Solutions to improve the activities of fundamental analysis in Thang Long Securities Company

ACKNOWLEDGEMENT
During my internship, I have an opportunity to learn much more about
professional and standardized quality in working of securities company and have
time to take this research. Although the time of internship is short, I have received
much help from my supervisor and Thang Long Securities Company.
I sincerely thank my lectures of Advanced Program, and Banking and Finance
Faculty who have created a good chance for me to apply my knowledge in theory
and get more experience in reality. This internship helps develop my skills useful
for my work in future as well as improve my basic knowledge available.
I respectfully thank to my supervisor M.S Nguyen Thi Thuy Duong, who has
instructed me to finish my research.
Moreover, to have the basic and actual knowledge to implement this research,
I really thank to Dr. Quach Manh Hao, general director of TLS, and Dr. Pham The
Anh, head economist of TLS, and all staffs of Analysis Department of TLS.
Director, manager and all staffs in Analysis Department of TLS help so much in
instructing me to work professional and supply useful data, statistic, and documents
to complete my research.

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


TABLE OF CONTENTS
ACKNOWLEDEGEMENT
TABLE OF CONTENTS
ABBREVIATION
LIST OF TABLES
LIST DIAGRAMS
EXECUTIVE SUMMARY
Security market line............................................................................................20
Profitable markets that yield high returns will attract new firms. This results in

many new entrants, which eventually will decrease profitability for all firms in
the industry. Unless the entry of new firms can be blocked by incumbents, the
abnormal profit rate will fall towards zero (perfect competition)....................28
The threat of substitute products or services....................................................29
The bargaining power of customers (buyers)...................................................29
The bargaining power of suppliers..................................................................30

ABBREVIATION

HO

Head Office

SBV

State Bank of Vietnam

SSC

State Securities Commission of Vietnam

SRTC

The Securities Research and Training Center

MOF

Ministry of Finance

GOV

Government

TLS

Thang Long Securities Company

Report

Fundamental analysis report

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


LIST OF TABLES
Table 2.1: Chartered capital of some leading securities companies 2010E..................
35
Table 2.2: Revenues structure of TLS..........................................................................
36
Table 2.3: Personnel of TLS.........................................................................................
40
Table 2.4: Models used by some securities companies.................................................
42
Table 2.5: PEs of ITC and similar real estate companies in 12 months cycle...............
43

LIST OF DIAGRAMS
Diagram 1.1: Operations of primary market................................................................
5
Diagram 1.2: Operations of secondary market.............................................................
6
Diagram 1.3: Types of data sources.............................................................................
15
Diagram 1.4: Security Market Line..............................................................................
18
Diagram 1.5: Industry life cycle...................................................................................
25
Diagram 1.6 Porter’s five forces..................................................................................
28

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


Diagram 2.1: Management structure of TLS................................................................
33
Diagram 2.2: Total assets and equities of TLS.............................................................
34
Diagram 2.3: Brokerage market shares of some leading securities companies in 2009....
35
Diagram 2.4: Brokerage market shares of some leading securities companies in the
first half of 2010...........................................................................................................
35
Diagram 2.5: Number of management accounts..........................................................
36

Diagram 2.6: Total revenues, expenses and gross revenues of TLS in recent years.....
37

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


EXECUTIVE SUMMARY
To deal with the question how to improve activities of fundamental analysis in
a securities companies, my research focuses on basic theory combined with reality
available in stock market of Vietnam. Basic theory involves key definitions about
financial market and securities companies; important and popular models used to
value and analyze a company and the industry it belongs. Reality involves status of
Thang Long Securities Company, where I take my internship, and issues of stock
market as well as management of Government and SSC. Then, I give some
comments about activities of fundamental analysis in TLS and recommendations to
improve them. In my opinion, I want to keep advantages of TLS and change to
improve limitations rather than change everything in analysis procedure. I give
recommendations for both TLS and Government and SSC. That is because TLS
cannot change environment around its operations itself. Some problems come from
company, but others come from regulations and weak in management of
Government. In fact, development of stock market of Vietnam in long term needs
combination of both authorities and all of securities companies. Therefore, my
research structure includes three chapters.
At the beginning, chapter one shows readers the theory of financial market,
securities companies and its operations. Next, chapter two continues to detail the
status of TLS in business, power of TLS in general as well as the activities of
fundamental analysis in TLS now. There are many statistics about TLS and other
securities companies with significant tables and charts. I also raise my ideas,
comments on reality of TLS based on data collected during the time of internship.

