FOREIGN TRADE UNIVERSITY

Faculty of Finance and Banking

FINANCIAL REPORT ANALYSIS ASSIGNMENT

Group 11:
V Th Phng Anh Nguy n Thu Hng Nguy n Quang Hi p Nguy n Ng c Thnh 0853040080 0853040032 0853040026 0853040065

Tr n Th Huy n Trang 0853040069 Trng Thanh Tng 0853040075

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TABLE OF CONTENT

1. INTRODUCTION ........................................................................................... 3 1.1 Purpose ..................................................................................................... 3 1.2 Background .............................................................................................. 3 1.3 Scope ......................................................................................................... 3 1.4 Methodology ............................................................................................. 3 1.5 Assumptions and Limitations .................................................................. 3 2. COMPANY ANALYSIS ................................................................................. 4 2.1 DHG Overview ......................................................................................... 4 2.1.1 Introduction ........................................................................................... 4 2.1.2 Business Operating ................................................................................ 4 2.1.3 Products, distribution systems and capability......................................... 5 2.2 Market capitalization ............................................................................... 8 2.3 Structure and independent of board ....................................................... 10 2.3.1 Shareholders structure ........................................................................... 10 2.3.2 Board of Management ........................................................................... 10 2.4 Strategies .................................................................................................. 11 3. INDUSTRY ANALYSIS ................................................................................. 14 3.1 Position in the pharmaceutical industry in Vietnam Economy .............. 14 3.2 Industrys business features..................................................................... 15 3.3 Pharmaceutical industry and challenges ................................................. 17 4. MACRO ANALYSIS ...................................................................................... 18 4.1 Economic area .......................................................................................... 18 4.1.1 Price ...................................................................................................... 18 4.1.2 Exchange rate Interest rate.................................................................. 19 4.2 Socio-culture area..................................................................................... 20 4.3 Government policy ................................................................................... 20

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TABLE OF CONTENT

5. ACCOUNTING ANALYSIS .......................................................................... 22 5.1 Income statement ..................................................................................... 22 5.2 Balance sheet ............................................................................................ 25 5.2.1 Assets .................................................................................................... 25 5.2.2 Resources .............................................................................................. 27 5.3 Cash flow statements ................................................................................ 29 5.3.1 Cash flows from operating activities ...................................................... 29 5.3.2 Cash flows from investing and financing activities ................................ 30 6. FINANCIAL ANALYSIS ............................................................................... 32 6.1 Liquidity ratio .......................................................................................... 32 6.1.1 Current ratio .......................................................................................... 32 6.1.2 Quick ratio ............................................................................................ 33 6.1.3 Cash ratio .............................................................................................. 33 6.2 Solvency ratio ........................................................................................... 34 6.3 Profitability ratio ...................................................................................... 37 6.4 Performance ratio .................................................................................... 38 6.5 Decomposing ROE Du Pont Method .................................................... 39 6.6 Market ratio ............................................................................................. 42 7. VALUATION .................................................................................................. 43 7.1 Dividend Discount Model ......................................................................... 43 7.2 Residual Income Model ............................................................................ 48 7.3 Conclusion ................................................................................................ 50 8. FORECASTING ............................................................................................. 51 8.1 Current situation ...................................................................................... 51 8.2 Forecasting ............................................................................................... 51 9. RECOMMENDATION & CONCLUSION ...................................................

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1.

INTRODUCTION

1.1

Purpose

The ultimate purpose of this report is to assess the value of DHG Pharmaceutical JointStock Company (DHG) in regards to investment decision. 1.2 Background

DHG is a leading company in the industry and account for about 12% market share of domestic drug production. DHG's distribution system is considered the strongest in the industry with 43 agents / branches, 54 counter medicines in hospitals. Sales system directly access to more than 40,000 customers across the country and spread to every village hamlet 1.3 Scope

To measure DHGs performance throughout, the report opened with the overall analysis of the company and the pharmaceutical industry. Then, accounting analysis was implemented to assess the extent to which financial reports could reflex DHGs business reality. DHGs financial ratios were analyzed in both time series and cross sectional method as a foundation to distress analysis, forecasting analysis and valuation. 1.4 Methodology 2008-

The main information source for this report is DHGs annual reports from

2010. Other materials included news, research and other reports obtained from electronic databases and the internet. 1.5 Assumptions and Limitations

The data using in this report was derived from public resources such as the companys website or the HOSE. All financial data has been audited by KPMG.

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2. COMPANY ANALYSIS

2.1

DHG OVERVIEW

2.1.1 Introduction - DHG joint-stock company, whose predecessor is 2/9 Pharmaceuticals enterprise, was first listed on the HOSE on 21st December 2006, with the offering price equaled to 320.000 VND/1share and the total original capital of 80 billion VND in 2006. In the period from 2005 to 2007, DHG had dramatically developments in production scale, technology skills, and sales systems and met the industrys highest standard for good manufacturing practice (GMP), good storage practice (GSP) and good laboratory practice (GLP). - During this period, there was a considerable increase in the growth rate and profit, respectively 41.49% and 50.75 %. In the period 2009 2012, RNCOS forecasts that the pharmaceuticals in developing Companys Overview Branch Status Chartered Capital(VND bils) Par value Fiscal year Pharmaceuticals Listed 200 10.000 31-12

countries might grow 12 15%/per year and DHG is the leading company with 12% domestic market-share.

- At the moment, the company is expanding production scale, improving its brand as well as orienting to become Viet Nams leading Pharmaceuticals distributor. In the shareholders structure, SCIC holds 44% and other institutions such as City Global Markets, Dragon Capital, Viet Capital, etc. hold 46%.

2.1.2 Business operating

The main business of DHG is producing drugs, especially pharmaceuticals which belong to Generic group.

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2.1.3 Products, distribution system and production capability

*Products - The revenue of the firm mainly comes from self-produced drugs. The proportion of self- produced products in total revenue increased from 89.2% in 2005 to 94% in 2009. On the other hand, the proportion of business activities in total revenue decreased gradually to just 2.2% in 2009 due to the fact that DHG prioritize selfproduced products. - The company is producing both pharmaceuticals and medicines. For the time being, medicine just accounts for 4.39% of revenue. This is consistent with the strategy of that are reducing the dependence on imported chemical materials and using medicinal herbs. - DHG has a relatively product structure some groups that account for highly proportion such as antibiotics( 41.82%), pain-release and antipyretic, ear-nosethroat(ENT) ( 15.47%) and vitamin mineral9 10.12%). Besides, groups of cardiovascular, nervous system and diabetes products have tendency to go up. Some main products like Hapacol( pain-release and antipyretic), Eugica( antitussive) and Haginat Klamentin( infection treatment) account for nearly 40% DHGs revenue in 2009. - In addition, DHG has 3 subsidiaries performing in other areas: Company Chartered Capital DHG Travel 3 billion Inbound services( 14.6 billion Main activities Revenue 2009 Earning before tax 1.8 billion

d ch v l hnh n i a) DHG Nature 5 billion Culture, sell pharmaceauticals; produce, sell process, 22.4 billion 2.8 billion

chemicals and food supplements

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DHG PP

5 billion

Produce, sell plastic 102.0 billion packing, aluminium, for Pharmaceauticals. paper

23.9 billion

- DHG is holding capital into Vinh Hao Kelp joint-stock company( which produces Spirulina kelp), Vinh Tuong high-quality-packing joint-stock company(which produces drug packing) and DHG Soft-drugs( which produces pharmaceauticals in form of soft-drugs). Regardless of DHG Soft-drugs, the rest are starting making profits.

