Chapter 1: Introduction
Background
Accurate company valuation is crucial in today's market economy, as it reflects the financial health of a business and aids internal managers in assessing their company's current status This valuation is also vital for lenders and investors when considering loans and investments In cases of mergers, acquisitions, or bankruptcy, firm valuation is indispensable for determining fair pricing Additionally, with the global growth of stock markets, proper valuation assists individual investors in making informed investment decisions Lastly, through the analysis and estimation of firm valuation, economists can gain a comprehensive understanding of the current market and economic conditions.
In a market economy, pricing needs are essential for understanding a company's true situation, influencing various business models In Vietnam, enterprise valuation primarily focuses on equitized companies and state-owned enterprises (SOEs).
In business operations, companies should prioritize enhancing their value, as this strategy fosters profit growth, strengthens their reputation, and boosts competitive advantages in the marketplace.
Valuing businesses in emerging markets like Vietnam presents significant challenges due to several factors The concept of firm valuation is relatively new, leading to a lack of consensus on valuation methods Different approaches or even variations of the same method can yield varying results, making it difficult to establish a universally accurate valuation model Additionally, the scarcity of historical financial data poses a challenge, as many enterprises in Vietnam are newly formed or in the process of restructuring to become privatized Consequently, there are often inaccuracies in the economic indicators required for accurate valuation.
The pharmaceutical industry has consistently attracted both domestic and international investors, driven by rising living standards and increasing demand Recently, this sector has shown remarkable growth, making it a promising opportunity for investors seeking potential returns.
Page | 10 pharmaceutical market is worth up to 1.2 trillion dollars and forecasts a 3-6% annual growth by the IQIVIA Research Institute (The Global Use of Medicine in 2019 and
As we look towards 2023, Vietnam's pharmaceutical industry is experiencing rapid growth, driven by heightened consumer awareness and rising incomes In 2018, the market size reached $5.9 billion, marking an 11.5% increase from the previous year, according to BMI Research This positions Vietnam as the second-largest pharmaceutical market in Southeast Asia, showcasing significant potential for growth Consequently, investing in a pharmaceutical enterprise in Vietnam presents a promising opportunity for investors seeking beneficial returns.
Traphaco Pharmaceutical Joint Stock Company (stock code: TRA), established on November 28, 1972, specializes in the trading, research, and development of pharmaceutical products, chemicals, functional foods, cosmetic items, and medical equipment Currently, their products are distributed nationwide through both OTC and ETC channels, with plans for future exports The company's headquarters is located at No 75 Yen Ninh Street, Ba Dinh District, Hanoi.
Chairman of the Board, General Director: Vu Thi Thuan
Charter capital: 414,536,730,000 VND (TRA: CTCP Traphaco - TRAPHACO |
Email: info@traphaco.com.vn
Website: http://www.traphaco.com.vn
Traphaco, a leading company in the pharmaceutical industry, aims to establish itself as a robust economic group in healthcare by 2020, focusing on sustainable development The company is dedicated to providing innovative products and services that enhance quality of life while honoring traditional values Traphaco prioritizes customer satisfaction, job creation, and employee growth, all while delivering added value to investors This commitment has fostered significant trust among both customers and investors.
1 OTC and ETC are abbriviations for over the counter and ethical drugs, respectively
48 years of establishment and development, Traphaco has achieved many exemplary achievements
Up to now, in the system of Traphaco, there are 28 branches in provinces and cities across the country, a distribution company, four subsidiaries and more than 27.000 customers nationwide.
Research objective
This thesis aims to determine a suitable price for Traphaco by leveraging university-level knowledge By employing valuation models like the discounted cash flow (DCF) model and relative valuation multiples, the study seeks to provide an accurate assessment of Traphaco's value Subsequently, it will offer strategic recommendations for Traphaco's management and investors.
Research question
This research must answer the following questions comprehensively to complete those objectives above:
Question 1:What is the best method to evaluate Traphaco?
Question 2: What are the recommendations for managers, company planners, and investors to improve the company's negative situation and thereby, help investors more secure in the future?
Research Scope
This thesis examines Traphaco's financial valuation based on consolidated financial statements and annual reports from 2014 to 2019.
Overview methodology and data
The research methods of this thesis include both qualitative and quantitative analysis, which are the two optimal analytical ones used for researching In particular, the
Qualitative analysis focuses on gathering information about the current state of domestic and foreign economies to identify trends that can forecast a company's development In contrast, quantitative analysis relies on precise figures from financial statements to calculate key financial indicators, enabling economists to accurately assess the company's financial situation This thesis utilizes data collected from secondary sources.
Thesis structure
This thesis is divided into five main chapters, as follows:
Chapter 1: Introduction: Brief presentation of the topic overview, Traphaco company, making assumptions, and presenting the basic structure of the thesis
Chapter 2: Literature review: Presentation of theories and methods for Traphaco valuation
Chapter 3: Methodology: Discussion of the methods of analysis and data collection used in this thesis
Chapter 4: Analysis and Findings: Declaration of industry analysis, company analysis, and construction of Traphaco valuation work
Chapter 5: Conclusion: Briefly summary of all the above chapters, giving recommendations to Traphaco and investors.
Conclusion
Chapter 1 provides an overview of the project's focus on Traphaco, introducing readers to essential concepts and methodologies for valuing a company This section lays the groundwork for understanding how to assess business performance and measure value effectively.
Chapter 2: Literature review
Firm valuation
A firm’s value (FV) is the market value of the company’s productive or operational assets that reflects the value of a business According to Investment Valuation (2012) of
Valuation, as defined by Damodaran, is the analytical process of assessing the current worth of an asset or company This involves estimating future value to determine its overall worth accurately.
A firm's value can be assessed through market value or book value, with market value being the more common reference Estimating a company's valuation involves key components such as industry analysis, corporate research, and valuation methodology, all aimed at determining the intrinsic value of its common stock (Damodaran, 2012) To ascertain if a company is undervalued or overvalued in relation to market sentiment, it is advisable to utilize price multiples like P/E, P/B, and P/S ratios.
In summary, valuation involves assessing the fair market value of assets at a specific point in time, taking into account various economic factors and the unique characteristics of those assets to fulfill a particular purpose.
2.1.2 Reason and Purpose of firm valuation
Valuations are crucial in today's market economy as they provide a comprehensive overview of a firm's value, serving various purposes for businesses and investors They offer vital information that impacts company operations and help determine fair pricing, especially during mergers, acquisitions, or bankruptcy events Valuations also facilitate the exchange of assets, aligning with shareholder interests, and are essential for attracting capital from financial investors and securing credit Banks and lenders rely on valuations to assess a firm's potential, guiding their investment decisions.