Finally, chapter three solves emerged issues of fundamental analysis in TLS. By
recommendations for TLS, Government, and SSC, I notice the importance of
changes in both company and the environment around company. Recommendations
divide according to the objectives they stress. For example, there have

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


recommendations for SSC, or for Government. They are just main points of my
research. If reader wants to understand more clearly, you would read in details.

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


1

INTRODUCTION
1. Rationale
The history of stock market is a long story.
In 12th century, France the courratiers de change were concerned with
managing and regulating the debts of agricultural communities on behalf of the
banks. Because these men also traded with debts, they could be called the first
brokers. A common misbelief is jthat in late 13th century Bruges commodity traders
gathered inside the house of a man called Van der Beurze, and in 1309 they became
the "Brugse Beurse", institutionalizing what had been, until then, an informal
meeting, but actually, the family Van der Beurze had a building in Antwerp where
those gatherings occurred; the Van der Beurze had Antwerp, as most of the
merchants of that period, as their primary place for trading. The idea quickly spread

around Flanders and neighboring counties and “ Beurzen ” soon opened in Ghent
and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in
government securities. In 1351, the Venetian government outlawed spreading
rumors intended to lower the price of government funds. Bankers in Pisa, Verona,
Genoa and Florence also began trading in government securities during the 14th
century. This was only possible because these were independent city-states not ruled
by a duke but a council of influential citizens. The Dutch later started joint stock
companies, which let shareholders invest in business ventures and get a share of
their profits - or losses. In 1602, the Dutch East India Company issued the first
share on the Amsterdam Stock Exchange. It was the first company to issue stocks
and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have
been the first stock exchange to introduce continuous trade in the early 17th century.
The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant
banking, unit trusts and other speculative instruments, much as we know them".
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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There are now stock markets in virtually every developed and the most developing
economies, with the world's biggest market being in the United States, United
Kingdom, Japan, India, China, Canada, Germany, France, South Korea and the
Netherlands.
By the time now, stock market becomes a familiar term with any people.
Although the market has time to be bear or bull, it still keeps the critical position in
financial market in the worldwide. The market capitalization value of the most
development stock markets in the world can be as big as thousands of billion
dollars. According to recent research of one independent group, China Stock Market

is blooming in 2009 and rise to the second in range of the biggest stock markets in
the world, just under the giant U.S. Stock Market.
To meet the demand of customer for services, Securities Company was
founded as indispensible along with the long history of stock market. All of
investors want to gain profit. Beginning with such desire of investors, analyzing
services were created to help the investors identify opportunity and limit risk. The
relationship between risk and return asked for a serious consideration from
securities companies. Their advices play a key role in ultimate decisions of
investors. Therefore, analyzing activities is very important without any exception in
securities companies.
Analysis in securities companies consists of two types of technical analysis
and fundamental analysis. They are different in functions and objectives. Technical
analysis bases on charts, trends, and diagram to give the sight about history and
available trend in the future while fundamental analysis bases on financial
statements, historical data, and information collected to understand deeper status of
that company. Fundamental analysis also helps investors estimate value of firm and
equity through significant models and their assumptions.
2. Research question
In limited dimension of this research, we just concern about activities of
fundamental analysis in Thang Long Securities Company. Procedures to write a
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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report in fundamental analysis have so many processes that they may let analysts be
confused. That is why the result is not good as much as possible due to obvious
reasons and personal reasons. During my internship, I recognize some issues, which
may hint the better results of fundamental analyzing reports, and raise some ideas,
which may help develop available efforts of such company. Therefore, my research

question focuses on how to improve activities of fundamental analysis in Thang
Long Securities Company
3. Research objectives
- Stud basic theory of securities companies and their activities of
-

fundamental analysis field
Analysis and valuation of fundamental analysis activities in Thang Long

-

Securities Company
Suggest some solutions to improve activities of fundamental analysis in

