k48_anh 2 Clctcnh_le Anh Minh

8/13/2019 k48_anh 2 Clctcnh_le Anh Minh

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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 Definitions of equity securities ........................................................ 7

1.1.2 Types of equity securities ................................................................ 7

1.2 Valuation process .................................................................................... 8

1.2.1 Definitions of value in equity valuation........................................... 8

1.2.2 Applications of Equity Valuation .................................................. 10

1.2.3 Valuation process ........................................................................... 11

1.3 Introduction to some popular valuation models ................................... 12

1.3.1 CAPM and APT ............................................................................. 12

1.3.2 Discounted cash flow model .......................................................... 14

CHAPTER 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 Analyzing dairy industry in Vietnam ............................................. 22

2.1.2 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

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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 VNM valuation .............................................................................. 39

3.1.2 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 Some limitations of my models ..................................................... 57

3.3.2 Suggestions to improve the possibility of applying valuation models

in Vietnam 57

CONCLUSION ................................................................................................. 59

REFERENCES ................................................................................................. 60

APPENDIX ....................................................................................................... 62

1. Data inputs for CAPM: ......................................................................... 62

2. Data inputs for APT: ............................................................................. 63

2.1 Tests of violations of regression assumption ........................................ 65

2.1.1 Required return of VNM based on CAPM .................................... 65

2.1.2 Required return of HNM based on CAPM .................................... 66

2.1.3 Required return of HNM based on APT model ............................. 67

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

3.1 VNM reports ......................................................................................... 68

3.2 HNM report........................................................................................... 71

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ABBREVIATIONS

APT : Arbitrage pricing theory

BMI : Business Monitor International

CAPEX : Capital expenditure

CAPM : Capital asset pricing model

EBIT : Earnings before interest, taxes

EBITDA : Earnings before interest, taxes, and depreciation, amortization

EBT : Earnings before tax

EMI : Euromonitor International

EPS : Earning per share

DDM : Discounted dividend model

FAO : Food and Agriculture Organization

FCFE : Free cash flow to equity

FCFF : Free cash flow to firm

GDP : Gross Domestic Product

GGM : Gordon Growth Model

MARD : Ministry of Agriculture and Rural Development

RIM : Residual income model

VND : Vietnam Dong (National Currency Unit)

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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

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INTRODUCTION

1. The rationale of research topic:

Nowadays, determining the value of a particular asset is perplexing questionsfor 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 dairyindustry.

Applying equity model to estimate their value of ownership stake in order tomake investment decision.

Giving suggestions to improve the possibility of applying valuation inVietnam.

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


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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 ThesisThe 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 dairyindustry in Vietnam

Chapter 3: Conclusions and suggestions to improve the possibility of applyingvaluation model in Vietnam.

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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 sharesPreference 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.

1.2Valuation process1.2.1 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 value8


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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 ProgramCurriculum 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 ValueA 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 concernassumption 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 ValueFair 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,

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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 ValuationIn 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 thepurchase, 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 containinvestors 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.

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- Valuations of business strategies. Investors always want to know whetherthe 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 approachprovides 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 todetermine 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, executivecompensation such as stock grants or stock options are estimate and

expensed in their financial reports.

1.2.3 Valuation processValuation 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, togetherwith 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.

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- Selecting the appropriate valuation model. Depending on thecharacteristics 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 modelbe:

Consistent with the features of the firm being valued;

Appropriate given the availability and quality of information;

and

Suitable for the purpose of valuation, including the analyst's

ownership perspective.

- Converting forecasts to a valuation. Beyond mechanically obtaining theoutput of valuation models, estimating value involves judgment.

- Applying the valuation conclusions. Depending on the purpose, an analystmay 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)

1.3Introduction to some popular valuation models1.3.1 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.

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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 sensitivityof the expected excess asset returns to the expectedexcess 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 assetsreturns on the indexs returns.

1.3.1.2Arbitrage Pricing Theory and the Factor ModelIn 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

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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) = the expected return to asset i

Rf = the risk free rate

j = the risk factor for factor j

i,j = the sensitivity of the asset to factor j

k = 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 single-

factor 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 model14


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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 ofvaluation 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 modelThe 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.

0 = (1+)=1 + (1+)

(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.