Valuation Approaches
The selection of the "Valuation Approach" is a crucial step in determining a company's market value There are three primary methods for assessing business value: the market approach, which compares similar companies; the cost approach, which evaluates the costs of assets; and the income approach, which focuses on projected earnings.
The asset approach focuses on evaluating a company's net assets, calculated by subtracting total liabilities from total assets According to Julie Young (2019), this method utilizes a fundamental formula to assess the company's financial health.
The net asset method is a business valuation approach that adjusts the reported values of a company's assets and liabilities to better reflect their estimated current fair market values This involves recalibrating the balance sheet after determining the market value of assets and the present value of debts Ultimately, the equity value of the company is calculated by subtracting the current debt value from the market value of the assets.
The liquidation value method is based on the balance sheet, focusing on the disparity between the proceeds from asset sales and the liquidation costs assessed by appraisers.
The determination of liquidation value involves several key stages: establishing a property sales calendar, assessing the market value of assets, calculating liquidation costs, evaluating corporate debt, analyzing operating profit during the liquidation period, and estimating asset prices up to the valuation date.
The cost approach offers several advantages, including the ease of evaluating a primary business and operating efficiently when asset values are determined based on the market This method is particularly effective for companies that maintain reasonable balance sheets.
The cost approach has its drawbacks, particularly for diversified corporations, as it can be challenging to assess asset values due to discrepancies between market value and book value Additionally, this method overlooks intangible assets and fails to account for inflation issues affecting the valued enterprises in their respective host countries.
The market approach, or relative valuation, is an effective method for estimating a firm's value by comparing it to similar companies within the same industry or with comparable capital structures This technique utilizes various price multiples, including EV to EBITDA, price-to-earnings ratio, price-to-book value, and price-to-sales ratio, to assess a company's worth (Tim Smith, 2019).
The relative Valuation method is considered as an essential part of firm valuation so that it will be explicitly presented later in this thesis
The income method is a widely used approach among appraisers and experts due to its practicality (Marshall Hargrave, 2019) This method focuses on discounting expected future economic benefits, primarily cash flow and present value, emphasizing the potential for future economic growth rather than the company's current book value, making it ideal for stable businesses By utilizing this approach, companies can pinpoint fundamental issues that may impede their development and propose effective solutions The income approach encompasses two key methods: the capitalization cash flow method and the discounted cash flow method.
The capitalization cash flow method is a widely used and straightforward technique for valuing a company It calculates the company's worth by determining the net present value (NPV) of anticipated future cash flows This NPV is derived by dividing future earnings by the capitalization rate, providing a clear assessment of the company's financial potential.
Page | 16 applicable in case the enterprise operates continuously and continues to develop in the future
This method is advantageous due to its simplicity and ease of use, relying on a financial basis for calculations that yield high accuracy However, it faces significant drawbacks, particularly in determining the appropriate capitalization rate, which varies across different business and production industries Additionally, the assumption of stable, permanent income for enterprises is difficult to achieve amidst the intense competition present in today's market.
Discounted cash flow (DCF) is a widely used valuation method that estimates an investment's worth based on its projected future cash flows This technique is particularly prevalent in financial analysis and is the approach employed in the valuation of Traphaco Company.
There are two main models in the discounted cash flow method: Free cash flow to the firm (FCFF), Free cash flow to equity (FCFE)
Because of its popularity and complex, the Discounted Cash Flow Method will be discussed in the following sections.
The Discounted Cash Flow model
Estimating a firm's price using Discounted Cash Flows (DCF) relies on the future expected income the enterprise can generate, while also considering the associated risks of that anticipated income.
The enterprise value is assessed by discounting the anticipated cash flows using a suitable discount rate, which incorporates the associated risk factors Typically, the Discounted Cash Flow (DCF) model is based on the current assessment of expected cash flows.
DCF is the present value of all future cash flows at the discount rate
CF is the cash flow or future payment r is the discount rate or the interest rate in which the business would be charged to obtain capital
2.3.2 Reason for choosing the DCF model
Corporate valuation has become a complex topic characterized by varied perspectives and methodologies, leading to ongoing debates Different valuation methods yield distinct outcomes based on their underlying assumptions The focus has shifted from stock valuation to corporate valuation, reflecting the increasing application of valuation models in mergers, acquisitions, and corporate restructuring Additionally, the rise of new businesses necessitates a renewed emphasis on estimation measures Consequently, the unique traits of emerging markets and growing enterprises prompt researchers to reassess their dependence on traditional financial statement figures in the valuation process.
Additionally, the importance of an enterprise strategy to its value is increasing
Understanding why a business earns superior income in the top position and why these high incomes can be achieved in a competitive landscape is a prerequisite for a proper appraisal process
Aswath Damodaran's research offers valuable insights for enhancing the application of the DCF model in Vietnam, particularly for small and medium enterprises that share similar characteristics to those he discussed This alignment is a key reason for our choice of the DCF model in our analysis.
Book value refers to the value of a company as recorded in its financial statements, specifically calculated through balance sheet accounting It is distinct from the total assets and total liabilities of the enterprise.
2.3.4 Differences in book value and market value
Simple book value, also known as accounting value, represents a firm's interest in its accounts after auditors have assessed its assets and liabilities Investors in the stock market evaluate whether this carrying value accurately reflects the firm's worth, leading to fluctuations between book value and market value over time The disparity between these values is influenced by several factors, including the company's industry, its asset and liability situation, and its unique characteristics There are three key scenarios that illustrate the fundamental relationship between book value and market value.
• Case 1: Book value is higher than the market value
The financial market values the company for less than its stated value or net value
When the market loses confidence in a company's potential for future profits and cash flow, it often leads to undervaluation This situation presents a unique opportunity for investors seeking value, as they can purchase shares at lower prices than the company's true worth, betting that the market's negative assessment will prove inaccurate.
• Case 2: The market value is higher than the book value
The market value of a company is significantly influenced by its manufacturing capacity and the effective utilization of its assets Typically, businesses that consistently generate profits tend to have a market value that exceeds their book value.
• Case 3: The Book value equals the market value
In this case, the investor sees no valid reason to believe the company is worth or is less than what the balance sheet records
The Discounted Cash Flow Method is widely recognized as the primary approach for evaluating a firm's worth This method involves estimating the firm's cash flows and applying a suitable discount rate Enterprise Value represents the value of the company's operating assets, which are essential for generating returns.
When applying Discounted Cash Flow (DCF) methods, investors and analysts focus on estimating the Free Cash Flow generated by a company's operating assets The appropriate discount rate for this analysis is the Weighted Average Cost of Capital (WACC), which is used to calculate the present value of these cash flows Consequently, the Enterprise Value of the company is determined using this formula.
