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CFA Institute Research Challenge

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Vietnam CFA Institute Research Challenge| Page 1


Student Research Report
This report is published for educational
purposes only by students competing in the
HAU GIANG PHARMACEUTICAL JSC
Vietnam CFA Institute Research Challenge Date: 13 Nov 2012 Healthcare Sector - Pharmaceutical Manufacturing Industry

Ticker: DHG Ho Chi Minh City Stock Exchange, Vietnam

Recommendation BUY Highlights


Target price (31 Dec 2013) 78
We initiate BUY for Hau Giang Pharmaceutical JSC (DHG or Company) with VND78,034
target price by year-end 2013, offering a 19.1% upside from its current price. DHG is
Vietnam’s largest pharmaceutical manufacturer measured by sales and capacity. We ground our
Current Price (13 Nov 2012) 65.5 rating on DHG’s expected continued strong fundamentals, favorable market conditions and a
sound expansion plan.
Upside 19.1%
Revenues are projected to grow at 17% CAGR during 2012-2017, supported by strong
(Figures in VND’000) consumption market and the expansion investment that adds 1.6x capacity to the existing factory
currently running at maximum.
DHG is projected to deliver a 2012 EPS of VND6,730, up 5% from 2011 and continue to
produce significant cash from operation to sufficiently fund investing and financing needs.
Liquidity is expected to remain satisfactory with current ratio averaging at 2.9x for 2012-2017.
DHG serves markets with future growth approximately at 15% CAGR. DHG is expected to
be well positioned to outperform the general market, driven by its leading position, nationwide
distribution network, experienced management, and strong production capacity.
We derive the VND78,034 weight-averaged target price using FCFE and P/E Multiple methods.
We assign FCFE and Multiple valuation 70% and 30% weight respectively.
Key risks to the target price include delays in operating the new factory, local currency
devaluation, input price inflation and fiercer-than-expected competition. Strong operating cash,
relatively sizeable market position and a competent management are expected effective risk
mitigations.
Table 1. Key financial data
2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
figures in VND'000,000
Net sales 2,034,525 2,490,880 2,883,929 3,344,919 3,954,688 4,684,008 5,455,235 6,225,838
Net Income 2,034,525 2,490,880 436,221 474,661 505,850 579,150 686,271 773,810
OCF 286,231 307,558 388,261 343,111 391,794 351,825 595,678 619,371

EPS adjusted (VND) 5,872 6,401 6,720 7,312 7,792 8,922 10,572 11,920
DPS adjusted (VND) 1,030 4,027 1,478 731 2,338 3,569 5,286 5,960
ROE 32.9% 31.0% 27.9% 24.4% 21.6% 21.5% 22.6% 22.8%
ROA 22.8% 21.8% 19.7% 17.7% 15.8% 15.8% 16.6% 16.7%

Figure 1. Relative performance (by Bloomberg)

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INVESTMENT SUMMARY
We rate BUY for DHG with the target price of VND78,034 by year-end 2013, presenting a
19.14% upside from its current price. DHG, headquartered in Can Tho City, Mekong Delta,
Vietnam, is Vietnam’s largest pharmaceutical manufacturer measured by sales and capacity.
Vitamins, ENT (Ear, Nose and Throat), Antibiotic, and Analgesic medicines are major product
groups, generating over 85% of sales with herbal medicines and other medications generating
the balance. DHG’s expected continued strong fundamentals, favorable market conditions and a
sound expansion plan support our rating.
Revenues are projected to grow at 17% CAGR during 2012-2017, driven by strong consumption
market and the expansion investment that adds 1.6x capacity to the existing factory currently
running at maximum capacity. Antibiotic medicines are expected to continue their role as key
revenue driver, growing at approximately 18% per annum and accounting for around 33% of
sales for over the next five years.
DHG’s EPS is expected to reach VND6,730 for F2012, up 5% from 2011, and projected to grow
at 13% per annum over 2013-2017. DHG is projected to produce increasing cash from operation
(CFO) from the current VND390bn, sufficiently funding investing and financing needs.
Operations are expected to remain satisfactorily liquid, with current ratio averaging at 2.9x
during 2012-2017. DHG is projected to continue its low leverage capital structure with Debt-to-
Equity expected to be at 4.5%.
DHG serves markets with positive future growth. Positive factors including Vietnam’s favorable
demographic groups, increased healthcare awareness, growing population, and the government’s
favorable policies towards improving the supply and quality of needed medicines, are expected
to outweigh perceived market risks, such as currency fluctuations and input cost inflation.
Vietnam’s pharmaceuticals consumption is expected to grow at about 15% over the next 5 years.
Holding a significant 6% share in a highly fragmented market, coupled with a sound expansion
plan expected to commence operation in late 2013, DHG is well-positioned to realize this
growth opportunity.
We derive the VND78,034 target price by weight-adjusting the results from FCFE and P/E
Multiple valuations. DHG’s stable operation, steady capital structure and high predictability of
cash flow justify the use of FCFE, which receives 70% weight. Multiple valuation, receiving 30%
weight, values DHG at aggregate level, placing the Company in relation to Southeast Asian and
Vietnamese comparable peers.
Key risks to the target price include delays in construction/equipping of the new factory, adverse
exchange rate movements, input price inflation and fiercer-than-expected competition. We
however expect DHG’s strong operating cash, relatively sizeable market position and a seasoned
management team will help the Company effectively manage these risks.
Figure 2. Historical price chart (by Bloomberg)

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SOCIAL RESPONSIBILITY
In concert with enhancing financial performance, DHG also embraces sustainable social
Figure 3. Revenue breakdown 2011 development. Improving overall life quality for workforce and their families, upholding industry
standards towards protecting environment, ensuring gender equality, labor safety and continuous
employee training are DHG’s on-going activities. This leads to positive reputation and branding,
7%
making DHG a trusted partner in all dealings.
7%
10% 43%

16%
BUSINESS DESCRIPTION

17%
Four product groups account for over 85% of sales. They are Antibiotic medicines, Vitamins,
ENT and Analgesic medications. These products are sold under multiple company-owned
brands. Other medicines and non-medical products contribute approximately 15% to sales.
Antibiotics ENT Around 95% of DHG’s medicines are popularly-used generic drugs with herbal medicines
having started to be increasingly important as high-value, rich-margin product group. Herbal
Analgesics Vitamins-minerals medicines, with inputs mostly internally sourced, currently account for 13% of sales and are on
Digestive products Others an upward trend.
Raw materials are primarily overseas sourced. Over 80% of raw materials and almost 100%
Source: DHG annual report 2011 of Active Pharmaceutical Ingredients (APIs, key inputs) are imported. China, India and Europe
are key import markets. While sales are mostly in local currency, this dependence on imported
inputs makes DHG business vulnerable to foreign exchange risk.
Quality assurance is constantly upheld: DHG’s manufacturing activities and products are in
Figure 4. Production progress full compliance with all required quality control/assurance standards. All finished products are
subject to WHO-GMP reassessment process before packaging. Warehouses, both for raw
materials and finished goods, also meet GDP (Good Distribution Practice) and GSP (Good
20% Storage Practice) standards. DHG complies with ISO/IEC 17025 and GLP (Good Laboratory
Import raw Practice) concerning its Lab operations.
material DHG has a nationwide distribution system. DHG’s distribution network covers to drug
Input 80% Domestic raw
store/hospital level in all provinces and cities in Vietnam. DHG’s sales force is able to sell
resource directly to 98% of state hospitals throughout Vietnam. The drug store channel generates 80% of
material
sales with the balance coming from the hospital system. DHG is planning to consolidate its
distribution system to ensure better resource allocation and more effective reporting mechanism.
5% To improve overall management, DHG has recently invested in an ERP system, which is
expected to enhance the Company’s decision-making quality thanks to enjoying better integrated
generic
management information of all facets of the operation. (see appendix 16 and 18)
Production 95% patent New factory is under construction for future growth. DHG has started construction of a new
factory that, together with the existing one, increases the Company’s total annual capacity to 8
billion units from the current 3 billion. The new factory requires a VND676bn investment which
will be financed totally by internal cash. In the context of the current factory operating at its full
capacity, the new factory, which commences operation in late 2013, is of essence to prevent
20% Trading business breakdown and further ensure readiness for materializing growth plans.

channel MANAGEMENT
Distribution Hospital
DHG’s senior management team has a combined 150 years of experience, well-balanced in
80% channel pharmaceutical production, marketing, R&D, financial and strategic management. Led by Mrs
Pham Thi Viet Nga, BSc Pharm, Ph.D of Economics, over 32 years of experience including 25
years as DHG’s CEO, the management has turned DHG around from near bankruptcy in late
1980’s to becoming Vietnam’s leading pharmaceutical company to date. We believe that DHG’s
Source: Team synthesized management shall continue to demonstrate their competence, capacity and strategy to grow the
Company forwards.

