(Luận văn HV chính sách và phát triển) determining the intrinsic value of common stock – the case of DHG pharmaceutical joint stock company

INTRODUCTION Rationales of the research Vietnam's stock market has been born for 22 years since 1998 but has made a strong development, making an important contribution to the country's economic development Vietnam's stock market is happening very vibrant and growing quite fast Contributing to the success of the stock market is the participation of its members: government, financial intermediaries, listed companies and investors Securities investment is a new investment channel for our country's financial market, bringing a lot of profits for domestic and foreign investors However, it also contains great risks In order to make the stock market more stable and professional, when deciding to invest, investors must analyze and revalue stocks Valuation is absolutely necessary It helps listed companies determine the fair price when issuing stocks, determining the cost of equity as well as the cost of merger and acquisition Besides, stock valuation helps commercial banks to determine stock value before deciding to lend Valuing stocks is also an indispensable stage in all decisions of individuals as well as organizations, help investors know the real value of stocks, find investment opportunities and make appropriate investment decisions Supply and demand activities in the market are often sentimental and follow the “herd mentality” so the stock price is raised, far exceeding its real value Therefore, many investors have made the wrong decision They have suffered heavy economic losses from those mistakes On the one hand, the stock valuation methods have its own advantages and disadvantages This is a challenge for analysts: How to choose the right and most appropriate valuation methods for Vietnam's stock market and for each type of business? On the other hand, stock valuation carry subjective views as well as depending on the qualifications of the analysts As a result, it still has multi – dimensional perspectives, positive and negative sides of the valuation results LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com With a desire to find reasonable valuation methods for stocks on Vietnam's stock market and then make recommendations to improve the financial position of a particular enterprise, help the intrinsic value of shares of that enterprise increase in the future, I decided to choose the research topic: DETERMINING THE INTRINSIC VALUE OF COMMON STOCK – THE CASE OF DHG PHARMACEUTICAL JOINT STOCK COMPANY  Research questions - What is the intrinsic value of DHG stock after applying alternative valuation methods and recommendation to different stakeholders? Objectives of the research  General objectives On the basis of theories of stock analysis and stock valuation, analyzing and valuing DHG stock Since then, making recommendations to investors and business managers  Particular objectives - Systematizing the theory of common stock analysis and pricing - Analyzing the financial ratios of DHG Pharmaceutical Joint Stock Company - Applying valuation methods to value DHG stock - Describing the difficulties in the process of valuing DHG stock - Making recommendations for investors and business managers Subjects and scope of the research  Research subject: Determining the intrinsic value of DHG stock  Research scope: - Space: DHG Pharmaceutical Joint Stock Company - Time: Statistics collected from 2015 to 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Research methodology  Secondary data collection  Literature review  Alternative valuation methods such as FCFF, FCFE, DDM, P/E, P/B Details of methods will be explained clearly in chapter Organization of the graduation thesis Apart from Introduction, Conclusion, Recommendations and References; contents of the graduation thesis are organized into chapters:  Chapter 1: Literature review of stock valuation  Chapter 2: Analysis of macroeconomic environment and pharmaceutical industry  Chapter 3: Financial situation analysis through financial ratios  Chapter 4: Valuation for stock of DHG Pharma – Recommendation for stakeholders LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER LITERATURE REVIEW OF STOCK VALUATION 1.1 Introduction of some theoretical issues about stock valuation 1.1.1 Stock market Stock market is a place where shares of pubic listed companies are traded (Frederic S Mishkin, 2010, p 8) Buying and selling securities can take place in the primary market, secondary market, stock exchange, over – the counter market, spot market or future market It help stockholders earn profits from selling securities and its price depends on the supply and demand of the market at that time Securities are issued for the purpose of raising capital for businesses/ companies or the government 1.1.2 Common stock 1.2.2.1 Definition Common stocks, also known as equity securities or equities, represent ownership shares in a corporation Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to vote at the corporation’s annual meeting and to a share in the financial benefits of ownership (Bodie, Jane & Marcus, 2014, p 41) 1.1.2.2 Characteristics of common stock The two most important characteristic of common stock as an investment are its residual claim and limited liability features  Residual claim means that stockholders