Ineffective capital structure of ninh van bay joint stock company

2.2 Problem symptoms From datas calculated from annual reports, supportive theories associated with the first meeting with responsible members, the symptoms revealed company’s ineffecti

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MBA Final Thesis:

Ineffective capital structure of Ninh Van Bay Joint Stock Company

Instructor: Dr Pham Phu Quoc Student: Le Anh Mai Chi MBA Class 5.2

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TABLE OF CONTENTS

Executive summary 5

CHAPTER 1: THE PROBLEM CONTEXT 6

CHAPTER 2: SITUATION ANALYSIS 7

2.1 Problems finding process 7

2.2 Problem symptoms 7

2.2.1 Significant profit decrease 8

2.2.2 Profitability decrease 10

2.2.3 Basic Earning Power ratio decrease 13

2.3 Possible problems 13

2.4 Main problems 17

2.4.1 Interest expense increase 17

2.4.2 Ineffective utilization of leverage factor 18

2.5 Possible causes of the problem 23

2.6 Main causes of the problem 24

2.7 Cause – effect tree of problem 26

CHAPTER 3: SOLUTION DESIGN 27

3.1 Possible solutions for inefficient capital structure 27

3.2 Implementation of suitable plans 28

3.3 Actions Plan 30

References 34

Appendix 38

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LIST OF FIGURES Figure 1 Revenue and Net profit of NVT from 2013 - 2015

Figure 2 Revenues of companies in the same industry with NVT 2013 - 2015

Figure 3 Profit margins of companies in the same industry with NVT 2013 - 2015

Figure 4 Cause – Effect tree

Figure 5 Actions plan

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LIST OF TABLES Table 1 Revenue and profit of NVT from 2013 – 2015

Table 2 Revenue and profit margin of companies in the same industry from 2013 – 2015

Table 3 NVT’s Profitability Ratios 2013 – 2015

Table 4 ROE, ROA and EPS of companies in same industry with NVT from 2013 - 2015

Table 5 The BEP ratios of NVT 2013 – 2015

Table 6 The possible problems and supportive theories

Table 7 NVT DuPont Analysis 2013 – 2015

Table 8 Interest Expense of NVT from 2013 to 2015

Table 9 Capital structure ratios of NVT and other companies from 2013 to 2015

Table 10 Income Statement of NVT from 2013 to 2015

Table 11 NVT’s net sales and total asset

Table 12 Possible causes and supportive theories

Table 13 Possible solutions

Table 14 Implementation of suitable plans

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Executive summary

The main problem is inefficient capital structure by increasing debts over the period 2013

to 2015 In which, total debt to total equity increased from 46.60% to 52.68% that leads to profitability decrease from 4.83% to -14.71% of ROE Financial ratios are calculated from company’s financial and accounting reliable sources as NVT had listed in the Ho Chi Minh Stock Exchange over the period 2013 to 2015 The ratios are also in comparison with other corporates in the industry associated with deep interviews of company’s leaders in order for trustable findings

The main causes of the problem are high debts on total projects and financing interest cost

of debts NVT has to borrow different resources of debts to finance the projects and operation, especially the contract of issuing 230 billion VND of bonds Using financial leverage sometimes

is good However, using that method in a wrong time when the difficulties of the economy plus the difficulties of the corporation in implementing projects may led to exhaustion of funds Continuing to borrow to maintain operating can be a temporary solution, but if it lasts, causing serious consequences

There are two solutions for company’s activities Firstly, NVT should reduce overinvestment and increase cash by reselling the project Six Senses Saigon River and transferring and withdrawing the investment in Tan Phu JSC Secondly, the company should increase sales in the control of expenses to get profits for financing current debts

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CHAPTER 1: THE PROBLEM CONTEXT

NVT is a tourism real estate, specializing in investment, construction and luxury eco resorts business in Vietnam NVT is creating five star quality and superior products in Vietnamese style, through inheriting and promoting deeply culture in Vietnam’s regions The company was founded

in 2006 with the charter capital of 1 billion Vietnam dong In 2009, the company raised the charter capital up to 505 billion Vietnam dong In 2016, the charter capital of the company is 905 billion Vietnam dong