EV is the Enterprise Value, as known as the value of operating assets
FCFt is the Free Cash Flow to the firm at time t
WACC is the Weighted Average Cost of Capital of the company
2.3.5.1 Weighted Average Cost of Capital
The Weighted Average Cost of Capital (WACC) is essential for determining a company's valuation, as it represents the overall cost of capital with each capital source, including debt, common stocks, preferred stocks, and bonds, weighted proportionately.
In the DCF Model, the WACC is considered as the discount rate to estimate the present value of FCF from the operating activities The formula of WACC is
E is the value of the Equity of the firm
D is the amount of Debt of the firm
Re is the cost of equity of the firm
Rd is the cost of debt of the firm
Tc is the current corporate tax rate that the firm pays
As seen from the formula above, to calculate the WACC of a firm, investors and analysts must calculate the cost of debt, cost of equity, and weigh their proportion carefully
The cost of debt is determined by the total amount of debt and the associated interest rates, which may arise from various sources such as short-term and long-term financial obligations, issued bonds, and more This interest rate is established through the borrowing agreement and the bond's coupon rate Typically, the cost of debt is calculated by dividing the interest expense by the average debt amount Additionally, debt can provide a tax shield for companies, necessitating the inclusion of the tax rate in the calculation of the Weighted Average Cost of Capital (WACC).
The cost of equity is determined by the required return rate expected by investors and is commonly calculated using the Capital Asset Pricing Model, which analyzes the relationship between a company's stock price and a market index There are two primary methods for calculating the cost of capital: the direct and indirect methods The direct method relies on market data relevant to mature markets like the United States and Europe In contrast, the indirect method is favored in emerging markets, such as Vietnam and Southeast Asia, where stock markets are less efficient; this approach adapts figures from developed markets while accounting for additional risks.
The details of estimate those figures will be presented in the latter part of this thesis
Free Cash Flow (FCF) is essential for assessing a company's value, representing the cash inflows and outflows from its business operations, investments, and financing activities In the context of the Discounted Cash Flow (DCF) Model, "free" refers specifically to cash generated from operating activities, as the model primarily focuses on valuing these assets Investing and financial activities are excluded from this calculation, with their values added back later to provide a comprehensive view of the company's overall worth.
To calculate Free Cash Flow from operating activities, the most common method begins with EBIT (Earnings Before Interest and Taxes) The calculation involves specific steps that lead to the final Free Cash Flow figure.
Free Cash Flow Based on the EBIT (earnings before interest and taxes)
= + Depreciation and other non-cash expense
= - Increase in Operating Current Assets The sum -ΔCA + ΔCL is the change in the firm's net working capital ΔNWC
= + Increase in Operating Current Liabilities
= - Increase in Fixed Assets at cost (CAPEX)
(Source: Benninga, S., 2014 Financial Modeling 4th ed p.62.)
Free Cash Flow to Firm
Free cash flow to the firm represents the cash generated from operating activities after accounting for depreciation and taxes, making it a key indicator of a company's financial health This metric is particularly useful for comparing firms, as it reflects the cash available to both creditors and owners When evaluating this cash flow, the appropriate discount rate to use is the Weighted Average Cost of Capital (WACC), as it pertains to the financial interests of both stakeholders.
The firm value for both creditors and owners is determined using discounted cash flow based on free cash flow to the firm To calculate the owner's value, debt is deducted from this figure In this model, since the cash flow is directed towards both owners and creditors, the weighted average cost of capital (WACC) serves as the appropriate discount rate.
The calculation of Free Cash Flow to the Firm (FCFF) plays a crucial role in shaping a company's financial policies When FCFF is less than zero, it indicates that the operating cash flow is inadequate to support the firm's financial needs.
To address the increased demand for new investments in fixed assets and the rise in net working capital, firms may need to secure additional funding or revise their capital investment strategies to mitigate investment demands Conversely, when free cash flow to the firm (FCFF) is positive, the generated cash flow meets investment needs and creates a surplus, prompting the company to consider increasing its dividend policy.
There are three methods to calculate Free Cash Flow to the Firm (FCFF): utilizing the Cash Flow Statement, Earnings Before Interest and Taxes (EBIT), and Net Income This article will focus on a detailed examination of the first two methods.
Enterprise Value assesses the future cash flow generated from operating activities Therefore, when determining free cash flow using the Consolidated Cash Flow Statement, it is crucial to focus on cash associated with operating activities.
Generally, a Cash Flow Statement has three main parts, which are Cash Flow of Operating Activities, Investing Activities, and Financing Activities, respectively First of all,
Operating Cash Flow remains constant as it directly correlates with operational activities Investment Activities should be approached with caution, focusing solely on investments in operating assets that generate revenue, which typically include long-term tangible assets Consequently, Capital Expenditure (CAPEX) is considered a cash outflow in Free Cash Flow to the Firm (FCFF), reflecting the cash utilized for acquiring Property, Plant, and Equipment (PP&E) The Financial Activities section of the Cash Flow Statement is disregarded in this calculation; however, interest earned from financing activities, such as lending, is treated as a cash inflow for operating activities After deducting taxes, this interest amount is included in the FCFF.
To sum up, the FCFF Calculation following Consolidated Cash Flow Statement Approach is presented as follows
FCFF = Operating Cash Flow + Interest Income * (1 – Tax rate) – CAPEX
Which is CAPEX = PP&E (current) – PP&E (last period) + Depreciation
2.4.3.2 Earning Before Interest and Taxes (EBIT) Approach
To calculate Free Cash Flow to the Firm (FCFF) using EBIT and related indicators from the Income Statement, follow these steps: First, determine EBIT, which represents earnings before interest and taxes Next, adjust EBIT for non-cash expenses, such as depreciation and amortization Then, account for changes in working capital and subtract capital expenditures This method provides a clear pathway to derive FCFF, reflecting the firm's cash generation capability.
Depreciation is a non-cash expense, which is reduced from revenues to EBIT Therefore, to get accurate FCFF, the step needs to take is to add back the depreciation amount
Depreciation expense varies based on a company's distribution, making it essential to review the notes in the financial statements to determine the accurate amount.
• Step 2: Adjust EBIT for taxes
EBIT, or earnings before interest and taxes, does not reflect the impact of taxes on a company's cash flow, as it includes interest and taxes Interest expense represents the payments a company makes to its lenders, which means there is no need to subtract it from EBIT when calculating Free Cash Flow to the Firm (FCFF), as FCFF is intended for both lenders and shareholders However, since taxes are a cash outflow, it is essential to adjust EBIT for taxes to accurately determine FCFF by subtracting the tax amount from EBIT.
