Corporate finance DHG

Table of Contents

I.

ABOUT DHG
Hau Giang Pharmaceutical Co., Ltd. is a private enterprise specializing in
trading all kinds of pharmaceuticals serving human needs. The company selfaccounting independent economy should have the right to be active in business and
corporate finance. But not so that the company only run for profit, on the contrary,
the company always ensure the correct business process and test and preserve the
quality of medicine because the drug is a special item to prevent and cure it. Directly
affecting human life and health.
For more than 43 years of formation and development, DHG Pharma is now
recognized as a leading company of Vietmam Pharmaceutical industry. Precursor of
DHG Pharma was 2/9 Pharmaceutical Factory and was founded on September 02nd
1974 at Kenh 5 Dat Set, Khanh Lam Commune (Khanh Hoa Commune now), U
Minh District, Ca Mau Province. On 02 September 1974, the Company was changed
into a Joint-stock Company with the initial charter capital was 80 billion VND.
“DHG” being listed on HOSE: December 21st 2006, 8,000,000 shares of DHG
Pharma posted on Ho Chi Minh Stock Exchange (HOSE) under the securities code
DHG.
DHG Pharma had come through many ups and downs of the war time, the
subsidy period and the inert economy before our equiztiation in 1974. With the spirit
of never-ending striving, under the close direction of the company’s leadership
board; the efforts of departments, branches, locals and friendly enterprises in the
same branch, the Company always sustained a stable production, enhancing the
standards of living and morale for citizens during these past years. Since then, DHG


Pharma has moved forward strongly and created a steady position in Viet Nam
pharmaceutical market and now is ready for international opportunities.
1. An introduction to the company:

Company name: DHG Pharmaceutical Joint-Stock
Company Abbreviation: DHG PHARMA
HOSE : DHG
Headquarters: 288 Bis Nguyen Van Cu, An Hoa Ward, Ninh Kieu District, Cantho
City
Authorized Capital: 871.643.300.000 VNĐ
Owner’s Equity: 2.521.236.027.240 VNĐ (at 2015 December 31th)
Tel: (0292). 3891433 – 3890802 – 3890074
Fax:
Email:
Website:
Tax Number: 1800156801

0292.3895209


Business registration certificate and tax code: 1800156801


• DHG announces new CEO. Accordingly, Mr. Doan Dinh Duy Khuong, Deputy
CEO in charge of sales will be acting CEO for a term of 6 months effective from
September 1st FY2017.
• The short term appointment may be viewed as a probationary period likely leading
to a longer term contract.
• For FY2017 as a whole, HSC forecasts FY2017 net sales of VND4,092 billion, up
8.16% and profit before tax at VND823.8 billion (+8.85% y/y).
• HSC furthers forecasts a FY2017 EPS of VND5,300 and giving us a forward P/E
of 20.6xs.
• For FY2018, HSC forecasts a net sales of VND4,397 billion, (+7.47% y/y) and

pre-tax profit of VND880.2 billion, (+6.85% y/y).

RECOMMENDATION: HOLD

II.

Structure analysis:
1. Assets and capital structure analysis


On the balance sheet as on the 31st of December 2016, the total assets of the
Company increased 17.3% (up to 3,946 billion VND) compared to the same period
last year. Assets structure and capital structure remained stable and experienced less
changes. Specifically, the owner’s equity always accounts for more than 65% of the
total capital, which is a strong foundation to implement the long-term development
strategy of the Company.
Because the Nonbundalactam factory enjoys a preferential tax rate of 0% for 4 years
(2015 - 2018), equivalent to a reduction of 44 billion dong of corporate income tax
in 2015. That is why the profit after tax of his big industry. Pharmaceuticals
increased 11% and reached 590 billion.
Hau Giang Pharmaceutical has been re-selecting the product portfolio - based on
customer needs, to maximize corporate profits. Hau Giang pharmaceutical instead of
passive orders received from abroad and exported to, the company has been
deploying plans to offer, creating a stable market in the country.


