PHÂN TÍCH TÌNH HÌNH tài CHÍNH và xác ĐỊNH GIÁ TRỊ cổ PHIỂU CÔNG TY CP ELCOM e

Vision ELCOM is oriented to be the leading company providing software, systems integration for telecommunications operators, and exclusive system products to serve state agencies and en

PHÂN TÍCH TÌNH HÌNH TÀI CHÍNH VÀ XÁC ĐỊNH GIÁ TRỊ CỔ PHIỂU CÔNG TY

CP ELCOM

ANALYSING FINANCIAL SITUATION AND EVALUATING STOCK PRICE OF

ELCOM JOINTSTOCK COMPANY

Opening words

Finance is always one of the most important functions to any enterprise Analyzing its financial situation is one of the important jobs that the enterprise managers should do seriously, regularly and accurately This can help point out the limitations in activities of the enterprise, then propose adjustments, changes, or modifications to overcome these difficulties, especially in the current difficult period

With the desire to apply the knowledge learned in the subject of corporate finance, together with the hope to find solutions for overcoming the company limitations, our team has selected the case of Electronics Communications Technology Investment Development Corporation (Elcom) to be analysed in our group assignments

We would like to thank Dr Nguyen Huu Anh, who has provided us with invaluable knowledge in the subject

Due to the time limitation, our theoretical study as well as investigation techniques cannot perform as well as expected The report, therefore, contains limitations and shortcomings We hope to receive criticisms and comments from you and other readers The assignment consists of three parts:

1 Introducing ELCOM

2 Analyzing ELCOM financial situation and proposing solutions to improve it

3 Analyzing the value of the ELCOM stock

and the Appendix for reference

I ELCOM Profile

Electronics Communications Technology Investment Development Corporation (ELC), formerly the Investment and Development Electronic Technology – Telecommunications Company Ltd., was founded in 1995 The company was transferred into a joint-stock company with a charter capital of 10 billion VND It has increased to 293 billion VND now

ELCOM has a branch in HCM City, two subsidiaries: ELCOM soft (100%) and ELCOM Industry (99.45%); and two associated companies ELCOM tech (40%) and El soft (30%) countrywide ELCOM tech operates mainly in the fields of high technology applications and El soft operates software applications

ELCOM is now the number-one Vietnamese supplier of telecommunications products and services for operators, interactive TV system and integration phone for organizations and businesses

Vision

ELCOM is oriented to be the leading company providing software, systems integration for telecommunications operators, and exclusive system products to serve state agencies and enterprises in Vietnam

Strategy

+ Distributing equipments and telecommunications systems

- To maintain the leading position on the provision of products and services for telecommunications operators, and focus on traditional customers: Vinaphone, Viettel, Vietnammobile

- Upgrade Core and Vas service systems to increase service quality and meet the needs of enlarging the number of subscribers by Vinaphone, Mobiphone, Viettel, Vietnammobile, Gtel

- Promote the provision of related services including installation, maintenance, and warranty for not only customers who imported ELCOM products but also the new ones who don’t buy products from ELCOM

+ Software Development and System Integration.

- ELCOM define this as one of the strategies of revenue-generating and enhancing the company prestige in the telecommunications market It focuses on developing its value added services (VAS) with specification of 3G technology newly-developed in Vietnam

- Developing solutions to serve end-users through its partnership with operators to share the total sales

Business Scope:

Telecommunications:

- Distributing telecommunications equipment and technology systems: ELCOM

is the company which imports and supplies core systems and value-added services for mobile phones, transmission and network access equipments, switchboard and original equipments for operators including Vinaphone, Viettel, Mobifone, VietnamMobile and Gtel

- This is the main business of ELCOM with high contribution of revenues Its profit margin is about 20-30% of the turnover

- Integrating telecommunications systems: In addition to the distribution of

telecommunication devices, ELCOM constructs and designs overall, including providing hardware equipments and software solutions in the areas of telecommunications, interactive television, computer & telephony integration

- Thanks to being the master of core technologies in the field, ELCOM is fully active in designing and supplying integration solutions for customers who are enterprise, agencies, mobile and fixed-line operators

Production of software:

ELCOM has mastered the technology of core and provided software services in the field: (1) Interactive TV - ITV, including Video Conferencing for customers who are agencies and organizations; (2) Computer & Telephony Integration – CTI for units which are in the postal sector and enterprises which have large customer base such as banking, insurance, etc.; and (3) Value Added Services - VAS for operators This

software scope brings back very high profit margins (70%) as the costs are mainly labor costs and costs of research and development (R & D)