Thang Long Securities Company
4. Research methodology
The methods used in research methodology dialectical materialism, historical
materialism method of Marxism - Leninism, abstract methods of science, statistical
sampling methods combined with analysis case, comparison and modeling.
5. Research scope
Research will concentrate on study of activities of fundamental analysis in
Thang Long Securities Company from 2008 to the first half of 2010.
6. Research structure
Apart from introduction and conclusion, my thesis include three chapters
Chapter 1: Securities companies and fundamental analysis in securities
companies
Chapter 2: Reality of fundamental analysis activities in Thang Long
Securities Company
Chapter 3: Solutions to improve the activities of fundamental analysis in
Thang Long Securities Company

CHAPTER 1

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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SECURITIES COMPANIES AND FUNDAMENTAL ANALYSIS IN
SECURITIES COMPANIES
1.1 General knowledge of Security Company and Financial Market
1.1.1 Financial Market
1.1.1.1 Definition of financial market
In economic, financial market is a mechanism which allow people to buy
and sell (trade) financial securities (such as stocks and bonds), commodities (such
as precious metals or agricultural goods), and other fungible items of value at low
transaction costs and at prices that reflect the efficient-market hypothesis.
In finance, financial markets facilitate:
The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
International trade (in the currency markets)
And are used to match those who want capital to those who have it.
1.1.1.2 Types of financial market
Financial markets are structures through which funds flow. Financial markets
can be distinguished along two major dimensions: (a) primary versus secondary
markets and (b) money versus capital markets.
a. Primary market versus secondary market
• Primary market
Primary markets are markets in which users of funds raise funds through new
issues of financial instruments, such as stocks and bonds. Most primary market

transactions in the United States are arranged through financial institutions called
investment banks, who serve as intermediaries between the issuing corporations
(fund users) and investors (fund suppliers). For these public offerings, the
investment bank provides the securities issuer (the fund users) with advice on the
securities issue (such as the offer price and number of securities to issue) and
attracts the initial public purchasers of securities for the fund users.
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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Rather than a public offering, a primary market sale can take the form of
private placement. With a private placement, the securities issuer (user of funds)
seeks to find an institutional buyer, or group of buyers to purchase the whole issue.
Privately placed securities have traditionally been among the most illiquid
securities, with only the very largest financial institutions or institutional investors
being able or willing to buy or hold them.
Primary market financial instruments include issues of equity by firms
initially going public. These first-time issues are usually referred to as initial public
offerings (IPOs).
Primary market securities also include the issue of additional equity or debt
instruments of an already publicly traded firm.
Diagram 1.1 Operations of primary market
Primary Markets

Users of Funds
(Corporations
issuing debt/equity
instruments)

Underwriting with
Investment Bank

Initial Suppliers of
Funds (Investors)

• Secondary Markets
Once financial instruments such as stocks are issued in primary markets, they
are then traded in secondary markets. Buyers of secondary market securities are
economic agents (consumers, businesses, and governments) with excess funds.
Sellers of secondary market financial instruments are economic agents in need of
funds. Secondary markets provide a centralized market place where economic
agents know they can transact quickly and efficiently.

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


6
Diagram 1.2 Operations of secondary market
Secondary Markets

Financial Markets

Securities Brokers

Other Suppliers of
Funds

b. Money Market versus Capital Market

• Money Market
Money markets are markets that trade debt securities or instruments with
maturity of one year or less. In the money markets, economic agents with shortterm excess supplies of funds can lend funds. The short-term nature of these
instruments means that fluctuations in their prices in the secondary markets in
which they trade are usually quite small.
Money Market Instruments. A variety of money market securities are issued
by corporations and government units to obtain short-term funds. These securities
include repurchase agreement, commercial paper, and banker acceptance.
• Capital market
Capital markets are markets that trade equity (stocks) and debt (bonds)
instruments with maturities of more than one year. The major suppliers of capital
market securities (or users of funds) are corporation and government. Given their
longer maturity, these instruments experience wider price fluctuation in the
secondary markets in which they trade than do money market instruments.
Capital Market Instruments. The major capital market instruments and their
outstanding amounts are both Vietnam Dong and US dollar market value. Corporate
stocks or equities represent the largest capital market instrument, followed by
corporate bonds and government bonds.
Foreign Exchange Markets
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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In addition to understanding the operations domestic financial markets, a
financial analyst must understand the operations of foreign exchange markets and
foreign capital markets. People still remember that the most recent crisis in the
global economy comes from the crisis of U.S. mortgage market. Vietnam is one of
the members of WTO, thus, the fluctuations of global economy and U.S. economy
link to Vietnam economy.

