Stock valuation in vietnam theory, practice and recommendation the case SACOM

vietnam national university, HANOI hanoi school of business Ngo Viet Duc STOCK VALUATION IN VIETNAM THEORY, PRACTICE AND RECOMMENDATION THE CASE SACOM master of business administration thesis Hanoi - 2007 vietnam national university, HANOI hanoi school of business Ngo Viet Duc Stock valuation in Vietnam THEORY, PRACTICE AND RECOMMENDATION the case sacom Major: Business Administration Code: 60 34 05 Master of business administration thesis Supervisor: DR CHU THANH TRAN PHUONG LAN, MBA Hanoi – 2007 TABLE OF CONTENTS ABSTRACT i TÓM TẮT ii ACKNOWLEDGMENTS iii LIST OF TABLES v LIST OF FIGURES vi INTRODUCTION CHAPTER 1: LITERATURE REVIEWS: STOCK AND STOCK VALUATION 1.1 STOCK – DEFINITION, TYPES AND FEATURES 1.2 VALUATION 1.2.1 Valuation 1.2.2 Value 1.2.3 Price 10 1.2.4 Time value of money 10 1.2.5 Present value 11 1.3 VALUATION MODELS 13 1.3.1 Internal Rate of Return (IRR) 15 1.3.2 CAPM 16 1.3.3 Book Value (BV) 18 1.3.4 P/E ratio (P/E) 18 1.3.5 Dividend Discount Model (DDM), Discounted Cash Flow (DCF) 19 CHAPTER 2: APPLIED VALUATION METHODS IN EVALUATING CABLES AND TELECOMMUNICATION MATERIALS JOINT-STOCK COMPANY (SAM) .22 2.1 OVERVIEW OF VALUATION METHODS IN VIETNAM 22 New requirements for enterprise valuation 23 2.1.1 Valuation before 1996 23 2.1.2 Valuation 1996 – 1998 24 2.1.3 Valuation 1998 – present 25 2.1.4 Pros and cons of valuation methods in Vietnam 27 2.2 CABLES AND TELECOMMUNICATION MATERIALS JSC – SACOM OVERVIEW 30 2.3 HISTORY OF SAM VALUATION AND PRICE 31 2.3.1 Stock market and SAM at early stage 2.3.2 Price adjustment and decrease period 2.3.3 SAM Internal Value 2.4 VALUATION OF SAM AT PRESENT 2.4.1 Applied Advantageous valuation method to value SAM quarterly stock prices in 2006 2.4.2 Applied P/E (Group D) to value SAM quarterly stock prices in 2006 2.4.3 Applied Dividend discount model – DDM (group C) to value SAM quarterly stock prices in 2006 2.4.4 Applied Discounted Cash Flow Model – DCF (group C) to value SAM quarterly stock prices in 2006 CHAPTER 3: COMMENTS AND RECOMMENDATION OF THE VALUATION METHODS IN VIETNAM 3.1 COMMENTS 3.1.1 Advantegeous value 3.1.2 P/E multiple 3.1.3 DDM, DCF 3.2 RECOMMENDATION TO APPLY VALUATION MODELS IN VIETNAM 3.2.1 Internal adjusting factors 3.2.2 External adjusting factors CONCLUSION REFERENCES APPENDIX APPENDIX Beta of SAM over 280 weeks (2000-2006) APPENDIX SAM’s historical Balance Sheets APPENDIX SAM’s historical Income Statements LIST OF FIGURES Figure 1.3.2 Securities Market Line Figure 2.3.2 SAM price movement (2000 – 2006) LIST OF TABLES Table 1.3.4 P/E facts Table 2.1 Number of joint stock companies 2000-2004 Table 2.1.1 Equitized enterprises before 1996 Table 2.2 SAM Fundamental Financial Indicies 2000-2005 Table 2.3.1 Comparison between market price and listed price as expected by enterprises Table 2.3.3 Value of five listed securities according to accounting figures Table 2.4.1 SAM years Fundamental Financial Indicies Table 2.4.2 P/E of listed stock Table 2.4.4 (a) Historical FCFE for 05 years (2002-2006) Table 2.4.4(b) Cashflow projection until the end of high growth period (2008) Table 2.4.4(c) Cashflow projection until the end of high growth period (2008) INTRODUCTION Necessity of the thesis The activity in stock market exchanges has increased much in Vietnam nowadays Consequently, the stock market is playing a growing important role to the society Many institutions as well as individuals are heavily invested in the stock market In order for the stock market to develop normally and stably, understanding valuation techniques of firms is very important Without some sorts of model to estimate value, investors would not be able to arrive at conclusions on what price to buy or sell an asset When researching different valuation results of a specific firm, the value often differs – we can see the sample in SAM case discuss in next chapter Different in valuation may come from different views of the future or assumption or technique and, hence, different recommended values We can’t know which of these values is the most accurate and this is only one of the many difficulties involved in valuation In Vietnam stock market, the situation is much more difficult since it’s an emerging market and to some aspect, there’s no rule for market like this in its early stage This study will focus on several valuation models that mostly use in firm valuation in Vietnam: Multiples (P/E), ABV, DDM and DCF in order to show the different of each method and their results, through understanding of those model and try to find the possible adjustment to make it accuracy Purpose The overall purpose of this study is to establish some improvements of the available valuation method currently applied in Vietnam stock market The aim is to expose some weaknesses of the method and the reasons behind Further, the study will be conducted to find solutions of these problems This will be accomplished by a literature study and a subsequent case study Methodology The Thesis