* Distribution system - The distribution system of DHG is considered the strongest one in the industry. The company has 7 subsidiaries distributed in Hau Giang, Ca Mau, Kien Giang, Dong Thap, Soc Trang, An Giang and Can Tho. In 2009. DHG changed 9 central distributors associating with local companies into branches in order to be active in business. Presently, the company has 43 agents/branches and 54 drugs stores in hospitals, among them 22 branches and subsidiaries reach GDP, and 10 drugs stores reach GPP. The sales system of the company access directly to 40.000 customers and spread all over the country. - Production capacity: The total value of production stands at the top of the industry with the maximum capacity. The present capacity is 3 billion products units/ per year. In 2009, DHG produced 2,976 billion products units, which was 3.6% more than that of 2008.

* Material - Material: 80% main materials are imported, in which mainly are used for pharmaceuticals and account for 50% prices. In order to be independent of these materials, the company fed Spriulina successfully in Vinh Hao to provide raw material for Spivital products. Besides, DHG Nature did buy and rent land to grow drugs in Tay
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Ninh, Da Lat to provide drugs for Eastern medicines. About the packing, 20% packing demand of DHG is provided by Vinh Tuong high-quality-packing joint-stock company. From 2007 to 2009, despite the fluctuation price, DHG still showed the effectiveness in managing output and input materials with compound interest maintained stably (53%). However, in the first 6 months of 2010, this number declined to just 49% due to the complicated fluctuation of input price in contrast to stable output price. According to the Ministry of Commerce, in 2010, the price index of medicines is 1.84%, which stands at 9/11 in the price index of necessary commodity group.

* Market and Position - Some main competitors of the company not only big foreign corporate such as Sanofi-Aventis, GSK and Pfizer but also domestic corporate such as DVD, DMC and IMP. In general, the competition level in the industry is very high. DHG is presently the leading company of Viet Nam pharmaceuticals with the maximum production value and market share in comparison with others in the country. In 2009, DHG took over 12 percent of the domestic market share and 5 % of the drug-consumption in Viet Nam( just stood behind 2 big foreign corporate such as Aventis and GSK). About the export market, DHG export mainly pharmaceuticals to neighbors and Africa.

* Potential Growth - Because the current capacity has run out so DHG should have plan to build a new factory. The land next to the headquarters which is 28330.9 m2 at Nguyen Van Cu street, Can Tho, at first, was planned to be used for constructing the factory. However, due to the fact that it is in the city, the plan was cancelled. Consequently, this lands usage aim will be changed into city land. At the moment, DHG does not have any concrete plan for it. - The new factory is going to be built in the Tr Noc Li industrial park, but then it will be moved to Tan Phu Thanh one( 8 ha) with cheaper rental, better hygiene condition, larger yard and better preferential tax policy( the amount of planned corporate tax is exempted from 2013 to 2027 is 710 billion VND).
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- The construction plan includes 2 stages. In the first stage, the investment capital is 310 billion VND ( from its own capital). This stage is going to be completed at the beginning of 2013 with 4000-product-unit capacity. Besides, the current factory, after being moved and restructured, will have 2 billion-product-capacity. Therefore, the total capacities of the company in 2013 will be 6 billion-product-capacity. - Since drugs are of humans necessary demand, moreover, the pharmaceuticals in Viet Nam is just in the developing process, the outlook of the company is relatively bright. On the other hand, as the company is being operated at the maximum capacity and the factory will come into operation in 2013, DHG can increase it revenue and profits by restructuring, but this increase will not be high. As the result, the business result of the company in the following years will not change much By 2003, the time when the company performance will be improved greatly after the factory comes into operation.

* Risks - Fluctuated prices will affect stability in business production. Exchange rate risk: VND will probably depreciate against USD, which will push the imported materials to increase. - DHG still has to face competition from foreigners with comparative advantages in technology, brand and preferences to use foreign goods of customers. However, with comparative advantages in distribution system, DHG is able to maitain the growth well.

2.2

MARKET CAPITALIZATION

- With a market capitalization of $342.05M and 24.29M outstanding shares, DHG is currently Viet Nams leading pharmaceuticals company. - Revenue and EBIT of DHG grew stably in the period 2006-2009. Besides, the fact that compound interest rate of DHG was fixed at 53% during the last period showed us the stability in business production of the company. Unlike most of the other companies in pharmaceutical industry which both sell self-produced products and distribute others ones, DHG just focus on selling self-produced products (94% revenue), as a result, it leads to the superiority in compound interest. For the time
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being, DHG is one of two companies which have the highest proportion in selfpr produced products. In addition, production scale and appropriately reserved material are also the reason for high compound interest. - In 2009, the indexes showed the profitability as compound interest, ROE and ROA also increased greatly in comparison to previous years and were much higher than n industrys average. The reason is that cost of goods sold was cut down( decreased nearly 112 billion compared to 2008) whereas its revenue grew by 17.5%. DHG did adjust some expenses of buying outsides, cut down on agents bonus because they outsides, were merged into branches or changed to branches and led to considerable decrease in cost of goods sold. Therefore, it can be seen that the cutting-down is sustainable. cutting down Moreover, interests from deposits bring DHG 27.3 billion profit and objective factors contribute to create sudden profits for the company. - In 2010, DHGs revenue was 667.76 billion, which is 16% higher than 2009. Besides, its EBIT was 431.9 billion VND, which was 5% higher than 2009 and 39% beyond the target. In addition, EAT was 381.12 billion VND, which was 5% higher than 2009. Last but not least, EPS was 14.088 VND/ 1 share.

1800 1600 1400 1200 1000 868.2 800 600 400 200 0 2006 2007 2008 87.1 1269.3 1485.5

1746

Revenue

667.76 357.6 381.12 115.1 121.6 2009 2010

EAT

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2.3 2.3.1

STRUCTURE & INDEPENDENCE OF BOARD UCTURE Shareholder Structure

- DHG shareholders includes: State capital investment company ( SCIC): 44.2%, investment staffs:.43% and other individuals, institutions:48.37%

48.370%

44.200%

7.430%

SCIC

Staffs

Other individuals, institutions

Among other individuals, institutions, Citygroup Global Markets accounts for 7.56%.

2.3.2 Board of Management - DHG, at first, was a company that faced many difficulties in transition period. However, 3 years later after being equalized, its board of management, with enthusiastism and dedication, changed the operating apparatus as well as organization structure impressively. So far, DHG has become the leading company in pharmaceutical industry with revenue and profit increasing 41.94% and 50.75% per armaceutical year on average. - However, finding the close staffs is currently a difficult problem of the company. According to Ms Pham Thi Viet Nga, DHGs Chairman of Board of Management an and General Director, the companys soul, management operation as well as growth orientation strategies all depends on her. As a result, the capacity of heritor will be one of the important factors which affect the long-term development of the company. long term
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2.4

STRATEGIES:

* In 2009, DHG applied Balance Score Card and gained 1.218 billion revenue, 246 billion EBIT, which was 116% higher than 2008. - Mrs. Pham Thi Nga - Chairman, CEO of the Company said: "Since 2008, inflation has become an obsession for all business when the loan interest rate, exchange rate USD / USD and the cost were all skyrocketing. However, the pharmaceutical industry which is production of essential goods for people's health were not allowed to increase prices until 30/06/2008, then only up a few items at a rate increased only about 5%-7%." Facing the difficult situation at that time, and also realizing the opportunity to restructure the organization - staff - policy, the Director General, along with heads of units, had continuous meetings to find the best solution to maintain DHG. A series of solutions were discussed. Finally, the fourth strategic elements in the model of Balance Score Card (BCS) were directed as follow: + Sales and marketing: exploiting the competitive advantages, focusing on developing key product lines, focusing on traditional customer groups basing on 80/20 principle as well as building internal brand, building brand in the minds of consumers through media activities, social activities with criteria to minimize costs and optimize efficiency. As a result, the label Klamentin, Haginat, Hapacol, Eugica, Spivital, Davitabone, Unikids, Eyelight, Glumeform brought nearly 40% of revenue for the company. + Financial - investment: settling debt, choosing reasonable time to of store raw materials, balancing between exchange rates and raw material prices, reviewing and standardizing all investment projects, only continuing implementation of the really needed and effective projects. + Production - products: Building standard procedures to reduce wastage, saving in production, organizing activities to raise responsibility in production, improving products quality, improving factories capacity.