Vietnam CFA Institute Research Challenge| Page 4


Figure 5. Pharmaceutical market forecast
INDUSTRY OVERVIEW
4500 4280 7%
4000
CUSTOMERS
3500 6%
3000 Doctors are DHG’s primary customers. Except for Vitamins being OTC products, a majority of
2500 5% the Company’s pharmaceuticals are prescription drugs and therefore, sales are largely dependent
2000 on whether doctors will prescribe them for patients. In Vietnam, prescription drugs cannot be
1500 directly advertised to consumers, but they can be marketed to health officers. DHG’s sales force
1000 4% frequently calls on doctors, hospitals, wholesalers, pharmacists and healthcare centers.
500 Organizing seminars introducing new drugs, sending samples to doctors and participating in
0 3% medical meetings are regularly done to market the Company’s products.
Sales ($bn) % of GDP
INDUSTRY PROSPECT
Favorable Forces
Low per-capita medicine spending and large population provide room for future growth.
Vietnam’s per-capita medicine expenditure has steadily increased during 2001 – 2011 at 16.5%
Source: BMI forecast
CAGR. Per-capita spending has reached USD27,6 in 2011 (Vietnam’s Ministry of Health). This
figure is however significantly lower than the world’s average of USD40 (BMI Report, Q3
2012). Vietnam’s medicine spending is expected to increase to USD33.80 per capita by 2014.
Figure 6. Health care and drug expenditure Vietnam has large and fast growing population, which is expected to increase from 87 million in
per capita in some countries 2011 to 100 million by 2019 (United Nation). This, combined with increased healthcare
3500 awareness and broader access to pharmaceuticals, creates a strong base for market growth.
3000 (appendix 12, 13)

2500 Heath Care Expenditure per Demographics boost the industry. Vietnamese demography is aging. This favors the industry
when older people tend to use more medicines. The proportion of the population whose age is
Capita higher than 55 was approximately 12.5% in 2010. However, this ratio will be 15% in 2015 and
2000 Drug Expenditure per Capita up to 18.2% in 2020 (United Nations’ forecast). Children under 4 years old which also form a
1500 large medicine user group are expected to maintain at 7.5-8% of a growing population for the
1000 next ten years.

500 Polluted environment and unhealthy lifestyles lead to expanded uses of medicines. Growing
cigarette and alcohol consumption, unhealthy diets, worsening air and water quality,
0 deteriorating food quality and sedentary lifestyles have caused several lifestyle-related and non-
Source: WHO communicable diseases more common in Vietnam. Among many others, cancer has become a
prevalent disease. In 2011 alone, around 150,000 people contracted cancers. This number is
forecasted to be 200,000 people per year by 2015 and onwards. Besides, diabetes, notably the
Type-2 diabetes, has become a national concern when approximately 3.2% of Vietnam’s adult
population, or 1.7 million people, currently contract diabetes. This figure is forecasted to reach
to 3.5%, or 3.1 million people, by 2030 (IDF Diabetes Atlas). All above factors will lead to
increasing uses of pharmaceuticals. (appendix 14)
Figure 7. Demographic group The government commits to further develop the pharmaceutical industry and improve
healthcare. Domestic medicine production currently meets approximately 50% of the nation’s
100% demand. The government has announced its plan to improve the domestic supply of
12.5% 15.0% 18.1%
80%
pharmaceuticals in order to meet 70% of total demand by 2015, and 80% by 2020. This plan
27.4% 28.0% 27.4% aims at boosting the domestic production of essential drugs in order to cut prices, stabilize the
60% supply and reduce dependence on foreign pharmaceutical imports. Corporate tax incentives and
40% 35.0% 33.9% 32. 7% lower tariff for imported raw materials are also part of the government’s plan to boost the
domestic pharmaceutical industry.
20%
Unfavorable Forces
25.1% 23.1% 21.8%
0% Vietnam has heavy dependence on imported raw materials. Vietnam currently imports over
2010 2015 2020 90% of needed raw materials to produce medicines. China, India and Europe are main import
Under 14 15-34 35-54 55+ markets for Vietnamese medicine manufacturers. Domestically produced raw materials are not
cost effective due to relatively small scale.

Source: United Nations R&D activities remain weak. Investment in R&D is low at almost all domestic pharmaceutical
producers. Average R&D spending is just about 1-3% of sales, much lower than the normal 15%
at multinational companies. Low R&D investment, due to lack of human resources and capital,

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Figure 8. Competitive advantages
has explained the domestic companies’ inability to introduce any patent medicines; they just
compete in the generics segment instead.
Higher
natural COMPETITIVE LANDSCAPE
Vietnamese pharmaceutical industry is highly fragmented with the participation of over 200
companies. Domestic companies mostly compete in the generics segment while patent drugs are
Distribution Lower price still the playground of multinational drug makers. Barrier of entry is fairly high because large
investment capital and a number of industry’s and government’s standards (PIC/s, EU-GMP…)
are required.
Domestic companies focus mainly on generic medicines. Lack of essential facilities and
technologies and low R&D investment have made generic medicine manufacturing a natural
Specific Quality (less choice for domestic companies. Approximately 90% of domestically produced pharmaceuticals
drug side effect)
DHG domestic foreign
are generics. This segment witnesses a high level of competition. Broad distribution network and
steady relationships with doctors, hospitals and wholesalers are key tools to compete. (appendix
15)
Source: Team analysis Domestic companies are expected to tap more into the upscale medicine market.
Commonly, foreign companies dominate the high value-added product sector, especially specific
medicines due to lack of domestic supply of such and therefore set high prices. However, over
Figure 9. Company positioning next few years, many patents, especially those for specific medicines, will be expired. According
to Pharma Report 2011 (www.media.mmm-online.com), the patents of blockbuster drugs worth
USD36bn will be expired in 2014-2015. This presents huge opportunities for domestic
Higher specific level companies to produce bio-equivalent generic versions of these specific drugs. When patents
expire, domestic companies can buy compounds from the patent holders to produce their own
products. This will help increase the supply of specific medicines at more affordable prices for
Peizer patients.
Sanofi
Novartis Domestic versus foreign companies
Merck &
Co GSK Group Government policies give domestic companies some advantages over foreign players.
Traphaco DHG Regulated discrepancies in tariff and distribution right and corporate tax incentives have given
domestic companies an edge over their foreign competitors. Imported raw materials are taxed at
Domesco 0% while finished product imports are imposed 5% rate. Foreign companies are still barred from
Imexpharm
OPC distributing their products directly to customers. In addition, domestic pharmaceutical
companies are subject to 15-20% income tax, 5-10% lower than the 25% statutory tax rate.
Higher price
Distribution network is unparalleled advantage that domestic companies enjoy over their
foreign competitors. Over the past years, taking advantage of the regulation that bars foreign
Source: Team’s estimate companies from directly importing their products to Vietnam and directly distributing goods to
customers, domestic companies have fully widened their distribution network. Along the way,
they have also created steady relationships with hospitals and drug stores across the country.
Figure 10. DHG’s competitive advantages These are meaningful intangible assets enjoyed by domestic companies.

Higher
natural
5
COMPANY COMPETITIVE ADVANTAGES AND
4
3
POSITIONING
Distribut 2 Lower

ion 1 price
Possessing many well-known brands and a diversified product portfolio is one of DHG’s
0
most important advantages. Brands such as Hapacol, Unikid, Eyelight, Spivital…have been
long recognized as high quality, gaining full trust and awareness by customers. With portfolio of
over 200 products, DHG is able to meet a wide range of treatment needs.
DHG’s production scale is also a notable advantage. Being the largest domestic
Specific Quality pharmaceutical manufacturer by capacity, currently 3 billion units per year, DHG will be a much
(less side larger producer when the new factory is put into operation. DHG’s combined capacity will reach
drug
effect)
DHG Traphaco Domesco 8 billion units per year, allowing the Company to enjoy economies of scale and scope.
Sanofi Novartis Of all domestic companies, DHG has relatively wider distribution networks. The
Company’s sales agents have reached over 20,000 drug stores across Vietnam. DHG is also able
Source: Team estimate to sell products directly to 98% of all state hospitals in Vietnam. Nationwide coverage and

