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2012

Duoc Hau Giang_DHG Stock Analysis


By Nguyen Mai Phuong
Student ID: CQ502065 Advanced in Finance K50

Portfolio Management Hanoi 5/25/2012

I. Company Introduction
1. General Information Vietnamese name English Name Abbreviation Stock code Head office Market capitalization Outstanding shares Listed date Website 2. Brief History Establishment: Precursor of DHG Pharma was 2/9 Pharmaceutical Factory and was founded on September 2nd 1974. On 02 September 1974, the Company was changed into a Joint-stock Company with the initial charter capital was 80 billion VND. Increase in charter capita Time Aug/2007 Dec/2007 Dec/2009 Dec/2010 Charter capital before increased 80.000.000 100.000.000 200.000.000 266.629.620 Added amount 20.000.000 100.000.000 66.629.620 2.500.000 Charter capital after increased 100.000.000 200.000.000 266.629.620 269.129.620 Cng ty C phn Dc Hu Giang DHG Pharmaceutical Joint-Stock Company DHG PHARMA DHG 288 Bis Nguyen Van Cu, An Hoa Ward, Ninh Kieu District, Cantho City VND 3,909.98 billion 65,166,299 shares 01/12/2006 http://www.dhgpharma.com.vn

Milestones 1996: The first year that DHG Pharmas products was elected as Vietnam High Quality Goods by customers. (15 years consecutive). The first year that the factories complied with the GMP standard. The first year that DHG Pharma being the leader of Vietnam pharmaceutical industry until now. 2004: Equitization 2006: DHG being listed on HOSE

3. Business Scope Pharmaceutical products manufacturing Export of pharmaceutical materials and pharmaceutical products Import of drug manufacturing equipment, pharmaceutical products and medical equipment Production and export of processed food items Printing packages Trading of foreign currencies

Resembling, installing and repair of electrical products Travel services and inbound transportation

II. Financial Performance


1. Business Performance 2008 2009 1,518.4 1,770.3 Revenue (bil VND) 19.6 16.6 % change 130 362.3 Net income (bil VND) 1.3 178.7 % change 6,443.4 13,392 EPS 10.1 4.85 PE (x) 19.1 41.7 ROE (%) For more financial ratios: look at appendix 2010 2,052.2 15.95 383.3 5.7 5,872.1 11.07 33.2 2011 2,491.0 22.4 433.8 13.1 6,602 9.0 32.2 2012F 2,842.3 14.1 460 13.0 7,500 10.1 35.1

Despite the financial downturn recently, DHG enjoyed a consistently increasing revenue and net income.in 2011, DHG had impressive growth in revenue and net profit for the shareholders of the parent company with an increase of 22.4% and 13.1%. The companys impressive revenue growth is due to 1) increase production capacity to 406 billion product units, up 23% over the same period last year; 2) sales promotion strategy was launched earlier than usual and 3) increased average selling prices by 11.3%. DHG has improved productivity and cost savings in 2011 effectively by improving production processes. Specifically, the company has focused on reducing bottle neck production stages and concentrated on production line running certain product at each stage, therefore, reducing waiting time. This change increased the production volume by 23%. The increased production along with sales volume up by 10% and average selling prices increased by 11.3% has increased sales revenue by 22.4%, its highest level in the most recent four years. Although fluctuated, both PE and ROE are expected to increase in 2012. This is a good sign showing the improvement of the company. 2. Comparison With Other Companies In The Industry Stock Code DHG DMC IMP OPC TRA Industry Gross Profit Margin 49.3% 32.9% 48.8% 51.8% 33.2% 40.1% ROE 31.1% 16.8% 12.0% 16.4% 24.1% 25.8% ROA 22.8% 11.7% 9.8% 11.6% 13.5% 16.7%

Revenue growth rate of DHG was high (17-18% / year), and profit growth was even higher (2 times faster than revenue growth). This shows that revenue growth of DHG is accompanied by outstanding increase in operating efficiency. This is also reflected in gross margin which was always maintained at 52% / year, along with indicators of ROE, ROA increased continuously from 19.1% and 12.7% in 2008 increased to 31.1% and 22.8% of 2011, and highest among pharmaceutical companies listed and nearly double the industry average.