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+ Personnel: maintaining the number of personnel, consolidating and transfering personnel to supplement online sales, training resources and synchronously carrying on a series of training programs for personnel. * In 2010, DHG applied 3-leg-brace strategy: shareholders - customers - the employees were used efficiently. - Stemming from the perspective of Senior Board of management, DHGs strategies were always oriented to sustainable values to implement the slogan "for a better healthy life". Three factors to make up a immortal position were determined: shareholders - investors, customers - consumers and workers. + Shareholders-Investors Current and future bosses play huge role in the strategic direction of DHG. To attract long-term investment, maintain the stock price traded on the true value, DHG set the objectives that were consistent with the expectations of shareholders & investors based on the sustainable development principle as well as implemented responsibilities to the social the environment - the employees. 8 golden letters as a guideline to serve these entities were being open, transparent, complete and timely. Investor Relations Commission (IR) of DHG was formed to create additional channels of direct communication as well as a link between the companies with its boss. The "Annual Report of Best 2 years 2008 and 2009 were evidences for the efforts of DHG promoting of shareholder relations. DHG also served customer thoroughly; visited regular customers; organized tours, seminars that introduced impressive and special products. Moreover, it involved loyal, long-term customers in discussing business strategies. Since then, the product and market strategies of DHG ensured the highest feasibility in terms of business, because it was clients who implemented that strategy. Companies always had timely solutions to help customers overcome the difficulties in business due to the mechanism, crisis and natural disasters. According to DHG, the difficulties of clients were also DHGs difficulties, and reasonable expectations of customers were also the strategies of the Company in the future. + The employee

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Towards spiritual values were criteria of the company to the employees. In addition to regular earnings by the efforts of their labors, the encouragement awards, cultural activities - art - sports ... DHG employees at the company were also organized specifically activities for parents, their relatives, such as Vu Lan ceremony, health diagnosis in Cho Ray or Hoan My Hospital. As a result, DHG encouraged a sense of responsibility, loyalty and pride of the employees as well as promoted innovative ideas, breakthroughs in business strategies and efforts to complete the mission of company. In some cases, the three entities were the same. The employees were shareholders, customers and consumers for products produced by themselves. Sometimes customers were shareholders and also employees of the company in implementing the sales contract commitments and the market development strategies. Investors & shareholders were at the same time trusted consumers who supported products DHG. A double effect was created from the 3-leg-brace, which made a spirally circular development, brought the company to new levels. In 2009, DHGs first 9-month-result was1372 billion, in addition profit before tax was nearly 280 billion. DHC believed that 1920-billion-revenue and 310-billion-EBIT plan was able to help the company overcome difficulties in 2010 thanks to the effective tools and strategies, particularly "3-leg-brace" strategies

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INDUSTRY ANALYSES

3.1

Position in the pharmaceutical industry in Vietnam Economy

- As assessed by the World Health organization (WHO), Vietnam pharmaceutical industry is developing. Vietnam has had continental pharmaceutical industry , but most of them have to import raw materials, therefore it can be said objectively that the Vietnam pharmaceutical industry is still developing at low medium level. Like neighboring countries, the pharmaceutical industry of Vietnam is subject to poverty. Health insurance is not enough and equal to people so patients have pay more for medicines they need. This has hindered the growth of the market. Therefore until 2009, GDP. health expenses in Vietnam accounted for only 1.6%

GDP Growth rate and Pharmatical revenue

40.000% 35.000% 30.000% 25.000% 20.000% 15.000% 10.000% 5.000% .000% 2002 2003 2004 2005
GDP

2006

2007

2008

2009

2010

Pharmaceautical industry

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2500 2000 1500 1000 500 0 2001 2003 2005 2007 2009

Total spendings for drugs Internally produced drugs

The chart above shows a significant shift in the structure of drug usage in our country country, from the 36%-market-share in 2001, to 50.27% in 2007. Besides Viet Nam share Besides, pharmaceutical industry targets to reach 70% in 2015. This is considered a major challenge for the pharmaceutical industry of Viet Nam. Basing on the fact that market share is increasing due to development of national distribution network increasing network, investment, receiving production technology of effective drugs through the production of drug franchise, as well as enhancing development of products groups based on diverse sources of Vietnam the pharmaceutical business in the country is facing great Vietnam, opportunities, not only controlling the home-market but also reaching the level. regional

3.2

Industrys business features

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- Pharmaceutical industry in Vietnam is ranked at 2.5 in 4 classification levels for drugs ranking of WHO. This level is assessed as having industry medicine as well as having produced generic drugs (drugs with the same radicals as invented drug ), but most are imported. - Currently, the Government has outlined the specific schedule for the pharmaceutical companies, including good manufacturing practice (GMP), good storage practice (GSP) and good laboratory practice (GLP) to ensure the international standards set by the WTO. To meet the targeted standards, DHG must have a large amount of investment capital and staffs must have high skills as well as qualifications. - Domestic pharmaceutical companies have not focused on products research and development, both in width and depth. Currently, companies focus on developing groups of similar products, leading to the production of repetitive and imitative models. According to the Vietnam Drug Administration, the drug that did not achieve quality in 2007 accounted for 3.3% of the total samples, which was 3.18% higher than in 2006. In addition, increasing drugs counterfeit also contributed to pushing up the poor-quality-drugs rate mentioned above, which made the corporate lose its prestige, therefore affected market shares. - Most pharmaceutical companies in the country only produce generic drugs, not curable ones. Therefore, the distribution system plays a very important role in the industry. Companies that can deliver medication to consumers hands are considered to be successful ones. - Vietnam drug market is divided into 2 areas: treatment and trade system, which account for 37:63 proportion respectively. Treatment system is direct sales system to hospitals through bidding. Trade system is the system sold in drug stores, secondary distribution center. - Currently, several domestic pharmaceutical companies are trying to set up distribution systems through constructing distribution centers, retail drug stores and associating with a number of locally pharmaceutical companies. In addition, auctioning into hospitals is also a key distribution channel for pharmaceutical industry. However, net profit ratio for this channel is not high due to the fact that winning price is usually low compared to drugs price in the market.
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- According to future forecasts, the distribution systems continue to be the main competitive factor in the pharmaceautical industry. Companies which effectively establish and operate their distribution systems will be the market-share leader.

