Professional Documents
Culture Documents
May 2014
DHG Peer
Chỉ index
số nhóm công ty cùng ngành VNIndex
Current Price (5/15/2014) VND 117,000
100%
Target Price VND 130,500 VN-Index
80%
Bloomberg ticker: DHG VN Exchange: HSX
Industry: Pharmaceuticals 60%
Year
Cash dividend
EPS We initiate coverage DHG Pharmaceutical JSC (DHG) with a
(VND/share) long-term BUY recommendation based on the following:
2013 3,500 9,010
DHG is currently the market leader among the local
2012 2,000 7,443
pharmaceutical companies in Vietnam.
2011 4,000 6,382
DHG’s main products include generics in the antibiotics and
Ratio DHG Peer VNI
pain-reliever categories, which together accounted for 57% of
2014 P/E 11.1x 13.9x 12.0x
the company’s sales of in-house products in 2013. DHG’s
2014 P/B 3.1x 3.4x 2.0x
extensive distribution network covers all 64 cities and
Debt / Equity 9.0% 19.1% 97.6% provinces of Vietnam and serves over 20,000 customers. In
Profit margin 16.7% 10.8% 9.9% 2014, the company’s annual capacity doubles to 9.6 billion
ROE 21.7% 22.0% 14.8% units thanks to their factories in Can Tho City. From 2009 to
ROA 32.1% 13.4% 3.4% 2013, DHG’s revenues and net profits achieved CAGRs of 19%
and 13%, respectively. DHG’s profit margin, ROE and ROA are
Company description: consistently among the highest in the industry.
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CONTENTS
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INDUSTRY OVERVIEW
PHARMACEUTICAL TRENDS IN ASIAN MARKETS
Along with other macro Asia’s pharmaceutical sector has been expanding rapidly and in line with the region’s
trends, rises in incomes strong economic growth and demographic changes, especially in countries
across Asia has contributed
belonging to the Association of Southeast Asian Nations (ASEAN). Several dominant
significantly to the increase
in healthcare spending within macro trends, such as rising household incomes, increased government expenditure
the regional countries. on healthcare, higher life expectancies and consumer health-awareness, have all
boosted demands for pharmaceutical products in the region. According to the
Economist Intelligence Unit (EIU), regional pharmaceutical sales doubled from
USD97 billion in 2001 to USD214 billion in 2010, and will reach USD386 billion by
2016, reflecting the compound annual growth rate (CAGR) of 10% for the period from
2010 to 2016.
The dramatic rise in incomes across Asia over the past ten years has contributed
significantly to the increases in healthcare spending among the regional countries.
About half of Asia still lives in rural areas, but they have greater access to
mainstream medicines and healthcare services, thanks to continual efforts made by
both the public and private sectors.
Real pharmaceutical spending per capita Healthcare spending per capita (USD)
2000 2011 2000 - 2011 CAGR
2000 – 2009 CAGR
15% 500 20%
12% 383
12% 400 16%
9% 10%
9% 278
9% 300 12%
7%
201
6% 200 8%
4%
2% 97 97 96 95
3% 2% 100 60 4%
0% 0 0%
Source: World Health Organization (WHO) Source: World Health Organization (WHO)
From 2004 to 2011, there Thanks to the positive macro catalysts mentioned above, Asia has become an
had been 653 cross-border attractive market for global pharmaceutical companies. In 2010, the Asia-Pacific
investment projects flowing
region accounted for 21% of Bayer AG’s total revenues as compared to only 10% in
into Asian countries.
1990. In addition, according to the international data provider fDiMarkets.com, there
had been 653 cross-border investment projects in Asia between 2004 and 2011 worth
a total of USD29 billion, coming from 321 companies in the pharmaceutical (70%)
and biotechnology space (30%). China was the largest recipient with 186 inward
investments, followed by India (157) and Singapore (94). Global pharmaceutical firms
have been moving into Asian countries in order to lower their production costs and
expand the research and development (R&D) base. R&D accounted for 200 projects
of the 653 cross-border investment projects mentioned above, compared to
manufacturing with 175.
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VIETNAM’S PHARMACEUTICAL SECTOR
By the end of 2012, Vietnam had a total of 183 drug makers, half of which were
manufacturers of western medicines. Vietnam’s pharmaceutical sector is
characterized by a strong reliance on the imports of both raw materials and end-
product medicines. Each year, local pharmaceutical firms have to import 90% of their
raw material needs from international suppliers such as China and India. At the same
time, Vietnam’s domestic production of drugs accounts for less than 50% of the
country’s annual consumption.
0 0% 0 0%
2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
In order to fully embrace the Based on our research, we believe that the industry landscape of Vietnam’s
long-term potentials of pharmaceutical sector is teeming with potentials. Vietnam’s expanding population,
Vietnam’s pharmaceutical
industry, the sector will have
higher levels of health awareness among the growing middle class, together with
to immediately address increased access to medicines across the country, should provide a roaring engine
several key structural for the pharmaceutical sector’s acceleration in the upcoming years. Between 2013
weaknesses. and 2018, Business Monitor International (BMI) predicted that the pharmaceutical
sector would achieve a CAGR of 16.4% in sales. Nevertheless, in order to fully
embrace the aforementioned potentials, Vietnam’s pharmaceutical sector will have to
immediately address the following structural weaknesses:
Consumers’ biases: Both local purchasers and doctors have a strong preference
for imported products. The general perception among Vietnamese consumers is
that domestic drugs are manufactured from outdated production facilities with
dismal quality control processes.
