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2015RMIT University

S3480697 – Le Nhat AnhS3461886 – Vuong Minh ChauS3461818 – Nguyen Hoang PhucS3461882 – Le Duc ManhS3461583 – Vu Duy Phat

ContentsI. Executive summary.................................................................................................................................................1

II. Macro Analysis........................................................................................................................................................2

1. GDP GROWTH......................................................................................................................................................2

2. INTEREST RATE....................................................................................................................................................2

3. INFLATION...........................................................................................................................................................3

4. EXCHANGE RATE..................................................................................................................................................3

5. GOVERNMENT REGULATION...............................................................................................................................4

III. Industry Analysis..................................................................................................................................................4

1. INDUSTRY OVERVIEW..........................................................................................................................................4

2. MARKET SCALE....................................................................................................................................................4

3. INDUSTRY DRIVING FORCES................................................................................................................................5

IV. Company Analysis................................................................................................................................................6

1. BUSINESS ACTIVITIES...........................................................................................................................................6

2. OWNERSHIP STRUCTURE.....................................................................................................................................7

3. COMPETITORS.....................................................................................................................................................8

4. DISTRIBUTION CHANNELS...................................................................................................................................9

5. COMPETITIVE ADVANTAGES................................................................................................................................9

6. DEVELOPMENT STRATEGIES..............................................................................................................................10

V. Financial Performance...........................................................................................................................................12

1. DuPont Analysis.................................................................................................................................................12

2. Risk Profile.........................................................................................................................................................15

VI. Estimating Required Rate of Return:.................................................................................................................16

1. DEFINITION........................................................................................................................................................16

2. RETURN ON RISK FREE ASSETS..........................................................................................................................16

3. EXPECTED MARKET RATE OF RETURN...............................................................................................................16

4. MARKET RISK PREMIUM....................................................................................................................................17

5. SYSTEMATIC RISK (β).........................................................................................................................................17

6. ADJUSTED BETA.................................................................................................................................................18

7. EXPECTED RETURN OF HSC................................................................................................................................18

VII. Valuation Model................................................................................................................................................18

1. DIVIDEND DISCOUNT MODEL (DDM).................................................................................................................18

2. FREE CASH FLOW TO EQUITY (FCFE)..................................................................................................................22

3. P/E RATIO..........................................................................................................................................................26

4. P/B RATIO..........................................................................................................................................................29

VIII. Model Discussion...............................................................................................................................................32

1. DISCOUNT DIVIDEND MODEL (DDM).................................................................................................................32

2. FREE CASH FLOW TO EQUITY (FCFE)..................................................................................................................33

3. P/E RATIO..........................................................................................................................................................33

4. P/B RATIO..........................................................................................................................................................34

IX. Recommendation:.............................................................................................................................................34

X. References.............................................................................................................................................................36

XI. Appendix...........................................................................................................................................................39

I. Executive summaryFounded in 2003 by Ho Chi Minh City Finance and Investment Company and Dragon Capital, Ho

Chi Minh Stock Company (HSC) was one of the largest charter capitals among stock companies in Vietnam market at the moment. HSC provides financial services and investment advisory for Private and also Institutional clients. Not the oldest one, but HSC has now reached the top position. After being listed in the Ho Chi Minh stock exchange in 2009, HSC is now leader of the market beside SSI.

In such a young and newly opened to the world market such as Vietnam, the stock market is a perfect complementary for market mechanism by facilitating more capital flowing through the market. After 17 years, the stock market has significant contribution to the fast growth rate of Vietnam economy. In return, HSC has also been growing at an impressive pace. Charter capital has increased more than 25 times, from only 50 billion to 1,273 billion VND. Many rewards, local and international, were honoured in the name of HSC for significant contribution and sustainable development.

This report will investigate deeply into the core of the company to analyse its current position. The period of 5 years, from 2010 to 2014 will be investigated. Being a stock company, HSC’s performance relies on the health of the economy. The macro-economic factors such as GDP growth rate, interest rate and government regulations can directly affect the company’s financial result immediately. These factors are being monitored for the last 5 years and will be analysed to clarify the relationship between macro-economic factors and the HSC’s performance, not only in the past but also for a future prediction.

The period from late 2011 to early 2012 was a bad time for Vietnam economy, especially for the stock market. However, HSC was less affected than many others. A closer look into the Industrial Analysis and Micro Analysis could show a hint on the secret of their success. Technically, HSC’s financial performance will be evaluated through a package of ratios, especially DuPont analysis. The company’s structure, their cost management and profitability will be revealed.

The aim of this report and all those analysis are to provide an insight into HSC and the stock market where it’s operating in, and that vision will draw investors to a conclusion where they are recommended to buy or sell HSC’s stocks based on the calculated value. Four different models will be used to estimate its intrinsic value, including Dividend discount model (DDM), Free cash flow to equity (FCFE), Price per Equity (P/E) and Price per Book value (P/BV) ratios. Each approach has its own strengths and weaknesses, hence different result. Therefore, a weight of appropriateness will be implemented on each model based on its level of reliability and sensitivity to the market. The final recommended price is the weighted average of all the approaches. Based on the team estimation, at the beginning of 2015, HSC stock price is currently undervalued. Investors are recommended to BUY.

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II. Macro Analysis1. GDP GROWTH

The GDP growth rate has been decreased slightly during the 4-year period from 6.4% to 6% with the average growth rate of nearly 5.8%. In 2010 and 2011, Vietnam recovered from the impacts of the global financial crisis in 2007 - 2008 as a result of the government’s stimulus package (VND 17,000 billion) in 2009, which allowed firms to borrow at 4% interest rate. However, this package did also put a pressure on the increasing inflation. The GDP growth rate

then decreased significantly in 2012 due to the increasing public debt, leading to the tight money policy at this time. Simultaneously, this also caused the downturn in the real estate and stock market. However, since 2013, Vietnam economy has recovered gradually with the positive signs contributed by the restructure of banking system in order to reduce the level of doubtful debt. With the current positive signal for the economy in 2014, Vietnam GDP growth rate is forecasted to increase to 6.5 % in the next 2 years and will, therefore, raise the business confidence both domestically and internationally. Such increase will encourage the Investment demand, and enhance the capital inflow into the Investing sector - which, in turn, reassures the potential development of the Financial services Industry.

2. INTEREST RATEIn Vietnam, the interest rate is governed by

the State Bank and is adjusted to meet the macroeconomic goals. From 2010 to 2014, the interest rate has fluctuated quite significantly while reaching the peak at approximately 15% in 2011 due to the pressure to fight the high inflation (18%). It then decreased in the following years, and now stabilized at 6.5 % since the beginning of 2014. The fluctuation of the interest rate is due to the fact that the Vietnam economy was affected by the global financial crisis in 2008. In 2015, according to Reuters (2015), State Bank of Vietnam wants to cut the interest rate down to

5.5% in the hope of boosting the GDP growth rate. Such decline will encourage a switch from holding to investing money into financial assets to achieve better return, which will ultimately boost the demand for Investment and ensure the future growth of the Financial services Industry.

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Figure 1: Vietnam Annual GDP Growth rate (World Bank 2015)

Figure 2: Vietnam Interest rate (IEconomics 2015)

World Bank 2015)

3. INFLATION

The inflation during this period, in general has been falling. In 2011, the inflation reached the peak (18.7%) as a result of the recession in the financial sectors and the growth in the consumer price index (CPI) at the same time, resulting in the economy slowing down due to the drop in GDP growth rate (Thanh Nien News, 2011). However, the inflation rate has been decreasing since the end of 2011. A stable inflation rate will help to promote the foreign fund flowing into Vietnam and

retain the existing domestic fund since the value of their investment would be well managed, especially since the government allows foreign investors to expand their ownership in more sectors starting in September 2015.

4. EXCHANGE RATE

Figure 4: Vietnam Exchange rate 2010-2015(Yahoo Finance 2015)

The exchange market in Vietnam is managed by the State Bank of Vietnam (SBV) to maintain the stability of exchange rate for specific period of time. During the last 5 years, the Vietnam dong (VND) has depreciated by approximately 18% relative to the US dollar. In particular, at the beginning of this year, the government has devalued the VND by 2% in the hope to boost the export value (Bloomberg, 2015). This movement will encourage the export sector to compete in the global market with a more competitive price. However, the simultaneous depreciation of others regional currencies such as Thailand, Indonesia, Malaysia and especially China have hurt the Vietnam export sector in price, even though the SBV has devalued the

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currency to 3%. VND is expected to devalue in the following years based on the decision of SBV. Therefore, in long term, such devaluation might discourage the capital inflow into Vietnam.

