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DHG Pharmaceutical JSC (DHG)

May 2014

INITIATING COVERAGE: BUY

DHG Peer
Chỉ index
số nhóm công ty cùng ngành VNIndex
Current Price (5/15/2014) VND 117,000
100%
Target Price VND 130,500 VN-Index
80%
Bloomberg ticker: DHG VN Exchange: HSX
Industry: Pharmaceuticals 60%

Beta: 0.66 40%


52w High / Low (VND‘000): 150/ 79
20%
Outstanding shares (mn): 65
0%
Market cap (VNDbn): 7,648
Free-float ratio (%): 47% -20%
5/15 7/15 9/15 11/15 1/15 3/15 5/15
LTM Avg trading vol (share) 18,136
Foreign-owned ratio (%): 49%

Year
Cash dividend
EPS We initiate coverage DHG Pharmaceutical JSC (DHG) with a
(VND/share) long-term BUY recommendation based on the following:
2013 3,500 9,010
 DHG is currently the market leader among the local
2012 2,000 7,443
pharmaceutical companies in Vietnam.
2011 4,000 6,382
 DHG’s main products include generics in the antibiotics and
Ratio DHG Peer VNI
pain-reliever categories, which together accounted for 57% of
2014 P/E 11.1x 13.9x 12.0x
the company’s sales of in-house products in 2013. DHG’s
2014 P/B 3.1x 3.4x 2.0x
extensive distribution network covers all 64 cities and
Debt / Equity 9.0% 19.1% 97.6% provinces of Vietnam and serves over 20,000 customers. In
Profit margin 16.7% 10.8% 9.9% 2014, the company’s annual capacity doubles to 9.6 billion
ROE 21.7% 22.0% 14.8% units thanks to their factories in Can Tho City. From 2009 to
ROA 32.1% 13.4% 3.4% 2013, DHG’s revenues and net profits achieved CAGRs of 19%
and 13%, respectively. DHG’s profit margin, ROE and ROA are
Company description: consistently among the highest in the industry.

Core businesses: manufacturing (85% of 2013 net


 We believe that DHG represents a good long-term investment.
revenues), and distribution (10%) of pharmaceutical Our forecast model yielded a 12-month target price of
products VND130,500 per share, representing a price appreciation
Main product lines: antibiotics (38%), pain relievers
(19%), respiratory drugs (12%) potential of 12% and a dividend yield of 3%.
Key cost components: active pharmaceutical ingredients  In the recent week, the drops in VN-Index and DHG’s stock
(API), packaging
Key business risks: supply sources for raw materials;
price were primarily caused by the market’s reaction toward
product offerings are very similar to competitors the news of Vietnam’s disputes with China on the South Sea. In
Customers: 20,000 wholesalers and pharmacies across addition, we noted that this decrease in DHG’s stock price was
Vietnam
Headquarter address: 288Bis Nguyen Van Cu Street, Can likely caused by the profit-taking of retail investors as the stock
Tho City, Vietnam had risen 80% in value between May 2013 and March 2014.
Website: www.dhgpharma.com.vn
Please see important disclosure information at the end of this report.

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CONTENTS

INDUSTRY OVERVIEW ............................................................................................................................................................. 3


PHARMACEUTICAL TRENDS IN ASIAN MARKETS ..................................................................................................... 3
VIETNAM’S PHARMACEUTICAL SECTOR .................................................................................................................... 4
COMPETITIVE LANDSCAPE ........................................................................................................................................... 5
THE COMPANY ......................................................................................................................................................................... 6
COMPANY’S DESCRIPTION ........................................................................................................................................... 6
Subsidiaries and affiliate companies ....................................................................................................................... 6
Management and ownership structure .................................................................................................................... 7
BUSINESS MODEL .......................................................................................................................................................... 8
More than 80% of DHG’s sales and gross profits come from in-house products ................................................ 8
Antibiotics and pain relievers are DHG’s top money makers .............................................................................. 10
Annual capacity is set to be doubled in 2014 ........................................................................................................ 11
Extensive distribution network that covers all 64 cities and provinces of Vietnam .......................................... 12
Growth prospects and challenges .......................................................................................................................... 14
FINANCIAL ANALYSIS .................................................................................................................................................. 16
Cost analysis ............................................................................................................................................................. 16
Profitability margins and returns on capital .......................................................................................................... 17
Operational efficiencies ........................................................................................................................................... 18
Liquidity analysis and financing structure ............................................................................................................. 18
Management’s forecast and 1Q2014 results ......................................................................................................... 19
SWOT ANALYSIS .......................................................................................................................................................... 20
VALUATION ................................................................................................................................................................... 21
Key forecast assumptions ....................................................................................................................................... 21
DCF Model ................................................................................................................................................................ 22
Market-based valuation ........................................................................................................................................... 23
DHG’S target price ................................................................................................................................................... 23
Technical analysis .................................................................................................................................................... 24
CONCLUSION .......................................................................................................................................................................... 25

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INDUSTRY OVERVIEW
PHARMACEUTICAL TRENDS IN ASIAN MARKETS
Along with other macro Asia’s pharmaceutical sector has been expanding rapidly and in line with the region’s
trends, rises in incomes strong economic growth and demographic changes, especially in countries
across Asia has contributed
belonging to the Association of Southeast Asian Nations (ASEAN). Several dominant
significantly to the increase
in healthcare spending within macro trends, such as rising household incomes, increased government expenditure
the regional countries. on healthcare, higher life expectancies and consumer health-awareness, have all
boosted demands for pharmaceutical products in the region. According to the
Economist Intelligence Unit (EIU), regional pharmaceutical sales doubled from
USD97 billion in 2001 to USD214 billion in 2010, and will reach USD386 billion by
2016, reflecting the compound annual growth rate (CAGR) of 10% for the period from
2010 to 2016.
The dramatic rise in incomes across Asia over the past ten years has contributed
significantly to the increases in healthcare spending among the regional countries.
About half of Asia still lives in rural areas, but they have greater access to
mainstream medicines and healthcare services, thanks to continual efforts made by
both the public and private sectors.

Real pharmaceutical spending per capita Healthcare spending per capita (USD)
2000 2011 2000 - 2011 CAGR
2000 – 2009 CAGR
15% 500 20%
12% 383
12% 400 16%
9% 10%
9% 278
9% 300 12%
7%
201
6% 200 8%
4%
2% 97 97 96 95
3% 2% 100 60 4%

0% 0 0%

Source: World Health Organization (WHO) Source: World Health Organization (WHO)

From 2004 to 2011, there Thanks to the positive macro catalysts mentioned above, Asia has become an
had been 653 cross-border attractive market for global pharmaceutical companies. In 2010, the Asia-Pacific
investment projects flowing
region accounted for 21% of Bayer AG’s total revenues as compared to only 10% in
into Asian countries.
1990. In addition, according to the international data provider fDiMarkets.com, there
had been 653 cross-border investment projects in Asia between 2004 and 2011 worth
a total of USD29 billion, coming from 321 companies in the pharmaceutical (70%)
and biotechnology space (30%). China was the largest recipient with 186 inward
investments, followed by India (157) and Singapore (94). Global pharmaceutical firms
have been moving into Asian countries in order to lower their production costs and
expand the research and development (R&D) base. R&D accounted for 200 projects
of the 653 cross-border investment projects mentioned above, compared to
manufacturing with 175.

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VIETNAM’S PHARMACEUTICAL SECTOR
By the end of 2012, Vietnam had a total of 183 drug makers, half of which were
manufacturers of western medicines. Vietnam’s pharmaceutical sector is
characterized by a strong reliance on the imports of both raw materials and end-
product medicines. Each year, local pharmaceutical firms have to import 90% of their
raw material needs from international suppliers such as China and India. At the same
time, Vietnam’s domestic production of drugs accounts for less than 50% of the
country’s annual consumption.

