(LUẬN VĂN THẠC SĨ) The solutions for valuation in the equitization of state enterprises, the case of Vietinbank Insurance One Member limited Company

VIETNAM NATIONAL UNIVERSITY, HA NOI SCHOOL OF BUSINESS PHAM TRUNG THANH THE SOLUTIONS FOR VALUATION IN THE EQUITIZATION OF STATE ENTERPRISES, THE CASE OF VIETINBANK INSURANCE ONE MEMBER LIMITED COMPANY Major: Finance Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: Dr Tran Phuong Lan Ha noi, 2011 TIEU LUAN MOI download : skknchat@gmail.com VIETNAM NATIONAL UNIVERSITY, HA NOI SCHOOL OF BUSINESS PHAM TRUNG THANH THE SOLUTIONS FOR VALUATION IN THE EQUITIZATION OF STATE ENTERPRISES, THE CASE OF VIETINBANK INSURANCE ONE NUMBER LIMITED COMPANY Major: Finance Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: Dr Tran Phuong Lan Ha noi, 2011 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABTRACT ii TÓM TẮT v TABLE OF CONTENTS viii LIST OF ABBREVIATIONS xii LIST OF FIGURES xiii LIST OF TABLES xiii FOREWORD 1 The necessity of the thesis The purpose of the research The objective and scope of research 4 The method of research 5 Outline of the Thesis CHAPTER 1: FRAMEWORK 1.1 Overview 1.2 The methods of the valuation of the firm 10 1.2.1 The free Cash Flow to The Firm 10 1.2.1.1 Theoretical Framework 10 1.2.1.2 The FCFF model 11 1.2.1.3 The strengths and limitations of FCFF model 15 1.2.2 The FCFE model 16 1.2.2.1 Theoretical Framework 16 1.2.2.2 The FCFE model 17 viii TIEU LUAN MOI download : skknchat@gmail.com 1.2.2.3 The strengths and limitations of FCFE model 18 1.2.3 The dividend discount model 19 1.2.3.1 Theoretical Framework 19 1.2.3.2 The dividend discount model 19 1.2.3.3 The advantages and disadvantages 22 1.2.4 The price multiple valuation model 24 1.2.4.1 The price to earning method 24 1.2.4.1.1 The theoretical framework 24 1.2.4.1.2 The price to earning model 24 1.2.4.1.3 The advantages and disadvantages 25 1.2.4.2 The price to book value method 26 1.2.4.2.1 The theoretical framework 26 1.2.4.2.2 The price to book value method 27 1.2.4.2.3 The advantages and disadvantages 28 1.2.4.3 The economic value added method 29 1.2.4.3.1 The theoretical framework 29 1.2.4.3.2 The economic value added method 29 1.2.4.3.3 The advantages and disadvantages 31 CHAPTER 2: EMPIRICAL STUDY ON THE NON LIFE 33 INSURANCE INDUSTRY AND THE VALUATION OF VIETINSCO 2.1 Overview of Viet Nam insurance market 33 2.2 The influencing factor to valuation of the firm 36 2.2.1The Macro environment 36 2.2.1.1 Political 36 ix TIEU LUAN MOI download : skknchat@gmail.com 2.2.1.2 Economic 36 2.2.1.3 Social 37 2.2.1.4 Technology 37 2.2.2 Non life insurance Industry 37 2.2.2.1 Competition within the industry 37 2.2.2.2 Threat of new entrants 38 2.2.2.3 Threat of substitute 38 2.2.2.4 Bargaining power of customers 39 2.2.2.5 Bargaining power of Supplier 39 2.2.3 Other factors 39 2.2.3.1 The psychological factors 39 2.2.3.2 The economic factors 41 2.2.3.3 The valued factors 41 2.3 General view about Vietinsco 42 2.3.1 General view 42 2.3.2 The structure of organization 46 2.4 The Valuation of Vietinsco 48 2.4.1 FCFF method 49 2.4.2 FCFE method 57 2.4.3 The dividend discount method 63 2.4.4 The price multiple valuation method 65 2.4.4.1 The price to earning method 65 2.4.4.2 The price to book value method 65 2.4.4.3 The economic value add method 66 x TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 3: THE COMBINATION OF THE VALUATION 71 METHODS 3.1 The calculation of the weight rate 71 3.1.1 The calculation of the weight rate base on the view of author 71 3.1.2 The calculation of the weight rate base on the interview experts 72 3.1.3 The calculation of the weight rate 73 3.2 The valuation matrix 74 CHAPTER 4: THE CONCLUSION AND RECOMMENDATION 75 Reference: Appendix Appendix : Vietinsco historical Balance Sheet Appendix 2: Vietinsco historical Income Statement Appendix 3: Vietinsco Capital employed Appendix 4: Vietinsco Ratio Forecast Appendix 5:Vietinsco Working Capital Movement Appendix 6: Financial Ratio Appendix 7:Vietinsco Cash Flow Analysis Appendix 8:Vietinsco sensitivity anaysis – Terminal Value approach – Growth in perpetuity