Solutions to improve the activities of fundamental analysis in Thang Long Securities Company

To deal with the question how to improve activities of fundamental analysis in a securities companies, my research focuses on basic theory combined with reality available in stock market of Vietnam. Basic theory involves key definitions about financial market and securities companies; important and popular models used to value and analyze a company and the industry it belongs. Reality involves status of Thang Long Securities Company, where I take my internship, and issues of stock market as well as management of Government and SSC. Then, I give some comments about activities of fundamental analysis in TLS and recommendations to improve them. In my opinion, I want to keep advantages of TLS and change to improve limitations rather than change everything in analysis procedure. I give recommendations for both TLS and Government and SSC. That is because TLS cannot change environment around its operations itself. Some problems come from company, but others come from regulations and weak in management of Government. In fact, development of stock market of Vietnam in long term needs combination of both authorities and all of securities companies. Therefore, my research structure includes three chapters. At the beginning, chapter one shows readers the theory of financial market, securities companies and its operations. Next, chapter two continues to detail the status of TLS in business, power of TLS in general as well as the activities of fundamental analysis in TLS now. There are many statistics about TLS and other securities companies with significant tables and charts. I also raise my ideas, comments on reality of TLS based on data collected during the time of internship. Finally, chapter three solves emerged issues of fundamental analysis in TLS. By recommendations for TLS, Government, and SSC, I notice the importance of changes in both company and the environment around company. Recommendations divide according to the objectives they stress. For example, there have recommendations for SSC, or for Government. They are just main points of my research. If reader wants to understand more clearly, you would read in details.

During my internship, I have an opportunity to learn much more aboutprofessional and standardized quality in working of securities company and havetime to take this research Although the time of internship is short, I have receivedmuch help from my supervisor and Thang Long Securities Company.

I sincerely thank my lectures of Advanced Program, and Banking and FinanceFaculty who have created a good chance for me to apply my knowledge in theoryand get more experience in reality This internship helps develop my skills usefulfor my work in future as well as improve my basic knowledge available

I respectfully thank to my supervisor M.S Nguyen Thi Thuy Duong, who hasinstructed me to finish my research

Moreover, to have the basic and actual knowledge to implement this research,

I really thank to Dr Quach Manh Hao, general director of TLS, and Dr Pham TheAnh, head economist of TLS, and all staffs of Analysis Department of TLS.Director, manager and all staffs in Analysis Department of TLS help so much ininstructing me to work professional and supply useful data, statistic, and documents

to complete my research

1.1.2.1 Definition of securities companies 71.1.2.2 Functions of Security Company 81.1.2.3 Operations of Security Company 8

1.2 Critical framework for fundamental analysis activities in Security Company 11

1.2.1 Definition of fundamental analysis 11

1.2.2 Requirements of a fundamental analysis report 11

1.2.2.1 Reference 111.2.2.2 Transparency 11

1.2.2.5 Update 12

1.2.2.6 Separation 12

1.2.2.7 Logic 12

1.2.2.8 Rights 13

1.2.3 Essential processes 13 1.2.3.1 Identify objectives 13

1.2.3.2 Guideline report 14

1.2.3.3 Select significant model 14

1.2.3.4 Collect data 15

1.2.3.5 Write the report 15

1.2.3.6 Correct and improve the report 15

1.2.4 Basic models used in fundamental analysis 16 1.2.4.1 Models used to value firms and stock prices 16

Security market line 20

1.2.4.2 Models used to analyze business conditions of one company 25

CHAPTER 2: THE REALITY OF FUNDAMENTAL ANALYSIS ACTIVITIES IN THANG LONG SECURITIES COMPANY31 2.1 The overview of Thang Long Security Company 31 2.1.1 The history of foundation and development of TLS 31 2.1.2 The management structure and organization of TLS33 2.1.3 The reality of business activities of TLS 33 2.1.3.1 Main products of TLS 33

2.1.3.2 Results of the company’s business activities 34

2.2 The reality of fundamental analysis activities in Thang Long Security Company 37 2.2.1 Processes of fundamental analysis 37 2.2.1.1 Identifying objectives 38

2.2.1.2 Collecting data 38

2.2.1.3 Writing report 39

2.2.2.1 Human resources 402.2.2.2 Technology 412.2.3 Models used in fundamental analysis activities 42

2.3 Evaluation of the company’s fundamental analysis activities 44

2.3.1 Achievements 44

2.3.2 Drawbacks 45

2.3.2.1 Limitations 452.3.2.2 Reasons 46

CHAPTER 3: SOLUTIONS TO IMPROVE THE ACTIVITIES OF FUNDAMENTAL ANALYSIS IN THANG LONG SECURITIES COMPANY 49

3.1 The development orientation of fundamental analysis in TLS 49

3.2 Solutions to improve activities of fundamental analysis 51

3.2.1 Constructing an analysis content 51

3.2.1.1 Constructing a report along with purposes 513.2.1.2 Constructing a report along with industries 523.2.2 Improving analysis procedure 55

3.2.3 Constructing an overall data source 55

3.2.4 Constructing models application 56

3.2.5 Training and Recruiting employees 56

3.3 Recommendations 58

3.3.1 Recommendations related to State Security Commission o f Vietnam58

3.3.1.1 Transparency of information 583.3.1.2 Improving fundamental analysis procedure 593.3.1.3 Increasing quality of training of securities and stock market 603.3.2 Recommendations related to the Government 61