Sales of Vietnam’s pharmaceutical industry Vietnam’s pharmaceutical spending per capita


Sales Pharmaceutical industry Pharmaceutical spending per capita Growth
Growth USD
(USDbn) Pharma growth % GDP growth %
8 24% 80 73.8 20%
Real GDP growth % 7.06
64.9
6.17 56.7
6 5.34 18% 60 15%
49.3
4.60
3.92 42.4
4 3.30 12% 40 35.9 10%
2.84 31.2
2.42 27.0
2.06 23.1
2 6% 20 5%

0 0% 0 0%
2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Source: BMI Vietnam Pharmaceuticals and Healthcare Report 2Q2014

In order to fully embrace the Based on our research, we believe that the industry landscape of Vietnam’s
long-term potentials of pharmaceutical sector is teeming with potentials. Vietnam’s expanding population,
Vietnam’s pharmaceutical
industry, the sector will have
higher levels of health awareness among the growing middle class, together with
to immediately address increased access to medicines across the country, should provide a roaring engine
several key structural for the pharmaceutical sector’s acceleration in the upcoming years. Between 2013
weaknesses. and 2018, Business Monitor International (BMI) predicted that the pharmaceutical
sector would achieve a CAGR of 16.4% in sales. Nevertheless, in order to fully
embrace the aforementioned potentials, Vietnam’s pharmaceutical sector will have to
immediately address the following structural weaknesses:

 Consumers’ biases: Both local purchasers and doctors have a strong preference
for imported products. The general perception among Vietnamese consumers is
that domestic drugs are manufactured from outdated production facilities with
dismal quality control processes.

 Limited offerings by domestic firms: Local pharmaceutical companies in Vietnam


are not keen on investing in R&D in order to develop new patented drugs due to
the huge expenditure and long time horizon usually associated with the
development of a new drug. At the moment, domestic firms are mostly content
with producing common generic drugs and often choose very similar product
portfolios in order to minimize business risks.

 Inadequate technological base: With regard to the field of bio-chemistry and


pharmaceutical chemistry, Vietnam is quite far behind when compared with its
regional neighbors. Without a strong technological base, Vietnam’s production of
active pharmaceutical ingredients will remain severely limited, thus deepening
the country’s reliance on import of raw materials for this sector.

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COMPETITIVE LANDSCAPE
Notable local competitors

Market 2013
Company name Ticker capitalization revenues
(VNDbn) (VNDbn)
DHG Pharmaceutical JSC DHG 8,824 3,527
Traphaco JSC TRA 2,134 1,682
Domesco Medical Import Export JSC DMC 1,175 1,430
Imexpharm Pharmaceutical JSC IMP 984 842
OPC Pharmaceutical JSC OPC 807 564
Pharmedic Pharmaceutical
PMC 467 357
Medicinal JSC
Cuu Long Pharmaceutical JSC DCL 286 699
SPM Corporation SPM 300 448
Hatay Pharmaceutical JSC DHT 207 743
Lam Dong Pharmaceutical JSC LDP 163 463

Source: VPBS collect. Data as of 5/15/2014

The majority of Vietnam’s publicly listed pharmaceutical companies are


headquartered in the country’s Southern regions; there are only two publicly listed
drug makers located in the North (Hatay Pharmaceutical JSC and Traphaco JSC) and
one in the Central of Vietnam (Lam Dong Pharmaceutical JSC). Currently, DHG’s top
three competitors in terms of revenues and market capitalizations are:

Traphaco JSC (TRA) is the maker of traditional-medicine drugs and is known in the
market for two flagship products: Boganic (liver health) and Hoat Huyet Duong Nao
(brain health). In 2013, sales of these two products together accounted for 35% of the
company’s total revenues. TRA’s main competitive advantage is the ability to source
90% of the raw material needs from its local suppliers while other drug makers in the
same field have to rely on imported products from China.

Domesco Medical Import Export JSC (DMC)’s offerings comprise a wide range
of products, from traditional medicines and vitamins & supplements to antibiotic,
pain-killer and specialty drugs. DMC’s better known products in the markets are the
generic drugs used for treatments for diabetes and cardiovascular diseases as their
costs are 30% to 40% lower than imported products.

Imexpharm JSC (IMP)’s competitive edge lies in the fact that the company
currently owns one of the most modern and technologically advanced production
facilities in Vietnam. IMP’s main products are high-end antibiotics belonging in the
Cephalosporin and Penicillin groups. Thanks to its high-tech production facilities, IMP
is often chosen as the manufacturing contractor for many multinational
pharmaceutical companies in the world.

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THE COMPANY
COMPANY’S DESCRIPTION
DHG Pharmaceutical JSC (DHG) was founded in September 1974 under an initial
name of Pharmaceutical Enterprise No.29. In September 2004, the company changed
its name to Hau Giang Pharmaceutical JSC and was equitized with an initial
chartered capital of VND80 billion. In 2006, DHG obtained WHO GMP/GLP/GSP
qualifications, and officially listed its shares on the Ho Chi Minh Stock Exchange
(HSX) with 8 million shares outstanding by the end of that year.
Between 2007 and 2013, DHG had successfully established 18 subsidiaries, out of
which 12 served as the core distributors of DHG’s products, together with 24
representative offices and 68 pharmacies across the country. Capitalizing on this
strong distribution network, the vast majority of the company’s sales are done
through the over-the-counter channel which accounted for 89% of DHG’s drug sales
in 2013. DHG’s main products include generics in the antibiotics and pain-reliever
categories, which together accounted for 61% of the company’s sales of in-house
products in 2013.
DHG’s total assets strongly increased by 30% y-o-y in 2013 primarily because of: (1)
VND325 billion increase in gross fixed assets in connection with the construction of
two new factories at TPT Industrial Zone, and (2) VND246 billion increase in inventory
due to the stocking-up of raw materials at these new factories.

Total equity Total assets


VNDbn Charter capital Retained earnings VNDbn
Current assets Long-term assets
Reserve funds & others
2,500 3,500

2,000 2,800
848
768
1,500 2,100 561
557
352 378 505
268
1,000 560 1,400 310
364 377 477
331 2,233
1,818
500 700 1,442 1,491
1,212
645 648 652 654 654

0 0
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Source: DHG’s audited financial statements Source: DHG’s audited financial statements

Subsidiaries and affiliate companies

Beside financial investments in 18 subsidiaries as mentioned above, DHG has also


made equity investments in Vinh Hao Spirulina Corporation (Spiviha) (31.5%
ownership) and Vinh Tuong High-Tech Packaging JSC (Viphaco) (6.7% ownership).
Spiviha supplies DHG with the raw materials (algae) for the company’s vitamin and
food supplement product lines (e.g. Spivital and Naturenz); while Viphaco is DHG’s
provider of packaging supplies. Currently, these financial investments do not
materially contribute to DHG’s financial results.

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Company name Main business activity 2013 Revenues 2013 PBT
DT Pharma One-Member Limited Trading of healthcare products VND49 billion VND2 billion
DHG Travel One-Member Limited Travel services VND73 billion VND3 billion
HT Pharma One-Member Limited Trading of healthcare products VND70 billion VND4 billion
DHG Nature One-Member Limited Manufacturing of pharmaceutical materials VND47 billion VND4 billion
CM Pharma One-Member Limited Trading of healthcare products VND69 billion VND3 billion
DHG Packaging & Printing One-Member Limited (1) Packaging & printing VND217 billion VND35 billion
Song Hau Pharma JSC (2) Trading of healthcare products VND137 billion VND9 billion
A&G Pharma One-Member Limited Trading of healthcare products VND115 billion VND4 billion
ST Pharma One-Member Limited Trading of healthcare products VND73 billion VND3 billion
TOT Pharma One-Member Limited Trading of healthcare products VND257 billion VND7 billion
TG Pharma One-Member Limited Trading of healthcare products VND44 billion VND1 billion
Bali Pharma One-Member Limited Trading of healthcare products VND58 billion VND3 billion
DHG Pharma One-Member Limited (TPT) Drug manufacturing n/a n/a
B&T Pharma One-Member Limited Trading of healthcare products VND31 billion VND0.5 billion
TVP Pharma One-Member Limited Trading of healthcare products VND36 billion VND1 billion
VL Pharma One-Member Limited Trading of healthcare products VND50 billion VND0.5 billion
DHG Nature 1 One-Member Limited 1 Manufacturing of pharmaceutical materials not in operation not in operation
DHG Packaging 1 One-Member Limited Packaging & printing in construction in construction
(1) To be dissolved in 2014; (2) DHG owns 51%
Source: DHG’s audited financial statements and VPBS’s summary

Management and ownership structure

DHG’s stock is regarded as a strategic long-term investment among foreign


investment funds because of the company’s market leading position among local
companies in Vietnam. For the past five years, foreign ownership in DHG has
consistently been between 46% and 49% (legal ceiling limit. Should ceiling limit on
foreign ownership be raised this year, we believe that the company will be very open
for further share purchases by foreign investors.
According to its latest resolution, which was approved by Vietnam’s Prime Minister
in November 2013, State Capital Investment Corporation (SCIC) will dispose of its
holdings in 376 companies but retain its long-term investments in DHG, FPT
Telecom, Viet Nam Dairy Products JSC (VNM) and Vietnam National Reinsurance
Company for the foreseeable future. This is because these four companies are market
leaders in their own fields and also generate a substantial amount of dividend
income for SCIC. In 2013 alone, SCIC collected a total amount of VND99 billion in
dividend from DHG.