Vietnam CFA Institute Research Challenge| Page 6


Figure 11. Net sales and revenue growth rate

8,000 25%
6,000 20%
steady relationships with customers help better strengthen the Company’s market position.
4,000 15% (appendix 16)
10%
DHG is among a few companies in Vietnam pioneering in producing and marketing drugs
2,000 5% extracted from herbs and natural sources. Herbal medicines, thanks to their few-to-no side
- 0% effects, are increasingly perceived by customers as good alternatives to chemical medicines.
DHG has developed its own herbal material zones and produced several herbal medications that
Net sales Revenue Growth Rate
are increasingly accepted by customers.
Currently holding 6% market share, DHG is expected to increase its share in a growing market
due to its dominant production scale, reputation and extensive distribution network.
Source: DHG annual reports and team estimate

FINANCIAL ANALYSIS AND PROJECTION


Figure 12. Profitability ratios
1,000 60% HISTORICAL FINANCIAL ANALYSIS
DHG has showed a remarkable improvement in financial performance over the recent three
800 years, mostly through revenue growth and effective control of operating expenses. This has led
600 40% to increasingly higher ROE and EPS in 2009-2011 than those in 2007-2008. Earnings quality
has remained satisfactory when annual CFO has equaled 85% of net income. Operations have
generated significant cash which was sufficient to finance CAPEX investments and cash
400 20%
dividends. DHG has taken minimal financial leverage when Debt-to-Equity during 2007-2011
200 averaged at 6%. In addition, DHG has solely focused on its core operations of manufacturing
- 0% and trading pharmaceuticals. Core operations have consistently accounted for over 95% of total
Net Income EBITDA sales. The Company has not invested in any long-term financial instruments or real estate
ventures.
Gross Margin Net Margin
DHG recorded VND2,039bn sales for Q1-Q3 2012 and earned a 48.6% gross margin. 2012 sales
Source: DHG annual reports and team estimate and profit margin both increased y.o.y by 17.1% and 1.4% respectively. As of Q3 2012, cash and
cash equivalent was VND602.5bn, approximately up 33% y.o.y. This strong cash holding
guarantees the planned disbursements to the new factory project without using bank loans.
Figure 13. Return ratios
Financial Performance
50%
Sales stably grew at approximately 18% per annum. DHG’s business has shown to be
40% recession-proof when the Company constantly gained increasing sales despite of economic
30% downturn in Vietnam. DHG generated VND2,490bn sales for 2011, almost linearly up from
VND1,269bn in 2007. DHG’s sales growth was driven by strong market demand, broad
20%
distribution network and continued success of product branding. (appendix 19)
10%
Gross margin, even though remaining relatively high, has slightly squeezed during 2007-
0%
2011. Gross margin in 2011 was 48.5%, down from 53.25% in 2007. This margin reduction was
caused by higher competition level, input cost inflation (primarily due to VND devaluation) and
pricing ceiling regulation set by the government in its effort to curb inflation during this period.
Return on Equity
Return on Assets Selling expenses have been effectively managed in the context of growing sales. By pushing
Return in invested capital sales through company-owned distribution facilities and internal sales force rather than
distribution contractors, DHG has succeeded in containing selling expenses at around 23% of
Source: DHG annual reports and team estimate sales since 2009. This was a remarkable improvement as compared to 35% in 2007 and 2008.
Figure 14. Liquidity ratios
Business has remained highly profitable. DHG generated VND415bn net profit for 2011,
presenting a 9% growth from 2010. Net profit margin has been notably richer since 2009 than
5,000 4.0x
4,000 3.0x
that in 2007-2008. Net margin in 2009-2011 was 19-23%, almost doubled that in 2007-2008.

3,000 2.0x
Financial Position
2,000 Liquidity has been satisfactorily sufficient. DHG’s current ratio and quick ratio during 2007-
1,000 1.0x 2011 averaged at 2.6x and 1.6x respectively, which is higher than industry average. The high
quick ratio has enabled DHG to fully meet all short-term obligations when due.
- 0.0x
Current Assets Current Liabilities Balance sheet has been solidly healthy due to low leverage. DHG has financed its assets
primarily by equity capital. Equity-to-Asset was in the region of 70% during 2007-2011. Debt-
to-Equity had been low at approximately 6% for the same period. By maintaining a balance
Current Ratio (x) Cash Ratio (x) sheet that is mostly internally-funded, DHG is relatively more shock-resistant than its peers.

Source: DHG annual reports and team estimate

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Figure 15. Asset and Liabilities
Working capital has been well managed: DHG’s cash cycle has decreased sharply from 180
Thousands

6,000 10%
days in 2008 to 149 days in 2010. This was due to decrease in Days of Inventory on Hand
(DIO), down to 125 days from 162 days, meanwhile Days of Sale Outstanding (DSO) and Days
8%
of Payables were stable. 2011 cash cycle increased to 161 days, driven by increase in finished
4,000 6% goods category. This was however well justified by the level of year-over-year sales growth in
2011 compared to that in 2010. Sales growth in 2011 was 22.4%, which was significantly higher
2,000 4%
than the 16.5% in 2010.
2% Cash Flows
- 0%
Operations have been significantly cash positive. Driven by high profitability and effective
working capital management, DHG’s operations have generated significant cash, fully sufficient to
fund investing activities and cash dividends. The Company produced VND307bn CFO in 2011,
Total Assets
well covering the VND299bn CAPEX in the same year. DHG has paid out, on average, 36% of
Total Liabilities annual net income as cash dividends during 2008-2011.
Interest-bearing Debt to Equity (%)
KEY ASSUMPTIONS FOR PROJECTION AND ESTIMATE
Source: DHG annual reports and team estimate
Sales growth: Sales are expected to maintain 16-17% growth over 2012-2016 before leveling
down to 14% in later years.
Year-to-Q3 2012 sales were VND2,039bn, 17.1% y.o.y increase. We project DHG will conclude
2012 at approximately VND2,888bn sales, presenting a 16% y.o.y growth.
Figure 16. Cash cycle days
250 DHG is projected to sustain the 16% growth in 2014, driven by both price increase and change
193 193 195 in product mix towards increasing the weight of higher value products. Sales in 2014 and 2015
200 170
157 149 161 160
180 are expected to grow at 18-19% primarily thanks to volume increase when the new factory has
been in operation. Sales in later years are forecasted to level down to 14% given the sizeable
150
base of the business and anticipated tougher competition.
100 By product line, Antibiotic medicines group is expected to continue its key role in generating
sales over the projection period, contributing approximately 33% to total sales and annually
50
growing at 18%. The remaining 67% is expected to come fairly equally from Vitamins, ENT,
0
Analgesic medicines and other products.
We attribute sales growth to both price increase, that tracks projected medium-term inflation of
-50 7-12% per annum and volume growth which is about 10-12% in 2014-2015 (when the new
2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
factory has smoothly operated) and 5-8% in later years. (See Appendix No.5 and No.20)
A/R (Net) DSO
Inventory days Gross margin: Gross margin is forecasted to slightly decrease due to expected higher
AP Days Outstanding
Working Capital Cycle (Days) competition and possible further inflation in input prices.
Source: Team estimate DHG earned 48.6% on its YTD sales. To be conservative, we project full 2012 gross margin will
be 46%. Going forward, we project gross margin to be 45% in 2013-2014 and then slightly
reduce to 44.5% in 2015 before leveling down to 43-44% in later years. Overall, average
projected gross margin during the projection horizon is 5-7% lower than historical average. This,
in our view, is driven by higher competition level when foreign companies are allowed to fully
penetrate the market under WTO commitments and anticipated VND devaluation.
Figure 17. Expected EPS and DPS
Selling expenses: We project selling expenses as percentage of sales to be 23.5% in 2012-2013,
14,000 11,956 which is slightly higher than the 23.2% historical average. In later years, we project a higher
12,000 level of selling expenses, averaging at 24.5% of sales, caused by expanded promotion activities
10,000 and increase sales force to realize the projected sales growth.
8,000
Effective tax rate: DHG will continue to enjoy 50% cut from the statutory 25% corporate income
6,000
tax (CIT) for all existing production facilities during 2013-2014. The new factory’s operation,
4,000 which is projected to contribute 30% to total pretax profit in 2014 and linearly up to 60% in 2017,
2,000 is subject to 100% CIT cut for the first 5 operating years and 50% cut for the next 5 years. Other
0 activities’ sales are taxed at normal rate of 25%. This leads to our projected effective CIT rate to be
14% in 2012-2013, 17.5% in 2014, 15% in 2015 and then down to 12.5% and 10% for 2015 and
2016 respectively.

EPS adjusted DPS adjusted Working capital items: DSO is expected to be 53 in 2012. With anticipated broader customer
base to grow sales, we conservatively assume DSO to be 55-60 in later years, which is 3-8 days
longer than historical average. We expect DIO to follow the same pattern as DSO over the next 5
Source: Team’s estimate years. DIO in 2012 is projected to be 140 (4 days longer than historical average) and straight up
from 145 to 160 days during 2013-2017.

