HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

FINANCIAL MANAGEMENT

ANALYSIS OF THE PERFORMANCE

AND VALUATION OF THE TWO CORPORATION:
Domesco Medical Import – Export Joint Stock Corporation
and Imexpharm Corporation

Tutorial: 2
Tutor: Ms. Le Thanh Binh
Group members:
Vu Quoc Huy – 1804010042
Nguyen Thi Anh Hong – 1804010041
Nguyen Mai Phuong – 1804010087
Hoang Thi Hai Anh – 1804010004
Nguyen Linh Chi – 1804010014
Date: May 24th, 2020
Executive summary

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 TABLE OF CONTENTS

Executive summary..........................................................................................................................i

1. Introduction to the two corporations and its relationship with financial market...............1

2. Performance appraisal..............................................................................................................3

3. Financial activities.....................................................................................................................5

3.1. Typical projects.....................................................................................................................5

3.2. Future projects.......................................................................................................................8

3.3. IPO......................................................................................................................................11

3.4. Sources of capital................................................................................................................13

4. Valuation..................................................................................................................................14

5. Recommendation.....................................................................................................................16

6. Conclusion................................................................................................................................17

REFERENCES............................................................................................................................18

APPENDICES..............................................................................................................................20

APPENDIX A: Calculation for market capitalization...............................................................20

APPENDIX B: Calculation of DuPont Equation.......................................................................20

APPENDIX C: Calculations for the firm’s valuation section....................................................21

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1. Introduction to the two corporations and its relationship with financial market
As a country with a rapidly aging population, Vietnam will soon pass the "golden population",
which shows the potential of the health care industry in general as well as the pharmaceuticals in
particular. According to BMI research, the market size of Vietnam's pharmaceutical industry
reached 5.9 billion US dollars, up 11.5% over the previous year, and it helped Vietnam become
the second-largest market in Southeast Asia, and be ranked one of 17 countries with the highest
pharmaceutical industry growth. During the development of the pharmaceutical industry in two
recent centuries, many corporations and companies have jumped in and out, some of them have
had considerable successes such as DHG Pharmaceutical JCS, Vietnam Fumigation JSC,
Traphaco JSC, and so on. However, two corporations are focused on this project, which has been
in the top 10 of reputable companies in 2019 (Vietnam Report), are Domesco Medical Import-
Export Joint Stock Corporation (DMC) and Imexpharm Corporation (IMP). These corporations
have developed for at least 30 years, their price of shares and financial reports have been
published and can be found in the official exchange market.

First of all, Domesco Medical Import-Export Joint Stock Corporation (DMC) is a well-known
corporation in the healthcare industry with many familiar products to domestic customers and
foreign customers. Established on 19/5/1989, DMC has been a corporation specializing in
researching, developing, manufacturing, marketing and trading the pharmaceutical products,
such as drugs, functional foods, medical equipment, and so on; and until now, DMC has
developed about 100 products meeting GMP – WHO standard and many other management
systems. According to the official page of DMC, this corporation has had 18,500 customers,
which have been hospitals, medical centers, drug agents and other pharmaceutical companies,
and 11 branches of DMC through the countries has been opened; besides, it has exported to 11
countries in Asia, Africa, and Latin America.

DMC has had annual meetings for shareholders to discuss necessary changes in Boards of
Directors and the Chief executive officer. CEO of Domesco Corporation currently is Luong Thi
Huong Giang with 6 years in this position. Moreover, the Boards of Directors have a chairman,
Le Dinh Buu Tri, a vice-chairman, Luong Thi Huong Giang, and 4 other members: Nguyen Van
Hoa, Douglas Kuo, Peter Huang, Lee Yoon Kiem since 2018. Ms. Giang and Mr. Hoa are
insiders while the others are outsiders, and Mr. Tri and Mr. Hoa have had the most number of
shares, 22.56%, and 12.15%, respectively when the others have had the number of shares smaller

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than 5%. The share of Mr. Tri and Mr. Hoa is managed by SCIC; therefore, the block
shareholders, who have to hold greater than 5% of total shares, are two institutional shareholders,
State Capital Investment Corporation (34.71%) and Abbott Laboratories (Chile) Holdco SpA
(51.69%)

The stock of DMC Company was listed on HOSE in 2006 and its symbol stock is its
abbreviation, DMC. Its market price recorded on 31st December 2019, is 72,000 VND per share.
In an annual report in 2019 of DMC, the total number of shares is 34,727,465 shares with 1,444
shareholders having voting rights. Therefore, the market capitalization of DMC is
2,493,458,607,500 VND.

As regard to Imexpharm Corporation (IMP), this is a pharmaceutical company providing

qualitative goods for human, such as medicine, sterilization substance, and so on. The
predecessor of IMP is Dong Thap pharmaceutical Alliance Company established in 1977, under
Dong Thap's medical bureau and it was renamed in November, 1992. From 2019, hundreds of
pharmaceutical products, which have met the EU-GMP standard, have been provided through 20
branches in Vietnam and has been exported to South Eastern countries.