Major shareholders (>1%) # Shares Ownership Ownership structure


State Capital Investment Corporation 28,313,119 43.31% Insider
Franklin Templeton Investment Funds 5,930,371 9.07% shareholders &
Portal Global Limited 4,708,748 7.20% Other employees
Vietnam Holding Limited 1,713,748 2.62% shareholders 3.04% Foreign
4.64% shareholders
Vietnam Enterprise Investment Limited 1,597,239 2.44%
48.99%
KITMC Worldwide Vietnam RSP 1,560,080 2.39%
JP Morgan Vietnam Opportunities Fund 1,385,098 2.12%
KWE Beteiligungen AG 1,303,543 1.99%
65,376,429
CAM Vietnam Mother Fund 1,005,738 1.54%
SCIC shares
Templeton Global Investment Trust (FT) 884,670 1.35%
43.31%
Grinling International Limited 874,891 1.34%
Templeton Global Investment (EM) 838,824 1.28%
FC Global 708,783 1.08%
Source: DHG

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According to the Resolution of Board of Directors dated April 28, 2014, Ms. Pham Thi
Viet Nga replaced Ms. Le Minh Hong as DHG’s CEO while Mr. Hoang Nguyen Hoc, a
representative from the State Capital Investment Corporation (SCIC), served as DHG’s
Chairman, replacing Ms. Nga.
Two of SCIC’s representatives, Mr. Hoang Nguyen Hoc and Mr. Le Dinh Buu Tri, are
serving as DHG’s Chairman and Vice-Chairman of the Board, respectively. While we
believe that Ms. Nga, DHG’s CEO will be the main driver behind the company’s
growth strategy during the next few years, it remains unclear to us as to SCIC’s exact
degree of influence on the company’s operations and policies.

Name Title Year of birth Qualifications / positions Stock ownership


BOARD OF DIRECTOR
Mr. Hoang Nguyen Hoc Chairman 1957 Vice President, SCIC 0.00%
Mr. Le Dinh Buu Tri Vice chairman 1970 Southern-branch Director, SCIC 0.03%
Mr. Doan Dinh Duy Khuong Member 1974 Deputy CEO, DHG 0.02%
Ms. Pham Thi Viet Nga Member 1959 CEO, DHG 0.23%
Ms. Dang Pham Minh Loan Member 1977 Vice President, VinaCapital 0.00%
Mr. Tran Chi Liem Member 1950 Former Deputy Minister, MOH 0.14%
Mr. Shuhei Tabata Member 1954 ASEAN Director, Nomura Trading Co. 0.03%
SUPERVISORY BOARD
Mr. Tran Quoc Hung Chairman 1958 HR Supervisor, DHG 0.02%
Mr. Dinh Duc Minh Member 1962 Senior analyst, Saigon Securities Inc. 0.00%
Ms. Nguyen Phuong Thao Member 1976 Capital management specialist, SCIC 0.00%
TOP MANAGEMENT
Ms. Pham Thi Viet Nga CEO 1959 PhD in Economics 0.23%
Mr. Le Chanh Dao Deputy CEO 1959 Master of Economics 0.09%
Mr. Doan Dinh Duy Khuong Deputy CEO 1974 Master of Business Administration 0.02%
Ms. Nguyen Ngoc Diep Deputy CEO 1968 Specialized Pharmacist 0.01%
Ms. Dang Pham Huyen Nhung CFO 1966 Bachelor of Foreign Trade 0.01%

Source: DHG’s 2013 AGM Resolution

BUSINESS MODEL

More than 80% of DHG’s sales and gross profits come from
in-house products

DHG’s revenues DHG’s 2013 revenue breakdown


VNDbn In-house products Distribution
Promotion
Services Others Travel
4,000 products
1%
4%
3,527 Distribution
3,200 10%
2,931
2,491
2,400
2,072
1,746 VND3.5
1,600 trillion

800 In-house
products
0 85%
2009 2010 2011 2012 2013

Source: DHG

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DHG’s in-house products DHG’s in-house products are the top money-earners as they were responsible for
accounted for 85% of DHG’s
85% of DHG’s revenues in 2013. Within this category, medicinal drugs contribute
net revenues in 2013.
more than 90% of the generated revenues, with food supplements and cosmetics
accounting for the remainder. The majority of drugs manufactured by DGH are
generic drugs, the production of which does not involve expensive R&D costs
required by the patent drugs that are offered by the international pharmaceutical
companies. DHG’s drugs are largely sold through the over-the-counter channel (OTC)
while sales via the ethical channel (ETC) only accounted for 11% of the total drug
revenues in 2013.
Toward the end of 2012, DHG Revenue contribution from the distribution rose from 4% in 2012 to 10% in 2013. This
had successfully transferred
shift was primarily caused by the re-classification of sales of the Eugica product line
the license of the Eugica
product line over to Mega
(i.e. cough drop) from the in-house product category to the distribution category. In
Lifescience Limited for a total 2012, sale of the Eugica product line generated approximately VND240 billion, or 8%
proceed of USD6 million. of DHG’s net revenues. Toward the end of 2012, DHG had successfully transferred the
license of the Eugica product line over to Mega Lifescience Limited for a total
proceed of USD6 million. From 2013 until 2017, DGH only manufactures and
distributes Eugica product line on a low-margin fees basis under the outsourcing
contract signed with Mega Lifescience Limited. The low margin of this activity is the
primary reason for the decline in the gross margin of the distribution segment in
2013.
DHG Travel One-Member Limited (DHG Travel), a 100%-owned subsidiary, is
primarily responsible for organizing and promoting travel services for DHG’s clients.
The business activities of this subsidiary depend to a large degree on the parent
company’s customer relation policies. Revenue generated from this segment is quite
small, contributing less than 1% of DHG’s total sales each year. Together with
promotion products, DHG Travel’s main purposes are (1) to ensure that DHG is able
to maintain long-term business relationships with its customers, and (2) to keep
DHG’s customers up-to-date with the company’s new product offerings each year.

DHG’s gross profit structure DHG’s 2013 gross profits

VNDbn 2010 2011 2012 2013 Distribution Promotion


In-house products 1,004 1,195 1,428 1,612 1% products
1%
Gross margin 52.9% 51.9% 52.8% 53.6%
Distribution 8 11 8 14
Gross margin 12.6% 11.5% 7.0% 3.7%
Travel 1 1 3 1
Gross margin 9.6% 16.5% 15.3% 6.3%
Promotion products 4 2 6 12 In-house
Gross margin 5.8% 2.7% 6.5% 9.0% products
98%
Total 1,017 1,210 1,445 1,639
DHG’s gross margin 50.1% 48.5% 49.3% 46.5%

Source: DHG’s data

Due to its superior revenue share and gross margin, DHG’s in-house products
contributed 98% to the company’s gross profits in 2013. The Eugica product line,
which boasts low gross margin due to the outsourcing agreement with Mega
Lifescience, was re-classified into the distribution business line at the beginning of
2013. This led to a decrease in the gross margin of DHG’s distribution activity from
7.0% in 2012 to 3.7% in 2013.

