NATIONAL ECONOMICS UNIVERSITY CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS BACHELOR’S THESIS Topic: Private equity valuation for Hanoi Stone Slab and Construction Joint Stock Company Student’s name : NGUYEN NHU KHANH Major : Finance Class : Advanced Finance B Student’s ID : CQ11121971 Supervisor : PROF PHAM QUANG TRUNG, PHD HANOI, 2016 ACKNOWLEDGMENTS For starters, I am pleased to send a gratitude to my thesis instructor, Prof Pham Quang Trung, who has given me precious and valueless advice on choosing research topic as well as writing the thesis report during the course of preparation, definitely without his assistance and profound knowledge, this thesis could not be finished as it is today It is my honor to be instructed by Prof Pham Quang Trung Thank you very much again! Secondly, I want to thank my internship guide, Mrs Nguyen Hong Nga, officer at Finance and Accounting Department, Hastone Vietnam.,JSC With her instruction and assistance, I am capable of gathering sufficient data and information to finish my thesis Her comments and advices on the content also contribute a great deal to the completion of this thesis Especially, her personal inspiration during tough period at work gives me much support and motivation to complete this project Finally, I want to thank all the lecturers at NEU and AEP centers, Mrs.Quyen at Advanced Finance 54B for the precious time with me during four years at National Economics University Without your teaching, supports and assistance, I cannot be here today to complete my thesis Thank you all very much! TABLE OF CONTENTS STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Barchelor’s Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper Hanoi, ./ / 2016 Nguyễn Như Khánh ABBREVIATION BPS Book value per share Capex Capital Expenditure CAPM Capital Assets Pricing Model DDM Dividend Discount Model EBITDA Earnings before Interest, Tax, Depreciation and Amortization EPS Earnings per share EV Enterprise Value EVA Economic Value Added FCFE Free Cash Flow to Equity FCFF Free Cash Flow to Firm Hastone Vietnam.,JSC Hanoi Stone Slab and Construction Joint Stock Company NOPAT Net Operating Profit after Tax NWC Net Working Capital RI Residual Income WACC Weighted Average Cost of Capital LIST OF TABLES Table 1: Functions and Responsibilities of Departments at HASTONE.,JSC Table 2: ROE decomposition in factors LIST OF FIGURES Figure 1: Organizational Structure of HASTONE.,JSC Figure 2: Characteristic of product classification in the market Figure 3: Five-Force Model created by M Porter Figure 4: Quantity of producing facing tiles of enterprises on Vietnam market Figure 5: Growth of Total Assets Figure 6: Growth of Profit after-tax Figure 7: Result of FCFF model ABSTRACT This report emphasizes on the challenges in valuing with different methods a joint stock company, which has not IPO yet This also has tried to discuss and analyze how an investor should try to value a private company In addition to special characteristics like the value of control, illiquidity discount and lack of diversification, normal valuation issues and techniques have been discussed as well Following is details about the impact and further discussion on valuation process After that, the paper will simulate a full valuation process on Hastone Vietnam.,JSC to estimate the equity value Finally, I will use such result to make recommendation for investors regarding the investment opportunity in Hastone Vietnam.,JSC INTRODUCTION Rationale Granite stone market is on the trend to a promising market, in terms of the conditions to develop and modernize in Vietnam, especially for new constructions and building, the demand for aesthetic of them is significantly increasing This potential product is quickly attracting a lot of capital and the cash inflow to this industry rapidly goes up in current time Vietnamese-Granite products are now prioritizing in Europe, Middle-East and Asia In 2009, export of paving stones of Ha Dong is estimated at over 12 million USD in export value Speaking of investment opportunity, we easily realized that field is on uptrend Understanding and analyzing the granite stone industry in general as well as Hastone Vietnam.,JSC which was state-own company and then restructure to become a joint stock company, after that we will conduct to evaluate this firm As a matter of investment discipline, corporate valuation appears to be one of the most significant steps in making investment decisions Valuation mostly concerns with the determination of an enterprise’s intrinsic value, which is conceptually defined as