Financial Analysis, Forecasting and Equity Valuation of Hoàng Anh Gia Lai

(Group 5)

PART 1: FINANCIAL ANALYSIS AND FORECASTING

1 | An Introduction

Hoang Anh Gia Lai Corporation (HAG), established in 1993, has changed its operation as a
joint-stock company model since 2006, and was officially listed on HOSE stock exchange in 2008
with the stock code: HAG. The audit firm responsible for auditing Hoang Anh Gia Lai's financial
statements is EY. (Ersnt & Young Global Limited)

Scope of Operations: HAG’s primary focus lines in crop cultivation, livestock farming, and
agri-industrial production. The company engages in the cultivation of various crops such as rice,
coffee, rubber, and pepper. Additionally, it is involved in livestock farming, including cattle, poultry,
and aquaculture. HGA also operates agri-industrial facilities for processing and value-added
production.

Size and Scale: HAG is considered a significant player in the agricultural industry, with a large-scale
operation and extensive resources. The company has established a strong presence across multiple
locations, enabling it to reach a wider customer base and expand its market share.

The ticker symbol for your company and the stock exchange on which its shares are listed: Hoang
Anh Gia Lai Joint Stock Company was officially listed on HOSE in 2008 with the stock code: HAG.

HAG's business performance in 2020-2022: In 2020, Hoang Anh Gia Lai achieved consolidated net
revenue of 3,085 billion VND and a loss after tax of 2,175 billion VND. The accumulated loss of the
mountain town enterprise amounted to VND 5,086 billion. Hoang Anh Gia Lai Joint Stock Company
(Code: HAG) announced the net revenue of the fourth quarter of 2020 reached VND 914 billion, an
increase of VND 318 billion compared to the same period in 2019 (Tap chi Thuong Truong, 2021).
Regarding the financial situation, as of September 30, 2022, the total assets of the enterprise stood at
VND 19,338 billion, an increase of nearly 5% compared to the end of 2021. Liabilities of HAGL
reached VND 14,403 billion, an increase of 4% compared to the end of 2021, in which long-term debt
of enterprises is at VND 5,880 billion; short-term debt is 2,743 billion dong (Anh, 2023). On the stock
market at the end of 2022, the current price of HAG shares in the afternoon session of 11/11 decreased
by 6.93%, to 6,840 VND/share (Ha Anh, 2022).
2 | Analysis of Income Statement and Balance Sheet

2.1. Income Statement Analysis

2.1.1. Overview

Our analysis shows that HAG's performance in the three years from 2020 to 2022, which saw a loss in
2020 and a modest profit margin from 2021 to 2022, was generally not outstanding. A large amount of
debt and inefficient assets that fail to generate enough cash flow, goods, or services may be the cause
of this situation. Our findings are based on a main study of operational revenue and expenses, as well
as comparisons to businesses in the same sector of agriculture.

2.1.2. Operating Revenue

2.1.2.1. Total Revenue Growth

Overall, due to the COVID-19 epidemic and massive financial problems, HAG's revenue declined by
about 34% (from 3,176,646 to 2,097,418 million VND) between 2020 and 2021. However, compared
to 2021, income increased quickly by almost 244% (from 2,187,416 to 5,197,983 million VND) in
2022 as a result of booming pig farming and fruit harvesting.

2.1.2.2. Net profit after tax (NPAT)

First and foremost, we can notice a significant variation in a percentage of net profit after tax over
three consecutive years. Due to enormous financing problems, HAG had a loss in 2020 that was
equivalent to nearly 75% of its total sales. HAG did, nevertheless, make a profit with a percentage of
around 6% for the sake of lower operating costs in 2021. Furthermore, due to the reversal of
provisions for accounts receivable, HAG continued to earn a profit with a ratio of one-fifth of total
sales by the end of 2022.

2.1.2.3. Comparison to some companies in the market

Because the efficiency of business operations is the primary focus of our comparison, we will omit
any profits and costs that are not linked to agricultural sales. As a result, in general, we can infer that
HAG was the most efficient firm in terms of sales activities, whereas BAF was the least efficient of
the three.

2.1.3. Expenses (before Income Taxes)

2.1.3.1 Cost of goods sold (COGS)

As the graph shows, costs always account for a significant amount of a company's overall revenue. In
particular, COGS for HAG amounted to more than 94% of total net sales in 2020. When it came to the
next year, that amount accounted for roughly 76%. In 2022, the proportion remained stable at around
77%. High portions are always the result of higher input prices.

2.1.3.1 Other expenses

Other expenses would likewise make up a significant amount of total net revenue, similar to COGS.
The company's loss may be explained by the fact that, more precisely, in 2020, costs were more than
total net sales by a percentage of almost 25%. The costs declined in 2021, accounting for 85.58% of
the whole net revenue, and they continued to decline in 2022, accounting for 65.88% of the total
revenue. One of the reasons for this would be the liquidation of investments.

2.1.3.2. Comparison with other companies

In this section, we look at how much it costs them to produce goods and services. The graph clearly
shows that the COGS of the three firms were roughly identical; however, when we look at the other
costs' category, we see that HAG had the greatest owing to its financing operations.
2.2. Balance Sheet Analysis

2.2.1. Asset

The balance sheet shows that during the past three years, there was a significant reduction in total
assets (decreased by 47% of 2020’s total assets in 2022).

