I. Introduction

It is probable that whenever thinking of core industries playing a critical role in maintaining a

sustainable development or boosting the economy, seldom does the idea of rubber industry

spring on our mind because of the fact that not every country is endowed with fertile soil for

planting, and then favorable weather for some specific kinds of trees to flourish. Vietnam is a

tropical country which is quite an ideal place for rubber to thrive, and actually, our nation has

benefited from this type of tree to develop quite a new field- rubber industry. Basically, rubber-

related companies manufacture their products from rubber to serve both domestic and global

demands. In this industry, DRC – Danang rubber joint stock company is a well-known

corporation that has gained a lot of remarkable achievements contributing to our country’s long-

term economic development. In order for a deep insight into the company’s “health” , it is crucial

to probe into its performance via analyzing both quantitative and qualitative information which is

a proper base for an investment decision making to reach in terms of potential investors. This

report is divided into three main parts. In the first place, the paper starts with a panorama of

rubber industry from which an analysis about company strategy, operations and assessment of

the quality of financial reporting are made. After that qualitative appraisal, the report continues

to dig more deeply into the quantitative aspect through financial analysis. Finally, from the

historical figures, the paper intents to make a forecast about the future development direction

which is a reliable foundation for investors to draw the investment decision. Hopefully, this

material will be a valuable reference for further research.

II. Main contents

1. Company overview

Danang Rubber Joint Stock Company (DRC) is located at Ngu Hanh Son district, in Da Nang

city. Established in 1975, the firm has been developing for more than 35 years and has so far

accomplished remarkable achievements in rubber industry in particular and in dynamic

Vietnamese market in general.

DRC has largely put its emphasis on producing, importing and exporting rubber materials and

products as well as manufacturing and installing machinery and equipment serving for rubber

production. Besides, the firm also expands its business to participate in commercial activities.

DRC was officially listed on HCM Stock Exchange in December-2006.

Cooperating with European experts and applying the most modern technology to production

line, DRC has installed an advanced manufacturing system encompassing significantly high-1

quality and widely diversified types of products: Light truck tires, heavy truck tires, super heavy

duty tires for agriculture tractors, retreaded tires, bicycle and motorcycle tires, as well as rubber

products meeting various needs in traffic construction work, ports and automobile rubber parts.

To obtain a fruitful outcome and firm prestige, DRC has indeed has formed and maintained an

appropriate corporate strategy via its slogan: Safe and reliable on all terrain, highly performable

on heavy load, endurable over the time – DRC conquers all the roads. In the first place, DRC

has so far aimed at upgrading and improving the quality of products for the sake of its loyal

customers and for the long-lasting prosperity and development of the firm. More noticeably, its

pursuit to superior products is always accompanied by the utmost concern for ecological

maintenance. What is more, DRC has been actually marked a deep stamp in the mind of the

customers by its considerate serving. In effect, these developing plans have indeed created the

unique competitive advantage for DRC.

DRC has been proud to receive a variety of governmental awards for its fruitful operation and

brilliant performance in many years such as: The Vietnam Golden Star Prize 2010, The

Prestigious Stock Brand 2009, Top 50 Leading Listed companies on Vietnamese stock market

2009… Currently, DRC has occupied about 35% of the market share, ranking the second in

producing motorbike, bicycle tires. Its products are consumed nationwide and exported to nearly

30 countries throughout the world like: India, Hongkong, Singapore, Brazil…

2. Industry analysis

Porter 5-forces method has helped us examining the development of an industry under the

constraints of 5 different factors: Buyer power, Supplier power, Rivalry among firms, treat of

new entrants, Threat of substitutes.

First of all, the power of buyer in the tire and tube industry is low, because the product is one

kind of necessity. Besides, due to the requirement of traffic safety, buyers become the price taker

in order to ensure about the product quality. The demand is nearly inelastic to price change and

the steady demand automatically pulls products through distribution channels. Although the tire

and tube sector accounts for 75% to 85% rubber product market share, the seller can easily raise

the price when needed.

However, the power of domestic supplier is high. Because of the shortage in natural resource,

the bargaining position of the natural rubber seller has powerful bargaining power to tire and

rube companies. The power of foreign supplier is medium due to high price which results from

high import taxation.2

Industry competition is quite high. The 3 main competitors are Da Nang rubber company,

Casumina Company and Gold star rubber company. Despite the harsh competition, there is still

cooperation among those companies. Furthermore, each company has its own advantages and

market. The main rival for Viet Nam rubber companies comes from abroad. The foreign

companies have their competitive edge in the quality. Moreover, they can produce some products

that Viet Nam companies cannot such as Radial tube. Even DRC began to produce Radial tube in

2011, for temporary it is hard to compete with the quality of foreign radial tires

Threat of new entrant is low in this industry because of capital intensive requirement.

Furthermore it is hard for new company to compete with the brand of big existing companies.

The invasion of foreign companies is low due to the import barriers and the low attractive

Vietnam small market size for rubber product.

Threat of substitute is zero as there is still no other product that can replace tire and tube.

3. Company strategy analysis

3.1. Nature of the product

DRC is now offering a wide range of different product lines to meet the demand of the market.

The main products of the company can be divided into three main categories:

- Tires for motorbikes, bicycles, and technical rubber: which is the traditional product of

DRC

- Special truck tires: which DRC has the absolute advantage in Vietnamese market, with

lower price but higher quality

- Bias technology tires: to meet the demand of the big trucks

It is the fact that DRC is applying the differentiation strategy, which is illustrated by the great

effort to catch up with the demand of the consumers, and reduce the competition and market

share of the foreign producers in Vietnam. Comparing with its two close competitors, Caosumina

which majoring in producing motorbikes and light truck tires, and SRC which majoring in

producing bicycle tires, DRC seems always to be the first comer to come up with new product

ideas. Like being stated above, with more than 3,000 billion invested in the Radial project, and

the expected production capacity of more than 600,000 tires /year, DRC is becoming the first

business to produce successfully the special tires for super trucks used in special purposes.

Moreover, in the year 2010, DRC was honored to receive the golden cup for the “most effective

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business in applying technology”. This is once again emphasizes the leading and creative role of

DRC in manufacturing and developing their products.

