Management Accounting Masan Group MBA

Subject: Management Accounting Preface: The writing to this assignment is under the view of an investors and/or managers It is comprised of the learning during management account lessons which are well lectured by Professor Dung and my personal working experiences especially during my years of working for Masan Consumer Company (2014 – 2016) PART A: COMPANY and FINANCIAL DATA The chosen company for this assignment is Masan Consumer Holdings (MCH) under Masan Group MCH is one of the leading consumer product companies in Vietnam with business size of USD 760 millions (forecasted by end of 2019) The Masan Group structure is as below chart: Masan Group founder – Mr Nguyễn Đăng Quang – the top leader of the group and gather around him with reputable local and international talents to run the companies: Masan Consumer has a diversified product range in foods and beverage categories which is started from its consumer-centric business philosophy: aiming to provide products to serve all basic needs of shoppers Its innovation and marketing strengths have given birth to popular brands in both local and overseas markets: In this assignment, i use MCH 03 key sets of data including 1) Quarterly Income Statement 2) Quarterly Balance Sheet 3) Quarterly Cash Flow, and other necessary data/information to support the work The main sources are: a) MCH public financial data on http://s.cafef.vn/bao-cao-tai-chinh/MCH b) Benchmarking MCH performance with the industry https://www.investing.com/equities/masan-consumer-corp-ratios c) Random related information from the internet with named websites All raw and processed data are given to the examiner and professor Dung for reference and cross check and a hand-out soft copy The file folder name is “Masan Data” PART B: THE COMPANY’s VISION, MISSION STATEMENT, OJECTIVES AND STRATEGY Since the founding year of 1996, Masan has been loyal to the mission which according to its founder, Mr Nguyen Dang Quang, always calls it the primary purpose for Masan to exist and strive: it is all about serving Vietnamese shoppers better everyday This is a guiding principle for the management making choices on business objectives and business strategies from time to time The below graph illustrates MCH 2020 Vision, Mission, Objective and Strategy: Debrief for readers’ digest: Mission: They wants to have complete circle of Farm to Factory – Factory to kitchen to provide all kind of protein products for human basic needs The new launch of fresh meat brand Meat Deli in 2019 is a clear case of this mission Vision:  The company recognizes the potentials of Asian markets where consumers have much culinary similarity for MCH products  They invest into technology and go after quality to be able to compete outside Vietnam market  They have strong regional partners like Singha to make way to the cross boarder distribution  More successful M&A to extend the value chain of MCH (engineering both production to distribution) will make MCH a large and complete FMCG company Objectives:  Foods/convenient foods has become stagnant for local market While beverage shows a good growing trend (Kantar World Panel)  Energy drink has been a big boom together with modern life style (the growth of 247 Energy drink is a testimonial)  Coffee powder is a big pie with strong China and other Asia consumption While the internal unrest of MCH main competitor is such an advantage to win more share  Overseas markets are supplemental source of growth if the JV with Singha works Strategies:  Processed Meat will be new game changer of MCH: for local market, the products will touch on a big daily purchase to grow sales and for international markets, the farm-to-factory concept will help to compete in protein supply market  Beer is a unmined gold for MCH: local market is big for size, Singha – the strategic partner – has the technology and the knowhow to grow beer category PART C: COMMENT and EVALUATE THE FINANICAL SITUATION OF THE ENTERPRISE PROVIDE FORECASTS OF BUSINESS, INVESTMENT AD FINANCE OF THIS BUSINESS Part C1/ COMMENT and EVALUATE THE FINANICAL SITUATION OF THE ENTERPRISE Revenue and Cost Performance: In quarter 03 of 2019 (Q3), MCH grew sales value at +6% versus the growth of cost at +9% Due to the data absence for both Q2 2018, 2029, i checked the combined Q1+Q3 increase/decrease of growth and it indexed +06% also for revenue and +09% Source: consolidated data publicized by http://s.cafef.vn/bao-cao-tai-chinh/MCH , Data 01 Profit Margin, Revenue, Cost Rewardingly, MCH has been able to grow business in very tough periods of 2019 for FMCG sector: the 2019 FCGM is projected to grow around 5%-6% only and Personal Care is supposed to lead the growth: This link is for us to understand further FMCG market performance in Q2, Q3 and up to December 2019: https://www.kantarworldpanel.com/vn/news/FMCG-Monitor-November-2019 The increase of COGS and Selling Cost in Q3 were significantly high (+9% and + 14% respectively) COGS is key since it is around 70% of