TABLE OF CONTENT ABBREVIATIONS ............................................................................................3 LIST OF TABLES ..............................................................................................4 LIST OF FIGURES ............................................................................................4 INTRODUCTION ..............................................................................................

5 CHAPTER 1: OVERVIEW OF EQUITY SECURITIES AND VALUATION MODELS ....................................................................................................................7 1.1 Introduction to equity securities and valuation processes ......................7 1.1.1 1.1.2 Definitions of equity securities ........................................................7 Types of equity securities ................................................................7

1.2 Valuation process ....................................................................................8 1.2.1 1.2.2 1.2.3 Definitions of value in equity valuation...........................................8 Applications of Equity Valuation ..................................................10 Valuation process ...........................................................................11

1.3 Introduction to some popular valuation models ...................................12 1.3.1 1.3.2 CHAPTER CAPM and APT .............................................................................12 Discounted cash flow model ..........................................................14 2: APPLICATION OF VALUATION MODELS IN

EVALUATING STOCKS IN DAIRY INDUSTRY IN VIETNAM .......................22 2.1 Analyzing dairy sector in Vietnam and two companies listed on Vietnam stock exchange Vietnam dairy market growth ......................................................22 2.1.1 2.1.2 Analyzing dairy industry in Vietnam .............................................22 The overview of two companies in dairy industry listed on Vietnam

Stock Exchange ..................................................................................................30 2.2 Applying valuation models to estimate stock price of Vinamilk and Hanoimilk ..............................................................................................................35 1

2.2.1

Methodology and data selection: ...................................................35

CHAPTER 3: ANALYSIS OF VALUATION RESULTS AND SUGGESTION TO IMPROVE THE POSSIBILITY OF APPLYING VALUATION MODELS IN VIETNAM ................................................................................................................39 3.1 Results of valuation models: .................................................................39 3.1.1 3.1.2 VNM valuation ..............................................................................39 Hanoimilk valuation.......................................................................46

3.2 Assessing the results from models:.......................................................53 3.3 Limitations and suggestions to improve the possibility of applying valuation models in Vietnam .................................................................................57 3.3.1 3.3.2 Some limitations of my models .....................................................57 Suggestions to improve the possibility of applying valuation models

in Vietnam 57 CONCLUSION .................................................................................................59 REFERENCES .................................................................................................60 APPENDIX .......................................................................................................62 1. 2. Data inputs for CAPM: .........................................................................62 Data inputs for APT: .............................................................................63

2.1 Tests of violations of regression assumption ........................................65 2.1.1 2.1.2 2.1.3 3. Required return of VNM based on CAPM ....................................65 Required return of HNM based on CAPM ....................................66 Required return of HNM based on APT model .............................67

Financial statements for FCFE model: .................................................68

3.1 VNM reports .........................................................................................68 3.2 HNM report...........................................................................................71

ABBREVIATIONS APT BMI CAPEX CAPM EBIT EBITDA EBT EMI EPS DDM FAO FCFE FCFF GDP GGM MARD RIM VND : Arbitrage pricing theory : Business Monitor International : Capital expenditure : Capital asset pricing model : Earnings before interest, taxes : Earnings before interest, taxes, and depreciation, amortization : Earnings before tax : Euromonitor International : Earning per share : Discounted dividend model : Food and Agriculture Organization : Free cash flow to equity : Free cash flow to firm : Gross Domestic Product : Gordon Growth Model : Ministry of Agriculture and Rural Development : Residual income model : Vietnam Dong (National Currency Unit)

LIST OF TABLES Table 3.1: CAPM result of VNM .....................................................................40 Table 3.2: APT first result of VNM..................................................................42 Table 3.3: APT final result of VNM .................................................................42 Table 3.4: Discounted Cash Flow Method Characteristics ..............................43 Table 3.5: CAPEX plan of VNM (bn VND) ....................................................44 Table 3.6: FCFE results of VNM (mnVND) ....................................................45 Table 3.7: CAPM result of HNM .....................................................................47 Table 3.8: APT first result of HNM..................................................................49 Table 3.9: APT final result of HNM .................................................................49 Table 3.10: FCFE model result of HNM based on CAPM (mVND) ...............52 Table 3.11: FCFE model result of HNM based on APT (mVND) ...................53

LIST OF FIGURES Figure 2.1: Milk consumption per capita in Vietnam .......................................22 Figure 2.2: Milk consumption per capita in some regions ...............................23 Figure 2.3: Processed liquid milk production in Vietnam ................................23 Figure 2.4: Processed liquid milks sales in Vietnam ......................................24 Figure 2.5: Sales of drinking milk products in Vietnam ..................................25 Figure 2.6: Sales of yoghurt and Sour Milk Products ......................................26 Figure 2.7: The market share of dairy industry in Vietnam .............................27 Figure 2.8: Net sales and EBT of VNM ...........................................................31 Figure 2.9: Revenue Breakdown of VNM ........................................................31 Figure 2.10: Net sales and EBT of HNM .........................................................35 Figure 3.11: Monthly return of VNM and VN Index .......................................39 Figure 3.12: Forecast sales and EBIT of VNM ( mnVND) ..............................44 Figure 3.13: Sensitivity analysis of VNM (VND) ............................................55 Figure 3.14: Sensitivity analysis of HNM resulting from CAPM (VND)........56 Figure 3.15: Sensitivity analysis of HNM resulting from CAPM (VND)........56

INTRODUCTION 1. The rationale of research topic: Nowadays, determining the value of a particular asset is perplexing questions for all participants in the investment world. For equity analysts, estimating the value of equity is at the heart of professional activities and decisions, which can lead to success or failure in their investing. Therefore, it is particularly critical to have equity valuation skill, especially in a developing financial market in Vietnam. As the result, equity valuation models are a foundation on which to base analysis and research but must to be applied wisely. Valuation models are always chosen based on the available information to be used as inputs. In the context of developing financial market in Vietnam, the lack of available data will restrict the choice of model and influence its results. Therefore, I decide to research on this problem and my topic for the graduation is The application of valuation models in evaluating stocks in dairy industry in Vietnam. 2. Purpose of the study My research is aimed to complete following objectives: Improving a model to estimate required return for companies in Vietnam dairy industry. Applying equity model to estimate their value of ownership stake in order to make investment decision. Giving suggestions to improve the possibility of applying valuation in Vietnam.

3. Research methodology: Data: Financial report from Vinamilk and Hanoimilk companies. Others data come from reports of BMI and EMI, and some trusted website. Methodology: 5

3 models are used in this research: CAPM and APT are used to estimate the required rate of return FCFE is used to estimate the equity value

4. Research subject and scope: Research subject: The required rate of return of enterprises The equity value of enterprises Scope of research: Companies in dairy industry that are listed on Vietnam Stock Exchange.

5. Structure of the Thesis The body of the thesis is divided into 3 chapters as follows: Chapter 1: Overview of equity securities and valuation models Chapter 2: Application of valuation models in evaluating stocks in dairy industry in Vietnam Chapter 3: Conclusions and suggestions to improve the possibility of applying valuation model in Vietnam.

CHAPTER 1: OVERVIEW OF EQUITY SECURITIES AND VALUATION MODELS 1.1 Introduction to equity securities and valuation processes 1.1.1 Definitions of equity securities Companies finance their operations by issuing either debt or equity securities. A key difference between these securities is that debt is a liability of the issuing company, whereas equity is not. Instead, shareholders have a claim on the companys assets after all liabilities have been paid. Because of this residual claim, equity shareholders are considered to be owners of the company. Investors who purchase equity securities are seeking total return (i.e., capital or price appreciation and dividend income). As the results, equity investors expect the companys management to act in their best interest by making operating decision that will maximize the market price of their shares (i.e., shareholder wealth). 1.1.2 Types of equity securities 1.1.2.1Common shares Common shares represent an ownership interest in a company and are the predominant type of equity security. As a result, investors share in the operating performance of the company, participate in the governance process through voting rights, and have a claim on the companys net assets in the case of liquidation. Companies may choose to pay out some, or all, of their net income in the form of cash dividends to common shareholders, but they are not contractually obligated to do so. Common shares may also be callable or putable. Callable common shares (also known as redeemable common shares) give the issuing company the option (or right), but not the obligation, to buy back shares from investors at a call price that is specified when the shares are originally issued. It is most common for companies to call (or redeem) their common shares when the market price is above the pre-specified call price. The company benefits because it can buy back its shares below the current price 7

and later resell them at a higher market price, and it can also reduce dividend payments to preserve capital, if required. Investors benefit because they receive a guaranteed return when their shares are called. Putable common shares give investors the option or right to sell their shares (i.e, put them) back to the issuing company at the price that is specified when the shares are originally issued. Investors will generally sell their shares back to the issuing company when the market price is below the pre-specified put price. Thus, the put option feature limits the potential loss for investors. From the issuing companys perspective, the put option facilitates raising capital because the shares are more appealing to investors. 1.1.2.2Preference shares Preference shares (or preferred stock) rank above common shares with respect to the payment of dividends and the distribution of the companys net assets upon liquidation. However, preference shareholders do no share in the operating performance and generally do not have any voting rights, unless explicitly allowed for at issuance. Preference shares have characteristics of both debt securities and common shares. Similar to the interest payments on debt securities, the dividends on preference shares are fixed and are generally higher than the dividends on common shares. However, unlike interest payments, preference dividends are not contractual obligation of the company. Similar to common shares, preference shares can be perpetual (i,e., no fixed maturity date), can pay dividends indefinitely, and can be callable or putable. 1.2 Valuation process 1.2.1 Definitions of value in equity valuation The definitions of value relevant to any research need to be considered before valuing assets. For any valuation of companies equity, an intrinsic value definition of values is most likely relevant. 1.2.1.1Intrinsic value 8

The intrinsic value of asset is the value of the asset given a hypothetically complete understanding of the assets investment characteristics. For any particular investor, an estimate of intrinsic value reflects his or her view of the true or real value of an asset (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 7) In equity valuation, there is a critical assumption that especially applied to public traded stocks: It can be exist the difference between market price and intrinsic value of a securities. Ve P = (V P) + (Ve V) In which, Ve P is the difference between market price and intrinsic value, (V - P) is the true mispricing, which will contribute to the abnormal return, (Ve V) is the error when an analyst estimates the intrinsic value of a security. 1.2.1.2Going-concern Value and Liquidation Value A company generally has one value if it is to be immediately dissolved and another value if it will continue in operation. In estimating value, a going concern assumption is the assumption that the company will continue its business activities into the foreseeable future. The going concern value of a company is its value under a going concern assumption. (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 7) An alternative to a companys going concern value is its value if it were dissolved and its assets sold individually, known as its liquidation value (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 8) 1.2.1.3Fair Market value and Investment Value Fair market value is the price at which an asset (or liability) would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is no under any compulsion to sell. (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, 9

page 8). The essential assumption that included in the concept of fair market value is that seller and buyer need to be informed all the important information of the investment. In some situation, an asset is worth more to a particular buyer taking account of potential synergies and based on the investors requirements and expectations is called investment value (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 8). 1.2.2 Applications of Equity Valuation In financial world, tools of equity valuation is applied to address many practical problems. Some applications are accomplished as the following: Stock selection: The primary use of equity valuation is to guide the purchase, holding or sales of stocks. Valuation is based on both a comparison of the intrinsic value of the stock with its market price and a comparison of its market price with that of comparable stocks. The final result is to give the answer to the question: is this stock fairly, underpriced or overpriced? Reading market expectation: Current market prices implicitly contain investors expectations about the future value of variables that influence the stocks price (e.g., earnings growth, expected return). Therefore, finding out about what companys fundamentals could infer the market price is important to any analysts. (Fundamentals might be the profitability, solvency or risk of a company) Evaluating corporate events: Corporate events may be mergers, acquisitions, liquidation or going private. Nowadays, investment tools are used to help investment bankers, corporate analyst, and investment analyst to invest in these events. For example, investors always to estimate the fair value of stock in merger and acquisition transaction to maximize the return for their investment.