Derivative Security Markets
Derivative security markets are the markets in which derivative securities
trade. Derivative securities is a financial securities (such as future contract, option
contract, or swap contract) whose payoff linked to another, previously issued
securities such as a security traded in the capital or foreign exchange market.
1.1.2 Securities companies
1.1.2.1 Definition of securities companies
Securities firms and investment banks are financial institutions that
underwrite securities and engage in related activities such as securities brokerage,
securities trading, and making a market in which securities can trade. (Peter S.
Rose/ Sylvia C. Hudgins)
Securities Company or Investment Fund Management Company is held in
the form of Limited Liability Company or Joint Stock Company under the
provisions of Enterprise Law. (The Law of Securities)
The securities company makes one, some or all of the following business
operations:





Securities brokerage;
Self-trading;
Underwriting securities;
Investment advisory securities.

Securities companies are allowed to carry out the underwriting of securities
when they have self-trading operation. In addition, securities companies can provide
financial advisory services and other financial services. (The Law of Securities)

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


8
Securities companies licensed to operate there must be facilitates to serve the
securities business. For the underwriting operation and investment advisory
securities, it is not required to satisfy conditions on technical system. Securities
companies must have enough legal capital as stimulated by government. Director
(CEO) and staffs must have significant certificates. Business plans must be in line
with the objectives of economy and social development and securities industry.
People who are granted license must meet the following conditions: have full legal
and acting capacity, meet standards of ethic and professional qualifications, have
enough certificates of qualification in securities granted by SSC.
1.1.2.2 Functions of Security Company
Securities transactions on the market: broker buying and selling securities
intermediary (in order of client orders for commission); and use their own capital to
buy or sell securities to get profit.
Monopoly in securities trading on the market and distribute securities to the
market.
Informational and consultant centre for investors.
Intervene into the stock market and contribute to affect stock price.
1.1.2.3 Operations of Security Company
a. Brokerage
A brokerage firm, or simply brokerage or broker in context, is a financial
institution that acts as a stockbroker. Brokerage firms serve a clientele of investors
who trade public stocks and other securities. (Wiki)
The buying and selling securities must be through brokers, whose legal or
person entity are licensed by State Securities Commission of Vietnam. Brokers are
legal entity known as Security Company and have the opportunity to become

official members of stock market.
Securities brokerage is an activity in which securities companies
representing customer transaction is conducted through the mechanism of trading at
the Stock Exchange or OTC market where customers will be responsible for the
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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economic consequences of the transaction. Risks that broker usually face are
customers or other brokers cannot repayment on time.
b. Self-securities
Self-securities activities are operations in which securities companies
conduct transactions of buying and selling by themselves. Securities dealing
activities can be carried out on the concentrated market or on the OTC. On the
centralized trading market, trading orders of securities companies to put into system
and perform the same as customer transaction. On the OTC market, these activities
can be conducted directly between companies and their partners or through a
network of information.
c. Underwriting
Underwriting is activity in which underwriter help issuers do legal
procedures before going to public, organizing the distribution of securities, and
stabilizing prices of securities in the initial period after its release.
To be involved in underwriting business, securities companies must have a
relative large amount of capital. This activity is so high risk that securities
companies must perform carefully a series of studies before deciding whether to
accept the or guarantee.
Underwriting income of securities companies come from service charge or a
certain percentage commission on the proceeds from the issuance. These fees
depend on the nature of the issue (large or small, favorable or difficult issue or the