all cost while selling and administrative cost is almost another 26% More than 95% of MCH Revenue is for Sales The recognizable jump amount of Sales Deduction which was almost double in a 06-month period (+189%) is also worth to consider These are main sales deduction i need to look at:    Commercial discount (Chiết khấu thương mại): for customers with high purchased volume… Price discount (Giả giá hàng bán): for disqualified stocks, failed delivery versus contracting specification, volume and time… Stock Return (Hàng trả lại): for damaged and/or experied stocks… The below graph illustrates the stock MCH RTM (Route-To-Market), helping to evaluate better impact of Sales Deduction to Revenue: Since 2014, MCH has begun struggling with high inventory at cross the stock chain due to high push in the past to achieve short-term and middle-term fiscal targets And with the decline growth of FMCG market performance over the past years, then the management team had to decide soften the sell-in and tress the sellout focus across the organization to even inventory, resulting to both inventory and revenue reduction However, it strengthens the business in long run This shifting has been taken over years Let’s look at the below figures extracted from MCH Balance Sheet and Cash-flow reports: Source: consolidated data publicized by http://s.cafef.vn/bao-cao-tai-chinh/MCH , Data 01 Profit Margin, Revenue, Cost In order to see if the cost-revenue situation is really a concern, i will dive to financial indicating figures in later sections Profitability Ratios: I now look into the profitability of MCH in past periods It is such an important part of this report since there is a popular saying in finance community: “No Profit No Mission” I will analyze 03 important profitability indices:  Gross Profit Margin (Biện Lợi Nhuận Gọp)  Operating Profit Margin (Biên Lợi Nhuận Hoạt Động)  Net Profit Margin (Biên Lợi Nhuận Thuần) Profit Margins % - MCH 60% 47% 47% 50% 47% 45% 42% 48% 46% 45% 44% 43% 41% 42% 21% 20% 22% 20% 40% 27% 24% 30% 26% 23% 17% 20% 23% 21% 25% 19% 23% 22% 17% 15% 6% 5% 10% 26% 26% 25% 24% 21% Operating Margin % 20 19 3- 2Qu ý Qu ý 20 19 01 Qu ý 12 01 42 Qu ý 20 18 01 12 3Qu ý Qu ý Gross Profit Margin % Qu ý 42 01 20 17 3Qu ý 20 17 2Qu ý 01 Qu ý 12 01 42 Qu ý Qu ý 3- 20 16 0% Net Profit Margin % Source: consolidated data publicized by http://s.cafef.vn/bao-cao-tai-chinh/MCH , Data 01 Profit Margin, Revenue, Cost Gross Margin % is 6% ahead of the industry while Operating Profit % and Net Profit Margin is very much on bar The company has been making good profit GMP is maintained around 40% to 50% with an average of 45% over the past 36 months Net profit margin was at average point of 19% and Operating Profit was at 22% averagely The decline of Sales in Q1 of 2017, during this time the company took hard call to reduce Sell-in to correct both customers’ and trade inventory to way healthier business development: Source: consolidated data publicized by http://s.cafef.vn/bao-cao-tai-chinh/MCH , Data 01 Profit Margin, Revenue, Cost Liquidity Ratios (or Financial Might): In this section, i go into MCH Balance Sheets of last nine quarters to consider the risk for inventors doing or wanting doing business with MCH by evaluating the its ability to comply with financial legal liabilities I benchmark these indices also with the industry to make conclude  Brief Balance Sheet: Source: consolidated data publicized by http://s.cafef.vn/bao-cao-tai-chinh/MCH , Data 02 Liquidity Ratio  Key liquidity ratios are in the below table: Data 02 Liquidity Ratio Source: https://www.investing.com/equities/masan-consumer-corp-ratios 3.1 Quick Ratio (Khả toán nhanh): Ideally, this ratio is at 01 which mean MCH could pay any short-term debt without any difficult This ratio was at 0.34 and was declining over the past 36 months which possibly means 02 things:  50% of chance, MCH is unable to pay quickly its short-term debts for suppliers, business partners or investors This is not so affirmed since this ratio is calculated without values of inventories  MCH has been putting more Cash and Cash Equivalent into operating/investing activities lately and/or the increase of operating activities It is likely the case: Source: Data 02 Liquidity Ratio Since this ratio is not taken in inventory values which could be a short term asset I should check also current ratio for better conclusion 3.2 Current Ratio (Khả toán hành): MCH current ratio was 0.59 vs industry figure of 2.63, explaining that MCH is putting short-term assets into business than companies of the same industry Since MCH and Techcombank are under one business group (Masan Corporation), this allows MCH could assess to quick finance for shortterm financial obligation The below chart shows it well that MCH has been pushing a lot costs to clear and maintain the good inventory level, resulting to reduction of Cash and Cash Equivalent and incremental of short-term debts This also shows the company makes hard use of cash and cash equivalent for