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We project Days of Payables to be in the range of 27-33 days, a conservative assumption given
the fact that historical average was 35 days.
Figure 18. Non-production cost ratios
40% Capital Expenditure: Capital Expenditure falls into two categories: Growth CAPEX (the new
30%
factory) and Maintenance CAPEX. As of year-end 2011, DHG has disbursed VND73.7bn to
construct the new factory. Growth CAPEX over 2012-2014 is therefore projected to be
20% approximately VND120, 270 and 100bn accordingly. We project that DHG will spend around
VND88bn per year in Maintenance CAPEX (roughly same as historical average) to maintain the
10% satisfactory working conditions of all existing factories.
0% Retention ratio: We project DHG to retain 80-90% of its earnings during 2012-2013 to duly
meet the Growth CAPEX requirements while maintaining the desired liquidity level. The
Company is expected to retain less in immediate later years before reaching the projected long-
Selling Expense (% of Sales) term retention ratio of 40% of annual net earnings.
G&A Expense (% of Sales)
Tax Margin

Source: Team’s estimate VALUATION

Table 2. Summary of valuation We use FCFE and P/E Multiple Valuation to value DHG. The weighted average target price is
VND78,034. We project the current price will converge to the target price by year-end 2013,
All figures in VND which then offers a 19.14% upside.
Target price Weight
FCFE valuation produces VND79,690 per share by year-end 2013. (appendix 8)
FCFE Valuation 79,690 70%
Multiple Valuation (PE) 74,171 30% We choose FCFE over other DCF methods because of DHG’s low-leverage capital structure,
stable operation and high predictability of financial results.
Target Price 78,034
Current price (Nov. 13, 2012) 65,500 We employ 8.8% risk premium, 10.1% risk-free rate (10-year government bond yield) and 0.62
% Upside (by Dec 31, 2013) 19.14% Adjusted Beta, all provided by Bloomberg, to arrive at the required rate of return on Equity of
15.6%.
Source: Team estimate We derive DHG’s Perpetual Growth Rate of 8% from the Company’s expected long-term
retention ratio of 40% and ROE of 20%.
P/E Multiple method shows VND74,171 per share by year-end 2013. (appendix 9)
Figure 19. Target price distribution
We place DHG in relation to its peers in Vietnam and Indonesia and Malaysia to arrive at the
justified P/E of 10 (75% weight to Vietnam’s pharmaceutical P/E average and 25% to
Indonesia/Malaysia average).
Monte Carlo Simulation
250
DCF Price Distribition (1681
We assign 70% and 30% weight to the FCFE and P/E Multiple results respectively to determine
observations) the target price. P/E Multiple receives less weight due to the difficulties to find a set of exactly
200 85% Probability: Target price > comparable companies. Meanwhile with DHG’s operation and earnings being stable and the
Current price (Nov 13, 2012)
dividend payout policy being fairly predictable, FCFE warrants a higher weight.
150 Using g and Re
as sensitive variables
100

50
KEY RISK ASSESSMENT
0

Input price and VND devaluation risks: Imported inputs, mostly APIs and pharmaceutical
30

45
60
75
90
105
120
135
150
165
180
195
210
225

chemicals/additives, make up 60-80% of COGS. Therefore, any unexpected surge in input prices
may squeeze DHG’s margins. Input price inflation may be caused by increase in production
VND'000 costs in import markets and/or VND devaluation. Mitigation: DHG actively sources all of its
materials from major suppliers who can ensure continuity in any market conditions. As a well-
established company in the industry, DHG has created and maintained good relationships with a
Source: Team’s estimate broad portfolio of suppliers through which the Company can obtain updated information on
price movements. This would allow DHG to tactically adjust its purchase plans. In addition,
DHG’s good relationships with banks allow the Company to buy USD and EUR at most
reasonable prices, even in scarcity times and open L/Cs with no collaterals.

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New factory delay risk: As the current manufacturing facilities are running at full capacity,
operating the new factory as scheduled becomes critical to business continuity and future growth.
Therefore, any delays in construction/equipping of the new factory could present operational
risks. Mitigation: All preparatory work for the new factory has been completed and the
construction is ongoing. As of Q3 2012, the Company has disbursed over VND100bn of
VND676bn total investment. With cash and cash equivalent by Q3 2012 posted VND603bn
while financial obligations being trivial, we are confident that the new factory’s
construction/equipping will be satisfactorily funded and operation will start as planned.
Competition risk: DHG’s business could in future be exposed to tougher competition, mostly
coming from foreign pharmaceutical companies which are allowed to further penetrate the
market under WTO commitments. Mitigation: Significant market position, nationwide
distribution network, good brand-name and competent management team are expected to enable
DHG to sustain and further develop its current leading position in the foreseeable future.
Legal risk: Laws and regulations governing the pharmaceutical industry are still opaque and
subject to unexpected changes. This may lead to potential legal risks when it comes to laws’
interpretation and application. Mitigation: DHG always ensures that its corporate
charter/documents to stay legally updated. The Company, once a year, pre-check tax balance
with the tax office before having its financial statements audited. DHG also ensures to have all
contracts and agreements reviewed by legal experts before signing. These practices help
minimize legal issues.

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APPENDICES
APPENDIX 1: Income statement

2007 2008 2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
Annual Income Statement ACTUAL PROJECTED
(All figures in USD)

Net sales 1,269,280 1,485,464 1,746,022 2,034,525 2,490,880 2,883,929 3,344,919 3,954,688 4,684,008 5,455,235 6,225,838
Cost of Goods Sold (601,278) (694,445) (822,446) (1,015,993) (1,282,117) (1,557,322) (1,839,706) (2,175,078) (2,599,624) (3,054,932) (3,548,727)
Gross Profits 668,002 791,019 923,576 1,018,532 1,208,763 1,326,607 1,505,214 1,779,609 2,084,384 2,400,303 2,677,110
SG&A (529,507) (625,423) (523,234) (618,574) (744,051) (879,598) (1,020,200) (1,245,727) (1,498,883) (1,718,399) (1,930,010)

EBIT 138,495 165,596 400,342 399,959 464,712 447,009 485,013 533,883 585,501 681,904 747,101

Depreciation 24,054 7,181 29,779 41,463 50,147 53,568 62,588 127,007 139,166 150,129 157,709
EBITDA 162,549 172,777 430,121 441,422 514,859 500,577 547,602 660,890 724,667 832,034 904,809

Interest Income 3,022 16,391 27,260 36,238 41,907 26,909 35,616 43,905 51,859 49,696 52,534
Other Financial Income 192 5,938 4,034 4,328 6,988 8,091 9,384 11,095 13,141 15,304 17,466
Financial income 3,214 22,329 31,294 40,566 48,895 35,000 45,000 55,000 65,000 65,000 70,000
Interest Expense (15,393) (5,216) (3,389) (2,010) (2,038) (2,596) (3,914) (6,407) (5,480) (4,910) (5,603)
Other financial Expense (1,897) (33,137) (20,208) (1,399) (5,144) (3,788) (4,393) (5,194) (6,152) (7,165) (8,177)
Financial expenses (17,290) (38,353) (23,597) (3,409) (7,182) (6,383) (8,307) (11,601) (11,632) (12,075) (13,780)
Other income 2,674 1,530 14,224 9,233 9,933 11,500 13,339 15,770 18,679 21,754 24,827
Other expenses - (6,077) (12,674) (12,204) (25,416) 20,000 17,000 20,099 23,806 27,725 31,642
Other profits/loss (11,402) (20,571) 9,247 34,186 26,230 60,117 67,032 79,269 95,852 102,405 112,689

Pre-tax Income 127,093 145,025 409,589 434,145 490,942 507,126 552,045 613,152 681,353 784,309 859,789

Taxes - (16,163) (52,519) (52,982) (75,415) (70,905) (77,385) (107,302) (102,203) (98,039) (85,979)
Net Income 127,093 128,862 357,070 381,162 415,527 436,221 474,661 505,850 579,150 686,271 773,810

Source: Company Report and Team's Estimate

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APPENDIX 2: Balance Sheet

2007 2008 2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
Balance sheet ACTUAL PROJECTED
(All figures in VND'000,000)
Cash 187,317 214,006 600,166 642,519 467,084 544,656 462,905 539,923 510,681 628,237 772,901
Account receivables 237,783 216,770 250,455 306,720 338,733 418,762 504,029 650,086 834,138 941,588 1,023,425
Inventory 232,398 308,236 306,732 347,100 514,191 597,329 730,842 893,868 1,103,950 1,314,039 1,555,607
Other current assets 16,942 44,515 55,116 145,696 170,683 196,265 241,934 297,956 370,357 451,962 544,462
Current Assets 674,439 783,527 1,212,468 1,442,034 1,490,692 1,757,013 1,939,710 2,381,832 2,819,127 3,335,827 3,896,395