• Step 3: Subtract Capital expenditure (CAPEX) and Working capital investment
After adjusting EBIT, it is crucial to subtract capital expenditures (CAPEX) and consider working capital investments, as these factors significantly impact cash flow CAPEX represents cash outflows for purchasing goods and building fixed assets, making it essential to deduct this amount to accurately reflect financial performance Additionally, fluctuations in working capital can further influence cash flow dynamics.
To calculate a company's net working capital, sum the capital accounts, receivables, inventories, payables (excluding loan interests and corporate income tax payable), and prepaid expenses This net working capital significantly impacts cash flow, necessitating its exclusion when determining Free Cash Flow to the Firm (FCFF).
These three steps can be summarized in the following formula:
2.4.4 Some notes for Firm Valuation after calculating the FCFF
In firm valuation using the DCF model, the calculation of Free Cash Flow to the Firm (FCFF) helps determine the firm's value based solely on assets involved in business activities However, this approach excludes assets related to investing and financial activities To accurately assess the total value of the firm, it is essential to include all previously overlooked assets, such as cash, marketable securities, cross-holdings, and other non-operating assets.
Value of firm = Enterprise Value + Cash and Marketable Securities + Value of Cross
Holding + Value of other Assets
Some investors believe that a firm's true value is solely represented by its equity, implying that all costs associated with the company's financial debt should be disregarded.
Value of equity = Value of Firm – Value of Debt
Relative Valuation
The relative valuation method assesses a company's worth by comparing it to similar firms within the same industry A commonly used tool in this approach is the price multiples ratio, which simplifies the valuation process This method operates on the principle that identical stocks should have comparable valuations; thus, a stock with a lower multiple is seen as undervalued, while a stock with a higher multiple is regarded as overvalued.
This section will explore four key valuation multiples: Price/Earnings per Share, Price/Book Value, and Price/Sales Additionally, we will discuss two methods for conducting Relative Valuation.
2.5.2 Popular Multiples used in Relative Valuation
2.5.2.1 Price/Earning per share Ratio – P/E
Investors commonly evaluate a stock's value using the price-to-earnings (P/E) ratio, which reflects the profits that equity holders can expect from the company's net income By analyzing this ratio, investors can gauge how much they are willing to pay for potential earnings, thereby determining the stock's worth.
If the P/E ratio is high, it means stocks of businesses are considered as overvalued, but this business seems to have the potentials for future development.
A low PE ratio may indicate that a company's stock price is undervalued, potentially signaling financial difficulties or challenges within its business operations.
The Price-to-Book (P/B) ratio indicates how many times a stock's market value exceeds its net asset value as reported in financial statements This metric is particularly popular among analysts in the banking sector, serving as a key tool for evaluating stock performance.
Price per share is the market value of that firm’s stock in the stock market
Book value per share is calculated by getting the difference between the balance sheet’s equity and debt, then divide to the total number of shares outstanding
A low P/B ratio shows that the stock is undervalued, and the company is having problems such as liquidity problems If the P/B catio is high, it indicates the stock is overvalued
Analysts utilize the price-to-sales (P/S) ratio for two main reasons: it indicates stable revenue growth, which is essential for growth companies, and it provides sales data that is less susceptible to manipulation than other financial figures Additionally, the P/S ratio varies significantly across different industries, making it most effective when comparing companies within the same sector.
The Price-to-Sales (P/S) ratio offers significant advantages for analysts and investors, as it relies on revenue figures, which remain concrete even in cases of negative earnings per share (EPS) Unlike EPS, which can be distorted and volatile, sales figures tend to be more stable, making P/S a valuable indicator for assessing a company's performance when EPS fluctuations are high.
A company may experience significant revenue growth and high earnings but still face challenges such as lack of profit or negative cash flow from operations For long-term sustainability, it is crucial for the company to achieve profitability and maintain positive cash flow Additionally, the methods used for recording revenue can significantly impact the company's revenue and stock performance.
A low PS catio indicates that the stock is undervalued, suggesting the company is facing performance issues and low-profit margins, which ultimately results in diminished competitive advantages.
A high PS ratio may indicate that a stock is overvalued, suggesting that the company has strong future prospects, a high gross profit margin, and a significant competitive advantage.
The Guideline Public Company Method (GPCM) is an effective approach for valuing private companies by utilizing comparable price data from similar firms This method involves adjusting the data to account for differences between the private company being evaluated and its comparable counterparts One of the key advantages of GPCM is its reliance on actual market data rather than speculative forecasts, ensuring a more accurate valuation However, the effectiveness of this method hinges on the reliability and precision of the data from comparable companies.
A transaction method is an analytical approach that evaluates a company's transaction history alongside that of comparable firms to benefit its owner To ensure optimal results, it is crucial to select equivalent companies that operate within the same industry, share a similar size, engage in comparable business activities, and are subject to the same economic risks that influence the company's valuation.
The Market Approach offers a key advantage by relying on precise data derived from actual trading sources, rather than being based on complex assumptions or judgments Additionally, this method is straightforward to implement, as appraisers can easily access public data from comparable companies.
Owning data on comparable companies is challenging due to the scarcity of firms that are truly similar across all indicators Valuation relies heavily on clear data, and when this information is ambiguous, accurately applying this method becomes difficult.
Conclusion
In conclusion, various methods exist for valuing a company, each with its own advantages and disadvantages Choosing the right valuation approach is crucial for accurately assessing a business's worth and providing investors with a clearer understanding before making investment decisions After evaluating the strengths and weaknesses of different valuation techniques and conducting a thorough company analysis, the Discounted Cash Flow (DCF) method and relative valuation will be employed to determine the value of Traphaco JSC.
Chapter 3: Methodology
Introduction
The methodology is crucial in research as it encompasses the research team's unique perspectives on the universe, which shape their approach and methods It is vital to acknowledge any preconceptions stemming from the researcher's expertise and experiences, as these can influence objectivity Despite this, research should strive to be impartial and free from bias, as any reflection of the researcher's prejudices undermines its scientific integrity (Bryman & Bell, 2007, p 30).
This chapter outlines the theory of research methodology, detailing the rationale behind selecting appropriate methods to meet research objectives Key components discussed include research philosophy, approach, strategy, methods, data collection techniques, and data analysis techniques Additionally, the thesis addresses ethical considerations and the limitations encountered during the research process.
Methodology
The philosophy of research is crucial in shaping ideas and conclusions regarding how studies interpret the environment It encompasses the methods of data collection, evaluation, and application for valuation firms, as highlighted by Johnson and Clark.
In 2006, the key concern is not whether research should be informed by philosophy, but rather how effectively the research team can justify their rational choices in comparison to the alternative approaches that the survey group might have considered.
