DOMESCO (HSX: DMC) Sector: Pharmaceutical

Transcription

1 INVESTMENT STRATEGY SHIELD PORTFOLIO 2H Sep, 2014 Steel sector TVS Shield Portfolio 2H is constructed with a moderately conservative approach which is ideal for those who wish to preserve a large portion of the portfolio's total value. With this strategy, we targets securities that pay a high level of dividends yield, low beta yet offering moderate upside potential, leveraging on their leading positions in medical supplies, pharmaceutical and consumer goods sectors. OUR PICKS FOR 2H : DUC THANH WOOD JSC (HSX: GDT) Sector: Wood processing Leading position in domestic market of kitchenware (50% market share) and among top 3 wooden toy player with nationwide distribution network (~1175 outlets). Expanding foreign markets and huge domestic demand. Dividend yield: 8.7% YTD performance vs. Vn-index: 7% GDT is currently trading at 29,500 VND/share or 2014 PE of 6x. DOMESCO (HSX: DMC) Sector: Pharmaceutical Leader in special treatment drugs segment which is growing rapidly. Its product portfolio consisting of diabetes, endocrinology and cardiology (52% of revenue) is 30-40% lower in price than imported drugs. Dividend yield: 4.2% YTD performance vs. Vn-index: 10% DMC is currently trading at 42,500 VND/share or 2014 PE of 8.9x. DANAMECO (HNX: DNM) Sector: Medical supplies Number 1 player in medical dressings segment (50% market share) with long term business relationship with public hospitals all over the country. Expected growing demand by 70% to meet WHO s standard from expanding and upgrading healthcare resources. Dividend yield: 8.1% YTD performance vs. Vn-index: 34% DNM is currently trading at 35,600 VND/share or 2014 PE of 7x. 1

2 1. DUC THANH WOOD JSC HSX: GDT 2

3 GDT In Focus Solid competitive advantage Leading position in domestic market of kitchenware (50% market share) and among top 3 wooden toys producers (together with Nam Hoa, Vessano). Steel sector Diversified exporting markets including up to 50 countries: Korea, Japan, Hongkong, EU, USA Nationwide distribution network of ~1175 outlets, from 300 outlets in Plenty of room for potential growth based on Growing demand as (1) family size becomes smaller thus widening the kitchenware business by 16% in , (2) Customers say no to Chinese plastic toys due to health issues, thus benefiting wooden toys segment, (3) Expanding Japan, South Korea and US markets. Increased capacity with VND18-20 Bn investment in Tan Uyen factory which is expected to come online in 2015, promissing a 20% p.a sales growth. Positive earnings outlook due to Stable gross and net margin with (3-year average of 33% and 17%) & lower income tax from 25% to 22% from 2014 onwards. Low input cost as rubber wood price has dropped by -7% from VND 6mn/m3 to VND5.3mn/m3 during 2013-Aug 2014, thus translating into higher gross margin. Opportunity from FTA Vietnam-EU & Vietnam- Korea with lower tariffs allows GDT to increase its profit margin. 1H2014 Positive performance: Revenue VND121 bn, +22% y/y, Net income VND23 bn, +51% y/y, net margin up from 15% to 19%. Given better business condition, the firm will likely to record VND 284bn of revenue and VND 52bn of net income, exceeding 2014 targets by 13% & 12%, respectively, excluding an additional net profit of VND 25bn from divestment in My Phuoc 2 land (Binh Duong). Low financial leverage: Debt/Equity and current ratio remain at healthy levels of 0.2x & 2.2x, respectively. Undervaluation: GDT is currently trading at 5.9x 2014 PE and 3.7x EV/EBITDA compared to average comparable companies of 10x and 5.3x, respectively, while offering an attractive dividend yield of 8.5%. GDT is expected to be traded at fair valuation of 45,200 VND/share within compared to current market price of 29,500 VND/share (as of 29 Sep 2014). BUY Price (29/9/2014) 29,500 Target price (VND) 45, PE(x) 5.9x 2014 PB(x) 1.5x Upside( %) 53% Dividend yield 8.5% Expected 2014 EPS growth** Key indicators 23% 2014 ROE 27.6% 2014 Debt/Asset 13.7% Market cap (USD mn) 15 Outs. Shares (mn) by end Avg 10 days traded (units) 6350 Ownership structure Domes tic investo rs 90% Mutual fund Elite 10% 3

