BUSINESS ANALYSIS AND
VALUATION
Lecturer: Trinh Quoc Dat, PhD
Resources:
Business Analysis and Valuation by Palepu, Healy, Bernard
Equity Asset Valuation by J. Pinto, E.Henry, T. Robinson, J.Stowe
Damodaran on Valuation by Aswath Damodaran
CONTACT
TRINH QUOC DAT, PhD.
Email: tqdat@hcmiu.edu.vn
Consultation hours: Wednesday (afternoon) and by
appointment
Room: #305
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COURSE ASSESSMENT
Elements
Weight
Project report
30%
Written report (group): 20%
Presentation : 10%
Mid-term Exam
30%
Final Exam (Individual)
40%
TOTAL
100%
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RESOURCES
Books (not strictly required):
 Business Analysis and Valuation by Palepu, Healy, Bernard
 Equity Asset Valuation by J. Pinto, E.Henry, T. Robinson, J.Stowe
 Damodaran on Valuation by Aswath Damodaran
Database on annual reports (for group project):
 Publicly traded US firms www.sec.gov/edgar.shtml
 Publicly traded VN firms www.vietstock.com; www.vndirect.com.vn
(and some other securities companies’ websites)
 Or company websites, under “Investor Relations”
Database on financial information:
 Yahoo Finance at www.finance.yahoo.com
 CNN at www.money.cnn.com
 Wall Street Journal at www.wsj.com
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“If
business schools could offer just
one course, it would not be on stock
trading, the efficient market
hypothesis or modern portfolio
theory. Rather, B-schools should be
encouraging students to learn the
boring, but critically important,
discipline of business valuation.”
Warren Buffett
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WHAT IS THE PURPOSE OF BUSINESS
ANALYSIS?
Finding problems (Analyzing the
problems) (Erasing the problems)
(Predicting problems)
Analyzing Data (Let data do the talking
and serve as the departure point of
analysis)
Proposing solutions
WHY VALUATION?
Valuation helps to answer the question: “ What is this
company worth?”
- It is the process of determining the fair value of a company,
or the price at which the company is fairly valued
Who needs valuation?
- Business owners: commencing a sale process, business
planning, future decision-making, access to external sources
of funding, and litigation purposes (including divorce )
- Investors (exisiting and potential): identify the “intrinsic
value”  can set buy and sell range for the security
ex: Buy at 10% below the valuation level, or sell at 30%
above the valuation level
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THIS COURSE IS DESIGNED TO…
Incorporate financial statement analysis skills to
understand how accurately the financial statements filed by
management reflect the health and value of a business
Then Value firms and stocks using valuation techniques:
- Intrinsic valuation (Discounted Cash Flow, Dividend
Discount Model)
- Relative valuation (price multiples)…
Discuss the sensitivity of estimated stock values to
various assumptions
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IMPORTANT CONCEPT FOR ANALYSIS
Doing Analysis from the whole ，Solving problem from
the point
It means that if you do not use Systematic Concept to do
analysis, you can not find the real problem.
A FRAMEWORK FOR BUSINESS ANALYSIS AND VALUATION
USING FINANCIAL STATEMENTS
Financial statements are the basis for a wide range
of business analysis.
A firm’s financial statements summarize the
economic consequences of its business activities.
The role of financial reporting in capital market
From Business activities to financial statement
From Financial statement to Business Analysis
COURSE CONTENT
Topic 1 : Business strategy analysis for developing an
understanding of a firm’s competitive positioning within its
industry, its key success factors and risks
Topic 2: Accounting analysis for judging how effectively a firm’s
financial statements reflect its business economics and strategy
Topic 3: Financial analysis for examining ratios and cash flow
measures of operating and financial performance
Topic 4: Prospective analysis for constructing meaningful
forecasts of future performance and estimating firm valuation
using valuation techniques (intrinsic and relative valuation)
Topic 5: Analysis of mergers and acquisitions and corporate
restructuring
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VALUATION TECHNIQUES
METHODS THAT DO NOT
INVOLVE FORECASTING
1. The method of comparables
Values stocks on the basis of
price multiples (stock price
divided by earnings, book value,
sales..) that are observed for
similar firms
2. Asset-based valuation
Values equities by adding up the
estimated fair values of the assets
of a firm and subtracting the value
of the liabilities
METHODS THAT INVOLVE
FORECASTING
1. Dividend Discount Model
Value = present value of expected
Dividends
2. Discounted Cash Flow Analysis
Value = present value of expected
Free Cash Flow
3. Residual Earnings Analysis
Value = Book value + present value of
expected Residual Earnings
4. Earnings growth Analysis
Value = capitalized earnings + the PV of
expected Abnormal Earnings Growth
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INVESTMENT AS A PROFESSION
Investing in Firms: the outside analyst
Credit analysts: evaluate the riskiness – and thus the value – of
business debt
Ex: Standard & Poor’s; Moody’s Investment Services; Fitch
ratings ; or bank loan officers
Equity analysts
- Buy-side analyst: perform equity research for money managers,
investment funds…
Ex: investment analysts in Vina Capital, Dragon Capital, VIG…
- Sell-side analyst: provide the research to support retail investors
through their brokers
Ex: equity analysts in securities companies like SSI, HSC..
