VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY THE INTERNATIONAL UNIVERSITY SCHOOL OF BUSINESS

Advisor: Mr. ROBERT T. CONNOLLY Student name: TRAN THI THANH THUY (BA070150)

Ho Chi Minh city, Vietnam 2011

APPLICATION OF CAPM (Capital Asset Pricing Model) IN VIETNAM STOCK MARKET

APPROVED BY Advisor Mr. Robert T. Connolly, MBA

APPROVED BY: Committee, Dr. Le VinhTrien, Ph.D., Chair

________________________________ Ms. Le Hong Nhung, MBA

________________________________ Ms. Hoang Thi Anh Ngoc, MBA

________________________________ Mr. Robert T. Connolly, MBA

________________________________ Ms. Le Thi Kim Chi, MBA

THESIS COMMITTEE (Whichever applies)

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ACKNOWLEGEMENT
It is with deep gratitude and appreciation that I acknowledge the professional guidance of Mr. Robert T. Connolly. His constant encouragement and support help me to achieve my goal. My gratitude also goes to Mr. John Harackiewicz and Mr. Hua Chia Yee for their generous support. Their practical advice and comments help me a lot in improving this paper. I am also grateful to the faculty of the School of Business Administration of the International University. Gratitude is also expressed to the members of my reading and examination committee, Dr. Le VinhTrien, Ms. Le Hong Nhung, Ms. Hoang Thi Anh Ngoc and Ms. Le Thi Kim Chi.

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LIST OF TABLES
Table 1: VN Index annual return 2001 2010, calculated from data source ................ 6 Table 2: Country bonds rating ....................................................................................... 7 Table 3: VN Indexs return demonstration .................................................................. 16 Table 4: Balance sheet of VNM in 2008 and 2009 ...................................................... 18 Table 5: Income statement of VNM in 2008 and 2009 ............................................... 19 Table 6: FCFE 2009 of VNM ...................................................................................... 20 Table 7: VNMs FCFE................................................................................................. 22 Table 8: Investment decision result of VNM when using CAPM 1 ............................ 23 Table 9: Investment decision result of VNM when using CAPM 2 ............................ 23 Table 10: Test result..................................................................................................... 25 Table 11: Test result for buy stock only ...................................................................... 26 Table 12: Analyze the sensitivity of cost of equity on the changing of Beta .............. 27 Table 13: Analyze the sensitivity of cost of equity on the changing of market return 28 Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate . 28 Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity ...................................................................................................................................... 29 Table16: LIST OF 31 SAMPLE STOCKS .................................................................. 37 Table 17: TABLE OF RESULT CAPM 1 ................................................................ 39 Table 18: TABLE OF RESULT CAPM 2 ................................................................ 42 Table 19: TABLE OF PROFIT/LOSS ......................................................................... 45 Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION ........................................................................................................... 47 Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION ........................................................................................................... 49 Table 22: TABLE OF BETA AND COST OF EQUITY ............................................ 51 Table 23: TABLE OF FCFE GROWTH RATES SENSITIVITY ANALYSIS ........ 52 Table 24: TABLE OF VIETNAM INFLATION RATE ............................................. 52 Table 25: TABLE OF VIETNAM GDP GROWTH RATE ........................................ 52

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LIST OF FIGURES
Figure 1: Security Market Line (SML) ...................................................................................... 4 Figure 2: VN Index Time period ............................................................................................. 14 Figure 3: The sensitivity of cost of equity on the changing of Beta ........................................ 27 Figure 4: The sensitivity of cost of equity on the changing of market return .......................... 28 Figure 5: The sensitivity of cost of equity on the changing of risk free rate ........................... 28 Figure 6: The sensitivity of estimated price on the changing of cost of equity Error! Bookmark not defined.

TABLE OF CONTENTS
LIST OF TABLES .................................................................................................... IV LIST OF FIGURES .................................................................................................... V CHAPTER 1: INTRODUCTION .............................................................................. 1 CHAPTER 2: LITERATURE REVIEW ................................................................. 3
A - CAPITAL ASSET PRICING MODEL (CAPM) ....................................................................... 3 B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE)......................................... 5 C - CAPM APPLICATION FOR EMERGING MARKET............................................................. 8 D - STOCK VALUATION METHOD THE DISCOUNTED CASH FLOW METHOD ............. 9 1 - Dividend Discount Model (DDM):................................................................................................. 9 2 - Discounted Free Cash Flow to Equity (Discounted FCFE) .......................................................... 10

CHAPTER 3: METHODOLOGY........................................................................... 12
A - TRADITIONAL CAPM APPLICATION ................................................................................ 13 BETA CALCULATION .................................................................................................................... 13 MARKET RETURN CALCULATION ............................................................................................ 15 B - CAPM APPLICATION FOR EMERGING MARKET ........................................................... 16 C - FREE CASH FLOW TO EQUITY (FCFE) ............................................................................. 17 D - INTRINSIC PRICE CALCULATION AND DECISION MAKING ...................................... 23

CHAPTER 4: RESULT............................................................................................ 25
A - TEST RESULT ......................................................................................................................... 25 B - SENSITIVITY ANALYSIS RESULT ...................................................................................... 27

CHAPTER 5: DISCUSSION / IMPLEMENTATION .......................................... 31

A RESULT EXPLANATION ...................................................................................................... 31

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B LIMITATION OF THE TEST................................................................................................. 32 C IMPLEMENTATION IN PRACTICE .................................................................................... 32

CHAPTER 6: CONCLUSION & RECOMMENDATION................................... 34 LIST OF REFERENCES .......................................................................................... 35 APPENDIX ................................................................................................................. 36

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CHAPTER 1: INTRODUCTION
CAPM Capital Asset Pricing Model is the most famous model used to estimate the cost of equity. However, this beautiful and easy-to-apply model has met lots of criticism (CFA curriculum). The reason is because the assumptions are difficult to meet and the result is difficult to test. Theoretically, CAPM is proven to be not a correct measurement, especially in emerging markets like Vietnam. The questions are: Does CAPM actually work in Vietnam market? Can investors use CAPM as an effective investment tool? Therefore, the purpose of this paper is to test whether investors can use CAPM to make profit in the Vietnam stock market. This paper has no interest in testing the accuracy of CAPM, but testing the potential profitability of using CAPM in making investment decisions in the Vietnam stock market, specifically in HOSE Ho Chi Minh stock exchange. The test was constructed in 31 random stocks of HOSE, which are listed before 2008 and the time range of the test is from 2008 to 2010. The idea is to estimate an intrinsic price of each stock at the end of 2009 based on cost of equity calculated by CAPM, assuming that present time is the end of 2009. Then, compare with market price at the end of 2009 and make buy/sell decisions. For example, if the intrinsic price calculated based on CAPM is higher than the market price on Dec 2009, a buy decision will be made and vice versa. After that, those buy/sell decisions will be checked whether they were profitable decisions based on the historical price data available in 2010. Again, CAPM Capital Asset Pricing Model is a standard and available model built from Markowitz portfolio theory in order to estimate cost of equity, the name itself demonstrate the objective of CAPM. The main purpose of this paper is to test the investment profitability when using the cost of equity, calculated by a popular and world wide accepted model. In other words, this paper do not test whether the value

of cost of equity calculated by CAPM is correct or not; instead, this paper want to test whether the buy/sell decision based on that cost of equity is profitable. The reason why I do not test the accuracy of CAPM is because cost of equity is an estimated number and there is no factual one for comparison.