4 GDT Solid foundation to prepare for sustainable growth Main operation: GDT manufactures Kitchenware, Houseware & Furniture, Toys & Kids Furniture. The firm aims to become the No.1 player in Vietnam kitchenware and wooden toys segment based on (1) its manufacturing competency and (2) market expansion. (1) GDT factories are operating at 75% capacity of 20,000 m3/year plus an expansion of 0.8ha in Tan Uyen factory (Capex of ~VND18-20bn) which comes online in 2015 to prepare for growing demand. (2) GDT enjoyed the huge potential of domestic market with domestic sales proportion up from 11% to 20%, or +25%p.a in sales value during Meanwhile, GDT benefits from export market expansion due to many FTAs (FTAs concluded: Vietnam-Japan, ASEAN-Korea; in negotiations: TPP, Vietnam-EU, Vietnam-Korea). GDT is conquer the niche market of kitchenware and targets to exploit the structural shift in domestic wooden toy segment. Growing kitchenware market (from VND274bn to VND317bn, +16% during ) as the urban population increased from 25mn to 29mn and the family size down to 3.6 members. Huge domestic wooden toy segment of ~VND2,074 bn with growing needs for healthy-educational toys underpinned by 4.2 million kids (less than 6 years old) attending schools nationwide (assuming average expenditure for toys of VND0.5mn/kid/year). Surging Vietnam GDP/capita from 1232 USD to 1911 USD in also adds more positive catalyst for this lucrative business. Chinese toys has previously cornered the domestic toy market (~80% market share) with cheap products. However, recent scandals regarding hazardous substances have created a structural shift to local healthy wooden toys, benefiting local producers, especially GDT. Expanding Asia market Japan and South Korea contribute 50%-52% GDT s 2013 total export revenue Total Household shop Toys shop Asia 72% USA 5% USA 4% Source: GDT annual report 2013, TVS research GDT constant expanding its distribution network Asia 77% EU 18% EU 24% H Source: GDT Annual report 4

5 GDT An expected structural change in revenue structure Toy segment is gaining ground in revenue structure In 2013, Kitchenware accounts 64% total revenue, followed by houseware 18% and toys 15%. In the upcoming years, these tree segments are estimated to remain as key pillars, but will experience a structural change. In view of the domestic toy market for kids (less than 6 years old) GDT plans to increase wooden toys segment up to 40% total revenue within 5 years, reducing the percentage of kitchenware and houseware to 50% and 6%, respectively, from 2013 levels. Improving gross margin Rubber wood represents about 60%-70% material cost, and 35%-40% of COGS and is always available with numerous domestic suppliers. As rubber price shows no sign of recovery with -36% y/y drop to USD1,965/ton as of Jun 2014, more and more rubber plantations have been chopped down. Hence, rubber wood price was also in downward trend from VND 6mn/m3 since the end of 2013 to VND5.3mn/m3 as of Aug 2014, -7%, thus allowing GDT to enjoy lower input cost and higher gross margin. Accordingly, the firm s 1H2014 gross margin increased to 34.5% compared with 33.9% in Given a dull prospect of rubber price, we expect to see the positive effects from cheaper rubber wood to linger till the end of 2014, translating into 2014 gross margin of about 35%. Structural change in revenue 100% 80% 60% 40% 20% 0% Toys Source: GDT Improving gross and EBIT margin due to low input cost Deprecia tion 3% 15% 16% 20% 24% 31% 36% 41% 64% 65% 64% 18% 15% 12% 10% 8% 7% 6% Outsour cing 4% Others 8% Labor 29% 61% Material 56% 58% 53% 50% F 2015F 2016F 2017F 2018F 2019F Others Kids furniture Houseware & furniture Kitchenware 60%-70% Rubberwood Source: GDT 5