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Antibiotics and pain relievers are DHG’s top money makers

DHG’s offering portfolio comprises over 300 products. The three product categories
with the largest revenue shares are antibiotics (2013: 41% of in-house revenue), pain
relievers (20%), and respiratory (14%).
Compared to the imported drugs, DHG’s products are quite comparable in term of
quality but are sold at 20% to 30% lower in prices. In 2013, DHG’s top 12 brands
account for nearly 60% of the company’s sales of in-house products.

Sale of DHG’s top 12 brands (VNDbn) In-house sale by product category in 2013

700 Musculo - Others


2009 2010 2011 2012 2013 skeletal 12%
Metabolism 5%
600
5%
500 Cardiovascular &
diabetes
5%
400
Antibiotics
300 Optometry & 38%
nerves
200 4%

100
Respiratory Pain relievers
12% 19%
0

2013 revenues % in-house


Usages
(VNDbn) sales
Hapacol Painkiller 600 20.0%
Klamentin Antibiotics 475 15.8%
Haginat Antibiotics 199 6.6%
Spivital Vitamins 63 2.1%
Eyelight Eye drops 70 2.3%
Davita Bone treatment 43 1.4%
Unikids Vitamins 70 2.3%
Naturenz Liver health 81 2.7%
Gavix Blood circulation 11 0.3%
Apitim Heart treatment 65 2.2%
Glumeform Diabetes treatment 28 0.9%
Nattoenzym Blood circulation 27 0.9%
Total 1,730 57.6%
Source: DHG’s data, VPBS collected

DHG drugs benefit extensively Currently, Hapacol (painkiller), Klamentin (antibiotics) and Haginat (antibiotics) are
from the company’s strong DHG’s flagship products and together accounted for 42% of DHG’s in-house sale in
distribution network and from
2013. Similar to the majority of drugs manufactured by DHG, these three products
their lower pricing as
compared to imported drugs. belong in the generic category and, as such, have to compete vigorously with both
the local competitors and imported drugs. Fortunately, DHG’s drugs benefit
extensively from the company’s strong distribution network and from their lower
pricing as compared to imported drugs. In addition, the DHG brand is often
associated with high-quality products and eye-catching packaging designs, which
have helped boost sales to end-users.

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DHG’s top three products vs. similar products in the market
DHG-brands Price per unit Main APIs Competitors Competing brands Price per unit
GSK Panadol 500 VND2,500
Hapacol 500mg VND1,500 Paracetamol Domesco Dopamol 500 n/a
Sandoz-Imexpharm Temol VND500
Imexpharm Claminat 625mg VND10,800
Amoxcilin, Acid
Klamentin 625mg VND6,500 GSK Augmentin 625mg VND14,000
Clavunic
Norvatis Curam 625mg VND13,000
GSK Zinnat 500mg VND25,000
Haginat 500mg VND16,500 Cefuroxime Domesco Zinmax 500mg VND11,000
Imexpharm Zanimex 500mg n/a
Source: VPBS collected

In addition to the generic category, DHG has been making R&D investments into its
bio-products, such as Spivital, which is made from the Spirulina algae, and Naturenz,
which is made from the combination of natural components. DHG has 31% share
ownership in Vinh Hao Algae Company, which provides raw material for DHG to
produce vitamins and other various new nutrient products. Although Spivital and
Naturenz only contributed respectively 2.1% and 2.7% to DHG’s in-house sales in
2013, our analysis indicates that these two products have huge potential for growth
in the long run.

Annual capacity is set to be doubled in 2014

New factories at TPT Starting in 2014, DHG’s annual capacity has been doubled from 4.6 billion product
Industrial Zone will help units to 9.6 billion product units thanks to its two new factories in Tan Phu Thanh
lower DHG’s tax rates while
Industrial Zone. The new non-Betalactam factory (annual capacity of 4 billion product
doubling the company’s
annual capacity starting units) commenced operation on April 20, 2014, while the construction of the new
2014. Betalactam factory (annual capacity of 1 billion product units) is still on-going with
the estimated completion date for December 2014. This is a propitious news since
DHG’s old factories located in 288Bis Nguyen Van Cu Street, Can Tho city, had been
operating at full capacity in 2013.

Annual production activities DHG’s production capacity and utilization (2013)

Million Production volumes Designed


VNDmn Facilities Products Utilization
units Production values (VNDmn) Capacity
5,000 5,000 Assembly #1* non- 100%
3.6 billion
Assembly #5* Betalactam 100%
4,000 4,000
Assembly #2* 600 million 100%
4,104 Betalactam
3,000 3,000 Assembly #3* 45 million 100%
3,410
3,010 Assembly #4* Soft capsules 400 million 100%
2,000 2,000 New factory #1 non-Betalactam 4 billion n/a
2,303
1,899 New factory #2 Betalactam 1 billion n/a
1,000 1,000
Total 9.6 billion units
0 0 (*): located within the old factory complex in 288Bis Nguyen Van
2009 2010 2011 2012 2013 Cu, Can Tho city

Source: DHG’s data, VPBS collected

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These two new factories at Tan Phu Thanh (TPT) Industrial Zone will be given
preferential tax rates for a period of 15 years (starting 2014), specifically: 0% tax rates
during the first 4 years of operation, 5% for the next 9 years and 10% of the
remaining 2 years. Starting 2014, DHG plans to shift between 60% and 80% of the
annual production output to the two new factories in order to take advantage of the
aforementioned preferential tax rates and to make use of the higher tax-deductible
depreciation costs.
In the long run, production of Betalactam and non-Betalactam drugs will be carried
out at the new factories while the old factories will only be utilized for the production
of food supplements and drugs that are made from natural ingredients.

DHG’s production complex at TPT Industrial Zone New non-Betalactam factory at TPT Industrial Zone

Source: DHG, VPBS collected

Both the old and the new factories are certified by the Ministry of Health (MOH) with
a GMP-WHO standard. Machinery and equipment for the new factories are primarily
purchased from the United States and Germany with the total capex investment of
approximately VND150 billion. In the long term, we expect that DHG will eventually
have to upgrade its production facilities to higher standards such as GMP-EU, EMEA
and PIC/S in order to become more competitive in both the local and international
markets.
Currently, DHG is having on-going discussions with various potential partners with
the aim to develop new production lines on the currently unused 2-hectare land plot
at the Tan Phu Thanh Industrial Zone. Nevertheless, according to DGH’s
management, no concrete agreement has been reached as of yet.

Extensive distribution network that covers all 64 cities and


provinces of Vietnam

DHG’s distribution system covers all 64 cities and provinces in Vietnam and as such
is one of the company’s primary competitive edges. The company’s sales network
comprises 12 subsidiaries (DHG owned between 51% and 100%), 24 representative
offices and 68 hospital-pharmacies, serving over 20,000 distributors and wholesalers.
By the end of 2013, the company had over 1,200 sales and marketing employees,
with each employee serving on average 75,000 persons in Vietnam.

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DHG’s sales by channel DHG’s sales by region in 2013 DHG’s sales by market in 2013
OTC ETC
Export
18% 16% 11%
1%
Mekong Northern
Delta 31%
33%

82% 84% 89%


Central Local
Eastern market
20% 17%
99%

2011 2012 2013

Source: DHG, VPBS collected

DHG’s distribution coverage in Vietnam can be broken down into four geographic
regions: Northern, Central, Eastern and Mekong Delta. Since DHG is based in the
Mekong Delta, the company’s products are most popular within that region. Between
2009 and 2013, sale break-down per region has been fairly stable with Mekong Delta
and Northern regions accounting for approximately 60% of DHG’s total revenues.
Since the majority of DHG’s in-house products are generic OTC drugs, the OTC
channel unsurprisingly accounted for over 80% of DHG’s drug sales for the past three
years. This orientation is also in sync with the local consumer habit as Vietnamese
consumers prefer advice and guidance from drugstore clerks over the hassles of
obtaining a doctor’s prescription.

