PHÂN TÍCH TÌNH HÌNH tài CHÍNH và xác ĐỊNH GIÁ TRỊ cổ PHIỂU CÔNG TY CP ELCOM e

PHÂN TÍCH TÌNH HÌNH TÀI CHÍNH VÀ XÁC ĐỊNH GIÁ TRỊ CỔ PHIỂU CÔNG TY CP ELCOM ANALYSING FINANCIAL SITUATION AND EVALUATING STOCK PRICE OF ELCOM JOINTSTOCK COMPANY Opening words Finance is always one of the most important functions to any enterprise Analyzing its financial situation is one of the important jobs that the enterprise managers should seriously, regularly and accurately This can help point out the limitations in activities of the enterprise, then propose adjustments, changes, or modifications to overcome these difficulties, especially in the current difficult period With the desire to apply the knowledge learned in the subject of corporate finance, together with the hope to find solutions for overcoming the company limitations, our team has selected the case of Electronics Communications Technology Investment Development Corporation (Elcom) to be analysed in our group assignments We would like to thank Dr Nguyen Huu Anh, who has provided us with invaluable knowledge in the subject Due to the time limitation, our theoretical study as well as investigation techniques cannot perform as well as expected The report, therefore, contains limitations and shortcomings We hope to receive criticisms and comments from you and other readers The assignment consists of three parts: Introducing ELCOM Analyzing ELCOM financial situation and proposing solutions to improve it Analyzing the value of the ELCOM stock and the Appendix for reference I ELCOM Profile Electronics Communications Technology Investment Development Corporation (ELC), formerly the Investment and Development Electronic Technology – Telecommunications Company Ltd., was founded in 1995 The company was transferred into a joint-stock company with a charter capital of 10 billion VND It has increased to 293 billion VND now ELCOM has a branch in HCM City, two subsidiaries: ELCOM soft (100%) and ELCOM Industry (99.45%); and two associated companies ELCOM tech (40%) and El soft (30%) countrywide ELCOM tech operates mainly in the fields of high technology applications and El soft operates software applications ELCOM is now the number-one Vietnamese supplier of telecommunications products and services for operators, interactive TV system and integration phone for organizations and businesses Vision ELCOM is oriented to be the leading company providing software, systems integration for telecommunications operators, and exclusive system products to serve state agencies and enterprises in Vietnam Strategy + Distributing equipments and telecommunications systems - To maintain the leading position on the provision of products and services for telecommunications operators, and focus on traditional customers: Vinaphone, Viettel, Vietnammobile - Upgrade Core and Vas service systems to increase service quality and meet the needs of enlarging the number of subscribers by Vinaphone, Mobiphone, Viettel, Vietnammobile, Gtel - Promote the provision of related services including installation, maintenance, and warranty for not only customers who imported ELCOM products but also the new ones who don’t buy products from ELCOM + Software Development and System Integration - ELCOM define this as one of the strategies of revenue-generating and enhancing the company prestige in the telecommunications market It focuses on developing its value added services (VAS) with specification of 3G technology newlydeveloped in Vietnam - Developing solutions to serve end-users through its partnership with operators to share the total sales Business Scope: Telecommunications: - Distributing telecommunications equipment and technology systems: ELCOM is the company which imports and supplies core systems and value-added services for mobile phones, transmission and network access equipments, switchboard and original equipments for operators including Vinaphone, Viettel, Mobifone, VietnamMobile and Gtel - This is the main business of ELCOM with high contribution of revenues Its profit margin is about 20-30% of the turnover - Integrating telecommunications systems: In addition to the distribution of telecommunication devices, ELCOM constructs and designs overall, including providing hardware equipments and software solutions in the areas of telecommunications, interactive