its capability to generate future cash flow for both creditors and shareholders Moreover, there are other methods finance theories aiming at identifying a reasonable measure of a firm’s value An estimate of corporate value serves as the benchmark for investors in their investment decision In other words, such estimators are essential in various other financial activities such as merger & acquisition (M&A), leveraged buyouts (LBOs) or initial public offerings IPOs Another thing people have to pay attention when analyzing and determining the intrinsic value of manufacturing firm is comparing the accounting policy such as depreciation methods, revenue recognition, allocation of financial lease or operating lease or specific items include capital expenditure, working capital as well as debt categories etc to other companies in peer group There is nothing definitely good or bad if we not make a comparison to take a view of full picture Research objectives and scope In recognition of the challenges analysts have to cope with when valuing manufactured firms, the paper is concentrating on utilizing different valuation approaches to determine corporate value In more details, a granite stone market is targeted for analytical review The research paper attempt to answer three research questions as following: What are the challenges confronted by analysts when valuing a paving granite stone-manufacturing firm in general and the condition of granite stone industry of Vietnam in particular? What are the recommendations for investors concerning the investment opportunity? What is the price per share Hastone Vietnam.,JSC using FCFF valuation approach and addressing the identified challenges? In terms of work scope, the research is limited to evaluating a specific paving granite stone-manufacturing firm in Vietnam which is Hastone Vietnam.,JSC, the company which has turned 40 years old in 2015 and just doing restructure from Stated-own Company to Joint Stock Company Moreover, the methods used in the research will be detailed in the Methodology and Data chapter In terms of valuation purpose, this paper aims at providing price per share of Hastone Vietnam.,JSC for secondary investors who are seeking investment opportunity in compound stone industry Literature Review a) The review of peer companies In the first view, we will see the ability of business firms in this industry to make the products The chart below summarizes for two characteristics which are the key point to compete in market 10 Figure Characteristic of product classification in the market Source: Annual report of Hastone Vietnam., JSC As we can see, Chinese goods, although engaged in all segments, from low-price segment to high price segment, however, are positioned mostly cheap items Therefore, Vietnam business firms are considered in the same segment with the segment of China This should be seen as the fiercest competition when cheap Chinese goods attacked with various designs and makes most companies manufacturing ceramic tiles and granite in Vietnam get losses or low profitability Meanwhile, the premium segment is dominated by the products of Italy and Spain, even to compete in this segment is more pleasant and brings better margins There is several reasons lead to lower margins popularity of granite companies in Vietnam Firstly, the business environment of Vietnam is detrimental to the manufacture granite and ceramic tiles company in competition with Chinese products: utility costs and the cost of capital accounts for a large proportion of the total cost of the ceramic tiles company In Vietnam, the prices of energy and fuels such as electricity, coal continuously escalating along with the frequent power cuts in the state of rotation is one of the important reasons that companies price of bricks 10 49 4.3.3 Profitability The net income surged during years, this lead to the rocket of ROE Conducting the Dupont analysis to decomposition and analysis ROE, we can realized that two figures have a highest growth is EBIT margin and financial leverage EBIT margin showed us how well the cost control is, after interviewing the chief accountant of Hastone Vietnam, the author conclude that the reason for this is the provision for inventory which has impaired is relatively high in 2012 and 2013, so when the real estate recovers, the company can take the faster inventory turnover, the cost of goods sold is not high due to impairment in the previous years Additionally, Hastone Vietnam increases their quantity to cut the cost lower, that also help EBIT margin grow stronger However, the