method of FCFF method Appendix 9: Vietinsco sensitivity anaysis – Terminal Value approach – Growth in perpetuity method of FCFE method Appendix 10: Vietinsco sensitivity anaysis – Terminal Value approach – Growth in perpetuity method of EVA method Appendix 11: The historical data on the return of rate the stock index, xi TIEU LUAN MOI download : skknchat@gmail.com treasury (a year), and Bonds (10 years) in US, 1928-2010 Appendix 12: Treasury Yield Curve Rates Appendix 13: Estimate country Risk Premiums Appendix 14: Interest rate per year Appendix 15:The information market in the non life insurance field LIST OF ABBREVIATIONS CAPM Capital asset pricing model CEO Chief executive officer COGS Cost of gross sale D Debt DDM Dividend discount model DIV Dividend value DPS Dividend per share E Earning EBIT Earning before interest and taxes EPS Earning per share EVA Economic value added FCF free cash flow FCFE Free cash flow to equity FCFF Free cash flow to firm GDP Gross domestic product NOPAT Net operating profit after taxes xii TIEU LUAN MOI download : skknchat@gmail.com OCF Operating cash flow/ cash flow from operating activities P/B Price to book P/E Price to Earning PV Present Value ROA Rate of asset ROE Rate of Earning Vietinbank Viet Nam joint stock commercial Bank for industry and trade Vietinsco Vietinbank insurance one number limited company WACC Weighted average cost of capital WC Working capital WTO World trade organization LIST OF FIGURES: Figure 1: Growth GDP (2002-2010) Figure 2: Non cash charges Figure 3: The structure of organization: LIST OF TABLES Table 2.1: FCFF for Vietinbank Insurance Company (2010-2015) Table 2.2: The β information market in US Table 2.3: The input information Table 2.4: The Valuation using terminal value xiii TIEU LUAN MOI download : skknchat@gmail.com Table 2.5: The valuation using FCFF method Table 2.6: The FCFE for Vietinbank insurance Company 2010-2015 Table 2.7: The valuation using teminal value Table 2.8: The Valuation using FCFE method Table 2.9: The income statement Table 2.10: The growth rate data Table 2.11: The valuation using DDM Table 2.12: The economic value added valuation Table 2.13: The valuation using terminal value Table 2.14: The valuation using EVA method Table 3.1: The view of experts about the weight rate Table 3.2: The weight rates Table 3.3: The valuation matrix xiv TIEU LUAN MOI download : skknchat@gmail.com FOREWORD – THE NECESSITY OF THE THESIS In the context of post-crisis global economy, Viet Nam’ economy has been growing continually to a high and stable speed Although the pace of global economic recovery is not all over the world, Asia has achieved quite well In Asia, Vietnam has continued to achieve the impressive growth After real GDP growth of 5.3% in 2009, Vietnam's economic growth forecasts to 6.78% in 2010 like China, Viet Nam is not only outstanding achievement by high growth but also a stable trend However, comparing with the growth of Thai Land (from -2.3 to 7.8%) and Malaysia (from 1.7% to 7.1%) , the growth of Viet Nam is the slower than the negative growth of countries in Asia in 2010 Figure 1: Growth GDP (2002-2010) Resource: International Monetary Fund, World Economic Outlook Database, April 2011 TIEU LUAN MOI download : skknchat@gmail.com The total estimated value of the firm is the sum of the present value of the five FCFE amounts and the present value of the terminal value The total equity value is VND 299,303,668,881 So, the Fair value per share is VND 9,976.79 Sensitivity analysis: Note that he present value of the terminal value component is approximately VND 180,254,932,392.This mean that 60 % of the total of the firm is reflected in the terminal value, which assumed perpetual growth in dividend of 8.9% The magnitude of the terminal value relative to the total value of the firm suggests he need to be very careful about sensitivity of the result to this growth assumption The sensitivity of the terminal value and the total equity value to estimates of the growth rates are shown Appendix 9: 2.4.3 THE DIVIDEND DISCOUNT MODEL: These amounts were provided in the table above and