television, computer & telephony integration - Thanks to being the master of core technologies in the field, ELCOM is fully active in designing and supplying integration solutions for customers who are enterprise, agencies, mobile and fixed-line operators Production of software: ELCOM has mastered the technology of core and provided software services in the field: (1) Interactive TV - ITV, including Video Conferencing for customers who are agencies and organizations; (2) Computer & Telephony Integration – CTI for units which are in the postal sector and enterprises which have large customer base such as banking, insurance, etc.; and (3) Value Added Services - VAS for operators This software scope brings back very high profit margins (70%) as the costs are mainly labor costs and costs of research and development (R & D) Industry: - ELCOM also invests in industrial projects, including: (1) Production of new materials for the telecommunications industry, (2) Mining: ELCOM capital contribution has been approved of copper mining in Bac Kan province with the output of about 34 thousand tons, (3) Environmental handling: ELC is holding 40% equity in the Technical ELCOM Joint-Stock Company which is a specified provider of solutions of environmental, urban lighting, and other technological applications, (4) Real Estate: a 5- hectare lot of land in Thanh Tri, Hanoi – by Ring road II Financial Analysis of ELCOM I.1 Analyzing business results Hereby is the result of ELCOM Business Report with figures of profit and loss Table 1: Statements of profit and loss for the past years and 3rd quarter, 2011 (billion VND) Items Net Revenue Cost of goods sold Gross margin Financial income Financial expenses - Included interest expense Cost of sales Management Cost Profit/ loss from operating 2008 2009 2010 3Q.2011 322.1 -225.7 96.6 4.3 -23.4 -3 -27.2 -23 706.9 -521.3 185.5 5.4 -31.9 -3.6 -30.9 -36.4 753 -477.6 275.4 11.6 -33.6 -5.7 -13 -58 287.0 -209.5 77.5 27.2 -23.7 -3.9 -20.0 -27.5 activities Profit / loss from subsidiaries, 37.2 91.7 182.5 33.6 associated company Other income / expense Income before tax Current income-tax Deferred income-tax Net profit 1.8 0.1 39.1 1.8 37.3 4.4 -0.9 95.1 5.3 -0.3 90.2 2.5 -0.3 184.7 20.8 -6.3 170.2 -0.3 33.2 0.98 32.3 Sales and profits:  ELCOM has maintained high growth speed in sales and profits in the past years Particularly, sales in 2010 grew slightly comparing to it in 2009 as the company focused on completing the signed project Net Sales Profit form operating activities  However, income after tax increased from 90 billion VND in 2009 to 170 billion VND in 2010 due to the contribution of business such as services and software production, with a profit margin of up to 78%  ELCOM sales in 2010 grow only by 7% while net profit increases by 88% due to the contribution of providing telecommunications services activities Financial expenses:  ELCOM financial costs are mainly reflected losses on exchange rate from account payables These are due to the company imports equipments and systems for installation for operators  Among the total financial cost of 33.6 billion VND in 2010, the cost of losses from exchange rate differences is about 4.27 billion VND, and the rest of 5.7 billion VND is interest expense Exchange rate differences accounted for 14% of the company’s net profit  In the context of high interest rates and capital costs, unlike many businesses, ELCOM business model is mainly service-based This allows ELCOM to be free from the need of large capital investment Therefore, interest expense primarily comes from short-term loans which are to implement projects for the customers Corporate Income Tax:  ELCOM is now taking two tax rates for its two different services In terms of commerce and technical services, the applicable tax rate is 25% Corporate income tax on the profit from software services is 5% a Analysis of sales and profits Currently, 84% of ELCOM sales come from the activities of distributing telecommunications products and services Software created and produced by ELCOM is contributing around 14% of the total revenue Revenue structure:  The distribution of goods and services, including telecommunications systems and equipments, accounted for 86% of total sales in 2010 43% of this comes from support services revenue (including technical support, consulting, maintenance, etc.)  