are the last in line of all those who have a claim on the assets and income of the corporation In a liquidation of the firm’s assets, the shareholders have a claim to what is left after all other claimants such as the tax authorities, employees, suppliers, bondholders, and other creditors have been paid For a firm not in a liquidation, shareholders have claim to the part of operating income left over after interest and taxes LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com have been paid Management can either pay this residual as cash dividends to shareholders or reinvest it in the business to increase the value of the shares  Limited liability means that the most shareholders can lose in the event of failure of the corporation is their original investment Unlike owners of unincorporated businesses, whose creditors can lay claim to the personal assets of the owner (house, car, furniture), corporate shareholders may at worst have worthless stock They are not personally liable for the firm’s obligations 1.1.3 Corporation 1.1.3.1 Definition A corporation is a business owned by stockholders, or shareholders A business becomes a corporation when the state approves its articles of incorporation 1and the first stock share is issued Unlike a proprietorship and a partnership, a corporation is legal entity distinct from its owners (Horngren, Harrison & Oliver, 2012, p 6) 1.1.3.2 Advantages and disadvantages of a corporation Advantages:  Separate legal entity A corporation is a distinct entity from a legal perspective It is an entity that exists apart from its owners However, the corporation has many of the rights that a person has Items that the business owns (its assets) and those items that the business has to pay later (its liabilities) belong to the corporation and not the individual stockholders  Transferable ownership rights Stockholders may transfer stock as they wish by selling or trading the stock to another person, giving the stock away, bequeathing it in a will or disposing of the stock in any other way The transfer of stock is entirely at the discretion of The articles of incorporation are the rules approved by the state that govern the management of the corporation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com the stockholder It does not require the approval of either the corporation or other stockholders  Continuous life The life of a corporation is stated in its charter The life may be perpetual, or it may be limited to a specific number of years If it is limited, the company can extend the life through renewal of the charter  Limited liability of stockholders Since a corporation is a separate legal entity, creditors have recourse only to corporate assets to satisfy their claims The liability of stockholders is normally limited to their investment in the corporation Creditors have no legal claim on the personal assets of the owners unless fraud has occurred  Ability to acquire capital It is relatively easy for a corporation to obtain capital through the issuance of stock Buying stock in a corporation is often attractive to an investor because a stockholder has limited liability and shares of stock are readily transferable Disadvantages:  Separation of ownership and management Stockholders legally own the corporation However, they manage the corporation indirectly through a board of directors they elect Thus, stockholders not have to disrupt their personal affairs to manage the business  Additional taxes Corporations are separate taxable entities First, corporations pay their own income tax on corporate income Then, the stockholders pay personal income tax on the earnings that they receive from corporations  Government regulation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com To protect persons who loan money to a corporation or who invest in its stock, states monitor the actions of corporation Corporations are subjected to more governmental regulation than other form of business 1.1.4 Intrinsic value versus market price The intrinsic value of an asset is the present value of expected future cash flows earning from that asset, discounted to the present with the investor’s appropriate required rate of return The market value of an asset is its price when it is traded in the market This value is determined by supply and demand in the market If the intrinsic value, or the investor’s own estimate of what the stock is really worth, exceeds the market price, the stock is considered undervalued and a good investment If the intrinsic value is lower than the market value, this stock is overpriced in the market If the stock market works effectively, market value and real value of securities would be equal Anytime, when the intrinsic value of a security is different from its current market value, the competition between investors seeking profit opportunities will quickly push market prices back to their intrinsic values Therefore, an effective market is one in which the value of all securities at any time fully reflects all publicly available information In such a market, the market value and the intrinsic value are the same 1.1.5 Definition of stock valuation Stock valuation is a method of determining the intrinsic value of a stock The importance of valuing stocks evolves from the fact that the intrinsic value of a stock is not attached to its current price By knowing