HOLD
Initiating Coverage
Head of research
Analyst
Nguyen Quang Duy
duy.nguyenquang@kimeng.com.vn
Price
Target
VN Index
VND 163,000
VND 165,000
537.8
Historical Chart
DHG (133.000, 139.000, 133.000, 135.000, +2.00000)
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
80000
70000
60000
50000
40000
30000
20000
10000
x10
2006
Feb
Apr
May Jun
Jul
Aug
Dec 2008
Performance
Absolute (%)
Relative (%)
Mar Apr
Aug
Sep Oct
1m
31.5
22.0
Mar Apr
3m
16.4
7.4
Aug Sep
Oct No
6m
55.2
-41.5
Stock Information
VIETNAM
Ticker code
DHG
21.3
Net cash
32,992
96.6
2006
868.2
87.1
87.1
5,081
57.2
32.1
26.8
1.5
2007
1,269.3
128.3
128.3
6,571
29.3
24.8
19.0
1.5
2008
1,537.5
153.0
135.9
6,796
3.4
24.0
15.5
1.5
2009E
1,665.1
243.6
217.4
10,873
60.0
15.0
10.4
1.5
2010F
1,972.3
218.3
194.9
9,746
-10.4
16.7
11.8
1.5
8 September 2009
Investment Merits
Goliath in the domestic pharmaceutical sector
DHG is the largest
listed
pharmaceutical
company in terms of
sales, market size,
distribution system
and
market
capitalisation.
Benefits
To slow down heartbeat.
To relieve chest pain.
To control cholesterol.
The contribution of the major products to its total revenue is illustrated in Figure 10
and 11.
Throughout the years of dedicated and continuous improvement, DHG has built a
reputable brand name and established an extensive distribution network with five
distribution subsidiaries, 44 sales agents, 44 retail drugstores and eight health
care stores around the nation. In total, the Group recruited more than 700 sales
personnel.
Leveraging on its far-reaching domestic distribution channel, DHG provides
pharmaceutical products to about 98.0% of the hospitals and 100% of the
community clinics in Vietnam. About 30.0% of its sales come from direct sales to
hospitals and the remaining 70.0% from over-the-counter (OTC) channels.
In terms of geographical reach, DHG is able to market its products across 64
provinces and cities in Vietnam. The Group has also developed a strong foothold
in Mekong 2 including Can Tho and An Giang where more than 28.0% of its
revenue is derived from this region. According to Intercontinental Marketing
Services (IMS), DHG is ranked number one in selling generic drugs in Vietnam.
DHG has received numerous accreditations given its continuous emphasis on
improving the Groups product offerings and enhancing its product brand names.
For instance, the Groups products have been voted as Vietnam High Quality
Goods for the past 12 consecutive years. Its product brand is also ranked as one
of the top ten brands in Vietnam.
8 September 2009
8 September 2009
Percent
25%
16
USD mn
1600
1426
1400
20%
14
1136
1200
12
15%
10
956
1000
817
708
800
10%
6
4
5%
600
526
609
427
400
200
0%
2001 2002 2003 2004 2005 2006 2007 2008
Consumption per capita (USD)
Grow th Rate
0
2001 2002 2003 2004 2005 2006 2007 2008
Spent on Medicinines
We are optimistic that DHG, being the largest domestic drug marker, will continue
to ride on the growth cycle of the sector. As illustrated below in figure 5 and 6, the
Group has enjoyed a strong growth rate over the past few years.
In 2008, the Groups earnings rose marginally by 5.9% y-o-y to VND135.9bn,
despite the revenue growth of 21.1% y-o-y to VND1,537.5bn. We understand that
the single-digit growth rate in earnings was explained by the imposition of a 10%corporate tax rate from 2008 to 2013 upon the expiration of its tax-exempt status
in 2007. Should we exclude the 10.0% tax expense, the Group would have
continued to register an uninterrupted double-digit growth in terms of revenue and
earnings. This represents a commendable set of financial results given the
challenging operating environment last year.
For the first half of 2009, the Groups net earnings surged by 34.9% y-o-y to
VND92.4bn, despite the marginal expansion of its revenue by 3.5% on a y-o-y
basis to VND791.4bn. We gather from the management that the modest revenue
growth was mainly due to the change in accounting policies in recording its sales
discount, which normally amounted to around 10.0% of its total sales. This is
because the management has previously recorded the sales discount by
increasing its selling expenses, but has now decided to deduct directly from its
revenue.
Readjusting DHGs sales discount by increasing selling expenses, rather than
offsetting it against the revenue, shows that the Group continued to enjoy doubledigit growth in both revenue and earnings in the 1H09. This indicates the
resilience of the domestic pharmaceutical sector and its potential for growth.