Systems and software created and produced by ELCOM accounted for 14% of sales in 2010 Gross margin by sector:  In the three sectors, the one of manufacturing and selling software ELCOM-made bring back the highest rate of gross margin, up to 78% in 2010 (See Table 3) According to financial statements of the company, costs of research and development for software products were recorded in the previous year due to these projects’ specification of research and development  Activities of import and distribution of telecommunications products have gross margins of averaging 25% over the years According to the company orientation, the company will continue to maintain this rate of gross margin in the years ahead, together with the development and expansion investment of telecommunications operators New material products  This business is carried out by New Material Technology Company, which is owned 99.45% by ELCOM ELCOM has invested 35.5 billion in the company shares and it is still in the time of losses due to its activities of further study the production of products Table 2: Revenue and profit in business/ product Items Net sales (billion VND) Distribution of telecommunications 2008 322 123 2009 707 208 2010 753 321 equipment Supplying services Software production Production of new materials Gross margin (billion VND) Distribution of telecommunications 154 46 97 34 400 97 185 48 325 105 277 78 equipment Supplying services Software production Production of new materials Returns on investment Distribution of telecommunications 24 40 -1 66 70 117 82 - 27% 23% 24% equipment Supplying services Software and system Average 15% 87% 30% 17% 72% 26% 36% 78% 37% Source: Calculation form ELCOM financial statements Approximately 80% of ELCOM revenue comes from three mobile operators – Mobifone, Vinaphone, and Viettel They have strong financial resources and low-risk loans b Analysis of market of customers To understand and identify the limitations of the financial activities of ELCOM, we need a market analysis of ELCOM customers Markets and customers of ELCOM:  ELCOM’s customers include four main groups: (1) mobile and fixed telecommunications operators, (2) central and local government, (3) agency of security and defense, (4) the business sector including units with large retail customers or with demand of conferencing system Table 3: Structure of revenues by customers Customer Vinaphone Mobifone Viettel Others 2008 2009 2010 42% 30% 5% 23% 100% 62% 12% 10% 16% 100% 66,5% 1.5% 10% 22%* 100% (*)EVN Telecom counted for 10% Source: ELCOM Structure of sales by customer:  ELCOM’s three major customers are Mobifone, Vinaphone, and Viettel who account for 84% of its total sales in 2009 and 78% in 2010 from the provision of equipments, value-added systems and supporting telecommunications services  Other clients of ELCOM mainly use equipments and video conference systems, systems of management solutions and customer care  In 2010, ELCOM has expanded its operations into the power industry by joining to deploy telecommunications systems for the Electricity Vietnam Telecommunications (EVN Telecom) through a contract with total value of over 70 billion VND  Risk focuses on a number of major clients:  Although all of ELCOM’s major customers have their financial strength and fast growth However, as about 80% of ELCOM revenue from the three major operators – Mobifone, Vinaphone and Viettel, there would be a customer credit risk which can affect the volatility of ELCOM’s business model I.2 Analysis of Balance Sheet: Structure of assets, capital Below is a shortened Balance Sheet: Table 4: Balance Sheet (shortened, counted in billion VND) Item 31.12.2010 31.3.2011 Cash and cash equivalent 177 246 Short-term financial investments 16 12 Customer receivables 488 488 Prepaid for sale 59 59 Other receivables 65 42 Provision for doubtful debts (10) (2) Net inventory 109 160 Other current assets 31 35 Short-term assets 936 1,000 Net fixed assets 30 41 Construction in progress 63 69 Long-term financial investments 102 97 Other long-term assets Commercial advantages 10 Long-term assets 214 221 1,150 1,1221 Short-term borrowings 53 94 Trade creditors 443 443 Deferred revenue 32 24 Other short-term liabilities 52 46 Total assets