Research on Vietnam Stock Market

transcript

RESEARCH ONVIETNAM STOCK MARKET

Group of Study & ResearchTran Cong Tuong

Bui Le Huyen TrangTran Kim Minh

To Quoc Phuong

AGENDA

Importance of Financial Management

Capital Employed & Capital Structure

Operating Performance Measure

Vietnam Stock Market

Securities Law

Financial Investment

Conclusion

Importance of Financial Management

Corporate Finance Objectives

Revenues growth

Capital growth

Earnings growth / Profit maximization

Stock price growth

Firm value maximization & Investor’s expectations

How Companies Create Value? [1]

CapitalEmployed

Fixed Assets+

CapitalEmployed

Fixed Assets+

EquityEquity

Net DebtNet Debt

Balance Sheet

Operating Performance(Asset allocation)

Cost of capital (Capital structure)

A company creates value only if operating performance is good enough to cover the cost of capital. (ROCE > WACC)

Firm Value, Growth Rate & Stock Price [2]

Firm Value, Growth Rate & Stock Price (cnt.) [2]

Firm Value, Growth Rate & Stock Price (cnt.)

Why did stock price of banking sector decrease in the last two years?

Why should we not invest in banking sector in this year (2011)?

Capital Employed & Capital Structure

Capital Employed [1]

Fixed AssetsEquity

Working Capital(Current assets- liabilities)

Net Debt(Debt - cash)

Fixed Assets

Current Assets

Cash & Equivalent

Equity

ProvisionsFor risks and expenses

Dettes d’ExploitationCurrent Liabilities

ASSETS LIABILITIES & EQUITYCAPITAL EMPLOYED

Capital Employed & Income Statement [1]

Low Cost Structure

Combination of

– Common stock

– Preferred stock

– Bond

– Long-term & short-term debts

=> To gain lowest cost of capital

Operating Performance Measure

Income Statement – Basic [3]

Income Statement – Trend Analysis [3]

Income Statement – Industry Analysis [3]

Activity Ratios

Indications of how well a firm utilizes various assets (inventory, fixed assets…)

– E.g. Total asset turnover ratio

– The effectiveness of using total assets to create revenue

– Higher -> Better, but compare industry average

– Different industries -> Different turnover ratios

– Manufacturing ≈ 1, Retail ≈ 10

Liquidity Ratios

Measure firm’s abilities to pay short-term liabilities

– E.g. Current ratio

– Ability to pay short-term debts as they become due

– Higher -> Better

– < 1 -> Liquidity crisis (Working capital negative)

– = 2 -> Reasonable ratio

Solvency Ratios

Information on firm’s financial leverage and ability to meet long-term obligations

– E.g. Financial Leverage (FL)

– Level of using debt financing

– More debts -> Higher FL -> More risky to shareholders

– Higher FL can increase shareholders’ return (ROE)

– VIC: 4.6, HAG: 2.1, TDH: 1.49, Real Estate: 2.65

Profitability Ratios

How well company generates profits

– E.g. Cross profit margin, operating profit margin, pretax income margin, net profit margin

Return on Equity (ROE)

Return on the amount of owners’ equity

Higher -> Better, Desirable > 15%

Important ratio for investor

VIC: 24.35%, HAG: 30.47%, TDH: 18.76%

Real Estate: 19.72%, Health Care: 19.67%

Return on common equity = net income - preferred dividends / average common equity.

Return on Assets (ROA)

How much earnings were generated from assets

Higher -> Better, but compare industry average

Different industries -> Different ratios

VIC: 4.92%, HAG: 13.16%, TDH: 12.63%

Real Estate: 8.28%, Health Care: 11.15%

Valuation Ratios

Valuation ratios are used for investment analysis in common equity

Measure of how cheap or expensive a security

Earnings, Dividends, Earnings per share (EPS), Price-to-Earnings (P/E), Price-to-Book Value (P/B)

Earnings, Dividends, Earnings per share (EPS),

Net Income – Preferred dividends = Net income available to common

Net income available to common – Common dividends = Retained Earnings

Earnings per share (basic)

VIC: 2,429; HAG: 6,592; TDH: 6,178 (vnd)