CHAPTER 2: LITERATURE REVIEW

A - CAPITAL ASSET PRICING MODEL (CAPM) For any investment decision, it is very important to estimate the intrinsic value or the correct price of the investment. By estimating the correct price, investors can see whether that asset is underpriced or overpriced so that he or she can make a buy or sell decision. CAPM Capital Asset Pricing Model is the most well-known and accepted pricing model. CAPM is used to estimate cost of equity, also called as investors expected return which is an important component to determine intrinsic price of a stock or intrinsic value of a firm. Capital Asset Pricing Model (CAPM) was built from Harry Markowitzs portfolio optimization Model. According to Markowitzs portfolio optimization Model, when the portfolio is well diversified, it will eliminate all unsystematic risk (diversifiable risk) and only systematic risk (undiversified risk) is left. Market return accounts for all risky assets trading in market, so there is no unsystematic risk such as industry risk, company risk, etc but only systematic risk, the risk that all market suffers like country risk, interest rate risk, (Those are macro factors which affect the whole economy) The line that shows the relationship between expected return and systematic risk () is called Security Market Line (SML)

Figure 1: Security Market Line (SML)

Even when there is no systematic risk, the expected return still equals to Risk free rate of return (Rf) the expected rate of return of risk-free asset. SML slopes upward because of higher risk, higher return. In fact, CAPM is the formula of SML, which is a regression line: ( )

The logic is to estimate expected return based on the return investor can earn without risk and the equity risk premium, which is the difference between the whole economy return and that non-risky return. Beta is the slope of the SML, which show the level of risk. Since SML slopes upward, risk and return has a positive relationship, higher risk, higher return. There is no negative Beta. Indeed, the expected return itself always contains the risk in it. The logic of CAPM is that: In order to estimate the expected return (cost of equity) of a single stock, we just have to compare it with SML by calculating a new Beta - the sensitivity of that stocks return with the market return. In other words, market return is used as a benchmark and we adjust stock return cost of equity of each stock according to market return by calculating the sensitivity of stock return to market return, and this sensitivity is expressed by Beta:

(CFA curriculum, level 1 2010) Then, we apply the CAPM formula: ( )

ke is the cost of equity, the return of the stock that we are looking for. Rf is the return of risk free assets or it is the interest rate of government bond since government bond is considered to have no credit risk. In the U.S., 10 year Treasury bond is used. RM is the market return. If what we are looking for is stock return then the market return is the index return. In US market, we use S&P 500s return, which accounts for 75% of U.S. market capitalization (standardandpoors.com). Since market return is used as benchmark, the Beta of the market will be 1 and the stocks Beta will fluctuate depending on their sensitivity to market return. Different stock has different Beta because they have different risk relative to market Beta. If a stocks Beta is less than one, we say it is a defensive stock and if more than one, it is an aggressive stock. As a result, an investor will have different expected return over different stock. In a corporation, equity is owned by stock holders so that expected return over a stock is also called cost of equity. Therefore, CAPM is actually very easy to apply. However, when applying CAPM in Vietnam market, there are many obstacles and many assumptions are required. B - CAPM APPLICATION IN VIETNAM STOCK MARKET (HoSE) Assume that current year is 2009. It is now the end of 2009 and we are calculating the expected return to make investment decisions. The original CAPM formula is: ( )

If we apply CAPM to HOSE similarly to U.S stock market then we have:

kA: Cost of equity, expected return of stock A (what we are looking for) Rf: risk free rate interest rate of Vietnam government 10 year term bond A: systematic risk based on stock A return covariance with VN-Index return RM: VN-Index return in 2009 Reasons why the original CAPM might be expected to fail: 1- CAPM was built from Markowitz portfolio theory so it has a same assumption, market return must consist of all risky assets of the whole economy, not only stocks but also real estate, gold, currency, etc. However, there is no published market return in the real world that can satisfy that assumption. As the result, we take the Index return as RM. For example, in U.S they use S&P 500 return for calculation. However, the S&P 500 accounts for only 75% U.S. market capitalization (standardandpoors.com) so can not fully represent the Market. In Vietnam, there is still no consensus on how much total market capitalization is represented by VN Index. In my estimation, VN Index is not even 50% of Vietnam market capitalization. The reason is that stock is just one investment channel along with gold and foreign currency, which attracts lots of investors attention. Besides, the VN Index is just the Ho Chi Minh stock exchange; there is another HNX Index for Hanoi stock market. Thus, using the VN Index as a benchmark for Beta calculation may not give the correct Beta value. 2- VN Index annual return change annually with very high volatility. Moreover, the VN Index was just established since 2001 so the size of VN Index is small and does not compose of all industries. Hence, VN Index is not representative of a diversified economy and the market liquidity is focused on a few high-capitalized stocks. (Table 1) Table 1: VN Index annual return 2001 2010, calculated from data source
VN Index annual return 2010 2009 -2.04% 56.78%

2008 2007 2006 2005 2004 2003 2002 2001

-65.95% 23.30% 144.49% 28.50% 43.38% -8.95% -22.13% 13.83%

3- U.S. government bond may not have credit risk but Vietnam government bonds do have risk. Due to country risk, Vietnam bonds are rated Ba3 by Moody and BB- by S&P, both ratings are below investment bonds (Table 2). The fact that Vietnam government may not be able to pay debt is possible. In other words, Vietnam government bonds are not risk free assets. Besides, the quality and length of data on bond are not suitable for making long-term assumption. Moreover, it is difficult to find long term Vietnam bond actively traded in market. Table 2: Country bonds rating

As a result, cost of equity will change every year with high volatility, if we use that cost of equity to discount long term cash flows, it could yield undesired result.

C - CAPM APPLICATION FOR EMERGING MARKET The formula used is still the standard formula of CAPM but the numbers applied are different to solve problem stated above ( )

Beta: VN Index is not diversified enough to be a correct benchmark. Therefore, Beta should be calculated relative to global index (CFA curriculum, level 2- 2010). In this paper I use S&P Global 1200 Market return: Global index return. This is a good benchmark in term of market diversification and market capitalization Risk free rate: Since the Vietnam government bond is not a risk free asset and with the unavailability of information, we should use the bond rate of developed country and then adjust it with inflation difference between the two countries (CFA curriculum, level 2 - 2010). In this paper I use the U.S. 10 year bond. As a result, by using this method of application, cost of equity should have lower volatility and would be presumed to give more correct cost of equity for discounting long term cash flows. There might be a concern that using global index is inappropriate since it may not be composed of Vietnam capitalization. However, many published models looking at emerging markets use a global index in calculation. The first reason is that Global index composes of all industries that Vietnam listed companies are operating. The second reason is because of the effect of globalization and that S&P 1200 consist of all big markets that have big effects on the world economy and world market price. For example, the financial crisis in the U.S. in 2008 affected the whole world economy. U.S. stock market went down, Global index also went down, VN Index certainly also went down and reached the bottom even though many companies performance was growing and they had good financial report. There was no place to

hide in stock market at that time. The third reason is that there is no conflict with other components of CAPM formula. If RM is Global index return then my Beta is calculated relative to Global Index and my Rf is US bonds rate adjust with Vietnam inflation. In summary, the application of CAPM for emerging market logically should perform better than the traditional application of CAPM, which is used for developed market. However, we need to do the test to see which one actually works better. D - STOCK VALUATION METHOD THE DISCOUNTED CASH FLOW METHOD When we know that CAPM is used to calculate cost of equity - ke, it is also important to know what valuation methods use ke to estimate stock price. In order to value intrinsic price of stock, we might use 2 types of discounted cash flow method, the dividend discount model (DDM) and Discounted Free cash flow to Equity (Discounted FCFE) The general idea is to discount future cash flow to present time, the general formula is: [ ] . PV is the present value of expected cash flow. The

difference is the type of Cash Flow that we use. 1 - Dividend Discount Model (DDM): In DDM, dividend per share is the cash flow and cost of equity is used as the discount rate. Then, when we discount future dividends per share to expected return, we will have the price per share, which is: [ ]

This dividend technique is used to estimate the intrinsic price of a stock. However, this technique is not appropriate to such young and primitive market like Vietnam. In Vietnam, dividend data is difficult to measure under some reasons below:

-There are high rate of return investment alternatives available so that limited dividend is paid out -Most of listed companies are in supernormal growth period that they do not pay out dividend -The assumption of relatively constant growth for the long term is inappropriate due to spontaneous dividend payment policy without long term strategic plan - The data of dividend per share is unavailable and difficult to calculate 2 - Discounted Free Cash Flow to Equity (Discounted FCFE) FCFE is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. In this method, we calculate the present value of future FCFE. Then, that discounted FCFE will be divided by the number of shares outstanding to get the price of stock. FCFE is cash flow available to shareholders. Thus, the appropriate discount rate is cost of equity [ ]

Advantages of the discounted FCFE method: - Whether the company decision is to pay out cash for equity in form of dividend or to keep cash for reinvestment, FCFE is not affected. - Growth rate of FCFE is more stable and easier to estimate than dividend per share.

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- FCFE can easily be computed based on financial statement. As the result, based on advantages and disadvantages of 2 methods, this paper uses the Discounted FCFE for valuation.