3.2. Degree of integration within value chain

Concerning the distribution channels, DRC is experiencing great integration with its

distributors. This company is building up its own distribution network all over the country with

more than 150 point of sales. The revenue also comes mainly from this channel with more than

75%. DRC is also the main supplier of tires for such big auto-producers in Vietnam as Truong

Hai auto, TMT, HuynDai… With the stable growth of the domestic truck manufacturing

industry, this cooperation between DRC and those companies is expected to benefit the company

in the long term. Moreover, DRC is exploiting new opportunities in foreign market such as

Malaysia, Laos, Singapore … Especially with the products of tires for super trucks, used in coal

and mineral industry, DRC has its strategic consumer Vinacomin, and the other part will be

exported to India and SinDRC.

Concerning the integration with the supplier within its value chain, this company has great

support from the parent company VinaChem. With the contract of mutual support between

Vinachem and VinaGroup (VRG), the alliance of extracting latex companies, members in the

VRG will supply raw latex for members of the VinaChem. Specifically, DRC will receive the

supply from Chư Sê, Chư Prông, Quang Tri entities. And in exchange, those companies will

consume the tires product of DRC.

3.3. Geographical diversification

About manufacturing, all the production activities of DRC are located in Da Nang. And by this

time, company is step-by-step moving its factories to the outskirt of Da Nang. As the schedule,

in the 4th quarter of this year, it will finish the displacement of factories producing tires for bike

and motorbike from inner Da Nang to Lien Chieu industrial zone. After that, the movement of

other factories which produce tires for trucks and tractors will be continuously moved during the

time of 2012 – 2013.

However, in contrast to that, the distribution network of DRC is widespread. As we said above,

DRC has about 150 points of sale in all 64 provinces which helps to bring products to last

customer. Besides that, DRC also speeds up exporting activities. Up to now, it has the customer-

base in 27 countries in Asia, Europe and America. Especially, it has established direct sale agents

in Laos, Cambodia, and Singapore. An optimistic result is that about 25% revenue of DRC

comes from exporting.4

3.4. Industry diversification

DRC just focuses on horizontal diversification by manufacturing, distributing and providing

related services in tire producing industry. In June 2011, Board of Management decided to add

real estate business in the Business Registration of the company. However, it has been clarified

that this activity doesn’t mean that DRC will invest in real estate market but it only leases unused

offices and factories

4. Accounting analysis

4.1. Company operation

In the period 2008 - 2010, the economic situation in the country and the world was unfavorable

and highly volatile. In 2008, right following the “heated credit” time was the downturn period

which was the result of the global financial crisis. In the beginning of 2009, interest rate and

material price was good for production but this status did not last long. The period from end of

2009 to now witnessed unstable condition of the economy with very high CPI and loan interest,

scarce funding. Government’s intervene action was passive and undirected.

In this macro-economic condition, Danang Rubber Company seemed to be sustainable. Despite

of the hard time, DRC continue to grow with increasing trend in net income (See chart 1

(appendix A). Net income in 2009 was outstanding because company took advantage of low-

price material reserved previously. This made the Cost of goods sold in the first half of the year

reduced by 40 billion in comparison with the first two quarter of 2008. Selling price also

increased in accordance with market price. Therefore, in 2009, revenue increased considerably

by 40.87%, the net income was 6.6 times higher than in 2008. But this was not a long-run

advantage. As we can see on the Figure 2 (appendix A) in the recent 2 years, rubber price, which

is the most important component of company’s product price, was increasing substantially. This

brought the COGS of DRC from just about 71% in 2009 to the normal level of about 83%.

Income in 2010 is lower than in 2009 but if we readjust income in 2009 from the abnormal

effect; the figure in 2010 is still satisfactory.

About the product strategy, at end of 2010, DRC have produced with 56% higher than

designed volume. For the purpose of increasing output, company has planned a new production

site which can produce a modern type of tire – radial tire, meeting the demand of tire for super-

heavy vehicles. This factory planned to be nearly 373 billion VND, 70% debt funding and will

finish in 2012. Therefore, in 2011 and 2012, we can anticipate an increase in debt account and

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increasing in revenue will mostly rely on increasing selling price – which cannot be significant.

But we can hope in the noteworthy boost in revenue when new factory come into production

4.2. Critical accounting policies

Inventories recognition

Inventories are recorded as the lowest cost between their original costs and net realizable value.

Cost of inventories are determined in accordance with the weighted average method and

recorded in line with the perpetual method, which is persistent in every year.

Provision for devaluation of inventories is recognized when the original costs are higher than

the net realizable value.

Account receivables

Account receivable is recognized at the values on supporting documents and invoices.

Provisions for bad debts are estimated by using the aging method. The details are followed the

Circular 228/2009 TT-BTC by Ministry of Finance.

Tangible fixed asset

Tangible fixed asset is determined by their historical costs less accumulated depreciation. The

historical costs include the purchase price and any capitalized expenditure putting the assets into

operation.

Fixed assets are depreciated in accordance with the straight-line method over their estimated

useful life.

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Assets Estimated useful life (years)2010 2009

Building, architecture objects 5 – 25 10 - 25Machines, equipment 3 - 12 7 - 12Transportation means 6 – 10 6 - 10Management appliances 5 3 – 8

Table 1: DRC's accounting policy for estimated life of fixed assets

In 2010, company changed depreciation rate of some fixed assets to assure the rationality of

their estimated useful life.

Revenue recognition

Sales of goods are recognized when most of risks and benefits associated with the goods

ownership are transferred to customers. Sales of service are recognized when services are

performed completely. In case that the services are provided in many accounting periods, the

determination of sales in each period is done on the basis of the service completion rate at the

end date of fiscal year.

Revenue from financing activities: Interest income is recognized on the basis of current time

and interest rate; dividend income is recognized when company has the right to receive it.

4.3. Quality of financial reporting

For the financial statements to be audited annually Danang Rubber Company has AAC as the

independently auditing unit, which is one of the 200 member firms of Polaris International - an

international association of accounting firms that is committed to being identified as an

organization representing the traditional values of independence and integrity in providing

professional services.