DHG’s distribution coverage

Source: DHG, VPBS collected

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Pharmacies and distributors selling DHG products typically benefit from 16% to 20%
discounts as compared to only 10% to 15% offered by other competitors. This has
undoubtedly helped DHG gain more shelf-life and shelf-spaces for their products.
In 2014 and 2015, DHG plans to spend approximately VND250 billion in order to
extend and upgrade its distribution network, comprising (1) investments in new
infrastructures (VND105 billion), (2) M&A transaction (VND91 billion) and (3)
construction of new drug warehouses (VND52 billion).
DHG’s sales through the ETC Since the beginning of 2012, DHG’s sales through the ETC channel have been
channel are being negatively experiencing setbacks due to the issuances of Circular 01/2012/TTLT-BYT-BTC and
affected by the issuances of
Circular 01/2012/TTLT-BYT-
Circular 36/2013/TTLT-BYT-BTC in 2012 and 2013, respectively. In essence, these
BTC and Circular circulars regulate the drug-bidding process in Vietnam’s stated-owned hospitals and
36/2013/TTLT-BYT-BTC. mandate the selection of the cheapest tender among bidders of the same bidding
category (e.g. GMP-WHO, PIC/S). DHG’s high-quality ETC drugs usually demand
higher prices due to their higher production costs which significantly decreases their
bid-winning chances in the ETC channel. DHG’s revenue from the ETC channel in
1Q2014 was recorded at VND69 billion, down 35% y-o-y. Nevertheless, as the ETC
channel accounted for only 11% of DHG’s drug sales in 2013, the company’s
operation, in our opinion, will not be significantly affected by these circulars.
Despite accounting for less 1% of DHG’s annual drug sales, DHG’s export channel is
linked with a wide range of countries: Moldova, Ukraine, Myanmar, Russia,
Mongolia, Cambodia, Nigeria, Laos, Singapore, Jordan, Sri Lanka and Romania. At
the moment, the company is also pursuing opportunities in Indonesia, Philippines,
Malaysia, Ghana, Ethiopia and Uzbekistan.
In the long term, we believe that these foreign markets will provide promising growth
opportunities for DHG, especially when Vietnam’s market enters a more matured
phase.

Growth prospects and challenges

Growth prospects

Between 2009 and 2013, DHG’s net revenues consistently followed an upward trend,
recording a CAGR of 19% over that period, on par with that of the entire
pharmaceutical industry in Vietnam. Currently, according to the MOH’s statistics,
Vietnam’s pharmaceutical market is still dominated by foreign rivals as domestic
production only accounts for less than 50% of domestic consumption. As such,
Vietnamese companies still have ample opportunities to capture more market share
and customers’ trust in the upcoming year vis-a-vis the foreign players.
In addition, as previously noted, Vietnam’s pharmaceutical sector is benefiting from
the support of not just one but several positive macro trends, such as rising
household income, higher health-awareness among the middle class and an
expanding population. As DHG is the largest publicly listed pharmaceutical company
in Vietnam, we expect that the company’s growth trend will track closely with the
whole industry.

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DHG's revenue growth vs. Vietnam pharmaceutical industry's growth
Vietnam's pharmaceutical industry DHG
30%

20.5% 22% 20%


18%
20%

17% 17.5% 17.4% 16.9%


10%

0%
2010 2011 2012 2013

Source: BMI, VPBS collected

Growth challenges

Similar to the rest of the industry, we note that DHG will face the following growth
challenges in the upcoming years:

 “Cookie-cutter” product offerings: The majority of products manufactured by


DHG are generic drugs (e.g. antibiotics, pain-relievers) that are also offered by
numerous competitors in Vietnam’s market. The few signature-offerings such as
Naturenz and Spivital are still in the brand-building phase, and thus have not yet
generated meaningful contributions to DHG’s bottom line.

 Tough competitions from foreign firms: Foreign pharmaceutical companies (e.g.


GlaxoSmithKline, Sanofi) or domestic companies with foreign-direct investments
(e.g. Savipharm) tend to have stronger financial backing, more modern
production facilities and better access to international markets. As such,
competing with these rivals will be especially challenging for local companies
such as DGH in the upcoming years.

 Dependence on foreign-sourced raw materials: Each year, pharmaceutical


companies in Vietnam have to import 90% of the required raw material from
international suppliers. Therefore, fluctuations in the international spot prices or
sudden supply shocks may potentially bring disruptions and adverse impacts to
DHG’s business operations.

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FINANCIAL ANALYSIS

Cost analysis

DHG’s cost structure has remained fairly unchanged between 2009 and 2013 and can
be analyzed as followed:

Cost structures (2013) Production cost by element (2013)

Others Depreciation Others


G&A
6% costs 4%
expenses
2%
9%
Outsourcing
expenses
16%

Cost of
Selling goods Raw materials
expenses sold 52%
25% 60% Staff costs
26%

Source: 2013 audited financial statements Source: 2013 audited financial statements

Raw materials
80% of DHG’s needs of raw Input material is DHG’s main expense as raw materials constitute more than half of
materials are imported from DHG’s 2013 total production costs. 80% of the raw materials used in the production
Europe, the United States,
Turkey, China, India and
of DHG’s in-house drugs are imported from Europe, the United States, Turkey, China,
Pakistan. India and Pakistan. As such, the relative stability of VND against other foreign
currencies in the past several years have enabled the companies to better manage its
input costs.
The company’s procurement department holds substantial negotiating power thanks
to the wide array of supplier choices and from the large orders it usually places with
its suppliers. In addition, DHG’s large cash balance enables the company to pay its
suppliers well within the contract terms, which helps boost the company’s reputation
as a reliable customer.

Selling and G&A expenses

Selling expenses as % of net revenues G&A expenses as % of net revenues


36% 12%
2011 2012 2013 2011 2012 2013
30% 10%

24% 8%

18% 6%

12% 4%

6% 2%

0% 0%
DHG TRA DMC IMP OPC PMC DCL DHG TRA DMC IMP OPC PMC DCL
Source: 2013 audited financial statements and VPBS’s analysis

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The ratio of selling expense to net revenues of DHG’s local peer group was at an
average of 18% for the past three years. DHG, along with Traphaco JSC (TRA),
Imexpharm JSC (IMP) and OPC Pharmaceuticals JSC (OPC) are companies with large
and extensive distribution networks, which require higher annual expenditures to
maintain. In addition, DHG’s generous selling arrangements with its customers, while
enabling the company to generate large sale volumes, and push the company’s
selling expenses to the high end of its peer group.
DHG’s ratio of general & administration (G&A) expenses to net revenues is on par
with its domestic peer group, which averaged at 8% for the past three years.
Pharimexco JSC (DCL)’s ratio of G&A expenses to net revenues doubled from 4% in
2012 to 8% in 2013, primarily due to the large provision expense set up for the
company’s account receivables in that year.

Profitability margins and returns on capital

DHG’s gross and net margins Peer group’s profitability in 2013


VNDbn Revenue Net profit
Gross margin Net margin % Gross margin Net margin
4,000 55% 60%

3,200 44% 50%


Revenue CAGR = 19%
Net profit CAGR = 13% 40%
2,400 33%
30%
1,600 22%
20%
800 11%
10%

0 0% 0%
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL
DHG’s ROE and ROA ratios Peer group’s ROE and ROA ratios in 2013

ROE ROA ROE ROA


45% 45%

36% 36%

27% 27%

18% 18%

9% 9%

0% 0%
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL
Source: DHG’s audited financial statements and VPBS’s analysis

We noted that, during the period from 2009 to 2013, gross margin has been shrinking
slightly each year due to the overall impact of inflation and minor increases in the
global spot prices of raw materials. Nevertheless, DHG still enjoys the highest
margins compared to the peer group, which averaged at 48% and 17% for gross
margin and net margin for the past three years, higher than the performances of the
local peer groups (respectively: 40% and 9%).
In terms of return-on-equity (ROE) and return-on-assets (ROA), DHG’s figures are the
second highest in both 2012 and 2013 among the selected peer group, just behind
those of PMC. In 2013, DHG’s ROE and ROA achieved 32% and 22% versus the local
peer’s averages of 22% and 15%, respectively.