CEO of Imexpharm Corporation has been Tran Thi Dao since May 2013 and she has been the
vice-chairman of Boards of Directors. Accepted by the annual meeting of shareholders, her total
income after tax in 2019 was 4,053,036,835VND. In BOD, Nguyen Quoc Dinh has been the
chairman and the other members are Le Van Nha Phuong, Vo Huu Tuan, Huynh Van Nhung,
Tran Anh Tuan, Han Thi Khanh Vinh, and Ngo Minh Tuan since 2018. In BOD, there have been
5 insiders and 3 outsiders, and the insiders are the chairman, the vice-chairman, Mr. Ngo Minh
Tuan, Mr. Huynh Van Nhung, and Mr Le Van Nha Phuong. All of BOD has the percentage of
shares under 1%, except for Mr Nguyen Quoc Dinh (1.01%). Imexpharm Corporation has had 3
block shareholders, they are 3 institutional shareholders: Vietnam Pharmaceutical Corporation
(22.87%), Balestrand Limited (5.92%), KWE Beteiligungen AG (14.26%).

The stock of Imexpharm Corporation was listed on HOSE in 2006 with the stock symbol IMP.
Until 31st December 2019, the number of listed stocks was 49,421,159 but the number of
outstanding shares was 49,387,359. The price of IMP share on 31st December 2019 was
48,000VND, so the market capitalization of IMP was 2,370,593,232,000 VND.

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2. Performance appraisal

It is easier to look at the balance sheet firstly to know what are the strengths and weaknesses of
the two corporations. The reason is that the balance sheet provides information about how large
the companies are, which types of assets they are holding, and how those assets are financed.

Imexpharm’s total asset is 1,847,174,315,262vnd in 2019 which increased by about 73 billion

vnd from 2018. Long-term assets rose, and it takes about three-fifth total while short-term assets
decrease about 55 billion vnd. In long-term assets accounts, the company focuses on long-term
investment as well as having more note receivables. Besides, there is a small number of
liabilities, mainly is short-term payable which rises about 25 billion vnd while the long-term one
declines more than 7 billion vnd. And the owner’s equity of the company makes up the main
amount – 1,558,889,267,109 which also increases nearly 55 billion vnd in 2 years. These
numbers indicate that the company has increasing assets mainly from higher owner’s equity and
a fraction is short-term liabilities. The company might tend to invest in the long-run and so, it
can raise value more in the future. However, the short-term assets are lower while the current
liabilities are higher, this result means the company does not increase its value.  

In the Domesco Medical Import’s balance sheet, there are some similar changes as Imexpharm
such as the increase in total assets and the owner’s equity although Domesco’s total assets are
not high as another (1,533,052,514,092 vnd). The differences are the conversely of the changes
in liabilities when Domeco’s short-term payable has a large decrease leading to the lower amount
of total liabilities while the increase in long-term one is tiny. It means that the amount of growth
in total assets’ majority is owner’s equity (have double higher than Imexpharm – 122 billion
vnd). It seems that Domesco focuses more on the current assets, or in other words, is the short-
term investment, so it is easy to see the high increase in profit of the firm directly but not certain
in the long run. Therefore, it can be said that the strengths of this one might be the weaknesses of
another; in fact, the total assets of Imexpharm are higher but its liabilities are higher too.

The second measure is based on the income statement which shows whether the companies have
high sales or not as well as they are creating profit or not. It just needs to glance at the operating

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income (or earnings from operations before interest and taxes). Both corporations have higher
operating income over the year and Imexpharm increases by 23 billion vnd which is higher
nearly 8 times of Domesco (just increase by 3 billion vnd). In contrast, the operating income of
Domesco higher than Imexpharm by nearly 100 billion, so can we conclude that the strengths of
Domesco are high sales with low expense, but it has slow growth rate and has not much long-
term investment; And that of Imexpharm are the rapid growth rate with high long-run
investment, but its costs as well as liabilities are quite high and have a tendency to increase
which might not create much profit. At present, the highest trading price of Imexpharm (IMP)
and (DMC) Domesco’s stock during the day of 30/4/2020 respectively is 57,300 vnd and 54,900
vnd. In case I was a financial manager, I would help to balance the rapid growth rate of
Imexpharm and concern more about the details costs to reduce them by effective methods, or I
would be more concerned about the long-term investment of the Domesco to help the company
has never stopped raising its value.

Looking at the details, we need to break down the DuPont equation which is “a formula that
shows that the rate of return on equity can be found as the product of profit margin, total asset
turnover, and the equity multiplier. It shows the relationships among asset management, debt
management, and profitability ratios” (Eugene F. Brigham & Joel F. Houston (2011)
Fundamentals of financial management, University of Florida).

ROE = ROA x Equity multiplier

ROE = Profit margin x Total assets turnover x Equity multiplier

Now let calculate ROE of each company, and find out the changes from 2018 to 2019:

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It can be easy to say that Imexpharm’s ROE is still small, but it is improving by 10% compared
to the previous year. The reasons why ROE rises are that profit margin stays the same, the total
assets turnover increases (the ratio tells us how much firms earn on its sales), and the equity
multiplier decreases (which measure financial leverage). The lower the equity multiplier, the
higher the ROE is because equity multiplier is related to the debt ratio of the firm (debt ratio = 1
– 1/EM). Therefore, the firm should remain the current policy to help increase ROE over the
years.