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CHAPTER 3: METHODOLOGY
The objective of this paper is to test whether investors might make profitable investment decisions by applying CAPM in valuation. The research is constructed on a portfolio of 31 stocks trading in HOSE (Ho Chi Minh stock exchange). Those stocks are chosen randomly. Stocks must be listed before 2008 because the examined time period is from 2008 to 2010. In order to construct the test, we assume that time 0, present time, is the end of 2009. The investor makes buy/sell decisions and holds the investment for one year. Transactions will be closed at the end of 2010. The idea is to calculate the how much the stock price should be at time 0 and then compare with current price to make a buy/sell decision. After that, we will see whether those buy/sell decisions are profitable when the investor closes transactions at the end of 2010. The purpose of this test is to answer the questions below: 1) Is CAPM an effective tool with high successful rate? 2) Between 2 methods of CAPM applications, the traditional application for developed market and the application recommended for emerging market, which one has a higher success rate? The sensitivity analysis is also constructed in order to give a better view on the effects of each component RM, Rf, on cost of equity and the effect of cost of equity on price estimation. All the computations are constructed in Excel worksheet. The following provides explanation and method of computation. Since it is too much to show all calculations of 31 stocks, one single stock is chosen for demonstration and I choose VNM

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The result of the test and further discussion on CAPM implementation in the Vietnam stock market will be mentioned in chapter 4 and 5 A - TRADITIONAL CAPM APPLICATION ( kA: Cost of equity, expected return of stock A Rf: risk free rate interest rate of Vietnam government 10 year term bond A: systematic risk based on stock A return covariance with VN-Index return RM: VN-Index annual return 2009 According to Duetche Banks research, the risk free rate of Vietnam in 2009 is 10.4%. I use this number because there is no data on Vietnam long term bond rate in 2009. Beta and market return are not available so we need to calculate them from available daily price data. BETA CALCULATION Now we know that Beta is computed based on covariance with VN-index, the problem left is which period of time we should choose to compute beta. I divide VNIndex time line in 3 periods. (Figure 2) Period 1 is from the date VN index is establish to 2005, this is the start up period and market movement is unstable. Period 2 is from 2005 to 2007, this period has an abnormal return that only happens once in 60 years (Hua Chia Yee, CFA). Thus, I choose the period from October 2008 to December 2009, where market movement is in a cycle. The purpose of this is to minimize Beta error (Hua Chia Yee, CFA) Beta is calculated by dividing the covariance of stock A return (R A) and VN Index return (RM) by the variance of VN Index return ( ) )

(CFA curriculum)

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Figure 2: VN Index Time period

The source we have is daily price of VN Index and other 31 stocks, which are available and can be downloaded from internet (www.cophieu68.com). In order to have Beta value of individual stocks, these following steps need to be taken. Step 1: From source data, extract weekly end price, the closing price of final transaction day in a week from October 10, 2008 to December 25, 2009. Friday is usually the final transaction day of a week. Step 2: Calculate weekly return. For an individual stock, there are 63 weekly returns from 10 Oct 2008 to 25 Dec 2009.

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Step 3: Calculate individual stocks Beta. After having weekly return of VN Index and other 31 stocks, Beta of an individual stock is calculated by dividing covariance between VN Index weekly return and Stock As weekly return to variance of VN Index weekly return. (CFA curriculum, level 1-2010, portfolio management) The result of those calculations is showed in Appendix (Table 21) The reason why I do not use daily data for Beta calculation is because it is not necessary to do so. In order to minimize Beta error, 25 weekly returns is recommended (CFA curriculum, level 1-2010) and my period is 63 weeks already. Besides, by skillfully taking only beginning and ending price of the week, I can eliminate error and inconsistency of raw price data.

MARKET RETURN CALCULATION Next component in CAPM formula is market return. From VN-Index price data sources, we have closing price of each transaction day. What is needed is VN Index return of 2009 Step 1: Calculate daily return.

Step 2: Plus 1 to daily return, then we got table 3

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Table 3: VN Indexs return demonstration

CODE VN INDEX VN INDEX VN INDEX VN INDEX VN INDEX VN INDEX VN INDEX VN INDEX . VN INDEX DATE 12/31/2009 12/30/2009 12/29/2009 12/28/2009 12/25/2009 12/24/2009 12/23/2009 1/6/2009 . 1/2/2009 Closing price 494.8 495.4 484.4 492.6 495.1 479.1 470.8 314 . 313.3 Daily return -0.0012 0.0227 -0.0166 -0.0050 0.0334 0.0176 0.0120 0.0067 . -0.0073 (1 + daily return) 0.9988 1.0227 0.9834 0.9950 1.0334 1.0176 1.0120 1.0067 . 0.9927

Step 3: Calculate 2009 return. VN Index 2009 return = [the product of (1 + daily return)] - 1 = (0.9988 x 1.0227 x x 0.9927) 1 = 0.5678 As the result, we have RM = VN Index 2009 return = 0.5678 = 56.78% Since we have all three component of CAPM, just apply CAPM formula we will have cost of equity of each stock. The result of cost of equity from those computations are showed in Appendix (Table 21)

B - CAPM APPLICATION FOR EMERGING MARKET ( )

Risk-free rate (Rf) = 10-year U.S government bond yield + (VN inflation U.S. Inflation) 10 year U.S. bond yield in 2009 is taken from federalreserve.com, which equals to 3.26%.VN inflation and U.S. inflation in 2009 are retrieved from IMFs website

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(International Monetary Fund), which equal to 6.717% and -0.4% respectively. Hence, Rf = 3.26 + [6.717-(-0.4)] = 10.38% Market return (RM) is a global index return instead of VN Index return and I choose S&P Global 1200. S&P Global 1200 captures approximately 70% of worlds market capitalization. This index is a composite of seven headline indices: S&P 500(United States), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40. Daily price data of S&P Global 1200 is available on standardandpoors.com. Apply the computation similar to VN Index return calculation we have S&P Global 1200s 2009 return is 27.8% Beta () is computed similarly to Beta calculation of traditional CAPM application, but instead of VN Index return, we use S&P Global 1200. Since we have all three components, cost of equity will be easily calculated and the table of result is showed in Appendix (Table 22) C - FREE CASH FLOW TO EQUITY (FCFE) Step 1: Calculate FCFE in 2009 The Free cash flow to equity in 2009 is computed based on financial statement. The FCFE formula that I used is:
FCFE = Net Income + NCC FCInv WCInv + Net borrowing

(CFA curriculum, level 2 2010) NCC: Non-cash charges like depreciation expense, deferred tax are not real cash outflows. Thus, they should be added back. FCInv: Fixed capital investment is the difference of total value of fixed assets in 2009 comparing to 2008. This is a cash outflow but is not deducted in Net Income so we have to deduct it from Net Income.

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WCInv: Working Capital Investment is the change of Working capital. This is a cash outflow so it needs to be subtracted from Net Income. The formula of WCInv I used is: WCInv = change in Account Receivable + change in Inventory Change in Account Payable Net borrowing: since FCFE is cash available to equity (shareholders) only, we have to adjust for cash flow to debt holders. Net borrowing = New debt Debt repayment = Change in long term liability + change in Note payable The Future FCFE is estimated based on inflation rate, GDP growth rate and historical FCFE VNM stock is taken as an example to show details of those calculations. VNMs financial statements in 2008 and 2009 can be found in table 4 and 5, and calculation result is in table 6. Table 4: Balance sheet of VNM in 2008 and 2009
Column1 Current Assets Cash and Cash Equivalents Short term financial investment Short term Account Receivables Inventory Other Current Assets Non-current Assets Long term Account Receivable Fixed assets Real Estate Investment Long term Financial Investments Other long term assets TOTAL ASSETS 2009 5,069,157 426,135 2,314,253 728,634 1,311,765 288,370 3,412,879 8,822 2,524,964 27,489 602,479 249,125 8,482,036 2008 3,187,605 338,654 374,002 646,385 1,775,342 53,222 2,779,354 475 1,936,923 27,489 570,657 243,810 5,966,959

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Liabilities Short term Liabilities Long term Liabilities Owners equity Expenditures and Other Funds TOTAL DEBT & EQUITY Source: www.cophieu68.com

1,808,931 1,552,606 256,325 6,637,739 182,265 8,482,036

1,154,432 972,502 181,930 4,761,913 96,198 5,966,959

Table 5: Income statement of VNM in 2008 and 2009

Column1 Gross Sale Revenues Deduction revenues Net Sales Cost of goods sold Gross profit Financial activities Revenues Financial Expenses Selling Expenses Managing Expenses Net Profit from Operating activities Other incomes Other Expenses Other profits Total profit before tax Corporate Income Tax Expenses Profit after Corporate Income Tax EBITDA EPS P/E Last Price of Quarter VOLUME Book value Source: www.cophieu68.com 2009 10,820,142 206,371 10,613,771 6,735,062 3,878,709 439,936 184,828 1,245,476 292,942 2,595,399 143,031 7,072 135,959 2,731,358 355,291 2,375,692 1,000,000 13,531 6.1 83 351,228,150 18.9 2008 8,380,563 171,581 8,208,982 5,610,969 2,598,013 264,810 197,621 1,052,308 297,804 1,315,090 130,173 0 130,173 1,371,313 119,771 1,250,120 1,000,000 7,113 23.3 166 175,297,500 27.2