III. Macroeconomic Factors Influence On The Firms Performance


1. Government Policies Pharmaceutical industry is one of the strongest sectors affected by the administration of the state. The government has issued many legal documents to manage the industry including documents related to issues such as state policy in the field of pharmacy, state management of drug prices, requirements of trading drugs, management of special drugs, drug quality standards, drug-testing facility, etc. On 19.04.2007, the Ministry of Health issued Decision No. 27/2007/QD- BYT on the schedule about practicing the principles of "Good Manufacturing Practice" (GMP) and "Good Storage Practice" (GSP). According to this decision, since 01/07/2008, businesses which do not meet GMP and pharmaceutical import and export enterprises whose warehouse systems do not meet the GSP standard will have to stop production, import and export. There are also the regulations as Good Laboratory Practice (GLP), Good Distribution Practice (GDP), Good Practice Pharmacy (GPP). Only companies meeting the these standards of business can survive and grow. These rules will help create conditions for merger and acquisition of small pharmaceutical companies, promoting domestic businesses to improve, focus on developing in depth and to be able to compete with other multinational companies. 2. Exchange Rate Exchange rate fluctuations directly affect the company since the active pharmaceutical ingredients (API) for manufacturing tablets of the company are mostly imported from Spain, America, Italy, etcand account for as much as 40-60% of the selling prices. VND depreciation against other foreign currencies increases the costs for imported inputs. According to calculations, if exchange rate increases 3.36%, the cost of DHG will increased 1.344 - 2.016%. However, thanks to the governments effort to stabilize exchange rate at 20,828 VND/USD with a small margin of +/-1% recently, the effect was somehow reduced. 3. Inflation High inflation makes people more cautious in their investment and consumption. This makes many industries become more difficult. However, compared to other industries, the pharmaceutical industry is one of the less affected industry by the crisis, because this is one of the essential items for people.

IV. Industry Analysis


Vietnam Pharmaceutical And Healthcare Industry SWOT Strengths Significant growth potential, given a large and growing population. The governments commitment to developing the health sector. Sizeable local generic drugs sector encouraged by the government. Strong traditional medicines segment Under-developed market with low per capita spending on drugs. Counterfeit drugs account for a significant amount of market consumption. Little distinction made between prescription and over-the-counter (OTC) drugs, with most medicines available without a prescription. Complex drug pricing policy biased towards local drug producers. Import-reliant market, especially in terms of high-tech products and active

Weaknesses

Opportunities Threats

pharmaceutical ingredients (APIs), which makes it vulnerable to international currency movements. Underdeveloped primary care services, infrustructure and a shortage of trained pharmacists hamper access to medicines and product market penetration. The Association of South East Asian Nations (ASEAN) harmonization initiative, including the adoption of Western regulatory standards such as International Conference on Harmonization (ICH) and WHO guidelines. Introduction of five-year exclusivity for clinical dossier data encouraging research based multinationals. If investment can be found for technological improvements, then there is great potential in the traditional Chinese medicine (TCM) market, in addition to fledging biotechnology. WTO membership improves the trading climate and in the longer term, redresses pharmaceutical trade issues. Government resistance to aligning patent law fully with international standards deterring multinational sector expansion. Pharmaceutical price inflation threatens to put medicines out of reach of poor and therefore limit market volume growth. Legalization of parallel imports negatively impacting performance of patented drugs. New health insurance legislation decreasing patients access to medicines.

V. Stock Valuation
Applying Earning model in DHGs stock and firm valuation Using CAPM to observe required rate of return k for DHG: k = rf + [E(rM) rf] Input data: rf = 12,89 % ( 5 year bond yield in 2012) = 0.34 (source: cafef.vn) E(rM) rf = RMP = 12.1% We have the required rate of return: k = 12.89% + 0.71 * 12.1% = 21.481% In 2012, DHG has a dividend policy with 20% payout ratio, so the reinvestment rate = b =80% ROE2012 = The fair value of DHG: expected =
( )( )

= 23.9%

= 10.1x

EPS = 6,830 VND Expected or fair value of DHG = 6,830 *10.1 = 68,983 VND /share

The market value of OCH in current is 8.64 x (cafef) The market price at 25/5/2013 is VND 59,000.0

We have conclusion here fair > of DHG currently in the market . The fair price > the current market price. Decision: So, DHG stock has been underestimated in the market. This can conclude that in current, DHG has been undervalued and is a potential stock. Investors should hold or even buy the stocks.

Appendix
Financial Ratios Stock price over 2011 -2012