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COMPETITIVE LANDSCAPE
Notable local competitors
Market 2013
Company name Ticker capitalization revenues
(VNDbn) (VNDbn)
DHG Pharmaceutical JSC DHG 8,824 3,527
Traphaco JSC TRA 2,134 1,682
Domesco Medical Import Export JSC DMC 1,175 1,430
Imexpharm Pharmaceutical JSC IMP 984 842
OPC Pharmaceutical JSC OPC 807 564
Pharmedic Pharmaceutical
PMC 467 357
Medicinal JSC
Cuu Long Pharmaceutical JSC DCL 286 699
SPM Corporation SPM 300 448
Hatay Pharmaceutical JSC DHT 207 743
Lam Dong Pharmaceutical JSC LDP 163 463
Traphaco JSC (TRA) is the maker of traditional-medicine drugs and is known in the
market for two flagship products: Boganic (liver health) and Hoat Huyet Duong Nao
(brain health). In 2013, sales of these two products together accounted for 35% of the
company’s total revenues. TRA’s main competitive advantage is the ability to source
90% of the raw material needs from its local suppliers while other drug makers in the
same field have to rely on imported products from China.
Domesco Medical Import Export JSC (DMC)’s offerings comprise a wide range
of products, from traditional medicines and vitamins & supplements to antibiotic,
pain-killer and specialty drugs. DMC’s better known products in the markets are the
generic drugs used for treatments for diabetes and cardiovascular diseases as their
costs are 30% to 40% lower than imported products.
Imexpharm JSC (IMP)’s competitive edge lies in the fact that the company
currently owns one of the most modern and technologically advanced production
facilities in Vietnam. IMP’s main products are high-end antibiotics belonging in the
Cephalosporin and Penicillin groups. Thanks to its high-tech production facilities, IMP
is often chosen as the manufacturing contractor for many multinational
pharmaceutical companies in the world.
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THE COMPANY
COMPANY’S DESCRIPTION
DHG Pharmaceutical JSC (DHG) was founded in September 1974 under an initial
name of Pharmaceutical Enterprise No.29. In September 2004, the company changed
its name to Hau Giang Pharmaceutical JSC and was equitized with an initial
chartered capital of VND80 billion. In 2006, DHG obtained WHO GMP/GLP/GSP
qualifications, and officially listed its shares on the Ho Chi Minh Stock Exchange
(HSX) with 8 million shares outstanding by the end of that year.
Between 2007 and 2013, DHG had successfully established 18 subsidiaries, out of
which 12 served as the core distributors of DHG’s products, together with 24
representative offices and 68 pharmacies across the country. Capitalizing on this
strong distribution network, the vast majority of the company’s sales are done
through the over-the-counter channel which accounted for 89% of DHG’s drug sales
in 2013. DHG’s main products include generics in the antibiotics and pain-reliever
categories, which together accounted for 61% of the company’s sales of in-house
products in 2013.
DHG’s total assets strongly increased by 30% y-o-y in 2013 primarily because of: (1)
VND325 billion increase in gross fixed assets in connection with the construction of
two new factories at TPT Industrial Zone, and (2) VND246 billion increase in inventory
due to the stocking-up of raw materials at these new factories.
2,000 2,800
848
768
1,500 2,100 561
557
352 378 505
268
1,000 560 1,400 310
364 377 477
331 2,233
1,818
500 700 1,442 1,491
1,212
645 648 652 654 654
0 0
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Source: DHG’s audited financial statements Source: DHG’s audited financial statements
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Company name Main business activity 2013 Revenues 2013 PBT
DT Pharma One-Member Limited Trading of healthcare products VND49 billion VND2 billion
DHG Travel One-Member Limited Travel services VND73 billion VND3 billion
HT Pharma One-Member Limited Trading of healthcare products VND70 billion VND4 billion
DHG Nature One-Member Limited Manufacturing of pharmaceutical materials VND47 billion VND4 billion
CM Pharma One-Member Limited Trading of healthcare products VND69 billion VND3 billion
DHG Packaging & Printing One-Member Limited (1) Packaging & printing VND217 billion VND35 billion
Song Hau Pharma JSC (2) Trading of healthcare products VND137 billion VND9 billion
A&G Pharma One-Member Limited Trading of healthcare products VND115 billion VND4 billion
ST Pharma One-Member Limited Trading of healthcare products VND73 billion VND3 billion
TOT Pharma One-Member Limited Trading of healthcare products VND257 billion VND7 billion
TG Pharma One-Member Limited Trading of healthcare products VND44 billion VND1 billion
Bali Pharma One-Member Limited Trading of healthcare products VND58 billion VND3 billion
DHG Pharma One-Member Limited (TPT) Drug manufacturing n/a n/a
B&T Pharma One-Member Limited Trading of healthcare products VND31 billion VND0.5 billion
TVP Pharma One-Member Limited Trading of healthcare products VND36 billion VND1 billion
VL Pharma One-Member Limited Trading of healthcare products VND50 billion VND0.5 billion
DHG Nature 1 One-Member Limited 1 Manufacturing of pharmaceutical materials not in operation not in operation
DHG Packaging 1 One-Member Limited Packaging & printing in construction in construction
(1) To be dissolved in 2014; (2) DHG owns 51%
Source: DHG’s audited financial statements and VPBS’s summary
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According to the Resolution of Board of Directors dated April 28, 2014, Ms. Pham Thi
Viet Nga replaced Ms. Le Minh Hong as DHG’s CEO while Mr. Hoang Nguyen Hoc, a
representative from the State Capital Investment Corporation (SCIC), served as DHG’s
Chairman, replacing Ms. Nga.