Gross Fixed assets 287,572 310,005 348,499 449,892 653,225 868,479 1,252,087 1,431,655 1,557,430 1,671,970 1,753,382
Less accumulated depreciati 57,583 84,619 113,056 142,358 193,772 247,340 309,928 436,935 576,101 726,230 883,939
Net fixed assets 229,989 225,386 235,443 307,534 459,453 621,139 942,159 994,720 981,329 945,740 869,443
Other Long term investments 38,432 72,869 74,062 70,167 45,562 52,751 61,184 72,337 85,678 99,785 113,880
Total Long term Assets 268,421 298,255 309,504 377,701 505,015 673,890 1,003,342 1,067,057 1,067,007 1,045,524 983,323

Total Assets 942,861 1,081,782 1,521,973 1,819,735 1,995,707 2,430,903 2,943,052 3,448,890 3,886,134 4,381,351 4,879,718

Short-term borrowings 43,430 8,455 73,980 12,802 21,116 28,839 43,484 71,184 60,892 54,552 62,258
Account payables 57,171 67,746 71,353 86,291 123,618 140,799 151,209 178,774 192,301 225,981 243,064
Other current liabilities 190,998 291,263 336,584 372,463 399,290 469,330 529,230 625,707 712,226 836,968 923,641
Current Liabilities 291,598 367,464 481,916 471,556 544,024 638,968 723,923 875,665 965,419 1,117,501 1,228,963

LT liabilities 814 15,193 14,242 59,141 58,224 58,224 58,224 58,224 58,224 58,224 58,224
Total Long-Term Liabilities 814 15,193 14,242 59,141 58,224 58,224 58,224 58,224 58,224 58,224 58,224

Total Liabilities 292,412 382,658 496,158 530,697 602,248 697,192 782,147 933,890 1,023,643 1,175,725 1,287,188

Paid in capital 578,852 578,761 645,391 647,891 651,764 651,764 651,764 651,764 651,764 651,764 651,764
Undistributed Earnings 71,597 117,178 372,643 632,431 729,783 1,070,035 1,497,229 1,851,324 2,198,814 2,541,950 2,928,855
Other funds/reserve - 3,185 7,781 8,716 11,911 11,911 11,911 11,911 11,911 11,911 11,911
Total Stockholders' Equity 650,449 699,125 1,025,814 1,289,038 1,393,458 1,733,710 2,160,905 2,515,000 2,862,490 3,205,625 3,592,530

Liabilities and Equity 942,861 1,081,782 1,521,973 1,819,735 1,995,707 2,430,903 2,943,052 3,448,890 3,886,133 4,381,351 4,879,718

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APPENDIX 3: Cash flow Statement

2008 2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
Cashflow ACTUAL PROJECTED
(All figures in VND'000,000)
Cash Flows from Operating Activities:

Net Income 128,862 357,070 381,162 415,527 436,221 474,661 505,850 579,150 686,271 773,810
Adjustments to Reconcile NI to cash provided by oper
Depreciation and Amortization 28,520 29,779 41,463 51,970 53,568 62,588 127,007 139,166 150,129 157,709
Changes in Working Capital
(inc) decrease in AR 21,012 (33,684) (56,265) (32,014) (80,029) (85,267) (146,057) (184,053) (107,450) (81,837)
(inc) decrease in Inventory (75,838) 1,505 (40,368) (167,092) (83,137) (133,513) (163,026) (210,082) (210,089) (241,568)
(inc) decrease in other current assets (27,573) (10,601) (90,580) (24,987) (25,582) (45,669) (56,022) (72,402) (81,605) (92,500)
Increase (decrease) in AP 10,575 3,607 14,938 37,327 17,181 10,410 27,565 13,527 33,680 17,082
Increase (decrease) in other current liabilitie 100,266 45,320 35,879 26,827 70,040 59,901 96,477 86,518 124,742 86,674

Net Cash Provided by Operating Activities 185,824 392,995 286,231 307,558 388,261 343,111 391,794 351,825 595,678 619,371
Cash Flows Provided by Investing Activities

New factory (73,700) (120,000) (270,000) (100,000) (60,000) (40,000) -


Ongoing fixed assets (19,761) (41,149) (119,714) (180,812) (95,254) (113,608) (79,568) (65,775) (74,540) (81,412)
Other Capital expenditures (34,437) (1,192) 3,894 24,605 (7,189) (8,432) (11,154) (13,340) (14,107) (14,096)

Net Cash Provided by Investing Activities (54,198) (42,341) (115,820) (229,907) (222,443) (392,040) (190,722) (139,115) (128,647) (95,508)
Cash Flows Provided by Financing Activities

Increase (decrease) in S/T Debt (34,975) 65,524 (61,177) 8,314 7,723 14,645 27,700 (10,292) (6,340) 7,706
Dividend paid (69,962) (30,018) (66,880) (261,400) (95,969) (47,466) (151,755) (231,660) (343,135) (386,905)
Net Cash Provided by Financing Activities (104,937) 35,506 (128,058) (253,087) (88,245) (32,821) (124,055) (241,952) (349,475) (379,199)

Net Increase/(Decrease) in Cash 26,689 386,160 42,353 (175,435) 77,572 (81,751) 77,018 (29,242) 117,556 144,664

Cash Beginning of Period 187,317 214,006 600,166 642,519 467,084 544,656 462,905 539,923 510,681 628,237
Cash End of Period 214,005 600,166 642,519 467,084 544,656 462,905 539,923 510,681 628,237 772,901

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APPENDIX 4: Master assumption

2012 2013 2014 2015 2016 2017


Historical Average ASSUMPTIONS
(2009-2011)

REVENUES
15.8% Vitamin (YoY % change) 14.5% 16.6% 21.0% 18.8% 16.6% 15.6%
19.9% ETN (YoY % change) 14.3% 16.6% 19.9% 18.8% 16.6% 16.6%
17.2% Antibiotic (YoY % change) 13.4% 15.0% 18.2% 18.2% 15.5% 13.4%
7.5% Analgesic (YoY % change) 13.2% 14.5% 18.8% 17.7% 14.5% 12.4%
14.1% Other medicines Sales (YoY % change) 17.6% 18.7% 23.2% 23.2% 19.8% 17.6%
19.0% 19.0% 18.0% 17.5% 17.5% 17.0%
Non-medical Sales/ total Sales

46.0% 45.0% 45.0% 44.5% 44.0% 43.0%


48.53% GROSS MARGIN

23.5% 23.5% 24.5% 25.0% 24.5% 24.0%


23.19% SELLING EXPENSE/SALES
7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
6.87% G&A EXPENSES/SALES

WORKING CAPITAL 53 55 60 65 63 60
52 Accounts Receiveable (days of sales) 140 145 150 155 157 160
136 Inventories (days of COGS) 46 48 50 52 54 56
42 Other Current Assets (days of CoGS) 33 30 30 27 27 25
35 Accounts Payable (days of CoGS) 110 105 105 100 100 95
132 Other Current Liabilities (days of CoGS) 1.0% 1.3% 1.8% 1.3% 1.0% 1.0%
1.90% Short-term borrowings (% of Sales)

Capital Expenditure 215,254 383,608 179,568 125,775 114,540 81,412


Capex 12,000 8,608 9,568 10,257 11,022 11,843
New land purchase 30,000 30,000 25,000 16,282 18,782 20,410
New building 35,000 35,000 30,000 24,901 27,901 30,391
18,254 40,000 15,000 14,335 16,835 18,769
Furniture, Fixtures & Equipment (FF&E)
120,000 270,000 100,000 60,000 40,000 0
Other fixed capital investments
All figures in VND'000,000
New Factory Investment

9.0% 9.0% 9.0% 9.0% 9.0% 9.0%


Debt financing
8.3% Short-term borrowing cost (%)
78.0% 90.0% 70.0% 60.0% 50.0% 50.0%
Equity financing
70.4% Retention ratio
14.0% 14.0% 17.5% 15.0% 12.5% 10.0%
Corporation Tax
13.5% Effective tax rate 12.5% 12.5% 25.0% 25.0% 25.0% 25.0%
Statutory tax for core operations 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Existing factory 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
New factory
Other activities 88.1% 87.9% 57.1% 45.9% 36.9% 26.9%
Contribution to Pre-tax Income 0.0% 0.0% 30.0% 40.0% 50.0% 60.0%
% of pretax income from existing factory 11.9% 12.1% 12.9% 14.1% 13.1% 13.1%
% of pretax income from new factory
% of pretax income from other activities

