business anlaysis and valuation the case of dhg pharmaceutical joint stock company

Vietnam is ranked in the group of Pharmerging Markets by IQVIA - the group of 17 nations with the highest growth rate of the pharmaceutical industry in the world - a growth rate of 14%..

Viet Nam National University Ho Chi Minh City ECONOMICS AND LAW UNIVESITY

ESSAY

Semester 1/2022 — 2023

FINANCIAL ANALYSIS Supervisor: Hoang Thi Mai Khanh

Tilte:

BUSINESS ANLAYSIS AND VALUATION: THE CASE

OF DHG PHARMACEUTICAL JOINT STOCK

COMPANY GROUP 5

Hoang Ngoc Quynh Lam K204051342

Nguyễn Lê Thị Hồng Trinh K204051360 Trần Hoài Linh K204051344 Nguyễn Thị Hải Nga K204050266 Ngô Bảo Khuê K204050263

BANG PHAN CONG

NHÓM 5 - LỚP K20405C

Hoang Ngoc Quynh Phan tich tai chinh, lam 0

1 Lam K204051342 ppt, thuyết trình 20%

Nguyễn Lê Thị Hồng Phân tích thị trường, °

x ¬ Phân tích thị trường, 0

3 Tran Hoai Linh K204051344 lam ppt, thuyét trinh 20%

^ Ta2 ˆ Phân tích tài chính, làm ° 4_ | Ngô Bảo Khuê K204050263 ppt, thuyết trình 20%

- Phân chia công việc,

5 | Nguyên Thị Hải Nga K204050266 phân tích kê toán, tông 20%

1 Business strategy analysis

1.1 Porter’s Five Force

1.1.1 Rivalry Among Existing Firms — High

Vietnam is a country with a rapidly aging population, increasing income and citizen are more interested in health-care services Vietnam is ranked in the group

of Pharmerging Markets by IQVIA - the group of 17 nations with the highest growth rate of the pharmaceutical industry in the world - a growth rate of 14% According to IQVIA report in 4Q/2022, the value of Vietnam's pharmaceutical market reached VND 187,659 billion, up 29% over the same period

This was also the year when pharmaceutical enterprises accelerated in the race to upgrade and build factories in accordance with international standards The construction of high-quality factories promises to increase the competitiveness of various local pharmaceutical enterprises For example, DHG Pharma started construction of Betalactam factory meeting Japan-GMP/EU- GMP standards, DCL invested in EU-GMP pharmaceutical factory project, IMP's IMP4 factory recetved EU-GMP certification

1.1.2 Threat of New Entrants — LOW

The pharmaceutical industry is one of the industries with high entry barriers Ignoring secondary causes such as people's loyalty, brand reputation, the main reason for barriers to entry is the government's strict management of the pharmaceutical industry

Drug prices at business establishments managed by the Ministry of Health are based on production and import costs Distribution rights are only available

to domestic pharmaceutical companies Foreign enterprises are permanently not allowed to directly distribute pharmaceutical products in Vietnam but must resell them to Vietnamese enterprises with distribution functions Pharmaceutical manufacturing and trading enterprises must meet standards such as GMP - WHO, GSP - WHO, GDP - WHO, GPP - WHO

1.1.3 Threat of Substitute Products - LOW

Drug is an essential products that can not be replaced by any other product Demand for pharmaceuticals is a necessity so possible substitutes for this item

is nearly zero

1.1.4 Buyers’ Power —- MEDIUM

Consumers’ purchasing and selection of medical, pharmaceutical and healthcare products is largely a matter of careful consideration, as negative consequences can result if they do not or decide not to carefully considered and considered

1.1.5 Suppliers’ Power - HIGH

Vietnam pharmaceutical industry in 2022 was still mainly dependent on foreign suppliers of raw materials, particularly China and India Overdependence

on foreign sources of medicinal herbs makes domestic drug prices always affected by fluctuations in world prices and the exchange rate between VND and foreign currencies Especially when there are unexpected events such as the Covid-19 pandemic that delay imports, causing disruptions to the supply chain 1.2.SWOT

1.2.1 Strengths

Being the biggest Generic pharmaceutical enterprise in Vietnam with strong financial resource; effective operation enables the Company to implement development strategies

DHG Pharma has successfully built a solid brand name and is trusted by customers and consumers over the years

DHG Pharma owns the factory with the largest designed capacity in Vietnam, helping the Company to proactively produce and increase output from the existing market, towards export, and with centralized bidding

Currently, DHG Pharma is operating with 2 pharmaceutical factories with modern machinery systems, meeting GMP-WHO and JAPAN-GMP standards, which are strict standards in drug manufacturing practices in the world 1.2.2 Weaks

DHG Pharma's R&D research is currently only focusing on generic products, products with expired proprietary protection: DHG Pharma has not spent much research budget on new products (new ingredients and formulas) due to supporting industry in Vietnam is still limited

The majority of the main production materials of DHG Pharma, similar to other enterprises in the industry, has to be imported (about 80% - 90%) As such, they are highly affected by input factors such as fluctuations in prices of raw materials, import tax policies and foreign exchange rates

1.2.3 Opportuinities

The demand for medical products is increasing globally, which creates a great opportunity for DHG Pharma to expand the market for its products

Numerous socio-economic factors including the rapid development of Vietnam's economy open up many development opportunities for pharmaceutical enterprises, including DHG Pharma

1.2.4, Challenges

The exchange rate management policy of the macro-economy with a priority for exports negatively affects enterprises with a large proportion of imports (in terms of raw materials, equipment, and technology)

Safety and quality regulations in the pharmaceutical industry are frequently updated, resulting in the fact that DHG Pharma has to regularly meet new requirements and invest more in product research and development

2, Accounting Analysis

2.1 Sales return

It can be seen that compared to Q4/2021 and Q2/2022, Q1/2022 has a higher reduction in sales due to returned goods Maybe this reason because DHG pharmaceutical company has a policy to buy goods at the end of the year and can refund at the beginning of next year if not satisfied This partly encourage the purchasing of customers and pushed up year-end sales

(million VND) Q4/2021 Q1/2022 Q2/2022 Sales return 546 1,118 306

The revenue at the end of the year usually higher than the rest of the year and the revenue at the beginning of the year lower than the remaining months

Q1/2022 Q2/2022 Q3/2022 Q4/2022 1,181 1,245 1,296 1,459

Revenue (billion

VND)

2.2 Customer loyalty program

The company has adopted a traditional customer program policy, whereby the value of free goods or the number of discounts or discounts given to buyers is recognized as unearned revenue When the buyer has met the required conditions the unrealized revenue is converted into revenue, thereby contributing to the revenue

at that time

(million VND) | Q4/2021 Q1/2022 Q2/2022 Q3/2022 | Q4/2022 Short-term

unearned 49,608 34,667 57,051 62,344 34,043 revenued

Q1/2022 Q2/2022 Q3/2022 Q4/2022 Revenue (billion VND) 1,181 1,245 1,296 1,459

Unearned revenue increased steadily from Q1/2022 to Q3/2022 and decrease 50% at the end of the financial year Unrealized revenue has been transferred to year- end revenue, which helps to increase sales revenue in the year-end as higher number

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of sales at the end of Q4/2022 compared to the previous 3Q In addition, unrealized revenue in Q4/2021 also decreased by VND 15 billion compared to Q1/2022, which means that unrealized revenue has been converted into revenue for Q1 2022 and helps offset the decrease in sale revenue from sales returns in Q1/2022

2.3 Inventory

The choice of inventory recognition principle also helps DHG pharmaceutical company in increasing gross profit According to SSI statistics, compared to two competitors in the same industry, VMD pharmaceutical company and Cua Long pharmaceutical company, DHG has a much higher gross profit margin

Year: 2022 DHG VMD DCL Gross margin 48.28% 7.7% 27.77%

VMD recognizes inventories at historical cost, while DHG is based on the lower

of cost 6 net realizable value As a result, DHG will have a lower cost of goods sold than VMD because DHG's management can choose a lower cost between historical cost and net realizable value Compare to DCL, DHG chooses to calculate the ex- factory price according to the weighted average method, which will help reduce the volatility of input material prices more than the FIFO method that DCL has chosen

Year: 2022

TEV€PM€| 5181740 | 100% | 7,133,723 | 100% | 1,036,162 | 100%

COGS 3,418,521 | 65.97% | 6,528,732 | 91.52% | 733,685 | 70.81%

However, recognizing inventories on the basis of the lower of cost or net realizable value may not reflect the true financial position of the company when net realizable value are determined based on management's estimates, and management can write down net realizable value in order to reduce cost of goods sold and increase profit

Financial analysis

3.1 Balance sheet analysis

DHG's total short-term assets account for the majority of the company’s total assets This comes from two main reasons: the value of the short-term investments the company is holding and the total inventory

2020 2021 2022 Billion Billion Billion VND “ VND “ VND “ Total Asset 4.448 100% 4,617 100% 5,168 100% Iventories 827 18.59% | 1,072 | 23.33% | 1,250 24.20% Shorterm

fianancial 2074 | 46.63% | 2,110 | 45.69% | 2,355 45.57% investment

Compared to other companies in the same industry, DHG owns a huge amount

of inventory, especially in 2021 and 2022, DHG's inventory has increased to a record

of more than 1,000 billion VND, up 29.76% and 16.62% respectively over the same period According to DHG's 2022 performance report, the strong growth of revenue

in 2022 compared to the previous year was thanks to the high demand for drug consumption, thereby with a large reserve of public inventories the company has done well in meeting the market demand

2019 2020 2021 2022 Inventories (billion VND) 725 826 1,072 1,250 Percentage change -18,74% 13,93% 29,76% 16,62%

According to Saigon Economic Review, 90% of input materials of the pharmaceutical industry are imported and imported mainly from China and India Therefore, during the Covid-19 outbreak, the supply chain of input materials of the pharmaceutical industry was heavily affected However, thanks to the storage of a large amount of materials, DHG has reduced the burden of the disruption of the material supply chain However, holding such a large amount of inventory at times

of low market demand will adversely affect the company when it cannot sell goods and still incur costs to maintain inventory or expired inventory

Short-term investment accounts for the largest part of the company's total assets This helps the company maintain cash balance effectively, not leaving too much excess cash but still ensuring the liquidity of the company In addition, short-term investment instruments also bring another income for the company Financial revenue of pharmaceutical company DHG has always remained above 100 billion during the period from 2019 to 2022 However, for a manufacturing company like DHG, the company should use the money to expand its products technology production and development rather than financial investment because the return from the investment is still not as high as the sales revenue

2019 2020 2021 2022 Financial income 122,49 140,43 122,94 137,14 Percentage change 13.64% 14.65% -12.46% 11.55%

net profit before tax

3.2 Income statement analysis

DHG Pharma's revenue has always been at the top of the pharmaceutical industry for many years thanks to advantages such as economies of scale with a chain of distribution systems across 34 provinces and a large inventory to fully meet the needs of customers, limit the disruption of raw material supplies with the time of social distancing due to the Covid-19 pandemic

Revenue 2020 2021 2022 DHG 4,206 4,522 5,181 Percentage change -4.69% 749% 14.59% DMC 1,542 1,567 1,593 IMP 1,420 1,301 1,676 TRA 1,914 2,167 2,408

During the outbreak of the disease in 2020, DHG's revenue decreased slightly compared to the previous period, possibly due to insufficient input materials for pharmaceutical production DHG's accumulated inventory at the end of 2019 was only about VND 725 billion, a decrease of 18.74% compared to last year and not satisfied the customer’s demand Learning from the experience from 2020, DHG has actively increased its inventory in the following years, especially in the end of 2021, the value of DHG's inventory reached more than VND 1,000 billion, an outstanding increase of 29.76% Thanks to the record increase in inventory, DHG's 2022 sales also exceeded the plan by 27.33% It is predicted that DHG's sales in 2023 will still grow strongly when the company's year-end inventory reaches VND 1,250 billion

2020 2021 2022 COGS 1,944 2,082 2,418 Percentage change -11% 7,10% 16,15% Income 738 776 988 Percentage change 16,99% 5,11% 27,33%

Although DHG's revenue in 2020 decreased slightly, the company still achieved

a higher profit in 2020 compared to 2019 The main reason came from the company's initiative in reducing cost of goods sold, down 11% from last year Profit in 2022 increased significantly compared to last year, increasing by 27.33% also thanks to the reduction of administrative and selling expenses Administration and administration expenses in 2022 account for only 5.18%, which is 0.59% less than

in 2021 and 2.02% in 2020 Selling expenses in 2022 account for only 17.62%, lower than 0.14% compared to the same period last year

2020 2021 2022

Billion ° Billion ° Billion °

VND 5 VND 5 VND 5 Revenue 4,206 100% | 4,522 100% 5,181 | 100% Selling exp 700 16.62% | 803 17.76% | 913 17.62% Adminisstraion exp | 303 7.20% 257 5.69% 268 5.18%

3.3 Analysis of Return and Profitability

DHG's profitability ratio ranks high among comparison companies, with ROE and ROA reaching 24.45% and 20.20%, respectively Being the leading company in terms of growth rate of return on average assets and return on total equity DHG's profitability ratios have grown, showing the company's ability to adapt flexibly in the context of the economic downturn and being heavily influenced by market fluctuations

DHG TRA PMC DMC

2020

ROE 21.27% 18.93% 21.43% 13.98% ROA 17.19% 13.45% 18.35% 11.98%

2021

ROE 21.09% 21.68% 17.19% 11.87% ROA 17.13% 16.75% 14.70% 10.32%

2022

ROE 24.45% 22.17% 20.43% 14.16% ROA 20.20% 16.66% 17.64% 11.56%

Compared to comparison companies, DHG is having the top profitability ratios

in the industry DHG’S net profit margin and operating profit margin of the leading company in the industry show that DHG has effective strategies to reduce administrative, sales and other expenses The company's gross profit margin ranks second only to TRA, indicating that the company needs to develop production as well as find cheaper sources of raw materials to get the lead in terms of gross margin

Year 2022

DHG TRA PMC DMC Net margin 21.14% 12.24% 17.66% 12.56% Gross margin 48.28% 55.99% 39.46% 28.43% Operating margin 23.01% 14.61% 19.22% 14.72%

3.4, Analysis of Efficiency and analysis of Working Capital

DHG's total asset turnover in the year did not have much difference compared to the whole industry, which shows that DHG's effective use of assets in business activities is equivalent to other companies in the same industry However, compared

to TRA, a major competitor of DHG, DHG 1s less efficient in using its assets than its competitors The main reason is that DHG's inventory utilization efficiency is lower than that of TRA From 2021 TRA has had an inventory turnover index higher than DHG by more than 0.6 turns in 2021 and 0.4 turns in 2022 Corresponding to inventory turnover, the average number of days of inventory in 2 years 2021 and

2022 are also lower than DHG's 33.7 days and 25 days respectively Thereby, it can

be seen that holding more inventory is inefficient compared to TRA and the company may be holding obsolete, no longer valuable inventory

2021 2022 Asset turnover

DHG 0.88 0.96

TRA 1.29 1.36

Industry 0.87 0.98

Inventory turnover

DHG 2.2 2.1

TRA 2.8 2.5

Days of inventory on hand

DHG 166.7 175.5

TRA 132.9 150.7

3.5 Liquidity Ratios

Compared to the industry as a whole, DHG has a better current ratio thanks to its huge inventory volume and year-on-year increase Thereby, it can be seen that DHG has abundant resources on short-term assets to ensure the payment of its short- term debts Even deducting inventory, DHG's quick ratio is still higher than the whole However, the high quick ratio of DHG is not a good sign because the company invests too much in short-term investments instead of investing more in production activities DHG's cash ratio is much lower than the industry as a whole, almost zero, showing that the company has very little cash reserves compared to the whole industry and the company will face many difficulties in paying its debts in cash and cash equivalents

2018 2019 2020 2021 2022 Current ratio

DHG 3.1 4.5 4.3 4.9 5.2 Industry 4.1 3.3 3.2 3.3 3.3 Quick ratio

DHG 2.3 3.4 3.3 3.5 3.7 Industry 2,2 2.3 2.3 2.3 2.2

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