Short-term liabilities 581 607 Long-term liabilities - Other long-term liabilities 15 30 Long-term liabilities 18 30 Equity capital 293 293 Share capital surplus 118 118 10 Undistributed earnings 136 164 Equity 551 585 0 1,150 1,222 Funds Minority shareholder’s benefit Total liabilities Structure of assets:  ELCOM’s total assets have increased by an average rate of about 60% within three years and reached 1.060 billion on September 30th, 2011  As its business model is mostly to import telecommunications products and produce related software, ELCOM assets are mainly presented in liquid assets, including account receivables and projects, and inventory, which is caused by the fact that equipments and telecommunications systems are in the process of implementation  ELCOM’s total assets increased by an average of 60% in three years  The highest of ELCOM’s account receivable is 528 billion VND, which accounts 50% of its total assets The company’s AR is mainly from its customers  Inventory is 82 billion VND, accounting for nearly 8% Account receivable:  ELCOM’s customer receivables was quite large, approximately 448 billion VND on March 31st, 2011, accounting for 59% of the company total revenue in 2010, and increased to 528 billion VND on September 30 th, 2011, accounting for 50% of the total asset value This is a large proportion which must be carefully studied and scrutinized As ELCOM’s reports, these account receivables primarily reflect those from operators’ 500-billion-VND-worth 30M project (30 million subscribers) The project was implemented from late 2010 and is expected to completed and inspection-tested in 2011 Payables for sale (443 billion VND on December 31st, 2010)  The company imports equipments and telecommunications systems from global groups of telecommunications equipments in the world as America’s Comverse, Nokia Simens Network, Celltick, IBM, etc  Due to its policies for these providers which are to balance the accounts of payable for sale, account receivables following project progress, cash flow pressure is not great  However, due to being paid in foreign currency to USD, ELCOM takes quite large exchange rate risk The cost of the exchange rate was around 27.4 billion VND in 2010 Inventory (160 billion VND on March 30th, 2011):  In service contracts which are being implemented, ELCOM inventory is mainly equipments and systems transferred to customers in progress (80 billion VND), inventory for the next projects (50 billion VND), and the deployment costs of ELCOM (19 billion VND)  As ELCOM can well-balance between the use of capital tie-up and customer receivables, the company’s demand for loans is very low Debt/ Equity ratio is around 0.16 on March 31st, 2011  ELCOM is now borrowing short-term foreign currency primarily from Military Bank, with a floating rate calculated after interest rate on 12-month savings deposit + a margin of about 1.7%/year Interest rate on savings deposit in 12 months is about 6%/year, so the current average capital cost for ELCOM’s foreign currency loans is about 7.7%/year  ELCOM has a high security borrowed-capital structure The company can balance their capital turnover between customer receivables and suppliers payables However, ELCOM has to face the risk of exchange rate as supplier payables are mainly in foreign currency Long-term assets  Long-term assets account for 275 billion VND, equivalent to 26% of the total assets  However, the proportion of long-term financial investments is so high, 86.7 billion VND/ 167.6 billion VND, in sectors of banking, real estate, and pharmaceuticals  As ELCOM currently owns a low investment cost real estate, mainly licensing and land clearance, its book value cannot reflect the real value of the company assets  The lot of land in Thanh Tri District has a total area of hectares, locating near the Hanoi’s third ring road It has a total investment costs of 30 billion VND recorded on December 31st, 2010 I.3 Financial indicators Capital efficiency:  In the current context in which capital costs increase, ELCOM is one of the few listed companies can maintain high capital efficiency indexes Average return on capital employed (ROCE) of ELCOM in the past years is 28% This is two times higher than the average of nearly 700 other companies listed on HOSE and HNK Table 5: Financial