- For companies with fast growth rates: Companies with fast growth rates often use most of their profits to expand production and business, in order to maintain a high growth rate. Therefore, using the dividend discount valuation method will not be feasible. If investors have a complete business plan and financial plan and the company operates in an industry that can be predicted at a relatively accurate level, the cash flow discount method can be used to value these businesses. However, valuing companies with high growth rates should use the P/E method proactively. The reasonable P/E level for these types of companies is equal to the average annual growth rate of the company in the coming years. For example, if the company is forecast to grow at an average of 25% per year in the next 10 years, the reasonable P/E level of this company is 25 times. The combination of the discounted cash flow method and the P/E method must be done reasonably. In the author's opinion, it is reasonable for investors to use 60% for the P/E method and 40% for the discounted cash flow method.
- The company is on the decline: The characteristic of these companies is that their business operations are at a loss, so they are only operating at a moderate level or are having to reduce the size of the People's Council. Because their business operations are at a loss, it is impossible to use the dividend discount method or the P/E method to value these companies. The commonly used method when valuing these companies is the valuation method based on net asset value. And the discounted cash flow method can be used to re-check the valuation results according to the valuation method based on net asset value, which is still the main method.
- Cyclical companies: When valuing cyclical companies, the most important thing is for investors to predict which stage of the development cycle the company is in. From there, make accurate forecasts for the assumptions needed for valuation. For these types of companies, the cash flow discount method is the most accurate, but investors should also rely on other valuation methods to check the results such as the dividend discount method and the method based on net asset value. However, for companies in this group, to improve investment efficiency, determining the investment time at the time of capital withdrawal is more important than valuation.
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Analysis and valuation of stocks of growth companies listed on the Vietnamese stock market - 1 -
Basics of Securities and the Stock Market - 51 -
Factors affecting the liquidity of stocks listed on the Vietnamese stock market - 4 -
Development Orientation of Vietnam Stock Market -
The Role of Valuation in a Market Economy
- Companies with hidden assets: The characteristic of companies in this group is that they have valuable assets but are not included in the balance sheet and most investors are not aware of these assets of the business. For example, companies that own many land ownership rights, valuable mining rights, patents, etc. The strategy of investors when targeting companies in this group is to buy these cheap stocks and wait for some factor to affect investors to know the value of the company's hidden assets, then the stock price will increase and previous investors will sell to make a profit. Therefore, the ratio between the real value of the company and the current trading price on the market is very important. The best valuation method for this group of companies is the net asset value method, which of course takes into account all of the company's assets, regardless of whether they are included on the balance sheet or not.
2. Select parameters and assumptions for valuation
When valuing any company, by any method, we have to make a number of assumptions. These assumptions are important.
because it directly and greatly affects the valuation results. The discounted cash flow valuation method and the discounted dividend flow method are the two most complex methods and require the most assumptions.
- Choosing the discount rate: When valuing by the dividend discount method or cash flow discount method, we must choose the appropriate discount rate, then the valuation can give the correct result. The popular formula for choosing the appropriate discount rate is based on the CAPM model. The difficulty for investors in Vietnam is determining the coefficient and the average market return. The average return on the Vietnamese stock market can be determined in the range of 15% to 20%/year. To determine the coefficient , we can base on the average return in the last 3 years of that stock, compare it with the average return of the market. We can calculate according to the formula: = (Average return in the last 3 years of the stock) / (average return of the market).
- Choosing assumptions about revenue, profit, cash flow: The company's revenue and profit in the following years are assumed based on the assumption about the company's growth rate. The company's growth rate depends on the company's return on equity (ROE) and the rate of retained profits for reinvestment. Investors can calculate the company's ROE on average over the previous 5 years, and the rate of retained profits for reinvestment depends on the company's dividend policy. This information is usually available in the company's annual report or in the prospectus published by the company. Usually, companies in a period of high growth will spend most of their profits for reinvestment and pay low dividends, and conversely, companies with slow growth will spend most of their profits to pay dividends to shareholders.
Investors either buy back their own shares to make treasury stocks, which is also a way to return money to investors, and at the same time support the company's stock price on the market from falling sharply, affecting the company's image. Although investors assume that the growth rate of the company's revenue and profit is equal to ROE multiplied by the retained earnings ratio for reinvestment, it is also necessary to take into account the factors supporting the company's growth, such as the ability to expand the market for current products and the ability to develop new products, the feasibility of investing in new projects. The assumption of the company's cash flow will be equal to the company's after-tax profit, plus annual depreciation, minus the difference in current assets and minus the cost of investment in fixed assets.
- Selecting parameters for valuation using the P/E ratio valuation method: Valuation using the P/E ratio method is a simple method, often used with other methods for verification. The parameters that need to be selected for valuation using this method are the average P/E ratio of the industry, which can be done based on selecting a sample of companies in the same industry and with similar business operations. Then take the average P/E of the industry multiplied by the EPS of the company in the last four quarters and we will get the price of each share of the company. However, when valuing using this method, it is important to note that the company's use of financial leverage must be equivalent to the industry average because if the company uses too much leverage, the company's operating risk will be greater than the industry average. Then we have valued the company higher than the industry average, because the price the company has to pay for that EPS is greater than the industry average. And conversely, if the company uses financial leverage lower than the industry average, when valuing using this method we are also determining
A price per share of the company is lower than the industry average. Another thing to note when valuing by this method is that we compare it with the industry average at the time of valuation, so we can value the company's shares high or low depending on whether the stock price on the market at the time of valuation is high or low. Therefore, the price determined by this method is only relative and can change at the time of valuation depending on the trend and state of the market.