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Table 6: FCFE 2009 of VNM

Net Income Non cash charge Fixed Capital Investment Change in Account Receivables Change in Inventory Change in current liability Working Capital Investment Change in long-term debt Note payable Net borrowing FCFE 2,375,692 7,072 588,041 82,249 -463,577 580,104 -961,432 74,395 0 74,395 2,830,550

Notes: Net Income 2009 is the number of Profit after corporate Income tax taken from Table 5 Non cash charge 2009 is other expense from Table 5 Fixed Capital Investment 2009: 2,524,964 - 1,936,923 = 588,041 Working Capital Investment2009: 82,249 + (-463,577) 580,104 = -961,432 Net borrowing: 74,395 + 0 = 74,395 FCFE 2009: 2,375,692 + 7,072 588,041 (-198,776) +74,395 = 2,830,550

Step 2: Estimate FCFE from 2010 to 2020 We assume that the company will exist and keep growing forever. FCFE 2010-2020 is estimated based on FCFE 2009 and expected growth rate My expectation of FCFE growth rate in period 2010 2020 is 20% per year. The reasons are:

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- The usually FCFE growth rate used for analysis in emerging market is from 10% to 30% and I take 20% in the middle. The reasons are because 30% is too high for Vietnam and 10% is too low due to high inflation rate (Appendix Table 23) and high bank rate of 14% - 20%. - Vietnam use 2020 as time marker for economic goals. From 2011 to 2020 GDP growth rate per year is 6.5%-7% in average. In 2020, Vietnam goal is to become an industrial economy. Thus, I take 2020 as the turning point. - Due to the characteristic of emerging market, FCFE growth rate of each company goes wildly. In period of 2006-2009, the range of average growth rate of 31 sample stocks is enormously huge, fluctuate from -1,989% to 1,097% (Table 20). Hence, the historical growth rate can not be used for estimation. Also, re-evaluation of FCFE is required at the end of every year, after closing transaction. As the result, FCFE 2010 = FCFE 2009 + |FCFE2009|x0.2 = 2,830,550 x 1.2 = 3,396,660 FCFE 2011 = FCFE 2010 + |FCFE2010|x0.2 = 4,075,992 and so on (Table 7)

Step 3: Estimate FCFE from 2021 to infinity and discount those cash flows to 2020 From 2021 to infinity, I expect the growth rate of FCFE is 5% per year. In order to discount FCFE from 2021 to infinity back to 2020, I use formula:

ke is cost of equity calculated above. FCFE 2020 part 1 = FCFE 2019 + |FCFE2019|x0.2 = 21,031,223.44

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Table 7: VNMs FCFE

VNM 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2020 - part 1 2020 - part 2 3,396,660.00 4,075,992.00 4,891,190.40 5,869,428.48 7,043,314.18 8,451,977.01 10,142,372.41 12,170,846.90 14,605,016.28 17,526,019.53 80,741,864.49 21,031,223.44 59,710,641.06

Step 4: Plus FCFE 2020 part 1 and FCFE part 2 to get FCFE 2020 FCFE 2020 = 21,031,223.44 + 59,710,641.06 = 80,741,864.50 Step 5: Calculate value of FCFEs at 2009 [ ]

Then we have PV of FCFE of VNM will equal to 14,285,829.19 (Table 8). ke is the cost of equity, which equals 41.98% by CAPM 1 and 17.52% by CAPM 2

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D - INTRINSIC PRICE CALCULATION AND DECISION MAKING Table 8: Investment decision result of VNM when using CAPM 1
Price at No. CODE 31 Dec 2009 1 VNM 71.7 Price at 31 Dec 2010 86 CAPM 1 - TRADITIONAL CAPM APPLICATION BUY/ SELL DISCOUNTED FCFE 14,285,829.19 Cost of equity (%) 41.98 Calculated price 40.67 Decision S Result LOSS

From table 5, we have VNM number of shares at the end of 2009 is 351,228,150. By dividing 14,285,829.19 to 351,228,150, we got the intrinsic price equals to 40.67. Compare 40.67 with the price at 31 Dec 2009 we make the decision is S meaning sell decision. However, the actual price at 31 Dec 2010, the time of closing transaction, is 86. Hence, to make profit, investor should make buy decision. This is presented as letter B in column BUY/SELL As the result, if investor uses traditional CAPM application, he or she will have a loss because of the mismatch between column BUY/SELL and column Decision. In contrast, investor will have a gain if he/she uses CAPM application for emerging market (CAPM 2), which is showed below: Table 9: Investment decision result of VNM when using CAPM 2
Price Price at at 31 No. CODE 31 BUY/SELL Dec Dec 2010 2009 1 VNM 71.7 86 B CAMP 2 - CAPM APPLICATION FOR EMERGING MARKET DISCOUNTED FCFE 65,218,670.55 Cost of equity (%) 17.52 Calculated Decision Result price 113.99 B GAIN

23

This process is applied similarly to the other 30 stocks. In both cases of CAPM 1 and CAPM 2, the GAIN result is counted as successful result. The result comparison between CAPM 1 and CAPM 2 is showed in next chapter.

24

CHAPTER 4: RESULT
A - TEST RESULT With the assumption that short selling is allowed in Vietnam, the table of result is: Table 10: Test result
CAPM 1 - TRADITIONAL CAPM APPLICATION Number of trials Number of success (Number of GAIN counted) Successful rate Successful rate of the whole market with 95% confidence interval PROFITABILITY 31 stocks 23 74.19% From 58.79% to 89.56% 12.89% CAPM 2- NEW CAPM APPLICATION 31 stocks 20 64.52% From 47.68% to 81.36% 7.62%

Although CAPM 2 logically should perform better than CAPM 1, the result is quite surprising. Traditional CAPM application actually works better then new one, with 74.19% successful rate compare to 64.52%. The result is for a random sample of 31 stocks. By applying statistical analysis on confidence interval of population proportion, 95% that the successful rate of CAPM 1 in the whole HOSEs stock population is from 59% to 90% and of CAPM 2 is from 48% to 81%. The formula applied is: (Complete business statistics)

Which is shown in the test result is that CAPM 2 is an effective tool, 74.19% successful rate is a very high number in investment world. However, this result is for 1 time testing only. To ensure 99% that the successful rate of CAPM 1 is 75%, the minimum number of testing times is:

25

Hence, in order to have 99% confidence that CAPM 1 will give 75% successful rate, the test should be conducted in at least 3 years. Therefore, 2 more year of testing is recommended. PROFIT/LOSS and PROFITABILITY are calculated with the assumption that the capital is distributed equally to 31 stocks. Details can be found in Appendix- Table 19 Table of PROFIT/LOSS We can only achieve 12.89% return only if short selling is available. Since stock price fluctuation is too high, more than 10%, maintaining short sell in one whole year is not possible. Moreover, short selling has never been allowed in Vietnam stock market. Thus, if we only consider stocks that have buy decision only, then the result will be as table 11 When the total value of 31 stocks went down -10%, 4.72% of return can be earned instead of 12.89%, which means 14.72% higher than portfolio performance instead of 22.89% and 5.76% higher than index performance instead of 14.93% (VN Index return in 2010 is -2.04% from table 1) Table 11: Test result for buy stock only
CAPM 1 - TRADITIONAL CAPM APPLICATION Number of BUY stocks Number of success (Number of GAIN counted) Successful rate PROFITABILITY 10 out of 31 stocks 6 out of 10 60.00% 4.72% CAPM 2- NEW CAPM APPLICATION 19 out of 31 stocks 9 out of 19 47.37% -1.82%

26

The purpose of table 11 is to show that not all the chances available in the market can fully be taken because of some other constraints. In this case, the constraint is legal issue. The result of table 11 can be helpful in further research about short selling issue in Vietnam market. B - SENSITIVITY ANALYSIS RESULT VNM data is taken as sample. This analysis help us have a good imagination on how each components is related and their effects on final result Among Beta, risk free rate, and market return, Beta has biggest effect on intrinsic price. 0.1 changes in Beta will cause up to 4.64% change in cost of equity which equal to nearly 10 unit difference in intrinsic price, in the case of VNM. 10 unit differences in intrinsic price is a huge number and that can change the whole result from buy to sell and vice versa.