Indicators of ELCOM Financial indicator Liquidity Quick ratio Current ratio Working capital efficiency Account receivable turnover Inventory turnover Account payable turnover Capital structure Debt/ Equity Debt/ Total assets Capital efficiency Unit 2008 2009 2010 Time Time 0.12 1.22 0.08 1.16 0.31 1.61 Day Day Day 76 328 323 154 57 213 237 84 339 Time Time 0.31 0.62 0.28 0.39 0.10 0.26 ROE ROA ROCE Growth Total assets Total revenue % % % 30% 8% 21% 47% 13% 35% 31% 15% 27% % % na 19% 57% 119% 67% 7% Source: Calculation from ELCOM financial statements • Current ratio and quick ration are both higher than the industrial average and the average of listed enterprises • Accounts payable turnover is too long, which incurred capital risk and cost Capital efficiency of ELCOM is two times higher than the average of nearly 700 other listed companies Its return on investment (equity and loans) has reached an average of 28% within years EBITDA and EBIT:  Both earnings calculated on the basis of cash flows (EBITDA) and earnings before interest and tax (EBIT) of ELCOM double in the year 2010 and reached 159.7 billion VND and 164.4 billion VND respectively At this level, enterprise value (EV) is evaluated about times higher than EBITDA and EBIT, marked to the market  This cash flow will play an important role in the company capital structure for new investment projects in the coming years Table 6: Brief financial indicators of ELCOM Indicators ESP Gross Profit Margin Operating Profit Margin Net Profit Margin EBITDA EBIT Interest Coverage Ratio Depreciation & Amortization Interest expense EBITDA EBIT Unit VND % % % % % Time Billion VND Billion VND Billion VND Billion VND 2008 4,120 26% 12% 13% 8.5% 10.6% (11.4) (6.8) (3.0) 27.4 34.2 2009 7,359 37% 13% 23% 11.2% 12.3% (24.1) (7.6) (3.6) 79.1 86.7 2010 5,805 61% 24% 36% 21.2% 21.8% (28.8) (4.7) (5.7) 159.7 167.4 Cash flows from operating and business activities  ELCOM’s before tax cash flow in 2010 is negative 32 billion VND, mainly due to the increase of customer receivables of 248 billion VND Whereas before tax cash flow generated in 2010 is 201 billion VND Cash flows from investment activities  Investments have a negative cash flow of 27 billion VND, which reflects the difference between the total investments by equity of about 58 billion VND and the dividends and interest received from these investments are 28.8 billion VND  In 2010, ELCOM equity investment in some banking business (Military Bank, Techcombank), Eloge France Pharmaceuticals, minerals, Green Indochinese real estate company However, according to our evaluation, the company’s current long-term investments are not really highly-profitable Cash flows from financial activities  The increasing amount of 198 billion VND mainly reflects the amount of 248 billion VND received from its stock issuance before being listed, subtracting 51 billion VND dividends paid in 2010  ELCOM now maintains the policy of paying a dividend of 30% or thousand VND per share Table 7: Summary of cash flow rotation Item (billion VND) 31.12.08 31.12.09 31.12.10 Cash flow from production and 60 102 (32) (14) (121) (27) (14) 33 37 20 37 (0) 38 198 139 38 178 business activities Cash flow from investment activities Cash flow from capital activities Total Opening balance Exchange rate difference Closing balance Source: Calculation from ELCOM financial statements The balance of cash and cash equivalents is 178 billion VND at the end of 2010, mainly generated by issuing shares before being listed ELCOM’s challenge is to use this capital in new development projects effectively I.4 Proposals to improve the financial situation at ELCOM - This sets requirements for ELCOM to find out how to maintain the longterm contracts with these partners as the company’s cooperation and development in many years based on the knowledge and experience as well as its good relationships Furthermore, due to the industry specification, the products and systems which ELCOM developed and Vietnamized will continue to be supported and upgraded by ELCOM - In addition, the company is also promoting the diversification strategy of telecommunications products to sectors of major businesses and governmental agencies in the coming years This huge demand for telecommunications services will continue to ensure ELCOM a sustainable