Two of SCIC’s representatives, Mr. Hoang Nguyen Hoc and Mr. Le Dinh Buu Tri, are
serving as DHG’s Chairman and Vice-Chairman of the Board, respectively. While we
believe that Ms. Nga, DHG’s CEO will be the main driver behind the company’s
growth strategy during the next few years, it remains unclear to us as to SCIC’s exact
degree of influence on the company’s operations and policies.
BUSINESS MODEL
More than 80% of DHG’s sales and gross profits come from
in-house products
800 In-house
products
0 85%
2009 2010 2011 2012 2013
Source: DHG
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DHG’s in-house products DHG’s in-house products are the top money-earners as they were responsible for
accounted for 85% of DHG’s
85% of DHG’s revenues in 2013. Within this category, medicinal drugs contribute
net revenues in 2013.
more than 90% of the generated revenues, with food supplements and cosmetics
accounting for the remainder. The majority of drugs manufactured by DGH are
generic drugs, the production of which does not involve expensive R&D costs
required by the patent drugs that are offered by the international pharmaceutical
companies. DHG’s drugs are largely sold through the over-the-counter channel (OTC)
while sales via the ethical channel (ETC) only accounted for 11% of the total drug
revenues in 2013.
Toward the end of 2012, DHG Revenue contribution from the distribution rose from 4% in 2012 to 10% in 2013. This
had successfully transferred
shift was primarily caused by the re-classification of sales of the Eugica product line
the license of the Eugica
product line over to Mega
(i.e. cough drop) from the in-house product category to the distribution category. In
Lifescience Limited for a total 2012, sale of the Eugica product line generated approximately VND240 billion, or 8%
proceed of USD6 million. of DHG’s net revenues. Toward the end of 2012, DHG had successfully transferred the
license of the Eugica product line over to Mega Lifescience Limited for a total
proceed of USD6 million. From 2013 until 2017, DGH only manufactures and
distributes Eugica product line on a low-margin fees basis under the outsourcing
contract signed with Mega Lifescience Limited. The low margin of this activity is the
primary reason for the decline in the gross margin of the distribution segment in
2013.
DHG Travel One-Member Limited (DHG Travel), a 100%-owned subsidiary, is
primarily responsible for organizing and promoting travel services for DHG’s clients.
The business activities of this subsidiary depend to a large degree on the parent
company’s customer relation policies. Revenue generated from this segment is quite
small, contributing less than 1% of DHG’s total sales each year. Together with
promotion products, DHG Travel’s main purposes are (1) to ensure that DHG is able
to maintain long-term business relationships with its customers, and (2) to keep
DHG’s customers up-to-date with the company’s new product offerings each year.
Due to its superior revenue share and gross margin, DHG’s in-house products
contributed 98% to the company’s gross profits in 2013. The Eugica product line,
which boasts low gross margin due to the outsourcing agreement with Mega
Lifescience, was re-classified into the distribution business line at the beginning of
2013. This led to a decrease in the gross margin of DHG’s distribution activity from
7.0% in 2012 to 3.7% in 2013.
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Antibiotics and pain relievers are DHG’s top money makers
DHG’s offering portfolio comprises over 300 products. The three product categories
with the largest revenue shares are antibiotics (2013: 41% of in-house revenue), pain
relievers (20%), and respiratory (14%).
Compared to the imported drugs, DHG’s products are quite comparable in term of
quality but are sold at 20% to 30% lower in prices. In 2013, DHG’s top 12 brands
account for nearly 60% of the company’s sales of in-house products.
Sale of DHG’s top 12 brands (VNDbn) In-house sale by product category in 2013
100
Respiratory Pain relievers
12% 19%
0
DHG drugs benefit extensively Currently, Hapacol (painkiller), Klamentin (antibiotics) and Haginat (antibiotics) are
from the company’s strong DHG’s flagship products and together accounted for 42% of DHG’s in-house sale in
distribution network and from
2013. Similar to the majority of drugs manufactured by DHG, these three products
their lower pricing as
compared to imported drugs. belong in the generic category and, as such, have to compete vigorously with both
the local competitors and imported drugs. Fortunately, DHG’s drugs benefit
extensively from the company’s strong distribution network and from their lower
pricing as compared to imported drugs. In addition, the DHG brand is often
associated with high-quality products and eye-catching packaging designs, which
have helped boost sales to end-users.
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DHG’s top three products vs. similar products in the market
DHG-brands Price per unit Main APIs Competitors Competing brands Price per unit
GSK Panadol 500 VND2,500
Hapacol 500mg VND1,500 Paracetamol Domesco Dopamol 500 n/a
Sandoz-Imexpharm Temol VND500
Imexpharm Claminat 625mg VND10,800
Amoxcilin, Acid
Klamentin 625mg VND6,500 GSK Augmentin 625mg VND14,000
Clavunic
Norvatis Curam 625mg VND13,000
GSK Zinnat 500mg VND25,000
Haginat 500mg VND16,500 Cefuroxime Domesco Zinmax 500mg VND11,000
Imexpharm Zanimex 500mg n/a
Source: VPBS collected
In addition to the generic category, DHG has been making R&D investments into its
bio-products, such as Spivital, which is made from the Spirulina algae, and Naturenz,
which is made from the combination of natural components. DHG has 31% share
ownership in Vinh Hao Algae Company, which provides raw material for DHG to
produce vitamins and other various new nutrient products. Although Spivital and
Naturenz only contributed respectively 2.1% and 2.7% to DHG’s in-house sales in
2013, our analysis indicates that these two products have huge potential for growth
in the long run.