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APPENDIX 5: Revenue Projection

Fiscal year 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E
All figures in VND'000,000

Avg selling price per unit growth rate 9.13% 17.26% 9.00% 8.00% 8.00% 7.00% 7.00% 7.00%
Volume growth rate 1.09% 3.23% 5.00% 8.00% 12.00% 11.00% 9.00% 8.00%
Sales Growth rate 10.32% 21.05% 14.45% 16.64% 20.96% 18.77% 16.63% 15.56%
Vitamin 171,000 207,000 236,912 276,334 334,253 396,992 463,012 535,057

Avg selling price per unit growth rate 6.67% 12.24% 11.00% 11.00% 9.00% 9.00% 9.00% 9.00%
Volume growth rate 2.85% 16.85% 3.00% 5.00% 10.00% 9.00% 7.00% 7.00%
Sales Growth rate 9.70% 31.15% 14.33% 16.55% 19.90% 18.81% 16.63% 16.63%
ETN 260,000 341,000 389,865 454,388 544,811 647,290 754,935 880,480

Avg selling price per unit growth rate 9.98% 6.24% 9.00% 7.50% 5.50% 5.50% 5.00% 5.00%
Volume growth rate 4.69% 12.24% 4.00% 7.00% 12.00% 12.00% 10.00% 8.00%
Sales Growth rate 15.13% 19.24% 13.36% 15.03% 18.16% 18.16% 15.50% 13.40%
Antibiotic 738,000 880,000 997,568 1,147,453 1,355,830 1,602,049 1,850,366 2,098,315

Avg selling price per unit growth rate 2.38% 9.16% 11.00% 9.00% 8.00% 8.00% 7.00% 7.00%
Volume growth rate 1.28% 2.11% 2.00% 5.00% 10.00% 9.00% 7.00% 5.00%
Sales Growth rate 3.69% 11.46% 13.22% 14.45% 18.80% 17.72% 14.49% 12.35%
Analgesic 253,000 282,000 319,280 365,416 434,115 511,040 585,090 657,348

Avg selling price per unit growth rate 29.73% 8.31% 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Volume growth rate -10.63% 4.07% 5.00% 6.00% 10.00% 10.00% 7.00% 5.00%
Sales Growth rate 15.94% 12.71% 17.60% 18.72% 23.20% 23.20% 19.84% 17.60%
Other medicines 296,000 333,000 391,608 464,917 572,778 705,662 845,666 994,503

Medicine sales 1,718,000 2,043,000 2,335,233 2,708,508 3,241,787 3,863,033 4,499,068 5,165,703
Growth rate 12.07% 18.92% 14.30% 15.98% 19.69% 19.16% 16.46% 14.82%

Non-medical Sales/Total Revenue 15.57% 17.95% 19.00% 19.00% 18.00% 17.50% 17.50% 17.00%
Non-medical Sales 317,000 447,000 547,771 635,329 711,612 819,431 954,348 1,058,036

Total Revenue 2,035,000 2,490,000 2,883,004 3,343,837 3,953,398 4,682,465 5,453,416 6,223,739
CAGR 16.49% 22.36% 15.78% 15.98% 18.23% 18.44% 16.46% 14.13%

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APPENDIX 6: Fixed Assets and Depreciation Projection

F2012 F2013 F2014 F2015 F2016 F2017


Existing Fixed Assets All figures in VND'000,000
Land 107,602 119,602 128,210 137,778 148,035 159,057
Buildings 102,817 132,817 162,817 187,817 204,099 222,880
FF&E 179,007 214,007 249,007 279,007 303,908 331,808
Others 143,353 168,353 193,353 218,353 237,688 259,524
In process 46,746 40,000 55,000 45,000 40,000 35,000
Ongoing 579,525 674,779 788,387 867,955 933,730 1,008,270
New factory 73,700 193,700 463,700 563,700 623,700 663,700
Total Existing Assets 653,225 868,479 1,252,087 1,431,655 1,557,430 1,671,970
New Additions to Assets
Land 12,000 8,608 9,568 10,257 11,022 11,843
Buildings 30,000 30,000 25,000 16,282 18,782 20,410
FFE 35,000 35,000 30,000 24,901 27,901 30,391
Others 25,000 25,000 25,000 19,335 21,835 23,769
In process (6,746) 15,000 (10,000) (5,000) (5,000) (5,000)
Ongoing 95,254 113,608 79,568 65,775 74,540 81,412
New factory 120,000 270,000 100,000 60,000 40,000
Total Additions to Assets 215,254 383,608 179,568 125,775 114,540 81,412
Total Assets
Land 119,602 128,210 137,778 148,035 159,057 170,900
Buildings 132,817 162,817 187,817 204,099 222,880 243,290
FF&E 214,007 249,007 279,007 303,908 331,808 362,199
Others 168,353 193,353 218,353 237,688 259,524 283,292
In process 40,000 55,000 45,000 40,000 35,000 30,000
Ongoing 674,779 788,387 867,955 933,730 1,008,270 1,089,682
New factory 193,700 463,700 563,700 623,700 663,700 663,700
Total Existing Assets 868,479 1,252,087 1,431,655 1,557,430 1,671,970 1,753,382

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F2012 F2013 F2014 F2015 F2016 F2017
Average Depreciation Period (yrs) All figures in VND'000,000
Land - - - - - -
Buildings 12 12 12 12 12 12
FF&E 9 9 9 9 9 9
Others 9.5 9.5 9.5 9.5 9.5 9.5
New factory 10.0 10.0 10.0 10.0
Annual Depreciation
Land 1,000 1,000 1,000 1,000 1,000 1,000
Buildings 11,068 13,568 15,651 17,008 18,573 20,274
FF&E 23,779 27,667 31,001 33,768 36,868 40,244
Others 17,721 20,353 22,985 25,020 27,318 29,820
New factory 56,370 62,370 66,370 66,370
Total Annual Depreciation 53,568 62,588 127,007 139,166 150,129 157,709
Accumulated Depreciation
Land 5,079 6,079 7,079 8,079 9,079 10,079
Buildings 41,180 54,748 70,400 87,408 105,981 126,255
FF&E 119,384 147,051 178,052 211,819 248,687 288,931
Others 81,697 102,050 125,035 150,055 177,373 207,193
New factory 56,370 118,740 185,110 251,480
Total Accumulated Depreciation 247,340 309,928 436,935 576,101 726,230 883,939
Net Balance
Land 114,523 122,131 130,699 139,956 149,978 160,821
Buildings 91,637 108,069 117,417 116,691 116,899 117,035
FF&E 94,623 101,956 100,955 92,088 83,122 73,268
Others 86,656 91,303 93,318 87,634 82,151 76,099
in process 40,000 55,000 45,000 40,000 35,000 30,000
New factory 193,700 463,700 507,330 504,960 478,590 412,220
Total Balance 621,139 942,159 994,720 981,329 945,740 869,443

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APPENDIX 7: Financial Ratios

2007 2008 2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
Return on Equity 19.10% 41.40% 32.93% 30.98% 27.90% 24.38% 21.64% 21.54% 22.62% 22.77%
Return on Assets 12.73% 27.43% 22.81% 21.78% 19.71% 17.67% 15.83% 15.79% 16.60% 16.71%
Return in invested capital 23.63% 44.30% 33.31% 34.22% 31.51% 27.61% 27.59% 26.31% 26.91% 26.17%

Total Gross Margin 52.63% 53.25% 52.90% 50.06% 48.53% 46.00% 45.00% 45.00% 44.50% 44.00% 43.00%
SG&A / Net Sales 41.72% 42.10% 29.97% 30.40% 29.87% 30.50% 30.50% 31.50% 32.00% 31.50% 31.00%
EBITDA margin 12.81% 11.63% 24.63% 21.70% 20.67% 17.36% 16.37% 16.71% 15.47% 15.25% 14.53%
Operating Margin 10.91% 11.15% 22.93% 19.66% 18.66% 15.50% 14.50% 13.50% 12.50% 12.50% 12.00%
Net Margin 10.01% 8.67% 20.45% 18.73% 16.68% 15.13% 14.19% 12.79% 12.36% 12.58% 12.43%
Effective tax rate 0.00% 11.14% 12.82% 12.20% 15.36% 13.98% 14.02% 17.50% 15.00% 12.50% 10.00%
Basic Weighted Average Share 32.13 63.99 50.28 64.15 64.92 64.92 64.92 64.92 64.92 64.92 64.92
EPS adjusted (VND) 1,958 1,985 5,501 5,872 6,401 6,720 7,312 7,792 8,922 10,572 11,920
DPS adjusted (VND) 230 1,078 462 1,030 4,027 1,478 731 2,338 3,569 5,286 5,960
Growth Rates (Yr/Yr)