Six Senses Ninh Van Bay Resort of the Company has become the destination of more than 150,000 inbound and outbound tourists Especially, the resort has received 14 awards voted by many travel agencies and organizations, well-known travel magazines such as Tatler world, World Travel Awards, the Guide Magazine, Conde ‘Nast Traveller A new development of the company – Six Senses Saigon River Project (Appendix 1), was started on the 1st of May, 2009 This will not only be a transit point for leisure from Saigon to Nha Trang, Phu Quoc, Dalat, Bangkok, Phnom Penh, Singapore… but also the convergence of internally tourist

However, according to the result of operating during the period of 2013 – 2015, profit has decreased significantly and did not achieve the annual plan In 2013, earning before tax (EAT) of the company was 39.8 billion Vietnam dong but in 2014 EAT decreased to 25.6 billion Vietnam dong while the plan for that year was 45 billion Vietnam dong In 2015, EAT was -122.9 billion Vietnam dong, which decreased significantly in comparison with 2014 and in comparison with the plan of 9.1 billion Vietnam dong

From NVT’s financial results, questions were raised: Is that a problem of the company? If yes, what are the reasons and what are the solutions, organizations’ action plans to solve the problem? This study was implemented to answer the questions

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CHAPTER 2: SITUATION ANALYSIS

2.1 Problems finding process

In order to identify these company problems, these following steps will be executed:

- Group meeting with the company to understand the division symptoms and possible problems The division is Financial Department and the group meeting includes of three staffs: Mr Tran Kim Nhan, Mr Truong Quang Phu and Mrs Tran Nguyen Thi Mai Suong, they are all financial executives of NVT;

- Review the literatures related to the symptoms and further study of the company financial and accounting reliable sources as NVT had listed in the Ho Chi Minh Stock Exchange and their financial reports are audited regularly The study also gathered information from the industry and competitors in the market by reliable sources as the information had listed in the Ho Chi Minh Stock Exchange Then the literatures were reviewed which related to any new discovery;

- Deep interview with persons in charged for more details: Mr Hoang Anh Dung - the General Director of NVT, Mrs Ngo Thi Thanh Hai – the Chief Accountant of NVT;

- Additional intelligent information may be acquired from competitors for further references

2.2 Problem symptoms

From datas calculated from annual reports, supportive theories associated with the first meeting with responsible members, the symptoms revealed company’s ineffective profitability as the following details:

- Profit has decreased significantly while revenue showed a different trend;

- Profitability decreased sharply over the period 2013 to 2015;

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- Basic Earning Power ratio decreased under interest rate

2.2.1 Significant profit decrease

The first symptom of NVT’s problem is gross profit, earning before tax (EBT), earnings after tax (EAT) dropped significantly from 2013 to 2015 while revenue did not change much In comparison with companies in the same industry of NVT in the same period of time, their revenues had the same trend with NTV However, profit margin had the sharply down trend opposite to the profit trends of other companies This symptom can be proved by the financial data and ratios below

Table 1 below shows revenues and profits of NVT from 2013 to 2015 for a clearly picture about the performance of the company

Table 1 Revenue and profit of NVT from 2013 – 2015 (Unit: billion VND)

From table 1, revenue of the company slightly increased from 2013 - 2014 and a little decreased from 2014 - 2015 In general, revenue of the company did not change much On the other hand, profits of the company significantly decreased throughout the years which have opposite trends with revenues Gross profit to revenue down from 46.07% in 2013 to 13.70% in

2015 EBT dropped sharply from 39.8 billion Vietnam dong in 2013 down to 25.6 billion Vietnam dong in 2014 and dramatically decreased to -122.9 billion Vietnam dong in 2015 As a result, EAT

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to revenue had a same sharply downtrend from 19.52% in 2013, 10.58% in 2014 and down to 67.48% in 2015 A more clearly picture of two opposite trends of profits and revenues is shown in figure 1 below

-Figure 1 Revenue and Net profit of NVT from 2013 - 2015

A comparison with other companies in the same industry with NVT was shown in table 2, figure 2 and 3 below Some companies in the same industry of tourism real estate are: Ocean Hospitality (OCH), Sao Mai Group (ASM) and Thanh Thanh Cong Tourist (VNG)

Table 2 Revenue and profit margin of companies in the same industry from 2013 – 2015