10

Valuations of business strategies. Investors always want to know whether the current strategies of board of managers can lead to the companys business success and increase the value of shareholder.

Communicating with investors and analysts. The valuation approach provides management, investors, and analysts with a common basis upon which to discuss and evaluate the companys performance, current state, and future plans.

Appraising private business. Analyst use valuation techniques to determine the value of firms or holdings in firms that are not publicly traded. Investors in nonpublic firms rely on these valuations to determine the value of their positions or proposed positions.

Share-based payment: Based on equity valuation tools, executive compensation such as stock grants or stock options are estimate and expensed in their financial reports.

1.2.3 Valuation process Valuation process includes understanding the company to be valued, predicting the company's performance, and choosing the suitable valuation model for a given valuation task. In general, the valuation process involves the following five steps: Understanding the business: Industry and competitive analysis, together with an analysis of financial statements and other company disclosures, provides a basis for forecasting company performance. Various framework exist for industry and competitive analysis. The primary usefulness of such frameworks is that they can help ensure that an analysis gives appropriate attention to the most important economic drivers of a business. Further, although frameworks can provide a template, obviously the informational content added by an analyst make the framework relevant to valuation. Forecasting company performance. Forecasts of sales, earnings, dividends, and financial position (pro forma analysis) provide the inputs for the most valuation model.

11

Selecting

the

appropriate

valuation

model.

Depending

on

the

characteristics of the company and the context of valuation, some valuation model will be more appropriate than others. In particular, the broad factors for model selection are that the model be: and Suitable for the purpose of valuation, including the analyst's Consistent with the features of the firm being valued; Appropriate given the availability and quality of information;

ownership perspective. Converting forecasts to a valuation. Beyond mechanically obtaining the output of valuation models, estimating value involves judgment. Applying the valuation conclusions. Depending on the purpose, an analyst may use the valuation conclusions to make an investment recommendation about a particular stock, provide an opinion about the price of a transaction, or evaluate the economic merits of a potential strategic investment. (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 11) 1.3 Introduction to some popular valuation models 1.3.1 CAPM and APT Among other popular models using to estimate required return of a particular issuer, CAPM and APT are proved to have many advantages. 1.3.1.1The Capital Asset Pricing Model: The CAPM is an equation for estimating required return that should hold in equilibrium condition if models assumptions are satisfied. The following are two key assumptions of CAPM: Investors are risk averse.

12

 Investment decisions are made based on some characteristics of their total portfolios, such as the variance and mean return. The main objective of the model is to evaluate the risk of an asset which is added to the systematic risk of total portfolio. In this case, systematic risk is defined to be the risk that cannot be removed by diversification. Moreover, due to its simplification and objective procedure, CAPM is the most common used by analysts to evaluate the required return of particular issuer. The CAMP equation is:

where: is the expected return on the capital asset is the risk-free rate of interest such as interest arising from government bonds i (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns, or also

(http://en.wikipedia.org/wiki/Capital_asset_pricing_model) The assets beta also can be estimated by a least square regression of the assets returns on the indexs returns. 1.3.1.2Arbitrage Pricing Theory and the Factor Model In the 1970s, Stephen Ross introduced the arbitrage pricing theory (APT) as an alternative to the CAPM. APT describes the expected return on an asset as a linear function of the risk of the asset (or portfolio) with respect to a set of factors. Like the

13

CAPM, the APT describes a financial market equilibrium. The APT relies on three assumptions: A factor model describes asset return. There are many assets, so investors can form well-diversified portfolios that eliminate asset-specific risk. No arbitrage opportunities exist among well-diversified portfolios (Richard A.Defusco, Dennis W.McLeavey, Jerald E.Pinto and David E. Runkle, Quantitative Methods for Investment Analyst CFA program curriculum level 2, volume 6, page 406). According to the APT, if the above three assumptions hold, the following equation holds: E(Ri) = Rf + 1i,1 + + ki,k Where: E(Ri) Rf j i,j k = the expected return to asset i = the risk free rate = the risk factor for factor j = the sensitivity of the asset to factor j = the number of factors

We can in fact substitute the APT equation into the multifactor model to produce what is known as an APT model in returns form. If the market is the factor in a singlefactor model, APT is consistent with CAPM. The CAPM can also be consistent with multifactor factors in an APT model if the risk premiums in the APT model satisfy certain restriction; these CAPM-related restrictions have been repeatedly rejected in statistical tests. See Burmeister and McElroy (1988), for example. 1.3.2 Discounted cash flow model 14

Common stock represents an ownership interest in a business. A business in its operations generates a stream of cash flows, and as owners of the business, common stockholders have an equity ownership of those future cash flows. Beginning with John Burr Williams (1983), analysts have developed this insight into a group of valuation models known as discounted cash flow (DCF) valuation models. DCF models which view the intrinsic value of common stock as the present value of its expected future cash flows are a fundamental tool in both investment management and investment research. 1.3.2.1The dividend discount model The DDM is the simples and oldest present value approach to valuing stock. For an n-period model, the value of stock is the present value of the expected dividends for the n periods plus the present value of the expected price in n periods.

(Jerald Pinto, Elaine Henry, Thomas Robinson and John Stowe, CFA program curriculum level 2, volume 4, page 132) There are some approaches, which help to solve forecasting problems: To forecast future dividends, some types of growth are used. Each type has some stylized patterns, as following: The Gordon growth model which assumes constant growth forever Two stage model and H model Three stage model Using pro forma financial statement, we can forecast dividend each year up to a final point called terminal point. A finite number of dividends can be forecast individually up to a terminal point, by using pro forma financial statement analysis. After that, it can be forecasted either.

0 = =1

(1+)

(1+)

15

Dividend growth from one of models using stylized growth pattern that I listed above The market price of share of a particular issuer in the final year ( terminal share price)

1.3.2.2Free Cash Flow Valuation: Beside dividend discount method, a common way to analyze DCF is to value free cash flow to the firm (FCFF) and free cash flow to the equity (FCFE). While dividends are the payment of company to shareholders, free cash flow are the available cash for all the shareholders and debtholders. Free cash flow to the firm is the cash flow available to the companys suppliers of capital after all operating expense (including taxes) have been paid and necessary investments in working capital and fixed capital have been made. FCFF is the cash flow from operations minus capital expenditure. Free cash flow to equity is the cash flow available to the companys holders of common equity after all operating expenses, interest and principal payments have been paid and necessary investments in working capital and fixed capital have been made. FCFE is the cash flow from operation minus capital expenditure minus payments to (and plus receipts from) debt-holders. Analyst like to use free cash flow as the return (either FCFF or FCFE) whenever one or more of the following conditions is present The company does not pay dividends. The company pays dividends but the dividends paid differ significantly from the companys capacity to pay dividends. Free cash flow align with profitability within a reasonable forecast period with which the analyst is comfortable The investor takes a control perspective.

(Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 192- 193) 16

FCFF is usually more preferred than FCFE in 2 cases, the levered company that has negative FCFE, or a company that does not have a stable capital structure. Present value of FCFF The FCFF valuation approach estimates the value of the firm as the present value of future FCFF discounted at the weighted average cost of capital: = The formula for WACC is =
=1

(1 + )

( ) (1 ) ( ) + () + () ( ) + ()

Present Value of FCFE

The value of equity can also be found by discounting FCFE at the required rate of return on equity, r: =
=1

Because FCFE is the cash flow remaining for equity holders after all other claims have been satisfied, discounting FCFE by r (required rate of return on equity) gives the value of the firms equity. Dividing the total value of equity by the number of outstanding shares gives the value per share. (Jerald Pinto, Elaine Henry, Thomas Robinson, CFA Program Curriculum 2013 level 2, Volume 4, page 238) Constant Growth FCFF valuation model As GGM model that has been mentioned above, a constant growth will assume FCFE to increase at a constant level: 17

(1 + )

FCFFt = FCFFt-1 (1+g) Firm value will be calculated as follows: = market value of debt. Constant Growth FCFE valuation model: Assume that FCFE grows at a constant rate g, FCFE in any period can be estimated as follows: FCFEt = FCFEt-1 (1+g) The value of equity if FCFE is growing at a constant rate is: = 1 1

To estimate the value of equity, the total firm value need to be subtracted by the

The discount rate is r, the required return on equity. Note that the growth rate of FCFE and the growth rate of FCFF need not to be and frequently are not the same. Computing FCFF: The calculation of FCFF using net income is similar to the calculation of FCF. Because FCFF is the cash flow allocated to all investors including debt holders, the interest expense which is cash available to debt holders must be added back. The amount of interest expense that is available is the after-tax portion, which is shown as the interest expense multiplied by 1-tax rate [Int x (1-tax rate)] (http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/freecash-flow.asp) FCFF = Net income available to common share holder (NI) Plus: Net noncash charge (NCC)

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Plus: Interest expense x (1 tax rate) Less: Investment in fixed capital Less: Investment in working capital Noncash charge: Noncash charge are added bank to net income at FCFF because they represent expenses that reduced reported net income but didnt actually results in an outflow of cash. The most significant noncash charge is usually depreciation. Fixed capital investment: Investment in fixed capital do not appear on the income statement, but they do represent cash leaving the firm. That means we have to subtract them from net income to estimate FCFF. Fixed capital investment is a net amount: it is equal to the difference between capital expenditure (investment in longterm fixed assets) and the proceeds from the sale of long-term assets. FCInv = Capital expenditures proceeds from sales of long-term assets Both capital expenditures and proceeds from long-term asset sales (if any) are likely to be reported on the firms statement of cash flows. If no long-term assets were sold during the year, then capital expenditure will also equal the change in the gross PP&E account from the balance sheet. Note that if long-term assets were sold during the year, any gain or loss on the sale is handled as a non-cash item as previous discussed. Working capital investment: This investment will be calculated by sum of total difference between current assets and current liabilities, but excluded some items as cash, notes payable and portion of long term debt. Interest expense: Interest was expensed on the income statement, but it represents a financing cash flow to bondholders that is available to the firm before it makes any payments to its capital suppliers. Computing FCFE from FCFF FCFE and FCFF are related to each other as follows: 19

Free cash flow to equity = Free cash flow to the firm Less: Interest expense x (1 tax rate) Plus: Net borrowing Approaches for forecasting FCFF and FCFE: Two approaches are commonly used to forecast future FCFF and FCFE. The first method is to calculate historical free cash flow and apply a growth rate under the assumptions that growth will be constant and fundamental factors will be maintained. This the same method that used for dividends discount models. In that case, the growth rate for FCFF is usually different than the growth rate for FCFE. The second method is to forecast the underlying components of free cash flow and calculate each year separately. This is more flexible, and more complicated method because each components can be assumed to grow at a different rate over some short-term horizon. This often ties sales forecasts to future capital expenditures have two dimensions: outlays that are needed to maintain existing capacity and marginal outlays that are needed to support growth. Thus, the first type of outlay is related to the current level of sales, and the second type depends on the predicted sales growth. In forecasting FCFE with the second method, it is common to assume that the firm maintains a target debt to asset ratio for net new investment in fixed capital and working capital. Thus, net borrowing may be expressed without having to specifically forecasting underlying debt issuance or repayment. 1.3.2.3Residual Income Valuation: The residual income model of valuation analyzes the intrinsic value of equity as the sum of two components: The current book value of equity The present value of expected future residual income 20

According to the residual income model, the intrinsic value of common stock can be expressed as follows: 1 = 0 + 0 = 0 + (1 + ) (1 + )
=1 =1

Where V0 B0 Bt r RIt

= Value of a share of stock today = Current per-share book value of equity = Expected per-share book value of equity = Required rate of return on equity investment (cost of equity) = Expected per-share residual income, equal to 1

(Jerald Pinto, Elaine Henry, Thomas Robinson and John Stowe, CFA program curriculum level 2 volume 4, page 376) A residual income model is a good choice of estimating value of equity when: A company does not have clear dividend policy or not pay dividends. A companys expected free cash flows are negative within the analysts comfortable forecast horizon. Great uncertainty exists in forecasting terminal values using other discounted cash flow method. Residual income models has two main disadvantages when: There is exist significant clean surplus accounting. Some fundamental inputs of this model, like book value and return on equity, are not determinable.