6 VND Bn GDT Positive upcoming business performance Accelerating momentum 1H2014 Positive performance: Revenue VND121 bn, +22% y/y, Net income VND23 bn, +51% y/y, net margin up from 15% to 19%. Notably, kitchenware and wooden toys recorded VND75.5bn, +22% y/y and VND20.5 bn, +31% y/y, respectively due to growing demand from both domestic customers i.e. Friesland Campina & Abbott as well as US, Japan & Korea markets. 2H2014 is expected to contribute a greater proportion in 2014 revenue as large exporting contracts are mostly executed at this time plus GDT s shipment to Nestle and P&G in domestic market. Given better business condition, the firm will likely to record VND 284bn of revenue and VND 52bn of net income, exceeding its 2014 targets by 13% & 12%, respectively. Strong balance sheet and Improving profitability Low financial leverage and high liquidity with Debt/Equity and current ratio remain at healthy levels of 0.2x & 2.2x, respectively. Strong balance sheet allows GDT to increase leverage whenever possible to take advantage of today s cheap funding cost for business expansion. Higher gross margin and effective cost management (as operating margin up from 17.6% to 19.5% in ) lay a solid foundation for an improvement in ROA and ROE in 2014 given positive growth in revenue and lower corporate income tax from 25% down to 22%. Revenue regains momentum Profitability ratios area expected to improve 40% 35% 30% 25% 20% 15% 10% 5% 0% F 2015F Others Kids furniture Toys Houseware & furniture Kitchenware Source: GDT Gross margin ROA 33.4% 29.9% ROE Operating profit margin 33.9% 35.0% F Source: GDT 6

7 GDT Financial Metrics (VND Bn) Income statement F 2015F Revenue Gross profit Operating profit Non-operating profit Profit to shareholders Balance sheet F 2015F Cash & equivalent Accounts receivable Inventories Total current assets Net fixed assets Others Total Assets Short-term debt Long-term debt Total liabilities Total equity Total debt & equity Cash flows F 2015F Beginning cash Operating cash Investing cash Financing cash Cash generated Ending cash F 2015F Margin GM 33% 30% 34% 35% 34% OM 19% 18% 19% 22% 21% NM 19% 17% 15% 18% 17% Growth ratios Sales 26% 5% 3% 20% 21% EPS** 27% -10% -5% 43% 16% Profitability ratios ROA 21% 17% 14% 19% 19% ROE 29% 24% 22% 28% 28% Liquidity/solvency Current ratio (x) Debt-to-asset 6% 21% 14% 14% 13% Debt-to-equity 7% 33% 21% 21% 18% Valuation metrics EPS (VND) 4,123 3,693 3,506 5,001 5,794 BVPS (VND) 15,171 15,494 16,849 19,350 22,644 Source: Bloomberg 7

8 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 GDT The Outperformer with attractive valuation 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Price Volume GDT VNINDEX 250, , , ,000 50,000 - ROE (%) Current GDT Vnindex ROC (%) GDT Vnindex Operating GDT margin (%) Vnindex EV/T12M GDT EBITDA (x) Vnindex Net GDT Debt/EBITDA (x) Vnindex PE GDT PE VNINDEX PE PB GDT PB VNINDEX PB Source: Bloomberg 8

9 GDT Valuation Given potential demand from both domestic, expanding foreign markets, plus GDT s market leading status with solid competitive advantages, we highly appreciate the prospect of GDT in upcoming years. We suggest applying Comparable approach (including P/E & EV/EBITDA) and DCF valuation to value GDT VN. The comparable companies (operating in furniture, wooden home supplies sector) are shortlisted in Asia-Pacific region with a focus on emerging markets. A. COMPARABLE APPROACH 1. Building benchmark ratios GDT proves to be more profitable than its region peers with higher ROE and ROA of 21.7% and 14% than the average of 14.4% and 7.1%, respectively while still has low TTM P/E of 6.6x, indicating the stock is currently undervalued. HSX: GDT Country EV/EBITDA Current P/E LTM Operating margin (%) ROE 2013 (%) ROA 2013 (%) GDT VN Equity VN FFHB MK Equity MA PHR MK Equity MA LHI MK Equity MA GEMA IJ Equity ID CSB MK Equity MA GTA VN Equity VN TTF VN Equity VN PTB VN Equity VN Average Source: Bloomberg 9

