FOREIGN TRADE UNIVERSITY FACULTY OF EXTERNAL ECONOMICS CORPORATE FINANCE ASSIGNMENT FINAL REPORT Group Members: Nguyễn Anh Dũng Nguyễn Duy Hải Hồ Thị Hằng Nguyễn Thị Thùy Linh Nguyễn Phương Ly Ly Nguyễn Hương Ly Hoàng Mai Ngân Trịnh Minh Thu Hanoi – November 16, 2011 TABLE OF CONTENTS Page I AGENCY PROBLEMS 1 DEFINITION AND CLASSIFICATIONS SPECIFIC CASES CAUSES AND SOLUTIONS .4 II THE RELATIONSHIP BETWEEN FINANCIAL MARKET AND CORPORATE FINANCIAL MANAGEMENT IN 2007 .5 IN 2008 .6 IN 2009 .7 IN 2010 .8 III RISK AND PROFITABILITY RISK PROFITABILITY .13 CORPORATE FINANCE I AGENCY PROBLEM DEFINITION AND CLASSIFICATION 1.1 Definition Agency problem indicates the conflicts of interest arising between shareholders and managers because of differing goals In theory, shareholders, who are the real owners of a company, should have the obligation to run the whole business However, uniting thousands of shareholders to make any decision is absolutely difficult In reality, real control of the companies belongs to directors who are authorized to manage the companies and generate benefits for both sides However, this power authorization proves to induce the separation in ownership and management rights of an enterprise In many cases, managers may pursue their own benefits without taking shareholders’ interest into account (Sometimes, the conflicts are not restricted to stockholders and managers only, but creditors may also get involved However, we would like to concentrate on the shareholder-manager conflicts in the scope of our report) 1.2 Classification Agency problem is divided into three main types, namely asymmetric information, risk incentives and foregone growth opportunities In this report, we would go into the depth of informational asymmetry Asymmetric information is a situation in which outsider investors have less information about the company's risk and profitability compared to insider managers Some phenomena arising on stock market are listed as failure to fully disclose information to investors, information leakage without permission to publish, defraud, unfair information disclosure to investors, late submission of financial reports, etc Among the listed phenomena, information disclosure and late submission of financial reports will be deeply discussed SPECIFIC CASES 2.1 Analysis of specific cases of agency problem In this part, we will focus on asymmetric information, which is one of the most popular types of agency problem With regard to this, we would like to mention two kinds of activities that lead to asymmetric information: late submission of financial reports and violation of information disclosure in stock transactions -1- CORPORATE FINANCE Firstly, let us take a look at some typical cases a) Case 1: Mr Le Van Loi, Chairman cum General Director of Thong Nhat Rubber JSC (HOSE: TNC) submitted financial reports later than the specified date of December 10, 2010 Normally, if everything goes right, every manager would submit financial reports punctually to avoid being fined (unless the company is allowed to extend the report deadline according to Accounting Code No 03/2003/QH11 on June 17, 2003) As usual, it is only when the company has been meeting with tense problems that their financial reports cannot be publicized on time In such cases, the Chairman may have figures properly fixed before publicizing them to shareholders, otherwise the company’s reputation may be badly injured leading to investors mass-withdrawing their capital b) Case 2: Ms Nguyen Thu Phuong – member of Control Board of Vinpearl Company (HOSE: VPL), bought 2000 VPL shares from 23/12/2008 to 31/12/2008 but did not disclose information Therefore on January, 2009, Ho Chi Minh Stock Exchange requested her to make explanation for that breach This case is very popular on Vietnamese financial market As an internal shareholder, Ms Phuong might have had some confidential information about VPL shares and decided to benefit herself For example, when she learnt that the share price was expected to increase in the next month, she would buy 2000 shares with a view to reselling them in the future However, she did not disclose information about this transaction, because when other shareholders heard about it and massively bought in (“the crowd effect”), the share price would be pushed up to much higher a level than it had been expected to be month ago As a result, she could not resell them to anyone In short, late