5. GOVERNMENT REGULATIONThe corporate tax in Vietnam was at 25% from 2010 and just reduced by 3% to 22% in 2014 which

aimed to stimulate the economy (Trading Economics). Furthermore, in 2015, the government announced through the Decree 60/2015/ND-CP that allowed the expansion in the foreign ownership by up to 100% in some sectors such as securities starting in September (Bloomberg, 2015). On the other hand, under the Decree 42/2015/ND-CP has been enacted by the Prime Minister, the Ministry of Finance also plans to set up the derivatives and derivatives trading market in 2016 such as requirements, regulation, and trading system (Vietnam Plus, 2015). Under those decrees, it will promise a dramatic growth for the stock market in the future as more foreign funds will flow into Vietnam after the market is diversified and more opened for foreign investors.

III. Industry Analysis1. INDUSTRY OVERVIEW

Under the Decree 48/CP was enacted by the government on July 11th 1998, Vietnam Stock Market was born. In the same time, Ho Chi Minh Stock Exchange was founded and started its first operation on July 28th 2000. Six years later, Vietnam Stock Depository was established to provide supporting services to the whole securities market.

As a young market in a young economy, the stock market was started lowly. Break-through came in 2006 with the newborn of Ha Noi Stock Exchange and the OTC market. With almost 60% growth rate, Vietnam was the second hot spot in the world for investment. The market was booming in 2007, VN Index reached its highest peak of 1170.67 points, but in the end of the year it was adjusted, went back down and fluctuated ever since. After 15 years, the VN-Index now is 594.26 point with around 126.5 million of stocks being traded every day, equivalent to 2,251.21 billion VND of trading value (HOSE 2015). As of today, Vietnam stock market capitalization is roughly 51.9 billion USD (31.1% GDP), one of the youngest and smallest stock market in the region.

2. MARKET SCALECurrently, there are 348 securities listed in HOSE, including 309 stocks, 38 bonds and 1 ETF. The

majority of them are in manufacturing (95 companies), wholesale and retail trade (45 companies), real estate (38 companies), construction (32 companies) and many more. According to HOSE (2015), there is only 5.5% of the listed companies are in the sector of finance, banking and insurance but they represent the highest percentage of market capitalization (more than 38% of the whole Vietnam stock market)

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Figure 5: Vietnam market liquidity from Sep 2014 to Aug 2015 (source)

In an Asian market like Vietnam, the traditional Tet holiday is usually on February, that’s why trading in that particular month is the lowest. The market is improved later on to reach its peak in the beginning of 4th quarter. Investors tend to trade a lot at the beginning of the fiscal year but they will play very carefully at the end to make sure they have nice looking financial report next year.

Put-through trades contribute around 10% to the total trading value in HOSE. According to HOSE (2015), only trades with volume from 20000 stocks and above in 1 deal have to use the put-through procedure. The Vietnamese economy is still weak, there are not much blue chip company’s listed, old regulations which strictly limited room for foreign investors and perhaps these are reasons why the HOSE is not so vibrant.

3. INDUSTRY DRIVING FORCESIn a country, the stock market could be a major index for the whole national economy. To illustrate,

it reflects not only the products and services in the market, but also the financial market. Therefore, these key factors should be closely investigated in order to clearly understand the fluctuation of the stock market.

● Vietnam economy The health of the economy is very important when investing in stock market. To explain, high GDP

with strong growth rate, positive net export, and stable price level will ensure a healthy environment for firms to develop and making a strong platform for the stock market. Furthermore, CPI and inflation are also important determinants in stabilizing the economy. However, Vietnam recently is still suffering from the financial crisis, bad management and low productivity and slow gait in reformation. Hence, this situation could not do much to boost the stock market.

● Interest rate Most of business operation is concerned with leverage, especially in financial business. The interest

payment plays in important role in which directly affects the profit margin of investors. In general, interest rate in Vietnam is relatively high 6.5% (comparing to Singapore, Thailand, Malaysia and the Philippines with the rate are 0.23%, 1.5%, 3.25% and 4%, respectively). Hence, if the interest rate of Vietnam could be lowered, there would be more capital flow into the stock market.

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Interest rate also impacts directly to every company’s performance, which is reflected on the stock price. With low interest rate, firms can be assured with not so expensive long term debt, make more profit, boost the stock price and enhance liquidity.

● Government regulations As a young market, the Ho Chi Minh Stock exchange is still limited and excluded many tools. The

upcoming Decree 60 is awaited to make a breakthrough to the market. With an increase in foreign ownership limit for publicly-traded companies, Vietnamese stock market will attract more capital inflow. Besides, cross ownership is restricted and hence, there will be more liquidity. Moreover, banking operations are facilitated in using more short term capital and lending for stock and real estate. Therefore, these adjustments could decrease interest rate and boost the economy.

IV. Company Analysis1. BUSINESS ACTIVITIES

Type of Clients:

Figure 6: HSC’s revenue breakdown 2014 (adapted from Annual report 2014)

● Individual clientsThe Brokerage service for Individual clients was the major strength in HSC business activities ever

since its inception. With the advantages of early entry and high reputation, HSC remains one of the 5 leading firms in this market segment. More importantly, HSC was the first company to apply the model of customer direct consulting through the VIS Portals into its operation.

● Institutional clientsHSC is one of the 3 leading securities brokerage for foreign investors. HSC provides practical utility

through their daily reports, company reports and specialized reports based on investing segment, and 6

strategic analysis documents. The company has diversified the services for Institutional clients in order to provide more options for both domestic and foreign investors.

Type of Services:

Figure 7: Revenue breakdown based on Business types in Q1 and Q2 of 2015 (adapted from Annual report 2014)

● Brokerage servicesHSC finds out the needs, the financial capacity and risk tolerance levels of customers and then

provides effective financial solutions, in accordance with their specific financial situations. Indeed, brokerage services are the core business of HSC. In the first 2 quarters of 2015, they contribute up to 39.5% and 46.9% of the firm’s revenue, respectively.

● Securities investmentsHSC simplifies the investment process for all customers, and offers them a complete approach to the

service of managing customers’ account to ensure that every transaction and provided information will be updated, managed and monitored continuously by highly professional and experienced staffs.

● Finance advisory servicesHSC ascertains the needs, financial current status and growth potential of the corporate clients to

provide specific solutions to best meet their specific requirements, from raising capital, looking for financial investors to issuance of shares to the public.

● Custodian servicesHSC receives securities deposited by clients, helps them to store and implement their rights to those

securities. The modern networks allow HSC to implement those rights efficiently, minimize the error and provide more accurate reports. Therefore, HSC is one of the most prestigious Securities Depository in the market.

2. OWNERSHIP STRUCTURE

Figure 8 shows the ownership structure of HSC. As can be seen, the major investors of HSC are foreign shareholders with nearly 49% of the firm’s ownership. The other 51% of the ownership belongs to the local investors in which 29.5% are owned by the State, and the rest are from other domestic investors.

7Figure 8: Ownership Structure (reproduced from HSC, 2014)

3. COMPETITORS

In Vietnam, there are approximate 100 securities corporations including domestic and foreign companies. Specifically, top 10 giant companies were holding 62% market share in Vietnam (Phuong Chi, 2015). From the figure 9, there were two main leaders in securities brokerage which are SSI and HSC with the market share were 12.53% and 11.74%, respectively.

HSC used to be a winner in 2013 with the market share of 13.28%; However, there was a huge change in Q4/2014, which HSC trading dropped dramatically, and SSI took the leader position in that year. Furthermore, the distance between the top 2 and

the rest was quite far. For example, 3rd and 4 th position were VCSC and VND with the market share of 6.52% and 5.81% and 2 times lower comparing to 1st position.

a. Saigon Securities Incorporation (SSI)

Saigon Securities Incorporation (SSI) was established in 2000 and had approximately 15 years’ experience in financial industry. Similarity to HSC, SSI has many business activities the same as HSC. Besides that, SSI has some activities raising profit that HSC does not have including depositary shares and leased assets. Moreover, according to VNeconomy (2012), SSI operated its business with more than eight thousand billion VND capital and was 2.5 times higher compared to HSC. With such a great amount of cash, their business activities would be more effective and easy than HSC. In addition, one difference in SSI compared with other securities companies as the company implements long-term investment strategy through holding of more than 20% of the capital to become associated company of SSI. To illustrate, looking at the list of associated companies of SSI, the majority are now trading in agricultural products, aquatic products for export. For example, NSC, HVG, ABT and SSC had good business results and stable dividend payment every year. With numerous activities raising revenues, SSI will have sustainable growth and become the most competitive rivals with HSC.

b. Viet Capital Securities (VCVS)

Figure 10: Top 5 Securities companies with highest revenue in 2014 (adapted from cafef, 2014)

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Figure 9: Securities market share 2014 (reproduced from Infonet, 2015)