10 GDT Valuation 2. Building scenario Scenario Summary WORST BASE BEST P&L: Revenue growth % 5.0% 7.0% 19.5% P&L: Gross margin % 30.0% 33.0% 35.0% P&L: SG & A % 14.5% 13.0% 13.0% Possibility 10% 60% 30% EPS (VND/share) 3,212 4,129 5,000 EBITDA (VND Bn) Expected EPS (VND/share) 4,300 Expected EBITDA (VND Bn) Projecting expected value Target price (VND/share) With P/E target 10.3x 44,000 With EV/EBITDA target 5.33x 39,600 DCF approach 52,000 AVERAGE TARGET PRICE 45,200 Current price (29/9/2014) 29,500 We expect GDT s bottom line in to depend heavily on (1) Sales growth, (2) COGS & (3) SGA. Thus, we conduct scenario analysis based on expected changes of these 3 elements. Worst case: GDT will miss 2014 target sales by at 5% in case major export markets slow down, gross margin down to 30% due to higher production cost, especially material cost and SGA will stay at 14.5% of revenue to maintain market shares and expand its distribution network. Base case: GDT will meet 2014 target. Best case: GDT will exceed 2014 target with sales +19.5% driven by recovery in domestic and foreign market which is in line with 1H2014 performance, gross margin 35% with slight drop in input cost and SGA remain at 13% due to improvement in operation efficiency. Given better business environment (expanding foreign market and huge domestic demand), plus nationwide distribution network, solid competitive advantages, we expected GDT to exceed its 2014 target. GDT is forecasted to be traded at fair valuation of 45,200 VND/share during 2H compared to current market price of 29,500 VND/share (as of 29 Sep 2014). 10

11 2. DOMESCO HSX: DMC 11

12 DMC In Focus Revenue growth due to high demand for special treatment drugs, expansion of factories and distribution system. We expect sales to increase by at least 10-12% p.a in due to: Steel sector DMC is the leader in special treatment drugs segment which is growing rapidly. Its product portfolio regarding diabetes, endocrinology and cardiology (52% of revenue) is 30-40% lower in price than imported drugs. Since the end of 2013, factory capacity has increased +67%, from 1.3 billion units/year to 2.18 billion units/year, expected to help boost revenue growth by +51% in Nationwide network with points of sale allows the firm to distribute its own products and CFR s products. Export sales is expected to increase by 10-15%, contributing 5-7% of 2014 net income due to markets expansion into Philippines, Myanmar, Latin America and Nigeria. In 1H2014, exports sales reached USD0.87 mn, +28% y/y Improving profitability ratio The firm s profitability ratios are expected to improve as the proportion of manufactured products with high gross margin is expected to increase from 71.2% in 2013 to 75% in 2014, and 80% in The manufacturing segment contributes 93% of total gross profit in In particular, the Non-betalactam line (cardiology, diabetes group...) has very high gross profit (about 70%). DMC the only firm which has a pharmaceutical strategic partner DMC can take advantage of technology, management, market development (especially in Latin America) and cost saving in R&D. The firm s R&D fund in 2013 was approximately VND129 bn, much lower than DHG (VND701 bn), IMP (VND196.5 bn) and TRA (VND156 bn). Undervaluation: DMC s 2014 P/E of 8.0x lower than average forward PE of comparable firms 10.8x and attractive 2014 PE/EPS growth of 0.47x. With the expected EPS growth rate of +17% (from a diluted 2013 EPS VND/share to about 4,700 VND/share in 2014), PEG ratio is approximately at 0.47x. This is the lowest level compared to those of its peers: TRA (1.39x), IMP (0.49x), showing that DMC is being undervalued. (Notably, DHG s expected PEG is -1.65x due to a decrease of 7.1% in 2014 EPS) BUY Price (29/9/2014) 42,500 Target price (VND) 54, PE(x) 8.9x 2014 PB(x) 1.6x Upside( %) 28% Dividend yield 4.2% 2014 ROE 19.2% 2014 Debt/Asset 11% Key indicators Market cap (USD mn) 57 Outs. Shares (mn) by end Avg 10 days traded (units) 34,980 CFR Int'l 51% VCHF 5% Ownership Deutsc he Bank Invest ment 5% SCIC 39% 12