-127.6-200

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Based on the comparison, NVT has the same trend in revenue with OCH and ASM: increase from 2013 to 2014 and decreased from 2014 to 2015 However, profit margin of NVT over the time has the significantly down-trend In the meanwhile, the other three companies have the up-trend profit margins This illustrates the problem in decreased profit from 2013 – 2015

2.2.2 Profitability decrease

The second symptom of NVT is the remarkably decreased performance efficiency from

2013 to 2015 which has an opposite trend to other companies in the same industry

Salim et al (1) indicated that firm performance, which is measured by return on asset (ROA), return on Equity (ROE) and earning per share (EPS) have negative relationship with short term debt (STD), long term debt (LTD), total debt (TD) Chen-Ying (2) used operating ratio and return on assets (ROA) for the two kinds of profitability indicators to measure insurers’ profitability

Figure 2 Revenues of companies in the

same industry with NVT 2013 - 2015

Figure 3 Profit margins of companies in the same industry with NVT 2013 - 2015

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Therefore, in order to evaluate the profitability and performance of the company, return on equity (ROE) is applied Besides, return on asset (ROA), earning per share (EPS) and gross profit margin were also calculated in table 3

Table 3 NVT’s Profitability Ratios 2013 – 2015

From table 3, the profitability ratios ROA and ROE of the firm have decreased from 4.83% down to -14.71% in ROE and from 2.92% down to -9.64% in ROA In 2013, the ROE was positive and higher than ROA which means in 2013 the company’s business created profit The ROE ratios 4.83% means if the investor invests in the company 100 dong, that investor will get 4.83 dong profit In 2014, even though the ROE and ROA of NVT decreased but still positive and ROE still higher than ROA However, in 2015, the ROE was down to negative which means if the investor invests in the company 100 dong, the investor will lose 14.71 dong With this ratio, no investors actually want to invest in NVT Besides, ROE in this year was much lower than ROA The company has used the leverage factor inefficiently This can be understood that the company used leverage but the profit was not enough to finance This leads to EPS reducing significantly from

248 down to -1,411VND

In the meanwhile, ROE and ROA of the companies in the same industry with NVT have the different trends

Table 4 ROE, ROA and EPS of companies in same industry with NVT from 2013 - 2015

From table 4, the period from 2013 to 2014, from the ROA and ROE ratios, the companies

in the same industry in a general look have the different result trends with NVT In period of 2013 – 2014, other companies had the down-trend results For example, ROE of OCH was from 5.8%

in 2013 down significantly to -76.76% in 2014 and VNG from 0.33 to 0.29% As a result, ROA of both companies was in a down trend In a general look, from 2013 to 2014, NVT got the satisfactory results among the companies in the same industry In the period of 2014 – 2015, all the competitors had the up-trend and positive results such as OCH’s ROE from -76.76% in 2014

up remarkably to 2.07% in 2015 Another illustration is VNG’s ROE from a down trend of 0.29%

in 2014 up to 0.64% in 2015 In another hand, with an opposite trend, ROE and ROA decreased unexpectedly to a negative and got the lowest result in among companies That event caused NVT

a negative and lowest EPS of -1.41 in 2015 In the meanwhile, OCH, ASM and VNG got positive results of 0.13, 0.62 and 0.19

In conclusion, decreased performance efficiency in 2013 – 2015 is the second symptom of the company

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2.2.3 Basic Earning Power ratio decrease

From 2013 to 2015, continuously reduction in Basic Earning Power ratio (BEP) is the third symptom of the company’s problem BEP is earning before interest and taxes (EBIT) divided by Total Assets (TA)

The formula is: BEP = EBIT/TA

BEP is used to determine how effectively a firm uses its assets to generate income and consider how leverage and tax rates affect the company Nguyen et al (3) used BEP ratios to measure the financial effect of factors that affect the enterprises which have foreign investment at HCMC in stage 2007 – 2011 Burney et al (4) proved that in order for financial leverage to increase ROE, the interest rate must be lower than BEP ratio The below table 5 shows the BEP ratios of NVT in period of 2013 to 2015:

Table 5 The BEP ratios of NVT 2013 – 2015

In the meanwhile, the average interest rate of saving in Vietnam’s market is around 6.5% From table above, all BEP in period of 2013 – 2015 were too low and in 2015 the figure was negative The figures stated that if the company uses financial leverage, the profit will get worse Therefore, company’s decreased and too low BEP is the third symptom of the company’s problem