business purposes: Source: Data 02 Liquidity Ratio However, i must go on investigating other important ratios below in a longer term perspective to assure the financial safety of MCH 3.3 Debt/Equity Ratio:  Long-term Debt/Equity – LD Ratio (Nợ Dài Hạn Trên Vốn Chủ),  Total Debt/Total Equity – TD/TE Ratio (Tổng Nợ Trên Vốn Chủ)  Total Debt/ Total Asset – TD/TA Ratio (Tổng Nợ Trên Tổng Tài Sản) Should an investor check in the below table, he or she could even be confident more in MCH finance position: Source: Data 02 Liquidity Ratio Long-term Debt/Equity is at controllable rate of 0.03 averagely means MCH has no issue to comply with its long-term liability even in the worst business scenario  Debt/Equity is at 0.81 is an ideal state showing perfect balance of Assets funded by debts and owner resources This means also MCH has very minimal finance risk growing and continue to grow its assets  Debt/Asset is at 0.37 is just safe for current MCH business When this ratio is bigger than 1.0 this invites financial risk when a company high debt ratio in its total assets Any unfavorable change is interest rate, forex or term of loans may cause severe damage to business The case of Sear in the USA was a good reference: the report is the TD/TA situations of these companies in the fiscal year of 2017 Sear went bankrupt in 2018 when all investors see the risk of debt in Sear They hold back investments: Operational Efficiency Indices: In this section, we will review three main indices to evaluate how efficient the business is run by MCH management team I will cover:  Inventory Turnover (Vòng quay hàng tồn kho)  Receivables Turnover (Vòng quay khoản phải thu)  Assets Turnover (Vòng quay tài sản) Source: Data 03 Management Efficiency If assets turnover is very much on bar with industry and has been improve over the years, inventory turnover and receivables are two improvement areas for MCH financially IT was half of industry level and RT was around 08 points behind This highly again the battle sell-out MCH has been taking in as said Return on Investment Ratio: The below indexes will give investor solid confidence to put cash into MCH: Source: Data 04 https://www.stockbiz.vn/Stocks/MCH/Ratios.aspx  ROA was above market norm: any form of assets of MCH is generating good return in income  ROE was almost 40% higher than the industry: MCH is giving stake holders more income than any other local FMCG could give Why it is possible:  ROIC was +43% higher than industry Masan could use capital to generate much more profit than the industry Part C2/ PROVIDE FORECASTS OF BUSINESS, INVESTMENT AND FINANCE OF THIS BUSINESS I am now projecting new 2020 business forecast of MCH This is going very meaningful and exciting exercise because:  The year FY 2019 has just been closed, so it is just right time for investors and managers to have quality forecast on business, investment and finance It is so necessary  Masan group just acquired Vinmart and Vinretail It is the biggest ever M&A of the group and very much contributive to the Mission and Vision of MCH It is expected to be the gamechanging factor for MCH Value Chain to win and to become number one consumer company in Asia At the same time, it brings lot of considerations for us from a financing standpoint It is worth to discuss in details To power the work of this part, i will apply analytical tools learnt during this management accounting course such as BEP, financial leverages, sales budgets… and most importantly we apply the Contribution Approach of Costing which in returns provides guiding components for tool application For readers’ better digest, i summarize key steps of the conversion process: a Project Sales Volume (Unit)  Work out Sales LBE (Last Best Estimate) of Masan 2019 business results This gives us 02 basic information: - Sales Values of each category - Category structure % Source: Data 05 Category Volume Projection  Collect Standard Pricing: of each products from SRP (Suggested Retail Price) view This is the public price before any promotion SRP is the key factor of Gross Revenue in Income Statement GR = SRP x Volume Therefore, Volume = GR/SRP I need to found out:  GR by category/ by products  SRP by products Source: Data 05 Category Volume Projection b Apply High-low Method and Scatter Chart to find out Variable Cost and Fixed Cost: With the relation between Sales Volume and Operating Cost, i now know for the past 48 months:  Variable cost is VND 181,311 per carton box product  And the fixed cost happens always is VND 304,004,911 per quarter Source: Data 06 Contribution Approach High-Low c Convert and Display Income Statement under Contribution Approach: Source: Data 06 Contribution Approach High-Low We now arrive at the very crucial part of this report: Forecasting MCH Business in the year 2020 The core task normally should be the Sales Budgeting for which Sales Forecast is the central work I take the following planning: 01 SALES FORECAST In order to become number one FMCG company in Asia, the BOM has decided to aim at +35% sales value growth in 2010 vs 2019 The logic is they have to grow ahead market to lead the growth and to win the share They are confident with this high aim with ambitious Vinmart acquisition in 2019 and the maturity of the strategic partnership with Singha to explore Asean Market further, and other dynamics whichare recognized as below:  The integration Vinmart into MCH family will give more organic growth via increasing space share for both convenience foods and beverage  Listing Meat Deli (fresh meat) into only Modern Trade Channel , together with Masan’s own super market, is promising for new additional growth as well  The effort to reduce Inventory level is continued thus the local growth will be maintained at single digit  After 03 years into partnership, Singha should be now ready to contribute to more than 01% of sales They must work hard to exploit Asean markets for Masan products, especially coffee powder  Export sales should be doing bigger sizes since the company has been investing into private production for export and marketing activities in core markets like China, Myanmar, Cambodia  Beverage should be leading the growth with continuous strong performance of 247 and stable supply of powder coffee comparing to key coffee competition The export market is big for coffee as well  From macro view point, the year 2020 will be another challenging year for FMCG with humble growth in consumption The main incremental remains at rural areas and with categories like beverages and milk With all of these considerations, we put down sales value forecast in 2020 as below: Source: Data 07 Sales Forecast 2019 2020 02 TARGET SALES AND PROFIT, BREAK-EVENT-POINT (BEP), The sales goals of VND 26,400 billion is displayed with contribution format is as below:  It yields a +28% growth of EBIT vs +35% Sales Value Growth  Unit variable cost and fixed cost are assumed at the same level of 2019  The launch of Fresh Meat adds variables cost and fix cost proportionately Source: Data 08 2020 Key Components CA Technically, BEP is where Revenue is equal to Expenses or Profit is 0.0 VND At the BEP point, I have the following equation to apply: Source: Data 08 2020 Key Components CA This says clearly to the management team that the red line for their business survival is 22 Millions of product units and/or minimum sales revenue of VND 5,290 billion 03 KEY LEVERAGES FOR MCH: In a competitive and dynamic environment like our economy, leverages and good usage of them are important for public company like MCH The very quick illustration for leverage is as the following picture: Lực tác động (impact force): định phí (fixed cost)  Cánh tay đòn (arm): doanh thu (Revenue)  Vật cần đẩy (lever): Lợi Nhuận (Profit) I believe in the spirit “No Profit No Mission” since each business in the end finds for short-term profits to build up their assets which is another form of long-term profits Therefore, using leverages is a must In this section, I will view this usage of three main leverages to excel MCH business:  Operating Leverage (OL) = Contribution Margin/EBIT  Financial Leverage (FL) = EBIT/EBT  Total Leverage (TL) = Contribution Margin/EBT Source: Data 09 Leverages Key Highlights:  OL was at TTM 1.43 which means if revenue increases 10% then EBIT will increase 14.5% in 2020 I forecast Sales revenue is +35% thus I could expect at least +24% profit incremental minimum If MCG does a better job in 2020 to reduce COGS, Selling Cost and Administrative cost, I can expect even more profit This is the challenge because the integration of Vinmart will add a lot of selling cost, administrative cost in year 01  FL is 1.07 which EBIT and EBT has a slim gap of leverage (0.07 point) In 2020, if MCH could attract more investments as capital rather than take loans or MCH can reach loans with better interests, it would be then make bigger EBT results This is more possible for Masan since it has reputable investors behind and they are so much willing to invest (I will cover this point more in details in following investment forecast)  TL was at 1.53% which means if revenue increases 10% then EBIT will increase 15.3% This happens when MCH applies well both OL and FL in the same structure of revenue, cost, assets as in 2019 TL will more effect on EBIT if MCH has better COGS, expenses and cost of loans 04 HERO PRODUCT PRICING STRATEGY: As shared in the early parts, Masan with its marketing “magic” has gave birth to loved brands in which Omachi Noodles and Wake-up 247 Energy drink are the iconic brands These two brands only will be accounting for 30% of sales in 2020 Thus, they will place very important roles to deliver targeted sales and profit of MCH 2020 business In this section, we will use pricing technique under contribution method to anticipate the impact of these two brands to sales and profit The purpose is anticipating correct pricing: a/ The projection of growth:  Omachi will grow at the same pace with company total growth  Wake-up 247 will lead the growth for MCH (+85%), given all positive