CORPORATE FINANCE ASSIGNMENT FINAL REPORT

Some phenomena arising on stock market are listed as failure to fully disclose information to investors, information leakage without permission to publish, defraud, unfair information di

FACULTY OF EXTERNAL ECONOMICS

CORPORATE FINANCE ASSIGNMENT FINAL REPORT

Group Members:

Nguyễn Anh Dũng

Nguyễn Duy Hải

Hồ Thị Hằng

Nguyễn Thị Thùy Linh

Nguyễn Phương Ly Ly

Nguyễn Hương Ly

Hoàng Mai Ngân

Trịnh Minh Thu

Hanoi – November 16, 2011

I AGENCY PROBLEMS 1

1 DEFINITION AND CLASSIFICATIONS 1

2 SPECIFIC CASES 1

3 CAUSES AND SOLUTIONS 4

II THE RELATIONSHIP BETWEEN FINANCIAL MARKET AND CORPORATE FINANCIAL MANAGEMENT 5

1 IN 2007 5

2 IN 2008 6

3 IN 2009 7

4 IN 2010 8

III RISK AND PROFITABILITY 9

1 RISK 9

2 PROFITABILITY 13

I AGENCY PROBLEM

1 DEFINITION AND CLASSIFICATION

1.1 Definition

Agency problem indicates the conflicts of interest arising between shareholders and managers because of differing goals.

In theory, shareholders, who are the real owners of a company, should have the obligation to run the whole business However, uniting thousands of shareholders to make any decision is absolutely difficult In reality, real control of the companies belongs

to directors who are authorized to manage the companies and generate benefits for both sides However, this power authorization proves to induce the separation in ownership and management rights of an enterprise In many cases, managers may pursue their own benefits without taking shareholders’ interest into account (Sometimes, the conflicts are not restricted to stockholders and managers only, but creditors may also get involved However, we would like to concentrate on the shareholder-manager conflicts in the scope

of our report)

1.2 Classification

Agency problem is divided into three main types, namely asymmetric information,

risk incentives and foregone growth opportunities In this report, we would go into the

depth of informational asymmetry Asymmetric information is a situation in which

outsider investors have less information about the company's risk and profitability compared to insider managers Some phenomena arising on stock market are listed as failure to fully disclose information to investors, information leakage without permission

to publish, defraud, unfair information disclosure to investors, late submission of financial reports, etc Among the listed phenomena, information disclosure and late submission of financial reports will be deeply discussed

2 SPECIFIC CASES

2.1 Analysis of specific cases of agency problem

In this part, we will focus on asymmetric information, which is one of the most popular types of agency problem With regard to this, we would like to mention two

kinds of activities that lead to asymmetric information: late submission of financial

reports and violation of information disclosure in stock transactions.

Firstly, let us take a look at some typical cases

a) Case 1: Mr Le Van Loi, Chairman cum General Director of Thong Nhat Rubber JSC (HOSE: TNC) submitted financial reports later than the specified date of December 10, 2010

Normally, if everything goes right, every manager would submit financial reports punctually to avoid being fined (unless the company is allowed to extend the report deadline according to Accounting Code No 03/2003/QH11 on June 17, 2003) As usual,

it is only when the company has been meeting with tense problems that their financial reports cannot be publicized on time In such cases, the Chairman may have figures properly fixed before publicizing them to shareholders, otherwise the company’s reputation may be badly injured leading to investors mass-withdrawing their capital

b) Case 2: Ms Nguyen Thu Phuong – member of Control Board of Vinpearl Company (HOSE: VPL), bought 2000 VPL shares from 23/12/2008 to 31/12/2008 but did not disclose information Therefore on 6 January, 2009, Ho Chi Minh Stock Exchange requested her to make explanation for that breach

This case is very popular on Vietnamese financial market As an internal shareholder,

Ms Phuong might have had some confidential information about VPL shares and decided

to benefit herself For example, when she learnt that the share price was expected to increase in the next month, she would buy 2000 shares with a view to reselling them in the future However, she did not disclose information about this transaction, because when other shareholders heard about it and massively bought in (“the crowd effect”), the share price would be pushed up to much higher a level than it had been expected to be 1 month ago As a result, she could not resell them to anyone

In short, late submission of financial reports and information violation in stock transactions would make benefit for managers on one hand, but affect shareholders’ interest on the other hand and hurt their trust in management of the company

2.2 Comments

In fact, Ms Phuong’s violation is only “one in a million” on Vietnam stock market Out of 8 companies assigned to our group, up to 6 companies reported similar cases (in fact, managers not only benefited themselves but sometimes revealed internal

information to their relatives also) These following tables would summarize such violation during the last 4 years:

Company Date Case Summary

TTP 29/11/2007

Mr Huynh Thanh Khang - member of Control Board sold 2000 TTP shares but did not disclose information

On 18/12/2007, HCM Stock Exchange sent official dispatch to request him to explain

TNC From 25/09/2008

to 21/10/2008

Mr Nguyen Nhat Thanh Lam – member of Control Board bought 7,000 TNC but did not disclose information On 22/10/2008, HCM Stock Exchange sent the official documents No 2152/SGDHCM-GS, requesting him to make explanation for the breach

VPL From 25/12/2008

to 31/12/2008

Ms Nguyen Thu Phuong – member of Control Board bought 2000 VPL shares but did not disclose information On 06/01/2009, Ho Chi Minh Stock Exchange requested her to make explanation for that breach

Company Date Case Summary

TTP 27/04/2009

Ms Nguyen Huu Thanh Tam (younger sister of Ms Nguyen Thi Huu Thuy - member of BOD) sold 3000 TTP shares but did not disclose information HCM Stock Exchange sent official dispatch to request her to explain

CII

From 26/04/2010

to 20/05/2010 From 07/05/2010

to 19/05/2010

Mr Le Minh Chau (younger brother of Mr Le Quoc Binh, CFO cum General Accountant) bought 2,140 CII shares but did not disclose information

Mr Le Minh Chau sold 1,040 CII shares but did not disclose information Ho Chi Minh Stock Exchange requested her to make explanation for that breach

ALP 28/07/2010 Ms Nguyen Thi Thanh Van (sister of Mr Nguyen

Quang Huy - member of BOD) sold 53,180 ALP

shares but did not disclose information The Chairman

of the State Securities Committee charged an administrative penalty (VND 20 million) on for Ms Van for that violation

HLA 20/12/2010

Ms Tran Uyen Nhan (daughter of Mr Tran Xao Co -Chairman of BOD) bought 100.000 HLA shares without disclosing information HCM Stock Exchange sent official dispatch to request her to explain

All things considered, it can be concluded that violation of information disclosure has

become a phenomenon on Vietnam financial market nowadays Thus what are the

causes and solutions to that kind of agency problem?

3 CAUSES AND SOLUTIONS

3.1 Causes

There are two main reasons why information violation has been so popular on Vietnam stock market in recent years

Firstly, too many transactions to supervise is really a hard-cracking problem Thousands of transactions each day are really a huge workload, thus it is easy to understand why the Stock Exchange Department ( SED ) cannot carefully supervise the action of every individual on the stock market Hence, businesses tend to backslide their violation activities again and again

Secondly, the lack of strict punishment also ranks an equal place in the essence Up to

2011, the maximum fine for not disclosing information just stands at 70 - 80 million VND only - too small compared to the profits violators have already earned Moreover, the SED has not imposed fines immediately after an enterprise was charged with information violation, thus, fails to deter businesses We can take the case of Ninh Hoa Sugar JSC (HOSE: NHS) for an example In July 2010, NHS did not submit the semi-annual reports on the specified date, but it was not until August 2011 that the Securities Committee decided to charge a fine on them

3.2 Solutions

Corresponding to the above-mentioned two causes, we would like to recommend two solutions

Firstly, the government should implement stricter punishment to prevent those violations Recently, the State Securities Committee has intended to introduce a new circular to replace the one in 9/2010, which shows their determination to minimize such violation

Secondly, setting up credibility charts for listed companies is another method that has been popularly applied in many countries (Fitch, Moody’s, Standard & Poor’s, etc are some typical examples) These charts would rank enterprises’ operation every year, thus serving as a base for banks and investors throughout their decision-making processes Therefore, if companies expect to gain more bank loans or mobilize capital from shareholders, they should maintain their credibility marks by working effectively and publishing all the information on time

II THE RELATIONSHIP BETWEEN FINANCIAL MARKET AND CORPORATE FINANCIAL MANAGEMENT

1 IN 2007

1.1 Financial market situation

In 2007, the dramatic growth in Vietnam’s economy brought about a boom in stock market The increase in the number of equitized enterprises led to a sharp rise in the market capitalization of shares Vietnam financial market, therefore, developed actively

on the base of the economic growth rate at 8.5% in the past year

1.2 Corporate financial management

Having benefited from the boost in Vietnam’s financial market, many companies had their shares quoted on the stock market in 2007 Some typical examples are Alphanam JSC (ALP), Khanh Hoa Electricity JSC (KHP), Thong Nhat Rubber JSC (TNC) and Tan Tien Plastic Packaging JSC (TTP) During this year, many corporations also made dividend payment in form of stock dividend and continued to issue additional shares to increase their chartered capital Let us take a look at ALP for an illustration

Company Date Financial Management Reasons ALP 7/10/2007 - Decided the form of dividend payment: When the economy

stock dividend at the rate of 30%.