2.3 Possible problems

From the supportive theories, researches, datas and the following Dupont analysic, these are possible problems of decreased profitability:

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1 Poor management of cost and expenses

leads to decreased profit margin

Abdelmoneim et al (5)

2 The ineffective utilization of asset leads

to decreased asset turnover

Abdelmoneim et al (5) Jovanovic et al (6) Soliman et al (7)

3 Ineffective utilization of leverage factor Yang (8)

Table 6 The possible problems and supportive theories

- Abdelmoneim et al (5) carried out a study to propose a comprehensive strategic model to manage profitability Strategic management accounting concepts and tools are adopted to explore and manage the main profitability drivers (cost, assets, and revenue) The results revealed that the proposed comprehensive profitability model which contains cost, the assets and revenue techniques was a better predictor of profitability than the alternative models, which contain a combination of two variables

- Jovanovic et al (6) announced that one of the most important information is the level

of profitability of the company in terms of return on assets (ROA) and return on equity (ROE)

- Soliman et al (7) conducted the study of the use of DuPont Analysis by Market Participants and announced that DuPont analysis is a common form of financial statement analysis, decomposes return on net operating assets into two multiplicative components: profit margin and asset turnover

- Yang (8) aims to study the relationship among venture capital (VC), financial leverage and enterprise performance by empirical study, utilizing the data from China's GEM (Growth

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Enterprises Market) listed companies of 2010-2014 The empirical results show that: VC is positively related to enterprise performance, and financial leverage is negatively correlated with corporate performance

In order to identify the possible problems of decreased profitability, the Dupont analysic is applied The DuPont identity is an expression that shows a company's return on equity (ROE) can

be represented as three other ratios: the profit margin, the total asset turnover and the equity multiplier The DuPont Analysis could show ROE is affected by operating efficiency, asset use efficiency and financial leverage Many researchers has conducted studies relevant to ROE and Dupont analysic as the followings:

- Muda et al (9) stated that ROE not only determines the profitability but also reflects the extent of effectiveness of the management use of shareholders’ investments

- Penman (10) claim that ROE is best interpreted as a profitability measure, not a risk measure and ROE indicates future profitability and thus distinguishes market-to-book ratios

- Klingenberg et al (11) proved that profitability ratios are Return on Asset (ROA), Return

on Equity (ROE) and Basic Earning Power (BEP)

- Rao et al (12) used DuPont analysis in order to extend of ROE for deep analysis of financial performance

- Jovanovic et al (6) used ROA and ROE to measure profitability in order to present financial performances of 5 top companies in Serbian food industry, especially in meat industry (MI)

- Khan et al (13) used profitability in the study measured by return on investment (ROI) and return on equity (ROE)

- Ibrahim (14) used three of accounting-based measures method to measure financial performance, they are return on equity (ROE), return on assets (ROA), and gross profit margin

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The formula is:

ROE = Profit Margin x Asset Turnover x Leverage Factor

Net Income/Total Equity = (Net Income/Net Sales) x (Net Sales/Total Asset) x (Total Asset/Total Equity)

According to calculations from financial reports, DuPont Analysis for NVT case is shown

in table below:

Total Asset/ Total Equity (3) = (4) x (5) 165.57% 143.30% 152.68%

Table 7 NVT DuPont Analysis 2013 - 2015

Table 6 shows an obvious analysis of components impacts ROE Profit margin and Asset turnover ratios decreased remarkably from 2013 to 2015 which caused decreased negative ROE Total Asset/Total Debt and Total Debt/Total Equity showed that NVT used leverage factor which can affect the profitability of the company Therefore, the possible problems of declined ROE are:

 Poor management of cost and expenses or/and decreased net revenues leads to decreased profit margin;

 The ineffective utilization of asset or/and decreased net revenue leads to decreased asset turnover;

 Ineffective utilization of leverage factor

2.4.1 Interest expense increase

The table below shows an obvious look of financial expense from 2013 to 2015:

Table 8 Interest Expense of NVT from 2013 to 2015

From table 8, financial expense were 1.8 billion VND with 0.9% increase to 43.8 billion VND with 23.2% In which, the interest expenses is 1.5 billion VND in 2014 and 37.7 billion VND

in 2015

With the information from consolidated financial reports from 2013 to 2015, the remarkable event which is the main reason why the interest expense increased significantly is issuing the bonds According to the contract buying bonds with warrant number 01-2100/HDDM-TP/NVT, in November 11st 2014 the company successfully issued 23,000 bonds with total amount

of 230 billion VND to Nam Thanh CO.LTD (After that, Nam Thanh CO.LTD transferred all the bonds to Vietnam Technological and Commercial Joint Stock Bank) The bond maturity is in 3 years and, the interest payment is half a year with the interest rate is 12% per year in two first

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terms The next rate is 3.5% plus basic interest rate of commercial bank department of Vietnam Technological and Commercial Joint Stock Bank Increasing debt lead to high interest expense can be concluded as one of the main problems

2.4.2 Ineffective utilization of leverage factor

With analysic from calculated datas of following table and supportive theories, ineffective utilization of leverage factor as the ineffective capital structure using debt is the main problem of the company:

RATIOS 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

STD to TA 19% 8% 10% 20% 45% 41% 33% 31% 24% 19% 22% 35% LTD to TA 9% 21% 23% 21% 20% 20% 24% 17% 14% 6% 6% 21%

711

2,046 1,370

From the table above, the capital structure ratios showed that NVT used leverage factor

by increasing total debt The company had a trend to reduce short-term debt from 265 billion VND

in 2013 down to 143 billion VND in 2015 and they increased long-term debt from 126 billion VND in 2013 to 309 billion VND in 2015 The remarkable event in 2014, according to the contract

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buying bonds with warrant number 01-2100/HDDM-TP/NVT, in November 11st 2014 the company successfully issued 23,000 bonds with total amount of 230 billion VND This event partly made the long-term debt increase rapidly from 126 billion VND in 2013 up to 306 billion VND in 2014

In comparison with companies in the same industry, OCH has the much higher TD to TA and TD to TE ratios than NVT and the ratios increased through the period of time, which means OCH used higher leverage than NVT From the table above, it is easy to proved that OCH used leverage mainly on increasing STD than LTD ASM also has the much higher TD to TA and TD

to TA ratios than NVT However the company increased TE significantly from 702 to 2,436 Therefore, TD to TA and TD to TE ratios increased throught the period of time VNG used more STD than LTD and tended to increase TD like the trend of NVT The raised leverage from 25% to 56% of TD to TA In a general look that other companies had trends to increase TD and TE in the meanwhile NVT increased TD and decreased TE

On another hand, with NVT’s situation, the BEP ratios in 2.2.3 stated that if the company uses financial leverage, the profit will get worse The illustration is the high financial expenses

Vătavu (15) did a research to establish the relationship between capital structure and financial performance in 196 Romanian companies listed on the Becharest Stock Exchange and operating in the manufacturing sector, over a period of eight-years from 2003 to 2010 The results indicated that performance in Romanian companies is higher when they avoid debt and operate based on equity The author also showed a preference for debt when they are in financial difficulties and they face high business risks, or when they cannot settle their debts due to a lack

of cash

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Gill et al (16) sought to extend Abor's (2005) findings regarding the effect of capital structure on profitability by examining the effect of capital structure on profitability of the American service and manufacturing firms and they measured profitability by return on equity

Therefore, the ineffective utilization of leverage factor as the ineffective capital structure using debt is the main problem of the company

High general and administrative expense and revenues deduction as well as the ineffective utilization of asset and decreased revenues are considered to be one of the main problems Mohamed (17) stated that because revenue represents one of the most important drivers that affect profitability, the aim in producing a model is to assist in the successful management

of profitability However, the results from data analysics and information show that these problems are unimportant problems

The first unimportant problem is high general and administrative expense and revenues

Table 10 Income Statement of NVT from 2013 to 2015

From table 10, the cause of decreased profit margin is the revenue deductions dropped down from -0.1 billion VND to -93 billion VND The reason is from the project Six Senses Saigon River of the Hai Dung CO.LTD In 2010, Hai Dung CO.LTD recorded the revenue appropriate with the foundation and civil work which were handed over to individual and enterprise customers according to the buying and selling contracts of villas belongs to the resort Six Senses Saigon River However, until 2015, Hai Dung CO.LTD have not finished the interior work and the others

of the villas and the customer have not completed the payment of work items which were already finished in 2010 In order to solve the problems of all parties in the contracts, they signed the economic contract liquidation minutes In which, Hai Dung CO.LTD would return the payment which was payed to customers and receive all the documents, receipts relevant Therefore, NVT has recorded the returned goods in term in the revenue deductions