Viet Capital Securities (VCSC) was established in 2007, is one of the fastest-growing stock companies in Vietnam. In 2014, VCSC accounted for 6.52% in the total brokerage trading of the market and became the 3rd company in the list of top 10 securities company had highest revenue in 2014. From the figure 2, comparing to other rivals HSC and SSI, VCSC earned more profit from consulting activities and accounted approximately 13.74% (VCSC annual report 2014). This number was greater comparing to SSI and SHC with 1.1% and 1.53%, respectively (Ha Thai 2015). According to Hoan, vice president has shared that ‘We emphasized the human factor as a competitive advantage. A good broker must have ability to advise customers most effectively rather trading the most’. VCSC chose human value as a key to be successful in the future. Although VCSC has established for short time, the company has built for itself many remarkable achievements and affirms its strong position in the Top 3 in the core activities of market segment: the first bank investment, broker and analyst. In the future, it may become another formidable competitor with HSC.

c. VNDIRECT (VND)

VNDIRECT Securities Joint Stock Company was established since 2006 with the co-founder Financial Group Investments IPA. After 8 years of establishment, VNDIRECT has grown into retail stock company with equity over 1835.3 billion VND and more than 500 professional employees (Infor Net 2015). In 2014, the company has focused on developing the core business activities such as personal brokerage, financial services, self-investment and investment banking. The result has brought for VNDIRECT so many successes. To illustrate, in 2014 only, the revenue had increased by 67.5% in which the array of brokerage was accounted for 42% (Hoang Tu 2015). Hence, the company has planned to increase the employee to emphasize on brokerage sector. Moreover, since 2009, the company has cooperated with INCOM to provide a SMS Securities for customer. This application will help the company gain advantages against other competitors in term of customer services. In 2015, the Decree 60 of the government will create more opportunities for the company to develop and expand the business.

4. DISTRIBUTION CHANNELSa. Online trading

HSC provides trading services through an online channel, i.e. the VM-Trade, which allows the customers to trade and search for information in the most rapid, convenient and accurate way. There are 2 different types of account for different types of customers: the VI-Trade for the normal customers and the VIP-Trade for the VIP ones. Different types of account provide different services, and the VIP accounts will have access to wider range of services.

b. Direct tradingHSC also provides direct trading services where the firm’s consultants and customers will meet face-

to-face in the trading offices. HSC’s offices only locate in Ho Chi Minh City and Hanoi. Meanwhile, SSI (currently ranked the 1st) has its trading offices spread in other big cities such as Hai Phong, Nha Trang, and Vung Tau. Obviously, in terms of direct distribution channel, HSC is one step behind its major competitors in capturing all available customers.

5. COMPETITIVE ADVANTAGESa. Human Resource

In 2015, HSC is a leader in Securities Company with 573 employees (Phuong Mai, 2015). The reason is that the company wants to enhance the quality of consultation as well as the services for customers, especially in brokerage area. Moreover, staffs in the company are well-trained with high specialization. As a

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result, human is key factor for the success of the business and are considered as the competitive advantages for HSC.

b. TechnologySince 2013, HSC has been successful in introducing the “information security ISMS” under the

standard of ISO 27001. The purpose is that to ensure the security of information under the principle of C.I.A (Confidentiality - Integrity - Availability). Specifically, ISMS helps minimize the risks related to security of information, enhance the confidence and peace of mind of customers in transactions at HSC (Bao moi, 2013). With this success, it will confirm the pioneering position of HSC in the development of advanced technology systems and gain the competitive advantages against other rivals.

c. High dividend paid

Another factor that is considered to be a key success factor is the high and dividend. For over the last four years, dividend always has been paid with high percentage, particularly in 2013 and 2014 is 12%. Compared to interest rate from deposit in bank, this rate of dividend is much higher. Thus HSC high dividend tends to be more attractive for clients.

d. Risk management

Risk management is also considered as competitive advantage for HSC. The reason is that beside the corporate governance and skilled employees, HSC also has to take a view of risks that may appear in business. By taking a clear look at all risks that expose to the business, HSC can be able to re-assess its strength at current position and develop an appropriate strategy for its growth.

e. Transparency for customers

For clients, transparency plays an important role for assessing HSC’s performance. To explain, clients and investors are concerned that what kind of activities HSC doing and whether the money are appropriately invested. Thus, to satisfy the wonders of customers, HSC focuses on developing Investor Relations with different information channels. To clarify, Investor Relations hold general meeting every year and provide annual reports for investors to be fully informed about company’s operating results and its activities. Moreover, Investor Relations also arrange meetings with investors and media every quarter to assess the financial situation of HSC and disclosure any information required for investors. Therefore, investors and clients are satisfied with disclosure method of HSC.

6. DEVELOPMENT STRATEGIESa. The “Prudent strategy”

10Figure 11: HSC Revenue breakdown (adapted from Security Information, 2015)

In 2015, the company has set a target of 779 billion in revenues and 415.6 billion in profit before tax. After many years doing business on market, HSC is growing fast and becomes one of the top securities Corporation in Vietnam. Hence, HSC already has a lot of competitive advantages against other rivals such as high market share, large number of well-qualified staffs and great amount of assets. For sustainable growth, in different time frame, HSC always has ‘prudent strategy’ to apply in order to maintain and develop its business (Security Information, 2015)

From 2010 to 2012, HSC did not focus on too much on investment activities due to the fluctuation of the economy. However, they choose less risky activities instead. Brokerage, financial advisor and lending margin were the main activities during that HSC applied to raise profit. With large customer network, these activities brought for company so many successes. Since 2012, the company boosted the development through many investment activities and high ROE and ROA each year would demonstrate for sustainable growth for the company (see appendix 3). In 2015, HSC will focus on developing investment strategies and hedging investments in securities. Furthermore, HSC will provide speculative services and online services through a network of worldwide brokers. Moreover, reinforcing the capital and expanding overseas operations in order to leverage the accessibility of potential customers.

b. Growth ModelFor the aim of maintaining the growth rate, HSC concentrates on a model that contains three main areas.

The first area is the company itself. HSC focuses on providing staff benefits to encourage their dedication; and manages the risks that can appear in its business to achieve a stable growth. This can be achieved through (HSC, 2014):

➢ Enhance the role of risk management and risk control in the financial management, the accounting and auditing, as well as the enterprise risk management.

➢ Continue to promote the transparency in business operation

In the second area, the concern of HSC is to maintain stable dividend for shareholders, following with the professional services and increase in capital raising channels. This can be achieved through (HSC, 2014):

➢ Reinforce and promote the development of core business through products and services diversification.

➢ Enhance the efficiency of using capital through continuously promoting the strengths of the current products and services, as well as through developing new products and services that meet both the international standards and the customers’ need.

The final area is the society, which requires HSC to meet the financial responsibilities to the Government and to protect the environment. This can be achieved through (HSC, 2014):

➢ Promote the creation of a strategic CSR development plan to accelerate the enhancement of corporate value based on the sustainable development.

Thus, to achieve positive impacts on these areas, HSC has to fulfil all the above missions to bring out benefits and opportunities for the company itself. Hence, by determining what HSC needs to do for this model, company can exploit the available benefits and opportunities.

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V. Financial Performance1. DuPont Analysis

NET PROFIT MARGIN

Figure 12: Net profit margin from 2010 to 2014(Team estimated)

The net profit margin measures how much a company actually earns form every dollar of sales. A more profitable company having better cost control usually has higher net profit margin.

HSC is one of the top companies that has highest net profit margin, but is the only firm able to keep it stable over the 5-year period. Meanwhile, most of the others suffered a fall of profit margin in 2011, especially VNDIRECT, due to the recession in the economy. From 2012 onwards, the industry witnesses a strong recovery with almost every firms increasing theirs net profit margin. HSC, in general, is more profitable than the average, indicating that the company’s management board has succeeded in leading the company through the recession time.

ASSET TURNOVER

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Figure 13: Asset Turn over from 2010 to 2014 (Team estimated)

Total asset turnover ratio is an indication showing the company’s efficiency in utilizing its asset to generate revenue. The higher the ratio is, the better the company performs and it also implies that company is generating more revenue for every dollar of assets (Investopedia 2015).

Overall, the asset turnover ratio for all firms fluctuated from 2010 to 2014. During 4-year period, while most of the firms had a fall in the ratio; However, HSC moved in the opposite direction with an increase from 16.71% in 2011 to 23.67% in 2014. The main reason is because HSC revenue has been rising throughout the last 4 years. This ratio also points out that HSC is more efficient in using its asset to generate higher revenue, compared to the three peers.

INTEREST EXPENSE RATE

Figure 14: Interest expense from 2010 to 2014 (Team estimated)

Interest expense ratio is the interest that company has to pay for the debts of borrowing. A higher rate of interest expense indicates the more debt company owed and a higher interest that it will have to repay. Therefore, a low interest rate expense is more preferred.