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- Dividend growth from one of models using stylized growth pattern that Ilisted above

- The market price of share of a particular issuer in the final year ( terminalshare 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 periodwith 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)

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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 FCFFThe FCFF valuation approach estimates the value of the firm as the present value

of future FCFF discounted at the weighted average cost of capital:

= (1 +)

=1

The formula for WACC is

= ()() +() (1)

+()

() + ()

Present Value of FCFEThe value of equity can also be found by discounting FCFE at the required rate

of return on equity, r:

= (1 + )

=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 modelAs GGM model that has been mentioned above, a constant growth will assume

FCFE to increase at a constant level:

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FCFFt= FCFFt-1(1+g)

Firm value will be calculated as follows:

= 1

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

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

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/free-

cash-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 long-

term 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 FCFFFCFE and FCFF are related to each other as follows:

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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

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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 onVietnam stock exchange Vietnam dairy market growth

2.1.1 Analyzing dairy industry in Vietnam2.1.1.1Vietnam 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

Source: Ministry of Agriculture and Rural Development (MARD)

12.2

12.7

14

14.915.1

10

11

12

13

14

15

16

2005 2006 2007 2008 2009

Consmption per capita (kg) Linear (Consmption per capita (kg))

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Figure 2.2: Milk consumption per capita in some regions

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

103.6

249.6

66.9

15.125.6

0

50

100

150

200

250

300

Global Developed

Countries

Developing

countries

Vietnam Asia

Milk consuption per capita in some regions (kg)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Processed liquid milk production, tonnes

Processed liquid milk production, tonnes, % change yoy

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Figure 2.4: Processed liquid milks sales in Vietnam

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 marketsA 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 impactof the governments campaign encouraging people to use domestic products along

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0

50,000

100,000

150,000

200,000

250,000

300,000

2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Chart Title

Processed liquid milk sales, tonnes Processed liquid milk sales, tonnes, % change y-o-y

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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

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

291.2

327.3

362.3

399

435.3

200

250

300

350

400

450

2008 2009 2010 2011 2012

Sales of drinking milk products: Volume 2008-2012 ( '000 tonnes)

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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, frommaking 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

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, premiumbrands are seen as providing better nutrition. Thus, consumers are willing

2,250.7

2,691.0

3,247.0

3,973.6

4,884.8

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2008 2009 2010 2011 2012

Sales of Yoghurt and Sour Milk Products (VND bn)

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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 ofpeople, 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 tosales as it helps products become more accessible to consumers.

- Price: For people with middle-incomes and low-incomes, demand ishighly 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

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

44.6 48.352.3 54.1

56.3 57.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012

Vietnam Dairy Products JSC (Vinamilk) Royal Friesland Campina NV

Nestl SA Hanoi Milk JSC

Mead Johnson Nutrition Co Fonterra Co-operative Group

Others

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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 anoutstanding 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

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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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Figure 2.8: Net sales and EBT of VNM

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

Source: Companys report

8,381

10,614

15,753

21,627

26,562

-

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010 2011 2012

Net sales Earnings before income tax Linear (Net sales)

21%

36%

22%

18%

3%

Powdered Milk Liquid Milk Condensed Milk Yogurt Others

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- 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.

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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

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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. In2012, 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

Source: Company report

2.2Applying valuation models to estimate stock price of Vinamilk andHanoimilk

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

363

275

310

272264

(40)

(30)

(20)

(10)

-

10

20

-

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012

Net sales Earnings before income tax

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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 traditionalchoice of evaluating stock that listed on Vietnam Stock Exchange.

- The length of data period: In this case, to better compared the results fromAPT 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):

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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 highinflation 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 shockincrease of crude oil price usually substantially affects the economy.

Thus, we expect return of VNM may be affected by this macro factor.

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- The industry index is one of macroeconomic factors that is critical to thecountrys 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 companiesequity:

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 offree cash flow to equity.

- The companys free cash flows align with the companys profitabilitywithin a forecast horizon.

- The capital structure of 2 companies are stable through the observedperiod.

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

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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

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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: 0.50122. Based on the adjusted long term beta: 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 ModelAPT 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


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.

