1 CHAPTER 1 STUDY METHODS OF ASSET MANAGEMENT IN LISTED CONSTRUCTION JOINT STOCK COMPANIES IN VIETNAM 1.1. Qualitative study The qualitative study in this thesis is used to find out the approaches of asset management currently practiced in the companies under research, which cannot be described in details or measured or quantified, such as models of cash flow forecast, material needs, tracking of liabilities, inventory, fixed assets, etc In addition, it provides more specific evidence to explain (or to find out the cause of) this situation, which involves perception of the management board, appoaches of capital management, business structure, mechanism and policy of the State, etc The data in the study came mainly from businesses selected for research, including a system of files, reports, websites or opinions given by the staff interviewed The collection of data was done in three ways: In-depth interviews, direct observation and desk research. The participants consisted of 15 enterprises randomly selected by cluster. 1.2. Quantitative study Through the quantitative variables clearly determined, the researcher could find out general rules of asset structure, asset management, capital structure, etc of the listed construction joint stock companies in Vietnam. Sequentially, the researcher produced objective conclusion and assessment on achievements and drawbacks of asset management in these companies. The main source of data included the audited financial reports of 104 listed construction joint stock companies from 2006 to 2010 and the data from the General Statistics Office, Ministry of Construction and the State Securities Commission. When the variables were sufficient, the reasercher was able to apply the analysing techniques of descriptive statistics and correlative regression. CHAPTER 2 THEORETICAL BASIS OF ASSET MANAGEMENT IN CONSTRUCTION COMPANIES 2.1. Overview of asset in construction companies In this thesis, asset management was analyzed with focus on forms of the existing property, including cash, accounts receivable, inventory and tangible fixed assets. Each of 2 these assets had specific characteristics reflexing particular products and operation of the construction industry. 2.2 Concept and objectives of asset management in construction companies Based on various management perspectives, it can be understood: "Asset management in the construction companies is the process of forming and administrating and using the assets of construction companies in order to maximize the asset value for business owners." 2.3. Contents of asset management in construction companies 2.3.1. Cash management in construction companies Scientifically, cash management can be broadly understood as fund management in enterprises, including such specific items as forecasting cash flow, determining optimal budget, monitoring and maintaining optimal funds. In particular, the determination of optimal budget can done based on the model of Baumol or Miller - Orr. 2.3.2. Management of accounts receivable in construction companies For the construction enterprises to be paid fully and timely in accordance with the work progress and to reduce stress caused by capital shortage, management of accounts receivable and cash management are of a great importance. The main activities of this section include: selecting investors, agreeing on payment methods; tracking debt collection and seeking corresponding fundings with the receivables. Effetive payment methods and debt collection play a decisive role over the outcome of this operation. 2.3.3 Management of inventory in construction companies In order to have effective management of inventory in construction companies, there should be forecast on demand of raw materials, determination of optimal order of supplies and control of existing inventory. For inventory as raw materials, it is advisable to choose the optimal order of supplies based on the models of EOQ or JIT. For the construction work in progress, it is necessary to determine costs and carry forward the most reasonable cost. 2.3.4 Management of fixed assets in construction companies The issues intensively analyzed include choosing approaches of forming fixed assets, assessing financial outcome of investment decision, pricing, depreciating, replacing and disposing fixed assets. As construction is a special industry, there should be close focus on asset lease and machinery depreciation by capacity and productivity. 2.4. Criteria for evaluating asset management in construction companies 3 Asset management in construction companies can be evaluated based on the a number of key criteria as follows: Current assets Short-term solvency = (1.25) Current liabilities Current average receivables Average period of collection = (1.27) Average sales on credit /day Current net revenue Current inventory turnover = (1.30) Currentl average inventory Current net revenue Current efficency ratio of fixed assets = (1.36) Current average use of fixed assets Current profitability ratio of fixed asset = Current net profit after tax (1.37) ________________________________ Current average use of fixed assets Period efficiency of total assets = Current net revenue (1:38) _____________________________________ Current average use of total assets Period profitability ratio of total assets (ROA) = Profit after tax and interest (1.39) Current average use of total assets 2.5. Factors affecting asset management in construction companies There are many elements affecting the asset management in construction companies, some of which are awareness and competence of the company management board, capital management, management tools, and management mechanism of the company. In addition, there are two external factors, including the State’s regulation on property management and level of market development. CHAPTER 3 4 CURRENT SITUATION OF ASSET MANAGEMENT IN LISTED CONSTRUCTION JOINT STOCK COMPANIES IN VIETNAM 3.1. Introduction to overall research When selecting the listed construction joint stock companies for research, the researcher did not base on their names but on the revenue from their construction activities (including construction and installation) in the total income of the companies, which was higher than the revenue from any other activities (such as trade of real estate, production of construction materials, comerce, water supply, etc ) for most of the time from 2006 to 2010. At the same time, the researcher removed the newly listed companies (from 2010) because they did not have sufficient data for analysis. List of 104 construction joint stock companies selected for overall study is presented in Appendix 02. As of 03.31.2011, the number of construction joint stock companies listed at the stock exchanges in Ho Chi Minh City and Hanoi was 104 companies, representing 5% of the active construction enterprises. The foundation of the listed construction joint stock companies was closely associated with the development history of Vietnam's construction industry, with 78% equitized from the state-owned enterprises including many large companies such as Machinery Installating Corporation (Lilama), Corporation of Construction and Infrastructure Development (Licogi), PETROVIETNAM (PV), Song Da Corporation and Vietnam Corporation of Construction, Import and Export (Vinaconex), etc. 82% of these companies have their own asset of at least 200 billion VND in value. Under Vietnam’s current regulations, all the listed companies in general (including construction companies) have to perform some duties such as: maintaining the listing standards (defined in Articles 8 and 9 of Decree 14/2007/ND-CP); issueing company rules as prescribed in Decision No. 15/2007/QÐ-BBCVT - BTC; complying with regulations of corporate governance promulgated in Decision No. 12/2007/QD-BTC; and publicizing information under the provisions of Circular No. 38/2007/TT-BTC. Table 3.6: Average value of asset structure of listed construction joint stock companies from 2006 to 2010 Unit:% Year Cash/Total assets Receivables/ Total assets Inventory/ Total assets Fixed assets/ Total assets 2006 6,93 33,79 28,72 21,88 5 2007 7,78 31,69 27,86 17,77 2008 5,70 27,59 32,55 17,37 2009 6,86 28,09 29,11 17,93 2010 6,08 32,07 26,63 17,53 Source: [31] and calculations by author As we can see, in the asset structure of the companies under research, the accounts receivable took the largest proportion (except in 2008), followed by inventory, fixed assets and cash. Although it presented the particular features of the construction industry, the asset structure above showed many potential risks of liquidity (e.g. failure to collect accounts receivable despite business results recorded), preventing the companies from finishing work on schedule or ensuring quality of work as agreed (due to shortage of capital). 3.2. Current situation of asset management of listed construction joint stock companies 3.2.1. Status of cash management 3.2.1.1. Forecast of cash flow Based on the construction plans (including detailed cost estimates) approved by the investors, the accountants figure out detailed spending needs of the enterprise for each period. Then, based on the financing plans for the project and payment terms agreed on with party A, they can determine the volume and arrival time of the counterpart funds. Under Article 9, ND112/2009/ND - CP on cost management of construction projects, the total estimated cost of a project is the total estimated cost of construction work, equipment, project management, investment consultation, backup In addition, management staff need to estimate the amount of escrow to be as bid bond (in accordance with the provisions of Article 27 of Procurement Act 2005) to ensure the implementation of contract, and to guarantee the advance payment when entering for each project. According to Decree No. 48/2010/ND - CP of the Government on construction contract, construction companies are required to ensure contract performance (in the form of deposit, escrow or letter of guarantee) before the contract takes effect and is approved by party A, which lasts until the switch to the stage of maitenance work. The escrow value as contract implementation guarantee is stipulated in the bidding documents and shall be at least 10% of the contract value. According to the actual results of survey, this number is usually 5%. Also, under Articles 16 and 17 of the decree, if requested by the investor, the construction companies must provide a guarantee of advance equal to the value of the investor’s advance. The amount advanced by the investor for the construction work is at least 10% of the contract value (for a contract worth over 50 billion VND), 15% of the contract (valued from 10 billion to 50 billion), and 20% (under 10 billion). Furthermore, even when they have completed the whole project, the construction companies cannot receive 100% of the contract value since they still have to perform 6 warranty of the work as agreed in the contract. The warranty work is stipulated in Article 45, Decree 48/2010/ND - CP. The use of money as escrow or deposit (directly to the investor or banks for letters of guarantee) to ensure contract performance, guarantee advance payment, and guarantee maintenance work, will result in stagnant funds, forcing management personnel to be careful in the process of balancing revenues and expenditures for the security of liquidity. 3.2.1.2. Determination of optimal budget The subjective evaluation given by 15 people interviewed showed that none of the listed construction joint stock companies in Vietnam fully applied the model above. Normally, the chief accountant determines the minimum cash balance for each period based on short-term spending plans of the business and as well as on management experience (this factor is quite important and was agreed on by 100% of the respondents). That balance is stored partly as cash in the safes of the company, partly as deposits at banks to meet regular needs of payment such as salaries, service fees of electricity / water / telephone / office rent, purchase of equipment / sub- materials, and partly as a reserve for unexpected incidents arising in the construction progress. In 9 of the 15 companies under survey, cash in safes and deposits at banks accounted for most of the cash balance (75%). In the remaining companies, an equivalent amount, including escrow for trust funds management at the financial company of the corporation or savings at banks, is used as collateral for loans and guarantees. 3.2.1.3. Monitoring and maintaining optimal budget - Changes in payment policies: When funds is abundant, the listed construction joint-stock companies can allow party A to reduce the rate of advance (this is also considered a major factor that increases business opportunities for the companies – agreed by 70% of the respondents), to delay collection of machinery rent, to offer extension on outstanding debts, to advance employee salaries, to increase rate of payment at sight for raw materials, to make early repayment, and to do the opposite in case of temporary shortage of funds. - Covering budget deficit: If long-term deficit occurs, the chief accountant proposes to the company director for deficit covering plans. In theory, several methods can help, such as selling liquidity securities or withdrawing savings, recovering investment trusts, etc However, most of the responses in the interview were "bank loans", which causes the company to sink deeper in debts and suffer from risk of losing ability of solvency. - Investment of surplus funds: 7 The most common investment plan is putting surplus funds as savings into banks or offering it as loans to other enterprises within the industry. The holding of securities has only been in practice since 2006 or 2007 due to the rapid growth of the market. 3.2.2. Status of receivables management in listed construction joint stock companies 3.2.2.1. Selection of investors and projects First, investor’s capacity: Currently, investors all have their own website to introduce their development history, capacity of personnel and finance, and projects already implemented by them However, to reduce potential risks, the staff of project department (or economic planning department) conduct verification of the information (especially the payment history) through the companies which have once been involved in that investor’s projects, or through other organizations such as banks, Ministry of Construction, Department of Taxation, etc Second, project legality: The project staff will check accuracy of the decisions on investment plans (explained clearly in the bidding documents) to see if they match with territorial or regional planning (provided by Department of Planning - Architecture or the designated agency like the People's Committees) before making any decision. Third, project funds: Currently, the construction projects of urban complex are generally funded with the capital advanced by the customers in the form of investment cooperation. This approach helps create capital stability, but sometimes disputes arise between investors and customers (on terms and value of contribution, product quality, delivery time, etc ), which affects the flow of project funds, resulting in delay of payment to the contractors. Besides, the contractors of public investment projects financed by government budgets frequently suffer from delay in payments. 3.2.2.2. Agreement of payment First, payment value: Commonly, the investor makes single or multiple advance ranging from 10% to 30% of the total contract value; the rest will be settled after the work handover. For the projects with over 30% of the capital funded by the State, payment must comply with the current regulations on each type of contract (Under Articles 49, 50 of the Procurement Act 2005). Second, billing period: The contractor and investor make agreements based on specific plans of construction and installation approved to ensure timely supply of capital for the construction companies. For the projects with over 30% of the capital funded by the State, the payment term is agreed by the parties, but no more than 14 working days from the date party A receives complete valid application of payment as agreed in the contract (Article 18, Decree 48/2010/ND – CP). 8 Third, changes in terms: Possible changes in construction cost can be foreseen in all construction contracts signed between the listed construction joint stock companies and investors, which requires advance adjustments to payment terms. Fourth, measures of payment security: Typically, to protect the interests of investors and contractors, measures of payment security are specified in the contract. As stated above, under the current regulations, the contractor shall make the bid security, contract performance guarantee, and advance payment guarantees to compensate investors for any losses caused by the contractor’s faults in the construction process. Forms of payment guarantee are collateral or escrow or letters of guarantee (usually issued by commercial banks), which are specified by the investor but do not exceed 10% of the contract value. Conversely, the contractor may request the investor to lease payment guarantees to prevent such risks as investor’s disappearance, bankruptcy, breach of contract, and delay of payment. However, the result through in-depth interviews showed that the construction enterprises (including the listed construction joint stock companies) were not competent enough to require the investor to secure payment. Consequently, they must depend on the current law to protect their own interests when such situations arise. 3.2.2.3. Monitoring and collecting debts According to Table 3.3, the accounts receivable account for 34.27% of the total assets, most of which is "receivables from customers" (60.5% - except for Vietnam Electricity Construction Corporation – VNECO and Song Da - Thang Long Construction Corporation). The rest is "advance to sellers" (advance to subcontractors, material suppliers, employees, etc ) and "other receivables ". First, tracking and settling debts: Liabilities are carefully tracked for each investor, each project, each month/ quarter Liabilities are sorted into several types such as overdue by 30 days, 60 days, 90 days and more than 90 days with increasing levels of tracking, urging and collecting. Under Article 53, Decree 85/2009/ND - CP giving guidance on the Bidding Law (2005, 2009) and the Construction Law (2003) guiding the selection of contractors, the billing record shall includes: minutes of work acceptance in the period of payment confirmed by the contractor’s representative, investor and consultant supervisor (if any); written confirmation of increase or decrease in work volume produced by the contractor’s representative, investor and consultant supervisor (if any); The list of payments on completed workload requested by the contractor and the price stated in the contract; proposal of payment made by the contractor, which clearly shows volume and value of the completed workload, value of 9 increased or decreased workload, value of advance, and value of payment in the payment period. Second, reserve against bad debts: As stipulated in Circular 13/2006/TT – BTC, the establishment and use of reserve for bad debts are guided as follows: 30% of the debt value overdue from 3 months to less than 1 year, 50% of the debts overdue from one year to less than 2 years, and 70% of debts overdue from 2 years to under 3 years. For undue debts from the economic organizations on the point of bankruptcy or dissolution, missing, fleeing, being prosecuted, committed for trial, or gaoled by law enforcement agencies, the company should estimate irrecoverable losses to set up a reserve fund. Third, settlement of disputes: Usually, if the investor falls into temporary financial crisis but can settle the debts after some months, the construction companies will offer the investor an extension of 30 to 90 days and apply certain penalty of interest rate. If the investor agrees to use an escrow service for payment, the contractor will transfer the dossiers and documents to the bank to be paid as commited. If the investor deliberately delays payment after repeated reminders or goes bankrupt or flees, the contractor will stop construction until receiving enough money or file a lawsuit to the enforcement agencies for settlement. Under Article 39, Decree 48/2010/ND - CP, the listed construction joint stock companies may temporarily stop the work in the construction contract when the investor fails to make payment after more than 28 days from the due date. In addition, under Article 44 of the Decree, the parties may hold negotiation and make settlement on what have been signed in contract. Recently, negotiation has been the most preferred solution applied by the listed constructions joint stock companies. Lawsuit is applied only when negotiation does not work. Commercial arbitration is not taken in consideration. 3.2.2.4. Seeking counterpart fundings for receivables It is necessary, even urgent, for the listed construction joint stock companies to seek counterpart fundings for receivables. This is because of the fact that although all of the 15 construction companies under survey gained profit (profit after tax> 0), their business result was not yet transformed into cash. Except for PETROVIETNAM NGHE AN CONSTRUCTION JOINT STOCK CORPORATION – PVNC, which had a larger net cash flow than profit after tax, all of the remaining companies had smaller cash flow than profit after tax. Particularly, the net cash flow of 8 of the 15 companies was under zero, suggesting that the cash flow of these companies was not sufficient enough to cover the spending needs even when the companies were making profit. Only after emplementing investment activities could the net cash flow in 2010 of the companies be improved. 10 In the short term, if Party A does not make sufficient and due payments, the chief accountant or the director of the construction company may hold negotiation with the key stakeholders such as employees, suppliers of raw materials, machinery-for-lease companies for extension of the due debts until the company’s accounts receivable are collected. In addition, the management staff can navigate the idle funds of other projects to the projects in need. When the payment is delayed for longer than one month, the chief accountant may decide to sell liquidity securities, to withdraw savings or to apply for short- term bank loans, depending on the specific condition of the business. These approaches will obviously incur borrowing costs or opportunity costs. 3.2.3. Status of inventory management of listed construction joint stock companies 3.2.3.1. Forecast of demand for raw materials The supplies office staff (assisted by technical personnel) base on the schedule and progress of each project approved to figure out the workload, including floor, stairs, playground, roads, pipelines, etc. to accomplish in the period. Combining the average consumption of materials with the table of work allocation (showing technical requirements of each project item), we can estimate the total consumption of raw materials in general and specific needs of each material (sand, gravel, brick, stone, cement, iron, steel, asphalt, power lines, pipelines ). Then, we can produce a detailed list of raw materials in demand by type of materials, time incurred in each project / package and a summary on material needs of the whole project. 3.2.3.2. Determining optimal order of supplies According to the evaluation given by the management staff interviewed, purchase of supplies as the construction work progresses (without identifying overall optimal order of supplies) is also an effective way to ensure economic efficiency for the construction companies and is appropriate for this particular industry. However, lack of material stock also causes many construction companies to fall into difficulties when material prices increase unexpectedly. 3.2.3.3. Monitoring and holding inventory For the inventory as raw materials which are imported on actual demand, the output price is standardized or authorized. The staff of supplies office, economic planning department and technical support unit should work in coordincation to monitor the construction progress and the supplies demand of each item to write a report on changes in material needs and current status of materials in stock and submit it to the board of directors for decision on the time and volume of the next supplies order. 3.2.3.4 Setting price and carrying forward costs of unfinished work With respect to inventory as the cost of unfinished construction work, the companies should base on the inventory sheet of the unfinished work to aggregate and allocate costs [...]... instance, it has helped increase the liquidity and profitability and reduced the debt ratio That is, the proper approaches for fund handling, on the one hand, helps strengthen liquidity, and on the other hand, increases profitability In other words, strict and scientific management of budgets helps achieve the objective of maximizing asset value while keeping safety (no increase in debt pressure) for enterprises... COMPANIES IN VIETNAM 4.2 Direct solutions for improving asset management in listed construction joint stock companies in Vietnam 4.2.1 Assessment on impact of asset management on ROA, ROE and Z index in listed construction joint stock companies in Vietnam Table 4.1: Impact of asset management and debt coefficient on ROA, ROE and Z index in listed construction joint stock companies in Vietnam Short-term... included in the value of the fixed assets on the balance sheet Therefore, the profitability ratio of fixed assets was much smaller in value (from 15 to 30 times) as the outsourcing cost was deducted to determine net profit Fourth, the profitability ratio of total assets (ROA) and the profitability ratio of equity (ROE) both tended to decrease, suggesting that efforts to manage assets in recent years... 58%), Russia, Germany, China (5% to 17%) and Vietnam for they are of good quality, low fuel consumption, and suitable for technical requirements of local construction 3.2.4.2 Assessing financial outcome of investment decision Two key factors often taken in consideration before purchasing fixed assets in the listed construction joint stock companies in Vietnam include the practical need (regular / irregular)... contribution (the first time issuance of shares) and undistributed profits (funds formed with profit after tax to supplement the equity) These are the traditional approaches commonly 15 applied in 75% of the enterprises in Vietnam (regardless State- owned companies, limited liability or joint-stock) 3.3.3.2 Objective causes In addition to the subjective causes mentioned above, there remain objective reasons... joint stock companies in Vietnam 3.3.1 Achievements Table 3.15: Average value of targets for assessing asset management in listed construction joint stock companies in Vietnam Target 2006 2007 2008 2009 2010 Short-term solvency (times) 1,23 1,29 1,26 1,19 1,32 Quick solvency (times) 0,81 0,69 0,69 0,79 0,76 Inventory Turnover (cycle / year) 3,66 3,44 3,01 3,92 3,55 Profitability ratio of total assets -... scientific estimates, we can confirm that when the asset is strictly and scientifically controlled, ROA, ROE and Z will all increase, improving profitability while the company’s operation is still in safety with no risk of bankruptcy The impact of short-term liquidity and average collection period were quite serious, so management staff should prioritize the management of cash flow and debts Although the debt... 187,9 Efficiency ratio of fixed assets (times) 8,91 9,91 8,31 7,13 6,18 Profitability ratio of fixed assets (times) 0,39 0,58 0,42 0,41 0,41 Source: [31] and author's calculations First, liquidity tended to decrease and was weaker that that of the listed joint stock companies of other sectors Especially, the immediate liquidity was much weaker than the quick solvency, averaged at only 0.15 times in 5 years... empowering, selling, contracting and leasing the state-owned enterprises Moreover, products of the construction industry are of unique features There has never been any precedent in Vietnam that the contractor sells party A’s debt to a debt purchasing company to recover capital for the project Currently, only a few debt collecting companies like Dan An, Song Bao, Minh Tin are licensed to establish and... that of rent Then, decision on which assets to buy (in terms of models, types, suppliers ) is based on several factors such as advice of sales staff, company budget and even discount rate for the decision maker Regarding hiring sub-contractors, the economic efficiency is measured by the difference between the rate of profitability achieved by self-performing the work and the rate obtained from transferring . liquidity and profitability and reduced the debt ratio. That is, the proper approaches for fund handling, on the one hand, helps strengthen liquidity, and on the other hand, increases profitability (cycle / year) 3,66 3,44 3,01 3,92 3,55 Profitability ratio of total assets - ROA (%) 4,75 5,25 4,82 4,77 4,45 Profitability ratio of equity – ROE (%) 21,3 16,8 14,7 16,2 13,8 Source: [31]. supplement the equity). These are the traditional approaches commonly 15 applied in 75% of the enterprises in Vietnam (regardless State- owned companies, limited liability or joint-stock).