In general, there was a big distinction between HSC’s interest expense ratio and its competitors. Through the whole 5-years period, HSC always maintained the lowest interest expense rate, whereas its peers fluctuated over time, especially in 2011. Due to the downfall of the economy, many Securities Company suffered from loss during that time and high interest expense ratio as a result. A supporting reason was during that time, HSC mainly concentrated on Consultant activities and interest on banking investment rather than self-investment as other competitors (Bao Moi, 2011). Thus, its loss would maintain lower than its competitors.

FINANCIAL LEVERAGE

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Figure 15: Financial leverage from 2010 to 2014 (Team estimated)

The financial leverage multiplier shows which capital contributes to the company’s assets. In DuPont analysis, this ratio shows how much company relies on debt that can reflect the accuracy of the return on equity (ROE). According to the graph, HSC’s and SSI’s financial leverages are quite similar which average ratio is around 1.5 times and adjusted very lowly. The ROE of the HSC would not change much as the financial leverage over this period is quite stable.

TAX RETENTION RATE

Figure 16: Tax retention from 2010 to 2014 (Team estimated)

The retention ratio evaluates the percentage of a firm’s earnings that are retained after all taxes are paid off. Normally, a firm with higher retention rate tends to generate higher return for the company itself as well as for its investors.

Based on the above graph, the tax retention ratio of the first 3 firms tends to increase initially and then decline over times as compared to an upward trend of VNDIRECT. From 2011 onwards, HSC retained the lowest after-tax earnings as compared to its two competitors. In 2014, the tax retention ratio of HSC

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increased to 78.1%, higher than that of its biggest competitor - SSI (which was currently at 76.4%). The overall increase in the tax retention rate reflected the government efforts in reducing the corporate tax and became the premise for an official Decree 96/2015/TT-BTC (regarding cutting corporate tax) later on in 2015.

RETURN ON EQUITY

Figure 17: Return on Equity (Team estimated)

The return on equity is the amount of net income relative to the shareholders equity. It measures how profitable a firm is by calculating how much profit the company made for every dollar shareholders have invested. A high ROE is usually indicating a faster growing company.

From 2010 to 2014, HSC is the only firm that could maintain a return on equity greater than 9% for 5 years. It was slightly affected by the market downfall in 2011 while VNDirect was struggled much more. In 2012, the market was recovered and most firms developed at almost the same pace, especially HSC who could yield a higher return than the industry average. The managing of directing board should be highly appreciated for growing stably both profit and equity throughout the years.

2. Risk Profile

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Figure 18: Financial Risk ratio from 2010 to 2014 (Team estimated)

The Debt-to-Equity (D/E) ratio and the Debt-to-Capital (D/C) ratio are measurement of a firm’s debt relative to its total value of equity, and are used to estimate the extent to which firm is taking on debts for leveraging. Normally, firm with higher D/E and D/C ratio tends to be more aggressive in debt financing and hence bears higher default risk.

Figure shows an upward trend in both ratios during the past 5 years, indicating that HSC became more aggressive toward debt financing as means of leverage. Even though the 2 ratios remain within the acceptable level, investing in HSC should be considered to be riskier over times.

VI. Estimating Required Rate of Return:1. DEFINITION:

CAPM is a model used to measure the expected rate of return of a risky asset which contains 2 components. Those components are the risk free rate and the systematic risk of the asset (Beta) multiply by risk premium. For risk free, this will be compensated for investors in terms of time value of the money, while compensation presented by the second part of CAPM will occur for any additional risks that investors have to bear (Investopedia, 2015).

The general formula of CAPM is:

E(R)i = RFR + βi(Rm – RFR)

2. RETURN ON RISK FREE ASSETS:

According to Tradingeconomics (2015), 10-year Vietnam Government Bond from 2007 to 2015 has a return of 6.79%. This rate of return of Vietnam Government Bond will be first component in determining expected return for HSC.

3. EXPECTED MARKET RATE OF RETURN:

To determine the expected rate of the market (VN-Index), many factors will need to be taking into account such as inflation, exchange rate or government regulation. However, to be simpler for this report, expected market rate of return will only consider the change in Vietnam’s GDP growth rate. The table below shows the expected market return which is based on different scenarios for GDP growth rate in Vietnam. To demonstrate that, the historical rates of annual GDP growth rate and data of VN-Index for more than 10 years are gathered for assumption (Worldbank, 2015; CafeF, 2015). Then VN-Index will be forecasted based on its historical change in response to change in GDP growth rate over the last 10 years.

As showed in below table, for GDP interval between 6 % and 6.5%, probability is around 90%. The reason is that the Vietnam government planned to have GDP growth rate of more than 6.2% in 2015 and it has a fact that in the first two quarters, the growth is 6.28% (Huu Hoe, 2015). Hence, this GDP growth rate will accumulate highest probability to happen. Thus, this leads to the low probability for another two intervals due to lack of evidence. To illustrate, for interval below 6%, IMF believes that ASIA countries including Vietnam will remain the same growth as previous years because of low export (IMF, 2015), therefore the probability in this scenario is 5%. It is the same for the third scenario World Bank affirms that GDP growth rate of Vietnam should be around 6.5 to 7 percent (World Bank, 2015).

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Finally, the expected market return will be the sum of all market returns in different scenarios.

GDP Interval Probability VN - Index Market return

5.5% - 6% 0.15 8.3% 1.245%

6% - 6.5% 0.60 14.7% 8.82%

6.5% - 7% 0.25 21.1% 5.275%

E(market return) 15.34%

Figure 19: Market return (Team estimated)

4. MARKET RISK PREMIUM:

Market Risk Premium = Expected Market Return – Risk Free Rate

= 15.34% - 6.79%

= 8.55%

5. SYSTEMATIC RISK ( )β :

Beta is a measurement which represents the systematic risk of a risky asset corresponding to the market as a whole. In this report, systematic risk (Beta) is measured by regression model with combination of the historical rate of return of HSC as a dependent variable and historical market return (VN-Index) as an independent variable. Historical data mentioned for calculating Beta is daily return of HSC and daily market return from beginning of 2010 to the end of the year 2014. The table below is a result for measuring the Beta by using regression model.

Figure 20: Regression model (Team estimated)

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Beta (slope coefficient for HSC) is 1.465 and this represents the positive relationship between the return of HSC and VN-Index.

R2 is 0.459 which indicates that 45.9% of the variation of HSC can be explained by the return of the market (VN-Index).

P-value represents the significance of the model, in this case is less than 5% and this indicates that the market return (VN-Index) can be used to explain the return of HSC.

6. ADJUSTED BETAThe raw beta above is not an accurate indicator for any future forecast due to its historical data.

Instead, the Bloomberg formula should be applied to calculate the adjusted beta which will be more precise in predicting the expected return of HSC:

Adjusted Beta = Raw Beta x 0.67 + 1 x 0.33 = 1.31

7. EXPECTED RETURN OF HSC

E(RHSC) = RFR + Beta (RM – RFR)

= 6.79% + 1.31 (15.34% - 6.79%) = 18 %

VII. Valuation Model1. DIVIDEND DISCOUNT MODEL (DDM)DDM is simplest model to estimate the intrinsic value for a stock given a growth rate. The current price

of the stock will be the sum of the present value of future dividend.

Based on the either constant growth or multi- growth of the company, a relevant formula will be applied to analyse for specific firm. In this report, there are two fundamentals DDM, one is used for the constant growth rate and another is used for the multi growth rate

Constant growth model:

P=D1

k−g=

D0(1+g)k−g

Where:

P: the intrinsic value of the stock

k : the required of return of the stock

g: is the growth rate

Note: the growth of the firm must be greater the value of the required rate of return of the stock.

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Multi growth stage model:

P=D1❑1+k

+D2❑

(1+k)2 +…+ Dn(1+k)n

Where:

P is the intrinsic value of the stock

k is the required rate of return of the stock D1, D2 …

Dn = Amount of the dividend paid out

Note: the growth of the firm must be greater the value of the required rate of return of the stock.

The second approach will be applied when the company has different timeframe of growing. Normally, the second way is more preferred as it reflects truly the growth of the market. To explain, dividend paid can base on some factors such as the policy itself, macroeconomics and microeconomics factors.

a. Dividend growth rateEstimate the growth based on historical data:

Another way to estimating the growth based on the history.

Looking at historical averages in growth:

➢ Geometric or arithmetic meansUsing various models:

➢ Linear regression:○ Book Value or EPSt = a + bt

➢ Log- linear regression:○ In (EPSt) or in (Book value)= a+ bt

In which:

EPS is earning per share in period

t is the year t where t goes from 1 to n

b is the coefficient that indicates the average absolute change in the series during the period

Estimate the growth by fundamental method:

g = Percentage of earning retained x Return on equity = RR x ROE

Where:

g = potential growth rate

RR= the retention rate of earnings

ROE= the firm’s return on equity19

ROE and retention ratio (RR) are the key determinants for a potential growth of a business. Based on the opportunity for the company to invest in the future, then the board of directors decided how much retention ratio is kept to reinvest (Reilly and Brown, 2012). As this report has stated above that ROE’s component including net profit margin, total asset turnover and financial leverage, then the business can increase either of each component to raise the ROE.