Industry:

- ELCOM also invests in industrial projects, including: (1) Production of new materials for the telecommunications industry, (2) Mining: ELCOM capital

contribution has been approved of copper mining in Bac Kan province with the output of about 34 thousand tons, (3) Environmental handling: ELC is holding 40% equity in the Technical ELCOM Joint-Stock Company which is a specified provider of solutions of environmental, urban lighting, and other technological applications, (4) Real Estate: a 5-hectare lot of land in Thanh Tri, Hanoi – by Ring road 3

II Financial Analysis of ELCOM

I.1 Analyzing business results

Hereby is the result of ELCOM Business Report with figures of profit and loss Table 1: Statements of profit and loss for the past 3 years and 3 rd quarter, 2011

(billion VND)

Profit/ loss from operating

Profit / loss from subsidiaries,

Sales and profits:

 ELCOM has maintained high growth speed in sales and profits in the past 3 years Particularly, sales in 2010 grew slightly comparing to it in 2009 as the company focused on completing the signed project

 However, income after tax increased from 90 billion VND in 2009 to 170 billion VND in 2010 due to the contribution of business such as services and software production, with a profit margin of up to 78%

 ELCOM sales in 2010 grow only by 7% while net profit increases by 88% due to the contribution of providing telecommunications services activities

Financial expenses:

 ELCOM financial costs are mainly reflected losses on exchange rate from account payables These are due to the company imports equipments and systems for installation for operators

 Among the total financial cost of 33.6 billion VND in 2010, the cost of losses from exchange rate differences is about 4.27 billion VND, and the rest of 5.7

Net Sales Profit form operating activities

billion VND is interest expense Exchange rate differences accounted for 14% of the company’s net profit

 In the context of high interest rates and capital costs, unlike many businesses, ELCOM business model is mainly service-based This allows ELCOM to be free from the need of large capital investment Therefore, interest expense primarily comes from short-term loans which are to implement projects for the customers

Corporate Income Tax:

 ELCOM is now taking two tax rates for its two different services In terms of commerce and technical services, the applicable tax rate is 25% Corporate income tax on the profit from software services is 5%

a. Analysis of sales and profits

Currently, 84% of ELCOM sales come from the activities of distributing telecommunications products and services Software created and produced by ELCOM is contributing around 14% of the total revenue

Revenue structure:

 The distribution of goods and services, including telecommunications systems and equipments, accounted for 86% of total sales in 2010 43% of this comes from support services revenue (including technical support, consulting, maintenance, etc.)

 Systems and software created and produced by ELCOM accounted for 14% of sales in 2010

Gross margin by sector:

 In the three sectors, the one of manufacturing and selling software ELCOM-made bring back the highest rate of gross margin, up to 78% in 2010 (See Table 3) According to financial statements of the company, costs of research and development for software products were recorded in the previous year due to these projects’ specification of research and development

 Activities of import and distribution of telecommunications products have gross margins of averaging 25% over the years According to the company orientation, the company will continue to maintain this rate of gross margin in the years ahead, together with the development and expansion investment of telecommunications operators

New material products

 This business is carried out by New Material Technology Company, which is owned 99.45% by ELCOM ELCOM has invested 35.5 billion in the company shares and it is still in the time of losses due to its activities of further study the production of products

Table 2: Revenue and profit in business/ product

Distribution of telecommunications

equipment

Distribution of telecommunications

equipment

-Returns on investment

Distribution of telecommunications

equipment

Source: Calculation form ELCOM financial statements

Approximately 80% of ELCOM revenue comes from three mobile operators – Mobifone, Vinaphone, and Viettel They have strong financial resources and low-risk loans

b Analysis of market of customers

To understand and identify the limitations of the financial activities of ELCOM, we need a market analysis of ELCOM customers.