2. Capital structure analysis:

COMPARISON WITH OTHER PHARMACEUTICAL COMPANIES

IN 2016, DHG PHARMA’S TOTAL ASSETS CONTINUED TO LEAD IN THE
VIETNAM PHARMACEUTICAL INDUSTRY, TRIPLE THE TOTAL ASSETS OF
THE SECOND LARGEST ENTERPRISE.
DHG Pharma’s charter capital was also the highest (872 billion VND), followed by
DMC (347 billion VND), TRA (345 billion VND), IMP (289 billion VND).
In 2017, DHG Pharma plans to increase its charter capital to 1,307 billion VND
through the issuance of bonus shares for current shareholders, the issued rate is 2 : 1,
expected to be issued in Q2/2017 – Q3/2017, continues to affirm its leading position
in Vietnam pharmaceutical industry.


3. Assets structure analysis
IN TERM OF SHORT-TERM ASSETS STRUCTURE, THE AMOUNT ACCOUNTED FOR 66% AT THE
BEGINNING OF THE YEAR AND INCREASED TO 69.6% AT THE END OF THE YEAR.


The growth rate of short-term assets (3.6 point) was mainly due to the
increase of cash, cash equivalents, and short-term financial investments (deposits in
banks with the maturity terms from more than 3 to 9 months). However, the
proportion of receivables and inventories decreased 1.7% and 0.4% compared to the
beginning of the year. This showed that the liquidity of the Company is guaranteed
and the management of customers’ debt is managed tightly.
In term of long-term assets structure, the proportion was 30.4% at the end of the
year while 34% at the beginning of the year. The proportion of longterm assets
decreased; however, the value went up to 56.7 billion VND due to fluctuation of
cash, cash equivalents and short-term financial investments. These items made up a
large proportion, so its changes have a strong impact on the general assets structure
(short term - long term).
Compared to the beginning of 2016, on the 31st of Dec 2016, the cost of fixed assets
increased 115 billion VND. The major fixed assets were mainly invested in the

distribution system, machinery, equipment, and transportation.


Long-term assets structure tend to strongly fluctuate from 2012 to 2016:
-

There was an upward trend in the number of fixed assets from 2012 to 2015,
reach the highest point of 37.81% in 2015, but dropped 10% in 2016 -> The

-

company has improved its factory to advance productivity.
A gradual decrease in long term financial investment from year to year.

=> Long-term asset is accounted for 30.4%, head accounting for 34.0%.
Proportion of longer-term assets decline, however increased in value 56.7 billion
because of the movement of money items, the cash equivalents and investments
in short-term. Compared to the beginning of 2016, at 31/12/2016, historical cost
of assets increased by 115 billion dong. Category large fixed assets arising in the
year because of the investment in the system distribution, investment in
machinery, equipment and means of transport, ...

4. Liabilities and equity structure analysis

The bar chart witness erratic in liabilities and equity structure:
-

Owner’s equity fuctuated during 5 years, reached the highest point at 74.97%
in 2015.

=> Share capital of total owner’s equity is an upward trend from 2012- 2016, but
decrease slightly in 2016. At the end of 2016, owner’s equity has been increased 373
billions compare to the beginning of the year. Raising fund from the retained earning
in 2016 and the profit from treasury stock, as a result, share premium has increased
6 billions. The low propotion of payable represents financial structure DHG's
healthy, sustainable nature.


III.

Asset ultilization, or Turnover Ratios analysis:
1. Short term solvency ratios

Generally, the efficiency ratios of the Company did not change sharply compared to
previous years. The receivables turnover was 6.3 times, up 0.9 times from 2015,
which showed more efficient control from DHG Pharma. The company still applied
the policy for customer debt as in 2014 (commercial debt is 30 days, if overdue from
45 days, thesales invoice will be suspended; ETC is 180 days), meanwhile, the sales
systems become more professional, KPI indicators are assigned to each
salespersons, delivery staff, and cashiers and they were monitored every week,
month, quarter, and year. The accounts payable turnover was 8 times, decreased
once compared to 2015. The company maintained a balance between with accounts
Receivables and payables.
For inventories, the inventory turnover was 3 times, equivalent to that of 2015.
Higher inventory turnover demonstrated that DHG’s goods are well-circulated and
not stagnant.
Comparing with listed companies in the same industry, DHG Pharma’s efficiency
ratios are not overwhelmingly dominant, but always are at high level of
performance.

DHG Pharma’s liquidity ratios are always better than the average in the industry. It
brings an advantage in raising capital for business operations as well as increases
credibility with suppliers.

IV.

Liquidity ratios:


DHG Pharma’s liquidity ratios are always better than the average in the industry. It
brings an advantage in raising capital for business operations as well as increases
credibility with suppliers.