Table 12: Analyze the sensitivity of cost of equity on the changing of Beta
Beta VNM Cost of equity (%) 41.98 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 15.04 19.68 24.31 28.95 33.59 38.23 42.87 47.50 52.14 56.78 61.42 66.06 SLOPE 46.38 4.64% For every 0.1 change in Beta, cost of equity change

Figure 3: The sensitivity of cost of equity on the changing of Beta

120.00 100.00 80.00 60.00 40.00 20.00 0.00 0 0.5 1 1.5 2 2.5

27

1.3 1.4 1.5 1.6 1.7 1.8 1.9 2

70.69 75.33 79.97 84.61 89.25 93.89 98.52 103.16

Table 13: Analyze the sensitivity of cost of equity on the changing of market return Figure 4: The sensitivity of cost of equity on the changing of market return Cost of
Rm equity 5 10 15 20 25 30 35 40 45 50 55 60 41.98 6.72 10.13 13.53 16.94 20.34 23.75 27.15 30.56 33.96 37.37 40.77 44.18
50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 0 20 40 60 80

SLOPE 0.68 For every unit change in market return, cost of equity change

0.68%

Table 14: Analyze the sensitivity of cost of equity on the changing of risk free rate
RFR 1 2 3 4 5 6 7 8 Cost of equity 41.98 38.98 39.30 39.62 39.94 40.26 40.58 40.90 41.22

Figure 5: The sensitivity of cost of equity on the changing of risk free rate
46.00 44.00 42.00 40.00 38.00 0 5 10 15 20 25

28

9 10 11 12 13 14 15 16 17 18 19

41.54 41.86 42.17 42.49 42.81 43.13 43.45 43.77 44.09 44.41 44.73

SLOPE 0.32 For every unit change in market return, cost of equity change

0.32 %

Table 15: Analyze the sensitivity of estimated price on the changing of cost of equity

Cost of equity 41.98 6 10 15 20 25 30 35 40 45 50 55 60

Estimated price 40.67 3,513.37 595.87 250.62 145.06 96.97 70.65 54.55 43.92 36.50 31.08 26.99 23.81

Figure 6: The sensitivity of estimated price on the changing of cost of equity

In average, when 1% change in cost of equity will cause -31.6 change in price. The sensitivity of intrinsic price on the changing of cost of equity (figure 6) is a parabolic line. If the cost of equity is low, the effect will be more serious. High cost of equity may not have as much impact as low cost of equity but ke change about 5% for

29

0.1 change in Beta of different stock and more than 7% for more than 10% change in RM every year. In summary, if analyzing in the same year then Beta has high effect on cost of equity, 0.1 change in Beta cause 4.64% change in cost of equity, and 4.64% change in cost of equity cause huge different in intrinsic price. If in different year then market return have biggest impact on intrinsic price. 1% change in RM cause 0.68% change in cost of equity but every year, RM changes more than 10% (Table 1) which cause more than 7% change in cost of equity and certainly intrinsic price will be affected heavily. Therefore, re-valuation every year is necessary. The risk free rate (Rf) does not have much impact since it does not change much every year (less than 1% every year).

30

CHAPTER 5: DISCUSSION / IMPLEMENTATION

A RESULT EXPLANATION Possible reasons why CAPM 1 perform better than CAPM 2 1. Traditional CAPM application might be used in many funds in Vietnam with high capitalization 2. The accuracy of CAPM can not be tested. Although CAPM has limitations and logically it will not give the correct result, no one can know for sure what the correct result is. To get cost of equity the input numbers are based mostly on analysts personal expectation and judgments. In other words, cost of equity is no more than an estimated number and there is no factual one for comparison since it deals with future matters. Besides, there is no better pricing model has been developed. 3. Vietnam market is inefficient. Market price does not fully reflect market information. Therefore, even if CAPM 2 gives the correct price of stock, the market will not move accordingly so investors will suffer loss. Based on the result of this paper test, CAPM is still a very promising valuation tool. There might be a concern that beside CAPM, there is another variable that affect the result, which is the FCFE. It is true that FCFE does have effect on the result. However, the effect of FCFE is minimized because: - The FCFE 2009 (at time 0) is real and calculated based on real performance (financial statement) by a standardized method. Thus, only the growth rate is the concern. - I assume that all 31 sample stocks have the same FCFE grow rate. By that, I ignore the different growth rates caused by micro factors, and only focus on the

31

growth rate caused by macro factors. In other words, I minimize the effect of FCFE growth rate by keeping the constant growth for all 31 stocks and only cost of equity is counted. - In order to test the effect of FCFE growth rate, a sensitivity analysis is constructed (Appendix, table 23). The result shows that, when g fluctuates from 15 to 30%, the growth rate range usually used in emerging markets, the successful rate of CAPM 1 has very small volatility of 1 success, from 74-77% B LIMITATION OF THE TEST The result might not be reliable in different years since the test is constructed in 1 year price only. In order to increase the reliability of the test result 5 to 20 years of testing is recommended, 3 years of testing at a minimum. The portfolio of 31 stocks is chosen randomly without careful research. When implementing, we can take only stocks that have Buy decision or more analysis of individual stock valuation should be taken for better portfolio performance. The FCFEs growth rate should be tailored to specific stock and industry. Different company has different characteristics that there should be different estimation on FCFEs growth rate. By considering micro factors on FCFE growth rate, we may have better result, higher successful rate. C IMPLEMENTATION IN PRACTICE For implementation, revaluation is needed at the end of holding period, after closing all transactions and before doing new series of transactions. The reason is because CAPM components and FCFE change every year with high volatility. Implementation of this paper need to be flexible and adjustments should be made to match investors strategy and investment objectives. Adjustments also depend on analysts trading styles. Specifically, 1 year holding can be suitable for mutual fund but it is not suitable for hedge fund. 12% return might be able to meet objectives of

32

middle age investors but might not be a desired number of young investors. The adjustments can be made on the following factors: The time line: The time line is the time period for Beta calculation, the time of opening and closing transaction. The adjustments in time line is the most important because they has to match investment strategy and investment style of analyst. The time of T-bond, risk free rate are also needed to be adjusted to tailor analysts judgment. FCFE growth rate: This growth rate is varied based on company characteristics and analyst judgment. Capital distribution: In order to meet required return of aggressive investors, more money should be put in high return stocks, stocks that have big difference between intrinsic price and current price. Capital distribution is varied by analyst judgment.

33

CHAPTER 6: CONCLUSION & RECOMMENDATION

CAPM is a promising fundamental analysis tool to earn profit in Vietnam stock market. The test results show that using a CAPM model can have a positive impact on Buy/Sell decisions. Although the CAPM application for emerging markets should theoretically work better than the traditional CAPM application, the result shows the contradiction. Therefore, CAPM 1 is recommended for application in Vietnam stock market. There are 3 possible explanations for the better performance of traditional CAPM application, which are the popularity of traditional CAPM, the inability of testing CAPM accuracy and the inefficiency of Vietnam market. Further research on those possible reasons should be constructed for better conclusion. Investors suitability has to be taken into account to make suitable adjustments for better implementation. In order to increase the reliability of this paper result, more testing on different years is recommended. Since there might be other models or other buy/sell signals (technical analysis) that can perform better than CAPM, comparison between them is also recommended. My recommendation is that fundamental analysis give a picture of what will happen in future and technical analysis tell us when it will happens by buy/sell signals. Thus, by combining those two, we can eliminate the limitation of two analysis styles and achieve even higher return.