AAC conducted the audit report for the fiscal year of 2010, saying that they applied the

necessary sampling method and experiments, relevant evidences to examine the information in

the financial statements. In accordance with Vietnamese current accounting standards together

with accounting principles and explanations provided by DRC, the auditors concluded that the

financial statements reflected honestly and fairly the financial situation of DRC at 12 th December

2010 and the results of business and the cash flows for the fiscal year ending 12th December

2010. The opinion of auditor in the financial press is unqualified.

5. Financial analysis

With the understanding about the tire producing industry and operation of DRC, in this part,

we explore more details about performance of DRC by analyzing its financial statements. The

figures will be examined to generate information about four aspects: liquidity, solvency,

profitability and cash flow. In order to reach more meaningful assessment about DRC, we also

compare it with The Southern Rubber Industry Joint Stock Company (CSM) and Sao Vang

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Rubber Joint Stock Company (SRC), which together with DRC dominate tire producing

industry.

5.1. Liquidity analysis

First of all, we look at revenue to cash ratio and days revenue in cash from the table 2 below.

These 2 ratios reflect how long the revenue from operation is held in cash. The shorter the

revenue stays in cash, the more efficient the company is. In 2008, the days revenue held in cash

decreased from 10.77 to 7.18. It is because in this year the revenue increased 10.32% while the

cash balance decreased nearly 60%. The underlying reason may be that DRC invested much in

fixed asset and construction. In 2008, the cash outflow for investing in fixed asset and

construction increased 112% compared with 2007. After that, the revenue went up continuously

in 2 years (40.46% and 19% relatively), however, it was still lower than the speed of increase in

cash account. As the result, the days revenue held in cash turned out to be 9.32 in 2009 and 15.72

in 2010. In comparison with SRC and CSM, in general, the time DRC held revenue in cash was

higher. The possible reason is that while DRC focuses on producing tire and tube for trucks,

CSM concentrates on tire and tune for motorbikes and SRC’s main products are for bikes. So the

cycle of capital of these two firms is shorter and they need to hold little cash.

Table 2: Liquidity ratios

Next, we analyze the current ratio and quick ratio, two most important measures of liquidity to

find the ability of DRC to meet current liabilities. The figures from the table show that both

current and quick ratio decreased in 2008 and reversed in 2009 and 2010. It’s reasonable because

in 2008 as the effect of financial crisis, there were the downturns in all industries not only tire

producing. The balance sheets of DRC point out that in 2008, current liabilities increased from

44.8% to 49.3% of total assets but the current assets decreased from 74.9% to 69.8%. Also as the

explanation of company, compared with 2007, in 2008 DRC must pay about 22bil VND extra as

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DRC SRC CSM

Year 2007 2008 2009 2010 Average 2007 2008 2009 2010 2007 2008 2009 2010

Revenue/Cash 33.9 50.81 39.15 23.22 36.77 40.9 120 26 41.6 17.6 23 54 42

Days revenue in cash 10.77 7.18 9.32 15.72 10.75 8.9 3 14 8.77 20.73 15.82 6.73 8.65

Current ratio 1.67 1.42 2.96 2.66 2.18 0.96 0.86 1.1 1.21 1.23 1 1.5 1.82

Quick ratio 0.72 0.45 1.1 1.1 0.84 0.34 0.21 0.5 0.32 0.5 0.32 0.55 0.83

OCF/Current Liability 3.96 0.3 2.22 0.16 1.66 2.73 0.21 1.45 0.09 3.45 0.27 2.13 0.18

the rise of interest rate and 17bil VND extra for the change in exchanged rate. That would

decrease the cash account or increase the account payable so decrease current ratio. In relation

with industry, DRC always dominates for the liquidity. In all 4 years the current ratio and quick

ratio for DRC were higher than both SRC and CSM.

About operating cash flow to current liabilities, in 2008, there was a big fall-down from 3.96 to

0.3 because the operating cash flow decreased about 90% (from about 980bil VND to 91bil

VND). The operating cash flow decreased that much is due to increase in price of main materials

(rubber and black coal) in 3 first quarters of 2008, in financial cost (as said above), and selling

and administration expense(25%) as well. As the data from statistic agents, up to the 3rd quarter

of 2008, price of rubber increased 50% and price of black coal was 20-30% higher than the

beginning of the year. However, in the 4th quarter of 2008 and the 1st quarter of next year,

because of financial crisis, price of rubber decreased quickly before went up again. DRC caught

this opportunity to buy rubber for inventory when the price was low. So, in 2009, cost of goods

sold decreased from 86.1% to 69.7% of total revenue. Together with that were the higher

products’ price and the lower proportion of current liabilities. So the ratio reversed to 2.22 in

2009. In 2010, DRC must pay corporate income tax after 4 years of exemption. And the cost of

rubber was still more expensive from 2nd quarter of 2009. Consequently, operating cash flow to

currents liabilities decreased to 0.16.

We continue liquidity analysis by looking at the net days working capital of the 3 companies

calculated for the 4-year period

Table 3: Net days Working Capital

The Days receivables of DRC decreased from 2007 to 2010 indicating that firm needed less

time holding accounts receivable till collection. The reason is that DRC’s Net sales grow up at a

high level, by 40.6% in 2009 and 19% in 2010. On the contrary, CSM and SRC had increasing

Days receivable in the 4-year period, which the result from high level of account receivable in

CSM and falling Net sales of SRC.

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DRC SRC CSM

Year 2007 2008 2009 2010 Average 2007 2008 2009 2010 2007 2008 2009 2010Days AR 39.56 38.54 24.82 28.4 32.83 22.58 21.32 38.89 46.71 18.14 18.73 18.66 21.17Days Inventory 81.84 84.03 87.4 80.16 83.36 72.23 83.51 93 88.52 81.29 88.43 96.08 73.92Days AP 7.6 4.33 4.74 4.93 5.40 11.1 10.93 15.04 15.9 9.2 10.99 11.58 4.72

Net Days WC 113.79 118.24 107.47 103.62 110.78 83.7 93.9 116.86 119.33 90.23 96.16 103.16 96.36

The Days inventory of DRC went down in 2010 although it had rising pattern from 2007 to

2009. In 2009, DRC had very low Inventory turnover rate because of low level Cost of goods

sold, 69.7% in common size, but the Inventory turnover rate rose in 2010 as the result of high

increasing of Cost of goods sold, by 38%. The reason is in 2009 DRC had a large amount of

inventory reserved from last year at low cost; in 2010, as the effect of high oil price, the cost of

goods increased. It also explains for the impressive increase Net sales of DRC in 2009 when

Cost of goods sold was low but market price of its products was high. CSM had the same trend

Days inventory with DRC that was high in 2009 but lower in 2010, SRC’s Days inventory

maintained at high level.