In fact, Domesco’s ROE is nearly double the Imexpharm’s ROE although it decreases slightly
over the year (decreased by 1.7%). As the above analysis, if the equity multiplier decreases, the
value of ROE will be higher. In this case, the equity multiplier decreases by 0.073 times, and
even the asset turnover also rises by 0.013 times, but these amounts are very tiny compared to
the decreasing of profit margin (by 0.7%). Therefore, it can be said that the reduction results
from the abatement of profit margin. In short, if the company changed the policy to amend its

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ROE, there would be the promotion in profit margin, or in more detail is the higher net income as
well as the reduction in equity multiplier (increase the total common equity).

3. Financial activities

3.1. Typical projects

Established and developed for a long time over 30 years, Domesco has become a large-scale
company in the field of pharmacy and is one of the leading companies. Therefore, Domesco has
completely mastered all the situations. In the extremely tense disease situation, Domesco joined
hands to prevent Covid-19.

Facing the complicated situation of the Covid-19 epidemic, as an enterprise producing essential
goods, both ensuring the maintenance of production activities and ensuring stable incomes for
workers, and especially, to ensure the health and safety for workers, and the community, and to
join hands with the Government to extinguish the respiratory disease Covid-19, the Company has
sought more common sources of raw materials and supplies for products on the Ministry of
Health epidemic prevention list to ensure adequate supply upon request.

Additionally, currently, the Company has many products that help support increasing resistance
such as Doragon, Dogarlic Green Tea, C-UP, Vitamin C Royal Jelly, etc. From March 2020, the
company launched the anti-epidemic products, which are antiseptic products in health including
ethanol 70%, ethanol 90%, hydrogen peroxide, mouthwash, etc. At the same time, the company
also cooperates with partners in the strategy of manufacturing and distributing products that
contribute to protecting public health and reducing outbreaks of diseases such as:

- Three-layer water resistant - antibacterial - smooth fine dust filter manufactured by Japanese
technology.

- Two-layer antibacterial mask, anti-UV - FABRIC MASK: anti-bacterial, sunscreen to protect

skin from the harmful effects of dirt and UV rays manufactured by Japanese technology.

- Mask of 2 layers of antibacterial, anti-droplets manufactured using Japanese technology.

To support the Government with poor patients and poor people to cope with the disease of
Covid-19, the Company has:

- Donating money and company's products to organizations in the province.

- Support food and medicine for border guards working at border gates.

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- Donating funds to the Province (through the Department of Health and the Vietnam Fatherland
Front Committee of Dong Thap province) to join hands to prevent Covid-19.

- Propagating and mobilizing workers to participate in responding to the call of the Standing
Committee of the Vietnam Fatherland Front Committee and the provincial Labor Confederation
on "All people support for the prevention of Covid-19".

- Funding 5000 masks of antibacterial and anti-droplet masks for Ho Chi Minh City Oncology
Hospital and the Association for the Protection of People with Disabilities, Agent Orange /
Dioxin Masks & Poor Patients in Dong Thap province.

This is considered as a volunteer program bearing the traditional cultural identity of Domesco,
which is a sharing, profound humanity and extremely meaningful to join hands, contributing to
repel the disease Covid-19 of both countries. Thereby, what Domesco wants to convey the
message to the community when using anti-epidemic products is: Use quality products, safety
and properly to protect yourself, your family, is also a measure to protect the community in the
best way.

On the other hand, Imexpharm continuously showed the important resolutions which directly
affect its financial activities. According to the contents of the Board of directors periodic meeting
on April 24th 2020, the Board of directors of IMP Corporation makes resolutions.

+ Absolutely approved (100%) by the BOD members attending the meeting to pass
business production results in quarter 1of 2020.
No. Criteria Result of Q1/2020 Growth rate

1 Total net revenue and income 304.3 10.1%

2 Profit before tax 51.4 13.2%

+ Absolutely approved (100%) by the BOD members attending the meeting to pass business
and production plans in quarter 2 of2020.

+ Absolutely approved by the BOD members attending the meeting to pass the report on
schedule of Binh Duong High tech Factory (IMP4) and Herbal medicine factory as of March
3rt, 2020.

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+ Absolutely approved by the BOD members attending the meeting to pass the authorization
for the General Director to receive a preferred loan from Asian Development Bank - ADB
for pharmaceutical enterprises manufacturing supportive products to fight against the Covid-
19 pandemic.

+ Absolutely approved (100%) by the BOD members attending the meeting to pass the agenda
and documents for the Annual General Meeting of Shareholders 2020.

+ Absolutely (100%) agree by the BOD members attend the meeting to pass adjustments of
statement on issuing new shares to increase Charter Capital presented to AGM as follows:

Offering folio wed employee stock ownership plan (ESOP - key employees)

● Issuing price (before adjustment): 15,000 dong/share

● Issuing price (after adjustment): 12,000 dong/share

According to the contents of the meeting via email on April 29th, 2020, the Board of
directors of IMP Corporation continues to approve decisions.

+ Absolutely approved by the Board of Directors (BOD) members attending the meeting to
pass the addition in a statement on the amendment of Imexpharm Corporation's Charter to
present at the Annual General Meeting of Shareholders 2020 as follows:

Article Content of old Charter Content of new Note

Charter

Section 2 1. The structure of Board of 2. The structure of Remove the regulation:

Director members as Board of Director “Board of Directors
Article 26 below: members as below: members must be
-The total number of permanent residents in
independent Board of -The total number of Vietnam” in order to
Directors members must independent Board of create opportunities for
account for at least one- Directors members foreign investors to
third (⅓) of the total must account for at participate in the Board
number of Board of least one-third (⅓) of of Directors.
Directors members. the total number of
-Board of Director members Board of Directors
must be permanent members.
residents in Vietnam.