New factories at TPT Starting in 2014, DHG’s annual capacity has been doubled from 4.6 billion product
Industrial Zone will help units to 9.6 billion product units thanks to its two new factories in Tan Phu Thanh
lower DHG’s tax rates while
Industrial Zone. The new non-Betalactam factory (annual capacity of 4 billion product
doubling the company’s
annual capacity starting units) commenced operation on April 20, 2014, while the construction of the new
2014. Betalactam factory (annual capacity of 1 billion product units) is still on-going with
the estimated completion date for December 2014. This is a propitious news since
DHG’s old factories located in 288Bis Nguyen Van Cu Street, Can Tho city, had been
operating at full capacity in 2013.
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These two new factories at Tan Phu Thanh (TPT) Industrial Zone will be given
preferential tax rates for a period of 15 years (starting 2014), specifically: 0% tax rates
during the first 4 years of operation, 5% for the next 9 years and 10% of the
remaining 2 years. Starting 2014, DHG plans to shift between 60% and 80% of the
annual production output to the two new factories in order to take advantage of the
aforementioned preferential tax rates and to make use of the higher tax-deductible
depreciation costs.
In the long run, production of Betalactam and non-Betalactam drugs will be carried
out at the new factories while the old factories will only be utilized for the production
of food supplements and drugs that are made from natural ingredients.
DHG’s production complex at TPT Industrial Zone New non-Betalactam factory at TPT Industrial Zone
Both the old and the new factories are certified by the Ministry of Health (MOH) with
a GMP-WHO standard. Machinery and equipment for the new factories are primarily
purchased from the United States and Germany with the total capex investment of
approximately VND150 billion. In the long term, we expect that DHG will eventually
have to upgrade its production facilities to higher standards such as GMP-EU, EMEA
and PIC/S in order to become more competitive in both the local and international
markets.
Currently, DHG is having on-going discussions with various potential partners with
the aim to develop new production lines on the currently unused 2-hectare land plot
at the Tan Phu Thanh Industrial Zone. Nevertheless, according to DGH’s
management, no concrete agreement has been reached as of yet.
DHG’s distribution system covers all 64 cities and provinces in Vietnam and as such
is one of the company’s primary competitive edges. The company’s sales network
comprises 12 subsidiaries (DHG owned between 51% and 100%), 24 representative
offices and 68 hospital-pharmacies, serving over 20,000 distributors and wholesalers.
By the end of 2013, the company had over 1,200 sales and marketing employees,
with each employee serving on average 75,000 persons in Vietnam.
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DHG’s sales by channel DHG’s sales by region in 2013 DHG’s sales by market in 2013
OTC ETC
Export
18% 16% 11%
1%
Mekong Northern
Delta 31%
33%
DHG’s distribution coverage in Vietnam can be broken down into four geographic
regions: Northern, Central, Eastern and Mekong Delta. Since DHG is based in the
Mekong Delta, the company’s products are most popular within that region. Between
2009 and 2013, sale break-down per region has been fairly stable with Mekong Delta
and Northern regions accounting for approximately 60% of DHG’s total revenues.
Since the majority of DHG’s in-house products are generic OTC drugs, the OTC
channel unsurprisingly accounted for over 80% of DHG’s drug sales for the past three
years. This orientation is also in sync with the local consumer habit as Vietnamese
consumers prefer advice and guidance from drugstore clerks over the hassles of
obtaining a doctor’s prescription.
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Pharmacies and distributors selling DHG products typically benefit from 16% to 20%
discounts as compared to only 10% to 15% offered by other competitors. This has
undoubtedly helped DHG gain more shelf-life and shelf-spaces for their products.
In 2014 and 2015, DHG plans to spend approximately VND250 billion in order to
extend and upgrade its distribution network, comprising (1) investments in new
infrastructures (VND105 billion), (2) M&A transaction (VND91 billion) and (3)
construction of new drug warehouses (VND52 billion).
DHG’s sales through the ETC Since the beginning of 2012, DHG’s sales through the ETC channel have been
channel are being negatively experiencing setbacks due to the issuances of Circular 01/2012/TTLT-BYT-BTC and
affected by the issuances of
Circular 01/2012/TTLT-BYT-
Circular 36/2013/TTLT-BYT-BTC in 2012 and 2013, respectively. In essence, these
BTC and Circular circulars regulate the drug-bidding process in Vietnam’s stated-owned hospitals and
36/2013/TTLT-BYT-BTC. mandate the selection of the cheapest tender among bidders of the same bidding
category (e.g. GMP-WHO, PIC/S). DHG’s high-quality ETC drugs usually demand
higher prices due to their higher production costs which significantly decreases their
bid-winning chances in the ETC channel. DHG’s revenue from the ETC channel in
1Q2014 was recorded at VND69 billion, down 35% y-o-y. Nevertheless, as the ETC
channel accounted for only 11% of DHG’s drug sales in 2013, the company’s
operation, in our opinion, will not be significantly affected by these circulars.
Despite accounting for less 1% of DHG’s annual drug sales, DHG’s export channel is
linked with a wide range of countries: Moldova, Ukraine, Myanmar, Russia,
Mongolia, Cambodia, Nigeria, Laos, Singapore, Jordan, Sri Lanka and Romania. At
the moment, the company is also pursuing opportunities in Indonesia, Philippines,
Malaysia, Ghana, Ethiopia and Uzbekistan.
In the long term, we believe that these foreign markets will provide promising growth
opportunities for DHG, especially when Vietnam’s market enters a more matured
phase.
