(Luận văn HV chính sách và phát triển) traphaco JSC analysis and valuation

PREFACE Over the past 20 years since the Decree No 48 / CP of the Government was signed on July 11, 1998, Vietnam's stock market has undergone many changes, but is also growing stronger and stronger many different stages Vietnam stock market has expanded strongly in terms of the number of securities codes, capitalization, transaction value In which, the total market capitalization of trading floors reached over million billion dong, the number of listed and registered companies traded more than 1,550 codes Many industries have been developed along with economic growth The stock market has made an important contribution to Vietnam's economic development Currently, the pharmaceutical industry is being interested in by many investors because it has a lot of potential for development The outstanding names in the pharmaceutical industry include Hau Giang Pharmaceutical JSC, Traphaco JSC, Traphaco JSC has a quite different direction than other companies in the same industry, which is more focused on traditional medicine Traphaco is almost monopoly, occupying a large market share in this segment Realizing this, I chose my thesis topic "Traphaco JSC: Analysis and valuation" to clarify the potential of this stock code Research Objective  Research Question: How we identify the fair value of TRA’s stock?  General Objective: Using Literature Review and applying it to find out the intrinsic value of TRA’s stock  Specific Objective: o Analyzing business performance of TRA and forecasting the potentials of TRA in five consecutive years (2019-2023) LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com o Using valuation methods to determine the intrinsic value of TRA’s stock and comparing this value with the market price so as to whether TRA has been overvalued or undervalued o Relying on the valuation outcome and then recommending investors whether they should invest in this stock or not Research Object TRAPHACO joint stock company Research Scope  Time: 2014 – 2018  Limited research: Vietnam Research Methods  Literature reviewer  Data analysis Research Structure My thesis has been devided to chapters: - Chapter 1: Literature Reviewer - Chapter 2: Analysis of TRA performance - Chapter 3: Valuation and Recommendations LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: LITERATURE REVIEW 1.1 Definitions 1.1.1 Stock market The stock market is a place for individuals or businesses to buy, sell and issue shares regularly These financial activities are carried out through official institutional exchanges or the free trading market (OTC) operating under defined regulations There may be multiple stock exchanges in a certain country or region Stock markets and stock exchanges can be used to replace the same place 1.1.2 Stock Stock is a financial asset, which is a type of securities issued in the form of a certificate or book, confirming the ownership and legitimate interests of the owner of the property Stocks are bought and sold mainly on stock exchanges, although there may be private sales, and are the foundation of almost every portfolio These transactions must comply with Government regulations to protect investors from fraud These investments can be purchased from most securities brokers 1.1.3 Valuation A valuation is an estimate of how much a business, property, or any asset is worth There are many different tools for implementing valuations A financier wants to implement valuation, they will analyze the management structure, capital structure, market value and future prospects In finance, things that are valued are financial assets (such as stocks, options, businesses, etc.) and debts such as bonds issued by a company Valuation models: are models created by investment analysis for the purpose of determining the value of financial assets These models have inputs that are collected LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com from avaiable information sources about assets such as financial reports, information on similar products, market movement, and so on Then, this information is processed through caculations and analysis combined with the subjective judment of the model user, and then he output is the intrinsic value of the financial asset (Bodie et all, Investment 2015) 1.1.4 Intrinsic value Intrinsic value is the qualitative or quantitative value of an asset, an investment or a company This term is used in basic analysis to estimate a company's value and its cash flow The intrinsic value used is the interest amount in the option contract Intrinsic value is calculated using basic analytical techniques to assess an enterprise in all aspects such as business model, corporate governance, market factors affecting businesses, goals of the business The value obtained is compared to the market value to determine whether the business is overvalued or too low by the market Typically, investors will use both qualitative measures and quantitative measures to get the most accurate results about the intrinsic value of a business However, all is an estimate, not a sure thing 1.1.5 