a stock’s intrinsic value, an investor may determine whether the stock is overvalued or undervalued at its current market price If the intrinsic value is greater than the market price, the stock is considered undervalued At that time, investors will buy this stock because the price of the stock will increase to return to its intrinsic value In contrast, investors will not buy LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com stocks being sold at prices higher than their intrinsic value because after a while, the stock price will decline to return to its intrinsic value 1.2 Stock analysis Stock analysis is a top-down approach in steps: Economic analysis, industry analysis and company analysis 1.2.1 Economic analysis To determine the fair price for a company's stock, securities analysts must forecast dividends and expected earnings from the company The performance of each company will be influenced by the state of the overall economy and each industry In addition, the macroeconomic picture affects stocks in different ways with varying degrees In conclusion, analyzing the economy including the global economy and the domestic economy to identify the factors that positively and negatively affect the company, and then make forecasts for the valuation of the company's stock 1.2.1.1 Global economy First, world economic growth may affect the domestic economic situation, import and export prospects, industry and company Second, exchange rate between domestic currency and foreign currency Exchange rate affects import and export trends, trends of accumulation and investment of the economy 1.2.1.2 Domestic macroeconomic Volatility of the stock market is closely related to the domestic macro economy The analysis of the macro economy is to assess the business environment and the impact of the business environment on the operation and business results of the company, and then impact on the company's stock price There are many basic macro factors that directly affect stock analysis and stock valuation LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  Gross domestic product (GDP): is the market value of all final goods and services produced within a country in a given period of time (N Gregory Mankiw, 2011, p 494) During the flourishing period, GDP increases and vice versa during the recession, GDP decreases  Inflation: is a situation in which the economy’s overall price level is rising (N Gregory Mankiw, 2011, p 514) The inflation rate is the percentage change in the price level from the previous period Inflation is often accompanied by economic growth and an increase in the number of jobs Inflation itself is not bad because Inflation could encourage economic development Moderate increases in price level tend to stimulate investment, including domestic investment and foreign investment, maintaining high employment rate and increase in GDP In contrast, high inflation would reduce growth and limit investment  Interest rate: is the cost of borrowing, or the price paid for the rental of funds (Frederic S Mishkin, 2012, p 38) Interest rates are probably the most important macroeconomic factors to consider in investment analysis The increase in interest rates could be bad news for the stock market Although there are many different interest rates in the economy, these interest rates tend to vary in the same direction, so economists often discuss at a representative interest rate 1.2.2 Industry analysis Industry analysis is the analysis of a specific industry (production, service, trade), which helps enterprises and analysts understand the industry's competitive advantage, including: supply and demand statistics, the level of competition in the industry and with other emerging industries, future prospects and the influence of external factors on the industry Industry analysis is important for the same reasons as macroeconomic analysis; similarly, it is unusual for a firm in a troubled industry to perform well 1.2.3 Company analysis LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1.2.3.1 Financial ratio analysis Ratio analysis expresses the relationship among selected items of financial statement data A ratio expresses the mathematical relationship between one quantity and another The relationship is expressed in terms of either a percentage, a rate, or a simple proportion  Liquidity ratios Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash Current ratio Current ratio = The current ratio measures a company’s ability to pay current liabilities with its current assets (Horngren, Harrison & Oliver, 2012, p 733) The higher the value of this ratio, the better the ability to pay current liabilities of the enterprise If current ratio is less than 1, enterprises cannot afford to pay short-term debts However, if this ratio is too high, it means the company has invested too much in short-term assets beyond what it needs Normally, that surplus will not make a profit, so that investment will be less effective Quick ratio Quick ratio = Quick ratio indicates the ability to repay short-term debts regardless of the sale of inventories Inventories are typically the least liquid of a firm current assets, and if sales slow down, they might not be converted to cash as quickly as expected (Brigham & Houston, 2019, p 110) Removing this item will more accurately reflect a company's ability to pay its liabilities if LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Forecasted financial statements from 2020 to 2024 based on analysis and identification of development trends of the company and the pharmaceutical industry Using the – stage pricing model to estimate the stock value of DHG Pharmaceutical Joint Stock Company Free cash flow to firm (FCFF) is discounted with WACC Free cash flow to equity (FCFE) is discounted by Cost of Equity The cash flow of DHG Pharma is divided into stages:  Stage 1: – year period from 2020 to 2024  Stage 2: The period from 2025 onwards It is assumed that cash flow will increase at a fixed rate of 3.6% from 2025 onwards and perpetuate forever 4.2.2.3 Valuation of DHG stock by Free Cash Flow to Firm Model (FCFF) The formula is used: FCFF = EBIT x (1 – tax rate) + Depreciation – Capex – Change in NWC Assumptions: Corporate income tax will be 68,189 million dongs, which is the average corporate income tax in the period from 2015 to 2019 because this item does not show a clear trend in the whole period Assume that the company's corporate income tax for the next years is optimal and will not change in the future Interest expenses drops by 20% in 2019, this decline rate is assumed to continue for the next years The reasons: DHG Pharma’s interest expenses increased sharply from 2015 to 2018 During this period, the company had short-term loans from banks Interest expenses of the company was also much higher than other companies in the industry The company in the future will restrict the use of debt to reduce its dependence on external creditors Otherwise, the company's high debt to assets ratio would made the company under great pressure to pay interest expenses Depreciation is estimated to increase by 5% / year Short-term assets always account for a high proportion of total assets and tend to increase from 2015 to 2019 However, this structure will tend to change in the coming years The company will gradually decrease its investment in short-term assets to focus on investing in fixed LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com assets because the company will focus on investing more for long – term plans in the future This will still ensure the current ratio of DHG Pharma Capex (Capital Expenditures) is estimated to increase by 5% / year As noted, DHG Pharma will focus on investing more in fixed assets Therefore, investments in fixed assets (factories, machines, equipment,…) will inevitably increase Net working capital is estimated to increase sharply in the future The company will continue to invest in short-term assets but will limit the use of debt to limit its dependence on external creditors The company will give priority to using its equity not only to ensure the safety of its corporate capital but also to reduce pressure on interest payment LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table 4.8: Valuation of DHG stock by Free Cash Flow to Firm Model (FCFF) Unit: Million VND 2020 2021 2022 2023 2024 Net income 656,840 685,480 726,608 768,024 808,497 Tax 68,189 68,189 68,189 68,189 68,189 EBT 725,029 753,669 794,797 836,213 876,686 Interest expense 18,712 14,969 11,975 9,580 7,664 EBIT 743,741 768,638 806,772 845,793 884,350 EBIT x (1 – tax rate) 594,993 614,910 645,418 676,634 707,480 Depreciation 89,607 95,134 100,651 105,512 112,739 Capex 69,564 86,134 91,236 96,659 102,425 Change in NWC 37,359 48,205 105,808 87,737 129,939 FCFF 577,677 575,705 549,025 597,750 587,855 Terminal value 14,097,634 PV (FCFF) 535,282 Firm value 11,938,858 Outstanding shares 130.7 Value of one share 91,346 494,307 436,803 440,669 10,031,797 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.2.2.4 Valuation of DHG stock by Free Cash Flow to Equity Model (FCFE) The formula is used: FCFE = FCFF – Interest expense x (1 – tax rate) + Net borrowing Assumptions: Net borrowing was chosen to be 17,592 million dongs, which is the average net borrowing in the period from 2015 to 2019 because this item does not show a clear trend in the whole period Assume that the company's net borrowing for the next years is optimal and will not change in the future Table 4.9: Valuation of DHG stock by Free Cash Flow to Equity Model (FCFE) Unit: Milion VND 2020 2021 2022 2023 2024 FCFF 577,677 575,705 549,025 597,750 587,855 Interest expense 18,712 14,969 11,975 9,580 7,664 80% 80% 80% 80% 80% Net borrowing 17,592 17,592 17,592 17,592 17,592 FCFE 580,299 581,322 557,036 607,678 599,316 – tax rate Terminal value PV (FCFE) ,Equity value 14,111,158 537,314 498,390 442,193 446,662 10,011,701 11,936,260 Outstanding share 130.7 Value of one share 91,326 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.2.3 Valuation of DHG stock by Comparable Model 4.2.3.1 Valuation of DHG stock by P / E method Step 1: Determining forward EPS in 2020 Categories 2020F Net income 656,840 Outstanding shares 130.7 Forward EPS 5,026 Step 2: Determining P/E multiplier The group of companies selected to compare and evaluate with DHG are similar sized companies and operate in the same pharmaceutical field, especially with similarities such as risk, market capitalization Table 4.10: Calculating P/E multiplier Trading name Stock code Market capitalization P/E Pymepharco JSC PME 4,613 14.12 Traphaco JSC TRA 2,441 17,90 Domesco Medical Import Export JSC DMC 1,820 8.08 Imexpharm Pharmaceutical JSC IMP 2,666 18.50 Binhdinh