V.

Market value ratios analysis:

In 2016, the stock price of several pharmaceutical company rose sharply due to the
improvement on business performance, plus positive information such as increasing
the foreign ownership limited (FOL). In that situation, the spectacular business
results of DHG Pharma in 2016 and the five - year business strategy for the period
of 2016 – 2020 have built investors’ confidence through the increase of P/B ratio
from 2.3 in 2015 to 2.9 in 2016. Simultaneously, with a low P/E ratio (14 compared
to the industry: 15.6). DHG Pharma’s shares are still appealing to investors.
Specifically, DHG Pharma’s stock price increased from 66,500 VND/share on the
31st Dec 2015 to 98,000 VND/share on the 31st of Dec 2016, and by the end of
Q1/2017 (31st Mar 2017), the share price of DHG Pharma is 138,400 VND.

VI.

Profitability ratios
One of the most frequently used tools of financial ratio analysis is profitability
ratios, which are used to determine the company's bottom line and its return to its
investors. The goal of a business is to make a profit, so this type of ratio examines
how well a company is meeting that goal. The commonly used ratios to evaluate
profitability are:
 Net profit margin: measures how successful a company has been at the

business of marking a profit on each dollar sales
• NET PROFIT MARGIN =
• Return on asset: how efficient management is at using its assets to generate
earnings.
•

RETURN ON ASSET=
 Return on equity: measures how well the company is using its shareholders'
or owners' invested money to generate profit.
• RETURN ON EQUITY=

2012
2013
2014
2015
2016
Industr
y

Profit margin

16.76%
16.82%
13.64%
16.42%
18.85%

Return on assets
20.66%
19.26%
15.32%
17.3%
19.5%

Return on equity
20.84%
29.94%
23.27%
24.6%
26.3%

12%

18%

 The chart shows a down ward trend in profit margin from 16.82% in 2013 to

13.64% in 2014, approximately 4%, while the one remained unchanged at
16% in 2012 and 2013. A lower net profit margin means that DHG was less
efficient at converting sales into actual profit. From 2014 to 2016, profit

margin jumped back at 16% and reached the highest point of 18.85% in 2016.
An increase in percentage of profit margin signals an improvement in both
operational efficiency and profitability. The company improved its profits
and efficiency by 3 percent in comparison with the previous year.
 The company saw a sharply decrease in percentage of return on equity
during 5 years. Around 6% of ROE decreased from 2013 to 2014 and recover
back to 23% and 24% in 2015 and 2016 respectively. Although ROE signal to
increase in 2014 to 2016, it’s still much lower than the highest point in 2014
and a rise is not much considerable. This evidence indicates that DHG is
using the equity provided by stockholders during 2014-2016 less effective in
comparison with the previous year.
 The chart shows a significant decline in percentage of return on asset from
21% in 2012 to 15% in 2014, nearly 6%. This decrease indicated that DHG
generated less profit from all of its resources in the year 2013 compared to
the previous year. After hitting a low of 15% in 2014, the return on asset is
increasing order in next three years, at 17.62% and 18% in 2015 and 2016
respectively. This increase indicates that company uses its assets to generate
earning more effective in comparison with the previous years. Beside, ROA
of DHG is much higher than the industry average, it means that the company
manages assets more efficiently than other competitors at the same time.

VII.

DUPONT ANALYSIS
DuPont analysis breaks ROE into its constituent components to determine which of
these components is most responsible for changes in ROE. According to DuPont
analysis, ROE is affected by three things:

•

Operating efficiency, which is measured by profit margin.


•
•

Asset use efficiency, which is measured by total asset turnover.
Financial leverage, which is measured by the equity multiplier.

Therefore, DuPont analysis is represented in mathematical form by the following
calculation:
ROE = Profit Margin x Asset Turnover Ratio x Equity Multiplier
ROE = x = ROA x Equity multiplier
ROE = = x x
Year

ROE

Profit margin

Total assets turnover

Equity multiplier

2012
2013
2014
2015
2016

32%
32.3%
25.0%
24.6%
26.3%

16.76%
16.81%
13.64%
16.42%
18.84%

1.24
1.37
1.13
1.23
0.73

1.4
1.6
1.5
1.33
1.36


VIII.