Revenue - Total 17.03% 17.54% 16.52% 22.43% 15.78% 15.98% 18.23% 18.44% 16.47% 14.13%
Operating income 19.57% 141.76% -0.10% 16.19% -3.81% 8.50% 10.08% 9.67% 16.47% 9.56%
Net Income 1.39% 177.10% 6.75% 9.02% 4.98% 8.81% 6.57% 14.49% 18.50% 12.76%

2007 2008 2009 2010 2011 F2012 F2013 F2014 F2015 F2016 F2017
Efficiency and Profitability Ratios
Asset Turnover 1.47x 1.34x 1.22x 1.31x 1.36x 1.35x 1.24x 1.28x 1.32x 1.34x
Fixed Asset Turnover 6.52x 7.58x 7.49x 6.50x 5.34x 4.28x 4.08x 4.74x 5.66x 6.86x
A/R (Net) DSO 68 53 52 55 50 53.0 55.0 60.0 65.0 63.0 60.0
AR Turnover 5.3x 6.9x 7.0x 6.6x 7.4x 6.9x 6.6x 6.1x 5.6x 5.8x 6.1x
Inventory turnover 2.59x 2.25x 2.68x 2.93x 2.49x 2.61x 2.52x 2.43x 2.35x 2.32x 2.28x
Inventory days 141 162 136 125 146 140.0 145.0 150.0 155.0 157.0 160.0
PP&E, net/ sales 22.7% 20.9% 20.0% 22.1% 26.2% 30.1% 37.4% 36.2% 33.2% 30.6% 28.2%
AP Days Outstanding 35 36 32 31 35 33.0 30.0 30.0 27.0 27.0 25.0
AP/Sales 4.5% 4.6% 4.1% 4.2% 5.0% 4.9% 4.5% 4.5% 4.1% 4.1% 3.9%
Net (non-cash) working capital 238,954 210,513 204,366 340,762 500,700 602,228 796,366 1,037,428 1,403,919 1,644,641 1,956,789
Change in Working Capital -28,442 -6,146 136,395 159,938 261,466 295,666 241,063 366,491 240,722 312,148
Net Working Capital % of Revenu 18.8% 14.2% 11.7% 16.7% 20.1% 20.9% 23.8% 26.2% 30.0% 30.1% 31.4%
Working Capital Cycle (Days) 175 180 157 149 161 160.0 170.0 180.0 193.0 193.0 195.0
Leverage and Liquidity Ratios

Debt to Equity (%) 6.8% 3.4% 8.6% 5.6% 5.7% 5.0% 4.7% 5.1% 4.2% 3.5% 3.4%
Current Ratio (x) 2.31x 2.13x 2.52x 3.06x 2.74x 2.75x 2.68x 2.72x 2.92x 2.99x 3.17x
Acid Test Ratio (x) 1.46x 1.17x 1.77x 2.01x 1.48x 1.51x 1.34x 1.36x 1.39x 1.40x 1.46x

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APPENDIX 8: FCFE Valuation Model

Calculate Requrires Rate of Return on Equity (Re)


Risk-free rate 10.1%By Bloomberg
Risk Premium 8.8%By Bloomberg
Beta 0.6Last 3-years adjusted Beta by Bloomberg
Re 15.6%
Calculate perpetual growth rate

Some companies in Indonesia and Malaysia Retention ROE (average Growth rate Weight
ratio (average last 5 years)
last 5 years)
Taisho Pharma Corp. (Indonesia) 24.0% 43.5% 10.4%
Darya Varia Laboratoria Ltd (Indonesia) 63.9% 14.6% 9.4%
Pharmaniaga Berhad Corp. (Malaysia) 57.8% 13.0% 7.5%
CCM Doupharma Ltd (Malaysia) 24.8% 21.0% 5.2%
Average 8.1% 40%
Company expected
Expected long-term ROE 20%
Expected Retention Ratio 40%
Expected Perpetual Growth rate 8.00% 60%

Perpetual Growth rate 8.05%

(All figures in VND'000,000)


Fiscal year 2013 2014 2015 2016 2017
Net income 474,661 505,850 579,150 686,271 773,810
Depreciation and Amortization 62,588 127,007 139,166 150,129 157,709
Change in Working Capital (194,138) (241,063) (366,491) (240,722) (312,148)
Capital Expenditure (392,040) (190,722) (139,115) (128,647) (95,508)
Net Borrowings 14,645 27,700 (10,292) (6,340) 7,706
FCFE (34,285) 228,773 202,418 460,691 531,569
Discount Factor 1.0000 0.8654 0.7489 0.6481 0.5608
PV (34,285) 197,976 151,588 298,560 298,119
Total PV of Free Cash Flow to Equity 5,173,057
Number of shares Outstanding (million) 64.92
Target Price (VND) 79,690

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APPENDIX 9: P/E Multiple Valuation

1. Calculate avarage P/E of comparable companies in Indonesia, Malaysia and Vietnam


Indonesia and Malaysia
Taisho Pharma Corp. (Indonesia) 12.17 by Bloomberg
Darya Varia Laboratoria Ltd (Indonesia) 10.61 by Bloomberg
Pharmaniaga Berhad Corp. (Malaysia) 12.75 by Bloomberg
CCM Doupharma Ltd (Malaysia) 10.79 by Bloomberg
Average P/E 11.58
Vietnam

Imexpharm 8.1 by Bloomberg


Traphaco 11.08 by Bloomberg
OPC 9.58 by Bloomberg
DHG 9.9 by Bloomberg
Average P/E 9.67

Weighting of two P/E sources


Source Weight
1. Average P/E in Indonesia and Malaysia 25%
2. Average P/E in Vietnam 75%
P/E 10.14

Fiscal Year 2013


(All figures in VND)
Projected transation P/E 10.14
Earning Per Share 7,312
Target Price (VND) 74,171

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APPENDIX 10: Sensitivity Analysis

Target price with DCF method


All figures in VND
Rate (g)

Cost of Equity ( Re)


14.1% 14.6% 15.1% 15.6% 16.1% 16.6% 17.1%
6.5% 82,783 77,260 72,387 68,056 64,183 60,699 57,548
Growth

7.0% 87,959 81,734 76,287 71,481 67,210 63,390 59,953


7.5% 93,924 86,843 80,703 75,331 70,590 66,378 62,610
8.0% 9.5%
100,875 130,879
92,730 117,379
85,745 79,690
106,316 97,086
74,390 89,268
69,715 82,564
65,559 76,751
Perpetual

8.5% 109,076 99,590 91,556 84,667 78,693 73,466 68,854


9.0% 118,899 107,684 98,327 90,403 83,606 77,714 72,557

Target price with PE method


All figure in VND

PE 8.64 9.14 9.64 10.14 10.64 11.14 11.64


Target price 63203 66859 70515 74171 77827 81483 85139

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APPENDIX 11: Pharmaceutical development progress

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APPENDIX 12: Health Care Spending in Percentage of GDP

Source: http://chartsbin.com

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APPENDIX 13: Vietnam Pharmaceutical expenditure per capital

Source: Vietnam Ministry of Health

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APPENDIX 14: Vietnam Burden of Disease projection from 2005 to 2030

Source: BMI’s estimate

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APPENDIX 15: Vietnam medicine revenue ($Mln)

IBM forecast % total % total CARG Positive factors Negative factors


(USD market market 2010-
currency) 2010 2020 2020

Patented 23.4% 17.8% 12.8% Gradual reduction of tariffs on pharmaceutical Counterfeit drugs
drugs products Global economic slowdown in 2009
Added foreign competitors force domestic companies fueled the demand for cheaper drugs
to improve efficiency Commission put many patented products
Specialty medicines will be the key growth factor. beyond the budgets of the majority
population of VN.
Generic 49.4% 55.8% 15.1% The Health Ministry promotes the use of Widespread belief that generic drugs are
drugs domestically-produced products and releases inferior to patented products.
guidelines that all hospitals are asked to prescribe
domestic pharmaceuticals.
Low consumer purchasing power.

OTC 27.2% 26.4% 12.6% Tighten regulations: ban on the sales of prescription Raising value of the prescription sector.
medicines drugs without the consent of doctors. Stricter dispensing control.
Consumption habit of Vietnamese: 45% likely to take The market are saturated with unlicensed
an OTC drug for minor ailment as soon as symptoms
are present. import offerings.