21

CHAPTER 2: APPLICATION OF VALUATION MODELS IN EVALUATING STOCKS IN DAIRY INDUSTRY IN VIETNAM 2.1 Analyzing dairy sector in Vietnam and two companies listed on Vietnam stock exchange Vietnam dairy market growth 2.1.1 Analyzing dairy industry in Vietnam 2.1.1.1Vietnam dairy market growth Despite the economic crisis in 2007-2008 and the adverse effect of the melamine scandal in 2008, the Vietnamese dairy market still saw a stable performance which the compound annual growth rate (CAGR) sales recorded at 17.7% over the past five years according to Euromonitor International (EMI). The market is expected to grow by 37% in the next five years. Vietnamese milk consumption per capita has nearly doubled recently, rising sharply from eight liters in 2000 to nearly 15 kilograms in 2008. However, this rate is still fairly low compared to other countries in developing regions. Figure 2.1: Milk consumption per capita in Vietnam
16 15 14 13 12.2 12 11 10 2005 2006 Consmption per capita (kg) 2007 2008 2009 Linear (Consmption per capita (kg)) 12.7 14 14.9 15.1

Source: Ministry of Agriculture and Rural Development (MARD)

22

Figure 2.2: Milk consumption per capita in some regions

300 250 200 150 100 50 0 Global 103.6

249.6

66.9 15.1 Developed Countries Developing countries Vietnam 25.6 Asia

Milk consuption per capita in some regions (kg)

Source: FAO Although milk production experienced a significant upward trend in the last ten years, domestic supply has only met 30% of domestic demand on average. Additionally, Vietnams GDP has grown at a high rate and is expected to remain growing by 6.5- 7% over the next five years. Increases in disposable income, the desire for healthy living and awareness of the benefits of nutritional products are expected to result in higher demand for milk and dairy products over time. Therefore, the Vietnam dairy market has enormous growth potential. Figure 2.3: Processed liquid milk production in Vietnam
700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Processed liquid milk production, tonnes Processed liquid milk production, tonnes, % change yoy 5.00% 0.00% 15.00% 10.00% 25.00% 20.00%

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Figure 2.4: Processed liquid milks sales in Vietnam

Chart Title
300,000 250,000 200,000 150,000 100,000 50,000 0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Processed liquid milk sales, tonnes 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Processed liquid milk sales, tonnes, % change y-o-y

Source BMI Powdered milk market: fastest and relatively stable growth rates. The sector has the fastest and most stable growth rates of all products in the dairy industry of Vietnam. CAGR of powdered milk market during the period 2001-2012 was 9.06%. By 2018, domestic demand for powdered milk is expected to double that of 2012, which was over 150 thousand tons/year. The CAGR over the period 2013-2018 is forecasted at 12.7%/year. Due to limitation of inputs and technology, this market, however, is largely dependent on imported products, specifically accounting for 70% of the total import turnover in dairy industry.

2.1.1.2Market trends in Vietnam dairy markets A strong increase in consumer awareness about nutritional issues: In the past, parents did not hesitate to buy necessity products for their children. They cared about product quality, origin and brands more than price. This explained the dominance of imported brands in baby food. But during the recession and after a series of quality-related scandals such as melamine, and exaggerated advertisements of milk formula products from manufacturers, customers no longer believe that the more they pay the better nutrition their children will receive. In addition, the impact of the governments campaign encouraging people to use domestic products along 24

with the significant improvement of quality control policies have both contributed to this substitution of customers preferences toward domestic products. Liquid milk market: rapidly changing the last 5 years. Liquid milk was once considered to be a product mainly for children. However, as consumers become more educated about the benefits of milk, the drinking milk environment became more diversified, with more products for adults. Volume and value CAGR of liquid milk market during 2008-2012 period reached 8.3% and 16.6% respectively. Due to the low average consumption per capita, as well as stable expected GDP growth rate, the volume CAGR of liquid milk market over the period 2012-2015 is forecasted to remain at the same level as the prior period. Figure 2.5: Sales of drinking milk products in Vietnam
450 399 362.3 350 327.3 291.2 435.3

400

300

250

200 2008 2009 2010 2011 2012 Sales of drinking milk products: Volume 2008-2012 ( '000 tonnes)

Source: BMI Condensed milk market: a maturing business. Condensed milk has been a common product in Vietnam for a long time. Although this product makes up the major share of dairy product sales, its growth was modest and showed signs of maturity with a CAGR of 10.88% during the past 5 years. Condensed milk was a main nutritional supplement in the past when storing methods were limited, but was substituted by liquid milk, which becoming more affordable and provided more 25

benefits to consumers. In the future, this market is expected to grow at a lower rate, declining from 10% at present to 5% in 2018. This will be mainly driven by consumption in rural area, by the consumption of low-income people, and by Business to Business (B2B) activities as a various usages of condensed milk, from making coffee to home-made yoghurt. Yoghurt market: growth driven by diversification and functional product. Yoghurt sector has seen a sustained robust growth of both drinking and spoonable with volume CAGR recorded at 7.8% and 8.1% over the past five years. However, volume CAGR is expected to slow down at 6.9% for drinking yogurt and 3.3% for spoonable, which market insiders believe to be evidence that signals of maturity stage of the sector. Figure 2.6: Sales of yoghurt and Sour Milk Products
6,000.0 4,884.8 3,973.6 3,247.0 3,000.0 2,250.7 2,000.0 2,691.0

5,000.0

4,000.0

1,000.0

0.0 2008 2009 2010 2011 2012 Sales of Yoghurt and Sour Milk Products (VND bn)

Source: BMI

2.1.1.3The key drivers of competition Brand: People are impacted by emotions and the history a brand brings to them. Especially in the powdered milk and baby food market, premium brands are seen as providing better nutrition. Thus, consumers are willing 26

to pay high prices for these product groups. International brands such as Mead Johnson, Abbott, and Friesland Campina are competing rigorously to take this opportunity. Customer loyalty: This factor, based on the consumption habits of people, plays a significant role in maintaining companies customers as they are continuously using one product for a long time once finding products quality is good. Distribution channel: wide distribution systems contribute largely to sales as it helps products become more accessible to consumers. Price: For people with middle-incomes and low-incomes, demand is highly elastic. Thus, price competition is considered a key driver in controlling a major market share. Figure 2.7: The market share of dairy industry in Vietnam
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 Vietnam Dairy Products JSC (Vinamilk) Nestl SA Mead Johnson Nutrition Co Others Royal Friesland Campina NV Hanoi Milk JSC Fonterra Co-operative Group 44.6 48.3 52.3 54.1 56.3 57.8

Source: EMI Following is the competitive scenario for each sector: Powdered Milk: Although many players appear on the list of competitors, the concentration in Vietnam powdered milk market is upper-moderate, with a 27

Herfindahl Idex (HHI) of 15.94%. Vinamilk conducted a dynamic advertising campaign to promote the brand Dielac, conveying the message that Dielac milk formula is as nutritious as other imported brands and was developed to meet Vietnamese babies nutritional needs. It boosted the brands image and resulted in an outstanding increase in Dielacs sales value. This significant increase contributed to a remarkable 55% growth in this market segment in 2012, and is expected to be 30% in 2013. Moreover, with Dielec 2 plant once complete in 2012, Vinamilk can increase its production capacity to 54.000 tons/years; subsequently, Vinamilk is expected to increase its market share in Vietnam from 57.8% in 2010 to 62.5% in 2018. Despite the positive development, Vinamilk must keep track on other leaders in the market, such as Royal Friesland Campina NV, which has a value share of 15.2% in 2012, as well as Friesland Campina and Mead Johnson. These foreign companies successfully strengthened their reputation and won consumers trust in product quality despite the serious melamine scandal in the dairy industry in 2008. All have spent huge amount of their budget on marketing activities. Liquid milk: With no clear player competing for market share, the liquid milk market still remains at a high level of concentration (HHI = 23,49%). Therefore, Vinamilk has been enjoying its position as a market leader, reaching 40% market value share and 55% growth YoY in 2010. Thanks to strict quality control system, the company was not involved in the melamine scandal in 2007-2008 but benefited from that. Thus, Vinamilk has exploited its superior positioning in price, diversified distribution channels, as well as brand campaign to gain market share and strengthened its customers loyalty. TH True Milk entering the market: Launched in December 2010, TH Milk JSC was the first dairy product in Vietnam that use clean as its main advertising message and positioning. The production project of TH Milk Company has an investment of US$1.2 billion, which is the biggest project of its kind in South East Asia. The company has imported 10,000 cows from New Zealand, Uruguay and Canada, and produced pure milk processed by equipment and advanced technology from Israel. Its production plan until 2012 calls for TH Milk to have 45,000 cows and a plant 28

capacity of 500 million liters of milk a year. This is expected to meet 50% of the demand for dairy products in the domestic market. By 2017, it aims to have 137,000 cows on its farms. Condensed Milk: The number of competitors in this subsector is relatively few compared to other dairy subsectors, which includes Vinamilk and Dutch Lady. Vinamilk has kept its dominant position for years with average market share of 80%. Vinamilk had been the unique condensed milk manufacturer before the appearance of Dutch Ladys products in domestic market. The company has built a solid loyalty of a considerable number of customers as evidenced by strong brand Ong Tho which is a familiar staple in peoples daily life. Target customers in this subsector are low-mid income consumers and B2B activities, thus lowering price affects customers directly. Regarding this driver, Vinamilks advantage is that besides premium product, which price is equivalent to Dutch Ladys, the company still maintain the low-price brand Ong Tho, which is favorable to customers. Having a vast network of retailer nationwide, Vinamilk has made these products more accessible to consumers. Additionally, distribution channel as government subsidiary to employees who work in hazard environment contributes a majority of the companys sale. Yoghurt: The fact that only three players account for over 80% of sales makes the yoghurt market highly concentrated. Vinamilk is the most well recognized brand in the market and it dominates the yoghurt market with about 63% market share. The success of Vinamilk mostly comes from spoonable yoghurt, the brand is virtually uncontestable. Vinamilk has eight flavors of spoonable yoghurt and four flavors of drinking yoghurt. Most notably are the launches of Probiotic and Nha Dam spoonable yoghurt in 2008. Vinamilk has the most well diversified products line among its competitors. However, Dutch Lady, the closest rival, seems to outperform Vinamilk in drinking yoghurt thanks to its better taste and flavors. Attracted by the high market growth, many players, such as: Moc Chau, Hanoimilk and Kinh Do, have joined the market in recent years, making the market more competitive.