This thesis adopts a positivist research philosophy, ensuring the generation of reliable and credible data The investigative team will collect data, leverage existing theories, and develop and test models This approach aims to enhance current methodologies and, upon validation of the model, contribute to the creation of new knowledge.
There are two ways of conducting research, which are deductive and inductive Deductive is a theory when an accurate conclusion is drawn from an accurate premise The
The complexity of deductive reasoning increases as more data is gathered to support compatible assumptions, while inductive reasoning relies on actual data that requires verification for conclusions Unlike deductive reasoning, which moves from general principles to specific instances, the inductive approach starts with specific data to form general conclusions This data collection is crucial for analyzing the topic and developing a conceptual framework.
The thesis will employ an inductive research approach, which involves a systematic process that includes market evaluation, an in-depth company study, and the calculation and delivery of TRA's value.
Research methods can be categorized into three main types: mixed, qualitative, and quantitative Mixed-methods research combines both quantitative and qualitative data, requiring careful integration of various approaches to collect and analyze evidence effectively The qualitative method focuses on understanding human behavior and its impacts, employing techniques such as one-on-one interviews, focus groups, and ethnographic studies Conversely, quantitative research relies on statistical and mathematical analysis, characterized by its objective, systematic, and replicable nature It includes scale categories like nominal, ordinal, interval, and ratio For a comprehensive analysis of TRA, both qualitative and quantitative methods will be utilized in the research process.
Data Collection Method
Data collection is essential for research and can be categorized into three primary sources: sampling, primary data, and secondary data (Dudovskiy, 2019) Each of these methods plays a crucial role in completing research, offering distinct advantages that researchers can leverage effectively.
Sampling is the process of selecting a small subset from a larger survey population to analyze its characteristics Researchers utilize two main methods for selecting samples: probability sampling, which relies on random selection, and non-probability sampling, which does not.
Utilizing the sampling method in research offers several advantages for researchers Primarily, it allows them to concentrate on relevant audiences while excluding those that are not pertinent Additionally, by working with a limited number of samples, researchers can remain flexible in their selection and investigation of various target groups Consequently, this approach enhances accuracy through in-depth research on a smaller sample size.
Researchers encounter several challenges when employing sampling methods A limited sample size can lead to ineffective and superficial results, particularly if the group is heterogeneous Additionally, selecting relevant variables becomes difficult due to these limitations Moreover, an improper sample choice can result in significant research costs.
In this essay, due to valuating an only company, the sampling method will not be applied to data collection to serve the process of research
Primary data refers to information gathered directly by researchers from original sources through techniques like surveys, interviews, or experiments However, when evaluating a public company, the difficulties in accessing key individuals can make collecting primary data challenging, rendering this approach unsuitable for the research process in this essay.
Secondary data refers to information that is readily available from various sources, often published on official websites This type of data is easy to gather, saving both time and money in the research process However, it remains an essential resource for researchers, provided they can identify and utilize accurate sources of information.
The primary advantage of utilizing secondary data is its ease of collection, allowing researchers to gather information quickly and at a low cost This makes secondary data a valuable resource for efficient research.
Page | 33 advantage of saving money and time Also, there is plentiful data of this type, which could come from many different sources
Secondary data can often come from unidentified sources, leading to potential misunderstandings and inaccuracies Additionally, the time value of this data is a significant drawback, as it consists of information gathered in the past, which may not be current or relevant for contemporary research needs.
This essay primarily employs secondary data collection methods, utilizing information from credible sources such as books, magazines, periodicals, annual reports from industry-related companies, and reputable websites like CafeF, Vietstock, and Traphaco's Official Website These sources are recognized as official and reliable by analysts in Vietnam.
Although there are some drawbacks related to up-to-date information, the data collected is believed to be good enough for conducting the research
Articles, sources of information will be presented in the reference section of this thesis.
Data Analysis Method
Data analysis involves the discovery, interpretation, and communication of the meanings contained within data This report focuses on two primary methods of data analysis: qualitative analysis and quantitative analysis, as outlined by Kohlbacher (2006).
Qualitative analysis offers insights into a firm's characteristics that cannot be quantified by machines or mathematical methods This approach emphasizes intangible factors related to social and experiential aspects, including customer behavior, management capabilities, corporate culture, and reputation In this study, the research team gathered data on Traphaco's business models, production technology, internal information, development strategies, and trade practices Through this analysis, they identified the competitive advantages that Traphaco holds over its peers, such as DHG and OPC, highlighting its strengths in the market.
Page | 34 weaknesses, opportunities, and concerns that the company has been facing are offered to show Traphaco's potential development
Quantitative data analysis involves the use of statistical, mathematical, or computational techniques to evaluate data This analytical approach aims to create and refine mathematical models and scientific hypotheses, enabling objective and precise decision-making.
This essay utilizes fundamental mathematical models and financial indicators to analyze Traphaco's data alongside other related pharmaceutical companies By calculating financial ratios from historical data, the research team evaluates Traphaco's financial health in comparison to its peers Additionally, various valuation methods are employed to determine an appropriate stock price for Traphaco Detailed explanations of the analysis methods will be provided in subsequent sections of the thesis.
Research Limitation
Every research project faces limitations, and this study is no exception The research team had only fifteen weeks to complete the essay, and due to the SARS-CoV-2 pandemic, offline meetings with the professor were not possible, resulting in insufficient online interaction via Skype Additionally, the team encountered challenges in data collection, particularly with secondary data in the Vietnam pharmaceutical industry, which lacks sufficient articles and reports due to its limited appeal Furthermore, the team's analytical skills were constrained, highlighting the importance of enthusiastic guidance from the professor.
Ethics Consideration
Ethical considerations play a crucial role in essay writing, as each participant must uphold these standards from the outset Adhering to the guidelines established by the school is vital for students undertaking this thesis The research team remains committed to objectivity, ensuring that biases are minimized during analysis.
Page | 35 interpreting data, ensuring reliable data sources Team members guarantee that sources of this essay are fully cited and not plagiarism.
Conclusion
This chapter details the research methods, objectives, strategies, and data collection and analysis techniques utilized to complete the thesis It also addresses the limitations and ethical considerations faced by the research team throughout the process By identifying these elements, the team can develop effective strategies to successfully finalize their graduation thesis.
Chapter 4: Findings and Analysis
Industry Analysis
4.1.1 The overall pharmaceutical industry in the World
The pharmaceutical industry plays an essential role in the development of humanity
The global population is experiencing rapid growth and aging, leading to increased environmental pollution and a rise in serious illnesses Consequently, spending on health services is on the rise, significantly impacting the overall value of drug consumption worldwide Additionally, mergers and acquisitions among pharmaceutical companies are becoming more frequent By 2023, global pharmaceutical market revenues are projected to surpass $1.5 trillion, with an annual growth rate between 3% and 6%.