34

LIST OF REFERENCES
1. (2009). Cost of Equity in Asia. Hong Kong: Duetsche Bank. 2. (2009). Complete Business Statistics, 7th edition. In J. S. Amir D.Aczel, Complete Business Statistics (pp. 235-245). McGraw Hill. 3. Board of Governors of the Federal Reserve System. (n.d.). Retrieved May 10, 2011, from Federal Reserve Web site: http://www.federalreserve.gov 4. CFAinstitute. (2010). CFA program curriculum. New York: Pearson Custom publishing. 5. Data and Statistic. (n.d.). Retrieved April 20, 2011, from International Monetary Fund Web site: http://www.imf.org 6. Indices. (n.d.). Retrieved May 10, 2011, from Standard and Poor's Web site: http://www.standardandpoors.com/indices/sp-global1200/en/ap/?indexId=SPGCMP1200USDFF--P-RGLL-7. Stocks' data source. (n.d.). Retrieved April 15, 2011, from Co phieu 68 Web site: http://www.cophieu68.com/export.php 8. Listed Securities. (n.d.). Retrieved April 5, 2011, from Ho Chi Minh Stock Exchange Web site: http://www.hsx.vn

35

APPENDIX
LIST OF 31 SAMPLE STOCKS TABLE OF RESULT OF CAPM 1 TRADITIONAL CAPM APPLICATION TABLE OF RESULT OF CAPM 2 NEW CAPM APPLICATION TABLE OF PROFIT/LOSS TABLE OF STOCK PRICE CALCULATION USING CAPM 1 TABLE OF STOCK PRICE CALCULATION USING CAPM 2 TABLE OF BETA AND COST OF EQUITY TABLE OF FCFE GROWTH RATE SENSITIVITY ANALYSIS TABLE OF VIETNAM INFLATION RATE TABLE OF VIETNAM GDP GROWTH RATE

36

Table16: LIST OF 31 SAMPLE STOCKS (List of 31 stocks taken as sample and their listing date)

NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

SYMBOL CODE ABT AGF BBC DHA DHG DIC DTT FMC FPT GIL GMD HAP HAS HPG KDC

LISTED ORGANIZATION BENTRE AQUAPRODUCT IMPORT AND EXPORT JOINT STOCK COMPANY Angiang Fisheries Import & Export Joint Stock Company BIBICA CORPORATION HOA AN JOINT STOCK COMPANY HAU GIANG PHARMACEUTICAL JOINT STOCK COMPANY DIC INVESTMENT AND TRADING JOINT STOCK COMPANY Do Thanh Technology Corporation Sao Ta Foods Joint Stock Company FPT Corporation BinhThanh Import Export Production and Trade Joint Stock Company Gemadept Corporation Hapaco Group Joint Stock Company Ha Noi P&T Construction & Installation Joint Stock Company HoaPhat Group Joint Stock Company Kinh Do Corporation

LISTING DATE 6-Dec-2006 26-Apr-2002 17-Dec-2001 4-Dec-2004 12-Jan-2006 22-Nov-2006 12-Jun-2006 20-Oct-2006 21-Nov-2006 28-Dec-2001 3-Aug-2002 8-Feb-2000 18-Dec-2002 31-Oct-2007 18-Nov-2005

37

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

KHA PAC PVD SAM SAV SCD SFC SSC TAC TCR TMS TNA TRI TS4 VNM VTB

Khanh Hoi Import Export Joint Stock Company Dry Cell and Storage Battery Joint Stock Company Petrovietnam Drilling and Well Services Joint Stock Company Sacom Development and Investment Corporation Savimex Corporation Chuong Duong Beverages Joint Stock Company SaiGon Fuel Company Southern Seed Corporation Tuong An Vegetable Oil Joint Stock Company Taicera Enterprise Company Transforwarding Warehousing Joint Stock Corporation Thien Nam Trading Import Export Corporation SaiGon Beverages Joint Stock Company Seafood Joint Stock Company No4 Viet Nam Dairy Products Joint Stock Company Viettronics Tan Binh Joint Stock Company

14-Aug-2002 11-Sep-2006 15-Nov-2006 18-Jul-2000 26-Apr-2002 11-Dec-2006 16-Jun-2004 29-Dec-2004 12-Jun-2006 26-Dec-2006 8-Feb-2000 5-Apr-2005 21-Dec-2001 7-Jan-2002 28-Dec-2005 12-Aug-2006

Source: Ho Chi Minh Stock Exchangewww.hsx.vn

38

Table 17: TABLE OF RESULT CAPM 1

Price at 31 Dec 2009 71.7 40.2 32.7 28 116 11.6 13.4 58.1 28.3 60.9 18 13.1 48.6 21.6 65.5 26.8 40.3 CAPM 1 - ORIGINAL CAMP Price at 31 Dec 2010 86 38.4 22.8 21.7 112.7 8.8 12.9 63.5 23 33.2 12.7 9.1 51 16.5 54 18.2 33.2 PRICE CHANGE BUY/ SELL DISCOUNTED FCFE 14,285,829.19 205,803.16 (3,761.83) 59,804.87 2,391,507.62 2,559.68 913,074.22 11,259,180.65 420,155.33 1,276,316.27 (17,788.89) 10,485.55 4,537,218.09 331,205.96 520,018.63 (94,383.76) 29,349.47 Cost of equity (%) 41.98 45.07 52.23 64.05 39.59 48.41 56.90 54.27 50.51 79.09 69.05 54.60 53.70 54.56 46.43 69.83 44.44 Calculate d price 40.67 25.41 (0.29) 3.89 89.72 0.49 126.82 78.93 42.70 26.47 (0.96) 1.31 57.79 23.46 25.77 (1.47) 3.04 price difference with 2009 price 31.03 14.79 32.99 24.11 26.28 11.11 113.42 20.83 14.40 34.43 18.96 11.79 9.19 1.86 39.73 28.27 37.26

No.

CODE

Number of shares at the end 2009 351,228,150 8,099,999 12,859,288 15,371,192 26,653,842 5,200,000 7,200,000 142,649,197 9,839,818 48,212,500 18,496,208 8,000,000 78,513,073 14,120,300 20,176,362 64,199,216 9,660,230

Decision S S S S S S B B B S S S B B S S S

Result LOSS GAIN GAIN GAIN GAIN GAIN LOSS GAIN LOSS GAIN GAIN GAIN GAIN LOSS GAIN GAIN GAIN

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV

14.30 1.80 9.90 6.30 3.30 2.80 0.50 5.40 5.30 27.70 5.30 4.00 2.40 5.10 11.50 8.60 7.10

B S S S S S S B S S S S B S S S S

39

18 19 20 21 22 23 24 25 26 27 28 29 30 31

SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB

9,999,020 27,548,360 8,470,350 10,102,626 8,000,000 10,040,937 8,109,000 8,200,000 196,363,998 26,617,000 8,477,640 18,980,200 37,007,997 11,022,660

36 9.5 36.6 27 16.8 29.1 34.5 15.6 35.7 65.3 22.3 22 8.3 13.4 1066.9

25 6 21.6 28.4 26.8 21.8 28.9 18.4 38.7 50.9 27.5 25.5 8.9 13.1 959.2

11.00 3.50 15.00 1.40 10.00 7.30 5.60 2.80 3.00 14.40 5.20 3.50 0.60 0.30 204.9

S S S B B S S B B S B B B S

238,116.64 (127,817.28) 44,568.37 406,203.78 271,994.14 77,144.00 550,683.16 (22,441.90) 6,624,158.63 84,929.14 239,356.58 145,033.56 317,234.99 (18,514.53)

49.78 47.05 71.86 36.35 48.08 52.51 32.27 52.78 62.93 51.17 46.15 80.59 46.90 40.10

23.81 (4.64) 5.26 40.21 34.00 7.68 67.91 (2.74) 33.73 3.19 28.23 7.64 8.57 (1.68) 794.94 23 74.19% 124.70 12.89% 4.72%

S S S B B S B S S S B S B S

12.19 14.14 31.34 13.21 17.20 21.42 33.41 18.34 1.97 62.11 5.93 14.36 0.27 15.08 731.38

GAIN GAIN GAIN GAIN GAIN GAIN LOSS LOSS LOSS GAIN GAIN LOSS GAIN GAIN

SUM NO. OF SUCCESS SUCCESSFUL RATE PROFIT PROFITABILITY PORFITABILITY OF BUY STOCKS

NOTE:

_ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010 _ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010, taken from www.cophieu68.com

40

_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010 _ the calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology _ 'Decision' is what investor make based on 'Calculated price' _ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price _ 'NO. OF SUCCESS' is number of Gain result counted _ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31 _ Profitability, Profitability of buy stocks are taken from Table 19