Valuation methods a Net asset value (NAV) Net asset value (NAV) is the value of all financial assets and non-financial assets minus the value of unpaid debts, often related to financial funds, because of those funds is registered with the Securities Commission The Securities Commission is acquired by their net asset value It is an important indicator of hedge funds and hedge funds when calculating the value of the underlying investments in these funds of investors This may be like the book value or equity value of a business Net asset value can represent the value of total equity or can be divided by the number of outstanding shares of investors LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The formula for a mutual fund's NAV calculation is straightforward: NAV = The correct qualifying items should be included for assets and liabilities of a fund b Valuation by discounted cash flow model (DCF) The DCF model is a way to evaluate the value of a stock or an investment project for an investor Analysts use this method to determine the future cash flow of a specific stock or project discounting the present value, thereby assessing the feasibility of the investment project If the future cash flow after the discount is too large compared to the current investment cost of the project, it can be assessed that this is a good investment project DCF model is built on the foundation of the concept of time value of money and the relationship between profit and risk Models can be represented as mathematical expressions as follows: PV = + + … + + Where: CFt is the expected cash flow to be obtained in the future, k is the discount rate used to discount the cash flow to the present value, n is the number of periods The DCF model is widely used in corporate financial decisions, especially investment decisions, specifically: - Valuation of assets, including tangible fixed assets and financial assets to make a decision to buy or sell it - Analyzing, evaluating and deciding investment in the project is highly feasible - Analyzing, evaluating and deciding whether to buy or rent fixed assets LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  Advantages of DCF This method takes into account the entire economic life of an investment and income It brings a profit earned by a new project It creates weight over time of financial factors Because discounted cash flow methods are clear and often consider the time value of money, this is the best method to use for long-term decisions It allows direct comparison of the expected return of investments with borrowing costs that other methods cannot It creates a grant for the difference in the time that investments generate their income This approach by recognizing the time factor provides enough for uncertainty and risk It provides a good measure of the relative profitability of capital expenditure by reducing income on current values  Disadvantages of DCF Assumptions regarding permanent growth and discount rates make the DCF calculated value more sensitive Valuation of DCF will fluctuate and will not calculate the value needed if there are any smallest changes It is best used only when there is a high degree of confidence in cash flow in the future Analyzing a company with a stable past cash flow, such as a food or health care company unaffected by changes in the economy, can make comparisons of trends stable planning in the future easier Profitable companies with abundant cash flow are more likely to continue to increase cash flow in the future, or hold on if the recession occurs Problems with using this model can happen to businesses with erratic cash flows, making it difficult to predict the future New companies that tend to be unproven or immature are also hard to judge using the DCF method LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DCF model is suitable for longer term investment because it creates long-term value, not suitable for short-term c Free cash flow (FCF) Free cash flow is a method of assessing business activities which is calculated by the difference between operating cash flow and capital expenditure On the other hand, free cash flow is the cash value that businesses can obtain after expanding assets for production and business activities If you want to maximize value for shareholders, it is imperative that businesses understand what free cash flow is, thereby building investment opportunities Businesses will find it difficult to conduct business activities such as advertising, product development and paying dividends without cash Free cash flow is calculated as follows: FCF = Net income+Depreciation–Change in Working capital–Capital expenditure The FCF is the unit of measurement of the company's cash available by working capital and fixed capital investments, or capital expenditure (CAPEX), over a certain period of time Companies want to enhance the value of shareholders, the FCF is a good way to express it As the free cash flow increases, the strength of the balance sheet increases However, when negative free cash flow is not only a bad sign, it may be a sign that the company is investing in many