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2.1.2 The overview of two companies in dairy industry listed on Vietnam Stock Exchange 2.1.2.1Vinamilk: Overview: Vietnam Dairy Products (Vinamilk) is the largest dairy manufacturer in Vietnam. In 2010, the company had 11 factories with a gross capacity of 677,150 tons/year. It is the primary milk producer in Vietnam with a market share of approximately 47%. Vinamilk was voted one of the top 100 strongest trademarks in Vietnam in 2006 by the Ministry of Industry and Trade, and was ranked as one of the Top 200 best small and mid-size firms in the Asian-Pacific region in 2010 by Forbes Asia. Vinamilks main strengths are its long-standing famous brands, vast distribution network with more than 150,000 retailers nationwide and a high quality diversified products portfolio. Formerly established in 1976 with the initial name of Southern Coffee-Dairy Company, it has continuously expanded through the acquisition of factories and small-scale milk companies. The company was formally converted into a joint stock company in Dec 2003 and renamed the Vietnam Dairy Products Joint Stock Company. Listed on the Ho Chi Minh Stock Exchange in 2006, Vinamilk has a value of VND 102,523.66 B in market capitalization. In the last 5 year, the company experienced a skyrocketing CAGR of 23.8% increase in net sales, from VND 8381B in 2008 to VND 26562B in 2012. EBT in 2012 was recorded at VND 6930B in 2012.

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Figure 2.8: Net sales and EBT of VNM

30,000 25,000 20,000 15,753 15,000 10,614 10,000 5,000 2008 Net sales 2009 2010 Earnings before income tax 2011 2012 Linear (Net sales) 8,381 26,562 21,627

Source: Companys report Business products: Vinamilk specializes in manufacturing four main products: powdered milk and baby food, liquid milk, condensed milk, and yoghurt. Figure 2.9: Revenue Breakdown of VNM
3% 18% 21%

22% 36%

Powdered Milk

Liquid Milk

Condensed Milk

Yogurt

Others

Source: Companys report 31

Powdered milk and baby food: Potential sector, representing 21% of

Vinamilks total revenue in 2010. This product group consists of baby nutritional foods and powdered milk for children, pregnant women and elderly people. The key brands are Dielac and Redielac. Liquid milk: The biggest Vinamilks sector, accounting for 36% of companys

sales in 2010. The liquid milk sector, comprising fresh milk and UHT milk, is expected to maintain this high proportion in the years to come. 100% Pure Milk is the companys primary brand. Condensed milk: The companys traditional products, contributing to 21.5%

of Vinamilks 2010 total sales. Two main brands are OngTho and Ngoisao Phuong Nam (Southern Star). Yoghurt: This sectors sales in 2010 were recorded at 18.5% of company

sales. Beside traditional spoonable plain yoghurt, this segment comprises of fruit flavor, functional spoonable and drinking yoghurt. Others: The company also produces some other product lines such as ice-

cream, and healthy beverages with the prominent brand being Vfresh. Strategy: Market share expansion in existing markets is highly focused on sales in high margin value- added sectors such as powdered milk, liquid milk and yoghurt. These sectors are estimated to increase by 10%, on average, over the next five years. In order to reduce import reliance, Vinamilk plans to gain initiatives in raw materials both by developing domestic cow farms and importing cows from other countries targeting 100,000 cows by 2015. Additionally, Vinamilk also has four mega-factories in progress, which, once finished, will increase the companys total capacity by 2.5 times. Financial Analysis Sales: top-line growth due to increasing market share and capacity expansion.

32

Domestic: Vietnam continues to be VNMs core market with an increasing proportion of total sales. The revenue is estimated to grow by 26% annually in the next five years due to the rising market share in yoghurt and powdered milk and a series of new product launches such as probiotics, innovative healthy beverages (artichoke juice, lemon-flavored green tea, and apple juice), mineral-added UHT Milk, pasteurized milk and several kinds of infant cereals. VNM is currently focusing on tremendous capacity expansion. Total estimated CAPEX to 2016 is VND 10,275B, of which VND 3,166 billion would be outlaid in the period of 2013-2016. The capacity expansion will boost the total design capacity by 2 times the total production capacity by the end of 2016. Export: There will be an expansion in the export product range and entry into new markets. Vinamilk is planning to introduce a diversified product portfolio, ranging from baby formula to UHT milk, and various types of healthy beverages like soya and juicy V-fresh to new markets. Meanwhile, VNM aims at maintaining a good position in the companys traditional market in ASEAN and Middle East. If the plan succeeds, it is expected to help increase the revenue growth to 26.58% CAGR from 2013 to 2017. Margins: compressed to a lower but more sustainable level. Vinamilks management board usually targets a rise of 10-13% in Average Selling Price per year. The target is based on the increasing trend of materials prices and the assumption that costs are not going to be passed through to customers due to stronger competition. However, Vinamilk benefits from the economies of scale which help to optimize SG&A expenses in the coming years. Strong cash position and healthy operational cash flows. Vinamilk is currently holding excessive cash of nearly VND 4,000B in the form of short-term investments, which accounted for approximately 20% of the total assets in 2012. During the economic downturn, this strong cash position is considered as one of the companys major advantages over its competitors because the company 33

can implement tactic movements to gain market shares from competitors, such as lowering prices, relaxing trade policies while maintaining a desirable profit margin. Along with a strong cash position, Vinamilk is expected to increase its OCF 4 times, reaching VND 21,726B by the end of 2015. Its earning quality ratio measured by (CFO to EBIT) is favorable, remaining at 71% over the projected period. In the meantime, excess cash, generated from the companys operation, is expected to be both paid out as dividends at the high rate of 50% and invested in capital expenditure from 2013 to 2017. Clean balance sheet with low leverage ratios. Vinamilks return on equity (ROE) ratio was recorded at 38% in 2012, resulting from its highly efficient operation. The company outperformed its competitors in almost every operational ratio and has been improving over years. Meanwhile, Vinamilk used a negligible amount of financial leverage with no short-term as well as long-term debts and has no intention to issue debt in the next five years; hence, liquidity and solvency ratios of the company are secured. Nevertheless, Vinamilks non-debt strategy would be highly critical since it is costly to use equity to finance. Moreover, considering the fact that the interest rate has decreased recently, Vinamilks return can be magnified further if the company decides to use debt to finance its operations. 2.1.2.2Hanoimilk Business Description Hanoimilk JSC (Hanoi milk) is a Vietnam food company, which produces mainly milk and dairy products, as well as products of animal husbandry and agriculture. It is located in Vinh Phuc province in the Red River Delta in North Vietnam, and is listed on the Hanoi Securities Trading Center. Its market capitalization is VND 52.5B in 2013. In 2012, Vietnam economic was very challenging. Therefore, many businesses faced up with the risk of bankruptcy due to overheating development in recent years. 34

Besides, to meet tight monetary policy of the Government, the Board of Directors had directed the implementation of business plans in 2012. Instead of going in the direction of overheating development, Hanoi milk had focused on improving labor productivity, lower production costs in order to achieve production efficiency. In 2012, the company achieved 74% of planed revenue. The net EBT was 1.2 billion compared to the target of 1.5 billion. In addition, the marketing program for traditional brand Izzi was getting not enough attention had also explained to the decline of revenues. Figure 2.10: Net sales and EBT of HNM
400 350 300 250 200 150 100 50 2008 2009 Net sales 2010 2011 2012 Earnings before income tax (30) (40) 275 363 310 272 264 20 10 (10) (20)

Source: Company report

2.2 Applying valuation models to estimate stock price of Vinamilk and Hanoimilk 2.2.1 Methodology and data selection: The objectives of the methodology is to evaluate the stock price of VNM and HNM, which listed in the Vietnam Stock Exchange. Therefore, two steps are 35

implementing to achieve these results. Firstly, CAPM and APT are used to estimate the required return for VNM and HNM. Secondly, using required rate resulting from step one as the proper discount rate, the DCF model is applied to find the intrinsic value of the two companies equity. Methods used to determine the required rate of return: The capital asset pricing model (CAPM): The CAPM, which provides an economically grounded and relatively objective procedure required return estimation, has been widely used in valuation. The expression for CAPM was given: Ri = Rf + i (Rm Rf) Where Rf = 9.25%, which is the current Vietnam Government bond with maturity in 10 years and Rm= 20.8%, which is the arithmetic mean of VN-Index return in this period. (Please see the appendix 1for more details) Beta estimation: The simplest estimate of beta results from an ordinary least squares regression of the return on stock on the return on the market. The result is often called an unadjusted or raw historical beta. In this case: VN index is chosen to represent market portfolio: It is the traditional choice of evaluating stock that listed on Vietnam Stock Exchange. The length of data period: In this case, to better compared the results from APT and CAPM model, my choice is more than four years of monthly data, yielding 49 observation. Moreover, the beta value in the future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic risk security, than to the value of the raw beta. Because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. The most common used adjustment was introduced by Blume (1971): 36

Adjusted beta = (2/3) (Unadjusted beta) + (1/3)(1.0) (John Stowe, Thomas Robinson, Jerald Pinto, Dennis McLeavey, CFA program curriculum level 2 volume 4, page 63-64). Arbitrage pricing theory (APT) model: Ri = Rf + 1(R1 Rf) + 2(R2-Rf) + 3(R3-Rf)+ ... + n(Rn-Rf) Ri : the return of stock i Rn: the return of macroeconomic factor n: Beta of the macroeconomic factor Beta is estimated from the OLS regression model as following: Ri = o + 1*R1 + 2*R2+ ...+ n*Rn The macroeconomic factors using in this model will be: Return of Vn_index, CPI, Gold Index, USD, Industry index, oil price and the length of data period is more than 4 years. CPI measures the nation inflation in the economy, in the case of high inflation rate, the real return will decrease. It is concluded that CPI and return of VNM have the inverse relationship. USD reflects the investment channel that can substitute for stock market. Moreover, because of import-export activities of VNM, USD return and VNM return have the inverse relationship. Gold Index is like USD, which means the national investment channel. In additional, recently, gold has been more favorable for domestic investors. So gold index is inverse proportional with VNM return Old price is also an important factor for Vietnam economy. One shock increase of crude oil price usually substantially affects the economy. Thus, we expect return of VNM may be affected by this macro factor.

37

The industry index is one of macroeconomic factors that is critical to the countrys economic growth. We expect the increase of this index lead to the increase in return of stock.