Growth prospects
Between 2009 and 2013, DHG’s net revenues consistently followed an upward trend,
recording a CAGR of 19% over that period, on par with that of the entire
pharmaceutical industry in Vietnam. Currently, according to the MOH’s statistics,
Vietnam’s pharmaceutical market is still dominated by foreign rivals as domestic
production only accounts for less than 50% of domestic consumption. As such,
Vietnamese companies still have ample opportunities to capture more market share
and customers’ trust in the upcoming year vis-a-vis the foreign players.
In addition, as previously noted, Vietnam’s pharmaceutical sector is benefiting from
the support of not just one but several positive macro trends, such as rising
household income, higher health-awareness among the middle class and an
expanding population. As DHG is the largest publicly listed pharmaceutical company
in Vietnam, we expect that the company’s growth trend will track closely with the
whole industry.
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DHG's revenue growth vs. Vietnam pharmaceutical industry's growth
Vietnam's pharmaceutical industry DHG
30%
0%
2010 2011 2012 2013
Growth challenges
Similar to the rest of the industry, we note that DHG will face the following growth
challenges in the upcoming years:
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FINANCIAL ANALYSIS
Cost analysis
DHG’s cost structure has remained fairly unchanged between 2009 and 2013 and can
be analyzed as followed:
Cost of
Selling goods Raw materials
expenses sold 52%
25% 60% Staff costs
26%
Source: 2013 audited financial statements Source: 2013 audited financial statements
Raw materials
80% of DHG’s needs of raw Input material is DHG’s main expense as raw materials constitute more than half of
materials are imported from DHG’s 2013 total production costs. 80% of the raw materials used in the production
Europe, the United States,
Turkey, China, India and
of DHG’s in-house drugs are imported from Europe, the United States, Turkey, China,
Pakistan. India and Pakistan. As such, the relative stability of VND against other foreign
currencies in the past several years have enabled the companies to better manage its
input costs.
The company’s procurement department holds substantial negotiating power thanks
to the wide array of supplier choices and from the large orders it usually places with
its suppliers. In addition, DHG’s large cash balance enables the company to pay its
suppliers well within the contract terms, which helps boost the company’s reputation
as a reliable customer.
24% 8%
18% 6%
12% 4%
6% 2%
0% 0%
DHG TRA DMC IMP OPC PMC DCL DHG TRA DMC IMP OPC PMC DCL
Source: 2013 audited financial statements and VPBS’s analysis
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The ratio of selling expense to net revenues of DHG’s local peer group was at an
average of 18% for the past three years. DHG, along with Traphaco JSC (TRA),
Imexpharm JSC (IMP) and OPC Pharmaceuticals JSC (OPC) are companies with large
and extensive distribution networks, which require higher annual expenditures to
maintain. In addition, DHG’s generous selling arrangements with its customers, while
enabling the company to generate large sale volumes, and push the company’s
selling expenses to the high end of its peer group.
DHG’s ratio of general & administration (G&A) expenses to net revenues is on par
with its domestic peer group, which averaged at 8% for the past three years.
Pharimexco JSC (DCL)’s ratio of G&A expenses to net revenues doubled from 4% in
2012 to 8% in 2013, primarily due to the large provision expense set up for the
company’s account receivables in that year.
0 0% 0%
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL
DHG’s ROE and ROA ratios Peer group’s ROE and ROA ratios in 2013
36% 36%
27% 27%
18% 18%
9% 9%
0% 0%
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL
Source: DHG’s audited financial statements and VPBS’s analysis
We noted that, during the period from 2009 to 2013, gross margin has been shrinking
slightly each year due to the overall impact of inflation and minor increases in the
global spot prices of raw materials. Nevertheless, DHG still enjoys the highest
margins compared to the peer group, which averaged at 48% and 17% for gross
margin and net margin for the past three years, higher than the performances of the
local peer groups (respectively: 40% and 9%).
In terms of return-on-equity (ROE) and return-on-assets (ROA), DHG’s figures are the
second highest in both 2012 and 2013 among the selected peer group, just behind
those of PMC. In 2013, DHG’s ROE and ROA achieved 32% and 22% versus the local
peer’s averages of 22% and 15%, respectively.
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Operational efficiencies
DHG’s cash conversion cycle (days) Peer group’s cash conversion cycle (days)
AP DOH Inv DOH
2011 2012 2013
AR DOH Cash conversion cycle
240 300
190 250
140 200
90 150
40 100
-10 50
-60 0
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL
DHG’s operations appear moderately efficient compared to its peer group. DHG’s
cash conversion cycle was, on average, 157 days for the period from 2011 to 2013,
versus the peer group’s average of 186 days over that period. Since Vietnam’s
pharmaceutical industry has to import 90% of its raw material needs from the
international suppliers, local pharmaceutical companies in Vietnam usually stock up
inventories for up to several months of production in order to avoid price fluctuations
and supply shocks. As such, the inventory holding level for this industry is higher
than that of other sectors.
Current ratio 2.5x 3.1x 2.7x 2.8x 2.2x 28% 29% 27%
80% 28% 29%
Quick ratio 1.9x 2.3x 1.8x 2.0x 1.4x
Total liabilities / Equity 0.5x 0.4x 0.4x 0.4x 0.5x 60%
Total liabilities / Total assets 0.3x 0.3x 0.3x 0.3x 0.4x
40%
Debt / EBITDA 0.2x 0.0x 0.0x 0.1x 0.3x 67% 70% 69% 71% 64%
Debt / EBIT 0.2x 0.0x 0.0x 0.1x 0.3x 20%
EBITDA / Int. Exp. 18.2x 219.5x 254.2x 223.1x 295.4x
EBIT / Int. Exp. 17.0x 198.9x 227.9x 197.5x 264.1x 0%
2009 2010 2011 2012 2013
Source: DHG’s audited financial statements and VPBS’s analysis
Solvency and liquidity ratios indicate that DHG’s financial conditions are quite
healthy. At the end of 2013, total assets were 64% financed by equity and only 7% by
interest-bearing debts. DHG’s level of cash on hand also appears sufficient as DHG’s
cash balance at year-end 2013 could readily satisfy 60% of the current liabilities
balance. Due to the aforementioned reasons, we foresee no issues with regard to
DHG’s solvency in the upcoming years.