first or primary distribution).
d. Consultant
Investment advisory securities means activities through analysis to provide
advice, analysis of situations and perform some work and other services related to
the issuance, investment, and the financial structures for clients.
Two forms of advices are direct and indirect consultant. The form of direct
consultant is done when securities companies analyze, deal with situations of
customers from which recommendation directly on the basic of a consultant fee
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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agreement. For the second, securities companies can share their information through
issuance of analysis reports in magazines, books or essays on the website of the
company. Securities companies must be responsible for truthfulness of their advices
to clients and in many cases consultant activities must be licensed and managed.
However, in the securities investment advice, investors need to take responsibility
for their own investment decisions.
• Principals of consultant:
Due to consultant jobs ask for utmost caution in giving advices to clients, so
they require to follow some guidelines:
Not to be sure about the value of securities because they always fluctuate
with market realities, and develop in psychological, economic, and social factors.
Always remind customers that advices based on theoretical analysis, cannot
completely right, and customers are who let the ultimate decisions.
Not to entice customers to buy or sell any securities, counsel must proceed
form the basis of objective, scientific and logical.
e. Portfolio management
Portfolio management is professional management of trust fund to invest to

portfolio. It makes profitability for customer on the basis of increasing profit and
serving initial capital.
In professional portfolio management, securities companies must ensure the
separation the assets of securities companies and assets of customers. Depending on
the trust of customers for securities companies, they may authorize a part or a whole
of property management. Periodically or request of customers, the company sent the
statement on the status of assets in the portfolio for customers, and not to disclose
information about the customer’s property except in special cases.
Securities companies are allowed to carry out the underwriting of securities
when they have self-trading operation. In addition, securities companies can provide
financial advisory services and other financial services.

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


11
Securities companies licensed to operate there must be facilitates to serve the
securities business. For the underwriting operation and investment advisory
securities, it is not required to satisfy conditions on technical system. Securities
companies must have enough legal capital as stimulated by government. Director
(CEO) and staffs must have significant certificates. Business plans must be in line
with the objectives of economy and social development and securities industry.
People who are granted license must meet the following conditions: have full legal
and acting capacity, meet standards of ethic and professional qualifications, have
enough certificates of qualification in securities granted by SSC.
1.2 Critical framework for fundamental analysis activities in Security
Company
1.2.1 Definition of fundamental analysis
Fundamental analysis refers to activities in which analysts use financial

statements, data and information collected to understand the status of one company.
Analysts, with their knowledge, give statements and recommendations to
customers. From that, customers will consider to buy, sell or keep stocks in
portfolio. However, the ultimate decisions depend on customers
2.1.2 Requirements of a fundamental analysis report
1.2.2.1 Reference
The reports analyzing organizations listed on the stock market note investors
that information involved in these reports are only for referent. Security Company is
not responsible for any consequence or events are considered as consequences of
readers of reports. In addition, reports must present the sources of information used
in them.
1.2.2.2 Transparency
Analysis reports are used not only for customers and investors on the stock
market but also for security company itself. Therefore, analyzing reports should be
precise and transparency according to events happened. Information sources should
be independent and obvious with the security company and its partners.
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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1.2.2.3 Generation
Reports should present fully comprehensive activities of organizations listed,
and analyze the interaction between listed organizations and environment as well as
overall industry environment.
1.2.2.4 Forecast
Reports are expected to forecast business performances and stock prices
changes of organizations listed in the future. The more announcements come to be
reality, the more prestige security company get.
1.2.2.5 Update

Stock market change by every minute, so reports should be updated
frequently. In some cases, daily overview reports are uploaded into the website of
security company right after stock market close trading.
1.2.2.6 Separation
Reports to investors and reports to securities companies are different in the
sense of whether content are full or short. In fact, analyzing reports for company
usually cover many parts. Those reports play in key role in brokerage, advisory, and
self-trading activities. Otherwise, analyzing reports for investors are usually shorter
and only concentrate on some main parts such as market overview, some key
stocks. In some cases, report may cover only on the concept of a typical stock.
Moreover, concept of reports also depends on the time of report. If reports
are daily, semimonthly, or quarterly, they forecast in short-term about the general
situation of stock market and some stocks. If reports are update frequently for a
typical stock, they are able to use in longer time.
1.2.2.7 Logic
Analysis report should be logical. They should show the relationship
between financial statements, business performances, and other information
collected of a company listed to the fluctuations in stock price of that company.
They should present the effect of macroeconomic information, economy cycle, and
random event to stock market. In brief, analyzing reports are essential to present the
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