submission of financial reports and information violation in stock transactions would make benefit for managers on one hand, but affect shareholders’ interest on the other hand and hurt their trust in management of the company 2.2 Comments In fact, Ms Phuong’s violation is only “one in a million” on Vietnam stock market Out of companies assigned to our group, up to companies reported similar cases (in fact, managers not only benefited themselves but sometimes revealed internal -2- CORPORATE FINANCE information to their relatives also) These following tables would summarize such violation during the last years: Company Date TTP 29/11/2007 Case Summary Mr Huynh Thanh Khang - member of Control Board sold 2000 TTP shares but did not disclose information On 18/12/2007, HCM Stock Exchange sent official dispatch to request him to explain Mr Nguyen Nhat Thanh Lam – member of Control TNC From 25/09/2008 to 21/10/2008 Board bought 7,000 TNC but did not disclose information On 22/10/2008, HCM Stock Exchange sent the official documents No 2152/SGDHCM-GS, requesting him to make explanation for the breach Ms Nguyen Thu Phuong – member of Control Board VPL From 25/12/2008 to 31/12/2008 bought 2000 VPL shares but did not disclose information On 06/01/2009, Ho Chi Minh Stock Exchange requested her to make explanation for that breach Company Date Case Summary Ms Nguyen Huu Thanh Tam (younger sister of Ms Nguyen Thi Huu Thuy - member of BOD) sold 3000 TTP 27/04/2009 TTP shares but did not disclose information HCM Stock Exchange sent official dispatch to request her to explain Mr Le Minh Chau (younger brother of Mr Le Quoc From 26/04/2010 CII ALP to 20/05/2010 Binh, CFO cum General Accountant) bought 2,140 CII shares but did not disclose information From 07/05/2010 Mr Le Minh Chau sold 1,040 CII shares but did not to 19/05/2010 disclose information Ho Chi Minh Stock Exchange 28/07/2010 requested her to make explanation for that breach Ms Nguyen Thi Thanh Van (sister of Mr Nguyen Quang Huy - member of BOD) sold 53,180 ALP -3- CORPORATE FINANCE shares but did not disclose information The Chairman of the State Securities Committee charged an administrative penalty (VND 20 million) on for Ms Van for that violation Ms Tran Uyen Nhan (daughter of Mr Tran Xao Co HLA 20/12/2010 Chairman of BOD) bought 100.000 HLA shares without disclosing information HCM Stock Exchange sent official dispatch to request her to explain All things considered, it can be concluded that violation of information disclosure has become a phenomenon on Vietnam financial market nowadays Thus what are the causes and solutions to that kind of agency problem? CAUSES AND SOLUTIONS 3.1 Causes There are two main reasons why information violation has been so popular on Vietnam stock market in recent years Firstly, too many transactions to supervise is really a hard-cracking problem Thousands of transactions each day are really a huge workload, thus it is easy to understand why the Stock Exchange Department ( SED ) cannot carefully supervise the action of every individual on the stock market Hence, businesses tend to backslide their violation activities again and again Secondly, the lack of strict punishment also ranks an equal place in the essence Up to 2011, the maximum fine for not disclosing information just stands at 70 - 80 million VND only - too small compared to the profits violators have already earned Moreover, the SED has not imposed fines immediately after an enterprise was charged with information violation, thus, fails to deter businesses We can take the case of Ninh Hoa Sugar JSC (HOSE: NHS) for an example In July 2010, NHS did not submit the semiannual reports on the specified date, but it was not until August 2011 that the Securities Committee decided to charge a fine on them 3.2 Solutions Corresponding to the above-mentioned two causes, we would like to recommend two solutions -4- CORPORATE FINANCE Firstly, the government should implement stricter punishment to prevent those violations Recently, the State Securities Committee has intended to introduce a new circular to replace the one in 9/2010, which shows their determination to minimize such violation Secondly, setting up credibility charts for listed companies is another method that has been popularly applied in many countries (Fitch, Moody’s, Standard & Poor’s, etc are some typical examples) These charts would rank enterprises’ operation every year, thus serving as