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Table 3.2: APT first result of VNM


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


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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 FCFEThree-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) Analytic stage CAGR = 26.7%

Stage 2 (2018-2027) Convergence stage CAGR = 10%

Stage 3 (2028 -

perpetuity)

Maturity with constant

growth

CAGR = 3%


The DCF-derived price target for Vinamilk is VND125,820at the end of 2013.

It incorporates in some following assumptions:

Sales: Sales are projected until 2018 on a per-product-unit per-year basis basedon 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.

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

Source: Company report and author estimates

Costs: Costs are broken down and forecasted separately. Imported powderedmilk 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 APEX 2013-2016

Vietnam Milk Factory Project 283

Dielac II Milk Factory Project 379

Danang Milk Factory Project 40

Offices, Warehouses 291

IT System, Factory, Distribution 727

LAMSONMILK 25

VN COW 1323

Others 98

Total 3166

Source: Company Reports

CAPEX: The total CAPEX of VND 3166B is outlined in the companys planfor the period from 2013 to 2016. After that period, the total CAPEX will

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,00080,000,000

90,000,000

2011 2012 2013E 2014E 2015E 2016E 2017E

Chart Title

Net sales EBIT

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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 byboth 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 2000-

2013, 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 conservativeview 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 2013 2014 2015 2016 2017

Net Earning 8,184,319 10,483,184 13,217,867 16,448,138 20,066,721

(+) Depreciation 561,690 588,784 613,995 633,519 642,430

(-) Change in WC 1,305,352 3,621,807 4,196,118 5,046,302 6,128,852

(-) FC Investment 1,128,780 1,113,351 985,146 703,664 226,610

(+) Net debt - - - - -

FCFE 2013-2017 6,311,877 6,336,811 8,650,597 11,331,691 14,353,688

PV of FCFE 5,396,611 4,632,293 7,396,201 6,055,434 12,272,305

FCFE Model 2018 2019 2020 2021 2022

FCFE 15,789,057 17,367,963 19,104,759 21,015,235 23,116,758

PV of FCFE 6,167,825 5,800,793 5,455,602 5,130,953 4,825,622

FCFE Model 2023 2024 2025 2026 2027

FCFE 25,428,434 27,971,277 30,768,405 33,845,246 37,229,770

PV of FCFE 4,538,462 4,268,389 4,014,388 3,775,501 3,550,831

Total PV of FCFE 83,281,210

PV of Terminal Value 26,198,822

Equity value 109,480,032

Number of share 834

Price 131,346


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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

Source: Cophieu68

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

May-12

Aug-12

Nov-12

Feb-13

HNM VN-Index

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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




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

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After all, according to CAPM, the required rate of return for HNM is estimated

as the following:

3. Based on the regression model: 20.9016%4. Based on the adjusted long term beta: 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)


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


Therefore, the finale is showed in the following:

Table 3.9: APT final result of HNM


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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)

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:

-

100,000,000,000

200,000,000,000

300,000,000,000

400,000,000,000

500,000,000,000

600,000,000,000

2011 2012 2013E 2014E 2015E 2016E 2017E

Forcast Sale

Net sales Gross profit

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

FCFE Model 2013 2014 2015 2016 2017

Net Earning 2,659 3,544 4,992 6,181 7,501

(+) Depreciation 10,483 11,547 12,765 14,167 15,771

(-) Change in WC 4,959 1,903 1,762 1,799 2,479

(-) FC Investment 7,063 11,035 14,074 16,840 19,512

(+) Net debt 5,307 5,939 6,807 7,820 8,984

FCFE 2013-2017 6,428 8,090 8,728 9,529 10,265

PV of FCFE 5,318 5,538 4,943 4,465 3,979

FCFE Model 2018 2019 2020 2021 2022

FCFE 10,984 11,753 12,576 13,456 14,398

PV of FCFE 3,522 3,118 2,760 2,444 2,163

FCFE Model 2023 2024 2025 2026 2027

FCFE 15,406 16,484 17,638 18,872 20,194

PV of FCFE 1,915 1,695 1,501 1,329 1,176

Total PV of FCFE 17,488

PV of Terminal Value 45,866

Equity value 63,354

Number of share outstanding 13

Price 5,068

Source: Authors estimate

The price of HNM that derived from this model is VND 5,068

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

FCFE Model 2013 2014 2015 2016 2017

Net Earning 2,659 3,544 4,992 6,181 7,501

(+) Depreciation 10,483 11,547 12,765 14,167 15,771

(-) Change in WC 4,959 1,903 1,762 1,799 2,479

(-) FC Investment 7,063 11,035 14,074 16,840 19,512

(+) Net debt 5,307 5,939 6,807 7,820 8,984

FCFE 2013-2017 6,428 8,090 8,728 9,529 10,265

PV of FCFE 5,353 5,611 5,041 4,583 4,112

FCFE Model 2018 2019 2020 2021 2022

FCFE 10,984 11,753 12,576 13,456 14,398

PV of FCFE 3,664 3,265 2,909 2,592 2,310

FCFE Model 2023 2024 2025 2026 2027

FCFE 15,406 16,484 17,638 18,872 20,194

PV of FCFE 2,058 1,834 1,634 1,456 1,298

Total PV of FCFE 47,720

PV of Terminal Value 19,537

Equity value 67,257

Number of shareoutstanding 13

Price 5,381

Source: Authors estimate

As it can be seen from this table, the price of HNM stock is estimated at VND

5,381.

3.2Assessing 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

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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 maylead 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.

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- Secondly, the stock prices derive from DCF model with 3 stages are VND131,346 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 toconclude 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% 18% 17% 16% 15% 14%

G

14% 119,012 129,367 141,462 155,714 172,671 193,073 217,935

13% 114,602 124,288 135,583 148,869 164,651 183,607 206,669

12% 110,465 119,528 130,078 142,466 157,155 174,768 196,159

11% 106,585 115,068 124,925 136,478 150,151 166,516 186,356

10% 102,946 110,889 120,101 130,877 143,607 158,815 177,217

9% 99,533 106,973 115,585 125,640 137,495 151,628 168,697

8% 96,332 103,305 111,359 120,744 131,786 144,923 160,757

7% 93,331 99,868 107,404 116,167 126,455 138,669 153,358

6% 90,516 96,649 103,703 111,888 121,477 132,835 146,465

5% 87,875 93,632 100,240 107,889 116,829 127,395 140,045


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

5,068

Ke

24% 23% 22% 21% 20% 19% 18%

g

10% 4,557 4,890 5,266 5,691 6,174 6,726 7,362

9% 4,389 4,702 5,054 5,451 5,902 6,417 7,009

8% 4,232 4,526 4,856 5,228 5,649 6,130 6,682

8% 4,158 4,443 4,762 5,122 5,530 5,994 6,526

7% 4,086 4,362 4,672 5,020 5,414 5,863 6,377

6% 3,950 4,209 4,500 4,826 5,195 5,614 6,093

4% 3,704 3,934 4,191 4,478 4,802 5,168 5,585

3% 3,593 3,811 4,052 4,322 4,625 4,968 5,358

2% 3,490 3,695 3,923 4,177 4,461 4,782 5,147

1% 3,394 3,588 3,802 4,041 4,309 4,610 4,951

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

Ke

5,381 23% 22% 21% 20% 19% 18% 17%

g

10% 4,890 5,266 5,691 6,174 6,726 7,362 8,100

9% 4,702 5,054 5,451 5,902 6,417 7,009 7,695

8% 4,526 4,856 5,228 5,649 6,130 6,682 7,319

7% 4,362 4,672 5,020 5,414 5,863 6,377 6,970

6% 4,209 4,500 4,826 5,195 5,614 6,093 6,645

5% 4,067 4,340 4,646 4,991 5,383 5,830 6,344

4% 3,934 4,191 4,478 4,802 5,168 5,585 6,064

3% 3,811 4,052 4,322 4,625 4,968 5,358 5,804

2% 3,695 3,923 4,177 4,461 4,782 5,147 5,563

1% 3,588 3,802 4,041 4,309 4,610 4,951 5,339


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3.3Limitations and suggestions to improve the possibility of applyingvaluation 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 factorslike 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 Vietnamesegovernment 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. InVietnam 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 partlybecause 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 inVietnam

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

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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 state-

owned 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 inVietnam 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, SecondEdition, 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.

Equit

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