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Management’s forecast and 1Q2014 results
Based on our analysis, we noted that DHG’s past financial performances, specifically
the actual revenues and profits after tax, consistently exceeded management’s
targets by 10% to 30%. As such, we expect this pattern to remain unchanged
throughout the forecast period.
Per management’s explanation, DHG’s sales are generally low in the first quarters
compared to the remaining of the year due to Vietnam’s Tet lunar holidays. 1Q2014
sales decreased by 36.1% q-o-q or 5.5% y-o-y primarily due to several large order
shipments made in 4Q2013 which lowered demand during the recent quarter. In
addition, DHG’s difficulties in the ETC channel due to the effects of Circular
36/2013/TTLT-BYT-BTC also contributed to a decrease in sales in 1Q2014.
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SWOT ANALYSIS
STRENGTH WEAKNESS
DHG is the leader among local pharmaceutical DHG’s 80% of raw material needs are still imported.
companies in terms of production volume and This reliance exposes the company to the price
market share for the past five years. fluctuations of APIs in the international market.
Production capacity will be doubled to 9.6 billion Export revenue is still low and accounts for only 1%
product units by the end of 2014 thanks to its two of DHG’s sales in recent years.
new factories in the TPT Industrial Zone.
Consumer awareness with regard to DHG’s products
DHG has a large and extensive distribution network is still low. Currently, brand recognition is mostly
of 12 subsidiaries, 24 representative offices and 68 observed at the distributor and retailer levels but has
hospital pharmacies, together covering all 64 cities yet to extend itself to the end-consumer level.
and provinces in Vietnam.
R&D activities are still below optimum level.
Ms. Pham Thi Viet Nga, DHG’s CEO, is a capable and
It’s not clear whether DHG has been able to identify
dedicated leader who has been with the company
and train the next generation of management.
since its very first days. Ms. Nga has held top
management positions at DHG since 1988, such as
CEO from 1988 to 2012 and Chairman of the Board
of Director from 2004 to 2013.
OPPORTUNITIES THREATS
Rising health-awareness among Vietnam’s middle Competitors offer products that are similar to DHG’s.
class and rising household incomes in Vietnam have Fierce competition brings the risk of perpetual price
led to a steady rise in the country’s pharmaceutical competition, which hurts all players in the market.
spending per capita in recent years.
Foreign companies tend to be better funded and
DHG’s generic drugs, priced cheaper than the have better access to new technologies and
imported drugs, are capable of gaining more market international markets.
share in the middle- to low-income segments of the
Both consumers and doctors in Vietnam prefer using
population.
and prescribing imported drugs over those that are
The company has enormous growth potentials with domestically produced.
regard to food supplement and nature-based
The Circular 12/2012/TTLT-BYT-BTC and Circular
product lines
36/2013/TTLT-BYT-BTC are negatively impacting
DHG’s sales through the ETC channel.
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VALUATION
Growth assumptions
BMI estimated that Vietnam’s pharmaceutical sector will achieve annual growth of
between 15% and 19% for the period from 2014 to 2018. As DHG is the largest local
drug manufacturer in Vietnam, we expect that growth in sales of the company’s in-
house drugs will closely follow the trend of the industry as a whole, albeit at a
slightly lower pace.
In Vietnam, vitamins and food supplements still represent new product segments
with substantial opportunities for future growth. Between 2010 and 2013, DHG’s sale
of food supplements, accounting for around 14% of DHG’s sales of in-house products
in 2013, had achieved annual growth of between 23% and 26%. Throughout the
forecast period, we expect that this segment will achieve an annual growth rate of
25%.
With respect to the other segments, based on their performances, we conservatively
predict annual growth rates of 10% for the forecast period.
Revenue growth 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
In-house products 21.5% 17.3% 11.1% 19.0% 18.6% 18.2% 17.9% 16.7%
Other segments 35.5% 21.8% 130.4% 10.2% 10.2% 10.2% 10.2% 10.2%
Profitability assumptions
Gross margin: As the manufacturing segment (i.e. in-house products) always
accounted for over 80% and 98% of DHG’s net revenues and gross profits in the past,
gross margin of this segment will continue to drive the gross margin of the entire
business. Between 2010 and 2013, gross margin of this segment varied between 52%
and 54%. For the forecast period, we expect that DHG’s gross margin will decrease
slightly each year from 53.0% in 2014 to 51.6% in 2018 since the benefits brought
about by the economies-of-sales (i.e. new capacity added) will be negated by
increased depreciation costs and price inflation each year.
Gross margin 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
In-house products 51.9% 52.8% 53.6% 53.0% 52.5% 52.0% 51.8% 51.6%
Others 8.0% 7.4% 5.2% 5.5% 5.6% 5.6% 5.6% 5.6%
Selling and G&A expenses: We expect that selling expenses and G&A expenses will
remain stable at 23% and 8% of net revenues, respectively.