a base for banks and investors throughout their decision-making processes Therefore, if companies expect to gain more bank loans or mobilize capital from shareholders, they should maintain their credibility marks by working effectively and publishing all the information on time II THE RELATIONSHIP BETWEEN FINANCIAL MARKET AND CORPORATE FINANCIAL MANAGEMENT IN 2007 1.1 Financial market situation In 2007, the dramatic growth in Vietnam’s economy brought about a boom in stock market The increase in the number of equitized enterprises led to a sharp rise in the market capitalization of shares Vietnam financial market, therefore, developed actively on the base of the economic growth rate at 8.5% in the past year 1.2 Corporate financial management Having benefited from the boost in Vietnam’s financial market, many companies had their shares quoted on the stock market in 2007 Some typical examples are Alphanam JSC (ALP), Khanh Hoa Electricity JSC (KHP), Thong Nhat Rubber JSC (TNC) and Tan Tien Plastic Packaging JSC (TTP) During this year, many corporations also made dividend payment in form of stock dividend and continued to issue additional shares to increase their chartered capital Let us take a look at ALP for an illustration Company ALP Date 7/10/2007 Financial Management Reasons - Decided the form of dividend payment: When the economy -5- CORPORATE FINANCE stock dividend at the rate of 30% was developing - Decided to issue million additional sharply, the shares to strategic partners, so that the company aimed to company's chartered capital would increase increase from 300 billion VND to 450 chartered its capital billion VND early in 2008 for operating Listed on HASTC with 30,000,000 activities, 12/12/2007 shares on the first day of transaction at generating as much Ho Chi Minh Stock Exchange profit as possible IN 2008 2.1 Financial market situation In 2008, the global economic crisis had negative influences on Vietnam economy as a whole The stock market growth rate decreased sharply by 65.9%, and the economy was dominated with gallop inflation, namely 22% At the first quarter of 2008, share prices were susceptible to a downward trend, which caused investors to lose faith in the stock market Despite some good signs from the macro-economy in the middle of the year, VN Index was still terribly stricken by the financial crisis Share prices had a tendency to decline in the long run To make it worse, foreign investors massively withdrew capital from Vietnam, darkening the gloomy picture of the whole economy 2.2 Corporate financial management As an essential result of the financial crisis, nearly all Vietnamese firms underwent extremely low investment efficiency Instead of investing in economic projects, managers tended to use cash to pay dividends so as to stabilize shareholders’ psychology In addition, companies also preferred safer financial activities such as investing in fixed assets and buying redeemable shares Company PAC Date Financial Reasons Management 17/01/2008 Issued million shares - Making more investments in fixed 14/07/2008 Paid stock dividend assets (plants, machines, etc.) proved (1.5 million shares) at -6- CORPORATE FINANCE the rate 10/1 19/09/2008 Bought back 300,000 redeemable shares to be wiser than in stocks or real estates at that time - Buying back redeemable shares The sales of stocks increased PAC’s chartered capital by 38% in 2008, and the company decided to buy a new technological production line to improve their current efficiency Moreover, by using stock dividend, PAC also succeeded in maintaining cash reserve to expand production and invest in new projects such as PINACO factory in Nhon Trach IN 2009 3.1 Financial market situation In 2009, Vietnam government issued a stimulate package valued at 143.000 billion VND Real interest rate decreased from 10% to 7% in February 2009, and the stock market began to show signs of gradual improvement The financial market started to recover and share prices began to increasing steadily However, for fear of inflationary risk and changeable monetary policies, the stock market still showed some bad signs Rising gold prices, fluctuating exchange rates and trade deficit posed noticeable threats to the whole financial market Stock prices faced with non-stop fluctuations during the year 3.2 Corporate financial management When the crisis seemed to show signs of recovery, firm managers wanted to mobilize capital to reinvest