other main part which makes the ROE increase is financial leverage Comparing to other peer companies in this industry, Hastone Vietnam used lower leverage accounted from 2012, that is why they planned to lever more in the next years and reaching over point in 2015 The motivation for them is that the total asset turnover was high enough and that still grew stably during times Following is the result of estimating ROE decomposition by Dupont analysis conducted by the author Table 4.1 ROE decomposition in factors ROE 5.04% 5.19% 27.42% 40.56% 5.04% Tax burden 0.8644 1.0076 0.8795 0.8425 0.8644 Interest burden 0.3910 0.4168 0.7544 0.8538 0.3910 EBIT Margin 12.36% 8.55% 15.34% 21.18% 12.36% Total Asset Turnover 0.5156 0.6356 0.8179 0.9691 0.5156 Source: Author estimated 4.4 Valuation This research paper employs the dividend discount model which is FCFF cash flow model in particular to estimate the firm value and the price per shares with the data provided by chief accountant of Hastone Vietnam First of all, the author will estimate the beta of Hastone Vietnam called beta project Due to this is the beta for private firm so this paper will evaluate it by unlevered the 49 50 beta equity from the peer public company called beta asset and then levered beta asset with the D/E ratio of Hastone Vietnam to get the beta project In this case the author choose Viglacera Tien Son Company – stock code VIT (this information is available on www.cafef.vn and we can gather it easily) because of two reasons Firstly, VIT have over 90 percent in weight of revenue for producing granite stone in Vietnam and foreign market Secondly, the business size of VIT is the same as Hastone Vietnam.,JSC Following is the estimation for beta project Source: Author estimated The next step, the author used the CAPM model to evaluate the cost of equity for Hastone Vietnam The latest data for government bond-10 year rate is collected from the website of Vietcombank Securities The return of VN-Index for 10 years is gathered from www.cafef.vn Following is the results of CAPM model: Source: Author estimated The third step, author forecasts the growth rate of revenue for Hastone Vietnam.,JSC using the average rate from the past and judgment from the industry condition and company plan in the next years, the growth rate of sales is approximately 27% The other items on income statement and balance sheet depend on the sales so that after run the model, the result author estimate is following Because there is financial theory stated that all the firms have to go through stages or periods, the first part is growing and expanding but after that, they will face to the downturn of life cycle and their growth rate will be reverted to the same as GDP growth rate Following is the firm value estimation 50 51 Table 4.2 Period Net income Result of FCFF model Year 2016 2017 2018 2019 2020 39.896 44.383 57.438 74.012 95.056 121.776 (+) Depreciation 6.705 1.830 1.900 1.973 2.049 2.128 (+) Provision 3.797 5.259 6.679 8.483 10.773 13.682 (+) Interest + (1 – tax rate) 6.485 4.603 5.312 6.216 7.367 8.832 18.168 81.615 29.211 36.995 46.876 59.420 1.026 723 746 771 797 825 FCFF 37.688 - 26.263 41.372 52.919 67.573 86.174 WACC 8.12% 8.12% 8.12% 8.12% 8.12% 8.12% Present value of FCFF 37.688 - 24.291 35.393 41.872 49.452 58.331 (-) Working capital Investment (-) CAPEX Firm value 198.444 Source: Author estimated Using the D/E ratio of the year-end 2015 that equals to 60% debt and 40% equity, author estimated WACC for this firm will be 8.12% The cost of debt is the averages of the latest data of interest rate of Techcombank, BIDV and Agribank which are banks lend money for Hastone Vietnam, JSC, the figure is 8.12% After that, firm value can be estimated by the sum of all discounted future cash flow to WACC The paper showed that firm value is approximately 198,444 million VND In the second period, author will estimated the terminal value after years from now The growth rate equals to the GDP growth rate for global (the data gathered from IMF report) Source: Author estimated Finally, the research can evaluate total PV of FCFF that equals to the sum of present value of terminal value and firm value in period one, the equity value of this firm by 51 52 subtracted market debt in 2015 from FCFF and divided it by total shares outstanding to get the price per share Source: Author estimated The research used mainly FCFF model and the financial model assumed that the investment will be last for years Because the change in plan and replace the large of plant, property and equipment (PPE) in the 2020 of Hastone