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The Board of Directors assigns to the Chairman, General Directors and related departments and
individuals to be responsible for implementing appropriate procedures in compliance with
regulations and basing on the contents passed in the resolutions.

3.2. Future projects

In the term of future projects, both Domesco and Imexpharm set their strategic plans. Firstly, the
table shows target results in 2020 of Domesco.

Target Target in 2020 Result in 2019 Growth rate

(million VND) (million VND) (%)

Net sales 1,468 1,430 -2.6%

Income after tax 233 230 -1.1%

ROS 15.8% 16.1% 0.2%

According to the annual report of Domesco in 2019 the budgeted plan of 2020 is rising net sales
from 1,430 million VND to 1,468 million VND and income after tax from 230 million VND to
233 million VND. This leads to a positive change in return on sales percentage by 0.2% (from
16.1% to 15.8%).

In order to gain that numbers, in 2020, Domesco will consolidate its market share, develop and
expand distribution channels

+ Developing sales and customer care policies that apply to each type of customer, and the most
stable sales program.

+ Building focused programs for customers who sign contracts and follow the contract schedule.

+ Opening new customers with sales programs to increase coverage with appropriate gifts.

+ Developing clinics, and prescription channels.

+ Organizing Pharmacy Meeting programs with the purpose of creating relationships between
branches and customers, building trust for customers, creating favorable conditions for branches
to take care of customers.

Not only that, but the company has also set out a plan to consolidate its sales staff:

+ Rearranging sales team. The managers often work with each employee to guide, train, etc.

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+ Maintaining a training course for sales staff to improve professional knowledge and product
knowledge, improve communication or sales skills, and exchange mutual experience learning.

+ Managers monitor, closely monitor and urge the sales team to follow the DMS-one sales route,
make full customer visits, and have successful orders.

+ Building and developing a strong team of retail branches.

Moreover, Product development is also one of the extremely important goals.

+ Develop a key portfolio for each channel: the list needs to focus on investment, the list is
mainly deployed on the channel.

+ Set clear goals for each product, each moment, each customer group.

+ Developing the list of clinic service channels in the hospital.

Besides, marketing is an indispensable activity.

+ Coordinate with Sales Department and branches to carry out the following activities:

1. Sponsorship for pharmacies;

2. Pharmacy meeting;

3. Sponsor and participate in conferences at hospitals and associations nationwide

4. Perform marketing tasks in accordance with the company's strategic direction

+ Promoting the brand: on the sales channels as planned and continuing to sponsor Pharmacy
cycling team - DOMESCO Dong Thap.

The Board of Directors of Imexpharm has just approved the business plan for 2020 with the goal
of both revenue and profit growth.

Target (billion VND) Actual Data in % Budget in Growth

2019 2019 Rate

Total Revenue & Income 1,420.7 98% 17.7%

Income before Tax & deduction for scientific 222.4 101.1% 15.4%
& technological development fund

Income before Tax 202.4 16.5%

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 (Source: IMP’s Board resolution.)

By the end of 2019, IMP recorded revenue of nearly 1,421 billion dong, up 18% compared to
2018. Profit before tax before setting aside the science and technology development fund reached
over 202 billion dong, up 17% compared to last year.

Target (billion VND) Budget in 2019 Growth Rate

Total Revenue & Income 1,750.0 23.2%

Income before Tax & deduction for 260.0 16.9%

scientific and technological
development fund

Income before Tax 260.0 28.4%

(Source: IMP’s Board resolution.)

Accordingly, IMP sets a target of VND 1,750 billion in total revenue, up 23% compared to the
year 2019. Compared to the plan in 2019, the Company sets a 2020 plan to increase 21% in
revenue. At the same time, IMP's BOD expects a pre-tax profit before deduction for the science
and technology development fund of VND 260 billion, up 28% compared to the results in 2019
and up 18% compared to the plan in 2019. The Board of Directors also approved the handling of
bad debts on February 5, 2020 with a total value of nearly VND 24 million. Specifically, the debt
will be erased in accordance with the meeting minutes of the Debt eradication Council of the
Company. In addition, IMP will receive credit lines in the form of unsecured loans at
commercial banks in 2020 with a total limit of 300 billion dong. According to IMP, the Binh
Duong high-tech factory project (IMP4) will be approved for the EU-GMP standard by the end
of Q1/2020.

3.3. IPO
Domesco said that the cost of Quarter 1/2020 of the company increased slightly over the same
period, due to ensuring income for employees and increasing the cost of prevention equipment
Covid-19 translation.