Dupont Analysis 2016
Return

Return on
on equity
equity
24.64%
24.64%

Return
Return on
on assets
assets

Equity
Equity multiplier
multiplier

18.07%
18.07%

1.36
1.36

Profit
Profit margin
margin

Total
Total assets
assets turnover
turnover

18.84%
18.84%

0.73
0.73

Net
Net income
income

Sales
Sales

Sales
Sales

Total
Total assets
assets

713,097$
713,097$

3,783,045$
3,783,045$

3,783,045$
3,783,045$

3,945,744$

3,945,744$

Total
Total cost
cost

Sales
Sales

Fixed
Fixed assets
assets

Current
Current assets
assets

$$

3,783,045$
3,783,045$

1,109,854$
1,109,854$

2,747,174$
2,747,174$

Costs
Costs of

of goods
goods sold
sold

Depreciation
Depreciation

Cash
Cash

2,070,059$
2,070,059$

537,893$
537,893$

603,189$
603,189$

Interest
Interest

Account
Account receivable
receivable

12,492$
12,492$

692,281$

692,281$

Selling
Selling generate
generate &
& administrative
administrative expenses
expenses

Taxes
Taxes

Inventory
Inventory

64,546$
64,546$

1,412,244$
1,412,244$

The DuPont analysis of DHG in 2016 is shown in the chart above and breaks down
how the return on equity is achieved. The company has strong ROE over three years
(2014-2016), and the range is between 25% and 26%. This is an upward trend from


year by year, indicated that DHG is using the equity provided by stockholders
during 3 years effectively and using it to generate more equity for the owners.
Besides, the percentage of profit margin reached the highest point of 18.84% in
comparison with the previous years, which signals an efficiency in operating

management.
Although profit margin is high, the total asset turnover hit a low of 0.73 times
( decrease 0.5 times in comparison with 2015). A decline in total asset turnover ratio
might result from a slow increase in sale revenue and could be a sign that the
company is "overinvested" in assets- the company added capacity in fixed assets -more equipment or vehicles -- that isn't being used ( fixed assets increase from 1,142
to 1,199 in 2015 and 2016 respectively). DHG’s asset turnover ratio is marginally
lower, which shows that the company is slightly less efficient at driving sales using
its assets.
These figures suggest that during 2016, the firm was able to generate higher margins
while increasing volume of sales for each unit of asset held, both of which indicate
higher management efficiency.
Look at the chart, the company saw a downward trend in Equity multiplier, from 1.6
in 2013 to 1.3 in 2016. The lower the ratio, the less debt the company employs in
relation to shareholder’s equity. Besides, profit before tax growth from 18% to 20%
because of an incentive to the new Pharmaceutical manufacturer.
=> To improve the efficiency of ROE, company focus on using asset to increase
revenue and profit margin. Although the performance of asset decline in comparison
with 2015, ROA and ROE increased mainly thanks to the support of the tax burden
index and net profit margins.


 DuPont analysis by trend 2012-2016

DuPont analysis breaks ROE into its constituent components to determine which of
these components is most responsible for changes in ROE. According to DuPont
analysis, ROE is affected by three things:

•
•
•

Operating efficiency, which is measured by profit margin.
Asset use efficiency, which is measured by total asset turnover.
Financial leverage, which is measured by the equity multiplier.

Therefore, DuPont analysis is represented in mathematical form by the following
calculation:
ROE = Profit Margin x Asset Turnover Ratio x Equity Multiplier
ROE = x = ROA x Equity multiplier
ROE = = x x


Year

ROE

Profit margin

Total assets turnover

Equity multiplier

2012
2013
2014
2015
2016

32%
32.3%

25.0%
24.6%
26.3%

16.76%
16.81%
13.64%
16.42%
18.84%

1.24
1.37
1.13
1.23
0.73

1.4
1.6
1.5
1.33
1.36

Source: DHG’s Annual report 2016


BRIEF CONCLUSION
Equity always accounts for more than 65% of total assets. Liquidity ratios were at a
high level. Cash, cash equivalents, and short-term financial investments accounted
for a high proportion of asset structure. Investors can be assured by the company
liquidity, capability of paying debts, and interest expenses. . Profitability ratios

(ROS 18.8%, ROA 19.5%, ROE 26.3%) of the Company were always high and
higher than the industry’s ratios. Meanwhile, the P/E ratio was lower than the
industry index.
In term of business efficiency, DHG Pharma’s revenue continues to grow at an
average annual growth rate of 15% per year. In 2017, the sales system will be
implemented under a new, more professional, diversified, and widespread model
with expectations to bring high results for the Company.
Profit before tax will increase in proportion with the revenue increase. In particular,
DHG Pharma will continue to receive higher tax incentives from the factory in Tan
Phu Thanh Industrial Zone in 2017. Thus, the profit after tax will have strong
support which


IX.