Tax expense: Due to the preferential tax treatment mentioned under the business
model section above, we expect that DHG’s tax rate will be 5% for the period from
2014 to 2017 and 9% for 2018.
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Balance sheet assumptions
We make the following key assumptions with regard to DHG’s balance sheet:
DCF Model
We use the discounted cash flow (DCF) model to value DHG as we believe future
cash flows remain the key fundamental value-driver for DHG stock. Our DCF model
suggests a fair price of VND123,900 per share. Our inputs for the DCF model are as
follows:
The risk-free rate is taken from the 5-year local currency Government bond yield,
which is currently equivalent to 7.2%.
The expected market return is expected to be 15.0%.
DHG’s beta is estimated to be 0.66.
Cost of equity is estimated to be 12.3% by using the capital asset pricing model.
Weighted average cost of capital (WACC) is calculated to be 12.2%.
DHG’s terminal growth rate is assessed to be 6.5%.
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Market-based valuation
Peer-group analysis
Market Sale growth Net margin Debt to Current Current
Company name ROA (%) ROE (%) P/E P/B
capital (% y-o-y) (%) equity (%) relative relative
USDmn 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 Current 2014 Current 2014 P/E P/B
Total average 14.7 14.3 12.1 10.7 39.8 19.1 12.1 13.4 22.1 22.0 18.3 17.4 3.5 4.1 1.35 1.88
Total median 14.7 15.6 9.5 10.2 32.4 15.2 11.6 12.6 17.3 17.8 13.4 13.9 2.7 3.4 0.88 1.24
DHG Pharmaceutical JSC Vietnam 362 17.7 20.3 16.6 16.7 2.4 9.0 22.5 21.7 31.7 32.1 12.9 11.1 3.6 3.1 1.01 2.03
2014 data of the local companies (except DHG) is based on management’s targets
Source: Bloomberg, VPBS. Data as of May 15, 2014
Compared to the peer group, we noted that DHG had materially higher profit
margins, ROE and ROA ratios in 2012 and 2013 while maintaining substantially lower
debt-to-equity ratio over the period. In addition, the company’s revenue growth in
these two years exceeded that of the peer group’s averages.
While DHG stock’s P/E and P/B are higher than those of the local competitors, these
ratios appear lower compared to the companies in the region that have comparable
market capitalization.
VNIndex Implied
P/E valuation Relative P/E Weight
P/E DHG's P/E
Local peers 0.8x 12.0x 9.5x 70%
Foreign peers 1.8x 12.0x 21.9x 30%
Target P/E 13.3x
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Technical analysis
DHG began its mid-term uptrend in December 2013 and hit the top in March 2014 at
VND150,000 per share. After that, the price of DHG declined and has broken down the
support level formed by the MA50 in May 7. Technically, the uptrend has shown sign
of reversal since this important level was violated. DHG is now traded slightly around
the MA200 at the level of VND115,000 to VND120,000, and we have not yet seen any
bottoming signal.
Thus, we believe that DHG is now in a downward trend with its strong resistance
level at VND137,000. However, the price of this stock may have some recovery in the
short term.
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CONCLUSION
DHG is the leader among the selected local pharmaceutical peer group with the
largest revenues during the past five years and a strong distribution network. The
company’s key products are generic drugs in the antibiotic and pain-reliever
categories, which together account for over 60% of DHG’s total net revenues for the
past five years.
On a fundamental basis, we noted that DHG is a growing company with fairly
efficient and profitable operations. The company, along with the rest of the local
pharmaceutical industry, is being supported by many positive macro factors, such as
rising household income and Vietnam’s expanding population.
We are convinced that, at the current market price of VND116,000 per share, DHG’s
stock represents a solid investment opportunity for long-term investors. Our
recommendation for DHG stock is BUY with a 12-month target price of VND130,500
per share.
For the past 5 years, foreign ownership in DHG has consistently been between 46%
and 49% (legal ceiling limit), implying the foreign investors favorably regard the stock
as a long-term buy. With regard to short-term investors, we would like to caution
market participants to be mindful of the stock’s low liquidity and low-beta (0.66)
against VN-Index.