Pharmaceutical companies are focusing their investments on five key disease categories: diabetes, cancer, asthma, blood fat control, and drug resistance, which collectively represent 50% of global medical investment.
Due to growing demand, major pharmaceutical companies are stepping up research and inventing biopharmaceuticals The group of biopharmaceuticals accounts for 70%, compared to 10% - 20% of conventional pharmaceutical enterprises
The global pharmaceutical market is characterized by a significant divide between developed and developing countries, with developed nations responsible for over 63% of global drug consumption Despite this high consumption rate, growth in these regions has stagnated, indicating that the industry has entered a saturated phase Currently, the primary source of growth in the pharmaceutical sector is emerging from a select group of 22 pharmaceutical countries.
4.1.2 The overall pharmaceutical industry in Vietnam
4.1.2.1 Vietnam Pharmaceutical Industry's Stage of Development
Before 1990, Vietnam's pharmaceutical market was monopolized by the government However, following the shift to a market-oriented economy in 1990, new pharmaceutical companies emerged, paving the way for growth and development in the sector.
Vietnam's pharmaceutical industry is experiencing significant growth amid rising pollution and the emergence of new diseases As per capita income and healthcare standards improve, the demand for health services is on the rise Additionally, the expansion of private hospitals and increased health insurance coverage among citizens have led to a higher rate of health check-ups in hospitals, creating new opportunities for the pharmaceutical sector.
Major pharmaceutical companies in Vietnam, including Hau Giang Pharma, Pymepharco, Imexpharm, and Traphaco, are enhancing their factories and facilities The Vietnam Drug Administration projects that the pharmaceutical industry will experience continued double-digit growth over the next five years, aiming to reach a market value of $7.7 billion by 2021 (Minh Duc, 2019).
4.1.2.2 Competition Structure of the Pharmaceutical Industry in Vietnam
Through observation and analysis, the competitive structure of Vietnam's pharmaceutical industry may be a monopolistic competition for several reasons as follows
Monopolistic competition is characterized by a significant number of potential buyers and sellers, as seen in Vietnam's pharmaceutical market where drugstores are prevalent in every town Numerous small enterprises and independent pharmacists operate these stores, contributing to a diverse seller landscape Recently, large retail companies have begun entering the pharmaceutical sector, intensifying competition as they strive for dominance in this unique market.
In a monopolistic competition industry, products are interchangeable yet distinguished by brand identity, as seen in Vietnam's market where generic drugs dominate These drugs, while having similar functions, can easily be substituted for one another To stand out from competitors and attract customers, companies are increasingly investing in marketing campaigns and quality-focused packaging, a hallmark of monopolistic competition.
The Vietnam pharmaceutical industry operates in a state of monopolistic competition, largely due to the low barriers to entry and exit for firms In this market, pharmaceutical companies have dual roles: they are both producers and contributors However, producing enterprises face significant challenges, including navigating numerous legal regulations and undergoing stringent testing processes to ensure compliance in drug production.
To enter the pharmacy industry, investors face minimal barriers, requiring only a certificate of origin and a qualified pharmacist on staff to commence operations and establish their business.
In a monopolistic competition environment, firms possess significant pricing power, allowing them to set prices for their products In Vietnam, the pharmaceutical industry is characterized by a large number of companies offering interchangeable products, enabling businesses to adjust their pricing strategies based on competitors' actions in the market.
In a monopolistic market, products are typically distinguished by their unique features, marketing strategies, and branding efforts Companies invest in marketing campaigns to create strong brand identities, while product packaging is designed with distinctive styles to enhance brand recognition and awareness.
In summary, from the above factors, Vietnam's pharmaceutical industry's competition model is identified as the monopolistic competition
4.1.2.3 Vietnam Pharmaceutical Industry – Current position and situation
Currently, Vietnam's pharmaceutical industry has the potential to grow but still faces many difficulties Vietnam's pharmaceutical raw materials depend on 80% of raw materials imported from China and India
Secondly, domestic R&D facilities have not been properly invested Vietnam's pharmaceutical products are mainly generic and similar types of the original brand
The export market is significantly impacted, with export turnover accounting for only 3% of the import value (Hieu Tri, 2020) Additionally, the domestic pharmaceutical market faces intense competition.
Moreover, the pharmaceutical industry is facing difficulties in legal regulations and product promotion Because of the above, the competitiveness of domestic drugs compared to foreign drugs is still limited
Finally, the domestic pharmaceutical market has not developed synchronously By identifying and recognizing these difficulties, leading pharmaceutical companies in
Vietnam, such as Hau Giang and Traphaco, have changed
Domestic pharmaceutical enterprises are increasingly investing in the establishment of processing factories while also focusing on research and development (R&D) activities As the pharmaceutical industry begins to grow, it showcases significant potential for future expansion, alongside the importation of drugs from abroad.
In recent years, Vietnam has strategically enhanced its pharmaceutical industry by expanding both domestic and foreign markets Key players like Traphaco and Hau Giang Pharmaceutical are focusing on developing extensive product lines and boosting export activities The industry is also embracing information technology to grow online pharmaceutical sales, while the demand for natural-origin functional foods and cosmetics continues to rise significantly.
Company Analysis
Founded on November 28, 1972, Traphaco has evolved into one of Vietnam's leading pharmaceutical companies, ranking among the top three in the industry and holding the top position in Eastern medicine With nearly 50 years of growth and development, Traphaco has significantly expanded its production capabilities and diversified its operations across various sectors, including research, manufacturing, and distribution.
Traphaco is committed to producing high-quality pharmaceutical products and cosmetics, with a recent focus on developing Western products, particularly an EU-GMP compliant eye-drop production line These products are widely distributed throughout the country The company employs long-term strategies that leverage advanced technologies in the production and processing of pharmaceuticals and medical equipment, all while aiming for sustainable development and delivering "green values" to its customers.
• Analysis of Traphaco’s Competitive Advantages
Traphaco, a leading company in the traditional medicine market, maintains its competitive edge through its long-standing brand and strong reputation.
Traphaco, a leading player in Vietnam's pharmaceutical market, boasts 48 years of establishment and a commitment to sustainable development The company has garnered numerous accolades, including the Vietnam Value award, recognition as one of the top 10 sustainable development corporations, and the prestigious "Sao vàng đất Việt" award Consistently ranked among the top pharmaceutical companies, Traphaco achieved the No.1 position twice in the last four years, reflecting its strong reputation based on consumer and expert surveys regarding financial strength and media presence In 2019, Traphaco outperformed DHG in reputation surveys, solidifying its status as a trusted brand in the high-quality pharmaceutical sector, supported by its self-sufficient raw materials.