3.3

Pharmaceutical industry and challenges

- 90% of raw materials for drugs production are imported. Never have the general economy as well as the pharmaceutical industry faced such dramatically increasing material prices as currently. Only in 2006 and 2007, imported materials prices increased by over 100% while domestic materials prices went up by 50%. This directly affects the profitability of pharmaceutical companies because the Government is controlling the selling prices. - With the goal of reducing dependence on imported raw materials, some industrys leading companies have constructed and developed medicinal factories. By 2015, domestic raw materials will meet 20% of production demands and this proportion will increase to 50% in 2020. - According to Decision No. 27/2007/QD-BYT the Ministry of Health on 19/04/2007: "From 01/07/2008, producers which do not meet the GMP standard as recommended by World Health Organization and systematic import-export enterprises which do not meet the GSP standard will have to stop production and direct import. " This will lead to a rigorous screening in the next period because in the country, there are only 75/180 GMP factories that meet the GMP standard. Therefore, if carrying out according to the schedule, many corporate will have to cease operation or convert from direct producers to distribution agents for standardized enterprises. Since 1/1/2009, foreign pharmaceutical companies has also been allowed to directly import drugs, without intermediaries to import entrusted and the average tax rate is 2.5%. This led to a decrease in the prices of imported drugs and that the domestic companies have to compete more powerfully, more intensely with imported drugs and of course, may face the risk of losing market shares.

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4.

MACRO ANALYSIS

4.1

Economic Area

Vietnam's economic growth over the years is stable, creating favorable conditions for economic development. But the global financial crisis had a strong influence on the economy of Vietnam, especially the processing industry for import and export, banking, real estate. High inflation makes people more cautious in their investment and consumption. This gives the industry more difficulty. Compared with other industries, the pharmaceutical industry is one of the least affected by the crisis the most, because this is one of the essential commodities to the people.

4.1.1 Price Pharmaceutical industry each year imports thousands of tons raw materials from abroad, which means a large loss of foreign currency. In the group of stocks that import 50-70% of raw materials, raw materials to produce drugs tablets of H u Giang Pharmaceutical Joint-Stock Company (DHG) were imported from Spain, America, Italy ... accounting for 40-60% of the capital. According to the Department of Pharmaceutical Management, with 90% of imported raw materials, Vietnams Pharmaceutical industry depends largely on foreign countries. Drug import value of Vietnam in 2010 is approximately $ 1.2 billion, of which the raw material is nearly $ 300 million. According to a recent assessment, market research firm Business Monitor International (BMI) of England, in 2013, drug imports will exceed 1.37 billion, compared with U.S. $ 923 million in 2008. BMI forecasts the next 5 years pharmaceutical market that Vietnam will be very potential for foreign companies. This is also the reason explains why drug prices keep on increasing. According to pharmaceutical companies, prices of imported raw materials are constantly changed to increase by foreign partners. Some pharmaceutical companies can not afford the materials and even had "suspended" their factories. The managers of a domestic pharmaceutical company said that raw materials are largely imported from China, India and some European countries. And also adjutants have to be imported.
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Meanwhile, the ability to develop domestic pharmaceuticals materials almost have no progress at all. According to the Ministry of Health, Vietnam currently have listed over 3,000 species of trees in natural forests that can be used as drugs. There are not only some medicinal plants to cure common ailments but also the plants that can research and develop drugs treat incurable diseases. However, very few domestic pharmaceutical companies invest in development the material to provide themselves. The increase in drug prices in 2011 is estimated from 3 - 5%. On the other hand, drug lies in the list of 14 items in governments price regulation, pharmaceutical companies cannot arbitrarily raise prices and transfer costs to the customer as many other industries. Furthermore, the government issued Resolution 11 to create mechanisms and policies to help businesses overcome this difficult period, including consideration of tax exemptions for imported raw materials to serve for the production and domestic consumption. Besides the support from the government, companies also have solutions to save themselves. Hau Giang Pharmaceutical Company is looking to launch new products in order to "avoid" the refusal of the Government about prices. Because the new products are the products without the old prices to rise.

4.1.2 Exchange Rate Interest rate At present, new medicine has much larger proportion than Oriental medicament products, with over 90% of the pharmaceutical market. But 90% of input materials of the companies to produce new medicine must be imported, so just a small change in exchange rates also affects the cost of pharmaceutical companies. If exchange rates increased 3.36%, the cost of pharmaceutical companies increased by 3.024%. Currently, there are 12 stocks listed on exchanges, including AMV, DBT, DCL, DHT, DHG, DMC, IMP, OPC, PMC, TRA, DVD and SPM. With the proportion of different materials in the cost structure, companies will be affected differently to exchange rate changes. In the group of stocks that import 50-70% of raw materials, raw materials to produce drugs tablets of H u Giang Pharmaceutical Joint-Stock Company (DHG) were imported from Spain, America, Italy ... accounting for 40-60% of the capital. With its own characteristics, Hau Giang Pharmaceutical (DHG) has abundant cash, financing interest expense affects businesses lighter than many other companies.
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In the second quarter of 2010, due to unusual exchange rate fluctuations, the cost of exchange rate variance is up to 8.6 billion. Selling price of DHG was located under the allowed limit, so the company is less likely to be allowed to raise price. Three main products of DHG (Hapacol, Klemetine Haginat) account for 40% of sales that can not be increased prices, while the material costs rose 25%. According to the analysis unit of a securities company, DHG price must be increased by 13% to compensate the cost. DHG was able to maintain gross margins of 52% in the first 6 months because of reserved cheap material of the Company can be maintained until the third quarter. DHG has a large product portfolio, with 270 product categories, which helps companies to be flexible in restructuring products to maintain profit. Dealing with difficulties, DHG was flexible to transfer product structure as ampicillin and vitamins into the same cheaper products . DHGs strategy in the final months of the year is focusing on products with high rate of return (such as cardiovascular, nervous drugs), with low material cost, and on functional products not included in the product list of the DAV management. 4.2 Socio-culture area

Standard of living of Vietnamese has been increasingly improved, creating favorable conditions for pharmaceutical development. Most people in Vietnam live in rural areas, have low standard of living and high demand of cheaper drugs, which are favorable conditions for Vietnam's pharmaceutical businesses to expand markets. Moreover, Vietnamese consumers are increasingly raising living standards, health care is also increasing along with the high demand for drugs to ensure their health. 4.3 Government Policy

Pharmaceutical industry is one of the strongest sectors affected by the management of the state. The government has promulgated many legal documents to manage the pharmaceutical industry including documents relating to such issues as state policy in the field of pharmacy, state management of drug prices, business conditions drugs, medicines management subject to the special control, quality standards of drugs, drug20 | P a g e

testing facility ... On 19/04/2007, the Ministry of Health issued Decision No. 27/2007/QD-BYT to implement the principle of "Good Manufacturing Practice (GMP) and" Good Storage Practice (GSP). According to this decision, since 01/07/2008, producers do not meet GMP standards as recommended by the World Health Organization (WHO GMP) and import-export business and pharmaceutical business system storage standard GSP will not have to stop producing and importing and exporting directly. There are also regulations such as GLP "Good Laboratory Practice of vaccines and biological," GDP "good practice in drug distribution," GPP "good practice of pharmacy management." Only companies meeting these standards can exist and develop business. These rules will help create conditions for small pharmaceutical companies Vietnam in merger or acquisition, promoting local businesses to focus on developing the depth to compete with multinational companies.

Pharmaceutical industry is also enjoying some preferential policies. At the time of high exchange rate, the Government has directed banks to create favorable conditions for pharmaceutical companies to purchase foreign currency under the listing price. In addition, the tight monetary policy of the Government to the dollar today will certainly reduce the burden on the pharmaceutical industry in recent years.