Target 1/2020 1/2019 (+/- %)

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 Net sales 290,351 309,681 (6)

Cost of good sold 194,992 207,838 (6)

Gross Profit 95,358 101,843 (6)

Financial Operating Revenue 4,464 4,904 (9)

Financial Expense 445 361 23

Less: Operating Expense - 663 -

Selling Expense 26,284 25,382 4

Administrative Expense 20,432 18,791 9

Operating Income 52,661 62,212 (15)

Other Income 666 258 158

Income before Tax 53,328 62,470 (15)

Income after Tax 42,632.4 49,959.1 (15)

(Source: Financial Statement for 1/2020 quarter of DMC Company)

DMC company announced the 1/2020 period results with net sales of over 290 billion dong and
net profit of nearly 43 billion dong, down by 6% and 15% respectively. This unit said that sales
decreased due to the impact of the Covid-19 epidemic. Meanwhile, selling expenses and
administrative expenses recorded an increase of nearly 4% and 9% compared to the first quarter
of 2019, partly due to ensuring income for employees. The increasing gap also comes from the
cost of prevention and other costs.

Different from Domesco, Imexpharm said that total revenue in the first quarter of 2020 reached
over VND 304 billion, up 10% compared to the previous year. Imexpharm products still play a
key role in the revenue structure, accounting for 87.3%; franchised goods were 27.7 billion
VND, up by 18.4% over the same period. During the period, financial income decreased from
VND 2.3 billion to VND 519 million, while financial expenses increased by 80% to VND 4.5

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billion (including VND 3.2 billion being a discount payment), selling expenses, and general and
administrative expenses also increased higher than in the same period. IMP said that the
promotion of sales into the ETC channel helped to save selling expenses for the company, so this
cost increased slightly, management expenses increased over the same period but still under
control. Total profit before tax in the first quarter of 2020 reached VND 51.4 billion, up 13.2%
compared to the first quarter of 2019. According to IMP, the proportion of OTC and ETC
channels in the first quarter of 2020 is 69.5% and 30.5%. Both OTC and ETC channels are
growing and in general, ETC is increasingly taking up a high proportion in the revenue structure.

The IMP leadership set a key goal in the second quarter to ensure a sufficient supply of raw
materials for production in the last 6 months of the year in the situation of Covid epidemic, in
order to ensure that the production and business targets in 2020 are fulfilled effectively. Some
important activities of the Company have been postponed due to the epidemic such as: EU-GMP
approval for IMP4 Binh Duong factory, holding the General Meeting of Shareholders in 2020…
If in the second quarter of 2020, the epidemic situation as the disease progresses, Imexpharm
will plan to carry out these important activities. In 2020, IMP targets revenue of 1,750 billion
VND, up by 23% compared to 2019; Profit before tax was VND 260 billion, up 28.4% compared
to 2019. With the first-quarter results, IMP has achieved a 17.4% revenue target and a 20% profit
target for the whole year. In the market, IMP shares temporarily stood at VND 50,900/share on
the morning of April 16, up 6% compared to the beginning of 2020.

Overall, an indispensable element in the industry competition Pharmaceutical prices are

competitive. In state domestically produced drugs are not sufficiently consumed, yes imported a
lot of foreign drugs, should lead to prices between drug manufacturers, between domestic and
foreign drugs will also be different. Domesco is predominant with a higher stock price than IMP
of about VND 36,400 (Domesco 87,300 VND and Imexpharm 50,900 VND). However, these are
2 of the leading companies with attractive revenue and holding important positions in Vietnam's
pharmaceutical industry.

3.4. Sources of capital

According to the financial statements of DMC for the year ended December 31 th, 2019, the firm
has used bank loans of 23,497,575,804 VND from Vietcombank at the beginning of 2019.
However, that amount of short-term borrowing was paid off, results in that its book value equals
to 0 in the balance sheet at the end of 2019; therefore, there is no debt that exists as sources of

13
capital the firm employs. By contrast, according to the financial statements of IMP for the year
ended December 31th, 2019, IMP has used total bank loans of 378,631,215,425 VND including
152,000,000,000 VND from Sacombank, 14,376,247,040 VND from Vietinbank,
202,254,968,385 VND from Shinhan Bank and 10,000,000,000 VND from BIDV. It can be
clearly seen that IMP has used much more bank loans than DMC. Besides, both two firms have
not issued bonds to raise capital. Apart from the capital sources of bank loans, DMC and IMP
has issued stocks to employs as the sources of capital with 34,727,465 and 49,387,359 stocks
outstanding respectively.

At the end of 2019, it can be clearly seen that DMC use 100% common stocks as the capital
sources; even during 2019, DMC used too little debt. On the contrary, IMP use only 1.59% debt
and 98.44% common stocks, which mean IMP has used too little debt, too.

4. Valuation
To value these two corporations, FCFF model was approached with the construction of n-staged
growth model. According to CFI (Corporate Finance Institute) website, the company experiences
a high growth rate in revenue, and, thus, free cash flow. Therefore, the growth rate approach of
free cash flow will be used to calculate the present value of FCFF in the high growth phase;
moreover, it is also used in the stable growth phase.

