(Luận văn) 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 lu over million billion dong, the number of listed and registered companies traded more an than 1,550 codes Many industries have been developed along with economic growth n va The stock market has made an important contribution to Vietnam's economic to gh tn development Currently, the pharmaceutical industry is being interested in by many investors ie p because it has a lot of potential for development The outstanding names in the nl w pharmaceutical industry include Hau Giang Pharmaceutical JSC, Traphaco JSC, d oa Traphaco JSC has a quite different direction than other companies in the same industry, an lu 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 va Research Objective oi lm ul nf "Traphaco JSC: Analysis and valuation" to clarify the potential of this stock code z at nh  Research Question: How we identify the fair value of TRA’s stock?  General Objective: Using Literature Review and applying it to find out the z intrinsic value of TRA’s stock @ l gm  Specific Objective: o Analyzing business performance of TRA and forecasting the potentials of TRA m co in five consecutive years (2019-2023) an Lu n va ac th si 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 lu an Research Scope n va  Time: 2014 – 2018 gh tn to  Limited research: Vietnam Research Methods p ie oa nl w  Literature reviewer  Data analysis Research Structure d lu va an My thesis has been devided to chapters: ul nf - Chapter 1: Literature Reviewer oi lm - Chapter 2: Analysis of TRA performance z at nh - Chapter 3: Valuation and Recommendations z m co l gm @ an Lu n va ac th si 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 lu may be multiple stock exchanges in a certain country or region Stock markets and an n va stock exchanges can be used to replace the same place Stock is a financial asset, which is a type of securities issued in the form of a ie gh tn to 1.1.2 Stock p certificate or book, confirming the ownership and legitimate interests of the owner of the property nl w d oa Stocks are bought and sold mainly on stock exchanges, although there may be an lu private sales, and are the foundation of almost every portfolio These transactions must comply with Government regulations to protect investors from fraud These va 1.1.3 Valuation oi lm ul nf investments can be purchased from most securities brokers z at nh 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 z @ to implement valuation, they will analyze the management structure, capital structure, l gm 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 m co company an Lu Valuation models: are models created by investment analysis for the purpose of ac th n va determining the value of financial assets These models have inputs that are collected si 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 lu or a company This term is used in basic analysis to estimate a company's value and its an cash flow The intrinsic value used is the interest amount in the option contract n va tn to Intrinsic value is calculated using basic analytical techniques to assess an enterprise in all aspects such as business model, corporate governance, market factors gh p ie 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 nl w Typically, investors will use both qualitative measures and quantitative measures to get d oa the most accurate results about the intrinsic value of a business However, all is an 1.1.5 Valuation methods oi lm a Net asset value (NAV) ul nf va an lu estimate, not a sure thing Net asset value (NAV) is the value of all financial assets and non-financial z at nh assets minus the value of unpaid debts, often related to financial funds, because of z 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 gm l hedge funds when calculating the value of the underlying investments in these funds of m co 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 an Lu outstanding shares of investors n va ac th si 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 lu an specific stock or project discounting the present value, thereby assessing the feasibility n va of the investment project If the future cash flow after the discount is too large tn to compared to the current investment cost of the project, it can be assessed that this is a good investment project ie gh p 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 w d oa nl expressions as follows: + + … + + va an lu PV = oi lm ul nf 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, z at nh n is the number of periods z The DCF model is widely used in corporate financial decisions, especially @ investment decisions, specifically: gm m co l - Valuation of assets, including tangible fixed assets and financial assets to make a decision to buy or sell it an Lu - Analyzing, evaluating and deciding investment in the project is highly feasible ac th n va - Analyzing, evaluating and deciding whether to buy or rent fixed assets si  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 lu an It allows direct comparison of the expected return of investments with va borrowing costs that other methods cannot n gh tn to It creates a grant for the difference in the time that investments generate their income p ie This approach by recognizing the time factor provides enough for uncertainty oa nl w and risk It provides a good measure of the relative profitability of capital expenditure by reducing income on current values d lu va an  Disadvantages of DCF ul nf Assumptions regarding permanent growth and discount rates make the DCF oi lm calculated value more sensitive Valuation of DCF will fluctuate and will not calculate the value needed if there are any smallest changes z at nh It is best used only when there is a high degree of confidence in cash flow in the z 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 gm l stable planning in the future easier Profitable companies with abundant cash flow are m co 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 an Lu flows, making it difficult to predict the future New companies that tend to be unproven n ac th va or immature are also hard to judge using the DCF method si 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, lu it is imperative that businesses understand what free cash flow is, thereby building an investment opportunities Businesses will find it difficult to conduct business activities n va such as advertising, product development and paying dividends without cash Free cash to gh tn flow is calculated as follows: p ie FCF = Net income+Depreciation–Change in Working capital–Capital expenditure w The FCF is the unit of measurement of the company's cash available by working oa nl capital and fixed capital investments, or capital expenditure (CAPEX), over a certain d period of time Companies want to enhance the value of shareholders, the FCF is a va an lu good way to express it ul nf As the free cash flow increases, the strength of the balance sheet increases oi lm 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 z at nh the value in the long term if the investments bring returns to investors z 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 gm l Flow to Firm (FCFF) model m co  Free cash flow to firm (FCFF) an Lu 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 n va ac th si (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 lu an considering the remaining amount for investors va n FCFF method is a good method for company operation It is taken into account to tn all types of cash flows from cash, cash expenditures and reinvestments needed to ie gh maintain business operations The remaining amount after performing all these p activities represents the company's FCFF nl w Free cash flow for businesses - FCFF is said to be the most important financial d oa index of the stock value of the business Using FCFF is the cash flow left after an lu dismissing all responsibilities and projections for the future will bring high accuracy nf va There are many formulas to determine free cash flow, one of which is: oi lm ul FCFF = Net income + Non-cash charges + Interest x (1-tax) – Long-term investment – Investment in worrking capital z at nh Other equations include: z FCFF = Cash Flow from Operations + Interest Expense x ( - Tax Rate) - Capex @ l gm FCFF = EBIT x (1 - tax rate) + Depreciation – Capital expenditures – Increase in Net working capital m co FCFF = EBITDA x (1 - tax rate) + Depreciation x tax rate -Long-term an Lu investments - Investments in working capital n va ac th si  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 lu positive Conversely, when the negative FCFF value indicates that the firm does not an generate enough revenue to generate profit At that time, investors should go find out n va why it is so gh tn to  Limits of Using FCFF p ie One fact is not going to solve every investor problem: Free cash flow is only as w good as the accuracy of the forecasts that are being used to simulate future growth A oa nl lot of things can happen to a company over the course of 365 days d It only works when there is visibility: Free cash flow metrics will only work lu va an when a company is operating with 100% transparency If there are questions about the ul nf sales practices, cost trends, and other information that can affect the free cash flow, oi lm 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 z at nh flow is a good piece of information to have, but the investor is forced to still make z 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 gm l investor square on the thumb Being off by just percentage point for some companies m co can change the financial outlook be tens of millions of dollars an Lu n va ac th si 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 = lu an n va According to DDM theory, dividends are the income that shareholders will have tn to 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 gh p ie two main types, namely, the dividend model does not grow and the dividend model w increases over time oa nl  Advantages of DDM d Justification: The main advantage of the model is based on theory Theory is lu va an indisputable The company's value is basically the value of never-ending permanent ul nf dividends that buyers intend to receive later over time oi lm 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 z at nh company's annual fund Companies announce additional dividends in the form of one- z time dividends @ gm No control required: for minority shareholders holding only a few stocks, the m co l 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 an Lu not have Therefore, receiving annual dividends is the only thing they can be sure of n va ac th 10 si 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 lu 400,000 145% an va 350,000 n 140% 300,000 tn to 250,000 gh 135% p ie 200,000 nl 125% d oa 50,000 w 100,000 130% 150,000 2014 120% 2015 2016 va an lu Long-term liabilities 2018 Financial Leverage oi lm ul nf Short-term liabilities 2017 Figure 26 - Capital Structure z at nh 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 z @ VND 10,410 million at the end of 2017 to VND 170,403 million at the end of 2018 l gm 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 m co materials in the system of production and working capital supplement an Lu n va ac th 72 si 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 lu an n va ie gh tn to ROE 15.78% Equity multiplier 1.44 p ROA 10.99% d oa nl w Total assets turnover 113.11% Total assets 1,589,862,0 38,209 Sales 1,798,349,6 66,292 oi lm ul Sales 1,798,349,6 66,292 Sales 1,798,349,6 66,292 Current assets 859,394,250,3 79 z at nh Total costs nf Net income 174,773,496 ,962 va an lu Profit margin 9.7% Fixed assets 730,467,787,8 30 z @ Depreciation Cash 316,133,597 ,252 Account receivable 153,573,242 ,990 Inventory 337,532,727 ,721 m co l gm COGS 863,658,955 ,814 an Lu Figure 27 - DuPont Analysis in 2018 n va ac th 73 si 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 lu Overall, in 2016-2017, all indicators increased but by 2018, this index fell again, an causing ROE to drop sharply from 23.3% in 2017 to 15.8% in 2018 There is only an n va indicator increase is financial leverage Prove that in recent years, the company has to tn always used good financial leverage to increase profits And another reason is part of ie gh the debt was paid However, it should not be used too much because it can be p counterproductive nl w ROA increased slightly from 2016 to 2017 (from 15.8% to 16.8%) and then fell d oa sharply in 2018 (from 16.8% to 11%) ROA measures how efficient a company’s an lu 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 nf va oi lm ul 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 z at nh 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 z decline in entrusted import-export business and revenue from subsidiaries All loans @ gm come from short-term bank loans 70% of TRA's revenue and 93% of gross profit l comes from self-produced products In particular, revenue from oriental medicines m co currently accounts for 77% with two main products: Boganic currently accounts for an Lu 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 ac th 74 n va about 50% of TRA's finished product sales Revenue from medicine contributes 23% si to the finished product revenue with the main product being T-B cough and mouthwash Table 2.5 - DuPont model extends lu 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 an va n Tax Burden measurement of the level of corporate income tax that companies to gh tn 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 ie p the costs From 2017-2018, the tax burden keep increasing 80.83% (increase 0.54% nl w compared to 2016) The change of tax burden is very small, but it goes in a bad d oa direction because of the increasing trend This shows that, the company has to pay an lu more and more tax but the profit does not increase rapidly, adding a tax burden nf va The ratio between Earnings before tax compared to Earnings before tax and oi lm ul 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 z at nh 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 z company absolutely no short-term loans or to pay off, it has no financial leverage @ l gm 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 m co 2016, EBIT margin is 14.07% In 2017, EBIT margin increased 17.3% (up to 3.32% an Lu compared to 2016) In 2018, EBIT margin decrease again to 12.06% in 2018 (up to 5.24% compared to 2017) n va ac th 75 si 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 lu an 2.5.2 Risk of price competition va n The proactive strategy in producing and processing clean raw materials, to gh tn 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 ie p problems price competition Foreign competitors dominate the pharmaceutical market nl w in Vietnam plus the psychology of consumers when favoring Western pharmaceutical d oa products over Oriental pharmaceutical products also makes it difficult for the company an lu 2.5.3 Risks related to corporate governance situation nf va SCIC's ownership rate accounts for 35.67% of Traphaco's capital and with the oi lm ul control actions from SCIC may negatively affect the ambitious development plan and orientation of Traphaco in the upcoming development period Traphaco is under 2.5.4 Risk of law and tax policies z at nh pressure to sell shares from its management z @ The pharmaceutical industry is one of the industries affected by the state's gm l management The Government has issued many legal documents to manage the m co 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 an Lu conditions drugs and drug management on the list of drugs subject to special control, n ac th 76 va drug quality standards, drug testing establishments si 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 lu Currently, the phenomenon of counterfeit goods and goods violating intellectual an property rights in the pharmaceutical sector is becoming a worrying fact for n va pharmaceutical enterprises with healthy business and production activities in the to gh tn market p ie 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 nl w intellectual property law together with the above decision will contribute to the d oa protection of pharmaceutical enterprises against the infringement of counterfeit and pharmaceutical industry nf va an lu counterfeit goods as well as further strengthening the competitive environment of the oi lm ul Although the Government has applied many measures to protect the trademark of domestically produced goods, counterfeit goods, counterfeit goods and smuggled z at nh 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 z reputation of businesses, especially for pharmaceutical companies because of @ gm counterfeit and smuggled pharmaceutical products Quality directly threatens the health l and life of users Therefore, the Company always consciously protects its products by m co improving the quality, design, packaging and paying more attention to the trademark an Lu and trademark registration n va ac th 77 si 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, lu improving gross profit margin over the years (up from 49.8% in 2016 to 55.6% in an 2017, higher than the Other pharmaceutical enterprises, in which products from Eastern n va Pharmacy contribute mainly (more than 70%) in the company's gross profit Traphaco's to gh tn ROE has reached 12.7% last year p ie TRA always promotes research and development activities, especially with R&D activities, annually Traphaco averages between and 5% of revenue for this nl w activity At the same time, Traphaco constantly promote research and development d oa activities by investing in human resources, research cooperation and protection of an lu copyright of authors It can be seen that R&D is the strength of Traphaco, with new nf va products constantly being deployed and contributing regularly to annual revenue oi lm ul 2.6.2 Subsidiaries, associates, joint ventures Traphaco has subsidiaries with 100% share capital and subsidiaries with a z at nh share capital of 51% and 58% On October 29, 2012, TRAPHACO became a major shareholder of Quang Tri Pharmaceutical - Medical Supplies Joint Stock Company z gm @ 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 l m co 2.7 SWOT Analysis Strenght Weakness an Lu Traphaco is the leading pharmaceutical The ability to manage costs is not really n va ac th 78 si 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 lu an pharmaceutical sector, Traphaco's choice n va of niche markets has created a to competitive advantage for the company gh tn At the same time, choosing to focus on OTC market also shows the p ie the difference of Traphaco when many other d oa primarily nl w enterprises rely on wholesale systems an lu TRA is proactive in raw materials when va using 80% of domestic materials while ul nf other enterprises mainly import nearly oi lm 90% of raw materials from China Most of Traphaco's medicinal raw materials from farming activities z at nh come of subsidiaries, including Traphaco Joint z gm @ Stock Company Sapa and Traphaco High-tech Joint Stock Company l Threats m co Opportunity Currently, the consumption trend of the Although Traphaco is strong in an Lu people has also changed compared to a the Oriental medicine segment, it is n va ac th 79 si 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 lu an functional foods and herbal medicine (treatment system) and OTC channel n va supplements to serve Increasing demand In 2017, Traphaco inaugurated the most to of consumers industry all, has the modern Western pharmaceutical factory been in Hung Yen province, officially gh tn pharmaceutical Above p ie 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 nl w and the whole industry have always pharmaceutical segment and with many d oa focused on developing Vietnam's long- competitors, it will be quite difficult and an lu standing traditional medicine industry a big challenge for Traphaco to support enterprises in ul nf programs va with the continuous improvement of development of pharmaceutical z at nh processing activities oi lm developing medicinal areas; research and z m co l gm @ an Lu n va ac th 80 si 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 lu assumption that consumption volume will increase by 10%, remaining steady I an n va estimate that TRAPHACO will reach VND 361,569 million in revenue 800,000,000,000 gh tn to 900,000,000,000 p ie 700,000,000,000 w 600,000,000,000 400,000,000,000 va an lu 200,000,000,000 d 300,000,000,000 oa nl 500,000,000,000 2019F oi lm ul nf 100,000,000,000 2020F 2021F 2022F 2023F z at nh Revenue z Figure 28 - Revenue forecast in 2019 - 2023 @ Capex: We assume that in the next years, TRA will expand its business by gm  l building more drug factories to achieve the goal of creating green products to protect m co human health We expect Capex will grow 20% in the next years an Lu n va ac th 81 si  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 lu an 8.4% va n Table 3.1 - CAPM model to 4.9% Rm 18% Beta 0.267 Cost of Equity 8.4% p ie gh tn Rf d oa nl w Cost of debt: an lu  oi lm ul nf va Cost of debt is calculated by following formula: z at nh 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 z gm @ the report of PHS So, I have WACC by using formula: l Table 3.2 - WACC valuation 5.1% m co Cost of debt 96.5% Debt / Total debt & equity 3.5% an Lu Equity / Total debt & equity n va ac th 82 si 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 lu an Free cash flow to n va firm (million of 2019F 2020F 2021F 2022F 190,861 280,900 325,758 2023F tn to VND) 82,787 gh FCFF 336,391 3,311,784 p ie Terminal value 82,787 190,861 280,900 325,758 3,648,175 Firm value: FCFF va Number of shares 2,817,915 an lu Terminal value & d of oa PV nl w Total oi lm ul Target price 41.454 nf outstanding 67,982.6 z at nh 3.1.2 Multiples Valuation z @ Valuation using both Forward P/E and P/B ratio P/E & P/B reflects the direct gm m co l 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 an Lu product lines and financial performance In Vietnam, DHG, IMP, PME and DMC are the biggest competitor of TRA n va ac th 83 si 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% lu an n va 3.1.3 Valuation tn to Forward PE & PB of peers To, forecast PE & PE of peers I collect this peers’ ie gh ratios during years ago and use excel function to forecast trend in 2019 Then, to p 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 nl w d oa Forecast EPS & Book value of TRA Because TRA has number of outstanding an lu 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 va ul nf Book value per share equal to VND 4,450 and VND 27,170 From my prediction, the z at nh 3.1.4 Weighting of the models oi lm target price from Multiples Valuation is VND73,383 Both DCF & multiples pricing are importance because each method has z @ different strengths Therefore, I assign weight for DCF with 50%, multiples with 50% Table 3.5 - Multiples valuation Price (VND) Weight 67,982.6 50% an Lu FCFF m co l gm and reach the target price of VND 70,682 n va ac th 84 si 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 lu an performance in the coming years when strategic investors appear, I believe these n va improvements, if any, will not be reflected immediately in the next 1-3 years I will tn to adjust my forecast when there are clear signs of improvement in business results ie gh Using the combined DCF and P/E & P/B valuations, my target price for TRA p shares is VND 70,682 / share HOLD recommendation oa nl w 3.2.2 For TRA In order to increase profit for TRA, I suggest that TRA should not focus too d an lu much on traditional medicines and functional foods, to expand and improve the nf va performance of Western pharmaceutical factories oi lm ul 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 z at nh 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 z foods m co l gm @ an Lu n va ac th 85 si lu an n va p ie gh tn to d oa nl w oi lm ul nf va an lu z at nh z m co l gm @ an Lu n va ac th 86 si