Price-to-Earnings (P/E)

(= stock price / EPS), trailing P/E, leading P/E

Price an investor is paying for $1 of the company's earnings

E.g. EPS: $2, Stock Price: $20, P/E = 10 (20/2)

Higher -> More expensive -> Higher hope, but not whole story

VIC: 36.64, HAG: 11.68, TDH: 5.49 (27Dec2010)

Compare P/E to other companies in the same industry

Different industries -> Different P/E ranges

Real estate: 14.65, Health care: 17.95, Banking: 8.44

Price-to-Book Value (P/BV or P/B)

Book value of equity = (total assets – total liabilities) – preferred stock

Compare a stock's market value to its book value

Screening for stocks are undervalued or overvalued, but having shortcomings

Different industries -> Different P/B ranges

Compare P/B to other companies in the same industry

VIC: 8.67, HAG: 3.14, TDH: 0.97 (27Dec2010)

Real estate: 1.69, Health care: 1.50, Banking: 1.81

Financial Ratios – Trend & Industry Analysis [3]

Vietnam Stock Market

Vietnam Stock Market at a Glance

State Securities Commission (SSC)

– Regulate the development of the national stock exchanges

Ho Chi Minh City Stock Exchange (Hose)

– Trade equities

Hanoi Stock Exchange (HaSTC)

– Trade equities, bonds and over the counter (OTC) securities

OTC securities are traded on a platform called Upcom

Vietnam Stock Market at a Glance (cnt.)

Top 100 Richest People on VN Stock Market

When MBA 18? :D

Securities Law

Criteria for Listing Shares in Hose

Capitalization: VND 80 billion charter capital

Profitability: profitable in last 2 consecutive years

Debt position: no overdue debts not setup provision

Minimum shareholders: 20% common shares held by at least 100 shareholders

Share lock-up: “Key people” hold 100% shares in 6 months, 50% in following 6 months

Publication of Information

EventClose Factory

STATE SECURITIES COMMISION

Do Not Inform Him

SECURITIES LAWArticle: Public of Information

Violate LawTo Be Hard Punished

LISTED COMPANY

Insider Trading

EventJust invent a

medicine for HIV

Tell your wife

Securities Law& Penal Code

Violate LawsTo Be in Jail

CEO of aListed Company

Buy Stock

Price Manipulation

AgreementBuy / Sell Stocks

Securities Law& Penal Code

Violate LawsTo Be in Jail

A Stock Surfing Team

Increasing / Decreasing Stock Price Artificially

Financial Investment

Good Company vs. Good Stock

Good company– Great financial data (huge capital, high revenues, earnings,

dividends…)

– High growth rate, strong brand name, great innovation…

– E.g. Microsoft, Apple, Vincom, FPT, Vinamilk

But are they good stocks? – May or may not be

Good stock– Stock price below intrinsic value (undervalued stock)

Typical mistake of investor– Invest on good company

Value Investing vs. Technical Trading

Value Investing Technical Trading

Methodology Invest on long-term value of the business Speculation

Investment time Mid-term or long-term Short-term (surfing)

Analysis

Fundamental analysis

(based on company financial data)

Technical analysis

(based on stock price historical data)

Key Step Investment valuation (find intrinsic value) Identify up/down trends

The firm may choose various ways of reporting their financial data (expenses, assets or liabilities…)

Two technical investors may derive totally different conclusions when observing the same chart

Other Investment Notes

Determine required rate of return

Measure the rate of return

Identify/measure risks (market risk, liquidity risk…)

Compare with alternative investments (bond, gold, real estate, foreign currencies, savings…)

Investment Process (Value investment)

StockValuationStock

ValuationInvestmentDecision

InvestmentDecision

IndustryAnalysisIndustryAnalysis

CompanyAnalysisCompanyAnalysisScreeningScreening

Economic

Analysis

Step 1: Industry Analysis

Sectors

Selecting investment sectors– Your knowledge & experience about the sector (in-depth

understanding)

– Trends of the sector

How to find Industry Analysis reports?– Saigon Securities Inc. website (SSI)

Financials Materials Coal Mining

Commodity Chemicals (Natural Rubber) Consumer Goods Electricity

Farming & Fishing Oil & Gas Pharmaceuticals

Real Estate Technology & Telecom Transport

Step 2: Screening

Screening:

– Create a shortlist of “industry-average-above” companies in a sector

– The shortlist is used for company analysis step

– How to create the shortlist?