move of Beverage Market and the up-trend of energy drink b/ Identify expected Income: Source: Data 10 Hero Product Pricing c/ Set the target prices: Source: Data 10 Hero Product Pricing It is suggested that MCH should make a price incremental in 2020 for both two brands to deliver target profit 05 INVESTMENT FORECAST: To have a good knowledge to forecast investment, it is necessary to look through the investor profile in Masan group: MCH has strong investors behind and they want to invest into Masan group since:  It has been proven over years that Masan manages well business performances  Masan has competitive edges to expand business with right logics as said in their vision and mission  Vietnam is still a growing market in the regions There are 04 main investment areas for any enterprise: Investment or capital contribution into subsidiaries (Đầu tư vào công ty con) Investment or capital contrubution into Joint Ventures (Đầu tư vào công ty liên doanh) Investment or capital contrubution into other entities (Đầu tư vào đơn vị khác) Investement on stocks (đầu tư chứng khoán) Capital Leasing (cho vai vốn) Other capital investment (các hoạt động tài khác) In the year 2020, key investment of MCH will be for: Integrating Vinmart (Vincommerce): the new eco system for MCH to grow business and to compete in market Merging Meat Deli into MCH value chain: the new and important category expansion generate additional sales and profit in near future Acquiring Net Company: to start the new games into Personal Care hand come care to become number one FMCG company in Asia I would like to go deeper into the happened M&A of Vinmart/Vin Commerce and the about-to-be happing M&A of Net Co: 5a) the marriage between Masan and Vin Commerce:  Summary of this deal of history: Local media had been covering the case so well that we could easily find information that we want to know about The following picture is aimed to provide the quick but holistic summary of it for busy managers and/or investors   Benefits of the deal (advantages) for Masan:  Another key step to complete MCH Mission and Vision: “Serving all basic needs of Vietnamese shoppers…” “Expanding the circle of Farm to Factory and now to Factory to Trade…”  A great driver to grow faster volume and value (+35% in 2020)  A competitive edge to win over other FMGC companies to become no.1: with this M&A, only Masan has an in-house supermarket (Masan had already an in-house bank)  A great impact to control COGS and Selling Expenses Possible challenges and critical watch-outs:  MCH hasn’t had hand-on experience to manage direct retails  The over-sized retail organization built by which is considered very costly  Negative react from other retailers like (Coop, Big C, AOne, Lotte…) who are current customers of MCH because MCH now becomes their competitors 5b) Direct and Open Offer to buy 60% Share of Net Co:  The background – Why does Masan want to buy share of Net Co? Average market price of Net stock is VND 46,000 / share and Masan is offering to buy with the price of VND 48,000 per share for 13,400,000 share, equal to an investment of USD 28 Million by CASH!!!! Why Masan wants to buy Net Co that much The following pictures and charts will unfold the answer:  It is a main producers for Unilever home-care products And Unilever is the dominant in this category Why we is just contracted manufacturer for international marketer? Masan could both producing and marketing products to own the entire value chain of home-care business, the core category of consumer goods  The fact that Net is the main contracted producer for Unilever and 30% of its products are being exported simply confirms Net has world-class technology and production capacity  The finance and revenue performance of the company is sound  What does Net Co means to MCH if successfully acquired:  Giving a gate-way to enter a new category under the mission of serving basic needs of consumers  Adding new source of growth to become undisputable no.1 FMCG company in Asia  Become a must-have supplier for any retailers This provides undefeatable negotiation position to short down selling cost Closing: I hope readers find this report useful to understand a lot of more business position of and its future prospects This is convincingly a healthy and profitable business which is very worth to invest I myself feel granted with practical knowledge from the managerial accounting course in this MBA program  ... profile in Masan group: MCH has strong investors behind and they want to invest into Masan group since:  It has been proven over years that Masan manages well business performances  Masan has... business, investment and finance It is so necessary  Masan group just acquired Vinmart and Vinretail It is the biggest ever M&A of the group and very much contributive to the Mission and Vision... assets into business than companies of the same industry Since MCH and Techcombank are under one business group (Masan Corporation), this allows MCH could assess to quick finance for shortterm