In the both two annual report of DMC and IMP in 2019, they mentioned the prospect of
pharmaceutical industry in Vietnam in the next several years. Particularly, with the higher
income, as well as the population aging and the more care about the health of Vietnamese
people, there are more and more opportunity for the pharmaceutical companies to develop in
their market. Basing on this situation that the higher demand and higher expenditure for the
pharmaceutical products in Vietnam, as well as the firm’s position in this industry, those two
corporations is expected to grow more and more in the future. However, according to the
business plan of DMC in 2020, the target of net sales is 1,430 billion VND, which lower than the
net sales of 1,468 billion VND in 2019. Moreover, the sales growth rate of DMC increases
slightly, from 4.07% in 2017 to 6.01% in 2019. Therefore, we assume that DMC will not
experience a higher growth rate period in the future, and this firm will only develop at the stable

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growth rate of 11.66%. By contrast, according to annual report of IMP in 2019, its total sales as
well as earnings before taxes is forecasted to grow at the significantly high rate, 27% and 22.5%
respectively, in the next three years. Furthermore, the sales growth rate of IMP increases
considerably in 2019, about 18.37%, compared to 1.66% in 2018. Therefore, we have made
assumptions that IMP is expected to grow at a higher growth rate of 15% in the first period from
2020 to 2022; after that, its growth rate will drop at the end of the first period to the stable
growth rate (4.15%). Another assumption is that the free cashflow to equity is the correct
measure of expected cashflow to stockholders.

In terms of capital structure, depending on the financial activities of DMC in the first quarter of
2020, the company will continue issue only common stocks (34,727,465 stocks outstanding) to
raise capital. Therefore, its capital components consist of only common equity with its market
value of 2,493,458,607,500 VND, and its cost of common equity is 11.82%. Since DMC has no
debt and preferred stock, this company uses 100% common stocks. By contrast, besides
maintaining issue common stocks (49,387,359 stocks outstanding) with its market value of
2,370,593,232,000 VND and its cost of common equity of 10.94%, IMP have borrowed from
bank loans as sources of capital the firm employs with the total of 387,631,215,425 VND since
2019.

At the end of 2019, the book value of debt of this company is 37,579,456,821 VND, with the
cost of debt is 0.98%. As a result, IMP uses approximately 1.56% debt and 98.44% common
stocks.

FCF2019 = 71,122.6 billion VND Value of firm = 49,634,684.5 million VND

WACC = 11.82%
g = 11.66% Value of a share = 1,429,263 VND
(DMC will experience only the stable growth rate)

WACC = 10.78%
High growth phase with growth rate of 15%
Year 2019 2020 2021 2022
FCF 80,091.6 92,105.34 105,921.14 121,809.31
million VND million VND million VND million VND

Present value 83,142.57 86,309.76 89,597.60 Total =

of FCF million VND million VND million VND 259,049.93

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 million VND

Stable growth phase with g = 4.15%

Present value of Terminal value of firm 1,407,479.77
million VND

Value of firm 1,666,529.7

million VND

Value of a share 32,983 VND

Figure 1: Estimated value of the DMC and other related data.

Figure 2: Estimated value of the DMC and other related data

From the two above figures, it can be clearly seen that the estimated value of DMC is
significantly higher than the one of IMP. The main reason for this considerable difference is the
growth rate in the stable phase. There is much more stable growth rate of DMC than that of IMP,
11.66% compared to 4.15%. In fact, the stable growth rate is estimated by the formula
“Growth rate = Retention ratio * ROE”. First, ROE of DMC is larger than that of IMP, 18.6%
and 10.6% respectively, according to the annual reports of the two companies in 2019. Second,
the retention ratio of DMC is also greater than the one of IMP, 62.68% and 39,2% respectively
(in 2019). The two above factors result in the much higher stable growth rate of DMC. Another
factor that contribution to the higher value of firm is WACC. In the case of DMC, WACC is
slightly higher than the stable growth rate,11.82% and 11.66% respectively. That leads to the
considerably greater value of DMC, based on the formula of present value of terminal value
[FCF/(WACC - g)]. On the contrary, the WACC of IMP (10.78%) is about over twice as large as
its stable growth rate (4.15%), which results in the much lower present value of terminal value of
IMP and its value, based on the same above formula.

From these estimated values of the two firms, the intrinsic value of stock can be found through
the approach of corporate valuation model. Since DMC do not use debt and preferred stock, the
value of common stocks is equal to the value of firm. Hence, the intrinsic value of a common
stock of DMC seems to be high with 1,429,263 VND, considerably higher than its actual market
value per stock (72,000 VND at 31/12/2019). In contrast, the value of IMP’s common stocks is
1,628,950.2 million VND after subtracting book value of debt from value of firm. Because we

16
cannot find the market value of debt, the book value of debt has been used instead. After that, the
IMP’s intrinsic value of a common stock is 32,983 VND, lower than its actual market value per
stock (48,000 VND at 31/12/2019). Besides, it can be clearly seen that the intrinsic value of a
stock of DMC is substantially greater than that of IMP.

5. Recommendation 

There is some advice for the financial manager in the current situation of the both corporations.
Firstly, Imexpharm should reduce its costs and it also can remain the growth of ROE as it is. The
reason is that Imexpharm has a high growth rate in income, but it results from high costs and
high liabilities, and the constant growth in ROE. Secondly, it is necessary for Domesco to pay
attention to the long-term investment to enhance its profit in the near future, and it also has to
change something in ROE such as improving the profit margin and lowering the equity
multiplier which can improve the current amount of ROE’s index.