are summarized here for convenience: 63 TIEU LUAN MOI download : skknchat@gmail.com TABLE 2.9: THE INCOME STATEMENT (VND) Fiscal year Net income 2011 6% 6.5% 8% 54.98% 50.44% 52.48% 600 650 800 2014 2015 DPS Net income 54,202,448,711 64,384,003,450 DIV rate Dividend payout ratio (%) 2013 32,740,362,936 38,658,990,669 45,730,166,976 DIV rate Dividend payout ratio (%) 2012 8% 8% 44.28% 37.28% 800 800 DPS Basing on these values, the following values need to estimate the growth rates in dividends beyond the 2015 forecast horizon are obtained: TABLE 2.10: GROWTH RATE DATA 2011 2012 2013 2014 2015 Dividend payout ratio 55.0% 50.4% 52.5% 44.3% 37.3% Plowback ration 45.0% 49.6% 47.5% 55.7% 62.7% Sustainable growth rate 4.3% 8.9% 5.3% 5.7% 7.3% The required equity return is estimate at 26.05 % The valuation using DDM is shown following: 64 TIEU LUAN MOI download : skknchat@gmail.com TABLE 2.11: THE VALUATION USING DDM (VND) L-T Dividend paid (D) 2011 2012 2013 2014 2015 600 Dividend growth (g) Required rate of 650 800 800 800 8% 23% 0% 0% Growth 8.00% 26.05% return Future value (FV) 14,400 Dividend Cash flows Present Value (PV) 600 650 800 800 15,200 2,664.059 The present value per share is estimated at VND 2,664.059 2.2.4 THE PRICE MULTIPLE VALUATION METHOD: 2.2.4.1 THE PRICE TO EARNING METHOD: Based on the industry average trailing P/E of 29.930 (www.vndirect.com, entered date 10/04/2011) , the implied share price of Vietinsco is VND 29.930.However, adjusting for the fact that Vietinsco’ s own exceptionally high trailing P/E ration has undue influence on the industry average, the share price estimate declines to VND 24,975 2.2.4.2 THE PRICE TO BOOK METHOD: 65 TIEU LUAN MOI download : skknchat@gmail.com Using the competitor average P/B ratio, the estimated value of a Vietinsco share is VND 29.930 (basic) (www.vndirect.com, entered date 10/04/2011) and VND 29.200 2.2.4.3 THE ECONOMIC VALUE ADDED METHOD: Basing the balance sheet and the income statement, the EVA was calculated as table 2.12 following 66 TIEU LUAN MOI download : skknchat@gmail.com TABLE 2.12: THE ECONOMIC VALUE ADDED VALUATION EVA Forward Estimates Fiscal Year 2011 2012 2013 52 weeks 52 weeks 52 weeks 48,656,160,263 57,047,898,208 67,026,391,015 Tax rate 25% 25% 25% NOPAT 36,492,120,198 42,785,923,656 50,269,793,262 WACC 22.4% 22.4% 22.4% Total Capital Employed 250,995,248,756 277,190,140,764 306,336,339,578 EVA (19,663,788,048) (19,230,645,138) (18,267,740,668) In VND EBIT 67 TIEU LUAN MOI download : skknchat@gmail.com EVA Forward Estimates Fiscal Year 2014 2015 52 weeks 52 weeks 78,928,050,167 93,169,268,341 101,463,834,557 Tax rate 25% 25% 25% NOPAT 59,196,037,625 69,876,951,256 76,097,875,918 WACC 22.4% 22.4% 22.4% Total Capital Employed 338,716,407,186 376,120,258,457 409,605,059,232 EVA (16,585,984,455) (14,273,544,931) (15,544,273,634) In VND EBIT Year T+6 68 TIEU LUAN MOI download : skknchat@gmail.com Using the estimated EVA for Vietinsco, the 22.37% WACC discussed in the text calculation using the EVA method are shown below: The terminal value was determined VND 42,048,438,772 TABLE 2.13 THE VALUATION USING TERMINAL VALUE Terminal Value Sum of PV of EVA (5 years) -51,475,821,960 WACC 22.37% Capital employed at year T 229,433,946,626 Present value of terminal EVA -42,048,438,772 Terminal Value as % of Total Value -30.9% TABLE 2.14 THE VALUATION USING EVA METHOD ( VND) Intrinsic ("Fair") Value Calculation Enterprise Value (Equity Value + Net Debt) Net Debt 135,909,685,895 (127,954,992,913) Equity Value (Market Capitalization) Oustanding shares 263,864,678,808 30,000,000 Fair Value Per Share VND 8,795.5 The total estimated value of the firm is the sum of the present value of the five FCFE amounts and the present value of the terminal value The total equity value is VND 263,864,678,808 So, the Fair value per share is VND 8,796 69 TIEU LUAN MOI download : skknchat@gmail.com Sensitivity analysis: Note that the present value of the terminal value component is approximately VND 42,048,438,772 This means that 31% of the total of the firm is reflected in the terminal value, which assumed perpetual growth