uses quantitative and qualitative approach and includes statements that will give the reader an insight in, how the research area was approached, why it was conducted in this way, how the work progressed, and, finally, the authors own critical opinions of the study The intention is to introduce the reader to how the study was conducted as well as a give the opportunity to develop a personal perception concerning the trustworthiness of the study Outline of the Study In the second part of this thesis the literature study will be conducted The study helps to understand the core concepts and the basic theories of valuation as well as the basic understanding of stock market and value of a thing It also contains a brief introduction of the development of Vietnam stock market and valuation history in Vietnam That information is necessary for the discussion to valuation in practice The third part of the thesis is the case study of SAM company In this we try to use different approach of valuation to find solutions for value of SAM By understanding different methods, we can understand difficulties with each valuation we applied and can work out to find ways to increase the accuracy of valuation The final part of the thesis is concerned with recommendations and conclusions of how the valuation process can be improved and what should be adjusted to increase the usefulness and accuracy of the valuation process involved in Vietnam stock market CHAPTER 1: LITERATURE REVIEWS: STOCK AND STOCK VALUATION “Valuation: the determination, through prior analysis, of a price for a business that might be paid by an investor “ (Hervé, 1993:95) In this chapter relevant theories connected to our problem discussion will be discussed The chapter begins with definitions and some possible discussions about some concepts that will be important when the analysis is conducted Thereafter, basic theories of models are introduced This is to give the reader insight how valuation models work Lately, history of Vietnam stock market is presented for setting up a scenario for valuation in early stage 1.1 STOCK – DEFINITION, TYPES AND FEATURES Stock, also referred to as a share, is commonly a share of ownership in a joint stock company (Copeland et al, 2000) The owners and financial backers of a company may desire additional capital to invest in new projects within the company If they were to sell the company it would represent a loss of control over the company It may be represented by a certificate and can be common or preferred, voting or nonvoting, redeemable, convertible, etc… There are kinds of stocks: 1.1.1 Common stock Common stock, also referred to as common shares, is the most usual and commonly held form of stock in a corporation (DeAngelo, 1990) The other type of shares that the public can hold in a corporation is known as preferred stock Common stock that has been re-purchased by the corporation is known as treasury stock and is available for a variety of corporate uses Common Stockholders are not guaranteed dividends, buy they expect to receive higher dividends during the company’s prosperous periods If a company fails or liquidates, common stockholders are paid, after bondholders and preferred stockholders Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation The terms common stock and capital stock are often used interchangeably when the company has no preferred stock Holders of common stock have voting powers in the corporation and participate in the profits of the corporation by way of dividends, but only after preferred stockholders have been paid their dividends (DeAngelo, 1990) 1.1.2 Preferred stock Preferred stock is a security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation (Copeland et al, 2000) Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend This stock does not usually carry voting rights Preferred stock has characteristics of both common stock and debt A preferred stock shareholder forfeits his voting rights, but receives dividends (which are set at a specified rate) before the common stock shareholder In the event of liquidation, bankruptcy preferred stock shareholders are paid before common stock shareholders It can be considered that a preferred stock is a hybrid between a share and a bond which, as opposed to ordinary shares, has a fixed yield, providing the issuer achieves a minimum profit (DeAngelo, 1990) The fixed income stream of preferred stock makes it similar in many ways to bonds 1.1.3 Rights Options granted to shareholders to purchase additional shares directly from the company concerned Rights are issued to shareholders in proportion to the securities they may hold in a company (Fama and French, 1992) Rights allow existing shareholders of a corporation to subscribe to shares of a new issue of common stock before that stock is offered to the public on the stock market A right usually has a life of to weeks, is transferable, and entitles the holder to buy the new common stock below the Public Offering Price Rights are often granted to protect