2.2.1.1. Current Asset

First of all, current assets of the corporation consist of cash and cash equivalents, short-term financial
investments, inventories and other current assets. The total current assets in 2020 was 8,930,375
million VND, while in 2021 it was 7,051,854 million VND in 2021 and increased to 8,038,561
million VND in 2022. Thus, there is a insignificant reduction in the amount of current assets from
2020 to 2022.
Short-term receivables made up the biggest percentage of current assets over the observed time,
accounting for 17.20 percent, 35.44 percent, and 34.17 percent of total assets, respectively, which
represent a high line of credit extended by a company.

2.2.1.2. Non-current Asset.

The second type of assets is non-current assets, which consist of long-term receivables, fixed assets,
investment properties, long-term assets in progress, long-term financial investments, and other
long-term assets and goodwill.

During the year of 2020, the value of non-current assets was 28,335,444 million VND. This amount
reduced greatly to 11,387,831 million VND in 2021 and was slightly increased to 11,759,827 million
VND in 2022.

Fixed assets accounted for the most percentage of non-current assets in 2020 with 33.8 percent of total
assets, which provide long-term financial benefits. In the following two years (2021 and 2022),
long-term assets in progress accounted for the largest percentage with 18.95 percent and 23.24 percent
of total assets, respectively.

2.2.2. Liabilities and Owners’ Equity

It was clear that total owner’s equity and liabilities likewise declined from 2020 to 2022 since total
assets equal total owner’s equity and liabilities.

2.2.2.1. Liabilities
Liabilities made up approximately 70 percent of total owner’s equity and liabilities throughout a
three-year period. Nearly half of the total liabilities, which are made up of short-term and long-term
obligations, had a dramatic reduction between 2020 and 2021, falling from 27,238,024 million VND
to 13,766,452 million VND. Then it rose by around 1 billion million VND by the year 2022.

2.2.2.2. Owners’ Equity

Similar to liabilities, owner's equity has also experienced a substantial decline by about half of the
amount, falling from VND 10,027,795 million VND to 4,673,233 million VND. Then, there was a
barely noticeable increase of approximately 500,000 million VND in 2022.

2.2.3. Compare to ASM, BAF

The total assets of BAF and ASM did not change much between 2020 and 2022. However, HAG's
total assets dropped dramatically, basically equaling ASM's total assets in 2021, despite the fact that
HAG's total assets were far larger in 2020 than BAF and ASM.

Similar to total assets, total liabilities of HAG also change considerably more than that of total
liabilities of BAF and ASM.
Owner's equity of BAF and ASM increased slightly from 2020 to 2022, in contrast to the sharp drop
in HAG's owner's equity.

3 | Ratio Analysis

3.1. Liquidity ratio

3.1.1. Current Ratio

As can be seen from the figure, in 2020, HAG’s current ratio is 0.58, which indicates that the
company may have had difficulty meeting its short-term obligations and may have been at risk of
defaulting on its debts. However, the current ratio increased significantly to 1.04 in 2021, which
suggests that the company's short-term liquidity improved over the course of the year, and HAG was
able to cover its short-term debt and had a low risk of bankruptcy. The current ratio dropped slightly
to 0.87 in 2022 indicating that HAG had fewer current assets relative to current liabilities, or the
company had difficulty managing its working capital.

3.1.2. Quick Ratio

The quick ratio of HAG fluctuated during the period of three years, which was 0.43, 0.98 and 0.75,
respectively. The quick ratios of the company were relatively lower than the current ratios, which
suggests that the inventory was a vital factor of the current assets. Moreover, these quick ratios were
lower than 1 means that a company's liquid assets are not sufficient to cover its current liabilities, or
the company is relying too heavily on inventory or other less liquid assets, which may be difficult to
convert into cash quickly.

3.1.3. Cash Ratio

The cash ratio of HAG remained at 0.1 from 2020 to 2022, which is generally considered to be low.
Hence, the company may have a relatively low level of liquidity and may struggle to meet its
short-term obligations if its cash flow is disrupted or it experiences unexpected expenses.

3.1.4. Compare With ASM, BAF

The liquidity ratios of ASM were consistently higher than those of HAG over the three year period, from
2020 to 2022. The numbers may suggest that ASM has a stronger financial position and is better able to meet
its short-term obligations than HAG.
Generally, the liquidity ratios of BAF were higher and more stable than those of HAG, which suggests that
BAF had a stronger ability to meet its short-term obligations and manage its working capital than HAG over
the period.

3.2. Efficiency ratio:

3.2.1. Inventory Turnover Ratio:

According to the bar chart, Inventory turnover of HGA started at 1.31 times in 2020. Afterwards, this
ratio decreased slightly to 1.15 in 2021 and then grew to 3.83 in 2022.
Inventory turnover is a metric that demonstrates how well a company handles its inventories, with
higher ratios indicating more efficient inventory management practices. However, it can be seen that
the fluctuation of inventory turnover from 2020 to 2022 can lead to problems such as obsolete
inventory, higher costs, inefficient resource usage, lower profitability and supply chain disruptions for
the firm.
3.2.2. Receivables Turnover Ratio

Based on the graph, The receivable turnover ratio of HAG reached 1.13 times in 2020 and then
declined at 0.91 times in 2021. Finally, it rocketed to 7 times in 2022.
The receivables turnover ratio reflects a company's ability to manage and collect outstanding
liabilities. A higher ratio indicates efficient collection of accounts receivable and a high percentage of
customers who quickly pay their debts. However, This graph illustrates that the receivables turnover
of HGA fluctuated and it means HAG has not optimized debt collection well.