Because of the decrease of both Days receivable and Days inventory, the Net days working

capital of DRC decreased in 4 years, indicating that the firm could reduce its short-term liquidity

risk. SRC with high number of Days receivable and Days inventory, the Net days working

capital increased regardless of the growth of Days payable. CSM’s Net days working capital was

also higher than that of DRC.

In general, DRC is the company with lowest short-term liquidity risk among the 3 large

competitors in rubber industry in the period of 2007-2010.

5.2. Solvency risk

After looking at the short term liquidity risk, we should also pay attention to the long term

solvency risk to have a better view about the financial health of DRC Company. This part

includes examining 6 ratios: Debt/ TA, Debt/Equity, L-T Debt/L-T Capital, L-T Debt/SE,

Interest coverage ratios, and OCF/TL

Table 4: Solvency risk ratiosFrom the table above, it is seen that the first four ratios illustrate the degree of debt usage by

the company. And it is easy to realize this group of ratios shared the same trend: rather high in

the first 2 years and decreased dramatically in the last 2 years. The reason came from the sudden

decrease in Total Liabilities in year 2009 and 2010, especially in year 2009 with change of

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Year DRC SRC CSM

2007 2008 2009 2010 Ave. 2007 2008 2009 2010 2007 2008 2009 2010

D/A 0.643 0.648 0.29 0.312 0.47 0.73 0.77 0.52 0.43 0.67 0.75 0.59 0.58

D/E 1.802 1.845 1.409 1.455 1.63 2.34 3.27 1.09 0.75 2.41 2.93 1.47 1.4

L-T Debt/ L-T Cap 0.354 0.306 0.072 0.055 0.20 0.23 0.366 0.146 0.69 0.28 0.35 0.133 0.097

L-T Debt/Equity 0.547 0.441 0.078 0.058 0.28 0.41 0.58 0.17 0.07 0.37 0.54 0.15 0.11

Interest coverage ratio4.21 2.15 29.79 30.03 16.55 5.8 N/A 8.3 4.74 2.36 1.028 1.634 1.573

OCF/Total Liabilities 2.639 0.237 1.311 0.167 1.09 1.86 0.035 0.573 0.261 0.16 -0.326 0.553 0.037

-42.79% due to the contribution of decline in both current and long-term debts, together with the

fast growth in total assets and total equity for the same period. As after the big economic

depression in 2008, the company began to recover and had the ability to pay back some part of

their debts obligations. Moreover, with a breakthrough of OCF as well as NI in 2009, the firm

could generate enough cash itself to finance their operations without much dependent on outside

sources of funds. The change in total assets and total liabilities were explained by the huge

investment project of DRC in manufacturing Radial tires, which required the growth in assets

and equity during 3 years from 2009 to 2011. The details are showed in the table 1 (appendix B)

All the above changes point out good trend in the solvency risk of the company. The cut in all

debt ratios signals the less likely in failing to honor long-term obligations of the company. Also,

in comparison with its competitors, DRC showed a lower use of debts. This may be considered

not being efficient in taking advantage of the financial leverage; however, it could be a wise

strategy for firms in current high inflation period with so high borrowing cost.

Turning to the interest coverage ratio, there seems a significant change between period before

and after 2008. Year 2007 and 2008, the company tended to keep this rather low but still met the

benchmark of 2. It is due to the favorable tax treatment of the company from 2006, which levied

no corporate tax on rubber companies as well as the tax reduction of 50% for those who were

first listed on the HCM stock exchange. Year 2009, DRC still benefited from the free tax

treatment, but the interest coverage ratio seems to be improved remarkably as a result of the

sudden rally in Net Income resulting from the extremely cheap input price, the cut in interest

expenses since the company relied less on debts together with the cut in borrowing cost. And this

ratio was maintained through year 2010. In comparison with its competitors, this firm showed

better prospect in managing the ability to pay back interest.

The last ratio (OCF/TL) experienced high rate in 2007 and 2009 because DRC could generate

high cash from operations during these two years. The low one in 2008 was explained by the

general economic downturn of the world, while the other in 2010 was attributed by the cease of

enjoying tax benefit. However, DRC always appeared to outperform the other two, and could

maintain a positive OCF even in hard times.

From all the analysis above, it is clearly shown that DRC has strong ability to meet long term

obligations and keep going concern in the future.

5.3. Profitability analysis

a. Return on assets

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The full overlook on the profitability of Danang Rubber company can be achieved by

comparing its profit figures with its main competitors, Southern Rubber company (CSM) and the

Sao Vang Rubber company (SRC).

Table 5: Return on asset ratios

First of all, the return on asset of DRC increased significantly just before its fell in last year to

about half of the previous year’s level. Starting at higher level than other competitors, DRC

insisted its position in the industry as a major company (35% tire market share) with ROA of

above 15% in comparison with 6% and 7% of SCR and CSM respectively. In the bull trend of

the industry, together with other company like SRC, DRC also had it profit increase 3 times to an

amazing level of 58% in 2009. In 2010, with the down trend of market, return on asset of Da

Nang Rubber Company fell significantly to half of 2009 level but still at very good level of 22%

in comparison with under 10% ROA of its competitors.

The fall of DRC’s return on asset in 2010 can be explained through examining its two

disaggregating components, profit margin and asset turnover. Of those two profit margins

appeared to be the main reason.

First, the deep fall in the income was resulted from the sharp rise of Cost of goods sold, from

14% in 2009 to 38% in 2010. This reflected the increase in the raw material price increase in

2010. DRC had to import a large proportion of it raw materials when ironically the latex supply

domestically is used to export. Another reason is tax effect. DRC got tax exempt from 2006 till

2009 therefore in 2010 the income after tax decreased by 50% in comparison with past year level

when tax is excluded from expenses.