existing shareholders from the effects of dilution 1.1.4 Warrants A warrant gives investors the right, but not the obligation, to buy a share at a certain price (the exercise price) by a certain date in the future (Fama and French, 1992) Warrants often accompany a share issue and they can be traded in the stock market in their own right The value of warrants is likely to be more volatile than the underlying shares, and this can be a high-risk area of investment Because of this it is a regulatory requirement to sign a warrants risk warning prior to trading different way The un-predictable movement of Vietnam market is strongly supported by large pool of investors who know less or almost nothing about stocks, bonds, valuation, earnings… the fact that the market is booming (or bubble as warning by IMF, 2006) make every party enjoy profits and ignore warnings sign In order to get a sound development and also take good position in this ―junior‖ 6-year-old stock market, we should consider some important factors that could adjusting any assumption and theories in valuation methods applied in Vietnam practice We can divide those adjusting factors into 02 main groups: 3.2.1 Internal adjusting factors Whether management board is highly appreciated? Management is the key aspect of every business As a result, the quality of management of a business can have a significant impact on the value placed on it When Vietnam State-owned-enterprises (SOEs) equitized, the old management board is about to replace SOEs became a joint-stock company later and prepare to be lited on stock market, a newly and well equipped management team should be in place to suit the changing situation Whether the business in starting period? After changing from SOEs to Joint-stock companies, there are 02 scenarios may happen: Businesses slow down in their first few years to adapt new environment create new relationship in their new name (the previous relationship, assigned contracts when being SOEs under General corporation, Ministry has now gone) Businesses are highly leveraged in their first few years and potentially loss making, but growing rapidly By understand this situation, we can adjust valuation of any newly company since its current bad performance does not truly reflect future growth The assumption in 49 that case should depends much on market views as to the future health of the market in which it operates Reliability of Accounting systems? The relevance and reliability of the business’s accounts affects valuation Reliability of past data may be questionable if there is a lack of verification when any changes to the accounting system occurred The equitization process make many SOEs had to change to new accounting principles Many of the initial sales of state-owned enterprises in Vietnam in the past were based on very low valuations of individual assets and liabilities Accounting changes may affect reported profits or balancesheet values, which can be very influential because the results shown on a company’s financial statements have a direct input into most valuations Sometimes, valued assets such as land and buildings are not re-valued to reflect changes in their valuations 3.2.2 External adjusting factors Supply and Demand relationship? The currently booming of Vietnam stock market was largely believe that because of the Supply and Demand relationship, that put stock price much higher in compare with its value On the market, 51% of most of stocks was owned by Government and a limit of 49% was given to foreign investors with long-term strategy and holding pool of capital that larger than GDP of Vietnam What will be left for domestic investors who mostly think of speculator and short term invest? Hype for the stock has caused investors to buy the stock for a higher price than they normally would Valuation in this period is much more difficult and should consider the situation to get a better assumption to take good short position How Legal Framework affect companies’ operation? Study about legal framework would help create effective valuation of a business If there are uncertainties in the legal environment, an appropriate discount should be 50 applied to the value Investors always look for safe and stability society to invest and pay full value of stock Other ways to improve valuation reliability – Gathering and following news and reports generate by companies in the past to keep tracks of what they are doing and operating – Collecting database of quarterly financial indices to improve future value comparisons – Updating the political and macro-economical movement to adjust assumption over periods (encouraging foreign investment, inflation rate, interest rate, gold price…) The best method of valuation is that investors should be conservative about their inputs and should not resist changing them when needed Aggressive assumptions can lead to inflated values and cause you to pay too much for a stock The best way forward is to examine valuation from a variety of perspectives If the company looks