different projects This valuation method can increase the value in the long term if the investments bring returns to investors There are two types of free cash flow: Free Cash Flow for the Firm (FCFF) and Free Cash Flow to Equity (FCFE) In the content of this thesis, I use the Free Cash Flow to Firm (FCFF) model  Free cash flow to firm (FCFF) Free cash flow to firm (FCFF) is the remaining cash flow for the entire company (those who own assets) and so it is also called free cash flow Free cash flow to firm LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (FCFF) represents the amount of cash flow from operations available for distribution after depreciation, tax, working capital and investment costs are accounted and paid FCFF is basically a measure of the company's profit after all costs and reinvestment This is one of many benchmarks used to compare and analyze the financial health of a company FCFF represents cash available to investors after a company has paid all business costs, invested in current assets (such as inventory) and invests in long-term assets ( as device) FCFF includes both bondholders and shareholders when considering the remaining amount for investors FCFF method is a good method for company operation It is taken into account all types of cash flows from cash, cash expenditures and reinvestments needed to maintain business operations The remaining amount after performing all these activities represents the company's FCFF Free cash flow for businesses - FCFF is said to be the most important financial index of the stock value of the business Using FCFF is the cash flow left after dismissing all responsibilities and projections for the future will bring high accuracy There are many formulas to determine free cash flow, one of which is: FCFF = Net income + Non-cash charges + Interest x (1-tax) – Long-term investment – Investment in worrking capital Other equations include: FCFF = Cash Flow from Operations + Interest Expense x ( - Tax Rate) - Capex FCFF = EBIT x (1 - tax rate) + Depreciation – Capital expenditures – Increase in Net working capital FCFF = EBITDA x (1 - tax rate) + Depreciation x tax rate -Long-term investments - Investments in working capital LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  Benefit of Using FCFF: The value of a stock is the sum of the expected cash flows of the business in the future However, stocks are not always correctly priced When understanding the FCFF method, investors who are allowed to check that stock investment are worth it It also shows the ability to pay dividends of businesses, buy back stocks or repay debts Investors should check FCFF if they want to invest in bonds or businesses Businesses after deducting costs still have cash to prove the FCFF value is positive Conversely, when the negative FCFF value indicates that the firm does not generate enough revenue to generate profit At that time, investors should go find out why it is so  Limits of Using FCFF One fact is not going to solve every investor problem: Free cash flow is only as good as the accuracy of the forecasts that are being used to simulate future growth A lot of things can happen to a company over the course of 365 days It only works when there is visibility: Free cash flow metrics will only work when a company is operating with 100% transparency If there are questions about the sales practices, cost trends, and other information that can affect the free cash flow, then there is too much uncertainty to use this measurement as a tool for the investor It also only works based on the projections created by the investor Free cash flow is a good piece of information to have, but the investor is forced to still make assumptions about what will happen in the future The accuracy of those assumptions will create a projection that either hits the nail on the head or falls fall short and hits the investor square on the thumb Being off by just percentage point for some companies can change the financial outlook be tens of millions of dollars LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com d DDM model The dividend discount model is a different model than the above This model analyzes based on the value of dividends that businesses pay to investors, because the main dividend is the actual amount remaining after the business that shareholders receive regularly after each year Money will bring the company's value to shareholders Formula calculated as follows: Value of stocks = According to DDM theory, dividends are the income that shareholders will have in the future To evaluate a company using DDM model, it is necessary to estimate the dividend value that the company can pay next year for investors The DDM model has two main types, namely, the dividend model does not grow and the dividend model increases over time  Advantages of DDM Justification: The main advantage of the model is based on theory Theory is indisputable The company's value is basically the value of never-ending permanent dividends that buyers intend to receive later over time Consistency: dividends tend to remain stable for a long time despite how