Moreover, one component contributing to the decrease in ROA is asset turnover. It is

questionable to see that asset turnover of DRC decreased in 2010 while both competitors have

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DRC SRC CSM

Year 2007 2008 2009 2010 Ave 2007 2008 2009 2010 2007 2008 2009 2010

ROA 0.17 0.16 0.58 0.22 0.28 0.06 0.06 0.22 0.07 0.07 0.01 0.22 0.12

Profit margin for ROA 0.08 0.07 0.22 0.09 0.12 0.03 0.03 0.11 0.03 0.04 0.23 0.13 0.06

Account Receivable turnover9.33 9.67 15.03 13.2 11.81 16.26 15.51 16.57 16.77 19.02 18.49 17.75 11.83

Inventory turnover 4.46 4.34 4.18 4.55 4.38 5.05 4.37 3.92 4.12 4.49 4.13 3.8 4.94

Fixed asset turnover 8.3 8.18 8.99 8.68 8.54 3.74 3.75 4.43 5.52 8.3 7.36 7.26 8.54

this ratios rise. Although the decrease is not huge, it is worth considering as DRC went on

opposite direction to market at this ratio.

According to the tables above, the fall in asset turnover of DRC can be explained mainly by

the fall in Account receivable turnover, from 15 times to 13 times. While other competitors had

their receivable turnover improved, DRC went on contrary direction. Furthermore, the increase

by 0.5 times in inventory turnover was offset by the fall of nearly 1 time in fixed asset turnover.

All of those above things suggest that DRC should pay more attention to credit sale activities and

fixed asset management so that their profit will not be harmed.

b. Return on capital equity

Table 6: Return on Capital Equity Ratios

On the other hand, ROCE measures the income allocable for common shareholders. From this

table we can see that ROCE of DRC in comparison with its two main rivals is notably more

competitive. This can be the result of higher TA T/O and CSL. The lowest ROCE was in 2008,

due to heavy interest force. Interest expense in this year was double than previous year. But the

following year was almost opposite; with very low interest expense (only equals to about 30% of

last year), high income, which lead to an exceedingly pleasing outcome for common

shareholders.

Profit margin for ROCE of DRC is higher than that of CSM or SRC, which indicate that the

proportion of earning allocable for DRC’s common SHs, after subtracting all expenses and debt

financing cost is acceptable and prospective.

CSL is the degree to which firm uses common shares to finance assets. DRC has noteworthy

high CSL in comparison with its two opponents. It means that DRC seems to prefer debt

financing to finance for assets while other companies prefer Equity. But we can see a decreasing

trend in CSL of DRC, which go against the other two rivals. It mainly results from growing

Equity while total liabilities do not change much over time.

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DRC SRC CSM

Year 2007 2008 2009 2010 Ave. 2007 2008 2009 2010 2007 2008 2009 2010

ROCE 0.636 0.364 2.556 0.85 1.10 0.161 0.005 0.633 0.089 0.19 0.021 0.688 0.333

Profit margin for ROCE 0.06 0.039 0.212 0.088 0.10 0.029 0.001 0.094 0.013 0.041 0.004 0.116 0.052

Capital structure leverage 4.905 4.218 4.549 4.007 4.42 2.908 3.184 3.519 3.557 2.688 3.232 3.601 3.453

Assets turnover 2.163 2.197 2.651 2.399 2.35 1.902 1.784 1.917 1.99 1.716 1.574 1.641 1.851

In conclusion, we can see that DRC is having a desirable level of profitability in a relatively

high competitive environment so it could be wise to invest in this company for long-run value.

5.4. Statement of Cash flow analysis

Statement of cash flow is a financial statement that shows how changes in balance accounts

and income affect cash and cash equivalents, and breaks the analysis down to operating,

investing, and financing activities. Essentially, the cash flow statement is concerned with the

flow of cash in and cash out of the business. The cash flow statement is intended to provide

information on a firm's liquidity and solvency and its ability to change cash flows in future

circumstances, provide additional information for evaluating changes in assets, liabilities and

equity.

By having a deep insight into DRC’s statement of cash flow (table 3 – appendix B), it entitles

us to a more detailed picture of corporate operation of this company. Looking at the Cash flow of

DRC from 2007 to 2010, it was noted that the firm generated positive cash flows throughout the

years despite their profound fluctuations especially in 2008. DRC created a high cash flow in

2007 but sharply declined by about ten times in 2008. Though operating activities made greater

revenue in 2008 than in 2007, this amount could not compensate for the firm’s suppliers expense

and interest expense. In 2009, However, there was indeed a dramatically fivefold growth in the

sum of cash flow from operation compared to 2008 mainly owing to a considerable increase in

the cash inflow from selling, providing services and others, together with a significant decrease

in interest expense. Nevertheless, DRC, once again underwent a drastic plummet in 2010 chiefly

due to a remarkable rise in supplier expenditure and labor salary as the result of a noted increase

in the amount derived from services and selling. In addition, on the grounds of corporate tax

expense that was deductible during four years, the firm borne this burden in 2010 which reduced

substantially the revenue gained in the year. However, In comparison with SRC- another leading

company in rubber industry, DRC ran its business effectively to reach a by far more fruitful

outcome by dint of the fact that the firm generated much more cash from operation than SRC in

four-year period and it did not experience any loss like SRC did in 2008.

Regarding the cash flow from investing activities, it is noteworthy that in the four-year period

between 2007 and 2010, the cash outflows exceeded the cash inflows due to the expenditure on

acquiring both current and long-term assets, along with purchasing securities and taking out

loans (2009) and investing in other companies (in 2010).In fact, DRC spent much greater amount

14

of cash on investing activities compared with SRC especially in 2008 when DRC poured into

investment about 100 billion VND, which was five times more than SRC spent in that year.

Nevertheless, during those years, DRC actually made some proceeds from sale of several fixed

assets, retaking the lent amount and revenue from investment that could compensate partly for

spending on fixed assets.

In terms of financial activities, cash flows generated were negative for three years apart from

2010. From 2007 to 2010, DRC paid out large amount of short-term and long-term borrowings

which imply that the firm relied much on outside financing for fixed assets purchase. Moreover,

it was accompanied by dividends paid out from 2008 to 2010 that made the amount received

back from short-term borrowers unable to compensate for. Notwithstanding, exclusively in 2010,

since the dividend amount to be paid out for shareholders was reduced notably for the purpose of

investing in some potential plans, together with a slight increase in the amount repaid by

borrowers, the total cash flow from financing activities in 2010 brought in a bright picture. To

compare with SRC, although this company ‘s losses over the years were not so huge as DRC,

even SRC’s financing activities yielded a positively large amount of cash in a year of financial

disaster ( 2008), but DRC surpassed SRC spectacularly in 2010 by roughly ten times.