in their business activities Therefore, some companies issued additional shares and sold redeemable stocks to maintain cash reserve, which would be used to invest in plants and machinery to improve production efficiency, expand production scale and invest in new projects Company Financial Management Reasons HLA - Tried to increase chartered - At this period, the government tried to capital by issuing 3.8 million back up the economy after the crisis, primary stocks therefore, many stimulating policies were - Carried out the plan of applied -7- CORPORATE FINANCE building a new steel factory, valued at 1000 billion VND - The company tried to expand its scale by issuing more stocks and building plants to make gradual recovery IN 2010 4.1 Financial market situation: In 2010, the world economy showed signs of cautious and steady improvement The world financial market began to stabilize after the public debt crisis in Greece In Vietnam, however, the exchange rate USD/VND considerably fluctuated Although the domestic stock market received a huge sum of newly-supplemented listed stocks, there still remained high risk of gallop inflation, which led gold prices to sky-rocket 4.2 Corporate financial management On receiving good signs from the financial market, corporations kept increasing their business scale by listing supplemented stocks, issuing shares and bonds and continuing to build plants as well as investing in unfinished projects Company Financial Management - Signed a term sheet with Emerging Markets - Reasons Increase net working Fund (GEM), in which GEM committed to capital invest 30 million USD in Alphanam (in form ALP of shares) Restructure balance the capital to debt/equity - Intended to issue 200-billion worth in bonds ratio for Military Bank The bonds had 3-year - Enhance the efficiency of maturity, an interest rate of 15% / year, and business operation of the face value of 100,000 VND/bond company III RISK AND PROFITABILITY Risk Through analyzing liquidity and leverage ratios of assigned companies, we would like to divide them into main groups a) Group 1: Companies with high liquidity ratios but low leverage ratios (TNC, TTP) -8- CORPORATE FINANCE TTP Liquidity Ratios Current Ratio Quick Ratio Leverage Ratios Total liabilities/ owner equity Total liabilities/ total assets 2008 5.59 2009 5.24 2010 2.03 1.75 4.51 1.51 4.33 1.43 3.36 2.36 2008 0.16 1.44 0.14 0.47 1.99 2009 0.17 1.57 0.15 0.50 1.91 2010 0.31 1.78 0.24 0.51 2009 5.44 2.22 4.79 1.93 2009 0.09 0.25 0.10 0.38 2010 4.71 2.25 4.14 1.81 2010 0.12 0.25 0.13 0.37 TNC Liquidity Ratios Current ratio Quick ratio Leverage Ratios Total debt ratio Total debt to equity 2008 2.80 1.59 1.96 1.22 2008 0.17 0.31 0.2 0.48 As can be seen from the tables, the liquidity ratios of the companies were relatively high compared to those of the industries For example, in 2010, the current ratio of TNC was 4.71, nearly twice as much as the industry ratio (namely 2.25) in the same year By contrast, the leverage ratios of both companies proved to be fairly low The total debt ratios always stood below 25% during the 3-year period In particular, in 2010, the D/A ratio of TNC was just 0.12 compared to 0.25 of the industry In short, it can be concluded that TNC and TTP maintained an extremely high amount of current assets, thus there would be no big problem for them to meet short-term and long-term debts However, too high liquidity ratios indicated that those companies did not efficiently allocate their capital into proper investment activities In this case, they had failed to take advantage of financial leverage in generating profit -9- CORPORATE FINANCE b) Group 2: Companies with low liquidity ratios but high leverage ratios (CII, HLA) CII Liquidity ratios Current ratio Quick ratio Leverage ratios Total liabilities to total assets Total liabilities to total equity Long term debt to assets 2008 0.62 3.09 0.62 1.66 2008 0.57 0.51 1.44 1.1 0.45 0.21 2009 1.9 2.88 1.89 1.36 2009 0.51 0.57 1.06 0.47 0.43 0.27 2010 1.63 2.46 1.39 1.31 2010 0.59 0.54 1.48 1.30 0.43 0.25 2008 0.58 0.62 1.05 1.24 2009 0.54 0.59 1.04 1.26 2010 0.57 0.51 1.09 1.19 2008 0.74 2009 0.81 2010 0.79 3.06 4.40 3.81 HLA Liquidity Ratios Quick ratio Current ratio Leverage Ratios Total debt ratio Total debt to equity ratio Overall, these two companies had reported very low liquidity ratios For example, the figures of HLA just stood around 1.0 during years, always lower than