From table 10, too high general and administrative expense is one of the problems that affects profit margin The position of this expense in 2013 was only 30.0% but increased to 54.3%

in 2015 In 2009, NVT bought 51% of Hong Hai Tourism JSC’s stocks with goodwill of 134.9 billion VND and 90% of Hai Dung CO.LTD capital with goodwill of 89.7 billion VND Total goodwill in the beginning of 2010 is 224.6 billion VND, allocated in 10 years and recorded in the general and administrative expense In 2015, the company recorded all the rest of goodwill from

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buying Hai Dung CO.LTD into the general and administrative cost with the amount of 44.1 billion VND on total general administrative cost of 102.6 billion VND Therefore, the main reason is high expense from goodwill allocation of buying subsidiaries

With the above analysic of information and datas, the problems of high expense from goodwill allocation of buying subsidiaries and revenue deductions will end from 2016 Therefore, these problems can not be concluded as the main problems

The second unimportant problem is the ineffective utilization of asset and decreased revenues Asset turnover ratio can often be used as an indicator of the efficiency A company deploys its assets in generating revenue Asset turnover which is calculated by net sales/total asset decreased during the period Net sales as explained above was decreased significantly by the revenue deductions of the problems happened to project Six Senses Saigon River In the meanwhile, total asset did not change significantly that decreased from 17.7% of growth in 2013

Table 11 NVT’s net sales and total asset

The reason of ineffective utilization of asset is originally revenue deduction which will end from 2015 Therefore, ineffective utilization of asset is not the main problem of decreased profitability

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2.5 Possible causes of the problem

From supportive theories and information of the interview with Mr Hoang Anh Dung, the General Director of NVT’s, possible causes of inefficient capital structure using debts are:

1 Generating cash flow in order to finance the debts Coricelli et al, Goel et al

2 Expanding by investing in the projects with high debt on

total project investment

Coricelli et al

5 Reducing the agency costs of free cash flow Jensen

Table 12 Possible causes and supportive theories

Coricelli et al (18) demonstrated in their study that as leverage increases, the costs of debt becomes larger and erode the net benefits to leverage Highly-levered firms not only suffer from a debt overhang problem, which reduces their incentives to invest in productive investment, their attention is also diverted from productivity improvements by the need to generate cash flow in order to service their debts

Besides, Goel et al (19) proved that financial leverage shows the relationship between borrowed funds and owner’s funds in the capital structure of a firm It includes debt, common equity and preferred equity that are used to finance the firm’s total assets, operations and financial growth

Jermias (20) analyzed the data of US manufacturing firms and observed that debt financing not only offers the benefit of tax shields to cost leaders but also accords increased efficiency due to constraints imposed by the debtholders

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Director of NVT’s, the problem of this company is the owner equity invested in the project are much lower compared to the total investment such as Emeralda Ninh Binh project with equity 150 billion Vietnam dong but the total investment of 500 billion Vietnam dong, the Six Senses Saigon River project with the equity of 110 billion Vietnam dong, but the total investment of 950 billion Vietnam dong In which, the pending project Six Senses Saigon River is the obviously direct relevant reason to the results above The cause of the disability to complete the project Six Sense Saigon River leads to record of negative 92 billion Vietnam dong as revenue deduction is due to depleted funds The project which is uncompleted become the financial burden for Ninh Van Bay

From Mr Dung, the original and main reason in a long-term why business of Ninh Van Bay inefficient is because the company has invested in projects right into the crisis, high interest rates so the cost of capital much high leads to debts by debts