In addition, investors can also refer to and use the parameters of other developed stock markets such as Thailand, Singapore, Japan, the UK or the US. These indicators will not be completely accurate for the Vietnamese stock market because the Vietnamese stock market has its own characteristics. Therefore, if investors use the parameters of foreign stock markets, they should use the Sensitivity Analysis method to adjust the parameters to suit the Vietnamese stock market.
III. CONDITIONS FOR IMPLEMENTING THE SOLUTION
1. For the Government and state management agencies
1.1. Increase the accuracy, completeness and timeliness of information disclosure by businesses
The Government plays an important role in enhancing the accuracy, completeness and timeliness of information disclosure on the Vietnamese stock market. The Government and state management agencies such as the State Securities Commission need to issue more detailed and complete regulations on information disclosure by listed companies. In the initial stage, the Government can influence through administrative measures such as closely inspecting and supervising information disclosure; establishing departments to collect and disclose information to the public. At the same time, it is necessary to encourage and require some industries and fields to have operational audits.
actions of enterprises to increase the accuracy of disclosed information. Gradually, administrative measures should be removed and replaced by measures that encourage enterprises to disclose information accurately, completely and promptly.
The government and state management agencies should also facilitate the development of information selling companies , which are companies that specialize in collecting and providing professional information. These companies will provide the most honest information about businesses, helping information users avoid asymmetric information, thereby analyzing and valuing stocks more accurately. Before developing information selling companies in an effective and organized manner, management agencies need to research, test and implement legal documents related to the establishment, organization and operation of professional information selling companies. The development of these professional information selling companies will contribute significantly to creating information transparency in the Vietnamese stock market, thereby helping analysis and valuation activities to be more convenient and accurate.
1.2. Completing the industry and market information database system
Along with increasing the accuracy, completeness and timeliness of information disclosure, there needs to be a database system sufficient to enter and disclose information on economic sectors, business data such as income, growth, average costs, etc. This is beneficial to the economy in general and is especially useful for stock analysis and valuation.
To complete the industry and market information database system, in parallel with collecting complete information of enterprises, there needs to be a specialized state agency including highly qualified analysts to collect and analyze business information by industry, by field and economic region, from which to make statistical estimates.
General estimated parameters for the market. Thanks to the general information about the industry and the market, analysts and valuers will have a basis to evaluate and compare the business to be valued with other businesses in the same industry, or can more easily estimate the parameters for valuation, thereby helping to analyze and value stocks more accurately.
1.3. Development of credit rating organizations' activities
Any stock market has credit rating organizations. These organizations will help securities companies and investors save time and money in collecting and processing information, through professional working methods and may have some exclusive authority to collect information. Thanks to the credit rating system, firstly, for businesses, credit ratings help companies expand domestic and foreign capital markets, reduce dependence on bank loans; at the same time, ensure the stability of funding sources for the company, highly rated companies can maintain the capital market in almost all circumstances, even when the capital market has adverse fluctuations. The higher the credit rating, the lower the loan interest rate, investors are willing to accept a lower interest rate for a safer partner... Second, for credit institutions: to support credit institutions in making credit decisions, monitoring and evaluating customers, and controlling risks more effectively... Third, for investors: they can know the risk level of each investment, thereby comparing and evaluating the profit-risk relationship between instruments to find the most beneficial instrument; ensuring investment efficiency and capital safety. Securities companies choose the best investment portfolio; creating conditions for capital mobilization on the stock market to be implemented more easily and conveniently.
In developed countries, credit rating agencies play a very important role in the market, because with an objective perspective and a professional management system, these credit rating agencies contribute greatly to making the investment environment more transparent. For valuation activities, credit rating reports are the basis for easier and more reliable valuation activities.
Vietnam needs to learn from developed countries in the world, develop the activities of corporate credit rating organizations to create transparency for the market and create trust for information users to analyze and evaluate stocks. Credit rating organizations in Vietnam have developed in the following directions:
- Government organizations or government agencies: with current conditions in Vietnam, credit rating organizations have the most conditions to operate, especially when they have the participation of the Government. According to the analysis in the above section, obtaining information from current businesses is difficult. Therefore, if in the position of a state agency, this organization has more conditions to perform its tasks. Of course, this must be a business organization, not a public service unit.
- Foreign credit rating organizations: Foreign credit rating organizations such as S&P, Meryll Lynch... have many strengths to perform this job in the Vietnamese stock market such as technology, experience, and human resources.
- Mixed company form: is a combination of the two forms above. This form of organization can have the advantages of both forms above. The problem is that there must be preparation from the Vietnamese Government before establishment.