Methods used to estimate the intrinsic value of two companies equity: After analyzing 2 companies, FCFE is most suitable to use because of the following reasons: The company is dividend paying by dividends significantly fall short of free cash flow to equity. The companys free cash flows align with the companys profitability within a forecast horizon. The capital structure of 2 companies are stable through the observed period. Data from financial reports of VNM and HNM in the last 4 years are inputs to make forecasts of balance sheet and income statement of 2 companies. More detailed data is included in appendix 2.2 and 2.3

38

CHAPTER 3: ANALYSIS OF VALUATION RESULTS AND SUGGESTION TO IMPROVE THE POSSIBILITY OF APPLYING VALUATION MODELS IN VIETNAM 3.1 Results of valuation models: 3.1.1 VNM valuation Required rate of return by CAPM: As I have mentioned above, the required return on equity of VNM is calculated based on the function: RVNM = Rf + i (Rm Rf) Where Rf = 9.25%, Rm= 20.8% (Please see the appendix 1 for more details) Calculating beta of VNM The following figure shows the monthly return of VNM in compared to VN Index in the period of 2009-2012. Figure 3.11: Monthly return of VNM and VN Index
0.5 0.4 0.3 0.2 0.1 0 Nov-10 Nov-11 May-11 May-12 Nov-09 May-10 Nov-12 Aug-12 May-09 Aug-11 Aug-10 Aug-09 -0.1 -0.2 -0.3 VNM VN-Index Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Source: cophieu68

39

The figure indicates that the monthly return of VNM followed the general trend of the market. It can be easily seen that beta coefficients is positive. According to the theory, the estimated beta coefficients is calculated from the regression model with the independent variable is return of VNM and the dependent variable is the return of VN Index and is shown in the following table: Table 3.1: CAPM result of VNM

Source: Author estimates The results of the model is confident and there are no violations of regression assumptions like heteroskedasticity and serial correlation. R2 = 26.34% shows the levels of explanation of VN index return to VNM return. As the results, we can conclude that the result of this regression show the confident results. (Please see the appendix 3.1 for the testing violations of the regression). Based on OLS results, beta of VNM is 0.5012, which shows that 1% increase in the market return leads to 0.50123% increase in VNM return. However, this beta alone cannot reflect all the systematic risk so the author need to adjust beta. According to Damodaran and Bloomberg, the adjusted beta will be calculated as the following 40

LR = 0.5012*2/3 + 1/3 = 0.6675 After all, according to CAPM, the required rate of return for VNM is estimated as the following: 1. Based on the regression model: 2. Based on the adjusted long term beta: 0.5012 0.6675

However, due to the Vinamilk long-term use of equity as the source of fund, the adjusted beta is more properly used as the proxy to calculate the required return of VNM. It means LR = 0.6675 and RVNM = 16.96% Required rate of return by Arbitrage Pricing Model APT is the extension of CAPM model, which add more macroeconomic factors that affect the return of VNM: Ri = Rf + 1(R1 Rf) + 2(R2-Rf) + 3(R3-Rf)+ ... + n(Rn-Rf) Ri : the return of stock i Rn: the return of macroeconomic factor n: Beta of the macroeconomic factor Beta is estimated from the OLS regression model as following: Ri = o + 1*R1 + 2*R2+ ...+ n*Rn The macroeconomic factors using in this model will be: Return of Vn_index, CPI, Gold Index, USD, Industry index, oil price. All the aspects that has been mentioned above is in theory. Thus, OLS model will be used to test the effect of each factor to VNM return. All the factors that cannot explained the return of VNM will be excluded from model to make APT model more confident.

41

Table 3.2: APT first result of VNM

Source: Author estimates Based on the results of regression, the only factor that affects the return of VNM is VN_Index. All other factor like CPI, FX, GOLD, INDUSTRY and OIL does not explained the return of VNM in the period of 2008 to 2013. Table 3.3: APT final result of VNM

Source: Author estimates 42

It can be conclude that in this case, by using some important macro factors, APT model is not superior than CAMP in explaining the return of VNM in the period of 2008-2013. In other way, the result of APT after excluding all the unaffected factors is the same with CAPM. Equity valuation by FCFE Three-stage Discounted Cash Flow (DCF) was employed to evaluate Vinamilk. Due to the fact that VNM has no long-term debt, this is the most suitable evaluation method. VNM has high growth prospects and FCFE reflects the free cash flow value of the company which accounts for future growth as well as a long-term perspective. The three-stage model is applied to cover three phases of the companys growth life cycle, including analytical stage, convergence stage and perpetuity stage, representing high growth, slower growth, and mature growth respectively. Table 3.4: Discounted Cash Flow Method Characteristics Stage 1 (2013-2017) Stage 2 (2018-2027) Stage 3 (2028 perpetuity) Analytic stage Convergence stage Maturity with constant growth Source: Author estimates The DCF-derived price target for Vinamilk is VND125,820 at the end of 2013. It incorporates in some following assumptions: Sales: Sales are projected until 2018 on a per-product-unit per-year basis based on competition and growth opportunity. The volume growth is separated from price increases in order to quantify the likelihood of price increases. In the aggregate, sales are forecasted to grow at 26% CAGR over the next five years. CAGR = 26.7% CAGR = 10% CAGR = 3%

43

Figure 3.12: Forecast sales and EBIT of VNM ( mnVND)

Chart Title
90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 2011 2012 2013E Net sales 2014E EBIT 2015E 2016E 2017E

Source: Company report and author estimates Costs: Costs are broken down and forecasted separately. Imported powdered milk input constitutes a large portion of COGS and is forecasted based on world price trends and OECDs forecasts. Margin is subjected to change if costs vary. Table 3.5: CAPEX plan of VNM (bn VND) Bn VND Vietnam Milk Factory Project Dielac II Milk Factory Project Danang Milk Factory Project Offices, Warehouses IT System, Factory, Distribution LAMSONMILK VN COW Others Total APEX 2013-2016 283 379 40 291 727 25 1323 98 3166 Source: Company Reports CAPEX: The total CAPEX of VND 3166B is outlined in the companys plan for the period from 2013 to 2016. After that period, the total CAPEX will 44

decrease to a lower level. It is allocated according to companys plan and is adjusted for the likelihood of project delay. Discount rate: Based on the required return analysis as mentioned above by both CAPM and APT model, Vinamilk has an adjusted beta equal to 0.67; given risk free rate equal to 9.25%, market risk is 20.8% in the period of 20002013, and Vinamilks cost of equity is calculated equal to 16.96%. Vinamilk usually prefers using equity to debt to finance; consequently, the appropriate discount rate is the companys cost of equity, 16.96%. Terminal growth: The terminal growth is estimated at 3%. I kept conservative view of the companys growth. Based on the assumption that the company will fully utilize its plants in 2027, without any further CAPEX plan, Vinamilk will grow at a modest rate at 3% after 2027. Table 3.6: FCFE results of VNM (mnVND)
FCFE Model Net Earning (+) Depreciation (-) Change in WC (-) FC Investment (+) Net debt FCFE 2013-2017 PV of FCFE FCFE Model FCFE PV of FCFE FCFE Model FCFE PV of FCFE Total PV of FCFE PV of Terminal Value Equity value Number of share Price 2013 8,184,319 561,690 1,305,352 1,128,780 6,311,877 5,396,611 2018 15,789,057 6,167,825 2023 25,428,434 4,538,462 83,281,210 26,198,822 109,480,032 834 131,346 2014 10,483,184 588,784 3,621,807 1,113,351 6,336,811 4,632,293 2019 17,367,963 5,800,793 2024 27,971,277 4,268,389 2015 13,217,867 613,995 4,196,118 985,146 8,650,597 7,396,201 2020 19,104,759 5,455,602 2025 30,768,405 4,014,388 2016 16,448,138 633,519 5,046,302 703,664 11,331,691 6,055,434 2021 21,015,235 5,130,953 2026 33,845,246 3,775,501 2017 20,066,721 642,430 6,128,852 226,610 14,353,688 12,272,305 2022 23,116,758 4,825,622 2027 37,229,770 3,550,831

Source: Author estimates 45

The above table show how I use FCFE model to estimate the price of VNM: Based on the above assumptions, the pro forma BS and IS for Vinamilk are calculated in order to calculate FCFE in the next 5 years. Please check the appendix 2.2 and 2.3 for more details. In the following years, Vinamilk will generate a stable and healthy cash flow. Surplus cash generated will be used to pay out dividends, thus increasing the dividend payout ratio to 50% in the next period. The remaining cash generated is still sufficient to support CAPEX in the future. 3.1.2 Hanoimilk valuation CAPM: The required return on equity of HNM is estimated from this equation: RHNM = Rf + i (Rm Rf), where Rf = 9.25%, Rm= 20.8% as I have mentioned above. Estimating beta of HNM: The following figure shows the monthly return of HNM in compared to VN Index in the period of 2009-2012. Figure 2.13: Return of HNM and VN Index
40.00% 30.00% 20.00% 10.00% 0.00% Nov-10 Nov-11 May-11 May-12 Nov-09 May-10 Nov-12 Aug-12 May-09 Aug-11 Aug-10 Aug-09 -10.00% -20.00% -30.00% HNM VN-Index Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Source: Cophieu68 46

The figure indicates that the monthly return of HNM followed the general trend of the market. It can be easily seen that beta coefficients is positive. According to the theory, the estimated beta coefficients is calculated from the regression model with the independent variable is return of HNM and the dependent variable is the return of VN Index and is shown in the following table Table 3.7: CAPM result of HNM

Source: Author estimates The results of the model is confident and there are no violations of regression assumptions like heteroskedasticity and serial correlation. R2 = 45.36% shows the levels of explanation of VN index return to HNM return. As the results, we can conclude that the result of this regression show the confident results. (Please see the appendix 2.1 for the testing violations of the regression). Based on OLS results, beta of HNM is 1.0088, which shows that 1% increase in the market return leads to 0.50123% increase in HNM return. According to Damodaran and Bloomberg, the adjusted beta will be calculated as the following LR = 1.0088*2/3 + 1/3 = 1.0059 47

After all, according to CAPM, the required rate of return for HNM is estimated as the following: 3. Based on the regression model: 4. Based on the adjusted long term beta: 20.9016% 20.8681%

However, due to the Hanoimilk long-term use of equity as the source of fund, the adjusted beta is more properly used as the proxy to calculate the required return of HNM. It means LR = 1.0059 and RHNM = 20.87% Arbitrage Pricing Theory (APT) Ri = Rf + 1(R1 Rf) + 2(R2-Rf) + 3(R3-Rf)+ ... + n(Rn-Rf) Beta is estimated from the OLS regression model as following: Ri = o + 1*R1 + 2*R2+ ...+ n*Rn As I have mentioned in the methodology part, return of Vn_index, CPI, Gold Index, USD, Industry index, oil price are used as the macroeconomic factor. All the aspects that has been mentioned above is in theory. Thus, OLS model will be used to test the effect of each factor to HNM return. All the factors that cannot explained the return of VNM will be excluded from model to make APT model more confident. Based on the results of regression, It can ben conclude that FX, GOLD and OIL does not explained the return of HNM in the period of 2008-2013. As I have mention above, these factors will be excluded one by one to find out the final result. ((Please see the appendix 2.1 for the testing violations of the regression).