The management is currently constructing a new Non Beta-Lactam plant to cope
with rising domestic demand. The total construction cost is estimated to be about
VND252.6bn (approximately USD15.0mn). The plant is expected to be completed
by 2Q11 with a total production capacity of 4.0bn units of drugs per annum.
8 September 2009
1,800
250.0
1,600
200.0
1,400
1,200
150.0
1,000
800
100.0
600
50.0
400
200
2004
2005
2006
2007
2008
2009E
2004
2005
2006
2007
2008
2009E
Investment Risks
We believe that investing in DHG is subject to the following risks:
Highly dependent on imported raw materials
We understand that DHG imports around 80.0% of its raw materials mainly
from Europe. This exposes the Group to the volatility of imported raw
material prices, which is beyond the managements control. Furthermore,
we understand that it takes a considerable time lag for DHG to increase
the average selling price (ASP) of its products given that the Group needs
to obtain approval from the relevant authority in Can Tho and the process
could be lengthy. Therefore, a sudden surge in the cost of imported raw
materials could put downward pressure on the Groups profit margin. DHG
is also highly vulnerable to the potential depreciation of VND/USD given
that the purchase prices of imported raw materials are quoted in
greenbacks. Therefore, the weakening of the VND could escalate the costs
of imported raw materials.
Intensified foreign competitions
Despite the current constraint that prohibits foreign players from direct
retailing (except through a joint venture), foreign interest has not subsided
given the strong potential offered by the domestic market. Besides that, the
gradual liberalisation of the sector such as reducing the import tax
gradually from 10.0% to 2.5% in accordance with the WTO Commitment
has also allowed foreign pharmaceutical companies to distribute their
products with competitive pricing. We gather that there were 68 additional
foreign pharmaceutical companies that registered to set up operations in
Vietnam last year. This has increased the number of foreign players to
438. Among the foreign players, the top three are from India (98 units, or
22.4%), Korea (45 units, or 10.3%) and China (41 units, or 9.4%). In 2008,
foreign-invested drug manufacturing plants produced about 22% of the
total domestic production.
8 September 2009
Valuation
A defensive stock. Being a defensive stock with a comparatively low beta of 0.7,
DHG has outperformed the VN-Index from March 2008 to February 2009 during
the market downturn. Nonetheless, the Group has underperformed the VN-Index
in this liquidity-driven rally. We are not surprised by such an underperformance
given that many low beta and defensive stocks have lagged behind the high beta
and speculative stocks, particularly the bombed out stocks during the run-ups.
140
270
120
220
100
170
80
DHG
VN-Index
DHG
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Mar-09
Mar-09
Jan-09
Sep-08
Nov-08
20
Jul-08
20
May-08
70
Mar-08
40
Apr-09
120
60
VN-Index
ROA
(%)
11.9
3,258.8
13.4
1,050.2
11.9
812.2
10.8
Name
Average
ROE
(%)
P/B
PER
2008
PER
2009
PER
2010
17.6
2.3
16.3
15.7
13.3
21.3
4.2
24.0
15.0
16.7
16.5
2.2
11.9
17.3
12.8
12.5
1.5
13.1
14.8
10.5
8 September 2009
APPENDIX
Corporate Profile
DHG was founded in 1974. The Group was equitised in 2004 and subsequently
st
listed on the 21 of December 2006 with an initial charter capital of VND80.0bn.
The Group is situated in the Ninh Kieu District, Can Tho Province. At present,
DHG manufactures around 406 products including 327 pharmaceutical products,
four cosmetic products and 75 dietary supplements. Its product range is mainly
divided into 12 groups including:
At present, the Group owns five manufacturing plants and one packaging
processing plant that are all GMP-WHO compliant. The manufacturing plants have
a combined production capacity of 3.0bn units per annum. Four plants are
involved in the manufacturing of pharmaceutical products and the other
manufacturing plant produces pharmaceutical bio-chemistry materials. DHG has
about 2,126 employees. About 33.0% of them are in production, with 37.0% in
selling and distribution and the remaining in the office.