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5.

ACCOUNTING ANALYSIS

5.1

INCOME STATEMENT
Cod e Fiscal year ended 31/12/2010 31/12/2009 VND VND 1.770.344.687.03 2.052.247.764.060 3 (17.722.522.132) (24.322.485.821) 1.746.022.201.21 2 (822.445.899.741 ) 923.576.301.471 31.294.906.087 (23.597.231.238) (389.443.987) (409.533.239.836 ) (113.700.825.796 ) 408.039.910.688 14.224.585.302 (12.571.248.709) (103.584.949) 409.589.662.332 (46.967.925.678) (281.354.320) 362.340.382.334 5.269.591.254 357.070.791.080 362.340.382.334 13.396

Total revenue Less sales deductions

1 2

Net sales Cost of sales Gross profit Financial income Financial expenses Including: Interest expense Selling expenses General and administration expenses Net operating profit Results of other activities Other income Other expenses Share of losses in an associate Profit before tax Income tax expense current Income tax (expense)/benefit deferred Net profit Attributable to: Minority shareholders Equity holders of the Company Net profit Basic earnings per share

10 11 20 21 22

2.034.525.241.928 (1.015.992.884.307 ) 1.018.532.357.621 40.566.222.890 (3.408.205.843) (2.010.709.744) (483.629.769.106) (134.944.063.183) 437.116.542.379 9.233.695.237 (8.223.688.183) (3.981.996.715) 434.144.552.718 (51.233.929.515) 424.611.128 383.335.234.331 2.172.986.662 381.162.247.669 383.335.234.331 14.234

24 25 30 40 31 32 30 50 51 52 60 61 62 60 70

(Source: The audited consolidated financial statements 2010 of DHG)

The total revenue of year 2010 was over 2,050 billions VND, increased by 16% in comparison with the year 2009, also is 106% as planned.
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Revenue and profits of DHG from 2007 to 2010

2500 2000 1500 1000 500 0 2007 Total Revenue 2008 2009 Net profit 2010

Net operating profit

In the chart, we see that the total revenue of DHG has increased year by year at the average rate of 17% which is the same as the average growth rate of the industry.

After adjustment, net operating profit is about 400 billions VND, tenth times more than financial and other profits. So, net profit of DHG in year 2010 mainly comes from operating activities.

Financial incomes of DHG mostly came from deposits at bank.

Financial Income
2010 VND 36.238.257.854 453.652.291 3.874.312.745 40.566.222.890 2009 VND 27.261.952.502 1.395.781.032 2.637.172.553 31.294.906.087

Interest from deposits at bank Dividends received Realized exchange gain

(Source: The notes to the audited consolidated financial statements of DHG 2010)

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Cost structure of DHG

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 COGS Financial expenses General and administration expenses Selling expenses Other expenses

COGS comprise 60% of total expenses and 46% of total revenues and still is having the upward trend because of higher input price. Financial expenses were quite low because in the year 2010, DHG had only 12 billions short-term borrowings. Selling expenses increased by 18% comparing to year 2009, however, the relative level with total revenue is the same. In 2010, there are a lot of difficulties, therefore, in order to put up sales, DHG had to have more marketing campaigns and commission fees to the agents. A general and administration expense remains the same level as the last year. This is quite reasonable regardless of the scale of company and human resources.

Cost structure of other companies in the same industry

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DHG OPC DCL DHT DMC IMP Other expenses Financial expenses General and administration expenses Selling expenses COGS

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Compared to other companies in the same industry, the COGS of DHG to the total costs is quite low. This is because DHG had the advantages of scale and production and distributions. Net profit reached 164% planned. Regardless of the problem of macro economy in year 2010, Net profit of DHG remains the same level as the previous year. EPS: 14,234 VND/share. It increase by 1000 VND/share compared to the year 2009. EPS of DHG is one of the highest ones in HOSE. 5.2 BALANCE SHEET

5.2.1 Assets: Current assets:

31/12/2010 Code ASSETS Current assets Cash and cash equivalents Cash Cash equivalents Short-term investments Accounts receivable Accounts receivable - trade Prepayments to suppliers Other receivables Allowance for doubtful debts Inventories Inventories Allowance for inventories Other current assets Short-term prepayments VAT to be deducted Taxes receivable from State Treasury Other current assets 100 1.442.034.118.769 1.212.468.335.434 110 111 112 120 130 131 132 135 139 140 141 149 150 151 152 154 158 642.519.118.992 286.505.741.815 356.013.377.177 0 446.197.923.622 306.719.736.511 28.193.510.841 117.510.052.422 (6.225.376.152) 347.099.608.749 350.125.465.504 (3.025.856.755) 6.217.467.406 1.283.164.897 408.648 439.785.275 4.494.108.586 584.128.534.956 162.206.364.906 421.922.170.050 16.037.166.667 296.978.172.666 250.454.852.730 26.407.748.971 23.553.146.919 (3.437.575.954) 306.731.856.718 311.576.681.540 (4.844.824.822) 8.592.604.427 533.511.176 0 130.507.156 7.928.586.095 25 | P a g e VND 31/12/2009 VND

(Source: The audited consolidated financial statements 2010 of DHG)

Cash and cash equivalents account for 45% of current assets. And it is more than the current liabilities. Liquidity is not the problem of DHG. DHG keeps a lot of cash because in 2011, theres a commitment to buy assets which are stated in the notes. Accounts receivable equals 31% of current assets. It increases 150 billions, compared to the year 2009. It mostly comes from other receivables. In the notes, other

receivables comprises of 70 billions prepaid commissions. In our opinions, in order to meet the target of 2010, DHG had to promote the sales by increasing the commissions.

Other receivables
2010 VND 77.087.927.595 1.092.298.387 7.081.051.026 12.499.149.208 13.848.944.240 5.900.681.966 117.510.052.422 2009 VND 7.676.998.375 5.090.610.265 1.985.742.846 0 0 8.799.795.433 23.553.146.919

Prepaid commissions Interest receivables Loans to other entities Receivables from employees Receivables from breaking land use contracts Other receivables

(Source: The notes to the audited consolidated financial statements of DHG 2010)

Inventories only comprises of 25% of total assets. DHG hadnt kept high level of inventories as in 2008. Long-term assets:
31/12/2010 Code ASSETS Long-term assets Fixed assets Tangible fixed assets Cost Accumulated depreciation Intangible fixed assets Cost Accumulated amortisation Construction in progress Investment property VND 31/12/2009 VND

200 220 221 222 223 227 228 229 230 240

377.700.975.901 303.438.987.167 167.840.794.676 310.198.804.023 (142.358.009.347) 127.878.195.760 131.894.976.812 (4.016.781.052) 7.719.996.731 6.456.882.120

309.504.424.142 237.015.139.115 118.833.144.230 231.889.301.477 (113.056.157.247) 112.919.647.760 113.634.980.185 (715.332.425) 5.262.347.125 0 26 | P a g e

Cost Accumulated depreciation Long-term investments Investments in associates Other long-term investments Allowance for diminution in the value of long-term investments Other long-term assets Long-term prepayments Deferred tax assets Other long-term assets TOTAL ASSETS

241 242 250 252 258 259 260 261 262 268

7.784.646.717 (1.327.764.597) 39.979.249.420 32.592.080.669 11.901.050.200 (4.513.881.449) 27.825.857.194 22.430.416.454 3.785.465.288 1.609.975.452

0 0 31.255.356.135 23.868.187.384 11.901.050.200 (4.513.881.449) 41.233.928.892 36.189.123.770 3.413.954.004 1.630.851.118

270 1.819.735.094.670 1.521.972.759.576

(Source: The audited consolidated financial statements 2010 of DHG)

In 2010, long-term assets are 66 billions more than in 2009, mainly because DHG bought tangible assets in year 2009 to improve the capacity of equipments which run at full capacity. In 2011, DHG plan to buy 300 billions assets which can produce 4 billions products for DHG. It will create much more revenues for DHG for the next coming years.