Vietnam's pharmaceutical production relies significantly on imported raw materials from China and India, despite the country's abundant resources of medicinal plants and mushrooms.
Traphaco has identified the significant potential of its crop areas for drug production and has taken steps to harness this opportunity by establishing Traphaco Sapa One Member Company Limited This subsidiary focuses on the manufacturing of exclusive inputs for the pharmaceutical industry.
Traphaco pharmaceuticals with high-tech production chains
By being proactive in quality raw materials, Traphaco has a tremendous competitive advantage compared to other competitors, which mostly imported raw materials o Green value chain
Traphaco's development strategy, "The Way of Green Health," leverages Vietnam's rich biodiversity and traditional medicine to create herbal-based medicines The company is committed to ongoing research and the development of sustainable value chains that encompass raw materials, advanced technology, innovative products, and efficient distribution services.
Traphaco is optimizing everything to be environmentally friendly, ensuring human health o Pioneering in technological applications and trends in pharma 4.0
By applying all technologies like ERP (Enterprise Resource Planning), DMS (Distributor Management System), BI (Business Intelligent), or MDR (Managed Detection and
Traphaco is leading the way in the pharmaceutical industry by integrating advanced technology into its production and distribution processes, aligning with the global trend of Pharma 4.0 This shift towards automation and digitization positions Traphaco for rapid and sustainable growth Additionally, the company’s product line adheres to GMP-EU standards, reinforcing its commitment to quality and compliance in the evolving market.
In Vietnam, there are limited pharmaceutical production lines that comply with GMP-EU standards, the highest benchmarks in the industry Traphaco stands out as the owner of the only GMP-EU certified eye drops production line in the country, setting a significant precedent in the Vietnamese pharmaceutical market Despite adhering to these stringent standards, Traphaco's eye drops remain competitively priced, offering quality eye care solutions at reasonable costs.
After all analyses above about industry and firm, the table below shows the SWOT model that applies to Traphaco
• Prestigious brand, trusted and loved by customers
• The strong, broad, deep, modern and professional distribution system
• Advanced technology, governance based on the information technology information (IT)
• Having reputable essential products, high sales
• Strong R&D capacity, development of originated drugs from medicinal herbs
• The distribution system in the South is not good
• Not yet exploited the products effectively on the list
• Revenue from OTC market accounts for a high proportion
• Consumers tend to use natural, environmentally friendly, and green health products
• Opportunities from strong linkage and distribution cooperation,
• The advantage for companies to master the distribution system
• Development opportunities thanks to large market capacity
• The trend of spending on medicine increased
• Opportunity to apply information technology to all fields of high branding yield
• Industry development strategy is not stable
• Counterfeit goods, fake goods, not yet effective measures to prevent
• Customers' requirements are higher and higher, according to each target group
• Vietnam's pharmaceutical raw materials market depends on foreign countries, mainly from China
An analysis of Traphaco's financial statements from 2014 to 2019 reveals key insights, particularly the company's strategy of maintaining a low debt ratio, which aligns with trends observed in the pharmaceutical industry.
Recently, Traphaco secured a significant loan for fixed asset investments, enabling the company to expand its production scale and enhance its competitive edge Despite a decline in sales over the past three years, effective expense management has allowed Traphaco to swiftly meet its long-term debt obligations Consequently, the firm maintains stable profitability, reflected in its return on equity (ROE) and strong creditworthiness.
Nevertheless, Traphaco keeps cash and cash equivalents at a high level and financial investment at low This might prevent the company from getting opportunities to enrich itself
Those opinions above will be demonstrated by specific calculations and analyses as follows
The balance sheet reveals that cash and cash equivalents, inventory, and short-term accounts receivable constitute the largest portions of current assets.
Short-term allowances for doubtful debts -0.6% -0.5% -0.6% -0.4% -0.7%
Firstly, Inventory has not changed too much with a proportion of approximately 35% in the last five years This might be the effect of Enterprise Resource Planning (ERP) that
Traphaco applied Therefore, even though Traphaco increased the number of stores, they could manage their amount of Inventories well
From 2015 to 2019, Traphaco experienced a significant decrease in receivables, declining from 30% to nearly 18%, with the total amount falling from nearly 300 billion to 163 billion This reduction, alongside stable sales figures, indicates that Traphaco is effectively managing its customer relationships, alleviating investor concerns regarding potential bad debts.
Cash and cash equivalents, on the other side, change over two periods:
From 2015 to 2017, the share of cash and cash equivalents fell significantly from 35% (345 billion) to 21% (161 billion) However, between 2017 and 2019, this trend reversed, with cash and cash equivalents rising to approximately 33.5% (297 billion) by 2019.
The company's substantial cash and cash equivalents provide stability during challenging times; however, this excess liquidity may hinder potential growth opportunities By not investing these funds, the company risks missing out on higher returns compared to the minimal interest earned on demand deposits Additionally, the proportion of short-term investments remains insufficient relative to the cash reserves held.
Traphaco is much higher than companies in the industry
Figure 4-1: Current Assets Growth Chart
Cash and cash equivalents Short-term Investment
Short-term allowances for doubtful debts
Cash and cash equivalents of Pharmaceutical Companies
Table 4-4: Cash and Cash Equivalents of Pharmaceutical Companies
Firm Valuation
4.3.1 Weighted Average Cost of Capital
The capital structure of TRA will be calculated due to TRA’s Balance sheet from 2014 to
Debts are calculated by Short-term borrowings and finance lease liabilities plus long-term liabilities So TRA’s Debt = D will be calculated with the following formula:
D = Short term borrowings and finance lease liabilities + Long-term liabilities
Applying the above formula to calculate the Owner equity of TRA at the end of 2019 is
According to TRA's consolidated financial statements, Owner Equity is all in Equity except Funding sources and other funds Owner Equity of TRA = E will be calculated with the following formula:
E = Equity – Funding sources and other funds
• Owner equity proportion and debt proportion
The owner equity proportion of TRA at the end of 2019 is calculated using the formula:
The debt proportion of TRA at the end of 2019 is calculated using the formula:
There are two ways to calculate a company’s cost of capital, which are the direct and indirect methods
The cost of equity of TRA can be calculated by using the direct method based on the
CAPM model The formula of the CAPM model is:
Where: ERi = expected return of investment
ERm = expected return on the market β = beta of the company
The risk-free rate of return refers to the yield generated from risk-free assets, primarily government securities In the context of the Vietnam market, where trading in government securities is limited, the deposit rates offered by state-owned commercial banks or inter-bank rates can serve as effective proxies for the risk-free rate.
The market risk premium is the difference between the anticipated return of a market portfolio and the risk-free rate Typically, a stock index serves as a representative for the entire market portfolio, with its rate of change indicating the market's return In Vietnam, the VN-index is utilized as the benchmark for this market portfolio.