3.3.2.1 Reviewing law on securities and stock exchange 613.3.2.2 Decentralizing authorities in management 61

REFERENCES

SBV State Bank of Vietnam

SSC State Securities Commission of VietnamSRTC The Securities Research and Training CenterMOF Ministry of Finance

TLS Thang Long Securities Company

Report Fundamental analysis report

Table 2.1: Chartered capital of some leading securities companies 2010E 35

Table 2.2: Revenues structure of TLS 36

Table 2.3: Personnel of TLS 40

Table 2.4: Models used by some securities companies 42

Table 2.5: PEs of ITC and similar real estate companies in 12 months cycle 43

LIST OF DIAGRAMS Diagram 1.1: Operations of primary market 5

Diagram 1.2: Operations of secondary market 6

Diagram 1.3: Types of data sources 15

Diagram 1.4: Security Market Line 18

Diagram 1.5: Industry life cycle 25

Diagram 1.6 Porter’s five forces 28

Diagram 2.1: Management structure of TLS 33

Diagram 2.2: Total assets and equities of TLS 34

Diagram 2.3: Brokerage market shares of some leading securities companies in 2009 35

Diagram 2.4: Brokerage market shares of some leading securities companies in the first half of 2010 35

Diagram 2.5: Number of management accounts 36

Diagram 2.6: Total revenues, expenses and gross revenues of TLS in recent years 37

To deal with the question how to improve activities of fundamental analysis in

a securities companies, my research focuses on basic theory combined with realityavailable in stock market of Vietnam Basic theory involves key definitions aboutfinancial market and securities companies; important and popular models used tovalue and analyze a company and the industry it belongs Reality involves status ofThang Long Securities Company, where I take my internship, and issues of stockmarket as well as management of Government and SSC Then, I give somecomments about activities of fundamental analysis in TLS and recommendations toimprove them In my opinion, I want to keep advantages of TLS and change toimprove limitations rather than change everything in analysis procedure I giverecommendations for both TLS and Government and SSC That is because TLScannot change environment around its operations itself Some problems come fromcompany, but others come from regulations and weak in management ofGovernment In fact, development of stock market of Vietnam in long term needscombination of both authorities and all of securities companies Therefore, myresearch structure includes three chapters

At the beginning, chapter one shows readers the theory of financial market,securities companies and its operations Next, chapter two continues to detail thestatus of TLS in business, power of TLS in general as well as the activities offundamental analysis in TLS now There are many statistics about TLS and othersecurities companies with significant tables and charts I also raise my ideas,comments on reality of TLS based on data collected during the time of internship.Finally, chapter three solves emerged issues of fundamental analysis in TLS Byrecommendations for TLS, Government, and SSC, I notice the importance ofchanges in both company and the environment around company Recommendationsdivide according to the objectives they stress For example, there have

1 Rationale

The history of stock market is a long story.

In 12th century, France the courratiers de change were concerned with

managing and regulating the debts of agricultural communities on behalf of thebanks Because these men also traded with debts, they could be called the firstbrokers A common misbelief is jthat in late 13th century Bruges commodity traders

gathered inside the house of a man called Van der Beurze, and in 1309 they became

the "Brugse Beurse", institutionalizing what had been, until then, an informalmeeting, but actually, the family Van der Beurze had a building in Antwerp wherethose gatherings occurred; the Van der Beurze had Antwerp, as most of themerchants of that period, as their primary place for trading The idea quickly spreadaround Flanders and neighboring counties and “ Beurzen ” soon opened in Ghentand Amsterdam

In the middle of the 13th century, Venetian bankers began to trade ingovernment securities In 1351, the Venetian government outlawed spreadingrumors intended to lower the price of government funds Bankers in Pisa, Verona,Genoa and Florence also began trading in government securities during the 14thcentury This was only possible because these were independent city-states notruled by a duke but a council of influential citizens The Dutch later started jointstock companies, which let shareholders invest in business ventures and get a share

of their profits - or losses In 1602, the Dutch East India Company issued the firstshare on the Amsterdam Stock Exchange It was the first company to issue stocksand bonds

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have

been the first stock exchange to introduce continuous trade in the early 17th century.

The Dutch "pioneered short selling, option trading, debt-equity swaps, merchantbanking, unit trusts and other speculative instruments, much as we know them"

There are now stock markets in virtually every developed and the most developingeconomies, with the world's biggest market being in the United States, UnitedKingdom, Japan, India, China, Canada, Germany, France, South Korea and theNetherlands.

By the time now, stock market becomes a familiar term with any people.Although the market has time to be bear or bull, it still keeps the critical position infinancial market in the worldwide The market capitalization value of the mostdevelopment stock markets in the world can be as big as thousands of billiondollars According to recent research of one independent group, China StockMarket is blooming in 2009 and rise to the second in range of the biggest stockmarkets in the world, just under the giant U.S Stock Market

To meet the demand of customer for services, Securities Company wasfounded as indispensible along with the long history of stock market All ofinvestors want to gain profit Beginning with such desire of investors, analyzingservices were created to help the investors identify opportunity and limit risk Therelationship between risk and return asked for a serious consideration fromsecurities companies Their advices play a key role in ultimate decisions ofinvestors Therefore, analyzing activities is very important without any exception insecurities companies

Analysis in securities companies consists of two types of technical analysisand fundamental analysis They are different in functions and objectives Technicalanalysis bases on charts, trends, and diagram to give the sight about history andavailable trend in the future while fundamental analysis bases on financialstatements, historical data, and information collected to understand deeper status ofthat company Fundamental analysis also helps investors estimate value of firm andequity through significant models and their assumptions

2 Research question

In limited dimension of this research, we just concern about activities offundamental analysis in Thang Long Securities Company Procedures to write a

report in fundamental analysis have so many processes that they may let analysts beconfused That is why the result is not good as much as possible due to obviousreasons and personal reasons During my internship, I recognize some issues, whichmay hint the better results of fundamental analyzing reports, and raise some ideas,which may help develop available efforts of such company Therefore, my researchquestion focuses on how to improve activities of fundamental analysis in ThangLong Securities Company

3 Research objectives

- Stud basic theory of securities companies and their activities of

fundamental analysis field

- Analysis and valuation of fundamental analysis activities in Thang Long Securities Company

- Suggest some solutions to improve activities of fundamental analysis in Thang Long Securities Company

4 Research methodology

The methods used in research methodology dialectical materialism, historicalmaterialism method of Marxism - Leninism, abstract methods of science, statistical sampling methods combined with analysis case, comparison and modeling

Chapter 2: Reality of fundamental analysis activities in Thang LongSecurities Company

Chapter 3: Solutions to improve the activities of fundamental analysis inThang Long Securities Company

CHAPTER 1SECURITIES COMPANIES AND FUNDAMENTAL ANALYSIS IN

SECURITIES COMPANIES

1.1 General knowledge of Security Company and Financial Market

1.1.1 Financial Market

1.1.1.1 Definition of financial market

In economic, financial market is a mechanism which allow people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such

as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis

In finance, financial markets facilitate:

The raising of capital (in the capital markets)

The transfer of risk (in the derivatives markets)

International trade (in the currency markets)

And are used to match those who want capital to those who have it

1.1.1.2 Types of financial market

Financial markets are structures through which funds flow Financial marketscan be distinguished along two major dimensions: (a) primary versus secondarymarkets and (b) money versus capital markets

a Primary market versus secondary market

 Primary market

Primary markets are markets in which users of funds raise funds through newissues of financial instruments, such as stocks and bonds Most primary markettransactions in the United States are arranged through financial institutions calledinvestment banks, who serve as intermediaries between the issuing corporations(fund users) and investors (fund suppliers) For these public offerings, theinvestment bank provides the securities issuer (the fund users) with advice on the

securities issue (such as the offer price and number of securities to issue) andattracts the initial public purchasers of securities for the fund users.

Rather than a public offering, a primary market sale can take the form ofprivate placement With a private placement, the securities issuer (user of funds)seeks to find an institutional buyer, or group of buyers to purchase the whole issue.Privately placed securities have traditionally been among the most illiquidsecurities, with only the very largest financial institutions or institutional investorsbeing able or willing to buy or hold them

Primary market financial instruments include issues of equity by firmsinitially going public These first-time issues are usually referred to as initial publicofferings (IPOs)

Primary market securities also include the issue of additional equity or debtinstruments of an already publicly traded firm

Diagram 1.1 Operations of primary market

Primary Markets

 Secondary Markets

Once financial instruments such as stocks are issued in primary markets, theyare then traded in secondary markets Buyers of secondary market securities areeconomic agents (consumers, businesses, and governments) with excess funds.Sellers of secondary market financial instruments are economic agents in need offunds Secondary markets provide a centralized market place where economicagents know they can transact quickly and efficiently

Initial Suppliers of Funds (Investors)

Diagram 1.2 Operations of secondary market

Money Market Instruments A variety of money market securities are issued

by corporations and government units to obtain short-term funds These securitiesinclude repurchase agreement, commercial paper, and banker acceptance

 Capital market

Capital markets are markets that trade equity (stocks) and debt (bonds)instruments with maturities of more than one year The major suppliers of capitalmarket securities (or users of funds) are corporation and government Given theirlonger maturity, these instruments experience wider price fluctuation in thesecondary markets in which they trade than do money market instruments

Capital Market Instruments The major capital market instruments and their

outstanding amounts are both Vietnam Dong and US dollar market value Corporatestocks or equities represent the largest capital market instrument, followed bycorporate bonds and government bonds

Foreign Exchange Markets

Financial Markets Securities Brokers Other Suppliers of

Funds

In addition to understanding the operations domestic financial markets, afinancial analyst must understand the operations of foreign exchange markets andforeign capital markets People still remember that the most recent crisis in theglobal economy comes from the crisis of U.S mortgage market Vietnam is one ofthe members of WTO, thus, the fluctuations of global economy and U.S economylink to Vietnam economy.

Derivative Security Markets

Derivative security markets are the markets in which derivative securitiestrade Derivative securities is a financial securities (such as future contract, optioncontract, or swap contract) whose payoff linked to another, previously issuedsecurities such as a security traded in the capital or foreign exchange market

1.1.2 Securities companies

1.1.2.1 Definition of securities companies

Securities firms and investment banks are financial institutions thatunderwrite securities and engage in related activities such as securities brokerage,securities trading, and making a market in which securities can trade (Peter S.Rose/ Sylvia C Hudgins)

Securities Company or Investment Fund Management Company is held inthe form of Limited Liability Company or Joint Stock Company under theprovisions of Enterprise Law (The Law of Securities)

The securities company makes one, some or all of the following businessoperations:

 Securities brokerage;

 Self-trading;

 Underwriting securities;

 Investment advisory securities

Securities companies are allowed to carry out the underwriting of securitieswhen they have self-trading operation In addition, securities companies can providefinancial advisory services and other financial services (The Law of Securities)