13 DMC A rising star in Vietnam Pharma lucrative market DMC is the No. 1 domestic pharma company in special treatment drugs which targets the middle & high income segment. In particular, the diabetes, endocrinology and cardiology drugs (52% of revenue) have great advantages with 30-40% lower price than imported drugs. DMC ranked 3rd with 3.7% market share of drugs produced domestically in 2013 and aims to occupy 5% in The domestic market accounts up to 97% proportion while exporting markets capture a modest share of 3% yet highly potential. Export activities have grown rapidly, from USD0.73 mn to USD1.8 mn in period, +34%p.a, making DMC achieve the highest export revenue compared with DHG (USD1.6 mn), IMP (USD1 mn). OTC is DMC s main distribution channel and continues contributing from 65% to 70% of revenue in DMC s high quality products targeting average-high income group are distributed mainly via OTC channel. The remaining 30%-35% is distributed via ETC channel which focuses on special treatment and new generation antibiotics group. DMC currently achieves nationwide market coverage with 10 branches & subsidiaries plus POS, equivalent to IMP and TRA (although still modest compared to DHG: 36 subsidiaries and branches). Positive 1H2014 business performance: revenue VND772 bn, +21% y/y, export sales VND18.3 bn +28% y/y, net income VND62.2 bn, 27.3% y/y. Notably, manufacturing segment represented over 70% total revenue, up 22.6% y/y production market share of drugs manufactured domestically IMP, 3.0% TRA, 4.0% Source: Ministry of Health DHG, 10.8% Others 78.5% DMC, 3.7% 2013 Market share of special treatment drug groups Sterilization Group 20% Source: IMS health Q Others 44% Neurology 6% Metabolism Group 19% Cardiovascula r Group 11% 13

14 DMC Financial Metrics (VND Bn) Income statement F 2015F Revenue 1,261 1,430 1,568 1,756 Gross profit Operating profit Non-operating profit Profit to shareholders Balance sheet Cash & equivalent Accounts receivable Inventories Total current assets Net fixed assets Others Total Assets 849 1,020 1,020 1,143 Short-term debt Long-term debt Total liabilities Total equity Total lia. & equity 849 1,020 1,020 1,143 Cash flows Beginning cash Operating cash Investing cash (12) (61) (100) (125) Financing cash (118) (8) (67) (48) Cash generated (25) (11) 11 (4) Ending cash Ratio F 2015F Margin GM 31% 29% 30% 31% OM 11% 10% 9% 11% NM 7% 8% 8% 9% Growth ratio Sales 11% 13% 10% 12% EPS** 13% 19% -21% 24% Profitability ratio ROA 11% 11% 13% 15% ROE 16% 18% 19% 21% Liquidity/solvency Current ratio (x) Debt-to-asset 9% 11% 9% 8% Debt-to-equity 14% 17% 13% 11% Valuation metric EPS (VND) 5,067 6,037 4,792 5,924 BVPS (VND) 32,025 35,291 26,524 30,648 Source: Bloomberg ** In Jan 2014, DMC issued bonus shares 2:1 14

15 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 DMC On its way to fair valuation 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% volume DMC VNINDEX Price 300, , , , ,000 50,000 - ROE (%) ROC (%) Operating margin (%) EV/T12M EBITDA (x) Net Debt/EBITDA (x) Field Current DMC Vnindex DMC Vnindex DMC Vnindex DMC Vnindex DMC Vnindex PE 3.5 PB DMC PE VNINDEX PE DMC PB VNINDEX PB Source: Bloomberg 15

16 DMC Valuation We suggest applying P/E and EV/EBITDA valuation approach to value DMC VN on comparable basis. We rely on the outlook of the pharma industry and the business operation of leading pharmaceutical companies in Vietnam, which bear many similarities with the operation of DMC, to carry out the following valuation on comparable basis. 1. Building benchmark ratios DMC EV/EBITDA P/E ROE PE/EPS (25/6/2014) ROE 2014 Growth DMC 6.28x 8.0x 17.8% 19.2% 0.47x DHG 11.6x 11.7x 32.0% 25.5% -1.65x TRA 7.93x 11.7x 27.1% 28.7% 1.39x IMP 5.26x 11.9x 8.4% 10.1% 0.49x Average 7.77x 10.8x 2. Building scenario Scenario Probability EPS 2014 EBITDA 2014 Source: Bloomberg (VND/share) (billion VND) Worst case 15% 2, Base case 60% 4, Best case 25% 5, Expected value 4, DMC s 2014 P/E 8.0x lower than average forward PE of comparable firm 10.8x, its current EV/EBITDA 6.3x compared to industry 7.8x and attractive 2014 PE/EPS growth of 0.47x. Target Price Target P/E 10.8x 50,917 Target EV/EBITDA 7.8x 58,206 Outstanding share (million shares) 27 Average target price 54,500 Market price 19/9/ ,000 Upside potential 30% DMC is expected to be traded at fair valuation of 54,500 VND/share during 2H compared to current market price of 42,500 VND/share (as of 29 Sep 2014). 16