Vietnam will affect the revenue so that makes sales growth and financial structures become unpredictable 4.5 Investment risks Goods imported from China and some other countries such as Malaysia, Indonesia, India, Italy, etc also are in direct competition with local goods Especially, China is the world's largest exporter and manufacturer and in the previous period, cheap Chinese products dominate the market in Vietnam led businesses to be in troubled However, due to high tariff protection and the changes in technology investments, design, local companies now are gaining market share again Therefore, we assess the risk of foreign products at a moderate level However, the risk of exchange rate is extremely high because of Hastone Vietnam, JSC is produced granite tiles not only for domestic market but also global market That is why this firm will face with high level of risk from exchange rate risk Another thing has to be considered is interest rate risk Due to the high financial leverage, which showed that Hastone Vietnam, JSC operated mainly by the debt capital providing by the banks In the case of increasing interest rate, Hastone Vietnam has to suffer more debt obligations and that will affect the cash flow of the firm 52 53 Last but not least, the liquidity risk is significant point due to this is the private firm so their stocks are trading on OTC market, which is not transparent and liquid as stock exchange market like HOSE and HASTC Investors obviously realized this when seeking the good investment on any private equity 4.6 Discussion and recommendations In this section, the paper will attempt to point out the difficulty in valuing a private equity firm and answer the three questions in the first chapter Firstly, the author has coped with several challenges when conducting the valuation process and building the financial model The data of private companies is very confidential and the business firm has less obligation and regulation that force them to provide financial information to the public That is why gathering financial statements is difficult and that took a long time to interview and negotiate with the person in charge to collect sufficient data However, the condition of granite market and its growth potential is available on the internet and reports of several stock companies such as MBS and VCBS, obviously, this industry is now attracting a huge of cash inflow for investment not only from local investors but also foreign investors Secondly, this research paper is conducted based on financial theories which author has learnt during the university and referred from the other course book and CFA Curriculum 2016 This project pays attention to the academic purpose of financial model but not for marketable purpose so that the results estimated are just for assumption and adjustment from the author view Finally, the price per share of Hastone Vietnam.,JSC is estimated at approximately 53.500 VND per share and the initial investment should be get back after years due to large change in PPE and the plan this firm will take on 2020 affecting the financial structure of the firm and equity value Because of private equity, there is no market value to determine whether this stock is mispricing or not However, that will be the reference for any investors who seek to investment opportunity in OTC market 53 54 CHAPTER 5: CONCLUSION This research aims at finding the difficulties in valuing a private equity firm The finding showed that there are numerous challenges and obstacles to determine the intrinsic value of the private firm compared to public company The first thing is accounting policies are depended on the tax purpose which help company to avoid the high tax and reduce net income There is no pressure as public firm on growing profit after tax to stimulate stock price and confidence of stockholders so that the firm is free from accounting choice to take the lowest net income as possible To adjust this situation, author has to estimate the useful life of every item on fixed assets to forecast the exactly depreciation charge each year Secondly, the corporate governance is hard to identify and explore due to lack of data and information Finally, estimating beta project is taken a longer time to find and choose the suitable peer company which has the same size and weight of main product in revenue For the time limit and data unavailability, the valuation result in this paper may not fully reflect the true value of Hastone Vietnam, JSC in reality However, the author is completely sure that this outcome strictly reflects