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Table 3.8: APT first result of HNM

Source: Author estimates Therefore, the finale is showed in the following: Table 3.9: APT final result of HNM

Source: Author estimates

49

The results of the model is confident and there are no violations of regression assumptions like heteroskedasticity and serial correlation. R2 = 51.00% shows the levels of explanation of VN index return and CPI to HNM return. According to APT model, VN Index = 1.0011, CPI = -3.8926. In addition, with Rf = 9.25%, which is the current Vietnam Government bond with maturity in 10 years and Rm= 20.8%, which is the arithmetic mean of VN-Index return in the period of 2005-2013, the RCPI = 9.45%, which is the arithmetic mean of CPI in the period of 2005-2013, the required return of HNM is: RHNM = 9.25% + 1.0011*(20.8%-9.25%) - 3.8925*(9.45%-9.25%) = 20.03% HNM Equity Valuation: I evaluate HNM by applying Discounted Cash Flow (DCF), which incorporates the long-term growth opportunity of HNM. Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE) is suitable for HNM as the company has no long-term debt. I deem this approach to be appropriate to capture the best estimate of the companys development plan and industry prospective. Three main components of FCFE: 2013 2018 Projected Cash Flows, 2019 2024 Projected Cash Flows, and Terminal Value. Six-Year Projected Cash Flow Assumptions: Sales: I forecast that revenue will increase by 14.52 percent CAGR in the period of 2013 2018. Moreover, the distribution network is upgraded, ensuring the output would be consumable and achieve the domestic market share as it targeted. Gross profit margin: As I estimated, gross margin will decrease slightly in next five years to 16.43%. In recent time, the proportion of COGS has increased mostly due to input materials with its percent imported witnessing upward trend in price.

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Figure 3.14: Forecast sales of HNM (VND)

Forcast Sale
600,000,000,000 500,000,000,000 400,000,000,000 300,000,000,000 200,000,000,000 100,000,000,000 2011 2012 2013E Net sales 2014E 2015E 2016E 2017E Gross profit

Source: Company report and author estimates CAPEX: For CAPEX costs to maintain normal operation of HNM, I keep the same proportion compared to sales as 4.08 percent of net sales. Convergence stage assumption: In this stage I anticipate HNM will grow at a stable level of 10 percent, equivalent to the dairy industry growth in Vietnam, according to BMI. Terminal value assumptions: I anticipate terminal growth of HNM at 3 percent due to increase in population size at 1 percent per year I expect the dairy industrys price will increase at level of 2 percent a year. This number is based on the increasing level of the dairy industry, which is always lower than CPI, while Vietnam's CPI is forecasted at level of 4 percent. Cost of equity: Based on the required return analysis as mentioned above, under CAPM and APT model, the required return for HNM is 20.8681% and 20.03% respectively. The two following tables show the results of HNM price by FCFE model:

51

Table 3.10: FCFE model result of HNM based on CAPM (mVND)

FCFE Model Net Earning (+) Depreciation (-) Change in WC (-) FC Investment (+) Net debt FCFE 2013-2017 PV of FCFE FCFE Model FCFE PV of FCFE FCFE Model FCFE PV of FCFE Total PV of FCFE PV of Terminal Value Equity value Number of share outstanding Price 15,406 1,915 17,488 45,866 63,354 13 5,068 10,984 3,522 2023 16,484 1,695 2,659 10,483 4,959 7,063 5,307 6,428 5,318 2018 11,753 3,118 2024 17,638 1,501 2013 3,544 11,547 1,903 11,035 5,939 8,090 5,538 2019 12,576 2,760 2025 18,872 1,329 2014 4,992 12,765 1,762 14,074 6,807 8,728 4,943 2020 13,456 2,444 2026 20,194 1,176 2015 6,181 14,167 1,799 16,840 7,820 9,529 4,465 2021 14,398 2,163 2027 2016 7,501 15,771 2,479 19,512 8,984 10,265 3,979 2022 2017

Source: Authors estimate The price of HNM that derived from this model is VND 5,068

52

Table 3.11: FCFE model result of HNM based on APT (mVND)

FCFE Model Net Earning (+) Depreciation (-) Change in WC (-) FC Investment (+) Net debt FCFE 2013-2017 PV of FCFE FCFE Model FCFE PV of FCFE FCFE Model FCFE PV of FCFE Total PV of FCFE PV of Terminal Value Equity value Number of share outstanding Price 15,406 2,058 47,720 19,537 67,257 13 5,381 10,984 3,664 2023 16,484 1,834 2,659 10,483 4,959 7,063 5,307 6,428 5,353 2018 11,753 3,265 2024 17,638 1,634 2013 3,544 11,547 1,903 11,035 5,939 8,090 5,611 2019 12,576 2,909 2025 18,872 1,456 2014 4,992 12,765 1,762 14,074 6,807 8,728 5,041 2020 13,456 2,592 2026 20,194 1,298 2015 6,181 14,167 1,799 16,840 7,820 9,529 4,583 2021 14,398 2,310 2027 2016 7,501 15,771 2,479 19,512 8,984 10,265 4,112 2022 2017

Source: Authors estimate As it can be seen from this table, the price of HNM stock is estimated at VND 5,381. 3.2 Assessing the results from models: As I have presented in the methodology section, DCF model, CAPM and ATM are used in order to estimate the intrinsic value of HNM and VNM stock. The use of CAPM have been under controversial globally among investors. For instance, some assumptions of CAPM are not realistic, such as investors can borrow any amount at a constant rate (risk free rate). Moreover, there are many empirical 53

studies about beta to determine the appropriateness of it in measuring systematic risk. Some research results by Blume (1971), Baesel (1974) and Roenfeldt (1978) have proved the instability of over the long time. In addition, research by Fama and French, 2004 and Mirza 2005 indicate that market risk - other component of CAPM, cannot be tested empirically. Besides, APT is also a linear model with multiples beta but it based on the law of no arbitrage. There are some additional components to be considered in this model, such as GDP, Inflation or Exchange rate that can affect the required return of a particular issuer. In reality, some studies of Chen (1986) have proved the influence of macroeconomic variable to the value of equity. However, RJ Shiller (1981, 1984, 1993 and 2005) suggested that some additional factors that could be included in this model, and have made APT is not clear in guiding analyst to choose standard factors. The stock risk and return may be poorly reflected by these factor, such as culture and psychology as well as Media report. To be concluded, the lack of guiding to choose the appropriate factors in APT is truly a disadvantage of this model in compare to CAPM, to be applied for estimating the required rate of return, especially in an emerging market like Vietnam. Applying these models to calculate the required rate return for VNM and HNM and following the valuation process that I had mentions above, I have come to some important conclusions: First, calculating the required return for one stock by different method may lead us to different results, but sometimes it does not. In this case, the required returns for VNM calculating by 2 models are the same. It happened because all of my inputs except market return cannot explain the return of VNM in the last 4 years. However, it can be seen there are differences in result in case of HNM. Requiring more inputs than CAPM, APT in theory lead to better result in theory by having higher explanation. As I have presented the results of CAPM and APT model in chapter 2, it can be seen that using APT model, R2 = 51%, a little bit higher than 50% resulting from CAPM model, when CPI is added to explain the required return of HNM. 54

Secondly, the stock prices derive from DCF model with 3 stages are VND 131,346 for VNM and VND 5,068 or 5381 for HNM depending on CAPM and APT model. Compare to current price of 2 stocks, it can be easily to conclude that both are undervalued. However, there are many assumptions and inputs that can affect to the price of 2 stocks, so I run sensitivity analysis in order to testing robustness of the results of models in the presence of uncertainty, as well as make my calculation more valuable. Three following tables will represent the results from may sensitivity analysis: Figure 3.13: Sensitivity analysis of VNM (VND)
Ke 131,346 20% 19% 129,367 124,288 119,528 115,068 110,889 106,973 103,305 99,868 96,649 93,632 18% 141,462 135,583 130,078 124,925 120,101 115,585 111,359 107,404 103,703 100,240 17% 155,714 148,869 142,466 136,478 130,877 125,640 120,744 116,167 111,888 107,889 16% 172,671 164,651 157,155 150,151 143,607 137,495 131,786 126,455 121,477 116,829 15% 193,073 183,607 174,768 166,516 158,815 151,628 144,923 138,669 132,835 127,395 14% 217,935 206,669 196,159 186,356 177,217 168,697 160,757 153,358 146,465 140,045

14% 119,012 13% 114,602 12% 110,465 11% 106,585 G 10% 102,946 9% 99,533 8% 96,332 7% 93,331 6% 90,516 5% 87,875

Source: Author estimates

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Figure 3.14: Sensitivity analysis of HNM resulting from CAPM (VND)

5,068 24% 23% 4,890 4,702 4,526 4,443 4,362 4,209 3,934 3,811 3,695 3,588 22% 5,266 5,054 4,856 4,762 4,672 4,500 4,191 4,052 3,923 3,802 Ke 21% 5,691 5,451 5,228 5,122 5,020 4,826 4,478 4,322 4,177 4,041 20% 6,174 5,902 5,649 5,530 5,414 5,195 4,802 4,625 4,461 4,309 19% 6,726 6,417 6,130 5,994 5,863 5,614 5,168 4,968 4,782 4,610 18% 7,362 7,009 6,682 6,526 6,377 6,093 5,585 5,358 5,147 4,951

10% 4,557 9% 4,389 8% 4,232 8% 4,158 g 7% 4,086 6% 3,950 4% 3,704 3% 3,593 2% 3,490 1% 3,394

Figure 3.15: Sensitivity analysis of HNM resulting from CAPM (VND)

Ke 5,381 23% 22% 5,266 5,054 4,856 4,672 4,500 4,340 4,191 4,052 3,923 3,802 21% 5,691 5,451 5,228 5,020 4,826 4,646 4,478 4,322 4,177 4,041 20% 6,174 5,902 5,649 5,414 5,195 4,991 4,802 4,625 4,461 4,309 19% 6,726 6,417 6,130 5,863 5,614 5,383 5,168 4,968 4,782 4,610 18% 7,362 7,009 6,682 6,377 6,093 5,830 5,585 5,358 5,147 4,951 17% 8,100 7,695 7,319 6,970 6,645 6,344 6,064 5,804 5,563 5,339

10% 4,890 9% 4,702 8% 4,526 7% 4,362 g 6% 4,209 5% 4,067 4% 3,934 3% 3,811 2% 3,695 1% 3,588

Source: Author estimates 56

3.3 Limitations and suggestions to improve the possibility of applying valuation models in Vietnam 3.3.1 Some limitations of my models In dairy industry, only 2 stocks are listed, so the calculation value of equity in my research cannot represent to the value of total domestic industry. The reasons for this matter is that financial reports of other companies like TH True Milk or Moc Chau in dairy sector have not been public yet. Due to the shortage of information, some important macroeconomic factors like GDP, Confidence Index or Unemployment Index are not included in APT model. Omitting these important inputs potentially lead to inaccurate results. This causes by the lack of qualitative and updated data in Vietnam. Risk free rate may not exist in Vietnam, because although Vietnamese government bonds are traded in the market, they actually have sovereign premium that need to be considered, especially for the foreign investors. Under CAPM, beta should be adjusted properly for the better results. In Vietnam stock market context, which exhibit thin trading and illiquidity in compared to developed market, beta from regression model is likely to be biased. Moreover, the stock market in Vietnam has a short history, about 10 years, which will make all the past data not to be the precise estimator of required return in the future. VN Index may not be properly to be present for market return, also partly because the limited market histories. Some proper adjustments should be consider to cover the problem such as survivorship bias. 3.3.2 Suggestions to improve the possibility of applying valuation models in Vietnam First and foremost, because CAPM is the most common model using in Vietnam stock market to determine the required rate of returns for companies, the beta instability problem should be firstly assessed. The solution for this problem is to adjust be based on the characteristics of each company, such as cash flow, leverage 57

or portfolio composition and liquidity status. Further action is suggested that we could run sensitivity analysis to find a range of required rate of return. Therefore, the result of required rate of return may be more reliable. Secondly, one of the major problem when applying valuation model in Vietnam is the quality of information, or the precise of input to put in modes. It is always depended on the experience of analyst to find available and most quality information. As a solution, I suggest to use the international data providers such as Bloomberg, Reuters or from some rating agency. However, it is too expensive to assess the data of these providers, so it is better that the local information providers like Stock Plus need to improve the quality of financial information and the government should provide more updated and objective macroeconomic inputs. Moreover, the government should require timely, accurate and transparent financial reports in Vietnam for evaluating performance to raise the quality of input data in order to reduce the risk of modeling. Last but not least, thin trading and liquidity are also factors that can impair the quality of inputs that used in modeling. Therefore, government should improve market liquidity by promote the benefits of investing in equity or establish a stateowned mutual fund to enhance the liquidity of markets.