13
interaction between data collected with stock market and stock price rather than
only original information.
1.2.2.8. Rights
All rights of reports belong to securities companies and distributed as well as
reproduced by companies themselves only. The writers of analysis report cannot

publish a part or a whole of his report when report submitted to company.
1.2.3 Essential processes
1.2.3.1 Identify objectives
Identify purpose, limits, scope, and subjects.
This is basis part, which helps analysts have overview of listed organizations
and factors affecting it. As stated above, reports for securities companies and for
clients are different, thus, the purpose of reports clarify basic concept.
Determine limits, scope and objects of reports help analysts zone analyzed
objects and other related objects; guarantee to meet requirements of department and
investors. Analysts can base on purpose, objects of reports to determine limits,
scope, and objects significantly.
Specifically, if the purpose of making report is to access fluctuations of stock
markets, that report will be based on information and data such as VN Index, HN
Index, interest rate (basic interest rate, overnight interest rate, refinancing interest
rate, interbank interest rate), CPI monthly, top ten stocks rising on stock market and
top ten stocks decline on stock market, or even industries which have big changes in
time of day or week. Because these types of information change day by day, the
statistic and comment provided by analysts will be in short-term. In my research, I
will concentrate on the other type of reports, which presents specific stock of one
company. This type of reports asks analysts to understand deeply about business
status of company listed through financial statements and other news. Analysts have
to clarify factors in environment out of company affecting its stock price and
business operations. They also have to forecast performances of that company in the
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


14
next quarter or at the end of fiscal year. From that, they give their thoughts and
recommendations in buying, selling, or keep stocks of that company.

1.2.3.2 Guideline report
Guideline report is an important part of procedure in making a report. Firm
in different industries have different background. For example, firms in
manufacturing or industrial sectors will be affected strongly by price of raw
materials on the market. Otherwise, financial firms are affected by interest rate and
changes in monetary policy of government and State Bank of Vietnam. Company
listed should be divided into different industries with various typical characteristic.
However, almost reports involve following concepts in a fixed form:
 Overview of company
 Analysis in general
 News (of both company and market)
 Valuation of stock price in the future under assumptions
1.2.3.3 Select significant model
Model selection in analysis is extremely important. There are too many
models used to value a firm or stocks in the world. Due to limits of analysts’
knowledge and experience, models, which are complicated and ask for many
assumptions are not requested. Analysts can be confused when models need to put
so many factors that analysts no longer distinguish what is most important. Model
with many assumptions can go to the result, which is not realistic.
On the other hand, different parts of reports use different models. Therefore,
analysts need to understand the advantages and disadvantages, conditions of each
model to conduct suitable.

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


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1.2.3.4 Collect data
Diagram 1.3 Types of data sources

DATA

PRIMARY DATA

SECONDARY DATA

There are two sources of data: primary data and secondary data.
Secondary data is data treated. We collect this data through public
information (old financial statements, old annual reports, periodic disclosure,
unusual information requested by SSC, or more information from the prospectus of
organizations listed). Information and statistics from SSC and relevant ministries
also are expected.
Primary data is data untreated. To have this data, analyzing department can
book company in advanced to meet public information person or find out indirect
data from independent group. In some special cases, department have to select
examples, and investigate partners, rivals, and investors of company to get more
information.
1.2.3.5 Write the report
Reports are the final products handling to investors and specialized
departments. Therefore, writing the report is so important that analysts usually have
to think carefully and revising many times during writing report. Writing report
must guarantee logical characteristic of that report.
1.2.3.6 Correct and improve the report
In normal way, analyst should spent fifty percent of their time to revise all
the report. Beside, reports have to be update day by day along with changes on
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