41

Table 18: TABLE OF RESULT CAPM 2

Number of shares at the end 2009 351,228,150 8,099,999 12,859,288 15,371,192 26,653,842 5,200,000 7,200,000 142,649,197 9,839,818 48,212,500 18,496,208 8,000,000 78,513,073 14,120,300 20,176,362 64,199,216 9,660,230 Price at 31 Dec 2009 71.7 40.2 32.7 28 116 11.6 13.4 58.1 28.3 60.9 18 13.1 48.6 21.6 65.5 26.8 40.3 Price at 31 Dec 2010 86 38.4 22.8 21.7 112.7 8.8 12.9 63.5 23 33.2 12.7 9.1 51 16.5 54 18.2 33.2 CAMP 2 - NEW VERSION OF CAPM FOR EMERGING MARKET PRICE CHANGE 14.30 1.80 9.90 6.30 3.30 2.80 0.50 5.40 5.30 27.70 5.30 4.00 2.40 5.10 11.50 8.60 7.10 BUY/ SELL B S S S S S S B S S S S B S S S S DISCOUNTED FCFE 65,218,670.55 1,360,052.31 (7,837.97) 271,534.89 9,949,670.55 15,790.99 5,012,938.07 45,723,094.77 2,049,031.85 8,128,082.07 (40,468.45) 70,499.39 22,365,613.18 1,924,135.66 3,168,265.34 (197,122.95) 129,543.82 Cost of equity (%) 17.52 15.31 16.25 24.77 17.52 16.79 20.31 23.08 19.69 24.05 20.10 17.64 20.57 19.06 16.35 23.64 18.70 Calculated Decision price 185.69 167.91 (0.61) 17.67 373.29 3.04 696.24 320.53 208.24 168.59 (2.19) 8.81 284.86 136.27 157.03 (3.07) 13.41 B B S S B S B B B B S S B B B S S Price difference 113.99 127.71 33.31 10.33 257.29 8.56 682.84 262.43 179.94 107.69 20.19 4.29 236.26 114.67 91.53 29.87 26.89 Result GAIN LOSS GAIN GAIN LOSS GAIN LOSS GAIN LOSS LOSS GAIN GAIN GAIN LOSS LOSS GAIN GAIN

No.

CODE

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV

42

18 19 20 21 22 23 24 25 26 27 28 29 30 31

SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB

9,999,020 27,548,360 8,470,350 10,102,626 8,000,000 10,040,937 8,109,000 8,200,000 196,363,998 26,617,000 8,477,640 18,980,200 37,007,997 11,022,660

36 9.5 36.6 27 16.8 29.1 34.5 15.6 35.7 65.3 22.3 22 8.3 13.4

25 6 21.6 28.4 26.8 21.8 28.9 18.4 38.7 50.9 27.5 25.5 8.9 13.1 959.2

11.00 3.50 15.00 1.40 10.00 7.30 5.60 2.80 3.00 14.40 5.20 3.50 0.60 0.30 204.9

S S S B B S S B B S B B B S

1,189,718.44 (217,876.46) 254,581.63 1,683,724.48 1,375,313.53 365,430.96 2,156,039.34 (39,896.19) 35,599,302.81 278,933.97 1,222,899.27 901,978.83 2,931,596.13 (33,534.22)

19.21 20.24 23.80 16.33 18.56 20.64 15.19 21.71 22.23 24.77 17.85 24.72 13.35 15.03

118.98 (7.91) 30.06 166.66 171.91 36.39 265.88 (4.87) 181.29 10.48 144.25 47.52 79.22 (3.04) 3,972.54 20 64.52% 7.62% -1.82%

B S S B B B B S B S B B B S

82.98 17.41 6.54 139.66 155.11 7.29 231.38 20.47 145.59 54.82 121.95 25.52 70.92 16.44 3403.89

LOSS GAIN GAIN GAIN GAIN LOSS LOSS LOSS GAIN GAIN GAIN GAIN GAIN GAIN

SUM 1066.9 NO. OF SUCCESS SUCCESSFUL RATE PROFITABILITY PORFITABILITY OF BUY STOCKS

NOTE:

_ Assume that investor buy/sell on Dec 31 2009 and sell/buy on Dec 31 2010 _ 'Price at 31 Dec 2009' and 'Price at 31 Dec 2010' are real opening transaction price on 31 Dec of 2009 and 2010 and taken from cophieu68.com

43

_'BUY/SELL' are decision investor should make on 31 Dec 2009 to make profit when closing transaction on 31 Dec 2010 _ Calculation of 'DISCOUNTED FCFE' , 'Cost of equity', 'Calculated price' of CAPM 1 is explained in methodology _ 'Decision' is what investor make based on 'Calculated price' _ 'Result' is the Gain or Loss result determined by what investor make based on calculated price and what investor should make based on real price _ 'NO. OF SUCCESS' is number of Gain result counted _ 'SUCESSFUL RATE' is the probability of success, calculated by dividing 'No. of success' by total number of sample, which is 31 _ Profitability, Profitability of buy stocks are taken from Table 19

44

Table 19: TABLE OF PROFIT/LOSS

CAPM 1 NO. CODE Price at 31 Dec 2009 71.7 40.2 32.7 28 116 11.6 13.4 58.1 28.3 60.9 18 13.1 48.6 21.6 65.5 26.8 40.3 Price at 31 Dec 2010 86 38.4 22.8 21.7 112.7 8.8 12.9 63.5 23 33.2 12.7 9.1 51 16.5 54 18.2 33.2 Amount of money 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Number of shares can buy within 1,000 thousand VND 13.9470 24.8756 30.5810 35.7143 8.6207 86.2069 74.6269 17.2117 35.3357 16.4204 55.5556 76.3359 20.5761 46.2963 15.2672 37.3134 24.8139 Amout of profit/loss (199.4421) 44.7761 302.7523 225.0000 28.4483 241.3793 (37.3134) 92.9432 (187.2792) 454.8440 294.4444 305.3435 49.3827 (236.1111) 175.5725 320.8955 176.1787 Amount of money 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 CAPM 2 Number of shares can buy within 1,000 thousands VND 13.9470 24.8756 30.5810 35.7143 8.6207 86.2069 74.6269 17.2117 35.3357 16.4204 55.5556 76.3359 20.5761 46.2963 15.2672 37.3134 24.8139 Amount of profit/loss 199.4421 (44.7761) 302.7523 225.0000 (28.4483) 241.3793 (37.3134) 92.9432 (187.2792) (454.8440) 294.4444 305.3435 49.3827 (236.1111) (175.5725) 320.8955 176.1787

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV

45

18 19 20 21 22 23 24 25 26 27 28 29 30 31

SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB

36 9.5 36.6 27 16.8 29.1 34.5 15.6 35.7 65.3 22.3 22 8.3 13.4

25 6 21.6 28.4 26.8 21.8 28.9 18.4 38.7 50.9 27.5 25.5 8.9 13.1

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 31,000 10,000

27.7778 105.2632 27.3224 37.0370 59.5238 34.3643 28.9855 64.1026 28.0112 15.3139 44.8430 45.4545 120.4819 74.6269 1,332.8066 484.9180

305.5556 368.4211 409.8361 51.8519 595.2381 250.8591 (162.3188) (179.4872) (84.0336) 220.5207 233.1839 (159.0909) 72.2892 22.3881 3,997.0277 12.8936% 471.8663 4.7187%

1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

27.7778 105.2632 27.3224 37.0370 59.5238 34.3643 28.9855 64.1026 28.0112 15.3139 44.8430 45.4545 120.4819 74.6269 1,332.8066

(305.5556) 368.4211 409.8361 51.8519 595.2381 (250.8591) (162.3188) (179.4872) 84.0336 220.5207 233.1839 159.0909 72.2892 22.3881 2,362.0498 7.6195% (345.6226) -1.8191%

TOTAL PROFITABILITY TOTAL OF BUY STOCK PROFITABILITY OF BUY STOCK

19,000

699.6567

46

Table 20: STOCK PRICE CALCULATION BASED ON TRADITIONAL CAPM APPLICATION

Cost of equity _ CAPM1 41.98 45.07 52.23 64.05 39.59 48.41 56.90 54.27 50.51 79.09 69.05 54.60 53.70 54.56 46.43 69.83 44.44 No. of shares 351,228,150 8,099,999 12,859,288 15,371,192 26,653,842 5,200,000 7,200,000 142,649,197 9,839,818 48,212,500 18,496,208 8,000,000 78,513,073 14,120,300 20,176,362 64,199,216 9,660,230 Price at 31 Dec 2009 71.7 40.2 32.7 28 116 11.6 13.4 58.1 28.3 60.9 18 13.1 48.6 21.6 65.5 26.8 40.3 Average growth rate of FCFE 20062009 -626.43% 44.20% -14.51% 156.67% 36.06% -1771.83% 104.19% 96.36% -217.61% 1097.20% 47.30% -94.05% 475.97% 161.76% 203.16% -935.22% 35.62% DISCOUNTED FCFE 14,285,829.19 205,803.16 (3,761.83) 59,804.87 2,391,507.62 2,559.68 913,074.22 11,259,180.65 420,155.33 1,276,316.27 (17,788.89) 10,485.55 4,537,218.09 331,205.96 520,018.63 (94,383.76) 29,349.47 CALCULATED PRICE 40.67 25.41 (0.29) 3.89 89.72 0.49 126.82 78.93 42.70 26.47 (0.96) 1.31 57.79 23.46 25.77 (1.47) 3.04