Pharmaceutical and Medical Equipment JSC DBD 2,681 20.95 Industry average P/E 16.10 (Source: Accumulating and calculating from http://www.finance.vietstock.vn) P / E multiplier is 16.10 Step 3: Calculating the intrinsic value of one share Forward EPS 5,026 Average industry P/E 16.10 Value of one share 80,942 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.2.3.2 Valuation of DHG stock by P/B method Table 4.11: Pharmaceutical companies – ROE and P/B Trading name Stock code Average ROE (5y) P/B Pymepharco JSC PME 18.62% 2.18 Traphaco JSC TRA 18.46% 2.19 Domesco Medical Import Export JSC DMC 20.58% 1.41 Imexpharm Pharmaceutical JSC IMP 10.42% 1.63 Binhdinh Pharmaceutical and Medical Equipment JSC DBD 25.21% 2.81 DHG Pharmaceutical JSC DHG 23.02% 3.46 (Source: Accumulating and calculating from http://www.finance.vietstock.vn) Figure 4.3: Pharmaceutical companies – ROE and P/B The above diagonal line shows the correlation between the P / B and ROE ratio of the stock The lower part of the diagonal line represents the undervalued stocks That is, the stock deserves a higher value, commensurate with its ROE In contrast, the upper part of the diagonal line shows that the stocks are overvalued by the market Stocks that are near the diagonal line represent: stock prices reasonably reflects its intrinsic value It can be seen that DHG stock is overvalued by the market LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DHG's average – year ROE (23.02%) will correspond to a reasonable P / B (on the diagonal line) of about 2.75 times This is a reasonable multiplier for DHG stock Book value per share of DHG Pharma is 26,996 Vietnam dongs The value of DHG stock will be determined as: 26,969 x 2.75 = 74,239 Vietnam dongs/ share Table 4.12: Target price of DHG stock Model Value of one share Weight DDM 77,688 10% FCFF 91,346 35% FCFE 91,326 35% P/E 80,942 10% P/B 74,239 10% Target price 87,222 4.3 Comment on valuation results - Reasons for choosing the weight for each valuation method 4.3.1 Comment on valuation results Through the process of valuing the shares of DHG Pharmaceutical Joint Stock Company by different models, we see the intrinsic value and attractiveness of DHG shares compared to other companies in the industry The DCF model results in a valuation result of approximately 91,000 Vietnam dongs / share, which is the highest in all the valuation models The P/B method yielded a value of 74,239 Vietnam dongs which was the lowest P/E method and DDM brings the share prices of 80,942 Vietnam dongs and 77,688 Vietnam dongs, respectively, which is lower than stock value from DCF method 4.3.2 Reasons for choosing the weight for each valuation method According to the oriented development strategies for the period 2016 – 2020, DHG Pharma will implement the dividend payment policy in cash with a minimum of 30% of par value per year to allocate a part of the profit to reinvest in business development and to increase the accumulated value for shareholders Therefore, the LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com dividend policy of DHG Pharmaceutical Joint Stock Company does not reflect future profitability of the business This is a disadvantage for Dividend Discount Model Comparable method is only effective when DHG Pharma is compared to other companies with similar production and same business activities, with the same scale of development speed, same profit growth Market capitalization of DHG Pharma is over 12 trillion VND, which is much larger than the other enterprises Furthermore, this method almost ignore the basic elements of the business such as operational risk or growth rate Finally, there is a price factor in the formula – market price of stocks If the stock market does not work stably, P/E ratio will be false This affects the calculation results FCFF and FCFE are the two most suitable methods for DHG Pharmaceutical Joint Stock Company because these two methods overcome the disadvantages of the DDM and Comparables method => From the advantages and disadvantages of the aforementioned methods, the weight of DDM, P/E and P/B is selected as 10% for each method The weight for FCFF and FCFE is 35% for each method With the above weighting when combining valuation models, the intrinsic value of the DHG stock is estimated at 87,222 Vietnam dongs The market price of DHG stock at the end of May 2020 was 92,000 Vietnam dongs, which was nearly 5.48% higher than the intrinsic value 4.4 Conclusion on the reliability of valuation results 4.4.1 About valuation methods To determine the target price, different valuation methods were used, including DDM, FCFF, FCFE, P/E, P/B The theoretical basis of these methods has been thoroughly researched and referenced from reliable sources The application of the pricing model in the valuation of DHG stock was made by the author based on personal opinion in the analysis and forecast of DHG Pharmaceutical Joint Stock Company LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.4.2 About target price Opinions, forecasts and estimates during analysis and valuation for DHG stock only express personal opinion of analyst without showing general view of DHG Pharmaceutical Joint Stock Company These personal views have been carefully considered by the author based on reference sources, the best and most reasonable sources of information at the time of writing the thesis However, the