Markets and customers of ELCOM:

 ELCOM’s customers include four main groups: (1) mobile and fixed telecommunications operators, (2) central and local government, (3) agency of security and defense, (4) the business sector including units with large retail customers or with demand of conferencing system

Table 3: Structure of revenues by customers

(*)EVN Telecom counted for 10%

Source: ELCOM

Structure of sales by customer:

 ELCOM’s three major customers are Mobifone, Vinaphone, and Viettel who account for 84% of its total sales in 2009 and 78% in 2010 from the provision of equipments, value-added systems and supporting telecommunications services

 Other clients of ELCOM mainly use equipments and video conference systems, systems of management solutions and customer care

 In 2010, ELCOM has expanded its operations into the power industry by joining

to deploy telecommunications systems for the Electricity Vietnam Telecommunications (EVN Telecom) through a contract with total value of over

70 billion VND

 Risk focuses on a number of major clients:

 Although all of ELCOM’s major customers have their financial strength and fast growth However, as about 80% of ELCOM revenue from the three major operators – Mobifone, Vinaphone and Viettel, there would be a customer credit risk which can affect the volatility of ELCOM’s business model

I.2 Analysis of Balance Sheet: Structure of assets, capital

Below is a shortened Balance Sheet:

Table 4: Balance Sheet (shortened, counted in billion VND)

Short-term liabilities 581 607

Structure of assets:

 ELCOM’s total assets have increased by an average rate of about 60% within three years and reached 1.060 billion on September 30th, 2011

 As its business model is mostly to import telecommunications products and produce related software, ELCOM assets are mainly presented in liquid assets, including account receivables and projects, and inventory, which is caused by the fact that equipments and telecommunications systems are in the process of implementation

 ELCOM’s total assets increased by an average of 60% in three years

 The highest of ELCOM’s account receivable is 528 billion VND, which accounts 50% of its total assets The company’s AR is mainly from its customers

 Inventory is 82 billion VND, accounting for nearly 8%

Account receivable:

 ELCOM’s customer receivables was quite large, approximately 448 billion VND

on March 31st, 2011, accounting for 59% of the company total revenue in 2010, and increased to 528 billion VND on September 30th, 2011, accounting for 50% of the total asset value This is a large proportion which must be carefully studied and

scrutinized As ELCOM’s reports, these account receivables primarily reflect those from operators’ 500-billion-VND-worth 30M project (30 million subscribers) The project was implemented from late 2010 and is expected to completed and inspection-tested in 2011

Payables for sale (443 billion VND on December 31 st , 2010)

 The company imports equipments and telecommunications systems from global groups of telecommunications equipments in the world as America’s Comverse, Nokia Simens Network, Celltick, IBM, etc

 Due to its policies for these providers which are to balance the accounts of payable for sale, account receivables following project progress, cash flow pressure is not great

 However, due to being paid in foreign currency to USD, ELCOM takes quite large exchange rate risk The cost of the exchange rate was around 27.4 billion VND in 2010

Inventory (160 billion VND on March 30 th , 2011):

 In service contracts which are being implemented, ELCOM inventory is mainly equipments and systems transferred to customers in progress (80 billion VND), inventory for the next projects (50 billion VND), and the deployment costs of ELCOM (19 billion VND)

 As ELCOM can well-balance between the use of capital tie-up and customer receivables, the company’s demand for loans is very low Debt/ Equity ratio is around 0.16 on March 31st, 2011

 ELCOM is now borrowing short-term foreign currency primarily from Military Bank, with a floating rate calculated after interest rate on 12-month savings deposit + a margin of about 1.7%/year Interest rate on savings deposit in 12 months is about 6%/year, so the current average capital cost for ELCOM’s foreign currency loans is about 7.7%/year

 ELCOM has a high security borrowed-capital structure The company can balance their capital turnover between customer receivables and suppliers payables

However, ELCOM has to face the risk of exchange rate as supplier payables are mainly in foreign currency

Long-term assets

 Long-term assets account for 275 billion VND, equivalent to 26% of the total assets

 However, the proportion of long-term financial investments is so high, 86.7 billion VND/ 167.6 billion VND, in sectors of banking, real estate, and pharmaceuticals

 As ELCOM currently owns a low investment cost real estate, mainly licensing and land clearance, its book value cannot reflect the real value of the company assets

 The lot of land in Thanh Tri District has a total area of 5 hectares, locating near the Hanoi’s third ring road It has a total investment costs of 30 billion VND recorded

on December 31st, 2010

I.3 Financial indicators

Capital efficiency:

 In the current context in which capital costs increase, ELCOM is one of the few listed companies can maintain high capital efficiency indexes Average return on capital employed (ROCE) of ELCOM in the past 3 years is 28% This is two times higher than the average of nearly 700 other companies listed on HOSE and HNK

Table 5: Financial Indicators of ELCOM

Liquidity

Working capital efficiency

Capital structure

Capital efficiency