- Decided to issue 6 million additional shares to strategic partners, so that the company's chartered capital would increase from 300 billion VND to 450 billion VND early in 2008

was developing sharply, the company aimed to increase its chartered capital for operating activities,

generating as much profit as possible 12/12/2007

Listed on HASTC with 30,000,000 shares on the first day of transaction at

Ho Chi Minh Stock Exchange

2 IN 2008

2.1 Financial market situation

In 2008, the global economic crisis had negative influences on Vietnam economy as a whole The stock market growth rate decreased sharply by 65.9%, and the economy was dominated with gallop inflation, namely 22%

At the first quarter of 2008, share prices were susceptible to a downward trend, which caused investors to lose faith in the stock market Despite some good signs from the macro-economy in the middle of the year, VN Index was still terribly stricken by the financial crisis Share prices had a tendency to decline in the long run To make it worse, foreign investors massively withdrew capital from Vietnam, darkening the gloomy picture of the whole economy

2.2 Corporate financial management

As an essential result of the financial crisis, nearly all Vietnamese firms underwent extremely low investment efficiency Instead of investing in economic projects, managers tended to use cash to pay dividends so as to stabilize shareholders’ psychology In addition, companies also preferred safer financial activities such as investing in fixed assets and buying redeemable shares

Company Date Financial

Management Reasons PAC 17/01/2008 Issued 3 million shares - Making more investments in fixed

assets (plants, machines, etc.) proved 14/07/2008 Paid stock dividend

(1.5 million shares) at

the rate 10/1

to be wiser than in stocks or real estates at that time

- Buying back redeemable shares

19/09/2008 Bought back 300,000

redeemable shares

The sales of stocks increased PAC’s chartered capital by 38% in 2008, and the company decided to buy a new technological production line to improve their current efficiency Moreover, by using stock dividend, PAC also succeeded in maintaining cash reserve to expand production and invest in new projects such as PINACO factory in Nhon Trach

3 IN 2009

3.1 Financial market situation

In 2009, Vietnam government issued a stimulate package valued at 143.000 billion VND Real interest rate decreased from 10% to 7% in February 2009, and the stock market began to show signs of gradual improvement The financial market started to recover and share prices began to increasing steadily

However, for fear of inflationary risk and changeable monetary policies, the stock market still showed some bad signs Rising gold prices, fluctuating exchange rates and trade deficit posed noticeable threats to the whole financial market Stock prices faced with non-stop fluctuations during the year

3.2 Corporate financial management

When the crisis seemed to show signs of recovery, firm managers wanted to mobilize capital to reinvest in their business activities Therefore, some companies issued additional shares and sold redeemable stocks to maintain cash reserve, which would be used to invest in plants and machinery to improve production efficiency, expand production scale and invest in new projects

Company Financial Management Reasons

HLA - Tried to increase chartered

capital by issuing 3.8 million

primary stocks

- Carried out the plan of

- At this period, the government tried to back up the economy after the crisis, therefore, many stimulating policies were applied

building a new steel factory,

valued at 1000 billion VND

- The company tried to expand its scale by issuing more stocks and building plants to make gradual recovery

4 IN 2010

4.1 Financial market situation:

In 2010, the world economy showed signs of cautious and steady improvement The world financial market began to stabilize after the public debt crisis in Greece In Vietnam, however, the exchange rate USD/VND considerably fluctuated Although the domestic stock market received a huge sum of newly-supplemented listed stocks, there still remained high risk of gallop inflation, which led gold prices to sky-rocket

4.2 Corporate financial management

On receiving good signs from the financial market, corporations kept increasing their business scale by listing supplemented stocks, issuing shares and bonds and continuing to build plants as well as investing in unfinished projects.

Company Financial Management Reasons

ALP

- Signed a term sheet with Emerging Markets

Fund (GEM), in which GEM committed to

invest 30 million USD in Alphanam (in form

of shares)

- Intended to issue 200-billion worth in bonds

for Military Bank The bonds had 3-year

maturity, an interest rate of 15% / year, and

face value of 100,000 VND/bond

- Increase net working capital

- Restructure capital to balance the debt/equity ratio

- Enhance the efficiency of business operation of the company

III RISK AND PROFITABILITY

1 Risk

Through analyzing liquidity and leverage ratios of 8 assigned companies, we would like to divide them into 3 main groups

a) Group 1: Companies with high liquidity ratios but low leverage ratios (TNC, TTP)