After all transactions relating to operating, investing and financing, the net change in cash

flow were positive at all except for the figure in 2008 due to some certain impact from financial

calamity worldwide. This scenario was actually desired to its rival – SRC for the reason that

SRC’s net change was negative in all of four years.

6. Valuation

6.1. Forecasting Income Statements

a. Sales and COGSAccording to the statistics calculated over a 4 year period, DRC’s sale growths were

approximately 26.3%(2007), 10.32%(2008), 40.64%(2009), 19.01%(2010) and about 21.46% as

the statistics calculated throughout 3 quarters of the year 2011. Based on the information from

VnEconomy, the average economic growth rate in Vietnam in 2010 was roughly 6.78%,

however it was then reduced to about 5.57% during the first six month of year 2011 (Report

122/BC-CP). In addition, from Economy and Forecast review, Vietnam’s economic growth rate

is projected to be 6.5% in 2012. Clearly, there is a positive sign in the growth rate perspective

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which can rely on to expect for an even more profitable scenario in 2012. Moreover, in the

article wrote by Pham The An (2011), the author analyzed that the inflation rate may continue to

increase in the last period of this year but it will not rise so dramatically like the first months of

the year. Especially, DRC is intend to launch a new product that is designed and installed

professionally during the year 2011.This product is promisingly hoped to raise the firm revenue

as a result of attracting an increasing number of customers and expand its market share.

Notwithstanding, the new product also costs an amount for advertising and some other expenses.

Therefore, taking all these matters into consideration, we forecast the next year’s net sale growth

to be about 22% compared with 2011. After one year, when the new product gains its customers’

recognition and adjusts itself to the market, we expect the sale growth will go up by 2%,

reaching 24% in 2013. This trend, however, is anticipated not to continue in the period from

2014 to 2016 on the ground that the new product may lose its competitive advantage gradually as

time goes by or it cannot live up to the customers’ expectation as they hope. Furthermore, taking

unpredictable ups and downs in the economy as a whole into account, it is probable that the sale

growth of DRC Company may drop to approximately 20%. The gross sales will be derived from

the fact that net sales account for about 98% of gross sales revenue.

In forecasting operating expense, after considering historical figures from 2007 to 2009, the

average amount of Cost of goods sold was about 84.79% of the gross revenue. However, because

of the launch of the new product, the company may have to include other expenditures. Thus, it

might be possible that the operating expense is 85% of the gross profit on average.

The details about these above items can be found in the following table:

(in million) 2012 2013 2014 2015 2016Sale growth rate 22% 24% 20% 20% 20%Gross revenue 3,266,143 4,050,017 4,860,020 5,832,024 6,998,429 Net revenue 3,200,820 3,969,016 4,762,820 5,715,384 6,858,460 COGS 2,776,221 3,442,514 4,131,017 4,957,220 5,948,665

Table 5: Sales and COGS projectionsb. Expenses & Other Income

Financial income

Assuming that the company holds cash through the years, it will earn an interest amount equals

to 9% of cash.

Financial expenses

Financial expenses include Loan interest expenses and others. Analyzing past years, the Loan

interest expense was around 8% of company’s total borrowings. Therefore, we assume that in the 16

next 5 years, it will be at same level towards total short-term and long-term borrowings

(calculated by 8% of average total borrowings on balance sheet)

Selling and administrative expenses

The selling and administrative expense are expected to experienced the same trend as sale

growth, with 2 first years high and gets to stable stage in later years. Taking into consideration of

average percentage of these two expenses to sale level, we project selling and admin costs as

follow:

- Selling expenses: 2.5% 2.0% 1.5% 1.5% 1.5%

- Administrative expenses: 1.8% 1.7% 1.4% 1.4% 1.4%

Other income

Other income is assumed to be 0.27% of net sales revenue during the next 5 years.

Other expenses

Other expenses are estimated at 0.18% of net sales revenue from 2012 to 2016.

6.2. Forecasting Balance sheet

Before coming to the valuation of RDC to decide whether this company is fairly priced or not,

we have to estimate financial statements up to a certain point in the future. We choose period

2011-2016 as our forecasting horizon. The FS of 2011 will be estimated by using extrapolation

from the data of 3rd quarter, whereas the following years data will be projected using the

assumptions below.

a. Projecting assets

Inventories

We base on the inventory turnover ratio to forecast average inventory for each year, and then

derive the ending balance of the same year. The inventory turnover of 4.37 are kept constant and

used as the key forecasting items.

Projecting fixed assets

The fixed asset of DRC composes of three main items: tangible and intangible fixed assets, and

construction in progress. However, for the purpose of simplicity, we just make the projection for

total fixed assets without breaking down them to smaller items. We first estimate net fixed assets

as percentage of sales, deriving from the historical average fixed asset turnover of 8.5. Average

useful life of PPE is estimated by the formula below and result in 15.8 years:

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Average useful life = PPE at cost /Depreciation of current year

From all the given data about net fixed asset, accumulated depreciation, and average useful

life, we calculate annual Depreciation by:

Annual Depreciation =

And finally the PPE at cost is estimated by summing up the net fixed asset and accumulated

depreciation for the current year as the table below has detailed

Long-term investment

Looking at the historical trend of this investment category of this company, the level of

investment seems to be kept constant for several years before taking any changes. Thus, we

assume that Long-term investment in further years should keep the balance of that in 2011.

Cash, Account Receivable, other current and fixed assets

In projecting these three items, we all base on the proportion to total assets to forecast for the

consequent years. The table below shows the detail of historical trends and the average number

of these ratios

Although it is more preferable that account receivable should increase with sale growth

through future years. However, it should be noted that the Account Receivable of 2011 is

unusual high, and we do not expect this trend to happen again. As a result, using ART will affect

a lot the consequent years’ ending balance. To put it another way, the ending AR is derived

directly from the percentage of total assets, with the decreasing trend as noted in the table.