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Operational efficiencies

DHG’s cash conversion cycle (days) Peer group’s cash conversion cycle (days)
AP DOH Inv DOH
2011 2012 2013
AR DOH Cash conversion cycle
240 300

190 250

140 200

90 150

40 100

-10 50

-60 0
2009 2010 2011 2012 2013 DHG TRA DMC IMP OPC PMC DCL

Source: DHG’s audited financial statements and VPBS’s analysis

DHG’s operations appear moderately efficient compared to its peer group. DHG’s
cash conversion cycle was, on average, 157 days for the period from 2011 to 2013,
versus the peer group’s average of 186 days over that period. Since Vietnam’s
pharmaceutical industry has to import 90% of its raw material needs from the
international suppliers, local pharmaceutical companies in Vietnam usually stock up
inventories for up to several months of production in order to avoid price fluctuations
and supply shocks. As such, the inventory holding level for this industry is higher
than that of other sectors.

Liquidity analysis and financing structure

DHG’s liquidity analysis DHG’s financing structure


Equity Payables
2009 2010 2011 2012 2013 Interest-bearing debts Minority interests
Cash ratio 1.2x 1.4x 0.9x 1.1x 0.6x 100%

Current ratio 2.5x 3.1x 2.7x 2.8x 2.2x 28% 29% 27%
80% 28% 29%
Quick ratio 1.9x 2.3x 1.8x 2.0x 1.4x
Total liabilities / Equity 0.5x 0.4x 0.4x 0.4x 0.5x 60%
Total liabilities / Total assets 0.3x 0.3x 0.3x 0.3x 0.4x
40%
Debt / EBITDA 0.2x 0.0x 0.0x 0.1x 0.3x 67% 70% 69% 71% 64%
Debt / EBIT 0.2x 0.0x 0.0x 0.1x 0.3x 20%
EBITDA / Int. Exp. 18.2x 219.5x 254.2x 223.1x 295.4x
EBIT / Int. Exp. 17.0x 198.9x 227.9x 197.5x 264.1x 0%
2009 2010 2011 2012 2013
Source: DHG’s audited financial statements and VPBS’s analysis

Solvency and liquidity ratios indicate that DHG’s financial conditions are quite
healthy. At the end of 2013, total assets were 64% financed by equity and only 7% by
interest-bearing debts. DHG’s level of cash on hand also appears sufficient as DHG’s
cash balance at year-end 2013 could readily satisfy 60% of the current liabilities
balance. Due to the aforementioned reasons, we foresee no issues with regard to
DHG’s solvency in the upcoming years.

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Management’s forecast and 1Q2014 results

DHG’s management forecast DHG’s 1Q2014 results


Net revenue Profit-before-tax 7,400
8,000 VNDbn 1Q2014 4Q2013 % q-o-q 1Q2013 % y-o-y

6,199 Revenues 728 1,140 -36.1% 770 -5.5%


6,000 5,216 Gross profits 381 536 -28.9% 345 10.3%
4,420 Gross margin 52.3% 47.0% n/a 44.8% n/a
3,880
4,000 Operating profits 152 193 -21.4% 140 8.6%
Operating margin 20.8% 16.9% n/a 18.1% n/a
2,000 992 1,184
686 729 835 Net profits 118 139 -14.6% 116 2.0%
Net margin 16.3% 12.2% n/a 15.1% n/a
0
2014 2015 2016 2017 2018

Source: DHG’s 2013 annual reports and VPBS’s analysis

Based on our analysis, we noted that DHG’s past financial performances, specifically
the actual revenues and profits after tax, consistently exceeded management’s
targets by 10% to 30%. As such, we expect this pattern to remain unchanged
throughout the forecast period.
Per management’s explanation, DHG’s sales are generally low in the first quarters
compared to the remaining of the year due to Vietnam’s Tet lunar holidays. 1Q2014
sales decreased by 36.1% q-o-q or 5.5% y-o-y primarily due to several large order
shipments made in 4Q2013 which lowered demand during the recent quarter. In
addition, DHG’s difficulties in the ETC channel due to the effects of Circular
36/2013/TTLT-BYT-BTC also contributed to a decrease in sales in 1Q2014.

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SWOT ANALYSIS

STRENGTH WEAKNESS
 DHG is the leader among local pharmaceutical  DHG’s 80% of raw material needs are still imported.
companies in terms of production volume and This reliance exposes the company to the price
market share for the past five years. fluctuations of APIs in the international market.
 Production capacity will be doubled to 9.6 billion  Export revenue is still low and accounts for only 1%
product units by the end of 2014 thanks to its two of DHG’s sales in recent years.
new factories in the TPT Industrial Zone.
 Consumer awareness with regard to DHG’s products
 DHG has a large and extensive distribution network is still low. Currently, brand recognition is mostly
of 12 subsidiaries, 24 representative offices and 68 observed at the distributor and retailer levels but has
hospital pharmacies, together covering all 64 cities yet to extend itself to the end-consumer level.
and provinces in Vietnam.
 R&D activities are still below optimum level.
 Ms. Pham Thi Viet Nga, DHG’s CEO, is a capable and
 It’s not clear whether DHG has been able to identify
dedicated leader who has been with the company
and train the next generation of management.
since its very first days. Ms. Nga has held top
management positions at DHG since 1988, such as
CEO from 1988 to 2012 and Chairman of the Board
of Director from 2004 to 2013.

OPPORTUNITIES THREATS
 Rising health-awareness among Vietnam’s middle  Competitors offer products that are similar to DHG’s.
class and rising household incomes in Vietnam have Fierce competition brings the risk of perpetual price
led to a steady rise in the country’s pharmaceutical competition, which hurts all players in the market.
spending per capita in recent years.
 Foreign companies tend to be better funded and
 DHG’s generic drugs, priced cheaper than the have better access to new technologies and
imported drugs, are capable of gaining more market international markets.
share in the middle- to low-income segments of the
 Both consumers and doctors in Vietnam prefer using
population.
and prescribing imported drugs over those that are
 The company has enormous growth potentials with domestically produced.
regard to food supplement and nature-based
 The Circular 12/2012/TTLT-BYT-BTC and Circular
product lines
36/2013/TTLT-BYT-BTC are negatively impacting
DHG’s sales through the ETC channel.

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VALUATION

Key forecast assumptions

Growth assumptions
BMI estimated that Vietnam’s pharmaceutical sector will achieve annual growth of
between 15% and 19% for the period from 2014 to 2018. As DHG is the largest local
drug manufacturer in Vietnam, we expect that growth in sales of the company’s in-
house drugs will closely follow the trend of the industry as a whole, albeit at a
slightly lower pace.
In Vietnam, vitamins and food supplements still represent new product segments
with substantial opportunities for future growth. Between 2010 and 2013, DHG’s sale
of food supplements, accounting for around 14% of DHG’s sales of in-house products
in 2013, had achieved annual growth of between 23% and 26%. Throughout the
forecast period, we expect that this segment will achieve an annual growth rate of
25%.
With respect to the other segments, based on their performances, we conservatively
predict annual growth rates of 10% for the forecast period.

Revenue growth 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
In-house products 21.5% 17.3% 11.1% 19.0% 18.6% 18.2% 17.9% 16.7%
Other segments 35.5% 21.8% 130.4% 10.2% 10.2% 10.2% 10.2% 10.2%

Profitability assumptions
Gross margin: As the manufacturing segment (i.e. in-house products) always
accounted for over 80% and 98% of DHG’s net revenues and gross profits in the past,
gross margin of this segment will continue to drive the gross margin of the entire
business. Between 2010 and 2013, gross margin of this segment varied between 52%
and 54%. For the forecast period, we expect that DHG’s gross margin will decrease
slightly each year from 53.0% in 2014 to 51.6% in 2018 since the benefits brought
about by the economies-of-sales (i.e. new capacity added) will be negated by
increased depreciation costs and price inflation each year.

Gross margin 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
In-house products 51.9% 52.8% 53.6% 53.0% 52.5% 52.0% 51.8% 51.6%
Others 8.0% 7.4% 5.2% 5.5% 5.6% 5.6% 5.6% 5.6%

Selling and G&A expenses: We expect that selling expenses and G&A expenses will
remain stable at 23% and 8% of net revenues, respectively.
Tax expense: Due to the preferential tax treatment mentioned under the business
model section above, we expect that DHG’s tax rate will be 5% for the period from
2014 to 2017 and 9% for 2018.