There are a lot of factors including internal and external factors could affect the growth of the business. Based on the analysis of macroeconomics, microeconomics and the business, the following information will provide of potential growth of HSC in the next five years.

Period Expected growth rate Explanation

2015 - 2016 7.00% - The “Room” expansion for foreign investors through the Decree No.60 (Huy Thang, 2015) is a positive sign for HSC to attain more foreign investments to expand its business.- Company enhances the risk management and risk control as the stock market is going to allow derivatives product trading. Such enhancement will help change the investors’ perception of investing in HSC being less risky, and hence can attract more capital inflows.- It is to grow quick as the market is currently unstable, and even in the near future.

2017 – 2018 12.00% - Through the enhancement in products and services diversification (HSC, 2014), HSC can capture more potential customers and therefore, has higher profit and ROE- Receiving many prestigious awards in 2014 will become a platform for HSC to enhance its strong and competitive brand.- The reduction in Corporate tax to 22% in 2015, and 20% from 2016 onwards (Decree 96/2015/TT-BTC, 2015) gives chances for HSC to increase its net revenue.- The allowed transactions at time (T+0) through the “Draft Circular replacing Circular 74” (Binh An, 2015) will create a positive impact on the stock price in the medium and long term, thereby boosting the revenue and profits for all Securities Companies.- The estimated increase of 15-20% in M2 Money supply - the total amount of VND in the

20

entire society will enhance the available money pool for investing sectors (Vietstock, 2015)

2019 – onwards

10.00% - The excess growth within the previous period will stimulate the simultaneous development of other competitors and even stimulate the entrances for new-born rivals.

b. Intrinsic value

Actual Normal Growth Super Growth Constant Growth

Year 2014 2015 2016 2017 2018 2019

Period 0 1 2 3 4 5

DIV 2,100 2,247 2,404.3 2,692.8 3,015.9 3,317.5

g 4.72% 7.0% 7.0% 12.0% 12.0% 10.0%

Annuity 41,469.2

DDM 1,904.2 1,726.7 1,638.9 1,555.6

Discount Annuity 21,389.4

Intrinsic value 28,214.8

The intrinsic value is 28,214.8 VND, which is lower the prevailing market price of HSC (31,200 VND) ⇒ Overvalued.

c. Sensitivity AnalysisIntrinsic value’s Sensitivity to Stage 1 and 2 of Growth rate

Super growth Slow growth

5% 6% 7% 8% 9%

10% 27,440.13 27,636.47 27,832.80 28,029.13 28,225.46

11% 27,627.54 27,825.66 28,023.77 28,221.89 28,420.00

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12% 27,814.95 28,014.85 28,214.75 28,414.65 28,614.55

13% 28,002.35 28,204.04 28,405.73 28,607.41 28,809.10

14% 28,189.76 28,393.23 28,596.70 28,800.17 29,003.64

There is a positive relationship between the growth rate in both the 2 stages and the intrinsic value of HSC. As the growth rate rises by 1%, the corresponding intrinsic value will increase, but not significantly (almost 0.9%). In addition, the gap between the 2 extreme values is quite small, around 1,800 VND. These suggest that the intrinsic value is therefore not very sensitive to change in the Dividend growth rate.

Intrinsic value’s Sensitivity to Beta and Market risk premium

Market risk premium

Beta

1.11 1.21 1.31 1.41 1.51

6.55% 48,966.71 43,113.13 38,687.39 35,223.84 32,439.47

7.55% 39,919.84 35,703.10 32,439.47 29,838.62 27,717.26

8.55% 34,070.81 30,806.17 28,214.75 26,170.24 24,465.19

9.55% 29,978.74 27,329.24 25,223.85 23,510.57 22,089.20

10.55% 26,955.37 24,732.87 22,952.33 21,493.85 20,277.29

As shown in the table above, the Beta and market risk premium have an inverse relationship with the intrinsic value of HSC. Specifically, when there is an increase in either Beta or the risk premium, the stock value of HSC will decrease. This can be explained as the risk increase, the required rate of return by investors have to increase in order to compensate for the higher risk they have to bear with.

In this sensitive analysis, there is a big impact on the the intrinsic value due to the input variables. To illustrate, when increasing either Beta by 0.1 unit or the Market risk premium by 1%, the average increase in the Intrinsic value of HSC is 9.34% and 13.34% respectively. Additionally, the gap between the maximum and minimum value is quite significant with 26,040 VND. Thus, the intrinsic value is very sensitive to change in the required rate of return.

As a result, it can be concluded that HSC intrinsic value is quite sensitive to change in either Beta or the market risk premium, and is not very dependent on the change in the dividend growth rate.

2. FREE CASH FLOW TO EQUITY (FCFE)a. Historical Data

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FCFE = Net income+ Depreciation expense – Capital expenditure – Change in working Capital – Principal Debt repayments + New debts issued

FCFE is a method to calculate the cash available to common stockholders after deducting all expenses, reinvestment and debt repayments.

2010 2011 2012 2013 2014

Net income 182,311,697,653 194,420,423,020 246,380,523,819 282,174,310,748 376,152,047,249

Depreciation 6,754,711,184 8,850,284,140 9,157,862,246 6,535,525,051 3,078,461,196

Capital expenditure (20,382,993,832) (4,636,982,426) (8,669,134,244) (3,175,695,574) (5,308,359,612)

Change in Net WC 332,839,245,774 1,280,106,895,287 (1,388,254,621,635) 1,133,805,376,339 107,708,306,686

New Debt 0 825,000,000,000 0 0 350,000,000,000

Debt Paid 0 (615,000,000,000) (100,000,000,000) (110,000,000,000) (350,000,000,000)

FCFE (164,155,830,769)

(871,473,170,553)

1,535,123,873,456

(958,271,236,114)

266,213,842,147

Outstanding shares 59,841,941 99,617,517 100,565,957 127,249,720 127,229,583

FCFE/share -2,743 -8748 15,265 -7,531 2,092

FCFE/Share growth rate -218.91% 274.49% -150.67% 127.79%

b. Estimated growth rate for FCFE per ShareIn the last 5 years, we have witnessed many changes in the stock market. As being still very young

and primitive, we have seen many adjustments in the market every year. That is the reason why the financial structure of HSC has been changed many times and many ways, hence its income. With high fluctuation, the forecast is not legit if relied on trailing ratios. Therefore, an investigation of micro and macroeconomic factors will be a more appropriate base to predict the future growth rate of FCFE per share.

The forecast includes 3 period, the near future (from 2015 to 2016) where there are many change in the local economy as well as the global economy, the future (from 2017 to 2018) where all the changes are fully implemented and the economy starts to accelerate, and the far future (from 2019 and onward) where everything is stable and the growth is constant.

PeriodExpected growth

rateExplanation

2015-16 6% In early 2015, market liquidity is not as high as expected. The monetary devaluation of many countries, especially in China, has negative effect on VN stock

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market. Revenue is predicted to decrease in 2015 (HSC, 2015).

However, HSC’s income could increase thanks to new regulations that facilitate the stock market:

- Increase in foreign ownership in Vietnamese companies (100% for stock company)

- Simplify administration procedure for foreign investor

- Investors may trade in T+0 or short sales

- Reduction in Corporate tax

- Increase in money supply

In term of politic, 2016 is the year of 12th National Congress of VN Communist Party and the US presidential election, many improvements in economic policies will be considered and may boost the market.⇒ HSC’s income could slightly increase in the near future, hence FCFE.

2017-18 15% New policies could be fully implemented in the economy, improve company’s performance.

The FTA with Euro zone which could be approved by late 2016 will bring new opportunities to VN market.

TPP also helps to improve trade.

This period could be the golden era for Vietnam when the economy is more opened and many facilitating policies are in place.⇒ HSC growth may increase more quickly in this period.

2019-onward

12% The economy is in the mature phase, growth is stable. HSC growth rate will also become stable due to its sustainable development strategies.⇒ FCFE per share growth rate is stable at a higher level.

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c. Intrinsic Value

Actual Normal Growth Super GrowthConstant Growth

Year 2014 2015 2016 2017 2018 2019

Period 0 1 2 3 4 5

FCFE/share 2,092.39 2,217.93 2,351.01 2,703.66 3,109.21 3,482.32

FCFE Growth rate 4.72% 6.00% 6.00% 15.00% 15.00% 12.00%

Annuity (VND) 58,130.63

Discount FCFE 1,879.76 1,688.

73 1,645.

93 1,604.

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Discount Annuity 29,992.7

9

Intrinsic value 36,811.