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INCOME STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Revenues 2,491 2,931 3,527 4,150 4,873 5,710 6,676 7,741
% y-o-y 22.4% 17.7% 20.3% 17.7% 17.4% 17.2% 16.9% 16.0%
COGS 1,282 1,487 1,887 2,224 2,613 3,065 3,574 4,138
Gross profits 1,209 1,444 1,640 1,926 2,260 2,644 3,102 3,603
Selling expenses 559 710 770 955 1,121 1,313 1,535 1,780
G&A expenses 185 218 271 332 390 457 534 619
EBIT 465 516 600 640 750 874 1,032 1,204
Depreciation & amortization 54 67 71 125 146 171 200 232
EBITDA 518 583 671 764 896 1,045 1,233 1,436
Financial income 49 42 48 75 88 103 120 139
Financial expense 7 4 16 13 9 9 10 11
Net other incomes / (expenses) -5 31 151 33 34 36 38 40
Income from associates -10 0 0 0 0 0 0 0
EBT 491 585 782 734 863 1,004 1,180 1,372
Tax expense 71 93 188 37 43 50 59 124
Effective tax rate 14.5% 16.0% 24.1% 4.4% 4.4% 4.4% 4.4% 8.4%
Profits after tax 420 491 593 697 820 954 1,121 1,249
Minority interest 4 5 4 7 8 10 11 12
Net income 416 486 589 690 812 944 1,110 1,236
% margin 16.7% 16.6% 16.7% 16.6% 16.7% 16.5% 16.6% 16.0%
EPS (VND) 6,382 7,443 9,010 10,562 12,417 14,442 16,984 18,913
BALANCE SHEET (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Current assets 1,491 1,818 2,233 2,442 2,881 3,436 4,142 4,949
Cash & near cash items 467 719 613 635 802 1,040 1,387 1,797
Short term investments 0 0 170 170 170 170 170 170
Accounts receivables 338 444 506 603 708 829 969 1,124
Supplier advances 79 84 107 127 149 175 204 236
Short-term prepayments 1 1 1 1 2 2 2 2
Inventories 515 512 758 829 973 1,142 1,332 1,542
Other current assets 90 58 78 78 78 78 78 78
Long-term assets 505 561 848 1,139 1,480 1,879 2,347 2,889
Net fixed assets 459 517 799 1,090 1,431 1,830 2,298 2,840
Long-term investments 17 17 21 21 21 21 21 21
Other long term assets 28 27 28 28 28 28 28 28
Total assets 1,996 2,378 3,081 3,581 4,361 5,315 6,488 7,838
Current liabilities 544 654 1,030 1,113 1,302 1,531 1,812 2,141
Accounts payable 124 74 268 213 251 294 343 397
Customer advances 1 1 3 2 2 3 3 4
Short-term borrowings 21 19 127 100 100 100 100 100
Payables to employees 126 157 207 269 350 455 591 768
Accrued expenses 166 242 236 322 378 442 517 600
Bonus & welfare fund 45 63 66 83 97 113 133 148
Other short term liabilities 62 97 124 124 124 124 124 124
Long-term liabilities 58 21 51 0 0 0 0 0
Long-term borrowings 0 21 51 0 0 0 0 0
Other long-term liabilities 58 0 0 0 0 0 0 0
Total liabilities 602 675 1,081 1,113 1,302 1,531 1,812 2,141
Equity 1,382 1,688 1,981 2,443 3,026 3,741 4,622 5,630
Share capital & APIC 652 654 654 654 654 654 654 654
Retained earnings 377 477 560 1,021 1,604 2,319 3,201 4,208
Other equities 286 491 701 701 701 701 701 701
Minority interest 12 16 18 25 33 43 54 66
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CASH FLOW STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Cash from operation activities 263 470 484 737 875 1,029 1,232 1,401
Cash from investing activities -188 -88 -468 -415 -487 -571 -668 -774
Cash from financing activities -251 -131 -122 -300 -221 -219 -218 -216
Net changes in cash -175 252 -106 22 167 238 347 411
Beginning cash balance 643 467 719 613 635 802 1,040 1,387
Ending cash balance 467 719 613 635 802 1,040 1,387 1,797
RATIO ANALYSIS 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Valuation ratios
Price earnings 13.0x 11.1x 9.4x 8.1x 6.9x 6.2x
P/B ratios 3.9x 3.1x 2.5x 2.0x 1.7x 1.4x
EV to EBIT 8.9x 8.3x 7.1x 6.1x 5.2x 4.4x
EV to EBITDA 8.0x 7.0x 6.0x 5.1x 4.3x 3.7x
Price to sales 2.2x 1.8x 1.6x 1.3x 1.1x 1.0x
Dividend yield 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Profitability ratios
Gross margin 48.5% 49.3% 46.5% 46.4% 46.4% 46.3% 46.5% 46.5%
EBITDA margin 20.8% 19.9% 19.0% 18.4% 18.4% 18.3% 18.5% 18.5%
Operating margin 18.7% 17.6% 17.0% 15.4% 15.4% 15.3% 15.5% 15.5%
PBT margin 19.7% 20.0% 22.2% 17.7% 17.7% 17.6% 17.7% 17.7%
Net profit margin 16.7% 16.6% 16.7% 16.6% 16.7% 16.5% 16.6% 16.0%
Return on avg. Assets 22.0% 22.5% 21.7% 20.9% 20.6% 19.7% 19.0% 17.4%
Return on avg. Equity 31.2% 31.7% 32.1% 31.2% 29.7% 27.9% 26.5% 24.1%
Leverage ratios
Interest coverage ratio (EBIT/I) 228x 197.5x 264.1x 59.9x 125.0x 145.7x 172.0x 200.6x
EBITDA / (I + capex) 2.1x 4.5x 1.9x 1.8x 1.8x 1.8x 1.8x 1.8x
Total debt/capital 1.5% 2.4% 8.2% 3.9% 3.2% 2.6% 2.1% 1.7%
Total liabilities/equity 1.5% 2.4% 9.0% 4.1% 3.3% 2.7% 2.2% 1.8%
Liquidity ratios
Asset turnover 1.3x 1.3x 1.3x 1.2x 1.2x 1.2x 1.1x 1.1x
Accounts receivable turnover (days) 49.5 55.3 52.3 53.0 53.0 53.0 53.0 53.0
Accounts payable turnover (days) 35.2 18.1 51.8 35.0 35.0 35.0 35.0 35.0
Inventory turnover (days) 146.7 125.6 146.6 136.0 136.0 136.0 136.0 136.0
Current ratio 2.7x 2.8x 2.2x 2.2x 2.2x 2.2x 2.3x 2.3x
Quick ratio 1.8x 2.0x 1.4x 1.5x 1.5x 1.5x 1.6x 1.6x
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Guide to Ratings Definition
VPBank Securities uses the following ratings system:
Buy: Expected return, including dividends, over the next 12 months is greater than 15%.
Hold: Expected return, including dividends, over the next 12 months is from -10% to +15%.
Sell: Expected return, including dividends, over the next 12 months is below -10%.
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