in dividend of 8.9% The magnitude of the terminal value relative to the total value of the firm suggests he need to be very careful about sensitivity of the result to this growth assumption The sensitivity of the terminal value and the total equity value to estimates of the growth rates are shown Appendix 10: 70 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 3: THE COMBINATION OF VALUATION METHODS 3.1 THE CALCULATION OF THE WEIGHT RATE 3.1.1 THE CALCULATION OF THE WEIGHT RATE BASE ON THE VIEW OF AUTHOR One of the most important factors in the determined valuation is to calculate the weight rate of valuation methods My view in considering the condition of operated Vietinsco and market is about the weight rate as following: FCFF method is the scientific and practical method to apply to investors who is professional organizations But in the context of the market there are fluctuations because of macroeconomic policies and to change in the policy of the board of Vietinbank for the system of the general purpose The determined weight rate is 10% The fluctuation in interest rates along with the changeable capital structure in the economic situation at the moment, the forecast may have inaccurate results However, FCFE method is suitable with Vietinsco, because the field of Vietinsco is non life insurance, the input factors of Vietinsco does not depend on the fluctuation of interest, it depends on the main business and channels The determined weight rate is 20% The DDM method is highly applicable, easy to use, especially, for individual investors when the financially technical requirements are not too 71 TIEU LUAN MOI download : skknchat@gmail.com complicated Investors use this method to be known the benefit of invested operation I sure that this method is suitable for Vietinsco, the determined weight rate is 20% The EVA Method requires the analysis of accounting data It is more complex and required many assumptions in the calculations With Vietinsco operated in the insurance market, this method is high inapplicable The determined weight rate is 10% The P/E and P/BV method is the method to reflect the value market of the enterprise Investors easily use to this method in the business and the invested operations In this context of the market, author determines the weight rate at 40%, including 20% for the P/E method and 20% for P/BV method 3.1.2 THE CALCULATION OF THE WEIGHT RATE BASE ON INTERVIEWED EXPERTS: The opinions of the experts are a valuable reference source to determine the weight rate Author choices the five experts with their profile and interviews them about the weight rate of the five methods The results of this survey are shown as following the table 3.1: 72 TIEU LUAN MOI download : skknchat@gmail.com TABLE 3.1: THE VIEW OF THE EXPERTS ABOUT THE WEIGHT RATE No Name Profile Nguyen MBA, Brandeis Thuy University FCFF FCFE DDM EVA P/E, 22% 30% 18% 9% P/BV 21% 13% 30% 19% 15% 23% 20% 35% 25% 10% 10% 15% 21% 18% 10% 36% 18% 22% 22% 8% 30% 18% 28% 20% 10% 24% Linh Nguyen MBA, University of Chi Strathclyde, Bao Thanh Viet Securities company Quach Dr, Birmingham Manh Business School, Hao Thang Long Securities joint Stock Company Pham MPM, CFA level 2, Ngoc loughbrough Quang University Dao Tien CFA level 2, Dat Habubank AVERAGE 3.1.3 THE CALCULATION OF THE WEIGHT RATE 73 TIEU LUAN MOI download : skknchat@gmail.com Basing on the calculation above, author has the selection under the table 3.2 To estimating the value of Vietinbank, author estimates the weight rate of the Author ’opinion at 40% and the weigh rate of the experts at 60% TABLE 3.2 THE WEIGHT RATE: No Name FCFF FCFE DDM EVA P/E, P/BV Experts (60%) 18% 28% 20% 10% 24% Author (40%) 10% 20% 20% 10% 40% Weight rate 15% 25% 20% 10% 30% 3.2 THE VALUATION MATRIX From the calculation above, the value of the enterprise is estimated in the table 3.4 following: TABLE 3.4 THE VALUATION MATRIX Method Price/share Weighted rate Weighted Average FCFF FCFE DDM EVA 19,213.9 9,976.8 2,664.1 8,795.5 15% 25% 20% 10% 2,882.1 2,494.2 532.8 879.5 P/E P/BV 24,974.5 29,200.0 15% 15% 3,746.2 4,380.0 100% 14,915 Average