42

d. Sensitivity AnalysisIntrinsic value’s Sensitivity to Stage 1 and 2 of Growth rate

Super Growth

Slow Growth

4% 5% 6% 7% 8%

13% 35,549.63 35,891.45 36,233.28 36,575.1 36,916.92

14% 35,833.25 36,177.8 36,522.35 36,866.9 37,211.45

15% 36,116.86 36,464.14 36,811.42 37,158.69 37,505.97

16% 36,400.47 36,750.48 37,100.48 37,450.49 37,800.49

17% 36,684.09 37,036.82 37,389.55 37,742.28 38,095.02

The sensitivity analysis shows a positive relationship between the growth rate, both in slow pace and fast pace, and the intrinsic value of HSC’s stock. For every percent increasing in the growth rate, the

25

intrinsic value is increased almost equally (~0.96%). However in Super growth stage, the intrinsic value is not as sensitive as before (~0.79%). This is an evidence to show that investors tend to be more careful when the company is growing too fast.

Intrinsic value’s Sensitivity to Beta and Market risk premium

Market Risk Premium

Beta

1.11 1.21 1.31 1.41 1.51

6.55% 107,262.07 81,357.13 65,521.28 54,839.39 47,147.69

7.55% 69,662.65 56,239.61 47,147.69 40,582.07 35,618.40

8.55% 51,565.02 42,959.71 36,811.42 32,199.47 28,612.11

9.55% 40,921.84 34,745.56 30,185.75 26,681.41 23,904.20

10.55% 33,914.36 29,163.29 25,577.05 22,774.19 20,523.41

As observing from above, the intrinsic value has negative relationship with both the Market Risk premium and Beta. The higher the Market risk premium is (which means either a higher in Expected rate of return or a lower Risk free rate), the lower the intrinsic value will be devalued. On the other hand, the higher the HSC stock’s market risk (beta), the lower its value is. Every change of 1 percent of market risk premium will lead to a 37599.42 change in the value, while a change of 0.1 of beta yields a lower change of 25904.94 in the value. Actually, investors care more about how much they will be compensated than how risky they are in the market.

3. P/E RATIOa. Historical Data

Figure 20: P/E Ratio from 2010-2014 (Team estimated)

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Overall, the period 2010-2014 witnessed an upward trend in the P/E ratio of both HSC and the industry average. Comparing to HSC and VND, SSI always maintains the highest P/E. Especially in 2011, SSI was the highest among the industry and even among itself in the other years. One supporting reason is that in 2011, its EPS was only 227 VND - much lower than the 2 other firms and the industry average. Meanwhile, the same case did not apply for VND within that same period. The company’s EPS was low and was a loss; therefore, the resulting P/E ratio was below zero. For HSC, despite an initial fall in 2011, its P/E ratio remained quite stable during the 3-year ending period.

b. Ratio Breakdown

2014 Payout Ratio Growth rate Beta Required rate (k)

SSI 47.16% 6.92% 1.08 16.02%

HSC 71.04% 4.72% 1.31 18.00%

VND 20.90% 6.78% 1.24 17.39%

Average 46.37% 6.14% 1.21 17.14%

Median 47.16% 6.78% 1.24 17.39%

The median will be used to avoid the extreme values and thus, provides a more accurate estimation for the future P/E.

➢ Payout ratio Holding other variables constant, firms with lower reinvestment needs will have higher P/E ratios

compared to other firms. The table has shown that the average payout ratio of the industry was 40.5%, while HSC possessed the highest ratio of 71.04%. Thus, it implies that the share price of HSC will be more expensive.

➢ Growth rate The growth rate of HSC is 4.72%, the lowest compared to SSI and VND. Such growth will lower the P/E

for HSC.

➢ Beta Normally, a high Beta implies higher required rate of return and therefore a lower P/E. Since HSC has

the highest beta compared to other competitors and the industry average, its P/E ratio will be negatively impacted.

c. Future Estimation

27

PEPS

=70 %∗(1+7 % )∗(1− (1+7 % )2

(1+18 % )2)

18 %−7%+

40 %∗(1+12% )∗(1− (1+12 % )2

(1+18 % )2)

18 %−12%+ 85 %∗(1+7% )2∗(1+12 % )2∗(1+10 %)

(18 %−10 % )∗(1+18 %)4 =10.61

Period 2014 2015-2016 2017-2018 2019 onwards

Length of Period (years) 1 2 2 Infinite

Required rate 18.00% 18.00% 18.00% 18.00%

Payout ratio 71.10% 70.00% 40.00% 85.00%

Expected growth rate 4.70% 7.00% 12.00% 10.00%

Estimated P/E: 10.62

Estimated 2015 EPS: 2,956 x (1 + g) = 3,162.92

Estimated 2015 Price: 3,162.92 x 10.62 = 33,549.16

d. Sensitivity AnalysisIntrinsic value’s Sensitivity to Stage 1 and 2 of Growth rate

Super growth

Slow growth

5% 6% 7% 8% 9%

10% 31,477.01 32,016.86 32,561.66 33,111.39 33,666.07

11% 31,973.09 32,521.85 33,075.63 33,634.44 34,198.27

12% 32,473.56 33,031.31 33,594.16 34,162.12 34,735.19

13% 32,978.43 33,545.24 34,117.24 34,694.44 35,276.84

14% 33,487.68 34,063.64 34,644.88 35,231.40 35,823.20

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There is a positive relationship between the growth rate in both the 2 stages and the intrinsic value of HSC. As the growth rate in either growth stage increase by 1%, the corresponding intrinsic value will increase, but not significantly (almost 1.7% for the slow growth stage and 1.5% for the super one). In addition, the gap between the 2 extreme values is insignificant, with nearly 4,346.2 VND. These suggest that the intrinsic value should be insensitive to change in the growth rate.

Intrinsic value’s Sensitivity to Beta and Market risk premium

Market risk premium

Beta

1.11 1.21 1.31 1.41 1.51

6.55% 68,286.79 58,442.62 51,016.87 45,220.22 40,572.95

7.55% 53,082.89 46,021.38 40,572.95 36,245.50 32,728.41

8.55% 43,294.18 37,853.60 33,594.16 30,172.52 27,366.46

9.55% 36,478.25 32,086.56 28,613.45 25,801.39 23,480.67

10.55% 31,468.60 27,806.12 24,888.46 22,512.56 20,542.77

As showed above, intrinsic value of HSC’s value is negative correlated to Beta and Market risk premium. Every 1% increase for Beta or Market risk premium leads to a fall in value of the HSC share, but with a lower decreasing rate. It means the higher the rise in the Market risk premium or Beta, the lower the decrease in the intrinsic value. Moreover, the difference between the two extreme values is quite large which is 47,744.02 VND. Hence, the intrinsic value has a high sensitivity towards Beta and Market risk premium.

4. P/B RATIOa. Historical Data

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In general trend, the last 5 years witnessed a recovery in the P/BV ratio of all firms and the industry as well after the initial fall in 2011. The reason for that fall in 2011 was because the stock price of all firms had a drop more than a half of their initial prices in the previous year.

As shown on the above graph, the P/BV ratio of SSI remained the highest among the industry, following by HSC. The difference between these 2 companies is not very noticeable throughout the period, only significant in 2010. Despite ranking the 2nd, HSC growth in this ratio was steadier and more noticeable throughout the 5-year period.

b. Future Estimation ➢ Based on Industry benchmark in 2014

2014 ROE Payout Ratio Growth rate Beta Required rate (k)

SSI 13.09% 47.16% 6.92% 1.08 16.02%

HSC 16.31% 71.04% 4.72% 1.31 18.00%

VND 8.57% 20.90% 6.78% 1.24 17.39%

Average 12.66% 46.37% 6.14% 1.21 17.14%

Median 13.09% 47.16% 6.78% 1.24 17.39%

Again, the median will be used to avoid the extreme values and thus, provides a more accurate estimation for the future P/BV.

However, using historical data to predict future movement will not be appropriate to this case. Even though the 2 components - the ROE and the Payout ratio - suggested that HSC was outperforming as compared to the other 2 competitors and the industry average, this method applies the growth rate of 2014 - which indeed has not yet captured the impacts of both macro and micro factors on the company's future growth rate.

➢ Based on Multi-growth stage Model Since using historical data to predict future growth is not applicable, the Multi-growth stage must be taken into account.