17 3. DANAMECO HNX: DNM 17

18 DNM In Focus Plenty of room for potential growth from Leading position in niche market of medical dressings segment (50% market share) with Steel sector close business relationship with public hospital, clinics, medical centers all over the country. Growing demand from expanding/upgrading healthcare resources, thus translating into an expected growth of at least 20% p.a for the next 3-5 years. Positive earnings outlook due to Structural shift to manufacturing segment with higher margin (~40%) Effective cost management with higher productivity plus recent success in self-producing cotton material for gauze and applied domestic sterile packaging technology, leading to ~5%- 10% costs saved. Sharp reduction in interest expense Strong balance sheet & improving profitability Deleverage with Debt/Equity down from 1.69x to healthy levels of 0.67x while improving current ratio from 1.1x to 1.6x in the same period. Improving profitability in : ROE (8% up to 33%), ROA (3% up to 13%). 1H2014 Positive Performance : Revenue VND109 bn, +37% y/y, Net income VND12 bn, +98% y/y, Net margin up from 7% to 11%. Undervaluation: DNM is currently trading at 7x 2014 PE and 1.8x P/B compared to those of healthcare sector 13.1x and 2.2x, respectively, while offering an attractive dividend yield of 8.1%. DNM is expected to be traded at fair valuation of 48,300 VND/share within compared to current market price of 35,600 VND/share (as of 29 Sep 2014). BUY Price (29/9/2014) 35,600 Target price (VND) 48, PE(x) 7.0x 2014 PB(x) 1.8x Upside( %) 35% Dividend yield 8.1% 2014 EPS growth** -14% 2014 ROE 30% 2014 Debt/Asset 32% **DNM issued 1.15 million share in 6/2014 Key indicators Market cap (USD mn) 7.7 Outs. Shares (mn) by end Avg 10 days traded (units) 2080 Ownership structure DNM Chairw omen 12% Others 49% Vinam ed 8% MB Securit ies 14% Thang Long Capital 17% 18

19 DNM Leader in a niche market Main operation - DNM is seasoned and well-known in the business of trading medical equipment from famous manufacturers: Oricare, Roche, Human, Jonhson, B.Braun, Hitachi, Honda, - Manufacturing medical consumables: protection products, sterile medical dressings, obsteric gauze, suturing materials, syringes, needles & catheters, ostomy products and surgical loves. - Advisory on medical equipment installation - The only firm that is in charge of medical stuff distribution in Central of Vietnam on behalf of the Ministry of Health. - Exclusively offer cleaning/washing service for all hospitals in Da Nang city. DNM is a market leader in Vietnam medical consumables industry, especially protection products, gauze, latex gloves with 2013 overall market share of 50%. Moreover, DNM medical mask is qualified for exporting to Japan and was approved by Vietnam Ministry of Health to be national standard. Factories: 1) Hoa Cuong (HC) Factory (6000 sqm in Da Nang): producing medical gauze, protection dress, life jacket, first aid kit. 2) Quang Nam (QN) factory (30,000 sqm in Trang Nhat IZ, Quang Nam Province) producing medical gauze/masks/gloves. Given 5 times larger than HC Factory, QN factory can be expanded easily to support growing demand. Target segment: Hospitals, medical centers, laboratories, clinics and pharmacy shops on nationwide scale. Notably, DNM is the main supplier for many international projects conducted by UNFPA, UNICEF, FIDR, ADRA, JICA, Doctors Without Borders DNM captures the lion s share in local medical gauze market DNM 50% Overall market share 2013 Khác 50% Sharp competition strategy Bao Thach, An Lanh, Bong Bach Tuyet, and others Source: DNM Prospectus 2014, TVS research With modern equipment imported from Japan, Korea, Taiwan, DNM complíe with international standards in terms of quality and health friendliness ISO 9001:2008, ISO 13458:2003, ISO 14971:2007, GSP to be qualified for exporting to US, Japan. Constant invest in R&D in improve product quality and achieve cost efficiency. Especially, DNM has successfully self-produced cotton material for gauze and applied domestic sterile packaging technology, allowing DNM to sharply reduce unit cost (5%-10% cost saved) 19