development - High exchange rate risk => Need to use of derivatives - Limiting the dependence of sales on the customer groups who are the telecommunications operators - Focusing on developing the customer group of national security and governmental agencies, with integrated solutions and diversified telecommunication products - Restructuring the financial portfolio which is not accounting for a small proportion of over 10%, - Increasing R & D costs and customer service expenses - Planning for efficient use of money in the project of 5ha of land in Thanh Tri II Evaluating stock value of ELCOM and giving recommendations to investors II.1 Introduction of ELCOM stock  Listed on HOSE on 13.10.2010  The reference price 50,500 VND/share  The highest Price: 52,757 VND/share  The lowest Price: 22,500 VND/share  Current Price 24,700 VND/share  Volume: 11,455,530 shares Table 7: Movement of transacted price +/- In one week 2.07% +/- In one month -17.39% +/- In one quarter -13.03% +/- In one year -46.14% +/- Listed -52.33% Highest in 52 weeks (20/12/2010)* 47,967 Lowest in 52 weeks (09/11/2011)* 22,500 Transaction volume average/day Volume/day (1 week) 1,465 Volume/day (1 month) 6,167 Volume/day (1 quarter) 23,602 Volume/day (1 year) 46,476 Highest volume in 52 weeks (16/12/2010)* 247,251 Lowest volume in 52 weeks (28/10/2011)* It can be seen that ELCOM share prices fluctuate closely to VN Index, a good level of liquidity  Chart 2: ELC stock price since being listed on HOSE Table 8: Comparison of ELCOM stock prices and other stocks’ in the industry Security Code +/- Volume EPS P/E ROA P/B Beta TYA 3.4 (0.1) 7,200 1,797 1.9 8% 38% 0.9% HAS 4.5 (0) 110 1,104 4.1 4% 23% 0.8% TLC 2.5(-0.1) 52,300 -3,599 -0.7 -24% 23% 1.6% VTC 3.1 (-0.2) 100 -296 -10.5 -3% 28% 0.7% TST 5.7 (-0.1) 2,400 2,172 2.6 4% 25% 1.1% UNI (-0.3) 66,000 562 8.9 3% 41% 1.6% SMT 3.5 (0) 704 4% 30% 0.7% VHG (-0.1) 32,030 -415 -12 -2% 0% 1.8% KST 9.8 (0) 73 134.2 0% 63% 0.7% POT 7.1 (-0.1) 5,100 810 8.8 3% 48% 0.9% II.2 valuating ELCOM stocks price Evaluating shares price of ELCOM by relatively comparing it with other companies’ in the industry for the major business segment of telecommunications: - Number of stock in the market: 29,300,000 - Earnings after tax in 2011: 190 billion VND - EPS 2011: 6,485 VND - P/E of other businesses in technology and telecommunications industry: 11.7 - Stock price: 75,870 VND per share - If being compared directly with the nearest competitor, service companies and postal equipment which has P/E of 4.4, ELCOM stock price will be 28,530 VND/share Do not apply the dividend discount method as the listing the time is too short, there is not enough reliable past data: • Valuating shares price by the method of net asset value for the property investment activity • ELCOM head office is at Dich Vong, Cau Giay District – Rental price: 20 million VND/year, in 50 years – Area: 1,100m2 – Market price of the lot of land: 50-55 million VND/m 2, plus construction cost of 70-80 billion VND => total value: 150 billion VND; • Project of 5-ha lot of land by Thanh Tri 3rd Ring Road – Area: 5ha – Cost of clearance, creating red book, land use tax: million VND/m or 250 billion VND – Market price: 25 million VND/m 2, plus construction cost of 40%: 400 billion VND – Net asset value of the land lot 400 – 250 = 150 billion VND; – Net asset Value (NAV) = 150 +150 = 300 billion VND – NAV/share = 10,238 VND/share • The shares value comparing to listed firms in the same industry 10,239 + 75,870 = 86,109 VND/share • The shares value comparing with similar companies in the market: 10,239 + 28,530 = 38,869 VND/share II.3 Recommendations for investors In the medium- and long-term: Continue to buy and hold the stocks ... service-based This allows ELCOM to be free from the need of large capital investment Therefore, interest expense primarily comes from short-term loans which are to implement projects for the... customers: Vinaphone, Viettel, Vietnammobile - Upgrade Core and Vas service systems to increase service quality and meet the needs of enlarging the number of subscribers by Vinaphone, Mobiphone,... turnover between customer receivables and suppliers payables However, ELCOM has to face the risk of exchange rate as supplier payables are mainly in foreign currency Long-term assets  Long-term