5.2.2 Resources 31/12/2010 Code RESOURCES LIABILITIES Current liabilities Short-term borrowings Accounts payable trade Advances from customers Taxes and other payables to State Treasury Payables to employees Accrued expenses Other payables Bonus and welfare fund 300 310 311 312 313 314 315 316 319 323 530.696.724.099 471.555.878.347 12.802.412.973 86.290.700.781 1.413.080.380 40.019.223.841 100.633.206.342 168.781.105.434 32.127.453.214 29.488.695.382 503.816.007.462 450.873.538.165 73.979.662.132 71.352.673.093 1.094.516.164 35.634.035.125 84.118.277.067 161.165.177.394 14.743.628.344 8.785.568.846
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31/12/2009 VND

VND

Long-term liabilities Unearned revenue Deferred tax liabilities Provision for severance allowance Science and technology development fund EQUITY Equity Share capital Capital surplus Treasury shares Investment and development funds Financial reserves Retained profits MINORITY INTEREST TOTAL RESOURCES Current liabilities:

330 333 335 336 339 400 410 411 412 414 416 418 420 410 440

59.140.845.752 119.417.273 0 21.163.637.977 37.857.790.502

52.942.469.297 0 53.099.844 14.189.209.835 38.700.159.618

1.280.322.125.140 1.010.375.905.079 1.280.322.125.140 1.010.375.905.079 269.129.620.000 266.629.620.000 378.761.392.824 378.761.392.824 (455.850.000) (410.400.000) 204.329.442.743 4.658.004.486 64.215.412.933 29.744.900.881 364.342.106.640 330.992.386.888 8.716.245.431 7.780.847.035

1.819.735.094.670 1.521.972.759.576

(Source: The audited consolidated financial statements 2010 of DHG)

The current liabilities of DHG in 2010 increased a little bit compared to the year 2009. In 2010, DHG has repaid 60 billion short-term borrowings which have high interest. Instead, the trade payable, taxes payable, salaries payable, and other payables has increased. These kinds of payables mostly do not have interest. This will help DHG save some of money for other purposes. Short-term liabilities increases mostly due to the increase in bonus and welfare fund which was from 9 billion in 2009 to 30 billion in year 2010. DHG borrows long-term debts very little. Most of long-term debts is the provision for severance allowance and science and technology development fund. DHG does not depend on long-term debts. Pressure on repaying debts and paying interest is very low. Therefore, its very attractive to the investors. DHGs equity increases 200 billions of retained earnings. In 2010, 200 billions of retained earnings are transferred to investment and development funds.

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5.3

CASH FLOW STATEMENTS

5.3.1 Cash flows from Operating activities

Code

Fiscal year ended 31/12/2010 31/12/2009 VND VND

CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax 1 434.144.552.718 409.589.662.332 Adjustments for Depreciation and amortisation 2 41.463.499.111 29.778.717.342 Allowances and provisions 3 3.059.549.639 (14.384.007.705) Gain on foreign exchange 4 0 (16.361.965) Gain on disposals of fixed assets 5 (1.279.976.595) 0 Dividends and interest income 6 (36.691.910.145) (14.804.882.568) Interest expense 7 2.010.709.744 3.389.443.987 Share of loss in associate 8 3.981.996.715 0 Operating profit working capital before changes in 9 446.688.421.187 413.552.571.423

Change in receivables and other current assets Change in inventories Change in payables and other liabilities Change in prepayments

10 11 12 13

(135.931.407.222) (44.624.486.304) (38.548.783.964) (3.340.301.188) 74.342.048.312 48.088.931.657 (749.653.721) (19.218.178.770) 345.800.624.592 394.458.536.818 (2.182.859.688) (3.628.334.868) (57.225.908.675) (30.681.344.976) 0 2.987.628.237 (28.167.068.454) (9.241.078.958)

Interest paid Corporate income tax paid Other receipts for operating activities Other payments for operating activities Net cash activities generated from operating

14 15 16 17

20

258.224.787.775 353.895.406.253

(Source: The audited consolidated financial statements 2010 of DHG)

DHG used the indirect method to prepare the cash flows from operating activities We can see that in year 2010 the cash flows from operating activities decrease from 354 billion to 258 billion. Mostly because DHG remains a high level of receivables and inventories compared to year 2009. If the company uses direct method to prepare
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the cash flows from operating activities, we guess that the cash collected from customers will decrease in 2010.

5.3.2 Cash flows from Investing and Financing activities Fiscal year ended 31/12/2010 31/12/2009 VND VND

Code CASH FLOWS FROM INVESTING ACTIVITIES Payments for additions to fixed assets and other long-term assets 21 Proceeds from adjustment of purchase price of land use rights 22 Proceeds from disposals of fixed assets and other long-term assets 22 Loans given to other entities 23 Loans collected from other entities 24 Term deposits received 25 Payments for investments in other entities 26 Collections on investments in other entities 27 Receipts of interests and dividends 28 Net cash used in investing activities 30

(124.759.054.121) 5.491.223.499 6.110.475.532 (5.095.308.180) 0 16.037.166.667 (13.615.000.000) 157.550.000 41.441.782.023 (74.231.164.580)

(57.436.448.175) 0 122.895.970 (26.377.492.867) 41.100.115.293 0 (230.000.000) 0 26.070.547.994 (16.750.381.785)

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from equity issued 31 Payments for shares repurchases 32 Proceeds from short-term borrowings 33 Payments to settle debts 34 Payments of dividends 35 Net cash (used in)/ generated from financing activities

2.591.350.000 0 (136.800.000) (117.900.000) 39.476.967.542 203.434.614.489 (100.654.216.701) (137.910.250.055) (66.880.340.000) (30.018.344.628)

40

(125.603.039.159)

35.388.119.806

Net cash flows during the period Cash and cash equivalent at the beginning of the period Effects of foreign exchanges Cash and cash equivalent at the end of the period

50 60 61 70

58.390.584.036 584.128.534.956 0 642.519.118.992

372.533.144.274 211.742.360.663 (146.969.981) 584.128.534.956

(Source: The audited consolidated financial statements 2010 of DHG) 30 | P a g e

Cash flows from investing activities: In this year, the cash flows from investing activities of DHG is -74 billion VND that increase by about 58 billion compared to year 2009, mainly because DHG in the year has bought equipments, machines and other long-term assets to improve the capacity.

Cash flows from financing activities: In 2010, the cash flows from financing activities of DHG are -125 billion VND mainly because in this year, DHG has repaid the short-term borrowings which have high interest in 2010. And dividends payout is also higher than the previous year. In conclusion, in 2010, net cash flows during the period are relatively lower than the previous year, from 372 billion to 58 billion. Is this the negative sign to the company? No. Because Firstly, cash and cash equivalent in 2009 is relatively high, even higher than the liabilities of year 2010. Therefore, liquidity is not the problem of DHG so in 2010, DHG do not need to create much cash. DHG used cash to other effective things. Secondly, cash flow from operating activities is high. The company still runs very well. Cash flow from operating activities can cover all cash needed. Thirdly, most of cash using in 2010 is to buy the fixed assets and pay the short-term borrowings. Thats very good because this will generate cash flows to the company in the future and the company will not have to face with high borrowings, high interest, low risk to the company. In general, in our opinions, DHG runs so well in 2010. The cash flows from operating activities can cover all funds needed and DHG has bought more fixed assets and repaid debts. However, in 2011, to be better, DHG should improve the credit policy and effectively manage the inventories.