16

market and news from listed organizations themselves. Customers who book reports
sometimes become to revisers of them. They may ask some misunderstood points or
statements in the report. Analysts are responsible to clarify them and explain why
they say those statements.
1.2.4 Basic models used in fundamental analysis
1.2.4.1 Models used to value firms and stock prices
In financial markets, stock valuation is the method of calculating theoretical
values of companies and their stocks. The main use of these methods is to predict
future market prices, or more generally potential market prices; then, to profit from
price movement. Stocks that are judged undervalued (with respect to their
theoretical value) are bought, while stocks that are judged overvalued are sold, in
the expectation that undervalued stocks will, on the whole, rise in value, while
overvalued stocks will, on the whole, fall.
In the view of fundamental analysis, stock valuation based on fundamentals
aims to give an estimate of their intrinsic value of the stock, based on predictions of
the future cash flows and profitability of the business. Fundamental analysis may be
replaced or augmented by market criteria what the market will pay for the stock,
without any necessary notion of intrinsic value. These can be combined as
"predictions of future cash flows/profits (fundamental)", together with "what will
the market pay for these profits?" These can be seen as "supply and demand" sides
– what underlies the supply (of stock), and what drives the (market) demand for
stock?
Discounted Cash Flow Valuation
Discounted cash flow calculations have been used in some form since money
was first lent at interest in ancient times. As a method of asset valuation it has often
been opposed to accounting book value, which is based on the amount paid for the
asset. Following the stock market crash of 1929, discounted cash flow analysis
gained popularity as a valuation method for stocks. Irving Fisher in his 1930 book
"The Theory of Interest" and John Burr Williams's 1938 text 'The Theory of
Supervisor: M.S Nguyen Thi Thuy Duong

Nong Thi Quynh Anh - Class: Advanced Finance


17
Investment Value' first formally expressed the DCF method in modern economic
terms.
In finance, discounted cash flow (DCF) analysis is a method of valuing a
project, company, or asset using the concepts of the time value of money. All future
cash flows are estimated and discounted to give their present values (PVs) – the
sum of all future cash flows, both incoming and outgoing, is the net present value
(NPV), which is taken as the value or price of the cash flows in question.
Using DCF analysis to compute the NPV takes as input cash flows and a
discount rate and gives as output a price, the opposite process – taking cash flows
and a price and inferring a discount rate, is called the yield.
Discounted cash flow analysis is widely used in investment finance, real
estate development, and corporate financial
Discount rate
The most widely used method of discounting is exponential discounting,
which values future cash flows, as "how much money would have to be invested
currently, at a given rate of return, to yield the cash flow in future". Other methods
of discounting, such as hyperbolic discounting, are studied in academia and said to
reflect intuitive decision-making, but are not generally used in industry.
The discount rate used is generally the appropriate Weighted Average Cost
of Capital (WACC), that reflects the risk of the cash flows. The discount rate
reflects two things:
1. The time value of money (risk-free rate) – according to the theory of time
preference, investors would rather have cash immediately than having to wait and
must therefore be compensated by paying for the delay.
2. A risk premium – reflects the extra return investors demand because they
want to be compensated for the risk that the cash flow might not materialize after all.

An alternative to including the risk in the discount rate is to use the risk free
rate, but multiply the future cash flows by the estimated probability that they will
occur (the success rate). This method, widely used in drug development, is referred
Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance


18
to as NPV (risk-adjusted NPV), and similar methods are used to incorporate credit
risk in the probability model of CDS valuation.
CAPM
In finance, the capital asset pricing model (CAPM) is used to determine a
theoretically appropriate required rate of return of an asset, if that asset is to be
added to an already well-diversified portfolio, given that assets’ non-diversifiable
risk. The model takes into account the asset's sensitivity to non-diversifiable risk
(also known as systematic risk or market risk), often represented by the quantity
beta (β) in the financial industry, as well as the expected return of the market and
the expected return of a theoretical risk-free asset.
The model was introduced by Jack Treynor (1961, 1962), William Sharpe
(1964), John Lintner (1965) and Jan Mossin (1966) independently, building on the
earlier work of Harry Markowitz on diversification and modern portfolio theory.
Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize in
Economics for this contribution to the field of financial economics.
Diagram 1.4 Security Market Line

The Security Market Line, seen here in a graph, describes a relation between
the beta and the asset's expected rate of return.
Source: www.en.wikipedia.org
The CAPM is a model for pricing an individual security or a portfolio. For
individual securities, we make use of the security market line (SML) and its relation

Supervisor: M.S Nguyen Thi Thuy Duong
Nong Thi Quynh Anh - Class: Advanced Finance