The salient information of the Group is illustrated below:
Key management team
Board of Directors
Mrs. Pham Thi Viet Nga
Mrs. Le Minh Hong
Mr. Le Chanh Dao
Mr. Pham Gia Tuan
Mr. Donh Dinh Duy Khuong
Mrs. Huynh Thi Kim Tuoi
Mrs. La Ngoc Van
Mrs. Nguyen Thi Hong Loan
Mrs. Ha My Dung
Board of Supervision
Mrs. Tran Thi Anh Nhu
Mr. Tran Quoc Hung
Mr. Nguyen Nhu Song
Board of Management
Mr. Bui Minh Duc
Major Shareholders
Domestic
Shareholders
(Excluding
SCIC), 12.5%
Foreign
Shareholders,
42.9%
SCIC, 44.6%
8 September 2009
%
Owner
Company Name
Song Hau Pharma
51%
CM Pharmaceutical One-member Limited 100%
HT Pharmaceutical One-member Limited 100%
DT Pharmaceutical One-member Limited 100%
ST Pharmaceutical One-member Limited
100%
DHG Travel One-member Limited
100%
DHG Packing & Printing One-member
Limited
100%
DHG Nature One-member Limited
100%
Chartered
Capital
(VND bn)
5.0
5.0
5.0
5.0
5.0
3.0
Established
Year
2008
2008
2008
2008
2009
2008
5.0
5.0
2098
2009
Main Products
The Group produces about 406 products including:
Hapacol. Hapacol is a group of DHG Pharmas products for Quick analgesic
antipyretic for all ages. The product group of Hapacol contributed about
VND197.0bn to DHGs revenue and VND17.9bn of its profit before tax (PBT) in
2008.
Klamentin and Haginat. These are two groups of new-generation antibiotics
Antibacterial power. Klamentin and Haginat contributed a combined total of
VND215.0bn to the Groups revenue and VND31.8bn of its PBT.
Spivital Daily nutrition source. Spivital is a supplementary nutritional
product that provides protein, vitamin and minerals. Although It was only first
introduced in September 2008, it has become a major revenue driver by
contributing VND 586.0mn and VND40.0mn to DHGs revenue and PBT,
respectively in 2008.
Euguca Natural remedy for cough. This is a product that treats cough. It
combines different types of herbal extracts from peppermint, cajuput and ginger.
Eugica contributed VND72.0bn and VND8.7bn to the Groups revenue and PBT in
2008.
Other major products of the Group include Davita Bone, Unikids Helps Children
have a good appetite, Eyelight For healthy eyes daily, and Glumeform
Helps stabilize glycemia.
The revenue breakdown of DHG for 2008 is illustrated below:
Vitamin - Minerals
Ophathalmic
10.5%
7.0%
45.5%
8.4%
7.0%
Musculoskeletal
Mekong 1
Digestives & hepatic and
biliary
27.6%
28.7%
Analgesics - Antipyretics
Mekong 2
Central Region
Diabetic
Western Region
Nervous system
North Region
Cardiovascular
13.9%
HCM City
Beauty care
14.1%
12.5%
Dermatological
Antibiotics, Antif ungals Antiparasites
15.8%
DHG
28 July 2009
Cash flow
2006
2007
2008 2009E 2010F
868.2 1,269.3 1,537.5 1,665.1 1,972.3
-391.4 -576.7 -713.4 -737.0 -945.2
-11.3
-24.1
-28.6
-25.4
-25.4
465.4
668.5
795.5
902.7 1,001.8
-367.8 -529.1 -629.4 -646.3 -770.8
97.6
139.4
166.1
256.4
231.0
-10.7
-11.5
-15.7
-16.1
-15.9
0.0
0.0
0.0
0.0
0.0
0.1
0.5
2.7
3.2
3.2
87.1
128.3
153.0
243.6
218.3
0.0
0.0
-16.0
-24.4
-21.8
0.0
0.0
-1.1
-1.8
-1.6
87.1
128.3
135.9
217.4
194.9
5,081
6,571
6,796 10,873
9,746
109.1
163.9
197.3
285.0
259.6
2006
25.0
87.1
11.3
-35.6
-47.6
-100.1
-102.5
-1.5
3.8
-75.1
84.5
0.0
94.5
-10.0
-0.5
2007
51.3
128.3
24.1
-74.2
-197.9
-139.2
-104.7
-36.6
2.1
-87.9
353.9
498.8
-124.4
-20.5
94.9
2008
154.1
135.9
28.6
48.1
-58.4
-55.0
-26.2
-28.5
-0.4
99.1
-17.3
-0.3
-35.0
17.9
81.8
2009E
86.8
217.4
25.4
-84.5
-71.5
-70.5
-100.3
36.4
-6.7
16.3
1.9