Turing to forecasting cash, as it is preferable that the firm should keep some cash to maintain

liquidity, we project cash to increase around the average percentage of TA of 4.6%, with little

decrease to 3% in 2012 since in further years, the company does not need to hold a lot of cash

when the Radial project and the new product introduction phase are all over. The same trend is

expected to happen with other current and fixed assets with the first year’s balance is around

average number and then falls as fund is released from the necessity of making early payments

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(main component of other assets) to boost sales in recent years. The detail balances of these

items as well as the number of total assets are described in the table below:

(in million) 2012 2013 2014 2015 2016 Net sales 3,200,820 3,969,016 4,762,820 5,715,384 6,858,460 Account receivable AR Turnover 11.3 11.3 11.3 11.3 11.3 Average AR 283,258 351,240 421,488 505,786 606,943 Beginning 511,414 55,103 647,378 195,599 815,973 Ending 55,103 647,378 195,599 815,973 397,913 Inventory Inventory turnover 4.37 4.37 4.37 4.37 4.37 Average balance 634,710 787,040 944,448 1,133,338 1,360,006 Beginning balance 634,710 787,040 944,448 1,133,338 1,360,006 Ending balance 686,023 888,058 1,000,839 1,265,837 1,454,174 Fixed assets Fixed asset turnover 8.5 8.5 8.5 8.5 8.5 Average Fixed asset (Net) 384,252 476,473 571,767 686,120 823,345 Net Fixed asset beginning 309,369 459,135 493,810 649,724 722,517 Net Fixed asset ending 459,135 493,810 649,724 722,517 924,173 Accumulated Depre.(last) (511,905) (577,516) (649,903) (737,716) (836,380)Annual Depreciation 65,611 72,387 87,813 98,664 118,956 Average useful life 15.8 15.8 15.8 15.8 15.8 Fixed asset at cost 1,036,652 1,143,713 1,387,440 1,558,897 1,879,509 Acummulated Depre.(current) (577,516) (649,903) (737,716) (836,380) (955,336)Account Receivable, Cash, other current and fixed assetsAR/TA 18% 18% 16% 15% 14%AR 273,936 330,568 341,593 371,434 409,295 Cash/TA 4.60% 4.60% 4.60% 3.00% 3.00%Cash 70,006 84,479 98,208 74,287 87,706 OCA/TA 0.78% 0.78% 0.78% 0.65% 0.65%Other current assets 11,871 14,325 16,653 16,095 19,003 OFA/TA 0.80% 0.90% 0.90% 0.70% 0.70%Other fixed assets 12,175 16,528 19,215 17,334 20,465 Total percentage 24.18% 24.28% 22.28% 19.35% 18.35%TA final 1,521,869 1,836,490 2,134,954 2,476,226 2,923,539 TA(exclude 4 items) 1,153,881 1,390,590 1,659,286 1,997,076 2,387,069

Table 6: Asset projectionsb. Projecting liabilities

Current liabilities

Short-term borrowings

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In the past DRC used to use much short-term borrowings, around 40% or more of total assets.

But 3 nearest years, this ratio decreased much to just above 10%. It may be because the volatility

of the economy and the some nuisance caused by such a big radial project. With the confidence

about the more stable macro-factors and the prospective of DRC we increase the weight of short-

term borrowings in total assets to 30% in 2012, 40% for the rest years.

Account payable (to suppliers)

The amount of account payable will be determined by the future credit purchase of company.

In the last 4 years, the days of account payable were just above 4, except 7.6 in 2007. The

average days account payable, excluding 2007, was 4.67. We assume that DRC will maintain

this figure in the future. In this case, to forecast account payable, firstly, we forecast the

inventory purchase for each year and then, use days account payable to calculate.

Advances from customers, payables to employees, short-term provision

Due to the fact that 2 first items are directly related to operation of business, we forecast them

by let them growth with sale growth rates.

About short-term provision, it only appears in 2011 with small amount. So that we charge it as

nonrecurring items

Taxes and other payables to the State Budget

This account includes tax payable (income tax, VAT) and others fees. It is varies with many

other factors (tax rate, tax settlement, tax payment,..). From the data of recent year, this item is

not significant, only about 0 – 1.86% of total assets. So, in the following year, we will estimate it

as 1% of total assets

Accrued expenses

After 3 years disappearing, this item recurring in 2011 with very higher amount (0.8% of

sale). We believe that the reason is that the radial project has taken too much capital of DRC.

And, in the future, when the project comes to finish and operate, this item will decrease.

Consequently, we forecast it as descend percentages of sale, 0.2% in 2012, 0.1% in 2013, 0.05%

in 2014 & 2015, and 0% in 2016.

Other payables

20

Other payables are very related to operation of the business. The figures of the previous years

proved that on average, other payables is equal to 0.4% of sale. We also use this rate in the

forecasting period.

Welfare funds

DRC states that, each year it will put 8% of net income of the year into welfare funds

Adding = 8%* net income

Amount used = beginning balance+ adding – ending balance

% used =used/(beginning balance+ adding)

The table points out that, on average, each year, 0.8 of the amount of money put in this fund is

used. So, we forecast the ending balances for next years will be equal to beginning balance plus

adding and multiply with 0.2.

Long-term liabilities

Long- term borrowings

It’s easy to see that except for 2011, DRC didn’t rely on long term loans as a heavy source of

capital. The proportion of long term loans in total assets decreased fast over the years to 3.89%

in 2010. However, it’s is nearly 11% in 2011. This increase is reasonable because DRC started

radial project in mid-year. Although, the construction will be continue in 2012, we expect that

the funds need to be disbursed is not too much and DRC can repay some with the cash from

operation. As the result, we assume that long term borrowing will decreased 14% in 2012 and in

following years when the project come to operation, this ratio will be 20% (the average %

decrease in the amount in previous years except 2011).

Provision for severance allowancesAs the requirement of the government, each year company needs to put aside 1-3% salary

resource for severance allowances. The historical data shows that, on average, the average

balance of provision for severance allowances was about 2.2% of total salary expenses. With

level of uncertainty about future, we keep this percentage 2.5% in our forecast.