3.2.3. Total Assets Turnover Ratio

From the figure, the total assets turnover ratio remained stable at 0.8 times from 2020 to 2021.
However, it dropped marginally to 0.27 in 2022.
Total asset turnover evaluates the effectiveness of a company in utilizing its assets to generate
revenue. For all three years from 2020 to 2022, this ratio is always less than 1, which means
HGA’s assets are not generating enough revenue at the end of the year, which may be unfavorable for
the company.

3.2.4. Days Sales In Inventory and Days Sales In Receivables

The patterns of days’ sales in inventory and days’ sales in receivables of MWG were almost the same.
The figure of days' sales in inventory rose from 280 days to 317 days in 2020 and 2021, but decreased
to 73 days in the final year. Meanwhile, the number of days’ sales in receivables also grew from 324
to 402 days in 2020 and 2021, then fell to 53 days in 2022.
These trends indicate that HAG took longer to convert its inventory into sales in 2020 and 2021, but
improved in the final year, suggesting a more efficient inventory management approach. Similarly, the
company took longer to collect payments from customers, as indicated by the increase in days' sales in
receivables in 2020 and 2021. However, in 2022, the number of days' sales in receivables decreased,
indicating an improvement in collection efficiency.

3.2.5. Compare With ASM, BAF

Compared with HAG, ASM and ASM, BAF consistently outperforms the other companies in terms of
inventory turnover ratio and total assets turnover ratio. A higher inventory turnover ratio indicates
more efficient management of inventory and quicker sales, while a higher total assets turnover ratio
suggests better utilization of assets to generate revenue.
It's important to conduct a thorough analysis of HAG's operations, financial statements, and
industry-specific factors to identify specific areas for improvement accurately. Additionally,
considering market trends, customer demands, and competitor analysis can help shape strategic
initiatives aimed at enhancing HAG's overall efficiency.

3.3. Long-term Solvency Ratio

3.3.1. Total Debt

As can be seen from the figure, 2020 total debt ratio of HAG was 0.49. After that, this figure dropped
slightly to 0.45 times in 2021. In 2022, the company experienced a small decrease to 0.41 times. For
all three years, this ratio of HGA was still in the ideal and healthy range for investors and
stockholders. This is a positive signal for the company to have fewer assets financed by liabilities.
A company's financial leverage is assessed using its total debt ratio. A high ratio often means that the
firm or stock is riskier for its owners.
3.3.2. Times Interest Earned Ratio

The profit level provides the capacity to pay interest, as shown by the times interest ratio. The ability
of the business to pay interest is positively correlated with the interest payment ratio, which is often
more than 2.

According to figures, HAG witnessed a little decrease in times interest earned ratio from 2,53 times to
2,16 times in the first two years. Then, the number climbed up to 6,44 in 2022. Hence, it can be seen
that this ratio of HAG through a 3-year period was quite high, implying that the company generated
good cash flows and also guaranteed debt repayment.

3.3.3. Cash Coverage Ratio

The ability of the company to produce cash from operations is gauged by the cash coverage ratio. The
optimal value for this number is 1.5.

The ratio remained greater than 1 for continuous three years indicating the sufficient ability of HAG.
Essentially, the cash coverage ratio rose to 6.87 in 2022 proved the positivity in the cash flow of the
company.

3.3.4. Compare With ASM, BAF

In general, HAG's indexes are quite similar to those of ASM and BAF in 2020 and 2021. In 2022,
HAG's growth is reflected in the spike in Times Interest Earned Ratio and Cash Coverage Ratio.
As can be seen from the graph, the total debt ratio HAG from 2020 to 2022 was nearly similar with
that of ASM, but there was a bit more variable in the figure of HAG. Overall, BAF enhanced the
long-term health for its ability to repay the debts and interest with their liquid assets. In comparison to
the BAF, HAG demonstrates a stable and sustainable debt ratio. Furthermore, the facts suggest that
the latter is several times stronger in terms of its ability to repay its debt.

3.4. Profitability ratio

3.4.1. Profit Margin vs. EBITDA Margin

The above table illustrates the rise in the Profit Margin and EBITDA Margin over the given period of
time. It is interesting to note that these indices reached their highest points in 2022, at 22.01% and
41.24%, respectively, which is a noticeable increase from the two years before. The significant
increase in EBITDA that the company realized during that fiscal term is what caused this noticeable
increase.

A higher gross profit margin implies that the company has a bigger pool of liquid resources available,
which may be wisely allocated to covering indirect expenses like interest payments and one-time
expenses. As a result, this indicator acquires a crucial relevance for both business owners and
financial analysts, especially when evaluating a company's financial well-being (Nariswari, T. N., &
Nugraha, N. M., 2020). Furthermore, a higher EBITDA % indicates that the HAG was able to reduce
its operating costs while still achieving increased profits. This accomplishment has given HAG the
ability to efficiently cover its operating expenses while still maintaining a healthy profit margin.

When it comes to the profit margin, its significant growth during the time period under study denotes
an enhanced ability of the business to make money from the sales of its products and a matching drop
in operating expenses.
https://doi.org/10.20525/ijfbs.v9i4.937

3.4.2. ROA & ROE Ratio

The Return on Equity (ROE) and Return on Assets (ROA) ratios both show an upward trend, peaking
in the fiscal year 2022. It is noteworthy that the ROE is significantly higher than the ROA, indicating
that the company's profit production is predominantly supported by equity.

The huge increase in net income between 2020 and 2022, which is especially illustrated by the
considerable increase of 1,128,745,396 VND in the fiscal year 2022, is blamed for the increase in the
ROA ratio. This growth occurred despite a significant decline in overall assets during the same period.