Overall 100% 100% 13.8% Increased pharmaceutical consumption from such a Lack of control and regulatory bias
market low level (26USD per capita per year) against foreign products.
Expanding population R&D of domestic companies still cannot
Higher level of health awareness be the spearhead factor for the industry.
Increased access to pharmaceuticals

Source: BMI’s estimate

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APPENDIX 16: Revenue breakdown by area

Source: DHG’s annual report 2011

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APPENDIX 17: DHG’s history

Source: DHG’s annual report 2011

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APPENDIX 18: Distribution channel

Source: DHG’s annual report 2011

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APPENDIX 19: DHG revenue breakdown 2006-2011
DHG revenue breakdown 2006-2011 DHG sales volume breakdown 2006-2011

Source: DHG’s annual reports Source: DHG’s annual reports

% revenue % sales volume

High value group 60% 25%

Low value group 40% 75%

High value group: accounts for about 25% volume but contributes about 60% revenue and this group will still predominate
DHG revenue in the future. This group includes antibiotics, antifungal, antiparasite products and other extremely high value products such as
diabetic, cardiovascular, nervous system, hepatic, biliary products (the Others group). We consider a strong potential development for this group
because antibiotics, antifungal, antiparasite group is the key revenue generating factor with more than 40% of the total revenue and HDG still
focuses on this group with new competitive products. Moreover, the Others group has been increased dramatically in the recent years with a
CAGR of 30% in 2006-2011. This is due to the new products that are welcomed by the market and it will be the factor that pushes the company
revenue in the upcoming years.

Low value group: accounts for about 75% volume but contributes just about 40% revenue and it has a tendency to be smaller
as some groups of products, such as Vitamin-mineral, are moving to the high value market. In general, this group still maintains a certain
growth as the OTC market is quite sustainable and bad environment conditions lead to a greater probability of getting common illnesses.
However, DHG also has its strategy to improve more valuable products , especially in the Vitamins-minerals group. This strategy is applied
successfully as the sales volume decreased continuously while the revenue still maintain.

The high value group will lead the company’s future revenue as it has potential revenue increasing factors that are unique well-
known products and lower price in comparison with that of foreign companies.

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APPENDIX 20: DHG revenue breakdown 2012-2017

Source: Team’s estimate

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APPENDIX 21: Extended Dupont analysis

In terms of ROE, DHG is still the leader, with a ROE of 31.0% (2011) versus the 9-company averages of 23%. This ratio remained over 30% with no
debt as it has for the last 3 years.
Tax burden. Net income/EBT ratio tends to decrease slightly in period 2008-2011. This means the burden of tax has affected somewhat to ROE. But
from 2013, when the new factory is in operation, the company will receive the incentive policy that cuts tax rate in 15 years.
Interest burden. DHG is not subject to the interest burden. The company even earned interst from its cash surplus. However, this kind of income
tended to decrease in 2011. Moreover, with the need of spending cash on distribution system and the new factory, this earnings would be down in 2012
and 2013. In long-term, the money invested in core business activities is expected to be more sustainable and make more profit
EBIT margin. DHG’s EBIT margin have been shrinking slightly in the past five years due to the impacts of government policy and VND devaluation.
However, it is still the highest and the most attractive amongst 15 domestic companies in Vietnam. The decline in margins is concerning but we expect
this trend has come to an end. DHG should be able to increase its margins from 2013 when the new factory is put into operation.
Asset turnover. In 2011, both Asset turnover ratio and total asset are increased. This indicates the company has used its asset more efficiently.
Financial leverage. DHG has chosen the safe way by financing its resources with the percentage of 70% is equity.

Source: DHG’s annual report and team’s analysis

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APPENDIX 22: Risk matrix

To boost the revenue in the period of 2012-2017, DHG will increase credit sell and untie the collection period. So, it increase the credit risk
of DHG. However, applying ERP will minimize this risk by tighter management the inventory at agencies.

Just 0.09% of medicine on the market is counterfeit but more than 1% of them are unqualified.. Before the strong competition of foreign
terms, the quality - scandal such as unqualified product may affect to the brand of DHG and decrease its revenue. However, the development in
“perfect management” to satisfy the national pharmaceutical standard will help DHG reduce this risk.

Imported more than 80% of raw material, DHG is in passive position against foreign suppliers. However, the careful choice and remaining
the good relationship with suppliers will help DHG decrease the affect of supply chain risk by the intermediate.

Moreover, the increase in product capacity since the complete of new factory will increase the lack of raw material. In the short term, if the
demand of material increase more than 17% per year, DHG cannot find the supplier who can satisfy the demand at the reasonable cost. This means
DHG will have to increase the COGS and decrease gross margin or increase the number of output slower and satisfy with the low growth rate of
revenue. Both of them affect major to Income of DHG. However, until 2014 when the new factory complete, DHG has found the new supplier to
increase the raw materials which help it decrease this risk.

Rare
Possible
Probable Stronger competition Increase raw material cost

Devaluation of VND

Low GDP growth rate Change in consumption habit


Credit risk
Delay operation of new factory Tighter regulation
Management risk

Shortage of material
Quality Scandal
Supply chain risk Decrease in demand
Minor Intermediate Major

Source: Author’s estimation

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APPENDIX 23: SWOT analysis

Source: Team’s analysis

STRENGTH WEAKNESS
-The historical brand and being one of leading position -The shortage of supplies: 80% of raw material is
-Large scale and expanding capacity imported -Most products are generic form.
-National wide distribution network and suitable Marketing strategy -Production capacity does not meet the demand
-Strong financial advantage and more development in R&D activities -The slow disbursement may delay the plan operating the new factory.
-Professional dedicated management board and high quality labor. -The lack of effective R&D activities than the foreign terms may
reduce profit margin.
-Data processing system is simple

OPPORTUNITY THREAT
-Government strategy to develop pharmaceutical industry and satisfy -The increase in COGS due to rising trend of material
popular demand international market and uncontrollable exchange rate fluctuation
-Increase in Vietnam popular and living standard that increase - The disloyal customers
spending for health care
-Stronger competitive from new foreign access
-Domestic pharmaceutical terms have right to distribute directly
- Fierce struggle between domestic companies on selling price
and distribution network
-The stricter management in seling price and operating conditions

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APPENDIX 24: Porter’s Five Forces analysis

BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF CUSTOMERS


-DHG is in passive position against foreign suppliers: 80% -Disloyal customers: doctor, pharmacist, etc. easily change
raw material is imported. supplier if they earn the higher commission.
-Rising trend of material price because of the lack of
-Changing consumer habit: prefer to functional products
supplier increases COGS and decreases margin.
than medicine.
-Owned material zone is insignificant.

COMPETITIVE RIVALRY

-Strong competition in generic segment

-Fierce struggle between domestic companies on selling price


and distribution network such as Traphaco, Domesco, etc.

-Aggressive competition from foreign brand such as Sanofi,


Novartis, etc.

-The existence uncontrolled of counterfeit

THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTE

-High gross margin attracts more entrants, specially the -Medicine is essential product that cannot completely
foreign terms. replace.
-Import tax decrease because of Joining WTO committee. -The appear diverse dietary supplements threat to
-New foreign entrants have famous brand and R&D pharmaceutical industry.
advantage.

Source: Team’s analysis

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APPENDIX 25: Marketing activities

MARKETING
BM (Brand Manager)

ACTIVITIES Manage 11 Brands


Haginat – Klamentin
Hapacol
Eugica
Davita Bone
Unikids
Spivital
Naturenz
Apitim
Eyelight
Glumefrom

CM (Category Manager)

Manage 10 Product Categories


MARKETING
Antibiotics Cate
Analgesics – Antipyretics Cate
DIRECTOR Musculoskeleta Cate
Respiratory system Cate
Nutritional Cate
Hepatic and Biliary Cate
Cardiovascular Cate
Ophthalmic & Nervous system
Cate
Digestive Cate
Skin care Cate

Event
Organize events

Source: DHG’s annual report And care of customers

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DISCLOSURES:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.

The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.

Ratings guide: A BUY rating is given when the security is expected to deliver an absolute return of 15% or greater over the next 12 month
period, and recommend that the investors take a position above the security’s weight in the VN-Index, or any other relevant index. A SELL
rating is given when the security is expected to deliver negative returns over the next 12 months, while a HOLD rating implies flat returns over
the next 12 months.
Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to
be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a
recommendation by any individual affiliated with the Vietnam CFA Institute or the CFA Institute Research Challenge with regard to this
company’s stock.

CFA Institute Research Challenge

Vietnam CFA Institute Research Challenge| Page 37