EXPENSE STRUCTURE OF DHG COMPARED TO LISTED
PHARMACEUTICAL COMPANIES

Source: 2016 audited Financial Statements of companies

THIS IS AN ADVANTAGE OF DHG WITH A COMPETITIVE MARKET OF
DAYS OF GARAGE BY PHARMACEUTICAL COMPANIES WITH QUITE
SIMILAR GENERIC PRODUCTS.

 IN 2016, DHG'S TOTAL ASSETS CONTINUED TO GROW AT THE TOP

OF THE PHARMACEUTICAL INDUSTRY OF VIETNAM, SECURING
ALL ASSETS OF SECONDARY CORPORATE COMPANIES.

DHG's authoried capital was also the highest (872 billions VND), followed by DMC
(347 billions VND), and IMP (289 billions VND).
In 2017, DHG plans to increase its authorized capital to VND 1,307 billions through
the issuance of bonus shares to existing shareholders, the issuance ratio is 2: 1,
expected to be issued in the Q2 of 2017 - Q3 / 2017 , continue to affirm the position
of leading pharmaceutical company in Vietnam.

 COMPARING THE PERFORMANCE OF THE COMPANY WITH

LISTED

COMPANIES,

DHG'S

OUTSTANDING BUT STILL HIGH.

PERFORMANCE

IS

NOT


 MARKET VALUE RATIOS (31/12/2016)

D

D

I

O

D

H

M

M

P

C

Book

G
33

C
25

P
32

C
21

L
11

value

20

44

33

50

65

(VND)
EPS

4
69

5
48

9
30

6
27

7
16

(VND)
P/B

93
2,

56
2,

76
1,

75
1,

00
2

P/E

9
14

7
76

7

18

8
14

14

,2

,6


In 2016, many pharmaceutical stocks gained dramatically thanks to improving
business results, plus positive information such as increasing the ownership ratio of
the first
Foreigners (Room). In that context, DHG with positive business results in 2016 and
business strategy 05 years in the period 2016 - 2020 was built in a way that has
created confidence from investors expressed through P / B will increase from 2.3 in
2015 to 2.9 in 2016. At the same time, with P / E still low compared with industry
(14 vs. 15.6), DHG's stock is still very attractive. with investers. DHG's share price
increased from 66,500 VND / share on 31/12/2015 to 98,000 VND /shares dated
31/12/2016, and arrived stock prices at the end of the first quarter of 2017
(31/03/2017) DHG's coupon is VND 138,400.


X.

CONCLUSION:

DHG is the largest drug manufacturers in the Vietnam stock exchange. As generics

drugs developed by domestic pharmaceutical companies are strongly competitive,
DHG is focusing on developing and promoting naturally health supplements.
Following this direction, DHG’s portfolio appears to benefit from the increasing
trend of health supplement consumption as well as the rising of non-communicable
disease (hepatic, cardiovascular, diabetes, etc.) in Vietnam. Moreover, the strategic
partnership with Taisho, a leading pharmaceutical company in Japan, promises to
support DHG in this direction, not to mention a significant revenue boost starting in
2017. In 2017, the company continues to benefit from tax incentives for the new
factories as corporate tax is estimated to be further decreased to 4% in 2017 from
8.3% of 2016
Among Vietnamese listed pharmaceutical firms, DHG is the leader in many aspects
such as scales, distribution system, and profitability (over 40% in gross margin and
20% in ROE). The company’s continuous effort to improve its management and sale
system is another point we highly appreciate. Despite these advantages, DHG is
currently trading at a discount P/E compared to other local and regional
pharmaceutical companies. Taking into account the historical P/E of DHG, the
company's strengths and especially the arrival of the strategic investor Taisho, we
recommend investors to ACCUMULATE the stock with a target price of
VND119,000 in LONG-TERM. At this price, the P/E 2017 is 16x, at which DHG
has been traded in the past.

Appendix