Additionally, the ROE for the fiscal year 2022 significantly outperforms the ratio shown in 2021,
rising by almost seven times. This extraordinary increase of 22.88% confirms HAG's positive
development pattern and indicates a significant improvement in its operating environment.
3.4.3. Compare with BAF

Based on the shown charts, a clear pattern that highlights the difficult performance faced by both
HAG and BAF in 2020, significantly impacted by the impacts of the COVID-19 pandemic, becomes
apparent. It is remarkable that BAF's ratios, although being muted, managed to maintain a positive
trajectory above zero, in contrast to HAG's ratios, which sank into negative territory. This discrepancy
highlights HAG's underwhelming performance throughout the previous time frame.
However, when studying the next year, a clear difference emerges. Notably, HAG demonstrated a
more quick and significant improvement in its profit margin as well as its EBITDA margin, as well as
significant gains in its return on assets (ROA) and return on equity (ROE). This remarkable recovery
confirms HAG's dominance within the sector and suggests that it has outperformed its rival, BAF.

3.5. Market-value ratio

3.5.1. Price-to-earnings ratio

The Price-to-Earnings (P/E) ratio is the most used measure of market value among the numerous
metrics. This ratio acts as a crucial metric, illustrating the relationship between the market price of a
company's stock and its profits per share. Notably, the P/E ratio for HAG peaked at 60.75 during the
fiscal year 2021, a rise that denotes a large increase in stock purchases by investors. However, this
measure fell sharply over the course of a year, indicating a rapid decrease in the price of HAG's
shares.

3.5.2. Market-to-book ratio

The difference between current market pricing and the predicted profits return for potential buyers
may be quantified using market value ratios. Increased market value ratio generally indicate increased
investor propensity to purchase shares of a certain company. This claim is consistent with the
observations made by Penman and Reggiani (2013), who emphasize the relationship between
increased market value ratios and increased investor stock acquisition motivation.
3.5.3. Compare with BAF, ASM

The graphic clearly shows a distinct trend: throughout the fiscal year 2020, a large majority of
investors preferred to allocate their capital to HAG's stock as opposed to its competing alternatives.
The Price-to-Earnings (P/E) ratio and the Market-to-Value ratios for HAG, however, both show a drop
in the next fiscal year, bringing these measures in line with the established average for the sector.
Despite this reduction, HAG still kept its place among the exclusive group of top businesses in
agriculture industry.
4 | Forecasting & Scenario Analysis

4.1. Forecasting:

4.1.1. Income Statement

An essential part of a three-statement pricing model is the forecasting of the income statement.
Starting this process requires assumptions regulating volume and pricing across various segments, a
deduction made possible by the price/volume segmentation visible in the Financial Statement. In
particular, it is shown that HAG's operating environment is expected to exhibit an increase in the
amount of fruits sold, accompanied by an increase in pricing, based on historical data going back to
2022. This expectation is based on the strong performance shown in 2022 and a consistent growth
pattern after the year 2020. An underlying assumption is that HAG's strategic direction will increase
fruit output, leading to a corresponding increase in profitability. Additionally, a combination of
projections from the annual report for 2022 are used to estimate each segment's contribution to the
Cost of Goods Sold and Operating Expense categories. These projections are further refined by
marginal provisions that account for unanticipated circumstances. This subtle technique guarantees
that any unexpected aspects are properly taken into account. Furthermore, the company tax rate of
20% is maintained, reflecting the current average business tax rate peculiar to the Vietnamese market.
This practical inclusion makes it easier to show the financial projection in its entirety and instills a
level of realism consistent with the fiscal dynamics defining the operational environment.

The predicted income statement gives a clear indication of how HAG will likely perform well over the
next three years, which will be marked by a remarkable increase in net income. Contrasting sharply
with the noticeably decreased net income numbers recorded in the years before, at -1,255,661,344
VND in 2020 and 203,030,161 VND in 2021, is this substantial recovery. The main reason for this
reversal is HAG's strong performance in 2022, which is a sign of a positive future. The lack of a
robust agriculture industry in Vietnam gives the cost of goods sold substantial significance, which is
further highlighted by spending on raw materials. As a result, this element makes a considerable
contribution to the total expenditure structure.

4.1.2. Balance Sheet

The inputs taken from the 2022 financial statement are represented by the blue dataset. This inclusion
may be attributed to HAG's operating environment at the time, which was marked by a sizable amount
of outstanding account debt, which in turn helped to raise account payable levels. As a result, it has
been hypothesized that HAG is about to take action to fulfill its current debt commitments. However,
it is anticipated that this debt payback initiative would require further financing in order to guarantee
the continuation of its operating activities. This course of action is in line with the general approach
that HAG is anticipated to adopt, which aims to strike a balance between paying off debt and
obtaining the necessary funding for the unhindered execution of its commercial activities.

4.1.3. Statement of Cash Flow

According to these previous assumptions, HAG will gain the positive net cash flow, which obtain the
significant number in 2026.
4.1.4. Fixed assets Schedule
In the structure of the fixed asset schedule, it is assumed that HAG would make capital asset
investments over the short term, highlightly in the upcoming year 2025, with the goal of enhancing
the efficiency of its fruit product operations. This strategic approach is motivated by the greater need
to increase the effectiveness and efficiency of Vietnam's agriculture sector, which is anticipated to see
improvements in the short-to-medium term, or within the next one to two years.