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Balance sheet assumptions
We make the following key assumptions with regard to DHG’s balance sheet:

2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F


Days sales outstanding 49 55 52 53 53 53 53 53
Days inventory outstanding 147 126 147 136 136 136 136 136
Days payable outstanding 35 18 52 35 35 35 35 35
Capex (VNDbn) 10.1% 4.4% 9.7% 10.0% 10.0% 10.0% 10.0% 10.0%
Deprecion, % net revenue 2.2% 2.3% 2.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Loans (VNDbn) 21 41 178 100 100 100 100 100
Dividend (VND per share) 4,000 2,000 3,500 3,500 3,500 3,500 3,500 3,500

DCF Model

We use the discounted cash flow (DCF) model to value DHG as we believe future
cash flows remain the key fundamental value-driver for DHG stock. Our DCF model
suggests a fair price of VND123,900 per share. Our inputs for the DCF model are as
follows:

 The risk-free rate is taken from the 5-year local currency Government bond yield,
which is currently equivalent to 7.2%.
 The expected market return is expected to be 15.0%.
 DHG’s beta is estimated to be 0.66.
 Cost of equity is estimated to be 12.3% by using the capital asset pricing model.
 Weighted average cost of capital (WACC) is calculated to be 12.2%.
 DHG’s terminal growth rate is assessed to be 6.5%.

Sensitivity of WACC and terminal growth rate to a target stock price


WACC
###### 11.2% 11.7% 12.2% 12.7% 13.2%
4.5% 118,700 112,300 106,800 102,000 97,900
growth rate
Terminal

5.5% 129,200 121,000 114,100 108,200 103,100


6.5% 144,200 133,100 123,900 116,300 109,900
7.5% 167,300 150,800 137,900 127,500 119,000
8.5% 207,400 179,600 159,400 144,000 132,000

Sensitivity of changes in in-house products’ gross margin forecast and


percentage of SG&A expenses to revenues to a target stock price
Changes in Gross Margin - Manufacturing
###### -4.0% -2.0% 0.0% 2.0% 4.0%
SG&A, % revenue

-2.0% 132,100 147,800 162,600 176,700 190,000


Changes in

-1.0% 111,900 128,000 143,300 157,800 171,500


0.0% 91,600 108,100 123,900 138,900 153,100
1.0% 71,300 88,300 104,500 120,000 134,600
2.0% 51,100 68,500 85,200 101,000 116,100

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Market-based valuation

Peer-group analysis
Market Sale growth Net margin Debt to Current Current
Company name ROA (%) ROE (%) P/E P/B
capital (% y-o-y) (%) equity (%) relative relative
USDmn 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 Current 2014 Current 2014 P/E P/B

Local pharmaceutical companies Exchange


Traphaco JSC HSX 89 31.8 20.1 8.3 8.9 45.0 15.2 12.9 14.5 27.3 26.3 13.3 11.7 2.7 NA 1.03 1.53
Domesco Medical Import Export JSC HSX 46 11.3 13.4 7.2 7.5 13.6 17.2 10.7 11.5 15.8 17.9 8.7 7.1 1.5 NA 0.67 0.82
Imexpharm Pharmaceutical JSC HSX 39 5.4 2.8 9.5 7.2 0.0 0.0 9.0 6.9 10.9 8.4 13.4 9.3 1.1 1.0 1.04 0.61
OPC Pharmaceutical JSC HSX 36 23.1 11.9 11.1 10.0 19.8 19.7 11.6 10.9 17.3 16.0 13.5 11.6 2.1 NA 1.04 1.16
Pharmedic Pharmaceutical Medicinal JSC HNX 20 14.9 17.9 14.6 15.6 0.0 0.0 27.7 29.5 36.1 39.0 6.4 9.2 2.9 NA 0.41 3.07
Cuu Long Pharmaceutical JSC HSX 13 -2.9 10.3 3.1 4.5 132.3 NA 2.5 NA 8.0 NA 7.6 7.1 1.0 NA 0.59 0.54
Average 13.9 12.7 9.0 8.9 35.1 10.4 12.4 14.7 19.2 21.5 10.5 9.3 1.9 1.0 0.80 1.29
Median 13.1 12.7 8.9 8.2 16.7 15.2 11.1 11.5 16.5 17.9 11.0 9.3 1.8 1.0 0.85 0.99
Global pharmaceutical companies Country
Tempo Scan Pacific Tbk PT Indonesia 1,113 14.7 3.4 9.5 9.3 NA 4.9 14.1 12.6 19.8 17.8 19.6 18.3 3.1 3.0 0.88 1.24
Torrent Pharmaceuticals Ltd India 1,728 22.7 17.7 10.9 14.2 49.3 50.5 10.1 12.6 25.6 33.1 15.5 17.9 5.4 5.6 0.88 1.91
Strides Arcolab Ltd India 504 -9.5 NA 36.7 NA 63.4 NA 16.7 NA 49.8 NA 3.5 20.6 1.5 1.1 0.20 0.51
Hunan Er-Kang Pharmaceutical Co Ltd China 2,178 37.3 21.1 18.3 19.2 0.0 0.0 12.8 14.4 13.7 15.5 70.0 53.9 10.2 8.7 7.12 8.03
Alembic Pharmaceuticals Ltd India 860 22.0 3.7 8.9 10.9 89.3 37.1 13.7 15.7 37.6 36.8 21.6 21.1 7.5 7.5 1.22 2.67
Unichem Laboratories Ltd India 314 6.2 23.5 8.1 10.5 10.5 3.7 7.6 11.0 11.1 16.3 11.0 13.9 2.3 2.2 0.62 0.80
Natco Pharma Ltd India 429 13.9 26.1 11.4 10.9 54.5 62.1 7.4 7.2 14.4 14.3 33.4 24.2 4.5 3.7 1.89 1.60
Average 15.3 15.9 14.8 12.5 44.5 26.4 11.8 12.3 24.6 22.3 24.9 24.3 4.9 4.6 1.83 2.39
Median 14.7 19.4 10.9 10.9 51.9 21.0 12.8 12.6 19.8 17.0 19.6 20.6 4.5 3.7 0.88 1.60

Total average 14.7 14.3 12.1 10.7 39.8 19.1 12.1 13.4 22.1 22.0 18.3 17.4 3.5 4.1 1.35 1.88
Total median 14.7 15.6 9.5 10.2 32.4 15.2 11.6 12.6 17.3 17.8 13.4 13.9 2.7 3.4 0.88 1.24
DHG Pharmaceutical JSC Vietnam 362 17.7 20.3 16.6 16.7 2.4 9.0 22.5 21.7 31.7 32.1 12.9 11.1 3.6 3.1 1.01 2.03

2014 data of the local companies (except DHG) is based on management’s targets
Source: Bloomberg, VPBS. Data as of May 15, 2014

Compared to the peer group, we noted that DHG had materially higher profit
margins, ROE and ROA ratios in 2012 and 2013 while maintaining substantially lower
debt-to-equity ratio over the period. In addition, the company’s revenue growth in
these two years exceeded that of the peer group’s averages.

While DHG stock’s P/E and P/B are higher than those of the local competitors, these
ratios appear lower compared to the companies in the region that have comparable
market capitalization.

VNIndex Implied
P/E valuation Relative P/E Weight
P/E DHG's P/E
Local peers 0.8x 12.0x 9.5x 70%
Foreign peers 1.8x 12.0x 21.9x 30%
Target P/E 13.3x

DHG’S target price

Methods Valuation Weight


DCF 123,900 60%
P/E at 13.3x 140,500 40%
Target price (VND/share) 130,500

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Technical analysis

DHG began its mid-term uptrend in December 2013 and hit the top in March 2014 at
VND150,000 per share. After that, the price of DHG declined and has broken down the
support level formed by the MA50 in May 7. Technically, the uptrend has shown sign
of reversal since this important level was violated. DHG is now traded slightly around
the MA200 at the level of VND115,000 to VND120,000, and we have not yet seen any
bottoming signal.

Ticker DHG (VND/share)


Horizon analytic 3 to 6 months
3 months highest price 150,000
3 months lowest price 112,000
MA50 days (5/15/2014) 137,000
MA100 days (5/15/2014) 128,000
Mid-term resistance level 137,000
Mid-term support level 115,000
Recommendation HOLD

Thus, we believe that DHG is now in a downward trend with its strong resistance
level at VND137,000. However, the price of this stock may have some recovery in the
short term.