20 DNM Financial Metrics (VND Bn) Income statement F 2015F Revenue Gross profit Operating profit Non-operating profit Profit to shareholders Balance sheet F 2015F Cash & equivalent Accounts receivable Inventories Total current assets Net fixed assets Others Total Assets Short-term debt Long-term debt Total liabilities Total equity Total liabilities & equity Cash flows F 2015F Beginning cash Operating cash Investing cash Financing cash Cash generated Ending cash F 2015F Margin GM 23% 32% 33% 31% 31% OM 8% 12% 14% 13% 13% NM 2% 6% 9% 9% 9% Growth ratios Sales 19% 2% -5% 19% 17% EPS** -41% 185% 45% -14% 14% Profitability ratios ROA 3% 9% 13% 14% 14% ROE 8% 27% 33% 30% 28% Liquidity/solvency Current ratio (x) Debt-to-asset 53% 45% 34% 32% 29% Debt-to-equity 169% 130% 81% 67% 59% Valuation metrics EPS (VND) 1,499 4,265 6,177 5,310 6,078 BVPS (VND) 18,292 17,105 20,018 20,384 23,462 Source: Bloomberg 20

21 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 DNM Undervaluation 140% 120% 100% 80% 60% 40% 20% 0% -20% Volume DNM VNINDEX Price 25,000 20,000 15,000 10,000 5,000 - ROE (%) Current DNM Vnindex ROC (%) DNM Vnindex Operating DNM margin (%) Vnindex EV/T12M DNM EBITDA (x) Vnindex Net DNM Debt/EBITDA (x) Vnindex PE DNM PE VNINDEX PE PB DNM PB VNINDEX PB Source: Bloomberg 21

22 DNM - Valuation Given stable demand from both domestic and foreign markets, plus DNM s market leader status with solid competitive advantages, we highly appreciate the prospect of DNM in the upcoming years. Given DNM s specific business model that can hardly be found in any listed comparable local company, we suggest applying DCF valuation approach to value DNM. D/E target 30% D/(D+E) 23% E/(D+E) 77% Cost of debt 10% Tax rate 22% Risk free rate (Ref. Vietnam Gov. Bond) 8.7% Beta (Ref. Bloomberg) 0.34 Equity risk premium (Ref. Damodaran, Stern, NYU and Vietnam ratings upgraded by Moody s from B2 to B1, as of Jul 2014) 11.75% Cost of equity 12.7% WACC 11.6% Long term growth rate (in line with GDP growth) 5% Target price (VND/share) DCF approach 48,300 Current price (29/9/2014) 35,600 Given available room for growth, especially its manufacturing segment, plus expanding distribution network, solid competitive advantages and closed relationship with public hospitals, DNM is expected to be traded at fair valuation of 48,000 VND/share during compared to current market price of 35,600 VND/share (as of 29 Sep 2014). 22

23 DISCLAIMER ANALYST CERTIFICATION We, Research Department of Thien Viet Securities Company (TVS), hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers. We will not compensate, directly or indirectly, for any specific recommendations or views expressed in this report. by Thien Viet Securities Company. All rights reserved. This publication may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of Thien Viet Securities Company (TVS). The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. HO CHI MINH 63A Vo Van Tan St, District 3 Floor 9, Bitexco Nam Long Building Tel: +84 (8) Fax: +84 (8) HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) Fax: +84 (4) RESEARCH DEPARTMENT research.hcm@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn BROKERAGE DEPARTMENT Ho Chi Minh brokerage.hcm@tvs.vn Ha Noi brokerage.hn@tvs.vn 23