4.2. Scenario analysis

The following estimations are illuminated when comparing the three imagined scenarios. In the
worst-case scenario, HAG is expected to bring in 8,654,606,285 VND in income while incurring
2,596,381,886 VND in expenses for the fiscal year 2027. In the best-case scenario, HAG might see an
even better result and could generate earnings of 10,385,527,542 VND. A significantly lower
expenditure outlay, predicted at 2,336,743,697 VND, goes along with this optimistic prognosis.
However, it is wise to consider a scenario with mitigating elements like inflation and other important
elements. In this scenario, revenue might drop to 6,923,685,028 VND substantially, along with an
increase in expenses owing to rising costs.
PART 2: EQUITY VALUATION

1 | Free Cash Flow to Equity (FCFE)

When valuing equity, the Free Cash Flow to Equity (FCFE) approach is widely used because it
estimates the cash available to shareholders. FCFE considers reinvestment needs and debt obligations,
making it useful for analyzing companies with complex capital structures or high debt levels. This
method takes into account both operational performance and financial decisions, providing a
comprehensive view of equity value. Damodaran (2012) suggests that FCFE valuation helps investors
determine a company's intrinsic share worth, aiding investment decisions. Allowing for the cash flow
effects of net capital expenditures, changes in working capital, and net changes in debt on equity
investors, we can define the cash flows left over after these changes as the free cash flow to equity
(FCFE):

𝐹𝐶𝐹𝐸 = 𝑁𝐼 + 𝐷&𝐴 − 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑁𝑂𝑊𝐶 − 𝐶𝑎𝑝𝑒𝑥 − (+) 𝑁𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔𝑠

where NI: Net Income
D&A: Depreciation and Amortization.
Change in NOWC: Change in Net Operating Working Capital over a specific period.
Capex: Capital Expenditure.
Net Borrowings: the overall change in its debt level.

1.1. Net income

Net income is the profit earned by a company after deducting all expenses, including operating costs,
taxes, and interest payments, from its total revenue. Net income is an important input in a DCF model
as it represents the cash available to shareholders after all expenses have been accounted for.
However, it should be noted that because net income also includes non-cash expenditures like
depreciation and amortization, it does not accurately reflect cash flows.

You need to look at a company's financial documents to determine its net income. On the income
statement, the net income is often stated. This report details the company's earnings, costs, and general
profitability for a given time frame. The net income, which is sometimes referred to as "Net Income,"
may be found at the bottom of the income statement once you've found it.
1.2. Depreciation & Amortization

Depreciation and amortization (D&A) are accounting techniques used to allocate the cost of long-term
assets (such as property, plant, and equipment) over their useful lives. In a DCF model, these non-cash
expenditures are added back to net income because they do not correspond to actual cash withdrawals.
By adding back depreciation and amortization, we calculate Operating Cash Flows, which reflect the
actual cash generated by the business.

Typically, the income statement or the notes to the financial statements provide information on
depreciation and amortization. Depending on the type of assets being depreciated or amortized, they
are often recorded as distinct line items under operating expenditures or cost of goods sold on the
income statement.

1.3 Change in NOWC

One of the components used to calculate FCFE (Free Cash Flow to Equity) is a change in NOWC
(Non-cash working capital). In DCF and FCFE analysis, we prioritize non-cash working capital over
regular net working capital to guarantee that the cash flows discounted appropriately reflect the
company's operational performance and are not distorted by short-term variations in working capital
requirements. Non-cash working capital has a more immediate and long-term impact on cash flows
and, as a result, is critical in appropriately valuing a company. According to Professor Damodaran's
perspective, he underscores the immediate impact of efficient non-cash working capital management
on day-to-day cash flows, as well as its long-term influence on a company's liquidity, stability, and
growth prospects. This approach is critical for accurately valuing a company because it ensures that
cash flows are derived from core operational activities, provides a more stable basis for valuation, and
eliminates distortions caused by non-operational items (Sather Research LLC, 2023).
There are two formulas for calculating NOWC, and both get the same results.
1. Non-cash Working Capital = Current assets (less cash) - Current Liabilities
2. Non-cash Working Capital = (Accounts Receivables + Inventory) - Accounts Payable
We will just detail how we chose it and collected data in the following paragraphs, as well as the
method for computing each component of the formula. The results of this calculation and the data
sources will be shown in the appendix. Because while collecting data on Yahoo Finance, the data of
the components of the second formula was not earned from 2019 to 2022, so we used the first
formula. In contrast to 2023 to 2025, we apply the second formula for the same reason.
First of all, we gathered data from balance sheet of HAGL on current assets, cash, and current
liabilities for the years 2019, 2020, 2021, and 2022. Following that, we compute the NOWC for those
years. Finally, we subtract the previous year from the following year to calculate the change in
non-cash Working Capital in each year.
We utilize the second formula to forecast the change in NOWC from 2023 to 2025 for the reason
mentioned before. However, it follows the same methods in computing the change in NOWC from
2020 to 2022.
A company's change in non-cash working capital (NOWC) increasing year-over-year indicates that
either its operating assets have grown or its operating liabilities have declined compared to the
previous period. When calculating free cash flow (FCF), an increase in the change in NOWC is
subtracted from the cash flow amount. However, if the change in NOWC is negative, the net effect is
that the amount is added to the cash flow amount. In the scenario where a company's accounts
receivables balance has increased year-over-year while its accounts payable balance has also
increased, it suggests that more customers have paid using credit rather than cash, thus reducing the
company's liquidity or the cash on hand. This impacts free cash flows as a higher change in NOWC
indicates lower FCF, while a decrease in NOWC implies higher FCF.
Thus, the change in non-cash working capital (NOWC) of HAGL is negative in 2020 and 2022, which
can indicate that either its operating assets have decreased or its operating liabilities have increased
compared to the previous period. This suggests that HAGL has potentially improved its liquidity, as a
negative change in NOWC means that the company has reduced its investment in operating assets or
increased its use of operating liabilities, resulting in a decrease in the amount of working capital tied
up in these assets and liabilities in 2020 and 2022. This could positively impact the company's free
cash flow (FCF) as a decrease in NOWC implies a higher FCF.
Reference