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CONCLUSION
DHG is the leader among the selected local pharmaceutical peer group with the
largest revenues during the past five years and a strong distribution network. The
company’s key products are generic drugs in the antibiotic and pain-reliever
categories, which together account for over 60% of DHG’s total net revenues for the
past five years.
On a fundamental basis, we noted that DHG is a growing company with fairly
efficient and profitable operations. The company, along with the rest of the local
pharmaceutical industry, is being supported by many positive macro factors, such as
rising household income and Vietnam’s expanding population.
We are convinced that, at the current market price of VND116,000 per share, DHG’s
stock represents a solid investment opportunity for long-term investors. Our
recommendation for DHG stock is BUY with a 12-month target price of VND130,500
per share.
For the past 5 years, foreign ownership in DHG has consistently been between 46%
and 49% (legal ceiling limit), implying the foreign investors favorably regard the stock
as a long-term buy. With regard to short-term investors, we would like to caution
market participants to be mindful of the stock’s low liquidity and low-beta (0.66)
against VN-Index.

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INCOME STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Revenues 2,491 2,931 3,527 4,150 4,873 5,710 6,676 7,741
% y-o-y 22.4% 17.7% 20.3% 17.7% 17.4% 17.2% 16.9% 16.0%
COGS 1,282 1,487 1,887 2,224 2,613 3,065 3,574 4,138
Gross profits 1,209 1,444 1,640 1,926 2,260 2,644 3,102 3,603
Selling expenses 559 710 770 955 1,121 1,313 1,535 1,780
G&A expenses 185 218 271 332 390 457 534 619
EBIT 465 516 600 640 750 874 1,032 1,204
Depreciation & amortization 54 67 71 125 146 171 200 232
EBITDA 518 583 671 764 896 1,045 1,233 1,436
Financial income 49 42 48 75 88 103 120 139
Financial expense 7 4 16 13 9 9 10 11
Net other incomes / (expenses) -5 31 151 33 34 36 38 40
Income from associates -10 0 0 0 0 0 0 0
EBT 491 585 782 734 863 1,004 1,180 1,372
Tax expense 71 93 188 37 43 50 59 124
Effective tax rate 14.5% 16.0% 24.1% 4.4% 4.4% 4.4% 4.4% 8.4%
Profits after tax 420 491 593 697 820 954 1,121 1,249
Minority interest 4 5 4 7 8 10 11 12
Net income 416 486 589 690 812 944 1,110 1,236
% margin 16.7% 16.6% 16.7% 16.6% 16.7% 16.5% 16.6% 16.0%
EPS (VND) 6,382 7,443 9,010 10,562 12,417 14,442 16,984 18,913
BALANCE SHEET (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Current assets 1,491 1,818 2,233 2,442 2,881 3,436 4,142 4,949
Cash & near cash items 467 719 613 635 802 1,040 1,387 1,797
Short term investments 0 0 170 170 170 170 170 170
Accounts receivables 338 444 506 603 708 829 969 1,124
Supplier advances 79 84 107 127 149 175 204 236
Short-term prepayments 1 1 1 1 2 2 2 2
Inventories 515 512 758 829 973 1,142 1,332 1,542
Other current assets 90 58 78 78 78 78 78 78
Long-term assets 505 561 848 1,139 1,480 1,879 2,347 2,889
Net fixed assets 459 517 799 1,090 1,431 1,830 2,298 2,840
Long-term investments 17 17 21 21 21 21 21 21
Other long term assets 28 27 28 28 28 28 28 28
Total assets 1,996 2,378 3,081 3,581 4,361 5,315 6,488 7,838
Current liabilities 544 654 1,030 1,113 1,302 1,531 1,812 2,141
Accounts payable 124 74 268 213 251 294 343 397
Customer advances 1 1 3 2 2 3 3 4
Short-term borrowings 21 19 127 100 100 100 100 100
Payables to employees 126 157 207 269 350 455 591 768
Accrued expenses 166 242 236 322 378 442 517 600
Bonus & welfare fund 45 63 66 83 97 113 133 148
Other short term liabilities 62 97 124 124 124 124 124 124
Long-term liabilities 58 21 51 0 0 0 0 0
Long-term borrowings 0 21 51 0 0 0 0 0
Other long-term liabilities 58 0 0 0 0 0 0 0
Total liabilities 602 675 1,081 1,113 1,302 1,531 1,812 2,141
Equity 1,382 1,688 1,981 2,443 3,026 3,741 4,622 5,630
Share capital & APIC 652 654 654 654 654 654 654 654
Retained earnings 377 477 560 1,021 1,604 2,319 3,201 4,208
Other equities 286 491 701 701 701 701 701 701
Minority interest 12 16 18 25 33 43 54 66

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CASH FLOW STATEMENT (VNDbn) 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Cash from operation activities 263 470 484 737 875 1,029 1,232 1,401
Cash from investing activities -188 -88 -468 -415 -487 -571 -668 -774
Cash from financing activities -251 -131 -122 -300 -221 -219 -218 -216
Net changes in cash -175 252 -106 22 167 238 347 411
Beginning cash balance 643 467 719 613 635 802 1,040 1,387
Ending cash balance 467 719 613 635 802 1,040 1,387 1,797

RATIO ANALYSIS 2011A 2012A 2013A 2014F 2015F 2016F 2017F 2018F
Valuation ratios
Price earnings 13.0x 11.1x 9.4x 8.1x 6.9x 6.2x
P/B ratios 3.9x 3.1x 2.5x 2.0x 1.7x 1.4x
EV to EBIT 8.9x 8.3x 7.1x 6.1x 5.2x 4.4x
EV to EBITDA 8.0x 7.0x 6.0x 5.1x 4.3x 3.7x
Price to sales 2.2x 1.8x 1.6x 1.3x 1.1x 1.0x
Dividend yield 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Profitability ratios
Gross margin 48.5% 49.3% 46.5% 46.4% 46.4% 46.3% 46.5% 46.5%
EBITDA margin 20.8% 19.9% 19.0% 18.4% 18.4% 18.3% 18.5% 18.5%
Operating margin 18.7% 17.6% 17.0% 15.4% 15.4% 15.3% 15.5% 15.5%
PBT margin 19.7% 20.0% 22.2% 17.7% 17.7% 17.6% 17.7% 17.7%
Net profit margin 16.7% 16.6% 16.7% 16.6% 16.7% 16.5% 16.6% 16.0%
Return on avg. Assets 22.0% 22.5% 21.7% 20.9% 20.6% 19.7% 19.0% 17.4%
Return on avg. Equity 31.2% 31.7% 32.1% 31.2% 29.7% 27.9% 26.5% 24.1%
Leverage ratios
Interest coverage ratio (EBIT/I) 228x 197.5x 264.1x 59.9x 125.0x 145.7x 172.0x 200.6x
EBITDA / (I + capex) 2.1x 4.5x 1.9x 1.8x 1.8x 1.8x 1.8x 1.8x
Total debt/capital 1.5% 2.4% 8.2% 3.9% 3.2% 2.6% 2.1% 1.7%
Total liabilities/equity 1.5% 2.4% 9.0% 4.1% 3.3% 2.7% 2.2% 1.8%
Liquidity ratios
Asset turnover 1.3x 1.3x 1.3x 1.2x 1.2x 1.2x 1.1x 1.1x
Accounts receivable turnover (days) 49.5 55.3 52.3 53.0 53.0 53.0 53.0 53.0
Accounts payable turnover (days) 35.2 18.1 51.8 35.0 35.0 35.0 35.0 35.0
Inventory turnover (days) 146.7 125.6 146.6 136.0 136.0 136.0 136.0 136.0
Current ratio 2.7x 2.8x 2.2x 2.2x 2.2x 2.2x 2.3x 2.3x
Quick ratio 1.8x 2.0x 1.4x 1.5x 1.5x 1.5x 1.6x 1.6x

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Guide to Ratings Definition
VPBank Securities uses the following ratings system:
Buy: Expected return, including dividends, over the next 12 months is greater than 15%.
Hold: Expected return, including dividends, over the next 12 months is from -10% to +15%.
Sell: Expected return, including dividends, over the next 12 months is below -10%.

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