author does not guarantee the absolute accuracy and completeness of this information 4.4.3 About risks of valuation results Past performance is not necessarily the same for future results Foreign currency exchange rates may affect the value of DHG stock 4.5 Limitations on analysis and valuation of DHG stock 4.5.1 Difficulties in determining cash flow of the enterprise Most enterprises in Vietnam so far have not had the habit of long-term financial planning and DHG Pharmaceutical Joint Stock Company is no exception In the annual report, DHG Pharma only has financial plans for the next year Forecasting in such a short time will cause great difficulty for the practice of stock valuation The forecast must be made at least years Most pricing methods rely primarily on corporate financial information in the future If the forecast is not long enough and inaccurate, it will lead to incorrect valuation results 4.5.2 Difficulties in determining growth rate and estimating discount rate The discounted cash flow model depends heavily on two important input data: growth rate of cash flow and discount rate This estimate depends on how much we trust the company and how the market operates It can be said that a small change of either of these factors will result in a major change in stock value Thus, if our input and assumptions are not good, the results will not be accurate, the company may be priced above or below its value The estimation of these two factors, especially the growth rate, is based on historical data and actual basis, but still carries the subjective factor of the forecaster LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.5.3 Market pricing is not effective An important assumption in the comparable method is that the market may mispriced a particular asset but overall market valuation is always correct Although in the P/E method, his method uses the adjusted P/E of the world and Vietnam's P/E for the pharmaceutical industry, but with the volatile stock market in Vietnam, the valuation of stocks by comparable methods can cause certain deviations The lack of investment knowledge is a matter of concern for a part of individual investors in the market Although, this issue has improved significantly in recent years, it still exists and exercises influences on the valuation of corporate stocks Psychology of investors often follows Herd Instinct, invest under the crowd, follow the moves of foreign investors or large organizations Although this mentality can be explained in terms of technical analysis methods, however, about fundamental analysis, the theoretical basis on which most valuation methods are based can distort corporate value 4.5.4 Difficulties in identifying companies in the same industry Comparable method is only effective when DHG Pharma is compared to other companies with similar production and same business activities, with the same scale of development speed, same profit growth DHG Pharmaceutical Joint Stock Company is a leading company in Vietnam's pharmaceutical industry Market capitalization of DHG Pharma is over 12 trillion VND, which is much larger than the second ranked enterprise – Traphaco Joint Stock Company, with a market capitalization of about trillion VND The large difference in market capitalization and competitive advantage makes DHG Pharma outperform the peers It is this difference that makes it difficult for comparable method The average P/E industry is only relative, which may affect the valuation result of DHG stock LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.5 Recommendation 4.5.1 For investors Figure 4.4: The security market line and the negative – alpha DHG stock The market value of DHG stock is approximately 92,000 Vietnam dongs (5/2020) From the beginning of April 2020, DHG's share price has risen from 70,000 to 92,000 by the end of May 2020 and tend to remain unchanged However, the recent increase in the company's share price was partly due to the positive signs of the situation of Covid-19 pandemic, partly because investors lack knowledge and experiences, trade is not through analysis but mainly by the Herd Instinct, psychological and investment actions always follow the sentiment DHG's business results in recent years have been volatile and not positive Net revenue in 2019 only increased slightly by 0.4% while net income decreased by 3.05% DHG plans revenue not to grow positively in 2020, instead, set goals to cut costs to improve net income Growth will be modest for 2020 and 2021 for both net revenue and net income as analyzed above The company's ROE has also tended to decrease in the last years Overpriced stocks plot below the SML Looking at the figure, it can be seen that DHG stock is overpriced The difference between the fair and actually expected rates of return on a stock is called the stock’s alpha, denoted by α Investors will sell LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com securities with α < The alpha of DHG stock is: α = E(r) – {Rf + β x [R(m) – Rf]} = 8% - [1.80% + 0.53 x (13.50% - 1.80%)] = - 0.001% Moreover, the intrinsic value of DHG stock is lower than market value Therefore, I make a recommendation to sell this stock 4.5.2 For DHG Pharmaceutical Joint Stock Company Through the analysis of financial ratio and Dupont, The author points out the disadvantages of the financial situation of the company and