1.4. Capital expenditure

Capital expenditure (CapEx) refers to investment made by a company in long-term assets or projects,
such as purchasing new equipment or expanding production facilities. CapEx is the term used to
describe the capital outlay necessary to run or grow the firm. The effect of CapEx on future cash flows
must be taken into account in a DCF model since it has a direct bearing on the company’s capacity to
provide returns.

The cash flow statement's investment activities column is where we locate the capital expenditure.
Normally, cash flows for the purchase, development, or enhancement of long-term assets are included
in this part.

First, we represent cash outflows, all capital expenditures - defined broadly to include acquisitions -
are deducted from net income. Depreciation and amortization are re-added because they are
accounting expenses rather than cash outlays. The firm's growth characteristics are typically the result
of the difference between capital expenditures and depreciation (net capital expenditures).
Low-growth companies may have low, and occasionally even negative, net capital expenditures,
whereas high-growth companies typically have large net capital expenditures relative to earnings
(Penman, 2013).

Second, when working capital rises, a company's cash flows are reduced, and as it falls, equity
investors have access to more cash flows. Fast-growing businesses in sectors with high working
capital demands can experience significant increases in working capital ( (CFI, 2023). We only take
changes in non-cash working capital into account in this study because we are interested in the cash
flow consequences.

1.5. Net borrowings

Finally, equity investors also have to consider the effect of changes in the levels of debt on their cash
flows which calls net borrowings. In simple terms, net borrowing is the result of subtracting the
amount of debt repayment from the total amount borrowed. Net borrowings are added or subtracted to
FCFE (Free Cash Flow to Equity) in order to account for the cash flow impact of a company's
borrowing activities. Net borrowings represent the net change in the company's borrowing levels
during a given period. Positive net borrowings indicate a source of cash, while negative net
borrowings indicate a use of cash. By including net borrowings in the FCFE calculation, it accurately
reflects the impact of financing activities on the available cash flow for distribution to equity holders.
This ensures that the FCFE measurement captures the complete picture of the cash available to be
distributed to equity holders after accounting for all relevant factors, including the company's capital
structure and borrowing activities (Serra, 2020).

As can be seen from the table, the Free Cash Flow to Equity (FCFE) based on the provided data of
HAG from 2019 to 2022 value insights into HAG's cash flow position and its ability to meet financial
obligations while generating cash for shareholders. In 2019, the positive FCFE with 522,349,167
VND indicates that HAG generated enough cash to cover its debt repayments and still had cash left
over to distribute to equity holders or reinvest in the business. Comparing this figure to the previous
year, we observe a significant increase because the FCFE of 2020 was 5,948,082,681 VND. This
means that in 2020, HAG had a much larger amount of cash available to be distributed to equity
shareholders compared to 2019 which can be attributed to various factors such as improved
profitability, cost management, or reduced capital expenditure requirements. In 2021, even though
HAG returned to a positive net income (203,030,161 VND), the FCFE turned negative due to the
higher level of new debt issued (1,458,994,671 VND) and significant debt repayment (2,126,304,017
VND). When a company issues new debt, it increases its financial obligations, resulting in higher
interest and principal repayments. Additionally, when a company repays existing debt, it reduces its
cash flow available for other purposes, including distributing to equity shareholders as FCFE. The
combination of higher debt issuance and notable debt repayment in 2021 likely led to a situation
where the cash flow available to equity shareholders was insufficient to cover their claims, resulting in
a negative FCFE (-6,279,538,838 VND). This suggests that the company's debt-related decisions and
obligations had a substantial impact on the cash flow available to equity shareholders. In 2022, despite
the further increase in net income, the FCFE (2,716,524,257) remained positive but relatively low
compared to the previous year. This can be attributed to the balance between new debt issuance and
debt repayment. While the company issued additional debt, it repaid a similar amount, resulting in a
moderate impact on the available cash flow to equity shareholders.

In the forecasting years of 2023 to 2025, HAG's Free Cash Flow to Equity (FCFE) figures exhibit
both positive and negative values. In 2023, the FCFE is negative (-3,985,685,344 VND), indicating
that the cash flow available to equity shareholders is constrained due to higher debt repayment
compared to new debt issuance. However, in 2024 and 2025, the FCFE turns positive, demonstrating
an improvement in the cash flow available to equity shareholders. This shift can be attributed to a
better balance between new debt issuance and debt repayment, where the company issues more debt
than it repays, resulting in increased FCFE. Comparing the FCFE figures in the base years
(2019-2022) with those in the forecasting years (2023-2025), we observe fluctuations driven by
variations in net income, new debt issued, and debt repayment. In the base years, negative or
relatively low FCFE resulted from higher debt repayment relative to new debt issuance, limiting the
cash flow available to equity shareholders. However, in the forecasting years, there is a shift towards
positive FCFE due to improved net income and a better balance between debt issuance and
repayment. It is crucial for HAG to carefully consider debt obligations and assess their impact on the
cash flow available to equity shareholders to maintain a healthy and sustainable financial position.