much volatility occurs However, dividends will only be paid from cash in the planned company's annual fund Companies announce additional dividends in the form of onetime dividends No control required: for minority shareholders holding only a few stocks, the stock is the only way to value While individuals or financial institutions affect the decisions of companies by holding large amounts of stocks that minority shareholders not have Therefore, receiving annual dividends is the only thing they can be sure of 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In the 2014-2015 period, Traphaco will have a turnover of 1.35 to 1.47 and decrease in 2015 - 2018 (1.47 to 1.13) From 2016-2018, Traphaco continues to invest in building and put into operation new pharmaceutical factory Thus, total assets turnover of TRA reduced in as the corporation made some long term investment withdrawals Also in this period, the focus on building more and increasing the capacity of the factory has helped the sales revenue growth well f Capital struture 400,000 145% 350,000 140% 300,000 250,000 135% 200,000 130% 150,000 100,000 125% 50,000 120% 2014 2015 Short-term liabilities 2016 2017 Long-term liabilities 2018 Financial Leverage Figure 26 - Capital Structure In 2018, Traphaco's debt was VND 482,648 million, increase VND 91,793 million compared to the same period last year, due to a raised in long-term debt from VND 10,410 million at the end of 2017 to VND 170,403 million at the end of 2018 The loan structure during the year was shifted when had more the long-term loans in 2018 Capital from current short-term loans is mainly used for the trading of raw materials in the system of production and working capital supplement 72 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The ratio of short-term debt to total liabilities of the company is always high (about 60-70%) mainly due to payables from sellers, usually accounts for 25% - 30% of total short-term debt At this stage, the financial leverage was gradually raised to 1.44 because in 2018, Traphaco borrowed a large amount of money, so the financial leverage increased again to make up for the loan 2.4.3 DuPont analysis ROE 15.78% Equity multiplier 1.44 ROA 10.99% Total assets turnover 113.11% Profit margin 9.7% Sales 1,798,349,6 66,292 Net income 174,773,496 ,962 Total costs COGS 863,658,955 ,814 Sales 1,798,349,6 66,292 Depreciation Total assets 1,589,862,0 38,209 Fixed assets 730,467,787,8 30 Cash 316,133,597 ,252 Sales 1,798,349,6 66,292 Current assets 859,394,250,3 79 Account receivable 153,573,242 ,990 Inventory 337,532,727 ,721 Figure 27 - DuPont Analysis in 2018 73 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table 2.4 - The basic DuPont analysis Net profit Assets Equity margin turnover Multipiler 2016 11.4% 1.38 1.36 2017 13.9% 1.21 1.35 2018 9.7% 1.13 1.44 Overall, in 2016-2017, all indicators increased but by 2018, this index fell again, causing ROE to drop sharply from 23.3% in 2017 to 15.8% in 2018 There is only an indicator increase is financial leverage Prove that in recent years, the company has always used good financial leverage to increase profits And another reason is part of the debt was paid However, it should not be used too much because it can be counterproductive ROA increased slightly from 2016 to 2017 (from 15.8% to 16.8%) and then fell sharply in 2018 (from 16.8% to 11%) ROA measures how efficient a company’s management is in generating earnings from their assets In this case, along with the sharp increase in interest expenses, generally, the health of TRA is not good Net profit margin increased in 2017 and decreased in 2018 (from 13.9% to 9.7%) The decline in net profit margin is due to better cost management than 2017, but declining net sales and inventories are much higher, interest expenses higher than 2017 (4.72 times higher than 2017) To explain the decline in net revenue is due to the decline in entrusted import-export business and revenue from subsidiaries All loans come from short-term bank loans 70% of TRA's revenue and 93% of gross profit comes from self-produced products In particular, revenue from oriental medicines currently accounts for 77% with two main products: Boganic currently accounts for 22% of the market share of activated liver and vascular tonic, currently accounting for 12% of the nerve market share Total revenue from these products accounts for about 50% of TRA's finished product sales Revenue from medicine contributes 23% 74 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com to the finished product revenue with the main product being T-B cough and mouthwash Table 2.5 - DuPont model extends Tax Interest EBIT Assets Financial Burden Burden margin turnover leverage 2016 80.29% 100.69% 14.07% 1.38 1.36 2017 80.71% 99.69% 17.3% 1.21 1.35 2018 80.83% 99.71% 12.06% 1.13 1.44 Tax Burden measurement of the level of corporate income tax that companies must pay Within three years, the tax burden tends to increase In 2016, tax burden is 80.29%, the company retained 80.29% for each contract they made after subtracting all the costs From 2017-2018, the tax burden keep increasing 80.83% (increase 0.54% compared to 2016) The change of tax burden is very small, but it goes in a bad direction because of the increasing trend This shows that, the company has to pay more and more tax but the profit does not increase rapidly, adding a tax burden The ratio between Earnings before tax compared to Earnings before tax and interest (EBIT) is call Interest burden In 2016, it was 100.69%, it is very high, indicating that the company almost no financial leverage In 2017, it plummeted down to 99.69%, financial leverage was higher, with companies that have benefited more But in 2018, it increased slightly by 0.02%, not significantly This shows that the company absolutely no short-term loans or to pay off, it has no financial leverage EBIT Margin is an indicator to assess the level of production costs compared to revenue EBIT margin has not grown in the past years, not following a fixed trend In 2016, EBIT margin is 14.07% In 2017, EBIT margin increased 17.3% (up to 3.32% compared to 2016) In 2018, EBIT margin decrease again to 12.06% in 2018 (up to 5.24% compared to 2017) 75 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2.5 Analysis of major risk related to operating activities 2.5.1 Business risks in the new pharmaceutical segment The goal of invading the Western Pharmaceutical segment can dilute its advantages like the Oriental medicine segment At the same time, when Western pharmaceutical manufacturing enterprises are gradually gaining position in the market, Traphaco may face difficulties in competing with other competitors in the industry 2.5.2 Risk of price competition The proactive strategy in producing and processing clean raw materials, enhancing product research and development activities is an opportunity as well as a challenge for Traphaco when the company can face difficult and cost-effective team problems price competition Foreign competitors dominate the pharmaceutical market in Vietnam plus the psychology of consumers when favoring Western pharmaceutical products over Oriental pharmaceutical products also makes it difficult for the company 2.5.3 Risks related to corporate governance situation SCIC's ownership rate accounts for 35.67% of Traphaco's capital and with the control actions from SCIC may negatively affect the ambitious development plan and orientation of Traphaco in the upcoming development period Traphaco is under pressure to sell shares from its management 2.5.4 Risk of law and tax policies The pharmaceutical industry is one of the industries affected by the state's management The Government has issued many legal documents to manage the pharmaceutical industry, including documents related to issues such as the State's policies on pharmaceuticals and the State's management of drug prices and business conditions drugs and drug management on the list of drugs subject to special control, drug quality standards, drug testing establishments 76 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Besides, it is an enterprise operating in the form of a joint stock company, business activities of the Company under the influence of Enterprise Law, Pharmaceutical Law, Securities Law, Sub-law documents and other laws Laws and documents under this law are in the process of being finalized, changes in policies may occur and, when they occur, will more or less affect the business situation of the Company 2.5.5 Risk of counterfeit and fake goods Currently, the phenomenon of counterfeit goods and goods violating intellectual property rights in the pharmaceutical sector is becoming a worrying fact for pharmaceutical enterprises with healthy business and production activities in the market On September 30, 2006, the Ministry of Health issued a decision on the issuance of data security regulations for drug registration records The introduction of intellectual property law together with the above decision will contribute to the protection of pharmaceutical enterprises against the infringement of counterfeit and counterfeit goods as well as further strengthening the competitive environment of the pharmaceutical industry Although the Government has applied many measures to protect the trademark of domestically produced goods, counterfeit goods, counterfeit goods and smuggled goods appear more and more popular and sophisticated in the market Counterfeit goods, counterfeit goods, and smuggled goods cause huge damage to the interests and reputation of businesses, especially for pharmaceutical companies because of counterfeit and smuggled pharmaceutical products Quality directly threatens the health and life of users Therefore, the Company always consciously protects its products by improving the quality, design, packaging and paying more attention to the trademark and trademark registration 77 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2.6 Potential of investment project 2.6.1 Situation of important investment projects TRA is proactive in raw materials when using 80% of domestic materials while other enterprises mainly import nearly 90% of raw materials from China Traphaco aims to develop a closed material area, most of Traphaco's medicinal raw materials come from farming activities of high-tech Traphaco and Traphaco SaPa Since then, limiting input import costs and managing the quality of pharmaceutical materials, improving gross profit margin over the years (up from 49.8% in 2016 to 55.6% in 2017, higher than the Other pharmaceutical enterprises, in which products from Eastern Pharmacy contribute mainly (more than 70%) in the company's gross profit Traphaco's ROE has reached 12.7% last year TRA always promotes research and development activities, especially with R&D activities, annually Traphaco averages between and 5% of revenue for this activity At the same time, Traphaco constantly promote research and development activities by investing in human resources, research cooperation and protection of copyright of authors It can be seen that R&D is the strength of Traphaco, with new products constantly being deployed and contributing regularly to annual revenue 2.6.2 Subsidiaries, associates, joint ventures Traphaco has subsidiaries with 100% share capital and subsidiaries with a share capital of 51% and 58% On October 29, 2012, TRAPHACO became a major shareholder of Quang Tri Pharmaceutical - Medical Supplies Joint Stock Company with the ownership rate of 42.91% of the charter capital operating in 2017, is the most modern medicine factory in Vietnam We expect the profit it brings in the future 2.7 SWOT Analysis Strenght Weakness Traphaco is the leading pharmaceutical The ability to manage costs is not really 78 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com company in the market with different good, still spending a lot on unnecessary business strategies: According to IMS or not so important activities Health Vietnam, Traphaco holds 1.3% Asset management and equity, the market share of Vietnam pharmaceutical company has not done well, ROA and industry, and maintains its No position ROE ratios are quite low and it can be in the Eastern Medicine market While further improved if we know how to foreign businesses are holding many invest advantages in the Western pharmaceutical sector, Traphaco's choice of niche markets has created a competitive advantage for the company At the same time, choosing to focus on the OTC market also shows the difference of Traphaco when many other enterprises rely on wholesale systems primarily TRA is proactive in raw materials when using 80% of domestic materials while other enterprises mainly import nearly 90% of raw materials from China Most of Traphaco's medicinal raw materials come from farming activities of subsidiaries, including Traphaco Joint Stock Company Sapa and Traphaco High-tech Joint Stock Company Opportunity Threats Currently, the consumption trend of the Although Traphaco is strong in people has also changed compared to a the Oriental medicine segment, it is 79 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com few years ago People tend to use more weaker than other companies in Western traditional medicines, or combination of medicine There are many strong western and western medicine The domestic and foreign companies in this advantage of Traphaco is that it has a segment such as Hau Giang long-standing source of medicinal herbs Pharmaceutical JSC (DHG) accounting and traditional medicine, Traphaco for about 90% market share of domestic should make use of that source to products In this segment, products research new product lines such as distribute much via ETC channel functional foods and herbal medicine (treatment system) and OTC channel supplements to serve Increasing demand In 2017, Traphaco inaugurated the most of consumers pharmaceutical Above industry all, has the modern Western pharmaceutical factory been in Hung Yen province, officially receiving positive support from the State: investing more in this area However, The guidelines and policies of the State with its small market share in the western and the whole industry have always pharmaceutical segment and with many focused on developing Vietnam's long- competitors, it will be quite difficult and standing traditional medicine industry a big challenge for Traphaco with the continuous improvement of programs to support enterprises in developing medicinal areas; research and development of pharmaceutical processing activities 80 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 3: RECOMMENDATION 3.1 Estimate and valuation 3.1.1 DCF Valuation: Free Cash Flow to Firm (FCFF) I have chosen Free Cash Flow to Firm (FCFF) to evaluate TRA which has high leverage and high growth prospects I expect that the revenue of TRAPHACO in FY2019 will growth by 11% the assumption that consumption volume will increase by 10%, remaining steady I estimate that TRAPHACO will reach VND 361,569 million in revenue 900,000,000,000 800,000,000,000 700,000,000,000 600,000,000,000 500,000,000,000 400,000,000,000 300,000,000,000 200,000,000,000 100,000,000,000 2019F 2020F 2021F 2022F 2023F Revenue Figure 28 - Revenue forecast in 2019 - 2023  Capex: We assume that in the next years, TRA will expand its business by building more drug factories to achieve the goal of creating green products to protect human health We expect Capex will grow 20% in the next years 81 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com  Cost of equity: The cost of equity was calculated using the CAPM The risk-free rate of 4.9% was obtained from 10-year Vietnam Government Bond Yield (March 2019, Hanoi Stock exchange) Market return of 18% was computed by stock price 500 days return from 15 March 2017 to 15 March 2019 I used the industry's beta to apply CAPM calculation in this case using the function in excel I used the beta of 10 pharmaceutical companies and the market capitalization rate of each company and got the result of 0.267 Applying CAPM to the above components resulted in the cost of equity of 8.4% Table 3.1 - CAPM model  Rf 4.9% Rm 18% Beta 0.267 Cost of Equity 8.4% Cost of debt: Cost of debt is calculated by following formula: When I use the Excel functions in combination with the formula, I get a very small number compared to the expectations Therefore, I will use the calculated data in the report of PHS So, I have WACC by using formula: Table 3.2 - WACC valuation Cost of debt 5.1% Equity / Total debt & equity 96.5% Debt / Total debt & equity 3.5% 82 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 10.97% WACC  Terminal value: Terminal growth rate is calculated based on estimate free cash flow and use excel function The final terminal growth rate is 8% which is explained more in appendix Table 3.3 - FCFF valuation Free cash flow to firm (million of 2019F 2020F 2021F 2022F 190,861 280,900 325,758 2023F VND) 82,787 FCFF 336,391 3,311,784 Terminal value 82,787 Total 190,861 280,900 325,758 3,648,175 Firm value: PV of FCFF & Terminal value 2,817,915 Number of shares outstanding Target price 41.454 67,982.6 3.1.2 Multiples Valuation Valuation using both Forward P/E and P/B ratio P/E & P/B reflects the direct relationship between price and EPS, price and book value per share I choose peers group based on the similar characteristics with SAB in terms of product lines and financial performance In Vietnam, DHG, IMP, PME and DMC are the biggest competitor of TRA 83 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table 3.4 - P/E & P/B valuation Price Weight Forward P/E 76,994 50% Forward P/B 69,772 50% Target price 73,383 100% 3.1.3 Valuation Forward PE & PB of peers To, forecast PE & PE of peers I collect this peers’ ratios during years ago and use excel function to forecast trend in 2019 Then, to evaluate SAB’s ratios, we use median between other company in the same industry The result for forward TRA’s PE & PB equal to 17.302 & 2.57 Forecast EPS & Book value of TRA Because TRA has number of outstanding share is constant Therefore, I evaluate similar with forecast of peers I collect information from financial statements of TRA and forecast trend The forward EPS and Book value per share equal to VND 4,450 and VND 27,170 From my prediction, the target price from Multiples Valuation is VND73,383 3.1.4 Weighting of the models Both DCF & multiples pricing are importance because each method has different strengths Therefore, I assign weight for DCF with 50%, multiples with 50% and reach the target price of VND 70,682 Table 3.5 - Multiples valuation FCFF Price (VND) Weight 67,982.6 50% 84 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Forward P/E 76,994 25% Forward P/B 69,772 25% Target price 70,682 100% 3.2 Recommendation 3.2.1 For investors Although I not deny the possibility of improvement in TRA's business performance in the coming years when strategic investors appear, I believe these improvements, if any, will not be reflected immediately in the next 1-3 years I will adjust my forecast when there are clear signs of improvement in business results Using the combined DCF and P/E & P/B valuations, my target price for TRA shares is VND 70,682 / share HOLD recommendation 3.2.2 For TRA In order to increase profit for TRA, I suggest that TRA should not focus too much on traditional medicines and functional foods, to expand and improve the performance of Western pharmaceutical factories In addition, TRA needs to expand its market share in the ETC segment, because the trend of the Vietnamese people is now to go to check-ups and buy prescription drugs, not like they used to buy prescription drugs TRA expanded more branches as well but shouldn't be too much Research and develop new products with functional foods 85 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 86 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... intelligent business analysis 1.2.3 Financial analysis Financial analysis is a set of concepts, methods and tools that allow the collection and processing of accounting information and other management... fiscal and monetary policies to control the economy through the central bank 1.2.2 Industry analysis Industry analysis is an assessment of a specific industry and related companies The industry analysis. .. based on SWOT Analysis, it is not enough to assess and orient the goals For example, a long list of problems cannot be solved by strengths and weaknesses and they are also important and must be