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Figure 21: P/BV Ratio from 2010-2014 (Team estimated)

PBV

=17.4 %∗70 %∗(1+7 % )∗(1− (1+7 % )2

(1+18 %)2)

18%−7%+

19.5 %∗40 %∗(1+12 %)∗(1−(1+12 % )2

(1+18 % )2)

18 %−12 %+

21.4 %∗85 %∗(1+7 % )2∗(1+12% )2∗(1+10 %)(18 %−10 % )∗(1+18 % )4 =2.21

Period 2014 2015-2016 2017-2018 2019 onwards

Length of Period (years) 1 2 2 Infinite

Required rate 18.0% 18.0% 18.0% 18.0%

Payout ratio 71.1% 70.0% 40.0% 85.0%

ROE 16.3% 17.4% 19.5% 21.4%

Expected growth rate 4.7% 7.0% 12.0% 10.0%

BVPS 18,518.44

Estimated P/BV: 2.21

Estimated 2015 BVPS: 18,518 x (1 + g) = 19,814.73

Estimated 2015 Price: 19,814.73 x 2.21 = 43,790.55

c. Sensitivity AnalysisIntrinsic value’s Sensitivity to Stage 1 and 2 of Growth rate

Super growth Slow growth

5% 6% 7% 8% 9%

10% 40,995.11 41,705.75 42,422.94 43,146.66 43,876.93

11% 41,656.51 42,379.09 43,108.33 43,844.22 44,586.76

12% 42,323.78 43,058.40 43,799.80 44,547.97 45,302.90

13% 42,996.91 43,743.69 44,497.36 45,257.91 46,025.34

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14% 43,675.91 44,434.95 45,201.00 45,974.04 46,754.09

The table above shows the sensitivity of intrinsic value of HSC share with the two different growth stages. Transparently, the price of share will move in the same direction with the growth rate. To illustrate, when the slow growth increases for 1% (from 7% to 8%), the price increases by 723.72 VND. Thus, this also leads to another observation that for any 1% change in slow growth or super growth, it would result to a change of 0.01% in the price of share. Therefore, the intrinsic value is less sensitive to two above growth rates.

Intrinsic value’s Sensitivity to Beta and Market risk premium

Market risk premium

Beta

1.11 1.21 1.31 1.41 1.51

6.55% 90,246.54 77,060.03 67,115.60 59,355.06 53,135.25

7.55% 69,882.11 60,427.50 53,135.25 47,345.64 42,642.23

8.55% 56,777.04 49,496.81 43,799.80 39,225.73 35,476.68

9.55% 47,656.97 41,784.13 37,142.46 33,386.72 30,289.40

10.55% 40,958.04 36,063.95 32,168.03 28,998.04 26,372.17

As shown above, the intrinsic value of HSC share has an inverse relationship with Beta and Market risk premium, meaning whenever Beta or Market risk premium increases, the intrinsic value will fall. For a rise of either 0.1 unit in Beta or 1% in the Market risk premium, the intrinsic price will dramatically fall, but at a diminishing rate. Besides, the gap between the 2 extreme value is very significant - 63,874.37 VND. Both suggest that the intrinsic value of HSC share will be very sensitive to change in Beta and the Market risk premium.

VIII. Model Discussion1. DISCOUNT DIVIDEND MODEL (DDM)

The Dividend discount model (DDM) is the first technique to calculate the value a stock based on the value of the dividends that will be paid in the future.

The advantage of this model is:

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Its simplicity leads to basic calculation and is almost based solely on the company’s dividend growth rate.

Besides, this model also has many drawbacks:

As this model requires the future dividend to calculate the price, many impractical assumptions have to be made. Such subjective inputs may negatively impact the model and hence, leads to bad prediction of the final intrinsic value.

If the required rate of return is less than the dividend growth rate, the DDM will be invalid. Although the company had paid dividends annually, the payout ratio was not stable over time. For

instance, the payout ratio for 2010 was 10% and fell to 5% in 2012 and then jumped up to 12% in 2014. This unstable dividend growth rate causes difficulty in predicting the growth in the future.

Regardless of its simple use and easy calculation, there are more disadvantages come along with the model. Hence, this method is considered not reliable and should only account for very low weight in predicting the final price.

2. FREE CASH FLOW TO EQUITY (FCFE)Similar to the Discount Dividend Model (DDM), the FCFE model determines the stock’s value by

discounting all the free cash flow after paying all expenses, reinvestment and debt repayments. However, the FCFE model is more reliable than the DDM since:.

➢ The FCFE model considers both internal and external factors rather than the dividend solely.➢ The cash flow is recorded daily so the historical data is reliable, accurate and hardly bias while

the DDM model is relied on the company’s dividend policy.➢ The FCFE can be used to forecast the potential dividend payment since it estimates the future

free cash flow of the company.Still, the FCFE has its own shortcomings:

➢ There were negative FCFEs in 2010, 2011 and 2013 due to the large change in working capital. The negative FCFE indicates a sign of the firm movement to raise or earn new equity.

➢ The historical FCFE fluctuated significantly, making it difficult to predict the forward FCFE to value the HSC stock.

➢ By taking into account more factors, the FCFE model will require more information needed to estimate the final intrinsic value, making it more complicated but reliable than the DDM model.

In short, the FCFE model will be better predictor than the DDM, and therefore will account for higher weight in the final calculation compared to the other discount model.

3. P/E RATIOP/E ratio is a widely-used technique to determine the current share price of a firm, based upon its

earning per share. Overall, a higher P/E ratio indicates higher expectation from the investors in the growth of future earnings. This is an useful technique for investor as:

➢ It is easy to use, to comprehend and to derive investing decisions correspondingly. ➢ Normally, P/E ratio measures the share’s real value rather than its price alone. This will,

therefore, reflect how investors evaluate and price the company. Regardless of the distinct advantages, this method still confronts some pitfalls needed to be considered:

➢ Based upon its definition, there is no such thing as a right or wrong P/E ratio, but rather a good ratio. Hence, a “good” P/E ratio has to adequately reflect the investor's’ view and attitude toward

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the firm value - which are very difficult to be used to provide accurate predictions on the future intrinsic value.

➢ The guidelines for calculating the earnings per share are governed by the Generally Accepted Accounting Principles (GAAP) which will change over time and will be used differently in different companies. The EPS of a given firm can be twisted into various numbers depending how the books are calculated and which Accounting principles have been adapted. Consequently, in most cases, it is quite unsure whether the investors are comparing the same figures, or only oranges to apples.

➢ When developing the model, some assumptions regarding the dividend have to be made. Since the P/E technique heavily relies on the growth rate and the payout ratio of dividends meanwhile HSC does not have a transparent dividend policy, those assumptions will increase the volatility between the predicted and the actual intrinsic value.

After evaluating the advantages and disadvantages of the P/E model, it is best not to heavily depend on this technique to calculate the company's intrinsic value (i.e this technique should not account for very high weight in the final price).

4. P/B RATIOThe final method used to assist investors decision is the P/B ratio. This technique reflects the market

value of the stock in terms of company’s book value. It is measured by dividing the latest closing price of the stock for the latest book value per share. P/B ratio is a helpful technique because of the following reasons:

➢ It is simple, easily calculated and understandable for the investors.➢ Other than the P/E ratio, it can bring another view of price stock to investors in relation to the

book value instead of the Earning per Share.➢ The P/B ratio also assists investors in knowing how much a firm values its assets compared to the

earnings it made. Nevertheless, P/B also has some specific constraints for analysing:

➢ Similar to P/E ratio, P/B needs to be measured based on the view of the investors about the future scenarios. Hence, that P/B ratio has to be “good” in the mind of investors for future price. Therefore, P/B ratio cannot be used to accurately predict the future price of stock.

➢ The P/B ratio does not take into account Intangible assets. Thus the ratio fails to reflect important intellectual assets that contribute to the brand and the growth of HSC. As a result, this lowers the book value and raises the P/B ratio higher.

As analysed for advantages and constraints, although there are some downside effects, P/B ratio is still considered to have a medium weight for calculating HSC intrinsic value in the future.

IX. Recommendation:The intrinsic value of HSC has been determined and analysed based on the four different models

which are the DDM, FCFE, P/E, and P/BV ratio. After evaluating the strengths and weaknesses of each model, it is best not to rely solely on one model to predict the final price. Instead, each model partially contributes to the company value; therefore, the final intrinsic value will be the weighted average of the four techniques.

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Based on the evaluation of both the advantages - disadvantages and the credibility (i.e, through the sensitivity analysis), the suggested weight for DDM, FCFE, P/E, and P/BV ratio are 5%, 15%, 40%, 40% respectively. The final price of HSC will be calculated as following:

Model Weight Intrinsic value Total

DDM 5% 29,664 1,483.20

FCFE 15% 36,811 5,521.71

PE 40% 33,549 13,419.60

PB 40% 43,790 17,516.00

100% Final Intrinsic value 37,940.51

The predicted price of VND 37,940 is higher than its prevailing market price of VND 31,200 (recorded at December 31th, 2014), indicating a sign of mis-pricing. The resulting investment decision would be most appropriate to BUY at the current undervalue price and hold until the market is self-corrected to make a profit of (37,940 - 31,200 =) VND 6,740 per share.