As regards investors, it is a great opportunity for them to buy such a stock from DMC since its
intrinsic value of a stock is much higher than its market value of one, 1,429,263 VND compared
to 72,000 VND (at the end of 2019 and at the beginning of 2020), and it seems to be certain that
its market value will not be up to that intrinsic value. By contrast, the IMP intrinsic value of a
stock (32,983 VND) is lower than its market value of one (48,000 VND at the end of 2019 and
the price tends to increase in 2020); therefore, the possible investment strategy for the investors
is to sell such a stock.

6. Conclusion

In short, it can be seen that the two corporations are in the top pharmaceutical industry in Viet
Nam. They have high values on market price as well as their intrinsic value because they are
trying to develop their products, and the marketing to enhance the firm’s value. Both companies
are doing well in sales but they cannot avoid the wrong decision if they lack calculation, and
estimation. Besides, although the firms have enough calculation, they also cannot grow because
of the prior conditions. Therefore, they need to minimize the risk as possible such as lower costs,
focus more on the value of the product to build the customer's belief, and then build the constant
growth rate of the company.

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 REFERENCES

Domesco. (2019, December 31). Financial statements. Retrieved from

https://www.domesco.com/pdf/dmc-financial-statement-audited-2019_en_1585563312.pdf
Imexpharm. (2019, December 31). Financial statements. Retrieved from
https://drive.google.com/file/d/1e_V0iBHTn9k5Q7neURm5dUgTfBZ6pgjU/view
Domesco. (2019, December 31). Annual report. Retrieved from
https://www.domesco.com/pdf/dmc-anual-report-2019-final_en_1590029055.pdf
Imexpharm. (2019, December 31). Annual report. Retrieved from
https://drive.google.com/file/d/1HYnRKXHeH8hjKucE0OlobZjc6bdaNzlw/view
WSJ. (n.d.). Domesco Medical Import & Export JSC, Income Statement. Retrieved from
https://www.wsj.com/market-data/quotes/VN/XSTC/DMC/financials/annual/income-
statement
WSJ. (n.d.). Domesco Medical Import & Export JSC, Balance Sheet. Retrieved from
https://www.wsj.com/market-data/quotes/VN/XSTC/DMC/financials/annual/balance-sheet
WSJ. (n.d.). Imexpharm Corp., Income Statement. Retrieved from
https://www.wsj.com/market-data/quotes/VN/XSTC/IMP/financials/annual/income-
statement
WSJ. (n.d.). Imexpharm Corp., Balance Sheet. Retrieved from
https://www.wsj.com/market-data/quotes/VN/XSTC/IMP/financials/annual/balance-sheet
CAFEF. (n.d). Domesco (HOSE). Retrieved from
https://s.cafef.vn/hose/DMC-cong-ty-co-phan-xuat-nhap-khau-y-te-domesco.chn
CAFEF. (n.d). Imexpharm (HOSE). Retrieved from
https://s.cafef.vn/hose/IMP-cong-ty-co-phan-duoc-pham-imexpharm.chn
Domesco. (2020, May 4). Resolution – Board of Directors of Domesco. Retrieved from
https://www.domesco.com/pdf/nq-07--chi-tieu---ngay-dhcd-2020_vi_1588670276.pdf
Hieu Minh. (2019, December 17). Announcing the top 10 reputable pharmaceutical companies
in 2019, the pharmaceutical industry forecast continues to grow 2 figures. Retrieved from
https://tinnhanhchungkhoan.vn/thuong-truong/cong-bo-top-10-cong-ty-duoc-uy-tin-nam-
2019-du-bao-nganh-duoc-tiep-tuc-tang-truong-2-con-so-307715.html
CFI. (n.d). Terminal growth rate. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-terminal-
growth-rate/?fbclid=IwAR0tcyesiuh5rL3LGy2i-
k9GcxlDbLmf436Ar3levPTE6ZNDpl8QRwZ8L-s

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Trading Economics. (n.d.) Vietnam Government Bond 10Y. Retrieved from
https://tradingeconomics.com/vietnam/government-bond-yield
Damodaran. (2020, April 1). Country default spreads and risk premiums. Retrieved from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

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 APPENDICES

APPENDIX A: Calculation for market capitalization

Market capitalization = Number of stocks outstanding * Price

DMC: Market capitalization = 34,727,465 * 72,000 = 2,493,458,607,500 VND

IMP: Market capitalization = 49,387,359 * 48,000 = 2,370,593,232,000 VND

APPENDIX B: Calculation of DuPont Equation

ROE = ROA x Equity multiplier

ROE = Profit margin x Total assets turnover x Equity multiplier

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 APPENDIX C: Calculations for the firm’s valuation section

I. Domesco Medical Import – Export Joint Stock Corporation:

I.1. Costs of components:

 Beta of the stock (β) = 0.67 (taken from CAFEF – a security firms’ website)
 Risk free rate (Rf) = 3.38% (Vietnamese government bond yield – 10 year maturity)
 Risk Premium (Rm – Rf) = 12.6% (from Damodaran’s equity risk premium estimate of
Vietnam)
 Cost of common equity (rS) = 11.82%
(Ri = Rf + β(Rm – Rf) = 3.38% + 0.67*12.6% = 11.82%)
 Cost of debt (rD) = 0 (due to no debt)

I.2. Weights on Debt and Equity: (Note: DMC do not have preferred stock)

 Weight on debt (WD) = 0

 Weight on common stock (WS) = 100%

I.3. WACC:

WACC = WDrD(1-T) + WSrS + WPrp = 0 + 100%*11.82% + 0 = 11.82%

I.4. Free Cash Flow (in 2019)

 EBIT = 266,947 million VND

 Tax Rate on Income = 20%
 EBIT(1-T) = 213,557.6 million VND
 Depreciation = 27,225 million VND
 Capital Expenditure = 41,887 million VND
 Working Capital = 1,018,974 million VND
 Change in Working Capital = 121,773 million VND (∆NOWC)
 FCF2019 = 71,122.6 million VND
[FCF = (EBIT(1-T) + Depreciation) – (Capital expenditures + ∆NOWC)]

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I.5. Value of the firm:

Based on assumptions, DMC will experience only stable growth rate in the future.