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CONCLUSION In financial market, stock valuation is essential in predict future market prices, or more generally market prices to profit from price movement. In the view of fundamental analysis, based on predictions of future cash flow and business, the analyst can estimate the intrinsic value and invest to take profit over long term. However, there are many models with their own assumptions and characteristic that can be difficult to apply, especially in an emerging market like Vietnam. In my dissertation, following all steps of the valuation process, I have made some valuations for some companies stocks in dairy sector, including VNM and HNM. Hopefully it can be helpful for further research about increasing the probability of applying valuation in Vietnam. To sum up, the thesis had made some following results: Analyzing the dairy industry and two companies that are listed in Vietnam stock exchange Evaluating the required return for VNM and HNM Applying valuation model to estimate the intrinsic value of stock of VNM and HNM. However, the results of the thesis are still limited with some deficiencies. I hope that my suggestion about adjusting beta, enhance quality of information and promote market liquidity will be helpful recommendation for further research on equity valuation in Vietnam.

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REFERENCES 1. BMI International, 2013, Food and drink report Q2, 2013. 2. Costas TH Grammenos & Angelos G Arkoulis, 2002, Macroeconomic Factors and International Shipping Stock Returns 3. Damodaran, A., 2001, Corporate Finance: Theory and Practice, Second Edition, John Wiley and Sons, New York. 4. Euromonitor International, 2013, Other dairy in Vietnam. 5. Euromonitor International, 2013, Drinking milk products in Vietnam. 6. Geert Bekaert, Campbell R.Harvey, 1995, The cost of capital in Emerging market. 7. GSO, (2008-2012), Statistical Yearbook. 8. Hanoimilk Joint Stock Company, 2011-2013, Financial report. 9. Hanoimilk Joint Stock Company, 2011, Annual report. 10. Jerald Pinto, Elaine Henry, Thomas Robinson and John Stowe, 2009. Equity Asset Valuation, Second Edition. 11. John J.Nagorniak and Stephen E.Wilcox, Equity Valuation: Concepts and Basic Tools. 12. Muhammad U Faruque, 2011, An empirical investigation of the arbitrage pricing theory in a frontier stock market: evidence from Bangladesh. 13. NEU, 2011, VNM CFA Research Challenge Report. 14. Peter Kritofk, 2010, Application of CAPM for investment decisions in emerging countries. 15. Richard A.Defusco, Dennis W. McLeavey, Jeyrald E.Pinto and David E.Runkle, 2004, Quantitative Methods for Invesment Analysis, Second Edition 16. Ryan C.Fuhrmann and AsjeetS.Lamba, Overview of Equity Securities 17. Saban Celik, 2012, Theoretical and Empirical Review of Asset Pricing Models: A Structural Synthesis. 18. Tho Dinh Nguyen, 2010, Arbitrage Pricing Theory: Evidence from an Emerging Stock Market.

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19. TW.S.Nei, 2011, The application of the Capital Asset Pricing Model (CAPM): A South African Perspective 20. Vinamilk Joint Stock Company, 2011-2013, Financial report. 21. Vinamilk Joint Stock Company, 2011-2012, Annual report. 22. http://en.wikipedia.org/wiki/Capital_asset_pricing_model

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APPENDIX 1. Data inputs for CAPM:

VNIndex -5.17% -18.32% 15.59% 15.07% 23.65% 0.84% 8.45% 15.75% 3.82% -1.29% -8.70% 0.41% -6.00% 3.25% 1.03% 7.74% -7.64% -0.93% -2.49% -6.91% -1.56% -0.13% -0.27% 7.72% VNIndex 6.90% -11.08% -1.49% 5.80% -11.05% -2.42% -5.66% 7.98% -3.08% -1.99% -8.49% -8.25% 11.00% 9.09% 4.10% 5.82% -9.70% -2.24% -1.61% -2.58% -3.93% 0.34% -2.24% 9.81% 14.44%

Date Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11

R VNM -3.24% -7.41% 5.19% 10.65% 2.49% -1.49% 38.19% 16.92% 11.94% -4.71% -5.51% -1.14% 3.10% 4.88% 0.53% 8.33% -4.20% 2.25% 0.00% -3.01% 0.00% -2.06% -3.17% 1.86%

R HNM -6.58% -11.29% 6.32% 15.12% 26.10% -9.19% 9.87% 17.78% -9.42% -4.42% -5.98% -2.08% -11.87% 16.64% 5.20% 10.22% -2.90% -3.59% -1.23% -17.49% -7.64% -3.23% -15.96% 0.00%

Date Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13

R VNM 9.05% -5.69% 6.64% 13.35% -2.75% 4.60% 3.61% 11.54% -1.59% 0.89% 7.66% -8.02% 2.46% 4.41% 2.78% -2.78% -3.89% 0.52% 1.70% 18.43% 8.08% 9.14% 1.52% 1.16% 15.91%

R HNM -3.92% -15.08% -2.35% -4.88% -23.89% 1.57% -8.13% -1.71% -1.74% -13.10% -15.08% 11.00% 9.91% 24.92% 1.46% 28.77% -21.77% -12.97% -9.68% -18.57% -17.82% 9.31% 6.45% 8.00% -5.94%

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2. Data inputs for APT:

Date Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 R VNM 15.91% 1.16% 1.52% 9.14% 8.08% 18.43% 1.70% 0.52% -3.89% -2.78% 2.78% 4.41% 2.46% -8.02% 7.66% 0.89% -1.59% 11.54% 3.61% 4.60% -2.75% 13.35% 6.64% -5.69% 9.05% R HNM -5.94% 8.00% 6.45% 9.31% -17.82% -18.57% -9.68% -12.97% -21.77% 28.77% 1.46% 24.92% 9.91% 11.00% -15.08% -13.10% -1.74% -1.71% -8.13% 1.57% -23.89% -4.88% -2.35% -15.08% -3.92% VNIndex 14.44% 9.81% -2.24% 0.34% -3.93% -2.58% -1.61% -2.24% -9.70% 5.82% 4.10% 9.09% 11.00% -8.25% -8.49% -1.99% -3.08% 7.98% -5.66% -2.42% -11.05% 5.80% -1.49% -11.08% 6.90% Oil 2.54% 3.72% -0.06% -2.12% -2.70% 1.04% 8.85% 6.58% -12.87% -8.43% -3.45% 4.54% 5.49% 2.55% -1.11% 5.34% -0.96% 0.41% -6.76% 1.95% -2.10% -6.95% 7.04% 11.04% 5.63% Gold -2.65% -0.77% -2.14% -1.43% 0.10% 7.02% 2.54% -0.55% 0.48% -3.55% -1.44% -3.92% 5.44% 0.63% -5.54% 4.38% -5.97% 0.78% 11.77% 2.85% 1.06% 2.22% 3.92% 3.74% 1.20% CPI 1.30% 1.25% 0.27% 0.47% 0.85% 2.20% 0.63% -0.29% -0.26% 0.18% 0.05% 0.16% 1.37% 1.01% 0.53% 1.39% 0.36% 0.82% 0.93% 1.17% 1.09% 2.21% 3.32% 2.17% 2.09% FX -0.01% -0.07% 0.00% -0.16% 0.21% -0.10% -0.17% 0.14% 0.00% 0.12% 0.17% -1.02% -0.07% 0.11% 0.02% 0.84% 0.00% 1.20% -0.07% 0.07% -0.29% -1.28% 0.19% 7.07% -0.02% Industry -21.30% -3.20% 2.65% 4.58% 5.55% -2.40% 1.21% 2.25% -4.06% 3.95% -2.60% 8.18% 12.63% -23.16% 5.38% 2.73% 3.38% -2.17% 4.13% -1.07% -0.76% 2.48% 0.77% 18.08% -17.10%

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Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13

1.86% -3.17% -2.06% 0.00% -3.01% 0.00% 2.25% -4.20% 8.33% 0.53% 4.88% 3.10% -1.14% -5.51% -4.71% 11.94% 16.92% 38.19% -1.49% 2.49% 10.65% 5.19% -7.41% -3.24%

0.00% -15.96% -3.23% -7.64% -17.49% -1.23% -3.59% -2.90% 10.22% 5.20% 16.64% -11.87% -2.08% -5.98% -4.42% -9.42% 17.78% 9.87% -9.19% 26.10% 15.12% 6.32% -11.29% -6.58%

7.72% -0.27% -0.13% -1.56% -6.91% -2.49% -0.93% -7.64% 7.74% 1.03% 3.25% -6.00% 0.41% -8.70% -1.29% 3.82% 15.75% 8.45% 0.84% 23.65% 15.07% 15.59% -18.32% -5.17%

2.92% 6.56% 3.48% 7.33% 0.36% 1.86% -0.35% -1.20% -10.11% 6.17% 6.08% -3.14% 2.90% -3.40% 4.75% 8.36% -4.61% 10.72% -6.42% 18.95% 15.58% 7.58% 11.49% -4.54%

-2.46% 1.51% 2.08% 5.59% 4.54% 1.91% -3.24% 2.28% 4.94% 3.18% 1.64% -2.02% -1.48% 0.68% 8.04% 4.67% 4.97% 1.62% -1.21% 1.83% 4.32% -3.69% -1.99% 9.82%

1.74% 1.98% 1.86% 1.05% 1.31% 0.23% 0.06% 0.22% 0.27% 0.14% 0.75% 0.96% 1.36% 1.38% 0.55% 0.37% 0.62% 0.24% 0.52% 0.55% 0.44% 0.35% -0.17% 1.17%

0.02% -0.02% 0.04% -0.03% 2.18% 0.13% 0.35% 0.16% -0.43% 0.08% 2.98% -0.03% -0.04% 3.50% 0.12% 0.11% 0.03% 0.08% 0.15% -0.06% 0.07% 1.74% -0.09% 0.01%

-13.80% -1.85% 1.69% 6.88% -2.77% -0.52% 3.24% -0.21% 4.27% -1.27% 24.90% -19.80% -2.39% 3.29% 1.92% 0.59% 0.77% 0.29% 2.90% 1.66% 1.56% -0.27% 11.48% 3.66%

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2.1 Tests of violations of regression assumption 2.1.1 Required return of VNM based on CAPM 2.1.1.1Heteroskedasticity Test:

Pro. Chi Square = 0.4064 > 0.05 so that it is no violation with 95% confidence. 2.1.1.2Serial Correlation LM Test:

Obs*R-squared = 1.351142 and Prob. Chi-Square = 0.5989 > 0.05 means that it is not violation with 95% confidence. 2.1.1.3Histogram Normality test:

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The residual is nearly normal distribution. 2.1.2 Required return of HNM based on CAPM 2.1.2.1Heteroskedasticity Test:

Prob. Chi-Square = 0.9306 > 0.05 means that it is no violations with 95% confidence. 2.1.2.2Serial Correlation LM Test:

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Prob. Chi-Square = 0.8796 > 0.05 means that is no violation with 95% confidence. 2.1.2.3. Histogram Normality test:

2.1.3 Required return of HNM based on APT model 2.1.3.1Heteroskedasticity Test:

Prob. Chi-Square = 0.8769 > 0.05 so there is no violation with 95% confidence. 2.1.3.2Serial Correlation LM Test:

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Prob. Chi-Square = 0.9115 > 0.05 means that it is no violation with 95% confidence. 2.1.3.3Histogram Normality test:

The distribution is nearly normal. 3. Financial statements for FCFE model: 3.1 VNM reports 3.1.1 Income statement

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INCOME STATEMENT ( mn VND ) Net sales

2011 21,627,429 (15,039,305)

2012 26,561,574 (17,484,830) 9,076,744 (2,345,789) (525,197) (2,870,987)

2013E 34,530,046 (22,720,771) 11,809,276 (3,049,526) (675,929) (3,725,455)

2014E 44,198,459 (29,082,586) 15,115,873 (3,903,393) (856,537) (4,759,931)

2015E 55,690,059 (36,644,059) 19,046,000 (4,918,276) (1,068,444) (5,986,720)

2016E 69,055,673 (45,369,577) 23,686,096 (6,098,662) (1,324,871) (7,423,533)

2017E 84,247,921 (55,350,884) 28,897,037 (7,440,368) (1,616,343) (9,056,710)

COGS 6,588,124 Gross profit (1,811,914) Selling expense (459,432) G&A expenses (2,271,346) Total operating expenses Operating profit Financial income Financial expense Interest expense Gain/Loss from financial activities 323,106 Other income (85,880) Other expense 237,226 Gain/Loss from other activities Gain/Loss from assosiated company 4,965,059 EBIT 4,978,992 Earnings before income tax provision (760,810) Income tax provision 4,218,182 Net earnings Attributable to: Minority interest 4,218,182 Equity holders of the parent 5,819,455 8,184,319 10,483,184 13,217,867 16,448,138 20,066,721 5,819,455 8,184,319 10,483,184 13,217,867 16,448,138 20,066,721 (1,110,213) (1,561,373) (1,999,942) (2,521,654) (3,137,913) (3,828,252) 6,929,668 9,745,692 12,483,126 15,739,520 19,586,051 23,894,973 6,926,553 9,745,692 12,483,126 15,739,520 19,586,051 23,894,973 287,317 632,258 809,290 1,019,705 1,264,435 1,542,610 (63,006) (265,569) (339,928) (428,309) (531,103) (647,946) 350,323 897,827 1,149,218 1,448,015 1,795,538 2,190,557 4,316,777 680,232 (246,430) (13,933) 433,803 6,205,757 475,239 (51,171) (3,115) 424,067 8,083,821 1,029,571 1,029,571 10,355,943 1,317,851 1,317,851 13,059,280 1,660,493 1,660,493 16,262,563 2,059,011 2,059,011 19,840,327 2,511,994 2,511,994

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3.1.2 Balance Sheet:

BALANCE SHEET ( mn VND ) Current Assets Cash & cash equivalent Short-term Investment Accounts Receivable Inventories Other current assets Fixed Asset Long-term investment Long-term receivables Fixed Assets Property Investment Long-term financial Investment Other Assets Total Assets LIABILITIES Total current liabilities Short-term Debt Accounts Payable Payroll Income Taxes Other current liabilities Long-term Liabilities Long-term debt Other longterm liabilities EQUITY Owners' Equity Chartered Capital Capital Surplus Other Funds Retained Earnings Minority interest TOTAL LIABILITIES AND EQUITY 107,338 15,582,672 3,105,466 2,946,537 1,830,959 44,740 287,463 783,375 158,929 158,929 12,477,205 12,477,205 5,561,148 1,276,994 1,464,139 4,177,446 15,582,672 150,152 19,697,868 4,204,772 4,144,990 2,247,659 106,151 333,953 1,457,228 59,782 59,782 15,493,097 15,493,097 8,339,558 1,276,994 682,291 5,198,758 19,697,868 298,371 25,266,080 5,678,824 5,601,108 3,120,676 137,938 448,891 1,893,604 77,716 77,716 19,587,256 19,587,256 8,341,558 1,276,994 2,319,155 7,654,053 25,266,080 381,914 32,099,743 7,268,894 7,169,418 3,994,465 176,561 574,580 2,423,813 99,476 99,476 24,830,848 24,830,848 8,343,558 1,276,994 4,415,792 10,799,009 32,099,743 481,212 40,600,589 9,158,807 9,033,467 5,033,026 222,466 723,971 3,054,004 125,340 125,340 31,441,782 31,441,782 8,345,558 1,276,994 7,059,365 14,764,369 40,600,589 596,703 51,009,112 11,341,261 11,185,839 6,231,467 275,439 897,724 3,781,210 155,422 155,422 39,667,851 39,667,851 8,347,558 1,276,994 10,348,993 19,698,810 51,009,112 727,978 63,539,550 13,836,339 13,646,724 7,602,390 336,036 1,095,223 4,613,076 189,615 189,615 49,703,211 49,703,211 8,349,558 1,276,994 14,362,337 25,718,826 63,539,550

2011 9,467,683 3,156,515 736,033 2,169,205 3,272,496 133,434 6,114,989

2012 11,110,610 1,252,120 3,909,276 2,246,363 3,472,845 230,006 8,587,258

2013E 17,454,166 4,834,207 3,128,599 3,347,712 4,835,575 299,007 7,811,914

2014E 24,881,831 7,071,754 4,004,607 4,285,071 6,189,535 382,730 7,217,912

2015E 33,894,454 10,024,211 5,045,805 5,399,190 7,798,815 482,239 6,706,134

2016E 44,880,053 13,811,135 6,256,798 6,694,996 9,655,833 597,977 6,129,060

2017E 58,193,198 18,534,543 7,633,294 8,167,895 11,780,117 729,532 5,346,353

5,044,762 100,671 846,714

8,042,301 96,714 284,429

7,103,386 125,729 284,429

6,390,636 160,933 284,429

5,737,718 202,775 284,429

4,996,486 251,441 284,429

4,027,187 306,758 284,429

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3.2 HNM report 3.2.1 Income statement:

INCOME STATEMEN T ( mn VND ) Net sales COGS Gross profit Selling expense G&A expenses Total operating expenses Operating profit Financial income Financial expense Interest expense Gain/Loss from financial activities Other income Other expense Gain/Loss from other activities

2011 272,080 (219,520) 52,560 (37,730) (10,539)

2012 263,509 (221,710) 41,799 (38,000) (11,310)

2013E 300,401 (241,463) 58,937 (42,887) (11,520)

2014E 343,959 (276,819) 67,139 (48,615) (13,058)

2015E 394,177 (317,235) 76,942 (55,156) (14,815)

2016E 453,303 (365,274) 88,030 (62,795) (17,037)

2017E 519,032 (418,757) 100,275 (71,181) (19,508)

(48,269) 4,291 2,181 (7,369) (4,694)

(49,311) (7,511) 643 (7,062) -

(54,407) 4,530 1,701 (5,470) (5,470)

(61,673) 5,466 1,947 (6,032) (6,032)

(69,971) 6,971 2,231 (6,669) (6,669)

(79,832) 8,198 2,566 (7,401) (7,401)

(90,689) 9,586 2,938 (8,241) (8,241)

(5,189) 4,200 (1,692)

(6,419) 27,220 (12,069)

(3,769) 5,107 (3,152)

(4,085) 5,847 (3,609)

(4,438) 6,701 (4,136)

(4,834) 7,706 (4,757)

(5,303) 8,823 (5,447)

2,508

15,152

1,954

2,238

2,564

2,949

3,377

Gain/Loss from assosiated company EBIT

(3,084)

1,221

(2,754)

(2,413)

(1,572)

(1,088)

(580)

Earnings before income tax provision Income tax provision Net earnings Attributable to: Minority interest Equity holders of the parent

1,610

1,221

2,716

3,619

5,098

6,312

7,660

(34) 1,577 -

1,221 -

(56) 2,659 -

(75) 3,544 -

(106) 4,992 -

(131) 6,181 -

(159) 7,501 -

1,577

1,221

2,659

3,544

4,992

6,181

7,501

71

3.2.2 Balance Sheet

BALANCE SHEET (mn VND) Current Assets Cash & cash equivalent Short-term Investment Accounts Receivable Inventories Other current assets Fixed Asset Longterm investment Long-term receivables Fixed Assets Property Investment Long-term financial Investment Other Assets Total Assets LIABILITIES Total current liabilities Short-term Debt Accounts Payable Payroll Income Taxes Other current liabilities Long-term Liabilities Long-term debt Other long-term liabilities EQUITY Owners' Equity Chartered Capital Capital Surplus Other Funds Retained Earnings Minority interest TOTAL LIABILITIES AND EQUITY 5,571 213,998 81,759 81,759 46,987 16,404 3,994 6,647 7,728 132,239 132,239 125,000 63,779 4,978 (61,517) 213,998 8,336 222,286 89,913 89,913 52,042 18,137 2,305 9,365 8,064 132,372 132,372 125,000 63,779 4,978 (61,384) 222,286 8,286 230,193 98,979 98,979 57,350 19,752 3,425 9,670 8,783 131,214 131,214 125,000 63,779 4,978 (62,543) 230,193 9,488 241,961 111,021 111,021 63,288 22,645 3,947 11,072 10,069 130,940 130,940 125,000 63,779 4,978 (62,816) 241,961 10,873 256,495 124,380 124,380 70,095 25,951 4,107 12,688 11,539 132,115 132,115 125,000 63,779 4,978 (61,642) 256,495 12,504 275,192 140,713 140,713 77,916 29,880 5,039 14,592 13,286 134,478 134,478 125,000 63,779 4,978 (59,278) 275,192 14,317 296,979 158,817 158,817 86,900 34,256 5,723 16,707 15,232 138,162 138,162 125,000 63,779 4,978 (55,595) 296,979 92,424 86,854 90,537 55,201 27,000 89,021 53,735 27,000 91,950 55,462 27,000 97,208 59,335 27,000 104,461 64,957 27,000 113,391 72,075 27,000

2011 121,574 3,935 31 59,183 52,534 5,891

2012 131,748 5,044 31 88,776 30,564 7,332

2013E 141,172 5,751 31 68,712 48,071 6,101

2014E 150,011 6,585 31 78,675 55,110 6,986

2015E 159,287 7,546 31 90,161 63,156 8,006

2016E 170,730 8,678 31 103,686 72,720 9,207

2017E 183,588 9,936 31 118,720 83,368 10,542

72