the benchmark ratios More noticeably, CII’s current ratio in 2008 was just 0.62, merely one-fifth of the industry rate (namely 3.06) Leverage ratios, conversely, were comparatively high (total debt ratios of both companies always exceeded 50%) In summary, CII and HLA stood very high risk of financial liquidity, which means that they might have problems in paying short-term and long-term debts However, while looking at the leverage ratios, those of CII were always smaller than 1.0 from 2008 to 2010, which indicated that they might efficiently take advantage of financial leverage On - 10 - CORPORATE FINANCE the contrary, as the D/E ratios of HLA ranged from to during the period, they suffered from extremely high risk of liquidity c) Group 3: Companies that maintained relatively efficient liquidity ratios (ALP, KHP, PAC and VPL) ALP Liquidity Ratios Current ratio Quick ratio Leverage Ratios Total debt ratio Long term debt ratio Debt to equity ratio 2008 1.91 0.71 1.25 0.47 2009 1.36 1.97 1.00 1.55 2010 1.69 1.88 1.29 1.48 2008 0.26 0.24 0.01 0.06 0.01 0.41 2009 0.40 0.50 0.01 0.13 0.02 0.46 2010 0.45 0.51 0.07 0.13 0.17 0.32 KHP Liquidity Ratios Current ratio Quick ratio Leverage Ratios Debt ratio Debt to equity ratio 2007 2008 2009 2010 1.01 1.00 1.84 1.78 1.42 1.36 1.44 1.42 1.21 1.20 1.06 1.03 1.93 1.89 1.63 1.59 2007 2008 2009 2010 54.2% 55% 1.18% 1.21% 70.51% 71% 2.39% 2.42% 69.40% 70% 2.27% 2.32% 53.35% 53% 1.14% 1.14% PAC Liquidity Ratios Current ratio 2007 2008 2009 2010 2.00 2.10 1.38 1.26 - 11 - CORPORATE FINANCE Quick ratio Leverage Ratios Debt ratio Debt to equity ratio 2.92 1.01 1.82 3.21 1.38 1.91 2.45 0.51 1.54 2.26 0.33 1.33 2007 2008 2009 2010 0.39 0.65 0.61 1.17 0.4 0.98 0.63 1.27 0.56 1.13 1.3 1.63 0.55 1.21 1.21 1.42 VPL Liquidity Ratios Current ratio Quick ratio 2008 1.33 1.47 2009 1.99 1.26 2010 2.21 1.60 Leverage Ratios Total liabilities/ 2008 2009 2010 0.62 0.79 0.66 1.01 1.56 1.32 total assets Total liabilities/ equity As all the liquidity ratios of those companies were at a range between and 2.5, they seemed to manage their current assets quite efficiently and stood little risk of financial liquidity However, in terms of leverage ratios, it can be seen the figures for PAC were relatively lower than the industry rates For example, in 2009, the total debt ratio of the company was 0.56, nearly a half of benchmark ratio (namely 1.13) Thus it can be concluded that PAC may not have taken full advantage of financial leverage Meanwhile, the other companies maintained fairly high leverage ratios during the period In 2009, the total debt ratio of KHP was 0.69, nearly equal to the industry ratio (0.7) ALP also reported the total debt ratio at 0.26 in the same year, well over the benchmark figure (0.24) This may indicate that they have relied much on financial leverage to generate profit Profitability 2.1 Overview - 12 - CORPORATE FINANCE Looking at the market value ratio (P/E) of companies, it can be concluded that their profitability went worst during 2008, then showing recovery for the next years The table below illustrates the P/E ratios of out of companies in our group from 2008 to 2010 Company TTP ALP KHP PAC TNC CII 2008 6.15 14.7 2.8 4.6 18.81 6.33 2009 4.92 9.19 2.99 3.02 9.11 3.33 2010 4.83 7.3 1.61 4.44 5.20 4.18 Overall, the P/E ratio tended to decline from 2008 to 2010 Considering the formula of the ratio (P/E= Price/EPS), it can be inferred that the gradual increase in EPS was the very first reason why P/E ratio decreased during the period (as share prices did not show any remarkable change, respectively) In short, companies had a tendency to make gradual recovery between 2008 and 2010 2.2 Asset management ratios a) Group 1: Companies with efficient asset management ratios (TTP, TNC) TTP Efficiency Ratios Inventory turnover Account receivable turnover Total asset turnover 2008 7.62 2009 12.96 2010 8.67 5.24 5.35 4.96 2.57 2.38 2.78 2008 4.51 2009 8.53 2010 5.89 8.14 6.68 8.48 0.68 0.83 0.64 0.74 0.59 0.7 TNC Efficiency Ratios Inventory turnover Account receivable turnover Total asset turnover - 13 - CORPORATE FINANCE As can be seen from the tables, all those ratios showed a significant change after 2008 In both companies, the ITO ratios increased dramatically in 2009 but just slightly dropped in 2010 In theory, inventory turnover illustrates how well a company manages its inventory levels If the ratio is too low, it suggests that a company may be