0.0
1.5
0.4
18.1
2010F
50.9
194.9
25.4
-2.0
-167.3
-108.4
-104.8
-2.7
-0.8
-57.4
1.0
0.0
1.0
0.0
-56.4
2007
2008
2009E
2010F
46.2
42.8
50.2
47.4
29.3
21.1
19.2
20.4
5.9
3.4
8.3
54.4
44.4
60.0
60.0
18.5
-9.9
-8.9
-10.4
-10.4
52.7
11.0
12.9
10.1
18.0
31.2
51.7
10.8
12.8
8.8
13.1
19.3
54.2
15.4
17.1
13.1
17.4
25.6
50.8
11.7
13.2
9.9
13.2
19.2
6.8
-21.8
8.1
5.0
10.6
5.8
2.3
1.4
1.8
107.0
60.9
22.5
0.2
1.1
-27.1
31.8
52.1
37.8
60.9
2.3
1.2
1.5
132.4
67.3
32.3
0.0
1.1
-25.3
49.2
54.3
54.6
32.9
2.5
1.7
1.2
164.3
80.8
35.6
0.0
1.0
-16.8
44.3
40.5
49.8
25.8
2.4
1.5
1.2
164.3
88.9
39.1
0.1
6,571
2,628
26,524
65,003
8,392
2,500
6,796
8,890
32,078
76,901
9,869
2,500
10,873
7,919
40,054
83,285
14,255
2,500
9,746
6,555
46,302
98,651
12,983
2,500
Key ratios
Balance sheet
YE Dec (VND bn)
Total assets
Current assets
Cash
ST investment
Inventories
Trade receivable
Others
Other assets
LT Investment
Net fix assets
Others
Total liabilities
Current liabilities
Trade payable
ST borrowings
Others
Long-term liabilities
Long-term debts
Others
Shareholders' equity
Paid in capital
Reserve
Other provisions
Minority interests
2006
482.8
329.6
35.0
0.0
121.4
166.4
6.8
153.3
1.6
148.1
3.5
312.4
291.1
18.5
167.9
104.8
21.3
0.0
21.3
170.4
80.0
81.3
9.1
0.0
2007
942.2
673.8
130.0
52.0
230.3
257.4
4.2
268.4
38.2
228.8
1.4
290.6
289.8
55.6
43.4
190.7
0.8
0.0
0.8
651.6
578.8
57.0
15.8
0.0
2008
1,133.5
838.6
211.7
2.3
308.2
309.9
6.4
294.8
66.7
226.4
1.8
376.6
361.4
75.9
8.5
277.1
15.2
0.0
15.2
756.9
578.5
180.0
-5.2
3.6
2009E
1,363.6
1,023.6
229.9
16.1
343.2
427.4
7.1
340.0
30.3
301.3
8.4
420.6
405.4
72.8
10.0
322.6
15.1
0.0
15.1
943.0
578.4
352.8
7.8
4.0
2010F
1,592.1
1,169.1
173.4
17.8
436.9
533.3
7.8
423.0
32.9
380.8
9.3
509.3
494.1
135.4
11.0
347.7
15.1
0.0
15.1
1,082.8
578.4
492.6
7.8
4.0
YE Dec
2006
Growth (YoY %)
Sales
56.7
63.3
EBIT
51.9
EBITDA
57.2
Net profit
57.2
EPS
Profitability (%)
Gross margin
53.6
11.2
EBIT margin
12.6
EBITDA margin
10.0
Net margin
22.5
ROA
57.8
ROE
Stability
Gross debt/equity (%)
104.1
82.4
Net debt/equity (%)
8.7
Interest coverage (x)
0.6
Int.&ST debt coverage (x)
10.2
CFO int. coverage (x)
0.7
CFO int.&ST coverage (x)
1.1
Current ratio (x)
0.7
Quick ratio (x)
2.2
Assets turnover (x)
106.6
Avg. inventories (days)
50.9
Avg. receivables (days)
15.8
Avg. payables (days)
4.8
Net cash (debt) (VND bn)
Per share data (VND)
EPS
5,081
1,459
OCFPS
5,793
BVPS
50,666
SPS
6,366
EBITDA/share
2,500
Cash Div/share
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Recommendation definitions
Our recommendation is based on the
following expected price
performance within 12 months:
+15% and above: BUY
-15% to +15%: HOLD
-15% or worse: SELL
10
DHG
28 July 2009
11
DHG
28 July 2009
12
Singapore
London
New York
Taiwan
Jeffrey S. SEO
jseo@kesusa.com
Lynda KOMMEL-BROWNE
lkommel@kesusa.com
Michelle MALLETTE
mmallette@kesusa.com
Jeffry NIEDERMEYER
jniedermeyer@kesusa.com
Benedict PEREZ
bperez@kesusa.com
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Tel: +91.22.6623.2600
Fax: +91.22.6623.2604
Connie TAN
connie@kimeng.com
Tel: +65 6333 5775
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Eddie LAU
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Tel: +852 2268 0800
US Toll Free: +1 866 598 2267
Warren KIM
wkim@kesusa.com
Tel: +1 212 688 8886
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Ed BANCOD (research)
ed_bancod@atr.com.ph
www.kimengresearch.com.sg