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 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 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: dhgpharma@dhgpharma.com.vn Website: http://www.dhgpharma.com.vn 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 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: 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 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 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 : 1, expected to be issued in Q2/2017 – Q3/2017, continues to affirm its leading position in Vietnam pharmaceutical industry 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 to 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, Liabilities and equity structure analysis The bar chart witness erratic in liabilities and equity structure: - Owner’s equity fuctuated during 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 billions The low propotion of payable represents financial structure DHG's healthy, sustainable nature III Asset ultilization, or Turnover Ratios analysis: 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 times, decreased once compared to 2015 The company maintained a balance between with accounts Receivables and payables For inventories, the inventory turnover was 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 • • 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 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 69 48 30 27 16 (VND) P/B 93 2, 56 2, 76 1, 75 1, 00 P/E 14 76 18 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 References 1) 2) 3) 4) http://www.cophieu68.vn/snapshot.php?id=DHGFinance.vietstock.com http://finance.vietstock.vn/DHG-ctcp-duoc-hau-giang.htm Annual report DHG 2015-2016 DHG’s Audited Fianancial statements 2012-2016 ... is 16x, at which DHG has been traded in the past Appendix References 1) 2) 3) 4) http://www.cophieu68.vn/snapshot.php?id=DHGFinance.vietstock.com http:/ /finance. vietstock.vn /DHG- ctcp-duoc-hau-giang.htm... 3890074 Fax: Email: dhgpharma@dhgpharma.com.vn Website: http://www.dhgpharma.com.vn Tax Number: 1800156801 0292.3895209 Business registration certificate and tax code: 1800156801 • DHG announces new... 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