According to Mrs Ngo Thi Thanh Hai, the Chief Accountant of NVT and from Table 9, in order to restructure the company's debt, increase working capital, invest in projects Six Senses Saigon River, apart from the most notable financial debt of 230 billion Vietnam dong of bond issuance in 2014, in December 31st 2014 Ninh Van Bay has had over 59 billion Vietnam dong in short-term loan, of which more than 51 billion Vietnam dong as loans from shareholders and other individuals with the interest rate from 12% to 17%, no security assets This loan will be matured before or in April 2015 In addition, there are more than 6.4 billion Vietnam dong of loan from the Ninh Van Bay Holiday CO.LTD with the interest rate 15%, not with no security assets, maturing

on February 23rd 2015

Mrs Ngo Thi Thanh Hai claimed that although the company has successfully issued 230 billion Vietnam dong of bonds in 2014, but mostly the purpose is to finance the debt structure

2.6 Main causes of the problem

Abor (22) conducted a research to examine the effect of debt policy (capital structure) on the financial performance of small and medium-sized enterprises (SMEs) in Ghana and South Africa The results of his study indicated that capital structure influences financial performance, although not exclusive Moreover, he proved that the capital structure, especially long-term and total debt ratios, negatively affect performance of SMEs

Aivazian et al (23) showed that leverage is negatively related to investment and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities

Zhong-qin et al (24) proved that a high leverage implies more monitoring efforts by creditors on the firm's overinvestment and will have a negative effect on overinvestment

Singh et al (25) used the data of US manufacturing firms and observed that higher leverage adversely influences the future investment in R&D which may in turn leads to negative impact on long-term operating performance and future growth opportunities

Moreover, with the purpose to go further about the original and main reasons, a deep interview with leaders of the company was conducted From Mr Hoang Anh Dung, the General

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Therefore, NVT still has been insufficient financial resources to invest in a large project, consuming hundreds of billions Vietnam dong

In conclusion, NVT has been stuck in a problem of inefficient capital structure that leads

to decreased financial performance The main reason of the problem is high debts on total project investments and generate cash flow in order to finance the debts

2.7 Cause – effect tree of problem

The following cause–effect tree is to have a general look main problem:

Figure 4 Cause – Effect tree

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CHAPTER 3: SOLUTION DESIGN

3.1 Possible solutions for inefficient capital structure

The study reveals problem is high debt by debt structure Using financial leverage sometimes is good because when a business starts borrowing, advantages surpassing disadvantages that leads to low cost of debt, combined with tax advantages will make the WACC (weighted average cost of capital) decreases as debt increases However if using that method in a wrong time when the difficulties of the economy plus the difficulties of the corporation in implementing projects may led to exhaustion of funds Continuing to borrow to maintain operating can be a temporary solution, but if it lasts, causing serious consequences Efobi et al (26) found out that the ratio of long-term debt to total asset (debt financing) and the ratio of equity to total liability of the firm (equity financing) had negative impact on the return on capital employed (ROE), while the ratio of short term debt to total liability had insignificant effect on return on capital employed (ROE)

The possible solutions for this problem are proposed that:

1 Raising capital: 2 Reducing and financing debts by: External financing

- Increasing capital injections by issuing

new shares; (Peer et al)

- Issuing new bonds; (Tawatnuntachai et al)

- Control the investment by reduction

of overinvestment and reselling the inefficient projects; (Stephen et al)

- Increasing sales in the control of expenses to get profits for financing debts (Peer et al)

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According to Stephen et al (27), a firm must either borrow the money (debt financing), sell

a portion of the firm (equity financing), or both Selling securities to the public is one of the ways

in which firms actually raise capital

Peer et al (28) suggested that company can increase the capital by increasing the profits or through capital injections by shareholders

Tawatnuntachai et al (29) found evidence suggesting that firms with a good reputation abroad and firms that want to raise large amounts of funds choose to issue global bonds instead of domestic bonds and although firms might be able to raise more capital by issuing global bonds, the issuing costs are not lower

Bierman et al (30) stated that firms not issuing new equity, the suitable hurdle rate for investments is a weighted average after-corporate-tax cost of debt and retained earnings

Schworm (31) declared that firms can always retain current earnings to finance optimal capital accumulation at future dates

3.2 Implementation of suitable plans

1

Increasing capital injections

by issuing new shares

The cost of issuing new share is high, dividends payable to shareholders continues to be the financial burden

Unsuitable

2 Issuing new bonds

The company already issued 230 billion Vietnam dong of bonds in 2014 and maturity in 2017

From Faulkender et al (32), firms that have access to the public bond markets, as

