risk when investing in the stock market

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Of course, the emerging market is still very attractive thanks to high GDP growth rate That is why more and more indirect investment from overseas have injected in emerging markets like Vietnam or China

3.2 Country risk premium and cost of equity

Add a country risk premium to the cost of capital for comparable investments in developed markets is a way to deal with increasing risk discussed above in emerging market Hence, the market risk premium for an emerging market will be the sum of the market premium for a mature market plus the country risk premium Calculation for equity required rate of return could then be started with the risk free rate in the mature market Another normal method for calculating market risk premium is to identify the excess return of local equity market over local risk free rate In one of its report in January 2009, using this method, Deutsche Bank come up with equity risk premium of 6.5% and cost of equity of 17% for Vietnam I have chosen this method for calculating the required rate of return for investment in Goldsun

I would like to use sensitivity analysis to see the changes of valuation with different required rate of return

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CHAPTER 2: THE BUSINESS OF GOLDSUN

1 Vietnam economic development overview

1.1 Recent economic conditions and implications

The financial crisis starting in 2008 made 2008 and 2009 the first years

in the post Second World War ear that global output- and per capita income – declined Moreover, global trade in 2009 plummeted nearly 25% from 2008’s level, the largest single year drop since the Second World War World trade and financial imbalances unwound: from 2008 to 2009 current account surplus or deficits fell for 4 out of every 5 countries as lower commodity prices, tighter credit, and, to some degree, greater protectionism reduced demand for traded goods World external debt disappeared The global recession was a result of widespread uncertainties in the financial markets, bank failures, tighter credit, falling home prices, collapsing asset prices, lowered consumer confidence and the drop in trade

In response to these conditions, many, if not most, countries pursued expansionary, monetary and fiscal policies, and attempted to avoid protectionist policies The fiscal stimulus packages put in place in 2009 required most countries to run budget deficits By the second half of 2009, the global economy appeared to be making halting, but forward steps

Vietnam has made progress over the past 10 years in moving from a planned economy to a market economy, opening up to foreign investment, maintaining consistent rapid growth The shift away from a centrally planned economy to

a more market-oriented economic model improved the quality of life for many Vietnamese On the other hand, because of the wide openness of the economy, Vietnam could not but avoid impact of complex developments of the world economic environment Vietnam’s accession to the World Trade

1.2 Economic performance

Vietnam has been one of the fastest-growing economies in Asia in recent years, with real GDP growth averaging more than 7% annually between 2000 and 2007, especially after Vietnam’s accession to the WTO The economic boom with rapid rise in exports and strong industrial growth has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004 The proportion of people living below the official poverty line fell from 20.2% in 2005 to 12.3%

in 2009 The current Socio-Economic Development Plan of Vietnam (SEDP) 2006-2009 sets Vietnam ‘s goal of becoming a middle income country by

2010 and an industrialized nation by 2020 However, in 2008, Vietnam was not immune to global economic slowdowns as well as global-like inflation which significantly eroded the value of consumer’s disposable income The real GDP growth began its down trend from 2008 with a decline from 8.48 percent in 2007 to 6.23 percent in 2008 and 5.32 percent in 2009 And Vietnamese GDP growth still slow over the medium term as a result of global financial market turmoil and recessionary conditions in the US, which is

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Vietnam’s largest export market, as well as Europe The chart below outlines Vietnam’s real GDP growth for the period of 2002-2010F:

Figure 1: Vietnam real GDP growth

Source: Vietnam General Statistics Office, Asian Development Bank

Figure 2: Vietnamese GDP growth position among Asian Countries in

2008 and 2009

Source: CEIC, Bloomberg and the World Fact Book – CIA

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Source: CEIC, Bloomberg and the World Fact Book – CIA

Vietnam’s economy still expanded by 5.32% in 2009 – the slowest pace since

1999 but still higher than the growth rates of many other Asian economies recording negative growth in 2009

In 2008, inflation rapidly increased during the first 6 months, gradually reduced since July, and reached negative level in Q4 In 2008 as a whole, average inflation rate increased by 22.97% (as compared to 8.3% in 2007), of which both food and non-food inflation rates significantly went up from 18.92% to 31.68% and from 7.8% to 10.05% respectively as compared to

2007 Thus, food price indicates made a great contribution to the growth of inflation In 2009, the easing inflation trend helped Vietnam to achieve single-digit inflation in 2009, in contrast with the towering 22.97% recorded in 2008, showing that Vietnam’s economy has been step by step escaping from the bottom of the downturn The chart below describes the average inflation for the period of 2002-2010E:

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Figure 3: Vietnamese average inflation

Source: Vietnam General Statistics Office, Asian Development Bank

In 2009, GDP growth in comparative price to 1994 reached VND 515.9 trillion (approximately $27 billion), an increase of 5.32% as compare to 2008 (VND 489.8 trillion); as for the sectors of production with the recovering strongly derived from industry and construction (5.52%), the service sector of 6.63% and agriculture, forestry and fishery with a slight increase of 1.83% 9

(Source: Vietnam General Statistics Office) Agriculture (including forestry

and fisheries) expanded by 1.8% weaker than its average growth of about 4%

in 2004-2008 The main cause was a poor summer-autumn rice harvest, which largely offset an abundant winter-spring harvest Industry grew by 5.5% slowing from rates of about 10% in most recent years Declining demand for exports as a result of the global recession weighed on manufacturing production However, construction got a boost from the Government‘s policy stimulus, and output of crude oil rose by 9.8% to 16.4 million metric tons, as new fields come on stream Services expanded by 6.6%, the pace easing a little from recent years The expansionary policies and generally buoyant consumption bolstered financial services and domestic trade At the same

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time, tourism-linked services such as hotels Vietnam’s key economic segments as measured by contribution of GDP are the manufacturing, agriculture and trade sectors, described in Table below:

Figure 4: GDP structure by sector in 2009

Source: General Statistics Office of Vietnam (as at 31 Dec 2009)

Note: Amounts expressed at 1994 constant prices

Foreign direct investment (“FDI”) and export growth have been key drivers of Vietnam’s development growth in recent years

Until 2008, both export and import have been growing rapidly In 2007, import growth exceeded export growth so that the trade deficit was actually expanding In contrast, export and import in 2009 dropped down significantly Weaker external demand reduced exports by 8.9% in 2009, making it the first year to see a decline since the beginning of economic reforms, particularly for

rice, coffee, rubber, and shoes Imports reduced by 13.3 (Source: General

weaker domestic economy, the depreciation in the dong: US dollar exchange rate and other official efforts to tackle the wide deficit on the merchandise trade account

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Figure 5: Export and Import growth

Source: Asian Development Bank

The steeper decline in imports in 2009 above, however, indicates a sharply narrower trade deficit reined in the current account deficit to 7.4% of GDP in

2009 from 11.8% in 2008 This is due to the Government’s efforts to restore macroeconomic balance

In terms of foreign-financed investment, there was a decline owing to a downturn in foreign direct investment (FDI) inflows Vietnam attracted FDI

of $21.48 billion in 2009 Actualized FDI capital gained $10 billion, lower

$1.5 billion than 2008

The narrowing of the trade deficit helped to alleviate pressure on the dong to depreciate against the US dollar The dong was continued to be valued, in November 2009 and February 2010 Taking into account the changes in the width of the flotation band, the combined effect of these two devaluations was

to increase the domestic price of the dollar by 8.9% By now, the exchange rate in the parallel market is only 1 to 2% above the upper limit of the band, compared to more than 10% in late 2009

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Bearing the impact from the global economic recession, the stock market hit its deepest low in the last four years, with the VN Index dropping to 235.5 points on 24 February 2009 After the economic stimulus measures, the VN Index began rising, climbing to 630 points in late October and now hovering around 500 points

1.3 Economic prospect

The year 2010 marks the completion of the Vietnamese Economic Development Plan 2006-2010, aimed at raising the economy to middle-income status In the recent conditions, the challenge is to focus on macroeconomic stability while maintaining economic growth Therefore, Asian Development Bank (ADB) foresees that the Government will do the following: to tighten monetary and fiscal policies further during 2010 to limit inflation and devaluation pressures, and keep the policies moderately tight in 2011; not use administrative measures to control inflation; and maintain stability of the banking system Fiscal policy will continue to be more tightened

Socio-In reality, the Vietnamese budget plan for 2010 mentions a reduction in the budget deficit targeting 2 to 3 percentage points of GDP On the monetary side, interest rate subsidies on short-term loans have been ended, but subsidies are maintained for medium-term loans to selected sectors at a reduced level of

2 percentage points The central bank also removed ceiling interest rate on medium- and long-term loans in February 2010, enabling banks to raise lending rates In addition to the increase in the central bank’s base interest rate

b 12% in late 2009, the Government also took the important step of allowing lenders and borrowers to negotiate most interest rates in February 2010 The