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6.

FINANCIAL ANALYSIS

6.1

LIQUIDITY RATIOS

6.1.1 Current Ratio Current ratio measures DHGs ability to pay short term obligations. The higher the short-term ratio, the more capable a company is in paying its obligations. The rule of thumb is for a ratio to be above 1, which would signify strong financial health.1 DHGs current ratio performance has increased gradually in recent 3 years, together with the increase in both current liabilities and current assets. In 2010, comparing with the other three lities companies, DHG has outperformed TRA and SPM, approximately equaled to IMP. It is signifying that DHG has a more efficient operating cycle and better ability turn its product into cash than TRA and SPM.

2008 Current ratio (Rc) 2.132

2009 2.689

2010 3.058

IMP2010 3.110

TRA2010 2.163

SPM2010 1.193

Table: Current ratio of DHG and IMP, TRA, SPM

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6.1.2 Quick Ratio In accordance with DHGs current ratio, the quick ratio of DHG has been outperforming TRA, SPM too, signifying that DHG has higher access to its most liquid assets in contrast to the others. Due to the lower inventories (that used efficiently or not, we would examine later) DHG has outperformed IMP in such rati ratio, after the inventories deducted.

2008 Quick ratio (Rq) 1.277

2009 1.990

2010 2.309

IMP2010 1.966

TRA TRA2010 1.314

SPM2010 1.121

Table: Quick ratios of DGH, IMP, TRA, SPM Figure: Quick ratio of DHG and IMP, TRA, SPM

6.1.3 Cash Ratio In accordance with DHGs current ratio and quick ratio, together with the same proportion of receivables in 3 other companies, the Cash ratio of DHG is still the best figure. The ratio of 2009 and 2010 is always above 1, while other companies, especially TRA has relatively low ratio. This is because TRA has significant high ially receivables compare to its assets. (VND 278 bill. Receivables compare to VND 520 bill. assets)
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2008 Cash ratio (R-cash) 0.582

2009 1.331

2010 1.363

IMP2010 0.716

TRA2010 0.132

SPM2010 0.344

Table: Cash ratio of DHG and IMP, TRA, SPM

6.2 SOLVENCY RATIOS

SOLVENCY RATIOS 2008 Debt to Equity (D/E) Debt to Assets (D/A) Financial leverage ratio (FL) Interest coverage ratio (IC) 0.549 0.354 1.554 28.804 2009 0.487 0.331 1.506 1,052.72 9 2010 0.415 0.292 1.421 216.91 6 IMP 0.274 0.215 1.274 41.16 0 TRA 0.658 0.397 1.658 10.28 2 SPM 0.635 0.388 1.635 18.66 8

Table: Solvency ratios of DHG, IMP, P a g e 34 | TRA, SPM

35 | P a g e

Debt ratios provide an indication of how many VND of debt financing the firm is using for each VND invested by its shareholders.2 Analysis of DHGs debt ratios showed a steady rate of debt to equity ratio and debt to assets ratio since 2008, and always a rate that lower than 1. This is due to the reason that the company has effectively raised funds from the shareholders. The chartered capital has been raised from 200 to 266.63 billion VND in 2009. Despite short and long-term debts increasing by a fair amount of 2billion VND since 2008, the debt ratios have been fairly stable attributed to an increase in equity value of 270billion VND during the same period. Interest coverage ratio, which shows the ability of a firm to meet interest payments has been increasing substantially in 2009,3 to than 1000 times. This can be easily explained by the fact that: Most of the funds raised by DHG is from the stockholders. Most of the liabilities are from short term investment, DHG has stable capital structure, so DHG has little pressure on the interest paid. The income of 2009 of DHG increased enormously in comparison with the previous year, due to the decreased in COGS In conclusion, DHGs debt ratios appeared to be extremely good. This means the ability of paying debt to DHG is not a concern. Furthermore, the other companies in the same industries (that we compared) had the same kind of raising capital, so they have fairly well capable of paying debt, too. DHG, definitely, has no difficulties in raising capital in the future.

Ibid.

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6.3 PROFITABILITY RAT RATIOS IMP2010 TRA TRA2010 SPM2010

2008 PROFITABILITY RATIOS Gross profit margin (GPM)) Return on Assets (ROA) Return on Equity (ROE) 0.496 0.230 0.333

2009

2010

0.522 0.279 0.419

0.521 0.132 0.195

0.460 0.111 0.143

0.303 0.149 0.209

0.321 0.188 0.311

In all of the three ratios ROE, ROA, GPM, Duoc Hau Giang has outperformed the other major pharmaceutical productions in the countries. They always keep pace with the competitors while still has the dividend payout ratio relatively high (that would dividend described later). DHG had the best profit result in 2009 that can be explained by the contribution of low COGS - the most important factor. The COGS has decreased more than 200 billion than the following year. year 2008 Net profit margin (NPM) Operating profit margin (OPM) 0.086 0.048 2009 0.205 0.245 2010 0.187 0.193 IMP 0.105 0.118 TRA 0.076 0.112 SPM 0.355 0.234

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6.4

PERFORMANCE RATIOS

PERFORMANCE RATIOS 2008 Receivable turnover Average collection period 5.926 61.593 2009 6.413 56.916 2010 5.523 66.087 IMP 4.079 89.483 TRA 3.603 101.304 SPM 1.754 208.096

Inventory turnover Day of inventory in hand

2.579 141.528

2.675 136.449

3.108 117.439

2.231 163.604

3.918 93.160

1.097 332.726

Total asset turnover Fixed asset turnover

1.499 5.383

1.359 5.826

1.228 5.973

1.034 6.677

1.764 11.270

0.869 0.162

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Other ratios that prove the successfulness of DHG, that is the performance ratios, and of we examine here the Average collection period and Day of inventory in hand. - Average Collection period shows us the average days for the company to collect the receivables. The smaller the ratio is, the better efficiency in collecting the credit efficiency money is. 2009 is the best efficient year of collecting money of DHG. - Day of inventory in hand: By far, as a pharmaceutical production, DHG has the relative long days of inventory on hand. But to be more precise, we woul compare it would to the same industrys corporations. In 2010, we could see that DHG outperformed almost all of the other competitors in the same industries. The day of inventory on hand is, though longer than other industries, smaller than the opponents in the pharmaceutical industry. This proves the the power of managing the inventories of the company, and also explains why it has such effective performance throughout the years. DHG has good trade credit policy and inventory policy. 6.5 Decomposing ROE Du Pont Method

To identify the drivers that create value for the firm and analyze DHGs performance against the 3 other major pharmaceutical corporations in Vietnam Imexpharm IMP, Traphaco TRA, and S.P.M SPM DuPont method was employed to break the ROE

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ratio into three parts which considers operating efficiency, asset use efficiency and financial leverage4