2 | Capital Asset Pricing Model (CAPM)

According to Terraza and Mestre (2020), the Modern Portfolio Theory is founded on the writings
of Markowitz (1952). Sharpe (1964), Lintner (1965, 1981), and Mossin (1966) built on this
foundation to establish a basic model in finance that provides a straightforward relationship between
an asset's returns and its risk: the Capital Asset Pricing Model (CAPM). As a result, we will use the
CAPM model to calculate the expected return on the HAG’s stock price after taking into account risk
and time value of money factors such as free cash flow to equity and terminal value. We compute the
CAPM using the following formula:

𝐸(𝑅) = 𝑅𝑓 + β(𝐸(𝑅𝑚) − 𝑅𝑓)

where: E(R): the expected return

𝑅𝑓: the risk-free rate

E(𝑅𝑚): the expected market return

𝐸(𝑅𝑚) − 𝑅𝑓: the risk premium

We will provide the results of this calculation and the data sources in the appendix since we will
only discuss how we chose it and collected data, as well as the formula for computing each
component of the formula, in the main text.
2.1. Risk free rate

First and foremost, we search for data on risk-free rate investments and decide on the Vietnam 10
Years Government Bond, which carries a 2.54% yield (𝑅𝑓=2.54%). We chose it because foreign

risk-free rate investing is riskier than domestic investment due to increased transaction costs, currency
volatility, and liquidity threats (Nguyen & Mansa, 2023). Furthermore, while the government could
default on its securities, the likelihood of this occurring is extremely low (Vipond, 2023).

2.2. Beta

Next, we use the following formula from Kenton et al. (2022) to obtain the number for Beta (β):​

𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒(𝑅𝑒,𝑅𝑚)
𝐵𝑒𝑡𝑎 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 (β) = 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒(𝑅𝑚)

where: 𝑅𝑒= the return on an individual stock

𝑅𝑚= the return on the overall market

Covariance = how changes in a stock’s returns are related to changes in the market’s returns
Variance = how far the market’s data points spread out from their average value

As a result, we will use the data for the daily adjusted close prices of HAG's stock and the daily
adjusted close prices of the VN-Index in 2023, as a metric for return on the broader Vietnam market
since the VN-Index is the most representative index for the Vietnamese stock market, for our
calculation.

2.3. Risk premium

After gathering the necessary data, we use the following formula to calculate the return on HAG's
shares and the return on market:

𝑃𝑡
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑠𝑡𝑜𝑐𝑘/𝑚𝑎𝑟𝑘𝑒𝑡 = 𝑙𝑛( 𝑃 )
𝑡−1

where: 𝑃𝑡 = adjusted close price of the stock/market index today

𝑃𝑡−1= adjusted close price of the stock/market index in the previous day

We agree with Hudson and Gregoriou (2015) that when evaluating multi-period returns, using
continuously compounded (logarithmic) returns is preferable since the continuously compounded
multi-period return is basically the sum of continuously compounded single period returns. After
using the formula, we will get the data needed to calculate Beta (β), and the result for Beta is 1.43
(β=1.43), which would have returned 14.3% when the market was up 10%. As an outcome, a Beta
value larger than one for a stock indicates that they are outperforming the broader market. These
stocks can provide investors with significant returns. However, these stocks may also involve a
significant risk component, since the price might fall at any time to average with the current market
(IIFL Securities, n.d.). Furthermore, for the reexamination, we will use another way to compute the
Beta, which is the equation for the slope of the regression line, and the result for Beta is the same for
both methods.
Then, we will compute the expected market return (𝐸(𝑅𝑚) , which is based on the average daily

return on market from 150 daily returns, and convert it to the average yearly return on market. The
transformation formula is as follows:

(1+𝐴𝐷𝑅)
𝐴𝑌𝑅 = 250
−1

where: 𝐴𝑌𝑅: the average yearly return

𝐴𝐷𝑅: the average daily return

The number 250 is presented as an assumption that there are 250 trading days on the stock
exchange. After entering the ADR data, we will obtain the expected market return, which is around
31.82% (𝐸(𝑅𝑚) = 31. 82%).

Finally, after finishing the computation for all of the components of the expected return formula,
we will obtain the result of 44.55% (E(R) = 44.55%).

3 | Terminal Value

In financial analysis, the terminal value includes the value of all future cash flows outside of a
particular projection period. It captures values that are otherwise difficult to predict using the regular
financial model forecast period. Two methodologies, the exit multiple method and the perpetuity
growth model, are employed to compute the terminal value, which depends on the type of analysis to
be done. The exit multiple method assumes the business is sold for a multiple of some metric based on
currently observed comparable trading multiples for similar businesses. On the other hand, the
perpetuity growth model assumes that cash flow values grow at a constant rate indefinitely. The
perpetuity growth model is preferred among academics as there is a mathematical theory behind it
(Team, 2022).

𝑇𝑉 = (𝐹𝐶𝐹 𝑥 (1 + 𝑔)/(𝑟 − 𝑔)
Where:
● FCF: Free Cash Flow
● r: Cost of equity of the firm
● g: Perpetual growth rate (or sustainable growth rate)

After collecting and calculating FCF, r, and g, we apply the perpetuity growth model to reach a
terminal value of 10.879.206.460 VND. This amount represents the estimated value of HAGL’s future
cash flows beyond the forecast period, and it's a key element in determining the overall valuation of
the company using methods of DCF analysis.