all the available information gathered at the time of valuation The impact of industry on valuation should also be addressed after 2020 when the firm reveals their plan 54 55 REFERENCES English: Jerald E Pinto et al., 2010 Equity Asset Valuation 2nd Ed New Jersey: John Wiley & Sons, Inc Williamson, O E., 1988 Corporate Finance and Corporate Governance Journal of Finance, 43, 567-592 Sanford J Grossman and Joseph Stiglitz, 1980 On the Impossibility of Informationally Efficient Markets American Economic Review, Vol 70, No 3: 393 – 408 Lee, Charles M.C., and Bhaskaran Swaminathan, 1999 Valuing the Dow: A Bottom - Up Approach Financial Analysts Journal, Vol 55, No 5: – 23 Andrei Shleifer and Robert W Vishny, 1992 Liquidation Values and Debt Capacity: A Market Equilibirum Approach Journal of Finance, Vol XLVII, No Jerald E Pinto et al., 2010 Equity Asset Valuation 2nd Ed New Jersey: John Wiley & Sons, Inc Lapide, L., 1998 A simple view of top-down versus bottom-up forecasting The Journalof Business Forecasting Methods & Systems, 17, 28-29 Fama, Eugene, 1970 Efficient Capital Markets: A Review of Theory and Empirical Work Journal of Finance, 25, 383-417 Schwarzkopf, A.B., Tersine, R.J., Morris, J.S., 1988 Top-down versus bottom-up forecasting strategies International Journal of Production Research, 26, 1833-1843 10 Gelly, P., 1999 Managing bottom-up and top-down approaches: Ocean spray’s experiences The Journal of Business Forecasting, 18, 3-6 11 Nkwi, P., Nyamongo, I., & Ryan, G., 2001 Field research into socio-cultural issues: Methodological guidelines International Center for Applied Social Sciences, Research, and Training/UNFPA 55 56 12 Gordon, T P., Morris, J.S., Dangereld, B.J., 1997 Top-down or bottom-up: which is the best approach to forecasting? The Journal of Business Forecasting Methods & Systems, 6, 13-16 13 Nkwi, P., Nyamongo, I., & Ryan, G., 2001 Field research into socio-cultural issues: Methodological guidelines International Center for Applied Social Sciences, Research, and Training/UNFPA Lapide, L., 2006 Top-down and bottom-up forecasting in S & OP The Journal of Business Forecasting, 25, 14-16 14 How to determine the approach to forecasting The Journal of Business Forecasting, 14, 2-3 15 Merriam, S., 2009 Qualitative research: A guide to design and implementation Jossey-Bass 16 Aliaga and Gunderson, 2000 Interactive Statistics New Jersey: Prentice Hall 17 Denzin, N., & Lincoln, Y (Eds.)., 2005 Handbook of qualitative research 3rd edition Sage Jain, C.L., 1995 18 Glesne, C., & Peshkin, 1992 Becoming qualitative researchers: An introduction Longman 19 Mack, N et al 2005 Qualitative research methods: a data collector’s field guide Family Health International 20 Porter, M., 1985 Competitive Advantages: Creating and Sustaining Superior Performance New York: The Free Press 21 Ohlson J.A., 1995 Earnings, book values and dividends in security valuation Contemporary Accounting Research 11, 661—687 22 James L Farrell, 1985 The Dividend Discount Model: A Primer Financial Analysts Journal Vol 41, No 6, pp 16-19+22-25 23 Samik Raychaudhuri, 2008 Introduction to Monte Carlo Simulation Winter Simulation Conference 24 Sharpe, William, Gordon Alexander, and Jeffery Bailey, 1999 Investments Upper Saddle River, New Jersey: Prentice Hall 56 57 25 Fuller, Russell J., and Chi - Cheng Hsia, 1984 A Simplified Common Stock Valuation Model Financial Analysts Journal Vol 40, No 5: 49 – 56 26 Porter, M., 2008 The Five Competitive Forces That Shape Strategy Harvard Business Review, 79-93 27 Gordon Myron J., 1962 The Investment, Financing, and Valuation of the Corporation Homewood, IL: Richard D Irwin 28 Black, F., and M Scholes, 1972 The valuation of option contracts and a test of market efficiency Journal of Finance 27:399–417 29 Aswath Damodaran, 2012 Investment Valuation: Tools and Techniques for Determining the Value of Any Asset New York: Wiley 30 Aswath Damodaran, 2006 Damodaran on Valuation: Security Analysis for Investment and Coporate Finance 2nd Ed New York: John Wiley & Sons Website: 31 https://vcbs.com.vn/vn/bai-viet/4/Lai-suat-trai-phieu-Chinh-phu-ky-han-10nam-len-muc-7nam-van-e-156264 32 http://data.vietstock.vn/ket-qua-giao-dich/vietnam.aspx 57 58 APPENDIXES Appendix A: Forecasting the items on Income Statement Appendix B: Forecasting the items on Total Assets on Balance Sheet 58 59 Appendix C: Forecasting the items on Total Liability and Shareholders’ Equity on Balance Sheet Appendix D: Forecasting the depreciation expense and movement of PP&E 59 60 Appendix E: Forecasting the amortization expense for intangible assets 60