2008 Net profit margin (NPM) Assets Turnover Return on Assets (ROA) Financial leverage ratio (FL) Return on Equity (ROE)

2009

2010

IMP2010

TRA TRA2010

SPM2010

8.56% 20.47% 18.68% 10.50% 1.544 1.361 1.233 1.058

7.62% 35.54% 1.961 0.529

13.22% 27.85% 23.03% 11.10% 14.93% 18.79% 1.554 1.506 1.421 1.274 1.658 1.635

19.48% 41.85% 33.28% 14.28% 20.87% 31.06%

Table: Deposing ROE - DuPont Model

Figure: Key ROE Components

Z., Bodie, A., Kane & A., Marcus, (2007), Essentials of investments, 6th edn, McGraw s McGraw-Hill/Irwin, Boston

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Figure: Comparison

Analysis shows Net profit margin of DHG changed differently in the 3 recent years. The figure in 2009 is the highest number, because the sudden decrease in the COGS of the company. Comparing to the other corporations in the same industry, DHG has to relatively high figure than the others, but lower than SPM. Asset Turnover of OST was performing well in recent years, though the downward trend, it is still higher than the two of the corporations: IMP & SPM. In this IMP component, DHGs is lower than TRA. As we can see, DHG raised most of its funds from stockholders, more than financial leverage, so it has the downward trend in leverage using these year. In comparison with other 3 companies, the financial leverage of DHG is larger than TRA and SPM financial (the two that have higher ratios above), but lower than IMP. DHG has lower financial leverage than IMP, lower Total assets turnover than TRA, lower Net profit margin than SPM, but overall, when added those factors together, fac DHG has relatively higher ROE than any of the corporations in the same industry. This reveal that DHG has flexibly managed in operating efficiency, asset use efficiency and financial leverage and the result is inevitably reasonable.

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6.6

MARKET RATIOS

MARKET RATIOS 2008 Price to Earning ratio (P/E) Price to Book ratio (P/B) 16.940 3.394 2009 10.360 2.980 2010 8.480 2.523 IMP 8.910 1.217 TRA 8.960 1.858 SPM 6.170 1.336

P/E ratio of DHG has declined overtime from 2008 to 2010; the P/E ratio of DHG is lower than IMP and TRA. The reason is that in 3 years (2008-2010) the price of DHG is stable and the EPS has increased year by year. It is a good significant for investors. P/B ratio of DHG is higher than almost firms in the same industry; this ratio has declined for 3 years. It means that it is safer for investors who invest in DHG.

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7.

VALUATION

7.1

DIVIDEND DISCOUNT MODEL

Using the 2 stage-model to value DHG: i. ii. Stage 1: DHG develops with the growth rate g in n years Stage 2: DHG develops with the growth rate which equals to the growth rate of the economy (ge)

Growth period 1 Growth period 2

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Share value

= Present value of future dividends =

( ) )

2 stage model: = +

+(

In which: - A: PV of dividends in period 1 (n years) = 1 1(1 + ) 1(1 + ) 1(1 + ) + + + + (1 + ) (1 + ) 1+ (1 + ) ( + ) +

- B: PV of dividends in period 2 = = = (1 + ) (1 + ) + ( + ) + + (1 + ) ( +

(1 + (1 + )

) ) + +

Equation: = = =

1+ 1( ) 1+ 1 1+ 1( ) 1+ 1

+ +

1 (1 + ) (1 + ) (

(1 + )

) )

( + ) ( )( + )

D1: Dividends of 2011

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 Do: Dividends of 2010 g: Growth rate in 1st period =

1=

(1 + )

b: reinvest ratio (plow back ratio) ROE: Return on Equity K: Cost of capital (Using WACC to calculate) ~16.28% ~7%

ge: Growth rate in 2nd period (the economys growth rate)

N: Growth period 1 ~15

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DIVIDEND DISCOUNTED MODEL

V: D1: N:

Value of stock (VND) Dividend per share 2011 (VND) Growth period 1 (years)

2007 Return on Equity Earnings per Share Dividend per Share Plow-back ratio Growth rate (1st period) D1 32.20% 7,000.00 2,500.00 64.29%

2008 19.45% 7,026.00 2,500.00 64.42%

2009 41.85% 13,396.00 3,000.00 77.61% 22.04% 4,881.79

2010 33.28% 14,234.00 4,000.00 71.90%

Average 31.70% 10,414.00 3,000.00 69.55%

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D1 Growth rate (1st period) Cost of capital N V

4,881.79 22.04% 16.28% 15 90,305.58

The share value of DHG derived from the Dividend Discounted Model is 90,305.58 VND per share.

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7.2 RESIDUAL INCOME MODEL Another method to compute value of DHG is Residual Income Model. Its main focus is DHGs ability to generate residual profits than just covering the cost of equity so that investors would be willing to pay more than the book value of equity. = = + + ( + ) + ( + ) +

k: Cost of capital (WACC) ~16.28%

0 47,591.00 14,234.00

1 58,082.33 17,371.85 9,624.04 0.86 164,716.39

2 70,886.45 21,201.44 11,745.64 0.74

Thereafter

BPS Earnings per Share REPS Discounted factor V

135,429.22 0.74

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In this method, the terminal value is calculated based on: : =

~7%

The share value of DHG derived from the Residual Income Model is 164,716.39 VND per share.

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7.3

CONCLUSION

From the Dividend Discounted Model, DHG is overvalued. From the Residual Income Model, DHG is undervalued. In order to evaluate more accuracy the share value of DHG, each value from different model is put a weight. The weights for share value from DDM and RIM are the average pay-out ratio and the average re-invest ratio of DHG (due to the essences of the 2 models: DDM is about the pay-out cash flows to investors, RIM is about the re-invest cash flows to the firm). 2007 Plow-back ratio Pay-out ratio 64.29% 35.71% 2008 64.42% 35.58% 2009 77.61% 22.39% 2010 71.90% 28.10% Average 69.55% 30.45%

Share Value DDM RIM V 90,305.58 164,716.39

Weight 30.45% 69.55%

142,059.63

From the Dividend Discounted Model and Residual Income Model, the share value of DHG is 142,059.63 VND per share.
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8.

FORCASTING

8.1 -

CURRENT SITUATION

2011 will be a very critical year. Macroeconomics fluctuations will make the companies difficult in operation, for example: high interest rates, volatile exchange rate, price of some essential inputs will be increased accordance to market mechanism..etc.

On the other hands, to stabilize the economy, the government will control and stabilize prices of some essential commodities and medicines is one of the most important products affecting social security. Therefore, the increase in drug prices is very difficult.

In 2011, DHG must disburse according to construction schedule. Therefore, however, DHG kept high amounts of cash in 2010, DHG may have to take some loans and have no financial incomes.

8.2

FORECASTING Net revenue: 2.250 billions VND (10% growth) Earnings before tax: 400 billions VND Cash flows from operating activities will be higher than 2010, however, net cash will be negative for the first time: -200 billions VND From 2012, in our opinion, the macroeconomics situation will be better, plant construction will be completed, the cash flows will be improved. Net revenue: 2.700 billions VND (20% growth) Earnings before tax: 600 billions VND

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9.

RECOMMENDATION & CONCLUSION

After extensive analysis, valuation and forecast of DHG, along with the considerations of market condition, we conclude that: Fundamental factors of DHG are good, potential growth is high, low level of leverage. Stable level of dividends, high EPS Intrinsic value of the stock is 142.000 VND, 18% higher than the current price of the stock. However, Macroeconomics is still critical, business confidence is low. In short-run, the market has not recovered yet. The liquidity of stock is quite pure compared to the stocks of other industries. No sudden information affecting the price of the stock. No abnormal profits.

We recommend to hold the stock.

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