inexpensive from all of them, we are confidence to believe that would be a good investment for us 51 CONCLUSION There are several opinions on what creates value in a firm Therefore, there are several different approaches to estimate the value of a firm To investigate all of these valuation approaches and try to make of improvements is a huge works Such research would demand an extremely large quantity of reliable information and, thereby, easily lead to an overload of information to gather as well as to analyze On this thesis, we just focus on an aspect of valuation in Vietnam practice only and evaluate value using a case study of SACOM Corporation (SAM) 04 most familiar methods are used (Advantageous BV, P/E multiple, DDM and DCF) in the study At each result, recommendation is cited to shows the pros and cons of the method and the possibilities to make it more reliable in Vietnam environment As an emerging market, Vietnam practices are far different from those in developed nations, the study at the end shows that using valuation methods that closely mark to market (P/E multiple) could be a good tools for short term investors and using DCF are far better for long term investors in Vietnam The thesis also cites that other non-financial market factors are also important that affect every assumption made in each valuation models The relationship between those factors and its effects to value of stocks would be interesting and can be the scope for further study 52 REFERENCES Copeland et al (2000), Valuation: Measuring and Managing the Value of Companies, John Wiley & Sons, New York Damodaran (2002), Investment Valuation, Tools and Techniques for Determining Value of Any Asset 2nd edition, John Wiley & Sons Inc, New York DeAngelo (1990), ―Equity Valuation and Corporate Control‖, The Accounting Review, 64 (1) Fama and French (1992), ―The Cross-Section of Expected Stock Returns‖, Journal of Finance, (2), 427-466 Kaplan & Ruback (1995), ―The valuation of cash flow forecasts: An empirical analysis‖, Journal of Finance, 50 (4) Markowitz and Harry (1999), ―The early history of portfolio theory: 1600-1960‖, Financial Analysts Journal, 55 (4) French CW (2003), "The Treynor Capital Asset Pricing Model", Journal of Investment Management, (2), 60-72 Ross Stephen (1977), ―The Capital Asset Pricing Model (CAPM), Short-sale Restrictions and Related Issues‖, Journal of Finance, 32 (177) Internet sources Bloomberg website: www.bloomberg.com Cables and Telecommunication Materials Corporation: www.sacom.com.vn General Statistics Organization: www.gso.gov.vn Hochiminh Securities Trading Center: www.vse.org.vn Ministry of Finance: www.mof.gov.vn State Securities Commission: www.ssc.gov.vn 53 APPENDIX APPENDIX Beta of SAM over 280 weeks (2000-2006) SAM Beta = SLOPE (SAM’s weekly return, Market weekly return) = 0.9616 Time period 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 54 55 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 56 57 58 59 APPENDIX SAM’s historical Balance Sheets Accounts ASSETS Current Assets Cash and Cash Eqv S.Term Marketable Secs Accounts Receivable Inventory Other Current Assets Total Current Assets Fixed Assets and Longterm Investments Fixed Assets Tangible Fixed Assets At cost Accumulated Depreciation Financial Lease fixed assets At cost Accumulated Depreciation Intangible Fixed Assets At cost Accumulated Amortisation Long term financial investments Other Fixed Assets Total Fixed Assets and L/T Investments TOTAL ASSETS Liabilities and Share holder's Equity Current liabilities Short-term borrowings Current portion of long term debts Trade creditors Dividends payable Other liabilities Total Current Liabilities Long-term liabilities Long-term Borrowings/debts Other Long-term Liabilities 60 Total Long-term Liabilities Total Liabilities Shareholder's Equity Operating Capital Preferred Equity Differences from asset revaluation Exchange rate differences Retained Earnings Other Reserves Total Shareholder's Equity Total Liabilities and Shareholder's Equity 61 APPENDIX SAM’s historical Income Statements Revenues Revenues from Exports Deductions Sales rebates Sales returns Net sales Costs of goods sold Gross Profits Incomes from financial activities Expenses for financial activities Net profits from financial activities Selling expenses Administrative expenses Operating profits Extraordinary Incomes Extraordinary Expenses Extraordinary Profits Profit before Tax Income Tax Profit after Tax 62 .. .vietnam national university, HANOI hanoi school of business Ngo Viet Duc Stock valuation in Vietnam THEORY, PRACTICE AND RECOMMENDATION the case sacom Major: Business Administration... concerning the trustworthiness of the study Outline of the Study In the second part of this thesis the literature study will be conducted The study helps to understand the core concepts and the. .. basic theories of valuation as well as the basic understanding of stock market and value of a thing It also contains a brief introduction of the development of Vietnam stock market and valuation