 Growth rate in Stable Phase = ROE * Retention ratio

Dividends 86,818,662,500
Retention ratio=1−Payout ratio=1− =1− =62.88 %
Net income 232,634,592,463

ROE = 18.6%

 Growth rate in Stable Phase (g) = 18.6% * 62.88% = 11.66%

 Value of firm

FCF 2019 71,122.6 million

Value of firm= = =49,634,684.5 million VND
WACC−g 11.82 %−11.66 %

I.6. Intrinsic value of stock:

Vcommon stocks = Vfirm – Vdebt – Vpreferred stocks = 49,634,684.5 million VND

(DMC has no debt and preferred stocks, so Vdebt and Vp = 0)

V common stocks 49,634,684.5

Po = = =¿ 1,429,263 VND
Number of shares outstanding 34,727,465

II. Imexpharm Corporation:

II.1. Costs of components:

 Beta of the stock (β) = 1.11 (taken from CAFEF – a security firms’ website)

http://s.cafef.vn/hose/hpg-cong-ty-co-phan-tap-doan-hoa-phat.chn

 Risk free rate (Rf) = 2.26% (Vietnamese government bond yield – 10 year maturity)

http://www.worldgovernmentbonds.com/country/vietnam/

 Risk Premium (Rm – Rf) = 8.21% (from Damodaran’s equity risk premium estimate of
Vietnam)

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

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  Cost of common equity (rS) = 10.94%
(Ri = Rf + β(Rm – Rf) = 3.38% + 0.6*12.6% = 10.94%)
Total interest expense 3,727,735,820
 Cost of debt (r D )= bank loans ¿= =0.98 %
Total borrowing¿ 378,631,215,425

II.2. Weights on Debt and Equity: (Note: IMP do not have preferred stock)

 Market value of common equity = 2,370,593,232,000 VND (market capitalization

number)
 Book value of debt = 37,579,456,821 VND (since we do not know market value of
debt, we use book value of debt = value of the borrowings on the balance sheet)
37,579,456,821
 Weight on debt ( W D ) = =1.56 %
37,579,456,821+2,370,593,232,000
2,370,593,232,000
 Weight on common stock ( W S )= =98.44 %
37,579,456,821+ 2,370,593,232,000

II.3. WACC:

WACC = WDrD(1-T) + WSrS + WPrp = 1.56%*0.98% + 98.44%*10.94% + 0 = 10.78%

II.4. Free Cash Flow (in 2019)

 EBIT = 203,042 million VND

 Tax Rate on Income = 20%
 EBIT(1-T) = 162,433.6 million VND
 Depreciation = 39,481 million VND
 Capital Expenditure = 202,786 million VND
 Working Capital = 517,301 million VND
 Change in Working Capital = - 80,963 million VND (∆NOWC)
 FCF2019 = 80,091.6 million VND
[FCF = (EBIT(1-T) + Depreciation) – (Capital expenditures + ∆NOWC)]

II.5. Value of the firm:

Based on assumptions, IMP will experience a higher growth rate of 15% in the period from 2020
to 2022; after that, the growth rate will drop at the end of that period to the stable growth rate.

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In High growth phase: growth rate = 15% (FCF will grow at 15% from 2020 to 2022

FCF2019 FCF2020 FCF2021 FCF2022

FCF 80,091.6 92,105.34 million 105,921.14 121,809.31
million VND VND million VND million VND
Present value 83,142.57 million 86,309.76 million 89,579.6 million
of FCF VND VND VND
 Total present value of FCFF in high growth phase = 259,049.93 million VND

In stable growth rate:

 Growth rate in Stable Phase = ROE * Retention ratio

Dividends 98,802,718,000
Retention ratio=1−Payout ratio=1− =1− =39.2 %
Net income 162,386,686,793

ROE = 10.6%

 Growth rate in Stable Phase (g) = 10.6% * 39.2% = 4.15%

 Present value of Terminal value of firm

FCF 2022∗(1+ g) 121,809.31million∗(1+4.15 %)

¿ = =1,407,479.77 million VND
WACC−g 10.78 %−4.15 %

Value of firm = 259,049.93 million + 1,407,479.77 million = 1,666,529.7 million VND

I.6. Intrinsic value of stock:

Vcommon stocks = Vfirm – Vdebt – Vpreferred stocks = 1,666,529.7 million VND - 37,579,456,821 VND =
1,628,950.2 million VND
V common stocks 1,628,950.2
Po = = =32,983 VND
Number of shares outstanding 34,727,465

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