CODE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV

FCFE 2009 2,830,550 45,546 -3,394 22,201 431,736 632 286,434 3,296,460 110,622 630,778 -19,797 3,098 1,307,935 97,742 120,498 -105,969 6,356

47

18 19 20 21 22 23 24 25 26 27 28 29 30 31

SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB

49.78 47.05 71.86 36.35 48.08 52.51 32.27 52.78 62.93 51.17 46.15 80.59 46.90 40.10

9,999,020 27,548,360 8,470,350 10,102,626 8,000,000 10,040,937 8,109,000 8,200,000 196,363,998 26,617,000 8,477,640 18,980,200 37,007,997 11,022,660

36 9.5 36.6 27 16.8 29.1 34.5 15.6 35.7 65.3 22.3 22 8.3 13.4

61,325 -107,005 19,382 63,874 66,484 21,520 71,091 -20,404 2,398,760 22,797 54,946 73,478 74,661 -13,879

72.29% -152.70% -0.02% -163.61% 288.59% 759.55% 748.05% 83.05% -1989.35% -16.76% 129.35% 126.18% 79.70% -104.37%

238,116.64 (127,817.28) 44,568.37 406,203.78 271,994.14 77,144.00 550,683.16 (22,441.90) 6,624,158.63 84,929.14 239,356.58 145,033.56 317,234.99 (18,514.53)

23.81 (4.64) 5.26 40.21 34.00 7.68 67.91 (2.74) 33.73 3.19 28.23 7.64 8.57 (1.68)

48

Table 21: STOCK PRICE CALCULATION BASED ON NEW CAPM APPLICATION

Cost of equity _ CAPM 2 17.52 15.31 16.25 24.77 17.52 16.79 20.31 23.08 19.69 24.05 20.10 17.64 20.57 19.06 16.35 23.64 18.70 No. of shares at the end of 2009 351,228,150 8,099,999 12,859,288 15,371,192 26,653,842 5,200,000 7,200,000 142,649,197 9,839,818 48,212,500 18,496,208 8,000,000 78,513,073 14,120,300 20,176,362 64,199,216 9,660,230 Price at 31 Dec 2009 71.7 40.2 32.7 28 116 11.6 13.4 58.1 28.3 60.9 18 13.1 48.6 21.6 65.5 26.8 40.3 Average growth rate of FCFE 2006-2009 -626.43% 44.20% -14.51% 156.67% 36.06% -1771.83% 104.19% 96.36% -217.61% 1097.20% 47.30% -94.05% 475.97% 161.76% 203.16% -935.22% 35.62% DISCOUNTED FCFE 65,218,670.55 1,360,052.31 (7,837.97) 271,534.89 9,949,670.55 15,790.99 5,012,938.07 45,723,094.77 2,049,031.85 8,128,082.07 (40,468.45) 70,499.39 22,365,613.18 1,924,135.66 3,168,265.34 (197,122.95) 129,543.82 CALCULATED PRICE 185.69 167.91 (0.61) 17.67 373.29 3.04 696.24 320.53 208.24 168.59 (2.19) 8.81 284.86 136.27 157.03 (3.07) 13.41

CODE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV

FCFE 2009 2,830,550 45,546 -3,394 22,201 431,736 632 286,434 3,296,460 110,622 630,778 -19,797 3,098 1,307,935 97,742 120,498 -105,969 6,356

49

18 19 20 21 22 23 24 25 26 27 28 29 30 31

SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB

19.21 20.24 23.80 16.33 18.56 20.64 15.19 21.71 22.23 24.77 17.85 24.72 13.35 15.03

9,999,020 27,548,360 8,470,350 10,102,626 8,000,000 10,040,937 8,109,000 8,200,000 196,363,998 26,617,000 8,477,640 18,980,200 37,007,997 11,022,660

36 9.5 36.6 27 16.8 29.1 34.5 15.6 35.7 65.3 22.3 22 8.3 13.4

61,325 -107,005 19,382 63,874 66,484 21,520 71,091 -20,404 2,398,760 22,797 54,946 73,478 74,661 -13,879

72.29% -152.70% -0.02% -163.61% 288.59% 759.55% 748.05% 83.05% -1989.35% -16.76% 129.35% 126.18% 79.70% -104.37%

1,189,718.44 (217,876.46) 254,581.63 1,683,724.48 1,375,313.53 365,430.96 2,156,039.34 (39,896.19) 35,599,302.81 278,933.97 1,222,899.27 901,978.83 2,931,596.13 (33,534.22)

118.98 (7.91) 30.06 166.66 171.91 36.39 265.88 (4.87) 181.29 10.48 144.25 47.52 79.22 (3.04)

50

Table 22: TABLE OF BETA AND COST OF EQUITY

NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 CODE VNM ABT AGF BBC DHG DTT FMC FPT GIL GMD HAP HAS KDC KHA PAC SAM SAV SSC TRI TS4 TMS TNA DHA SFC DIC HPG PVD SCD TAC TCR VTB CAPM 1 Beta () 0.68 0.75 0.90 1.16 0.63 0.82 1.00 0.95 0.86 1.48 1.26 0.95 0.93 0.95 0.78 1.28 0.73 0.85 0.79 1.33 0.56 0.81 0.91 0.47 0.91 1.13 0.88 0.77 1.51 0.79 0.64 Cost of equity (%) 41.98 45.07 52.23 64.05 39.59 48.41 56.90 54.27 50.51 79.09 69.05 54.60 53.70 54.56 46.43 69.83 44.44 49.78 47.05 71.86 36.35 48.08 52.51 32.27 52.78 62.93 51.17 46.15 80.59 46.90 40.10 Beta () 0.41 0.28 0.34 0.83 0.41 0.37 0.57 0.73 0.53 0.79 0.56 0.42 0.58 0.50 0.34 0.76 0.48 0.51 0.57 0.77 0.34 0.47 0.59 0.28 0.65 0.68 0.83 0.43 0.82 0.17 0.27 CAPM 2 Cost of equity (%) 12.63 11.94 12.23 14.92 12.63 12.40 13.51 14.39 13.32 14.70 13.45 12.67 13.59 13.12 12.26 14.57 13.01 13.16 13.49 14.61 12.26 12.96 13.62 11.90 13.96 14.12 14.92 12.74 14.91 11.32 11.85

51

Table 23: TABLE OF FCFE GROWTH RATES SENSITIVITY ANALYSIS

FCFE growth rate 2010 2020 (%) 10 15 20 25 30 RESULT (successful rate) CAPM 1 61.29% 74.19% 74.19% 77.42% 74.19% CAPM 2 67.74% 67.74% 64.52% 61.29% 54.84%

Table 244: TABLE OF VIETNAM INFLATION RATE

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 Inflation rate (consumer prices) 3.90% 3.10% 9.50% 8.30% 7.50% 8.30% 24.40% 7.00% 11.80% Rank 91.00 115.00 189.00 175.00 166.00 175.00 211.00 167.00 205.00 Percent Change -20.51% 206.45% -12.63% -9.64% 10.67% 193.98% -71.31% 68.57% Date of Information 2002 est. 2003 est. 2004 est. 2005 est. 2006 est. 2007 est. 2008 est. 2009 est. 2010 est.

Source: CIA World Factbook

Table 255: TABLE OF VIETNAM GDP GROWTH RATE

Year 2003 2004 2005 2006 2007 2008 2009 2010 GDP - real growth rate 6.00% 7.20% 7.70% 8.50% 8.20% 8.50% 6.20% 5.30% Rank 22.00 23.00 27.00 23.00 29.00 28.00 55.00 26.00 Percent Change 20.00% 6.94% 10.39% -3.53% 3.66% -27.06% -14.52% Date of Information 2002 est. 2003 est. 2004 est. 2005 est. 2006 est. 2007 est. 2008 est. 2009 est.

52

2011 Average

6.80% 7.16%

32.00

28.30%

2010 est.

Definition: This entry gives GDP growth on an annual basis adjusted for inflation and expressed as a percent. Source: CIA World Factbook

53