4 | Sustainable Growth Rate (SGR)

According to PIMS, growth is a significant level of business prosperity. The sustainable growth rate
(SGR) is the rate at which a business can anticipate to grow in the long term without any additional
debt or equity, or using its own internal resources. The SGR can be calculated using this formula:

𝑆𝐺𝑅 = 𝑅𝑅 × 𝑅𝑂𝐸

where:

𝑆𝐺𝑅: Sustainable Growth Rate

𝑅𝑅: Retention Ratio

𝑅𝑂𝐸: Return on Equity

4.1. ROE

Firstly, we search for historical data for ROE over the period 2019 - 2022, which is 1.29%, -9.36%,
2.76% and 22.88%, respectively. To forecast the ROE for 2023, we compute the average ROE of the
previous 3 years (2020 - 2022) and obtain the result of 5.43%. Similarly, the ROE for 2024 and 2025
is 10.36% and 12.89%, respectively.

4.2. Retention Ratio

Next, we use the following formula to calculate the retention ratio:

𝑅𝑅 = 𝑅𝐸 × 𝑁𝐼

where: 𝑅𝑅: Retention Ratio

𝑅𝐸: Retained Earnings

𝑁𝐼: Net Income

The historical data for retained earnings are presented on HAG’s balance sheet, while the future data
are forecasted earlier. Similarly, we can find the data for net income on HAG’s income statement and
forecast income statement. After gathering all the necessary data, we can calculate the retention ratio
for the period 2019 - 2025.

Finally, after calculating the retention ratio and the return on equity, we can compute the sustainable
growth rate (SGR).

5 | Conclusion

From the Discounted Cash Flow to Equity analysis, it becomes evident that the present valuation of
HAG is twice its estimated intrinsic value. These values stand at 9.00 VND and 4.52 VND
correspondingly. This implies a significant decrease of 49.83% in HAG's intrinsic value. Additionally,
the distinction between intrinsic value and market price is commonly referred to as the price-to-book
ratio (P/B ratio).
Over the course of three years, the price-to-book ratio (P/B) has consistently remained at a relatively
high level, ranging from 0.49 to 1.64. This trend is indicative of a heightened investor interest in
acquiring shares of a particular company.

Nevertheless, the discounted cash flow measurement methodology itself, along with the perpetual
value of free cash flow to equity (FCFE), comes with certain limitations stemming from its reliance
on a singular discount rate. This is due to the utilization of an infinite annuity for computing the
ongoing value of FCFE, which omits the consideration of variables such as evolving debt ratios,
expanding project capitalization, shifts in return on equity towards a risk-free rate, or the mitigation of
technical risks. The capital structure of a company significantly influences its overall value,
necessitating a delicate balance between equity and debt to uphold the advantages of leveraging.
Consequently, in publicly traded enterprises, the composition of a company's capital structure mirrors
the valuation of shares owned by individual shareholders (Veronika Jezkova, Zuzana Rowland,
Veronika Machova, 2020).

Conversely, an effective evaluative measure when comparing P/B ratios is the return on equity (ROE)
ratio. This metric reflects the efficiency with which a company utilizes shareholder equity to generate
additional profits. Remarkably, HAG's price-to-earnings (P/E) ratio peaked at 60.75 during the fiscal
year 2021, indicating a significant upsurge in investor interest and stock purchases. However, this
metric underwent a swift decrease in the following year, showcasing a sharp decline in the valuation
of HAG's shares. Furthermore, the return on equity (ROE) for the past two years has surged by nearly
sevenfold, underscoring HAG's effective utilization of its shareholders' investments. Mohd. Heikal,
Muammar Khaddafi, Ainatul Ummah studies (2014) suggests that a higher return on equity is
associated with an increased likelihood of the company achieving income growth.
While it may appear that HAG's stock is currently trading at a higher valuation than warranted, this
does not necessarily imply that it's a recommended purchase or option to consider.

In summary, if we rely on the discounted free cash flow to equity (DCF) model to assess intrinsic
value, the indication is to sell the shares. This model suggests that HAG is overvalued, possibly
leading to a decrease in its stock price in the upcoming projected fiscal periods. By contrast if
shareholders factor in profitability ratios, such as the significant ratios like return on equity (ROE) and
price-to-earnings (P/E), it emphasizes HAG's capacity to generate profits through the stock market.

6 | Appendix

This is the website where we get the information on the Vietnam 10 Years Government Bond, which
was last updated on August 14, 2023.
The link:
http://www.worldgovernmentbonds.com/bond-historical-data/vietnam/10-years/#:~:text=The%20Viet
nam%2010%20Years%20Government%20Bond%20reached%20a%20maximum%20yield,%25%20(
15%20December%202021).&text=Personal%20Finance%20in%20Your%2020s,Dummies%20
This is the website where we take the adjusted close prices for the VN-Index in 2023, and we just
present a snapshot of a period (03/01/2023-11/08/2023).
The link: https://s.cafef.vn/lich-su-giao-dich-vnindex-1.chn
This is the website where we take the adjusted close prices for the HAG’s stock in 2023, and we just
present a snapshot of a period (03/01/2023-11/08/2023).
The link: https://s.cafef.vn/lich-su-giao-dich-hag-1.chn#data

This is our spreadsheet with the data, formula, computation, and results.

This is the website where we take the data for return on equity (ROE):
https://finance.vietstock.vn/HAG/financials.htm?tab=CSTC
This is the website where we take the data for retained earnings and net income:
https://finance.yahoo.com/quote/HAG.VN/balance-sheet?p=HAG.VN

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