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<http://antt.vn/ssi-vs-hsc-meo-nao-can-miu-nao-019083.html> An, B 2015, ‘Chuyen thang 7: Chung khoan nhieu ho tro moi’, BSC, viewed 29 August 2015,

https://www.bsc.com.vn/News/2015/7/16/464214.aspx Bao moi 2014, ‘HSC Khong Chi La Moi Gioi’, Bao moi, viewed 29 August 2015,

<http://www.baomoi.com/HSC-khong-chi-la-moi-gioi/127/12587388.epi> Báo mới 2015, ‘Nhin lai nam 2011 Day Bien Dong Cua Cac Cong Ty Chung Khoan’, Bao moi, viewed 29

August 2015, <http://www.baomoi.com/Nhin-lai-nam-2011-day-bien-dong-cua-cac-cong-ty-chung-khoan/127/7770395.epi>

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CafeF 2015, ‘Du Lieu Lich Su’, CafeF, viewed 20 August 31 2015, < http://s.cafef.vn/Lich-su-giao-dich-VNINDEX-1.chn >

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Ha, T 2015, ‘Ban Sac Rieng Cua Chung khoan Ban Viet’, Tin nhanh chung khoan, viewed 2 August 2015, <http://tinnhanhchungkhoan.vn/chuyen-dong-doanh-nghiep/ban-sac-rieng-cua-chung-khoan-ban-viet-107612.html>

Hoang , N 2015, ‘Chung Khoan 2015 Trong Tuong Quan Voi Cung Tien M2’ , Vietsock, viewed 29 August 2015, <http://vietstock.vn/2015/03/chung-khoan-2015-trong-tuong-quan-voi-cung-tien-m2-830-409237.htm>

Hoang, T 2015, ‘DHCD VNDIRECT: Chuyen San Niem Yet Sang Hose’, CafeF, viewed 29 August 2015, <http://cafef.vn/thi-truong-chung-khoan/dhcd-vndirect-chuyen-niem-yet-sang-hose-2015042316451945.chn>

Huu, H 2015, ’ Chính phủ đặt mục tiêu tăng trưởng GDP vượt kế hoạch’, Dau Tu Chung Khoan, viewed 20 August 2015, <http://tinnhanhchungkhoan.vn/thuong-truong/chinh-phu-dat-muc-tieu-tang-truong-gdp-vuot-ke-hoach-124893.html>

Huy ,T 2015, ‘Nghi dinh Noi Room nham muc dich gi?’, Thư viện Pháp luật, viewed 29 August 2015, <http://thuvienphapluat.vn/tintuc/vn/thoi-su-phap-luat-binh-luan-gop-y//10785/nghi-dinh-noi-room-nham-muc-dich-gi>

Incom 2009, ‘INCOM Cung Cap Dich Vu SMS Securities Cho CTCP Chung Khoan VNDIRECT’, Incom, viewed 29 August 2015, <http://www.incom.vn/INCOM-cung-cap-dich-vu-SMS-Securities-cho-cong-ty-co-phan-chung-khoan-VNDirect-c2-370-i117.html>

International Monetary Fund 2015, ‘World Economic Outlook: Uneven Growth – short and long – term factors’, p.45-68, International Monetary Fund, viewed 20 August 31 2015, ,<http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c2.pdf>

Investopedia, ‘Capital Asset Pricing Model – CAPM’, Investopedia, viewed 20 August 31 2015,<http://www.investopedia.com/terms/c/capm.asp>

Phuong, C 2015, ‘Thi Phan Moi Gioi HSX 2014: HSC Mat Bot Thi phan, SSI Dau Bang’, CafeF, viewed 2 August 2015, <http://cafef.vn/thi-truong-chung-khoan/thi-phan-moi-gioi-hsx-nam-2014-hsc-mat-bot-thi-phan-ssi-dau-bang-2015010717101083015.chn>

Phuong, M 2015, ‘Nhan Su CTCK Tang Vot 6 Thang Dau Nam HSC, VNdirect Dung Dau Ve Quan So’, CafeF, viewed 29 August 2015, <http://s.cafef.vn/ssi-161801/nhan-su-ctck-tang-vot-6-thang-dau-nam-vndirect-hsc-dung-dau-ve-quan-so.chn>

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Thanh nien news 2015, ‘ANZ forecasts 65 pct GDP growth for Vietnam in 2015-16’, Thanh nien news, viewed 30 August 2015, <http://www.thanhniennews.com/business/anz-forecasts-65-pct-gdp-growth-for-vietnam-in-201516-39935.html>

Thu vien Phap luat 2015, ‘Thong Tu 96-2015 TT BTC Huong Dan Thu Nhap Doanh Nghiep Tai Nghi Dinh 12-2015-ND-CP’, Thu vien Phap luat, viewed 29 August 2015, <http://thuvienphapluat.vn/van-ban/Doanh-nghiep/Thong-tu-96-2015-TT-BTC-huong-dan-thue-thu-nhap-doanh-nghiep-tai-Nghi-dinh-12-2015-ND-CP-279331.aspx>

Tradingeconomics, ‘Vietnam Government Bond 10y’, Tradingeconomics , viewed 20 August 31 2015,<http://www.tradingeconomics.com/vietnam/government-bond-yield>

Tri Thuc Tre 2015, ‘20 Cong ty Chung Khoan Lon Nhat Kiem Tien Tu Nhung Nguon Nao’, CafeF, viewed 2 August 2015, <http://cafef.vn/thi-truong-chung-khoan/20-cong-ty-chung-khoan-lon-nhat-kiem-tien-tu-nhung-nguon-nao-20150202023136504.chn>

Van, H 2015, ‘Giam Lai Suat Cho Vay Theo Nghi Dinh 67 Tu 7% Xuong 6,5%/Nam’, CafeF, viewed 30 August 2015, <http://cafef.vn/tai-chinh-ngan-hang/giam-lai-suat-cho-vay-theo-nghi-dinh-67-tu-7-xuong-6-5-nam-20150813111536928.chn>

Vneconomy 2012, ‘Chinh Phu: Thi Truong Bat Dong San Chua Co Kha Nang Phuc Hoi’, VNeconomy, viewed 30 August 2015,<http://vneconomy.vn/bat-dong-san/chinh-phu-thi-truong-bat-dong-san-chua-co-kha-nang-phuc-hoi-20121020095845624.htm>

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https://www.hsc.com.vn/vn/media/press/1099/1

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XI. AppendixSTOCK BOND ETF

No of securities codes

309 38 1

Proportion 88.79% 10.92% 0.29%

Listing volumes

(1000 securities)

39,503,473.23 66,310.46 21,500

Proportion 99.78% 0.17% 0.05%

Listing value

(mil VND)

395,034,732.25 6,827,412 215,000

Proportion 98.25% 1.7% 0.05%

Appendix 1: Vietnam stock market composition 2015

Month Order matching Put-through

Volume Value Volume Value

08/2015 88,898,450.00 16,365,667.98 7,808,633.40 2,150,861.58

07/2015 290,957,543.00 51,678,438.62 28,738,504.50 5,865,453.96

06/2015 289,597,123.00 44,276,690.76 25,225,782.20 6,245,352.86

05/2015 195,284,756.00 27,482,716.96 13,226,452.00 4,094,638.80

04/2015 147,991,528.00 24,037,139.48 17,155,109.90 5,044,225.69

03/2015 204,052,694.00 34,241,352.30 17,723,349.30 5,270,256.60

02/2015 104,381,298.00 17,048,719.04 9,076,077.60 2,119,226.61

01/2015 196,927,239.00 32,093,532.96 25,891,170.30 6,011,135.77

12/2014 232,499,235.00 38,739,911.29 29,289,819.20 9,831,105.11

11/2014 249,440,754.00 42,076,946.06 19,397,882.40 4,791,387.55

10/2014 294,758,720.00 51,268,274.24 17,377,530.90 4,454,744.91

09/2014 305,633,012.00 54,026,544.55 30,458,876.00 9,415,740.13

Appendix 2: Market liquidity in the last 12 months

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YEAR ROA ROE

2010 7.9 11.7

2011 7.5 10.7

2012 8.5 11.8

2013 8.9 12.8

2014 10.8 16.3

Appendix 3: Adapted from Security Information, 2015

Year VN-Index Yearly Return GDP Growth Yearly2001 235.4 41.46% 6.2% 0.00%2002 183.33 -8.98% 6.3% 1.61%2003 166.94 -20.88% 6.9% 9.52%2004 239.29 11.80% 7.5% 8.70%2005 307.5 29.62% 7.5% 0.00%2006 751.77 146.26% 7.0% -6.67%2007 927.02 25.06% 7.1% 1.43%2008 315.62 -65.73% 5.7% -19.72%2009 494.77 57.90% 5.4% -5.26%2010 484.66 -6.26% 6.4% 18.52%2011 351.55 -27.66% 6.2% -3.13%2012 413.73 18.21% 5.2% -16.13%2013 504.63 16.22% 5.4% 3.85%

2014 545.63 8.15% 6.0% 11.11%Appendix 4: Historical GDP and VN-Index from 2001 to 2014 (Adapted from World Bank, 2015)

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