overstocking or overbuilding its inventory, or that it may be having issues selling products to customers Normally higher inventory turnover is better, and in this situation, we consider this a positive change Also, the total asset turnover ratios revealed the positive signs in both companies The figure of TTP increased slightly from 2008 to 2010 On the other hand, although the ratio of TNC modestly declined from 0.68% to 0.59%, its total assets increased nearly by 200% from 143,554 to 284,630 million VND correspondingly Thus, the slight decrease in ATO still indicated the efficiency of TNC in doing business b) Group 2: Companies which need improvement (ALP, PAC, VPL, HLA, KHP) We cannot affirm absolutely that these companies did not utilize their assets and manage its liabilities effectively, but there are numerous doubts about their real asset management ability For instance, looking at PAC situation, the Receivable Turnover ratio increased gradually from 14.73% (2008) to 18.24 % (2010), but the other efficiency ratios decreased steadily With regard to ALP, VPL, HLA and KHP, all the ratios declined dramatically, in which VPL and KHP recorded the smallest ATO ratio (VPL: 0.09%, KHP: 0.3% in 2010) c) Group 3: The last company, CII, showed noticeable weakness in asset management The table below shows the efficiency ratios of CII from 2008-2010: Efficiency Ratios Inventory turnover Account receivable turnover Total asset turnover 2008 6.75 2009 11.3 2010 0.36 2.55 1.39 0.71 0.12 0.09 0.07 2.3 Profitability ratios - 14 - CORPORATE FINANCE a) Group 1: Among companies, CII proved to maintain the highest profitability ratios Profitability Ratios Net profit margin (%) ROA (%) ROE (%) 2008 2009 2010 57.97 160.16 206.23 6.60 16.95 12.66 24.15 10.47 24.56 As can be seen from the table above, the company’s net profit margin remarkably increased by nearly times from just 57.97% in 2008 to 206.23% in 2010 The figures exceeded 100% in both 2009 and 2010, indicating a noticeable growth compared to that in 2008 ROE also experienced a large rise during the period, which meant the company had gradually recovered from the financial crisis 2007 – 2009 However, these figures somehow conflicted with the above-mentioned efficiency ratios This raises doubt whether the company had their reports window-dressed or not b) Group 2: PAC and TTP were recorded with relatively stable profitability ratios ROE and ROA of both companies rose sharply from 2008 to 2009 and underwent a slight fall in 2010 However, the figures always exceeded those of the industries throughout the period, indicating that the companies generated profits more efficiently than their rivals in the same field PAC Profitability Ratios ROA (%) ROE (%) 2008 16.4 2009 25.13 2010 14.69 13.72 26.76 19.27 40.5 11.23 33.75 19.28 31.2 27.5 2009 16.42 9.43 2010 14.32 7.39 TTP Profitability Ratios ROA (%) 2008 13.78 7.75 - 15 - CORPORATE FINANCE ROE (%) 16.55 16.62 19.14 18.21 17.82 13.38 c) Group 3: The other companies all tended to make progress during the period, with profitability ratios increasing steadily from 2008 to 2010 However, their operating activities did not prove to be efficient enough, as the companies’ ROE and ROA were still far lower than those of the industries Let us take ALP for an example Profitability Ratios 2008 2009 2010 11.66 14.51 18.97 Gross Profit Margin (%) 7.38 17.06 17.91 2.49 4.66 6.76 Net Profit Margin (%) 1.94 8.43 6.44 3.44 4.68 5.91 ROA (%) 2.66 9.32 7.38 4.96 7.62 11.71 ROE (%) 5.50 18.07 19.91 Although the company’s ROE slightly increased during the period, it still stood far below the benchmark ratio In 2010, ALP’s ROE was only 11.71% compared to 19.91% of the industry This indicates that the company still needs much improvement to compete against their rivals on the same field in the future - 16 - ... PAC also succeeded in maintaining cash reserve to expand production and invest in new projects such as PINACO factory in Nhon Trach IN 2009 3.1 Financial market situation In 2009, Vietnam government... stocks, issuing shares and bonds and continuing to build plants as well as investing in unfinished projects Company Financial Management - Signed a term sheet with Emerging Markets - Reasons Increase... asymmetric information, risk incentives and foregone growth opportunities In this report, we would go into the depth of informational asymmetry Asymmetric information is a situation in which outsider investors