Securities companies licensed to operate there must be facilitates to serve thesecurities business For the underwriting operation and investment advisorysecurities, it is not required to satisfy conditions on technical system Securitiescompanies must have enough legal capital as stimulated by government Director(CEO) and staffs must have significant certificates Business plans must be in linewith the objectives of economy and social development and securities industry.People who are granted license must meet the following conditions: have full legaland acting capacity, meet standards of ethic and professional qualifications, haveenough certificates of qualification in securities granted by SSC

1.1.2.2 Functions of Security Company

Securities transactions on the market: broker buying and selling securitiesintermediary (in order of client orders for commission); and use their own capital tobuy or sell securities to get profit

Monopoly in securities trading on the market and distribute securities to themarket

Informational and consultant centre for investors

Intervene into the stock market and contribute to affect stock price

1.1.2.3 Operations of Security Company

a Brokerage

A brokerage firm, or simply brokerage or broker in context, is a financialinstitution that acts as a stockbroker Brokerage firms serve a clientele of investorswho trade public stocks and other securities (Wiki)

The buying and selling securities must be through brokers, whose legal orperson entity are licensed by State Securities Commission of Vietnam Brokers arelegal entity known as Security Company and have the opportunity to becomeofficial members of stock market

Securities brokerage is an activity in which securities companiesrepresenting customer transaction is conducted through the mechanism of trading atthe Stock Exchange or OTC market where customers will be responsible for the

economic consequences of the transaction Risks that broker usually face arecustomers or other brokers cannot repayment on time

b Self-securities

Self-securities activities are operations in which securities companiesconduct transactions of buying and selling by themselves Securities dealingactivities can be carried out on the concentrated market or on the OTC On thecentralized trading market, trading orders of securities companies to put into systemand perform the same as customer transaction On the OTC market, these activitiescan be conducted directly between companies and their partners or through anetwork of information

c Underwriting

Underwriting is activity in which underwriter help issuers do legalprocedures before going to public, organizing the distribution of securities, andstabilizing prices of securities in the initial period after its release

To be involved in underwriting business, securities companies must have arelative large amount of capital This activity is so high risk that securitiescompanies must perform carefully a series of studies before deciding whether toaccept the or guarantee

Underwriting income of securities companies come from service charge or acertain percentage commission on the proceeds from the issuance These feesdepend on the nature of the issue (large or small, favorable or difficult issue or thefirst or primary distribution)

d Consultant

Investment advisory securities means activities through analysis to provideadvice, analysis of situations and perform some work and other services related tothe issuance, investment, and the financial structures for clients

Two forms of advices are direct and indirect consultant The form of directconsultant is done when securities companies analyze, deal with situations ofcustomers from which recommendation directly on the basic of a consultant fee

agreement For the second, securities companies can share their information throughissuance of analysis reports in magazines, books or essays on the website of thecompany Securities companies must be responsible for truthfulness of their advices

to clients and in many cases consultant activities must be licensed and managed.However, in the securities investment advice, investors need to take responsibilityfor their own investment decisions

In professional portfolio management, securities companies must ensure theseparation the assets of securities companies and assets of customers Depending onthe trust of customers for securities companies, they may authorize a part or a whole

of property management Periodically or request of customers, the company sent thestatement on the status of assets in the portfolio for customers, and not to discloseinformation about the customer’s property except in special cases

Securities companies are allowed to carry out the underwriting of securitieswhen they have self-trading operation In addition, securities companies can providefinancial advisory services and other financial services

Securities companies licensed to operate there must be facilitates to serve thesecurities business For the underwriting operation and investment advisorysecurities, it is not required to satisfy conditions on technical system Securitiescompanies must have enough legal capital as stimulated by government Director(CEO) and staffs must have significant certificates Business plans must be in linewith the objectives of economy and social development and securities industry.People who are granted license must meet the following conditions: have full legaland acting capacity, meet standards of ethic and professional qualifications, haveenough certificates of qualification in securities granted by SSC

1.2 Critical framework for fundamental analysis activities in Security Company

1.2.1 Definition of fundamental analysis

Fundamental analysis refers to activities in which analysts use financialstatements, data and information collected to understand the status of one company.Analysts, with their knowledge, give statements and recommendations tocustomers From that, customers will consider to buy, sell or keep stocks inportfolio However, the ultimate decisions depend on customers

2.1.2 Requirements of a fundamental analysis report

1.2.2.1 Reference

The reports analyzing organizations listed on the stock market note investorsthat information involved in these reports are only for referent Security Company isnot responsible for any consequence or events are considered as consequences ofreaders of reports In addition, reports must present the sources of information used

in them

1.2.2.2 Transparency

Analysis reports are used not only for customers and investors on the stockmarket but also for security company itself Therefore, analyzing reports should beprecise and transparency according to events happened Information sources should

be independent and obvious with the security company and its partners

1.2.2.3 Generation

Reports should present fully comprehensive activities of organizations listed,and analyze the interaction between listed organizations and environment as well asoverall industry environment

1.2.2.4 Forecast

Reports are expected to forecast business performances and stock priceschanges of organizations listed in the future The more announcements come to bereality, the more prestige security company get

1.2.2.5 Update

Stock market change by every minute, so reports should be updatedfrequently In some cases, daily overview reports are uploaded into the website ofsecurity company right after stock market close trading

1.2.2.6 Separation

Reports to investors and reports to securities companies are different in thesense of whether content are full or short In fact, analyzing reports for companyusually cover many parts Those reports play in key role in brokerage, advisory, andself-trading activities Otherwise, analyzing reports for investors are usually shorterand only concentrate on some main parts such as market overview, some keystocks In some cases, report may cover only on the concept of a typical stock