price Thus, the price of share of Vietinso is VND 15.000 74 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 4: CONCLUSION AND RECOMMENDATION Valuation plays a key role in many areas of finance – in corporate finance, in mergers and acquisitions and in portfolio management The value of the company can be directly related to decisions that it makes – on which projects it takes, on how it finances them, and on its dividend policy Understanding this relationship is the key to making value increasing decisions and to sensible financial restructuring Other hand, the valuation process depends much on quality of information and depends on the estimation when making assumptions Assumptions are made with prediction on future picture of the enterprise More over, the determinedly accurate value of the firm is very difficult, however, the price sell of the firm or the transferred price are often affected by many factors, so it is the higher price or the lower price or as the real price In the focus of this thesis was the value of Vietinsco, who is operating the non life insurance industry Drawing form analyses of Vietinsco and influencing risks, the equity value of vietinsco was calculated using the matric valuation (VNĐ 15,000 per share) As a concluding remark, one has to keep in mind that although the discounted cash flow framework, along with other valuation models, is a quantitative tool, but the inputs leave plenty of space for subjective judgements A mixture of financial theory, accounting methodology, 75 TIEU LUAN MOI download : skknchat@gmail.com industry knowledge and sound assumption was used to evaluate the equity of the company As the underling assumptions change, the estimated value of the firm may change as well This project has helped me look at an interesting practical case of using valuation methodology to value an insurance company Author believes choosing the reasonable price will be the key factor for a successful Initial public offering Author believes the recommended price and all analysis that author makes above will be good reference for potential investors who are interested in Vietinbank Insurance as well as the company when making decision with regard to the strategic investor though the initial public offering process in the coming time Recommendation for Vietinbank insurance: For the company to receive higher valuation from investors, the company’s specific risks should be evaluated by the investors to be low At the moment, basing on the investigation of author about the management, strategy, organization, the risk is assessed to be rather highest in the scale of management risk, cash flow risk, growth risk and other risk For investors to pay higher, the following suggestions are made to Vietinbank insurance to take action: - Enhance the management in business, strengthen senior management capability by recruiting new managers who have experience, 76 TIEU LUAN MOI download : skknchat@gmail.com conducting course of training for current managers regarding both skills technical knowledge and management knowledge - Reorganized the structure of the departments, strengthen the competency and the coordination among the department including sales department, underwriting department, reinsurance department, account and financial department to ensure business targets - Improve the internal control to guarantee the transparency, cost efficiency of all the transactions and interaction within company 77 TIEU LUAN MOI download : skknchat@gmail.com ... HA NOI SCHOOL OF BUSINESS PHAM TRUNG THANH THE SOLUTIONS FOR VALUATION IN THE EQUITIZATION OF STATE ENTERPRISES, THE CASE OF VIETINBANK INSURANCE ONE NUMBER LIMITED COMPANY Major: Finance Code:... Vietinsco is a component of the Vietinbank, the equitization of state owned enterprises is part of a roadmap for equitization of Vietinbank 2- THE PURPOSE OF THE RESEARCH Theoretical methods of valuation. .. life insurance, remain product is non life insurance The products of non life insurance are main areas as human insurance, property insurance, liability insurance The challenges in the non life insurance: