Investment project analysis of a packaged fresh cake manufacturer

TRNG I HC M TP. HCM UNIVERSITÉ LIBRE DE BRUXELLES HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL MBAVB4 NGUYEN NGOC HONG INVESTMENT PROJECT ANALYSIS OF A PACKAGED FRESH CAKE MANUFACTURER MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION (PART-TIME) Tutor’s Name: Dr. NGUYEN MINH HA Ho Chi Minh City (2011) i ACKNOWLEDGMENT I extent my thanks for all professors taking part in Vietnam Belgium master program who are doing full of meaning jobs to open opportunities for me to approach a new different education. Each lesson is a granted valuable gift which is always behind me during my life and career path. I would like especially thank to my tutor Mr. Nguyen Minh Ha for his help during period of doing thesis. I am appreciate his devoted and meticulous comments on my written paper from the commencement. There is no doubt that without his help, I would not finish this paper. I owe the debt of gratitude to my parents, brother and sister who always support me by their own way and encourage me so much during the two year MBA course. They make me feel a peaceful living to pursue my studying target for a better future. Finally, I wish to thank my MBAVB4 friends who are willing to give the class their supports which are derived from their kindness in a collective studying team. I am also thank to friends in my studying group who have spend their time with me to debate issues, search materials or patiently re-guide me lessons. Without all these kindness of life, I would not be as I am today. Thank you. ii COMMITMENT Hereby I, Nguyen Ngoc Hong, commit that this final thesis is my own work. No part of this thesis has previously been submitted to any place by any means. In consideration of confidential business opportunity, I confirm that this project is for my final thesis only. iv EXECUTIVE SUMMARY Since Vietnam joined the World Trade Organization (2007), the economy of country has improved, which has led to rising disposable household incomes and continuous improvements in living standards. Therefore, Vietnamese consumers are now able to take better care of their health and well-being. In addition, the means of communications feature health-oriented articles and programmers that are regularly broadcast encouraging Vietnamese people to pay more attention to their health in order to live happily as well improve life expectation. For these reasons, the health and wellness trend continued to grow strongly in Vietnam throughout the review period, especially in large cities such as Ho Chi Minh, Ha Noi and Da Nang. On the social sight, the consuming expenditure has ever increased promptly as not ever been before. The expenditure habit is gradually changed due to higher standard living from higher income. It is also required products being suitable with life style which carry out characteristics of convenience and easy for using. Food processing industry is not out of modern tendency. Packaged food products are seem to become booming of demand. Although it is a traditional market where famous brand name are existing, there is still opportunities for new comers entering the market with its innovation and differentiation. The changing in demand of food processing industry is on the sight of a group local investors. The idea of implementation of project is executive in which catching the new consuming trend by supplying top qualify, delicious and freshness packaged cakes that satisfy convenience and healthy required from consumers. And, the project is being considered to building a factory for production to exploit the local market. The idea is from analyzing demand, supply, competitive and new consuming trend in term of market size, growth and differentiation of products. It is discovered a new market segment to products served for health and wellness of consumers. From the overall outlook, the production capacity will be calculated for further investment consideration. When investing in long term assets, many aspects are also considered such as location of the factory, life time estimation or production machine system. And finally, financial figures are used to measure the efficiency of the project. Risk analysis is carefully considered in the project under impact of one and two variables senario as well as simulation analysis to find out sensitive factors to the result for effective management. The aspect of operation and v production management is also mentioned as inventory, organization structure, human resource, the cost of goods sold and working capital requirement. The final purpose of all analysis is to rightly assessment the project and well management its performance after investment decision. By the end of analysis, the investor should be able to see the possibility and profitability of this project that are used for further investment decision. For this project, it has financial indicators as positive NPV and IRR greater than return on equity. It is supported by others such as MIRR greater than return on equity, PI greater than 1, less than the life of project to payback period of 5 years 8 months and discounted payback period of 8 years 2 months and ADSDR greater than 1. Based on these indicators, the project is feasibility and the expected profitable return of investors is satisfied. Moreover, the simulation analysis method figures 68.75% probability for NPV > 0. Therefore,the investor should implement the project. However, the investor should pay their attention on four sensitive factors as unit price, productivity, raw material and sales cost for well management the performance. In which, unit price is much more considered than others due to 72.3% contributed to variance view. Moreover, during the project on operation, the investor should be caution on controlling modern technology, spreading brand name and persuading distributors by sales cost strategy. In conclusion, the next detail action plans after investment must be considerate carefully to ensure a effective project. vi Table of contents ACKNOWLEDGMENT i COMMITMENT ii TUTOR’S COMMENTS iii EXECUTIVE SUMMARY iv Table of contents vi List of tables x List of charts xii List of pictures xiii ACRONYMS xiv CHAPTER I: INTRODUCTION 1 1.1 PROBLEM STATEMENT 1 1.2 OBJECTIVE OF THE STUDY 2 1.3 SCOPE OF STUDY 3 1.4 METHOD AND DATA OF STUDY 3 1.5 SIGNIFICANCE OF THIS STUDY 3 1.6 THE STUDY STRUCTURE 4 CHAPTER II: OVERVIEW OF INVESTORS AND THE PROJECT 5 2.1 THE OVERVIEW TO INVESTORS 5 2.2 THE OVERVIEW OF THE PROJECT 7 2.2.1 General information about the project 7 2.2.2 Introduction about products of the project 7 2.2.3 Introduction about the location of the project 9 CHAPTER III: THE MARKET ANALYSIS 11 3.1 OVERVIEW ABOUT INDUSTRY AND CAKE SEGMENT 11 3.1.1 General overview about macro-economics 11 3.1.2 The introduction about Packaged food industry 12 3.1.3 The introduction about Packaged Cake segment 15 3.2 DEMAND MARKET OF PACKAGED CAKE SEGMENT 15 3.2.1 The existing market size of Packaged Cake segment 15 3.2.2 The forecasting market size of Packaged Cake segment 17 vii 3.2.3 The demand characteristics of Packaged Cake segment 18 3.3 SUPPLY MARKET OF PACKAGED CAKE SEGMENT 19 3.3.1 Classification of competitive groups of the product 19 3.3.2 Classification of price to competitive products 22 3.3.3 The main players in existing market 23 3.3.4 The competitive landscape 26 3.4 ENTERING INTO THE MARKET GAP BY CATCHING CONSUMING TREND AND DIFFERENTICATION 28 3.4.1 The consuming trend outlook 28 3.4.2 The product differentiation of project 30 3.4.3 The market opportunity to enter into new segment of product 31 3.4.4 The capacity of project 32 CHAPTER IV: THE INITIAL INVESTMENT AND TECHNICAL ANALYSIS 34 4.1 MAIN PRODUCTION MACHINE SYSTEM 34 4.1.1 Auto-Bake technology 34 4.1.2 Overview the production process 35 4.1.3 The operation mechanism of production machine system 35 4.1.4 Supplementary equipments for auto-bake main production system 38 4.1.5 Capacity of production machine system 40 4.1.6 Supporting instruments for production 41 4.2 BUILDING PRODUCTION FACTORY 41 4.2.1 Cost for land using right 41 4.2.2 Building the main factory 42 4.2.3 The costs related to construct main factory 43 4.3 ADMINISTRATIVE COSTS UNDER PROJECT CONSTRUCTION 44 4.4 DEPRECIATION PERIOD TO CATEGORIES OF INITIAL INVESTMENT 44 CHAPTER V: OPERATION AND PRODUCTION MANAGEMENT ANALYSIS 48 5.1 SALES AND MAKETING MANAGEMENT 48 5.1.1 Production capacity exploited 48 5.1.2 Inventory and consumption ratio 50 5.1.3 Forecast revenue, marketing and sales cost 52 viii 5.2 ORGANIZATION STRUCTURE 52 5.3 HUMAN RESOURCE AND ADMINISTRATIVE MANAGEMENT 53 5.4 COST OF GOODS SOLD 55 5.5 FINANCIAL STRUCTURE OF PROJECT 57 5.6 PRO-INCOME STATEMENT 58 5.7 WORKING CAPITAL REQUIREMENT 61 5.8 PRO-CASH FLOW STATEMENT 64 CHAPTER VI: PROJECT EVALUATION AND RISK ANALYSIS 66 6.1 THE EXPECTED RATE OF RETURN OF INVESTORS 66 6.1.1 Estimating the factors of CAPM base on characteristics of project 66 6.1.2 Estimating the Return on equity, R e 69 6.2 FINANCIAL ANALYSIS ON EQUITY POINT OF VIEW 69 6.3 PROJECT VALUATION CRITERIA 70 6.3.1 Net present value - NPV method 70 6.3.2 Interest Rate of Return - IRR method 70 6.3.3 Modified Internal Rate of Return – MIRR method 71 6.3.4 Profitability Index – PI method 71 6.3.5 Regular Payback – RP method 71 6.3.6 Discounted Payback – DP method 71 6.3.7 The Annual Debt Service Capacity Ratio – ADSCR method 71 6.4 THE RESULT OF PROJECT VALUATION 72 6.5 RISK ANALYSIS 72 6.5.1 Sensitivity analysis under impacted one variable 72 6.5.2 Sensitivity analysis under impacted two variables 77 6.5.3 Scenario analysis 81 6.5.4 Simulation analysis 82 6.6 THE IMPACT OF A DEBT STRUCTURE 84 6.7 PROJECT VALUATION UNDER INFLATION ENVIROMENT 85 CHAPTER VII: CONCLUSION AND RECOMMENDATION 89 7.1 CONCLUSION 89 7.2 RECOMMENDATION 90 ix REFERENCES 91 APPENDIX 1: AUTO-BAKE PROCESS AND TECHNOLOGY OVERVIEW 94 APPENDIX 2: BUILDING MATERIAL STANDARDS FOR FACTORY 106 APPENDIX 3: INTRODUCTION ABOUT BID TENDERS 109 APPENDIX 4: CALCULATION RATE OF RETURN (Re) BY CAPM METHOD APPROACH 112 APPENDIX 5: FINANCIAL MODEL WITH REAL VALUE. 118 APPENDIX 6: FINANCIAL MODEL WITHOUT DEBT STRUCTURE 132 APPENDIX 7: FINANCIAL MODEL UNDER INFLATION 135 x List of tables Table 2.1: The investors of project and their chapter capital 6 Table 3.1: Compare between competitive products in the market 20 Table 4.1: The separate equipments assembled in machine system and its suppliers 37 Table 4.2: The list of main machines in a fully production line 40 Table 4.3: Oven Power Loading and Out Put Chart of production system 40 Table 4.4: The price for renting the land located the factory of project 42 Table 4.5: Price offering of 6 tenders for constructed categories 43 Table 4.6: The list of items of total initial investment capital 44 Table 4.7: The depreciation period applied on initial investment categories of project 45 Table 4.8: Depreciation schedule for initial the project of initial investments 46 Table 5.1: Production capacity planed to exploit year by year 49 Table 5.2: Products in volume produced and consumed year by year 51 Table 5.3: The detail of human resource cost 54 Table 5.4: The weighted and cost ratio between inputs and outputs 55 Table 5.5: Cost of goods sold of the project 56 Table 5.6: The detail of loan financed project 57 Table 5.7: Debt repayment schedule 58 Table 5.8: Financial structure of project 58 Table 5.9: Pro-income statement 60 Table 5.10: Turnover of working capital requirements 61 Table 5.11: Working capital requirement 63 Table 5.12: Pro-cash flow statement on equity point of view 65 Table 6.1: Calculate the beta of project by CAPM approach 68 Table 6.2: Calculate Return on equity (R e ) by CAPM approach 69 Table 6.3: The result of project valuation 72 Table 6.4: Sensitivity of unit price on the NPV and IRR 73 Table 6.5: Sensitivity of productivity on the NPV and IRR 73 Table 6.6: Sensitivity of raw material cost per piece on the NPV and IRR 74 Table 6.7: Sensitivity of marketing cost on the NPV and IRR 75 Table 6.8: Sensitivity of sale cost on the NPV and IRR 75 [...]... months after lunar year and in summer is lower than seasonable one 15 3.1.3 The introduction about Packaged Cake segment By divide the volume size of Packaged Cake group from Packaged Portion Bake one, it occupies 10.4% in total value And, it moves the same direction with overall upward trend and carries the same characteristics of the Packaged Portion Bake group Chart 3.4: The scale of Packaged Cake. .. Packaged Cake on Packaged Portion Bake 15 Chart 3.5: Market size of Packaged Cake in Volume 2005 - 2010 16 Chart 3.6: Market size of Packaged Cake in Value 2005 - 2010 16 Chart 3.7: Forecast market size of Packaged Cake in Volume 2011 - 2015 17 Chart 3.8: Forecast market size of Packaged Cake in Value 2011 - 2015 18 Chart 3.9: The price of competitive products 23 Chart 5.1: Organization... existing market gap at the current foreseen where packaged cake products are not freshness and fresh cakes are not packaged The last reason for idea of products is that exists a similar segment become popular in other countries while still be strange in Vietnam market 8 Being heritage of value of brand and valuable advantages from joint venture relationship is one of the determinants to shape products of. .. the above attractive factors, this study endeavors to evaluate the feasibility of a investment project of packaged fresh cake manufacturer in Vietnam based on market analysis and financial indicators The result of assessment is used to support investors in 3 making decision whether should invest on the project with their expected return The project is taken aim to calculate the production capacity that... food made from a part or whole mixture of flour, eggs, butter, sugar, flavour etc and a similar characteristics as small portion size, portability, nice package and frequent use The group has such categories as Confectionery, Pastries, Cakes, Biscuits, Ice Cream, Sweet and Savory Snacks Here, it is called Packaged Portion Bake 3.1.2.2 The size of Packaged Portion Bake market Packaged Portion Bake record... size of Packaged Cake segment The packaged cake segment is forecasted to continue in increasing annual average growth during period 2010-2015 is 6.37% in volume and 5.48% in value The year by year growth is detailed in two below charts in terms of volume and value Chart 3.7: Forecast market size of Packaged Cake in Volume 2011 - 2015 Source: Euromonitor, 2010 18 Chart 3.8: Forecast market size of Packaged. .. capital structure 85 Table 6.15: The pro-cash flow statement under inflation 87 Table 6.16: The result of project under inflation 88 xii List of charts Chart 3.1: Inflation rate year on year 12 Chart 3.2: Market size of Packaged Portion Bake in Volume 2005 - 2010 13 Chart 3.3: Market size of Packaged Portion Bake in Value 2005 – 2010 14 Chart 3.4: The scale of Packaged. .. on Packaged Portion Bake Source: Euromonitor, 2010 3.2 DEMAND MARKET OF PACKAGED CAKE SEGMENT 3.2.1 The existing market size of Packaged Cake segment Packaged Cake demand is recorded growth rate of 7.81% to reach 20,176.90 tons in volume and growth rate of 15.53% to reach VND 1,888.40 billion in value in 2010 (Euromonitor, 2010) The convenient feature of this kind product is small portable piece that... being available some dominants with the famous brand name and loyal customers The motivation of establishment company is derived from capacity of local investors and experience of foreigner partner Behind a legal entity have just born officially without any experience in the industry in prior, that is combination of talent business man and a successful brand name at its located country It is added... recommendation 5 CHAPTER II OVERVIEW OF INVESTORS AND THE PROJECT 2.1 THE OVERVIEW TO INVESTORS The idea of implementation the project is taken shape from a group local investors They are business man who have been successful in two industries as real estate and pharmaceutical in the form of limited liability and joint venture company They currently are managers and members of management board of companies . 2010 13 Chart 3.3: Market size of Packaged Portion Bake in Value 2005 – 2010 14 Chart 3.4: The scale of Packaged Cake on Packaged Portion Bake 15 Chart 3.5: Market size of Packaged Cake in Volume. forecasting market size of Packaged Cake segment 17 vii 3.2.3 The demand characteristics of Packaged Cake segment 18 3.3 SUPPLY MARKET OF PACKAGED CAKE SEGMENT 19 3.3.1 Classification of. 16 Chart 3.6: Market size of Packaged Cake in Value 2005 - 2010 16 Chart 3.7: Forecast market size of Packaged Cake in Volume 2011 - 2015 17 Chart 3.8: Forecast market size of Packaged Cake