Step 2: Screening (cnt.)

Quick review balance sheet & income statement in last 3 years

“Industry-average-above” criteria

– Charter capital, revenues, earnings

– Net profit margin, EPS

– ROE

– P/E

– Financial Leverage

– It’s not necessary to satisfy all criteria

Step 3: Company Analysis

Fundamental analysis on the shortlist’s companies

Fundamental analysis

– Analyzing company business

– Analyzing company financial data

Step 3: Company Analysis (cnt.)

Analyzing company business

– Business model

– Competitive advantage

– Management team

– Corporate governance

Step 3: Company Analysis (cnt.)

Detailed financial analysis (both trend & industry analysis)

– Balance sheet, Income statement, Cash flows

– Shareholder equity (market capital, book value / a stock…)

– Management effectiveness (ROE, ROA, ROCE…)

– Profitability (gross profit margin, net income margin…)

– Growth rate (revenue growth, earning growth… )

– Financial leverage & risks (quick ratio, debt-to-equity, financial leverage… )

– Dividend

Step 4: Stock Valuation

Valuation is finding real value of stock (intrinsic value)

– Market price < intrinsic value => undervalued stock

– Market price > intrinsic value => overvalued stock

How to find intrinsic value of stock?

– Calculate by yourself (based on forecast of future cash flow)

– From reputable securities companies: Mekong Securities, Kim Eng, SSI, VinaSecurities, BVSC

Step 4: Stock Valuation (cnt.)

Relative valuation

– Comparing the stock price to those of similar companies

– Often used in Screening step (step 2)

P/E method: comparing stock P/E with

– Average P/E of the industry

– Average P/E of similar companies in the same industry

Step 5: Investment Decision - Buy

Company business – Good business model

– Strong management team

– A unique competitive position

Company financial status– High management effectiveness

– High profit margin

– Fast growth rate

Valuation– Market price much smaller than intrinsic value

Step 5: Investment Decision - Sell

Market price greater than intrinsic value

And other criteria

Step 5: Investment Decision - VIC

VIC – Vincom Joint Stock Company

Good business & financial status

Market price on 25/10/2010: 69.000

BVSC Valuation:

Market price (69) much smaller intrinsic value (104)

Market price on 31/12/2010: 97.500

Return on investment (monthly): 18.5% >> Interest rating 1.5%

Step 5: Investment Decision - VIC

Conclusion

Importance of correct intrinsic value calculation (valuation)

Using financial leverage as you can control risk

Building ability of smelling undervalued asset

Thank you!

Appendix

Investor Confidence Survey

Start date: 26-Nov-2010

End date: 09-Dec-2010

Number of respondents: 32

Demographic - Age

Demographic - Gender

Do you currently own any direct stocks/shares or funds in the VN stock market?

Investor Confidence Index

Investor confidence is quite low but investor confidence index should be compared with results of other quarters to see investor confidence trend.

Investor Confidence Index (cnt.)

People who own stocks (red bar) are more positive than people who not own stocks (yellow bar).

Expectations about the stock marketCompared to current, how do you think your investment portfolio will be in the next 6 months?

“Tất cả” is investors

Do you intend to withdraw from the VN stock market in the next 6 months?

30% of investor will withdraw from VN stock market in the next 6 months.

References

1. Prof Patrick GOUGEON, ESCP Europe/ 2009 – Financial Analysis

2. McKinsey Quarterly, The CEO’s guide to corporate finance

3. Schweser Study Notes CFA Level 1 2011

4. Slide Template: Avaya Asia-Pacific

Group of Study & Research

Tran Cong Tuong, tctuong@gmail.com

Bui Le Huyen Trang, huyentrang2310@gmail.com

Tran Kim Minh, yaletran@yahoo.com

To Quoc Phuong, toquocphuong@gmail.com