Investing in Firms: the inside analyst
Business analyst
Strategy analyst
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CONVENTIONAL ACCOUNTING EQUATION
FROM ACCOUNTING PERSPECTIVE
Assets
Liabilities & Equity
Current assets
Current liabilities
Fixed assets - tangible
Long-term liabilities
Fixed assets - Intangible
Equity
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CONVENTIONAL ACCOUNTING EQUATION
FROM A FINANCIAL PERSPECTIVE
Assets
Liabilities
Existing investments
Generate Cash Flows today
Includes long-lived (fixed) &
short-lived (working
capital) assets
Assets
in
place
Expected value that will be
created by future
investments
Growth
assets
Debt
Equity
Fixed claims on Cash Flows
Fixed maturity
Tax deductible
Residual claims on Cash Flows
Perpetual lives
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Why, in the first place, do
investors need valuation skills
while there are intermediaries
(brokers, investment bankers)
who do the job for them?
Sell-side analyst’s incentives and
investors’ incentives are not fully aligned!
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MINI-CASE 1: DOT-COM CRASH OF 2000
1990’s: witnessed a global technology revolution that started
with the personal computer (PC) and then Internet era
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MINI-CASE 1: DOT- COM CRASH OF 2000
This gave rise to a “new economy”: companies that base
their business model around exploiting the Internet, as
opposed to the “old economy” (manufacturing, retail,
commodities)
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MINI-CASE 1: DOT-COM CRASH OF 2000
How market responded?
- The capital market seemed to think similarly: “new economy”
was the future and old economy companies would become
less relevant”
- Analysts insisted that traditional financial analysis was no
longer relevant. “The “new economy” demands new ways of
thinking.”
As a result…
From July 1999 to February 2000 (7 months)
NASDAQ COMPOSITE INDEX (heavily weighted with
technology and internet stocks) : up by 74.4%
DOWN JONES INDUSTRIAL AVERAGE (composed mainly of
old economy stocks): fell by 7.7%
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MINI-CASE 1: DOT-COM CRASH OF 2000
What happened next?
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MINI-CASE 1: DOT-COM CRASH OF 2000
Because it is a bubble, it has to burst!!!
In February 2001, all these stocks were trading at one-digit number!!!
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MINI-CASE 2: FPT IN VN STOCK MARKET
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MINI-CASE 2: FPT IN VN STOCK MARKET
How did the company reach this peak?
…It was possible, given the company’s growth in Revenues,
Net Income over years before the IPO, echoed by the macro
conditions and investor expectations that time…
(in ‘000s)
2006
2005
2004
Revenue
21,339,751
14,100,792
8,734,781
Net Income
450,436
301,378
174,818
2003
2002
4,148,298 1,514,960
43,894
17,979
Investors were paying too much for growth!!!
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HOW BUBBLE WORKS
In a bubble, investors behave as if they are joining a
chain letter.
- They adopt speculative beliefs that are then fed on
to other people
- These speculative beliefs are facilitated by talking
heads in the media, by analysts and poor financial reporting
- Each person believes that he will benefit from more
people joining the chain, by buying the stock and pushing
prices up
 Bubble forms, only to burst…as speculative beliefs are
not fulfilled
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WISDOM TOLD…
Some golden rules for valuing a business
• One does not buy a stock, one buys a business
• Value depends on the business model, the strategy
• Good firms can be bad buys: avoid the risk of
paying too much for a stock (ex. paying too much for
growth, “new knowledge”, etc..)
• Don’t mix what you know with speculation
• Stick to your beliefs and be patient, prices gravitate
to fundamentals, but that can take some time
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SOME FINAL THOUGHTS…
Key point in investment: Understand not only what the
value is, but the sources of the value
A good valuation does NOT mean a precise estimate of
the value
Since valuation involves making assumptions (uncertainties)
A well-done valuation is NOT timeless: Value will change
as new information is revealed..
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SUMMARY OF VALUATION PROCESS
THE TYPICAL FLOW
Understanding
the business
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Forecasting
the future
1. Information
collection
1.
2. Industry and
strategies
analysis
3. Accounting
analysis
4. Financial
analysis
2.
3.
4.
Structured
forecasting
Income
Statement
forecasts
Balance
Sheet
forecasts
Financial
analysis
Valuation
1.
2.
Cost of Capital
Valuation
models
3.
Valuation
ratios
Complications
4.
TUTORIALS
NOT YET !!!
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BUSINESS ANALYSIS
AND VALUATION
ABOUT YOUR GROUP PROJECT REPORT…
PROJECT REPORT
Form groups of 4-5 students (no team should have fewer
than 4 or more than 5 students)
Analyze and value a company of your choice:
- Could be US or Vietnam companies
- No company should be analyzed by more than 1 group
(first come first served) – deadline 2 weeks from now by
email
- Be prepared to discuss and defend your analysis in the
presentation sessions – 2 last sessions of the course
- Presentation: partial group grades, partial individual
grades applied
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HOW TO CHOOSE A COMPANY FOR YOUR GROUP
PROJECT…
Stay away from:
- Financial services companies: SSI, PVF..
- Banks: VCB, EIB, ACB..
- Insurance companies: BVH, OGC..
Not because they are bad or not worth to look at, but
because they, by nature of their industry, have special
regulations and characteristics that complicate your
valuation
Also avoid companies that operate in multiple industries
like FPT,…  difficult to point out their core businesses
and thus strategies..
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HOW TO CHOOSE A COMPANY FOR YOUR GROUP
PROJECT…
After you filter such companies, you can go with some
suggested criteria:
- Blue-chip stocks
- Market capitalization
- Historical price movements/fluctuations
- Time the company went public (preferred to have at least
3 years of historical financial statements)
Some safe companies to work on: VNM, DHG, KDC,…
these companies have a track of stability, clear strategy
and focus on core business  easier to predict future
performance
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