The beta is a measure of the systemic risk of a stock or the entire portfolio The beta shows the correlation of stock or portfolio volatility with the overall market movement
The beta coefficient is derived from historical stock prices and market index data using a regression equation However, due to the inefficiency of the Vietnamese financial market, this direct calculation may not yield accurate results An alternative approach, known as the indirect method, can be considered for a more reliable assessment of beta.
Estimating the beta of joint-stock companies in Vietnam directly from stock market data presents challenges, making the direct method suboptimal for calculating the cost of equity Additionally, calculating the expected return of the portfolio further complicates this process.
4 We use the indirect method introduced by Nguyen and Tran (2011) in their teaching case for the Fulbright
Page | 65 practice, the more reliable method of calculating the cost of equity is based on standard metrics on a developed stock market such as the United States
The cost of equity for a company in Vietnam is determined by taking the cost of equity of a comparable company in the United States and adding a risk premium This approach assumes that the company operates within the US market, allowing for the calculation of its cost of equity based on US data To adjust this figure for the Vietnamese market, a country risk premium is included, reflecting the higher perceived risks in Vietnam Additionally, an exchange rate premium is necessary due to currency differences between the two countries.
To sum up, the company’s cost of equity by the indirect method can be written as the formula follows:
E[R TRA ] VN = E[R company in the same industry ] US + RP C + RP E
E[RTRA] VN = expected return on equity of TRA
E[Rcompany in the same industry] US = expected return on equity of pharmaceutical companies in the United States
To assess the risk associated with Traphaco's operations in the US, we utilize the Capital Asset Pricing Model (CAPM), incorporating the levered beta and essential financial metrics from the US market.
𝐄 𝐑𝐢 = 𝐑 𝐟𝐫 + 𝛃 × 𝐌𝐚𝐫𝐤𝐞𝐭 𝐏𝐫𝐞𝐦𝐢𝐮𝐦 This formula requires specific calculations of each component according to the US Market
The primary factor in valuation models for the US market is the risk-free rate, which is currently set at 0.09% for the 3-month T-bond, as updated by the US Treasury Department.
5 Data available at https://www.treasury.gov/resource-center/data-chart-center/interest- rates/pages/TextView.aspx?data=yieldAll
A key factor in determining a company's cost of equity is beta, which measures the volatility of a stock relative to the market Since TRA operates exclusively in the pharmaceutical sector, it is appropriate to reference the beta of U.S pharmaceutical companies However, it is essential to adjust this beta, as the ratios of debt to equity and corporate income tax rates differ significantly for TRA compared to U.S firms This adjustment ensures a more accurate calculation of TRA's cost of equity.
As of March 2020, the unlevered beta for the pharmaceutical sector in the United States is 1.22 This figure aims to determine the beta of a pharmaceutical company that shares the same capital structure as TRA operating in the U.S The calculation of levered betas is performed using a specific formula.
𝐿𝑒𝑣𝑒𝑟𝑒𝑑 𝐵𝑒𝑡𝑎 = Unlevered beta × [1 + (1 − tax rate) × Debt
According to Traphaco’s financial statements in the last five years, the tax rate applied for this company is 20%
Lastly, the market premium is needed to calculate to identify a firm’s cost of equity
The market risk premium is defined as the difference between the market return and the risk-free rate In the context of the US market, this premium is calculated by comparing the return on the S&P 500 Index, which reflects market performance, to the return on Treasury bonds, representing the risk-free rate To accurately capture market fluctuations, returns should be analyzed over a specific time frame This study examines data from 1969 to 2019, covering a significant economic cycle During this period, the average return on the S&P 500 Index was 11.5%, while the average return on Treasury bonds was also considered to establish a comprehensive understanding of the market risk premium.
Bonds (US) from 1969 to 2019 is 7.15% Therefore market risk premium will be 4.35% (11.5% - 7.15%)
Following the CAPM Model, the cost of equity for Traphaco as this company operates in the United States is
6 All data used in this method based on Damodaran calculation, which is available on website http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm
To determine the appropriate cost of equity for Traphaco in the US market, it is essential to incorporate both the country risk premium and the exchange risk premium to adjust the Re for the Vietnamese market The country risk premium represents the additional return investors expect as compensation for the heightened risks associated with investing in a foreign market compared to their domestic market Given the financial market disparities between Vietnam and the United States, Damodaran's calculations indicate that Vietnam's country risk premium is 4.7%, denoted as RPc = 4.7%.
The exchange rate risk premium is defined as the disparity between the returns on investments in local currency and those in USD This approach involves calculating the difference between the VND deposit interest rate and the corresponding USD return, highlighting the inherent exchange rate risk.
As of March 2020, the average deposit interest rate for US dollar accounts at commercial banks in Vietnam, specifically using Vietcombank as a reference, was 3.55% for corporate customers This rate highlights the competitive landscape of deposit interest rates in the Vietnamese banking sector.
Following all of the above results, the cost of equity of TRA is below:
Based on the income statement of TRA in 2019, interest expense of TRA in 2019 is
Total debt at the beginning of 2019 = 206,962,575,931 VND
Total debt at the end of 2019 = 144,423,529,160 VND
The following formula will calculate the cost of debt
Cost of debt in 2019 = Interest expense in 2019
Average debt within the period Apply the formula above, the cost of debt is calculated below
As mentioned above, the WACC is identified by the following formula:
𝑾𝑨𝑪𝑪 = 𝑿 𝒆𝒒𝒖𝒊𝒕𝒚 × 𝑹 𝑬 + 𝑿 𝒅𝒆𝒃𝒕 × 𝑹 𝑫 × (𝟏 − 𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) From calculated figures above, here is the appropriate WACC for Traphaco
Return on capital (ROC) measures the effectiveness of TRA in utilizing its invested capital to generate profits The formula for calculating ROC is outlined below.
• Earnings before tax and interest
Following Income statement, EBIT is done by total profit before tax plus back interest expense of TRA in the period
EBIT = Earning before tax + interest expense
The earning before interest and tax of TRA is shown in the table below
Table 4-17:TRA’s EBIT from 2015 to 2019
To calculate Return on Capital (ROC), it is essential to adjust Earnings Before Interest and Taxes (EBIT) by excluding financial income and other non-operating profits, as well as accounting for financial expenses, including interest expense The adjusted EBIT is determined by subtracting financial income and other income from the original EBIT, where financial income is derived by deducting financial expenses from financial revenue.
Adjusted EBIT = EBIT – (Financial revenue – Financial expense) – Other income
Below is TRA’s adjusted EBIT from 2015 to 2019 following formula above:
Table 4-18: TRA’s adjusted EBIT from 2015 to 2019