makes the following recommendations: 4.5.2.1 Account receivables The company should have policies to monitor and implement the collection of "account receivables" more effectively because receivable turnover of DHG Pharma was lower than that of Traphaco – a company of similar size and similar equity When days’ sales in receivables is shorter, the company can put this appropriated capital into its business investment to improve its capital efficiency In order to collect receivables earlier, the company can make policies such as: “Paymen t Discount” for customers to pay before the due date, send payment requests to customers who owe longer than allowed time 4.5.2.2 Inventory The inventory turnover of DHG Pharma in the period from 2017 to 2019 was quite safe compared to other companies in the same industry However, this ratio tended to decrease, making days’ sales in inventory increase With a company specializing in manufacturing specific products such as DHG Pharma, the quality of the products directly affects consumers' health Long days of inventory on hand will likely reduce product quality In addition, the company's inventory was quite big and was stored for such a long period of time could lead to an increase in the company's storage costs and maintenance costs The company should have policies to enhance the promotion of its products through advertising channels and especially through seminars because it is one of the ways that the company can communicate directly with consumers LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4.5.2.3 Long – term assets The company's asset structure was in favor of short-term assets However, the proportion of current assets was increasing while long-term assets was increasing This contributed to the decline of total asset turnover The company should invest more in long-term assets to make its asset structure more reasonable 4.5.2.4 Interest expenses DHG Pharma’s interest expenses increased sharply from 2015 to 2018 During this period, the company had short-term loans from banks Interest expenses of the company was also much higher than other companies in the industry This made the interest coverage ratio drop sharply The company in the future should restrict the use of debt to reduce its dependence on external creditors Otherwise, the company's high debt to assets ratio would made the company under great pressure to pay interest expenses 4.5.2.5 Current ratio The current ratio in 2019 was quite high, higher than the reasonable level of approximately times This was a negative sign that the company's capital efficiency was not effective The company should try to reduce its current ratio 4.5.2.6 Cash ratio Cash ratio in 2019 was 0.10 times This is a concern for the ability to pay in cash of the company If this ratio is too low (almost zero), the company may have difficulty making payments and is very sensitive to any small fluctuations in its business operations The company needs to try to improve the cash ratio The company should increase the proportion of "cash and cash equivalents" in total current assets in order to serve production and business activities, guarantee short – term solvency with its own cash => If DHG Pharmaceutical Joint Stock Company can improve the above-mentioned disadvantages in the coming years, ROE will certainly increase and the company's financial situation will be improved more positively Therefore, the intrinsic value of DHG Pharma will surely increase in the future LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONCLUSION Determining the intrinsic value of common stock of a joint stock company plays an important role not only in making decisions for investors but also the company's managers, serving the goal of increasing the company's value in the long term The research topic has codified the literature review for the analysis and valuation of common stock of a joint stock company Since then, the author applied to the analysis and determination of intrinsic value of DHG stock, made recommendations to investors in buying or selling stocks The author also made recommendations to enterprise to help improve the financial situation of the company to increase the intrinsic value of stocks in the future With the above contents, the author hopes to contribute knowledge and ideas to help investors and managers of the company have a clear view, thereby accurately determine the intrinsic value of DHG stock and make investment and management decisions reasonably Due to the limitation of time and knowledge, graduation thesis will not avoid defects The author looks forward to receiving comments from teachers, friends and readers to continue researching and developing the topic LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... in the future, I decided to choose the research topic: DETERMINING THE INTRINSIC VALUE OF COMMON STOCK – THE CASE OF DHG PHARMACEUTICAL JOINT STOCK COMPANY  Research questions - What is the intrinsic. .. and the intrinsic value are the same 1.1.5 Definition of stock valuation Stock valuation is a method of determining the intrinsic value of a stock The importance of valuing stocks evolves from the. .. disposing of the stock in any other way The transfer of stock is entirely at the discretion of The articles of incorporation are the rules approved by the state that govern the management of the corporation