Moreover, concept of reports also depends on the time of report If reportsare daily, semimonthly, or quarterly, they forecast in short-term about the generalsituation of stock market and some stocks If reports are update frequently for atypical stock, they are able to use in longer time

1.2.2.7 Logic

Analysis report should be logical They should show the relationshipbetween financial statements, business performances, and other informationcollected of a company listed to the fluctuations in stock price of that company.They should present the effect of macroeconomic information, economy cycle, andrandom event to stock market In brief, analyzing reports are essential to present the

interaction between data collected with stock market and stock price rather thanonly original information

1.2.2.8 Rights

All rights of reports belong to securities companies and distributed as well asreproduced by companies themselves only The writers of analysis report cannotpublish a part or a whole of his report when report submitted to company

1.2.3 Essential processes

1.2.3.1 Identify objectives

Identify purpose, limits, scope, and subjects

This is basis part, which helps analysts have overview of listed organizationsand factors affecting it As stated above, reports for securities companies and forclients are different, thus, the purpose of reports clarify basic concept

Determine limits, scope and objects of reports help analysts zone analyzedobjects and other related objects; guarantee to meet requirements of department andinvestors Analysts can base on purpose, objects of reports to determine limits,scope, and objects significantly

Specifically, if the purpose of making report is to access fluctuations of stockmarkets, that report will be based on information and data such as VN Index, HNIndex, interest rate (basic interest rate, overnight interest rate, refinancing interestrate, interbank interest rate), CPI monthly, top ten stocks rising on stock market andtop ten stocks decline on stock market, or even industries which have big changes intime of day or week Because these types of information change day by day, thestatistic and comment provided by analysts will be in short-term In my research, Iwill concentrate on the other type of reports, which presents specific stock of onecompany This type of reports asks analysts to understand deeply about businessstatus of company listed through financial statements and other news Analysts have

to clarify factors in environment out of company affecting its stock price andbusiness operations They also have to forecast performances of that company in the

next quarter or at the end of fiscal year From that, they give their thoughts andrecommendations in buying, selling, or keep stocks of that company

1.2.3.2 Guideline report

Guideline report is an important part of procedure in making a report Firm

in different industries have different background For example, firms inmanufacturing or industrial sectors will be affected strongly by price of rawmaterials on the market Otherwise, financial firms are affected by interest rate andchanges in monetary policy of government and State Bank of Vietnam Companylisted should be divided into different industries with various typical characteristic

However, almost reports involve following concepts in a fixed form:

 Overview of company

 Analysis in general

 News (of both company and market)

 Valuation of stock price in the future under assumptions

1.2.3.3 Select significant model

Model selection in analysis is extremely important There are too manymodels used to value a firm or stocks in the world Due to limits of analysts’knowledge and experience, models, which are complicated and ask for manyassumptions are not requested Analysts can be confused when models need to put

so many factors that analysts no longer distinguish what is most important Modelwith many assumptions can go to the result, which is not realistic

On the other hand, different parts of reports use different models Therefore,analysts need to understand the advantages and disadvantages, conditions of eachmodel to conduct suitable

1.2.3.4 Collect data

Diagram 1.3 Types of data sources

There are two sources of data: primary data and secondary data

Secondary data is data treated We collect this data through publicinformation (old financial statements, old annual reports, periodic disclosure,unusual information requested by SSC, or more information from the prospectus oforganizations listed) Information and statistics from SSC and relevant ministriesalso are expected

Primary data is data untreated To have this data, analyzing department canbook company in advanced to meet public information person or find out indirectdata from independent group In some special cases, department have to selectexamples, and investigate partners, rivals, and investors of company to get moreinformation

1.2.3.5 Write the report

Reports are the final products handling to investors and specializeddepartments Therefore, writing the report is so important that analysts usually have

to think carefully and revising many times during writing report Writing reportmust guarantee logical characteristic of that report

1.2.3.6 Correct and improve the report

In normal way, analyst should spent fifty percent of their time to revise allthe report Beside, reports have to be update day by day along with changes on

DATA

market and news from listed organizations themselves Customers who book reportssometimes become to revisers of them They may ask some misunderstood points orstatements in the report Analysts are responsible to clarify them and explain whythey say those statements

1.2.4 Basic models used in fundamental analysis

1.2.4.1 Models used to value firms and stock prices

In financial markets, stock valuation is the method of calculating theoreticalvalues of companies and their stocks The main use of these methods is to predictfuture market prices, or more generally potential market prices; then, to profit from

price movement Stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in

the expectation that undervalued stocks will, on the whole, rise in value, whileovervalued stocks will, on the whole, fall

In the view of fundamental analysis, stock valuation based on fundamentalsaims to give an estimate of their intrinsic value of the stock, based on predictions ofthe future cash flows and profitability of the business Fundamental analysis may bereplaced or augmented by market criteria what the market will pay for the stock,without any necessary notion of intrinsic value These can be combined as

"predictions of future cash flows/profits (fundamental)", together with "what willthe market pay for these profits?" These can be seen as "supply and demand" sides– what underlies the supply (of stock), and what drives the (market) demand forstock?

Discounted Cash Flow Valuation

Discounted cash flow calculations have been used in some form since moneywas first lent at interest in ancient times As a method of asset valuation it has oftenbeen opposed to accounting book value, which is based on the amount paid for theasset Following the stock market crash of 1929, discounted cash flow analysisgained popularity as a valuation method for stocks Irving Fisher in his 1930 book

"The Theory of Interest" and John Burr Williams's 1938 text 'The Theory of

Investment Value' first formally expressed the DCF method in modern economicterms.

In finance, discounted cash flow (DCF) analysis is a method of valuing aproject, company, or asset using the concepts of the time value of money All futurecash flows are estimated and discounted to give their present values (PVs) – thesum of all future cash flows, both incoming and outgoing, is the net present value(NPV), which is taken as the value or price of the cash flows in question

Using DCF analysis to compute the NPV takes as input cash flows and adiscount rate and gives as output a price, the opposite process – taking cash flowsand a price and inferring a discount rate, is called the yield

Discounted cash flow analysis is widely used in investment finance, realestate development, and corporate financial

Discount rate

The most widely used method of discounting is exponential discounting,which values future cash flows, as "how much money would have to be investedcurrently, at a given rate of return, to yield the cash flow in future" Other methods

of discounting, such as hyperbolic discounting, are studied in academia and said toreflect intuitive decision-making, but are not generally used in industry

The discount rate used is generally the appropriate Weighted Average Cost

of Capital (WACC), that reflects the risk of the cash flows The discount rate

reflects two things:

1 The time value of money (risk-free rate) – according to the theory of timepreference, investors would rather have cash immediately than having to wait andmust therefore be compensated by paying for the delay

2 A risk premium – reflects the extra return investors demand because theywant to be compensated for the risk that the cash flow might not materialize after all

An alternative to including the risk in the discount rate is to use the risk freerate, but multiply the future cash flows by the estimated probability that they willoccur (the success rate) This method, widely used in drug development, is referred

to as NPV (risk-adjusted NPV), and similar methods are used to incorporate creditrisk in the probability model of CDS valuation.

CAPM

In finance, the capital asset pricing model (CAPM) is used to determine atheoretically appropriate required rate of return of an asset, if that asset is to beadded to an already well-diversified portfolio, given that assets’ non-diversifiablerisk The model takes into account the asset's sensitivity to non-diversifiable risk(also known as systematic risk or market risk), often represented by the quantitybeta (M) in the financial industry, as well as the expected return of the market andthe expected return of a theoretical risk-free asset

The model was introduced by Jack Treynor (1961, 1962), William Sharpe(1964), John Lintner (1965) and Jan Mossin (1966) independently, building on theearlier work of Harry Markowitz on diversification and modern portfolio theory.Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize inEconomics for this contribution to the field of financial economics

Diagram 1.4 Security Market Line

The Security Market Line, seen here in a graph, describes a relation between the beta and the asset's expected rate of return.

Source: www.en.wikipedia.org

The CAPM is a model for pricing an individual security or a portfolio Forindividual securities, we make use of the security market line (SML) and its relation

to expected return and systematic risk (beta) to show how the market must priceindividual securities in relation to their security risk class The SML enables us tocalculate the reward-to-risk ratio for any security in relation to that of the overallmarket Therefore, when the expected rate of return for any security is deflated byits beta coefficient, the reward-to-risk ratio for any individual security in the market

is equal to the market reward-to-risk ratio, thus:

The market reward-to-risk ratio is effectively the market risk premium and

by rearranging the above equation and solving for E(Ri), we obtain the CapitalAsset Pricing Model (CAPM)

E (Ri) = Rf +  i(E (RM) – Rf)

Where:

E (R i ) is the expected return on the capital asset

R f is the risk-free rate of interest such as interest arising from government

bonds

i (the beta) is the sensitivity of the expected excess asset returns

to the expected excess market returns, or also,

E (R M ) is the expected return of the market

E (R M ) – R f is sometimes known as the market premium or risk premium (the

difference between the expected market rate of return and the risk-free rate

 i =

Note 2: the risk free rate of return used for determining the risk premium isusually the arithmetic average of historical risk free rates of return and not thecurrent risk free rate of return.

Security market line

The SML essentially graphs the results from the capital asset pricing model

(CAPM) formula The x-axis represents the risk (beta), and the y-axis represents the

expected return The market risk premium is determined from the slope of the SML

The relationship between M and required return is plotted on the securities market line (SML) which shows expected return as a function of M The intercept is

the nominal risk-free rate available for the market, while the slope is the market

premium, E(R m )− R f The securities market line can be regarded as representing asingle-factor model of the asset price, where Beta is exposure to changes in value ofthe Market The equation of the SML is thus:

SML: E (Ri) = Rf +  i(E (RM) – Rf)

It is a useful tool in determining if an asset being considered for a portfoliooffers a reasonable expected return for risk Individual securities are plotted on theSML graph If the security's expected return versus risk is plotted above the SML, it

is overvalued since the investor would be accepting less return for the amount ofrisk assumed.And a security plotted below the SML is undervalued since theinvestor can expect a greater return for the inherent risk

PE Earning ratio

The fundamental valuation is the valuation that people use to justify stockprices The most common example of this type of valuation methodology is P/Eratio, which stands for Price to Earnings Ratio This form of valuation is based onhistoric ratios and statistics and aims to assign value to a stock based on measurableattributes This form of valuation is typically what drives long-term stock prices.

The other way stocks are valued is based on supply and demand The morepeople that want to buy the stock, the higher its price will be Conversely, the morepeople that want to sell the stock, the lower the price will be This form of valuation

is very hard to understand or predict, and it often drives the short-term stock markettrends

In short, there are many different ways to value stocks The key is toconsider each approach while formulating an overall opinion of the stock Look ateach valuation technique and ask yourself why the stock is valued this way If it islower or higher than other similar stocks, then try to determine why Andremember, a great company is not always a great investment Here are the basicvaluation techniques:

Earnings per Share (EPS)

EPS is the total net income of the company divided by the number of sharesoutstanding They usually have a GAAP EPS number (which means that it iscomputed using all of mutually agreed upon accounting rules) and a Pro Forma EPSfigure (which means that they have adjusted the income to exclude any one timeitems as well as some non-cash items like amortization of goodwill or stock optionexpenses) The most important thing to look for in the EPS figure is the overallquality of earnings Make sure the company is not trying to manipulate their EPSnumbers to make it look like they are more profitable Also, look at the growth inEPS over the past several quarters / years to understand how volatile their EPS is,and to see if they are an underachiever or an overachiever In other words, havethey consistently beaten expectations or are they constantly restating and loweringtheir forecasts?

The EPS number that most analysts use is the pro forma EPS To computethis number, use the net income that excludes any one-time gains or losses andexcludes any non-cash expenses like stock options or amortization of goodwill.Then divide this number by the number of fully diluted shares outstanding Bydoing your fundamental investment research, you will be able to arrive at your ownEPS forecasts, which you can then apply to the other valuation techniques below.

Price to Earnings (P/E)

Now that you have several EPS figures (historical and forecasts), you will

be able to look at the most common valuation technique used by analysts, the price

to earnings ratio, or P/E To compute this figure, take the stock price and divide it

by the annual EPS figure For example, if the stock is trading at $10 and the EPS is

$0.50, the P/E is 20 times To get a good feeling of what P/E multiple a stock trades

at, be sure to look at the historical and forward ratios

Historical P/Es are computed by taking the current price divided by the sum

of the EPS for the last four quarters, or for the previous year You should also look

at the historical trends of the P/E by viewing a chart of its historical P/E over thelast several years Specifically you want to find out what range the P/E has traded in

so that you can determine if the current P/E is high or low versus its historicalaverage

Forward P/Es are probably the single most important valuation methodbecause they reflect the future growth of the company into the figure Andremember, all stocks are priced based on their future earnings, not on their pastearnings However, past earnings are sometimes a good indicator for futureearnings Forward P/Es are computed by taking the current stock price divided bythe sum of the EPS estimates for the next four quarters, or for the EPS estimate fornext calendar of fiscal year or two Also, it is important to remember that P/Eschange constantly If there is a large price change in a stock you are watching, or ifthe earnings (EPS) estimates change, be sure to recompute the ratio

Growth Rate

Valuations rely very heavily on the expected growth rate of a company Forstarters, you can look at the historical growth rate of both sales and income to get afeeling for what type of future growth that you can expect However, companies areconstantly changing, as well as the economy, so don't rely on historical growth rates

to predict the future, but instead use them as a guideline for what future growthcould look like if similar circumstances are encountered by the company Tocalculate your future growth rate, you will need to do your own investmentresearch The easiest way to arrive at this forecast is to listen to the company'squarterly conference call, or if it has already happened, then read a press release orother company article that discusses the company's growth guidance However,remember that although company is in the best position to forecast their owngrowth, they are not very accurate, and things change rapidly in the economy and intheir industry So before you forecast a growth rate, try to take all of these factorsinto account

In addition to any valuation technique, you really want to look at a range offorecast values For example, if the company you are valuing has been growingearnings between 5 and 10% each year for the last 5 years but suddenly thinks itwill grow 15 - 20% this year, you may want to be a little more conservative than thecompany and use a growth rate of 10 - 15% Another example would be for acompany that has been going through restructuring They may have been growingearnings at 10 - 15% over the past several quarters / years because of cost cutting,but their sales growth could be only 0 - 5% This would signal that their earningsgrowth would be probably slow when the cost cutting has fully taken effect.Therefore, you would want to forecast earnings growth closer to the 0 - 5% ratethan the 15 - 20% The point is that you really need to use a lot of gut feel to make aforecast That is why the analysts are often inaccurate and that is why you shouldget as familiar with the company as you can before making these forecasts

Assuming that two stocks have the same earning growth, the one with a lowerP/E is a better value The P/E method is perhaps the most commonly used valuation

in the stock brokerage industry By using comparison firms, a target price /earningsratio is selected for the company, and then the future earnings of the company areestimated The valuation’s fair price is simply estimated earnings times target P/E.

P/B ratio

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare acompany's book value to its current market price Book value is an accounting termdenoting the portion of the company held by the shareholders; in other words, thecompany's total tangible assets less its total liabilities The calculation can beperformed in two ways, but the result should be the same each way In the first way,the company's market capitalization can be divided by the company's total bookvalue from its balance sheet The second way, using per-share values, is to dividethe company's current share price by the book value per share (i.e its book valuedivided by the number of outstanding shares)

As with most ratios, it varies a fair amount by industry Industries that requiremore infrastructure capital (for each dollar of profit) will usually trade at P/B ratiosmuch lower than, for example, consulting firms P/B ratios are commonly used tocompare banks, because most assets and liabilities of banks are constantly valued at

market values A higher P/B ratio implies that investors expect management to

create more value from a given set of assets, all other things equal (and/or that themarket value of the firm's assets is significantly higher than their accounting value).P/B ratios do not; however, they directly provide any information on the ability ofthe firm to generate profits or cash for shareholders

This ratio also gives some idea of whether an investor is paying too much forwhat would be left if the company went bankrupt immediately For companies indistress, the book value is usually calculated without the intangible assets thatwould have no resale value In such cases, P/B should also be calculated on a

"diluted" basis, because stock options may well vest on sale of the company orchange of control or firing of management

It is also known as the market-to-book ratio and the price-to-equity ratio(which should not be confused with the price-to-earnings ratio), and its inverse iscalled the book-to-market ratio.

1.2.4.2 Models used to analyze business conditions of one company

Industry life cycle

Diagram 1.5 Industry life cycle

Any business is constantly in seeking ways to grow future cash flows bymaximizing revenue from the sale of product and services Cash flows allow acompany to maintain viability, invest in new product development and improveworkforce; acquire additional market share and become a leader in its respectiveindustry

A consistent and sustainable cash flow (revenue) stream from product sales

is key to any long-term investment, and the best way to obtain a stable revenuestream is a cash cow product, leading products that command a large market share

in mature markets

In addition, industry life cycles are becoming shorter and shorter andmany products in mature industries revitalized by product differentiation andmarket segmentation Organizations increasingly reassess product life cycle

MaturityGrowth

Decline Introduction

costs and revenues as the time available to sell a product and recover theinvestment in it shrink

Even as product life cycles shrink, the operating life of many products islengthening For example, the operating life of some durable goods, such asautomobile and appliances, has increased substantially This leads the companiesthat produce these products to take their market life and service life to account whenplanning Increasingly, companies are attempting to optimize life cycle revenue andprofits through the consideration of product warranties, spare parts, and the ability

to upgrade existing products

It is clear the concept of life cycle stages has a significant impact uponbusiness strategy and performance The product life cycle method identifies thedistinct stages affecting sales of product, from the product’s inception until itsretirement

In the introduction stage, the product is introduced to market through afocused and intense marketing effort designed to establish a clear identity andpromote maximum awareness Many trial or impulse will occur at this stage Nest,consumer interest will bring about the Growth stage, distinguished by increasingrevenues and emergence competitors The Growth stage is also characterized bysustaining marketing activities on the vendor’s side, with customer engaged inrepeat purchase behavior patterns Arrival of the product’s Maturity stage isevident when competitors begin to leave the market, sale velocity dramaticallyreduces, and sales volume reaches to steady state At this point in time, mostly loyalcustomers purchase product Continuous decline in sales signals entry into theDecline stage The lingering effects of competition, unfavorable economicconditions, new fashion trends often explain decline in sale

Porter five-force model

Porter's five forces is a framework for the industry analysis and businessstrategy development developed by Michael E Porter of Harvard Business School

in 1979 It draws upon Industrial Organization (IO) economics to derive five forcesthat determine the competitive intensity and therefore attractiveness of a market.Attractiveness in this context refers to the overall industry profitability An

"unattractive" industry is one in which the combination of these five forces acts todrive down overall profitability A very unattractive industry would be oneapproaching "pure competition", in which available profits for all firms are drivendown to zero

Three of Porter's five forces refer to competition from external sources Theremainders are internal threats It is useful to use Porter's five forces in conjunctionwith SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats)

Porter referred to these forces as the micro environment, to contrast it with themore general term macro environment They consist of those forces close to acompany that affect its ability to serve its customers and make a profit A change inany of the forces normally, requires a business unit to re-assess the marketplacegiven the overall change in industry information The overall industry attractivenessdoes not imply that every firm in the industry will return the same profitability.Firms are able to apply their core competencies, business model or network toachieve a profit above the industry average A clear example of this is the airlineindustry As an industry, profitability is low and yet individual companies, byapplying unique business models, have been able to make a return in excess of theindustry average

Porter's five forces model includes three forces from 'horizontal' competition:threat of substitute products, the threat of established rivals, and the threat of newentrants; and two forces from 'vertical' competition: the bargaining power ofsuppliers and the bargaining power of customers

This five forces analysis is just one part of the complete Porter strategicmodels The other elements are the value chain and the generic strategies

The five forces

Diagram 1.6 Porter’s five forces

The threat of the entry of new competitors

Profitable markets that yield high returns will attract new firms This results inmany new entrants, which eventually will decrease profitability for all firms in theindustry Unless the entry of new firms can be blocked by incumbents, the abnormalprofit rate will fall towards zero (perfect competition)

The existence of barriers to entry The most attractive segment is one inwhich entry barriers are high and exit barriers are low Few new firms can enter andnon-performing firms can exit easily

Economies of product differences

Brand equity

 Switching costs or sunk costs

 Capital requirements

 Access to distribution

 Customer loyalty to established brands

 Absolute cost advantages

 Learning curve advantages

 Expected retaliation by incumbents

 Government policies

 Industry profitability; the more profitable the industry the more attractive

it will be to new competitors

The intensity of competitive rivalry

For most industries, the intensity of competitive rivalry is the major

determinant of the competitiveness of the industry

 Sustainable competitive advantage through innovation

 Competition between online and offline companies

 Level of advertising expense

 Powerful competitive strategy

 The visibility of proprietary items on the Web

The threat of substitute products or services

The existence of products outside of the realm of the common product boundaries increases the propensity of customers to switch to alternatives:

 Buyer propensity to substitute

 Relative price performance of substitute

 Buyer switching costs

 Perceived level of product differentiation

 Number of substitute products available in the market

 Ease of substitution Information-based products are more prone to substitution, as online product can easily replace material product

 Substandard product

 Quality depreciation

The bargaining power of customers (buyers)

The bargaining power of customers is also described as the market of

outputs: the ability of customers to put the firm under pressure, which also affects the customer's sensitivity to price changes

 Buyer concentration to firm concentration ratio