Unsuitable

Increasing sales in the control

of expenses to get profits for

financing current debts

In the period from 2013 to 2015, the revenues of the company did not change much This solution is suitable for the company to get more profits to finance debts

is investors of Emeralda Ninh Binh project At the same time, the gross loan excluding interest of Tan Phu JSC up to December 31st 2015 was 210 billion Vietnam dong Due to the need of financial restructuring to meet operating requirements of NVT, the company should transfer and withdraw

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the investment in Tan Phu JSC (Including the terms of shares and loan account) to complement capital for the company

3.2.2 Increasing sales in the control of expenses to get profits for financing debts

The other solution is boosting sales activities, focused on traditional customers (Six Senses Ninh Van Bay, Emeralda Ninh Binh), the projects’ marketing activities should be focused in both domestic and foreign market to expand the market Specifically, for Six Senses Ninh Van Bay project, the company maintains services quality and expands the promotional programs to attract tourists, continues to expand its market share of tourists to the medium level and creates promotional policies to attract and expand the market share of domestic visitors Company should focus on improving resort and hotel services and administration management

3.3 Actions Plan

The actions plan in 6 months could be scheduled as following:

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Figure 5 Actions plan

w1 w2 w3 w4 w1 w2 w3 w4 w1 w2 w3 w4 w1 w2 w3 w4 w1 w2 w3 w4 w1 w2 w3 w4

Value the project to be onsale

Finance Project

Development 01/01/2017 01/15/2017 2 weeks

Looking and negotiating with interested investors

Finance Project

Development 01/15/2017 02/28/2017

1.5 months

Conducting selling contract and process

Finance

Legal Project Development

02/28/2017 03/31/2017 1 month

Transfer and withdraw the investment in Tan Phu JSC

Transfer the investment Finance

Finance Department of Tan Phu JSC.

01/01/2017 01/31/2017 1 month

Maintain services quality

Resort's General Director

Quality Control 01/01/2017 06/30/2017 6 months

Create and promote the promotional programs

Sales and Marketing

Resort's General Director 01/01/2017 06/30/2017 6 months

01/01/2017 01/15/2017 2 weeks

04/01/2017 06/30/2017 3 months Training

Practice

Control the quality of training

1 times a month (end

Resell the project Six Senses Saigon River

Maintain services quality and expands the promotional programs to attract tourists

Ord Solutions Task name Sub-tasks t in charge

(Main)

Apr-17 May-17 charge

(Support)

Start Finish Duration

Jan-17

Selecting, training and improving the qualifications

of resort's service staff

Training Resort's General

Director

Feb-17 Mar-17

01/01/2017 06/30/2017

2 times a month (1st and 15th)

- Discount program

- Voucher program

Sales and Marketing

Resort's General Director

32

Based on the analysic of suitable plans in 3.2, there are 2 main actions that NVT should have 2 main actions: reduction of overinvestment and increase cash by resale the inefficient projects and increasing sales in the control of expenses to get profits for financing current debts All these actions should be completed within 6 beginning month of 2016 to improve the problem

With the first main action, the company should resell the project Six Senses Saigon River within 3 months and transfer and withdraw the investment in Tan Phu JSC Within 1 month with department in charge of Finance Department Both these sub-tasks must be done as soon as possible to avoid the risks Reselling the project includes of 3 actions The Finance Department should valueing the project to be onsale with Project Development department’s support This task should be done in 2 weeks because of internal task The next step is to find and negotiate with interested investors This step should take 1.5 months After finding and negotiating successfully with suitable investor, NVT may conduct the selling contract and process to transfer the project to the investor The first transaction of transferring should be completed within 1 month and the next transactions depend on the negotiation within 6 months Transfering and withdrawing the investment in Tan Phu JSC should be done as soon as possible within one month

The second action is increasing sales in the control of expenses to get profits for financing current debts including of 3 main tasks which should be carried out right away and at the same time NVT should maintain service quality and expand the promotional program to attract more tourists during the time Maintaining service quality is duty of resort’s general director and this always must be done continuously In the meanwhile, Sales and Marketing of resort may create and promote the promotional programs to attract tourist such as best prices of packages or wedding packages and so on Besides, NVT’s Sales and Marketing deparment should create promotional policies such as discount or voucher programs in low seasons, especially in the period of low