(in million) 2012 2013 2014 2015 2016Account payableCOGS 2,776,221 3,442,514 4,131,017 4,957,220 5,948,665 Ending inventory 686,023 888,058 1,000,839 1,265,837 1,454,174 Beginning inventory 583,397 686,023 888,058 1,000,839 1,265,837 Inventory purchase 2,878,847 3,644,549 4,243,798 5,222,219 6,137,001 days AP 4.37 4.37 4.37 4.37 4.37Average balance 34,499 43,675 50,856 62,581 73,543 beginning balance 44,094 24,904 62,445 39,266 85,895

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ending balance 24,904 62,445 39,266 85,895 61,191 Welfare fundsadding 11,122 10,095 13,776 17,608 21,922 beginning 13,215 4,867 2,992 3,354 4,192 used 19,470 11,970 13,415 16,769 20,892 ending 4,867 2,992 3,354 4,192 5,223

Table 7: Liabilities projectionsc. Projecting Equity

Common stockAs in year 2011, we use the information of 3 quarters to estimate the balance of the year, the

company common stock value VND512,820,706,667 , in which par value is VND 10,000 per

share. In the next 5 years, it is assumed that the company would maintain its common stock

value at equal to the previous year’s balance.

Share premiumThe account remained unchanged during the analyzed years at VND 3,281,000,000. Therefore,

it is expected to be stable at that level in the forecasting horizon.

Investment and development fund, financial reserve fund and other fundsAs the balance of these funds fluctuate significantly during the years from 2006 to 2010 due to

the use of company on funds, which is hard to detect, we treat them as plug-in items on Balance

sheet.

Retained earnings

In the period from 2012 to 2013, we assume that the company continues using the same plan

of distributing the profit as it used in prior years:

2012-2013 2014-2016Profit after tax( 25% tax) 100% profit after tax 100% profit after taxInvestment and development fund

Financial reserve fund

Welfare fund

Bonus for management

5% of profit after tax

5% of profit after tax

8% of profit after tax

VND 1,000,000,000

5% of profit after tax

5% of profit after tax

8% of profit after tax

VND 1,000,000,000

Dividend17% nominal value(VND 1,700 per share)

20% nominal value(VND 2,000 per share)

Table 8: Retained earning projection

Following this plan, each year the company will take a portion of money out from the profit

after tax to put into funds and reward the management, pay dividend then add the remaining to

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the retained earnings balance of the very previous year (see table 2 & 3, appendix A). Therefore

net income in statement of cashflows will be lower than profit after tax.

Given all the balance sheet and the income statement estimated above, the cash flows

statements are derived for the year from 2011-2016, and then they will be used as inputs for

valuation of the company.

6.3. Free cash flow valuation a. Calculation of Free Cash Flow to common equity holders

The details about FCF calculation are provided in Appendix D

b. Valuation

We use the below assumptions to estimate firm’s value:

VALUATION PARAMETER ASSUMPTIONS (Unit: VND)COST OF EQUITY CAPITAL:

Equity risk (i.e. beta) (ß)(15/12/2011) -0.01

Risk free rate (Rf) 9.00%

Market risk premium (Rm-Rf) 8.80%

Required rate of return on common equity: 8.91%

Current share price (15/12/2011) 17,20

0

Number of shares outstanding 30,769,248 Current market value 529,231,065,600

Long-run growth assumption 4.00%

Table 9: Valuation assumptionsBase on the projected financial statements we have derived in previous sections, we now try

to figure out the value of the firm from equity shareholders’ point of view. The value of firm

comprises two parts which are the present value of periodic cash flows for equity shareholders

and the continuing value of cash flows after 5 years of prediction period.

Firstly, it is easy to calculate the PV of periodic cashflows with all data available. The risk

free rate (Rf) we used is the current prime rate of SBV which is 9%. According to Pablo, Javier

& Luis (2011), the market risk premium of Viet Nam is 8.8%. The beta of DRC at December

15th,2011 is -0.01. Then we can calculate the required rate of return by using CAPM model to

derive Re equal to 8.91%. Periodic cashflows then were discounted at this Re to get the PV of

412,180,668,419. (Details on periodic cashflows calculation, see in Apendix D)

Secondly, to calculate the continuing value of cashflows out of the prediction period, we

use assumptions that is future cashflows from 2016 on will grow at the constant growth rate g

equal 4% for the years after prediction period. Applying the Gordon growth model, we

calculated the continuing value of the firm at year 2016 equal 1,030,625,193,213, discounted at 23

Re to get the present value of 672,762,317,010. Here, taking into account midyear accounting

effect, we can derive to the total PV of all cashflows or the value of firm at present equal

1,133,250,071,855.

The firm currently has 30,769,248 shares outstanding. Dividing the calculated value of firm

to equity shareholders by number of share, we got the actual value per share of firm equal

36,831. In comparison with the current DRC share price, it is clear that DRC stocks are

underpriced by about 53%.

Details about estimation:

Sum of PV free cash flows 412,257,712,265

Terminal value of continuing cash flows 1,029,156,468,385

Present value of terminal value 671,587,712,631PV of free cash flows for common equity shareholders 1,083,845,424,895

Adjustment to midyear discounting 1.0446

Total PV free cash flows to equity 1,132,141,577,029

Shares outstanding 30,769,248

Estimated Value per share 36,795

Current Share Price( at 15/12/2011) 17,200

Percent difference -53%

Pricing Underpriced

Table 10: Valuation details

III. Conclusion

All in all, DRC has run in quite a favorable environment on the ground that although it faces

fierce competition from other firms and low demand from customers in general, the corporation

benefits from abundant numbers of suppliers, low threat of new entrant and especially, it has no

perfect substitute. In fact, DRC is currently one of the leading companies in this industry with the

developing strategy of differentiation which easily gains competitive advantage. Moreover,

compared to other large companies in the same sector, DRC is really outstanding in regard to its

ability of managing and running to generate a promising and desirable amount of cash. A good

history makes a potentially fruitful future. Through a fundamental projection, it can be seen that

DRC is forecasted to continue to generate positive cashflows for investing purposes. In this

anticipation, the company is thought to spend a large amount in investing activities in the near

future for further expanding and developing, and in order to be afford for that objective, DRC is

predicted to manipulate external sources besides its own cash. After all these matters, Danang

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Rubber joint stock company deserves attention and investment from both domestic and

international investors.

\

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www. drc .com.vn

http://www.stockbiz.vn/

http://stox.vn/stox/

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