.

FOREIGN TRADE UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION
-----&-----

FINANCIAL MANAGEMENT ASSIGNMENT

FINANCIAL ANALYSIS
OF TRAPHACO JOINT STOCK
COMPANY (TRA)

Group members: Pham Nhat Huy - 1712250008

Nguyen Thi Bach Linh - 1712250047
Phuong Thu Phuong - 1712250023
Nguyen Ngoc Thuy Trang - 1714250026
Course: Financial Management
Instructor Dr. Nguyen Thuy Anh

Hanoi, December 2019

 TABLE OF CONTENTS
1. Introduction............................................................................................................2
1.1 Purpose............................................................................................................2
1.2 Scope...............................................................................................................2
1.3 Methodology....................................................................................................3
1.4 Limitations.......................................................................................................3
2. Company overview.................................................................................................4
2.1 Company background, mission, vision and strategy........................................4
2.2 Operation.........................................................................................................5
3. Industry analysis.....................................................................................................8
3.1 Product Life Cycle...........................................................................................8
3.2 Porter’s 5 Forces..............................................................................................8
a) Rivalry among existing firms (Low)............................................................8
b) Threat of new entrants (High)......................................................................8
c) Bargain power of buyers (Medium).............................................................9
d) Bargain power of suppliers (Low)................................................................9
e) Threat of substitute products (High).............................................................9
4. Internal environment analysis...............................................................................10
4.1 Corporate Governance...................................................................................10
a) Corporate Governance analysis..................................................................10
b) The Board of Directors...............................................................................14
c) Shareholders Analysis................................................................................15
4.2 Position Assessment: Using BCG’s Matrix...................................................18
a) Estimating Growth rate..............................................................................18
b) Estimating Relative Market Share..............................................................19
c) Position Assessment...................................................................................20
5. Financial analysis.................................................................................................20
6. SWOT analysis.....................................................................................................29
6.1 Strengths........................................................................................................29
6.2 Weaknesses....................................................................................................29
6.3 Opportunities.................................................................................................29
6.4 Threats...........................................................................................................30
7. Recommendations................................................................................................30
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1. Introduction
1.1 Purpose
In corporate finance, the analysis is conducted internally by the accounting department
and shared with management in order to improve business decision making. This type
of internal analysis may include ratios such as net present value (NPV) and internal
rate of return (IRR) to find projects worth executing.
Many companies extend credit to their customers. As a result, the cash receipt from
sales may be delayed for a period of time. For companies with large receivable
balances, it is useful to track days sales outstanding, which helps the company identify
the length of time it takes to turn a credit sale into cash. The average collection
period is an important aspect in a company's overall cash conversion cycle. A key area
of corporate financial analysis involves extrapolating a company's past performance,
such as net earnings or profit margin, into an estimate of the company's future
performance. This type of historical trend analysis is beneficial to identify seasonal
trends.
Traphaco is the targeted company that we plan on analyze their financial reports. They
has been a major competitor in the vietnamese pharmaceutical market. However, we
have only seen the big picture of what they display to the public. It is their financial
status that speaks up what is really going on, what their future holds and whether they
can better the situation.
We believe our financial analysis of Traphaco and help assess the operational
efficiency and managerial effectiveness of the company. The report also indicates the
financial strengths and weaknesses and creditworthiness.
1.2 Scope
As we mention above, Traphaco has build their brand name in the mindset of many
Vietnamese customer with a stable position in the market. In order to analyze their
financial status, it is essential for us to discuss the overview of Vietnam healthcare
system and Vietnam pharmaceutical market.
For deeper look into the company, we will discuss the structure of the financial
statements, the economic characteristics of the pharmaceutical industry in which the
firm operates and the strategies the firm pursues to differentiate itself from its
competitors.
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 1.3 Methodology

At its core, the financial statement is a pulse of the financial health of Traphaco,
defining whether it is capable of paying expenditures, overburdened with debt or flush
with capital to expand. There are two primary methods of financial statement analysis:
horizontal and vertical. Other methods are extensions of these.

Horizontal Financial Data Analysis

Horizontal financial data analysis covers the financial information as it changes from
reporting period to reporting period. Comparing line items on the financial statement
such as cost of goods sold or net income from one quarter to another helps the business
leader define progress.
Vertical Financial Data Analysis
Vertical financial data analysis takes a look at the financial statement independent of
time. The goal of vertical analysis is to find the correlations of various line items to
each other in the financial statement.
Trends and Ratios in Financial Analysis
Because the horizontal analysis is looking at the same line items over time, it is
specifically designed to recognize trends in the company's financial status. The ratios
defined in vertical analysis help clearly show upward and downward trends in gross
and net profits.
1.4 Limitations
- Inflationary effects. If the inflation  rate is relatively high, the amounts associated
with assets and liabilities in the balance sheet will appear inordinately low, since
they are not being adjusted for inflation. This mostly applies to long-term assets .
- Subject to fraud. The management team of a company may deliberately skew the
results presented. This situation can arise when there is undue pressure to report
excellent results, such as when a bonus plan calls for payouts only if the reported
sales level increases.
- No discussion of non-financial issues. The financial statements do not address
non-financial issues, such as the environmental attentiveness of a company's
operations, or how well it works with the local community.
- No predictive value. The information in a set of financial statements provides
information about either historical results or the financial status of a business as of

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a specific date. The statements do not necessarily provide any value in predicting
what will happen in the future.

2. Company overview
2.1 Company background, mission, vision and strategy
BACKGROUND
Traphaco - Vietnam's No. 1 pharmaceutical brand is the result indicated by the AC
Nielsen brand health research conducted in 2018.
As a favorite traditional medicine brand with 2 product lines of Liver tonic (Boganic)
and Brain Tonic (Cebraton, cerebral blood circulation improvement) with their market
shares rank no.1 of their treatment group in 2018. Traphaco has promoted its research
and development capability to make breakthroughs in the manufacturing of western
medicines.
"Smart western-medicine manufacturing plant" inaugurated in 2017, went into
production and generated revenues of VND 250 billion right in 2018, bringing to the
market eye drops with the latest sealed-technology in the world, creating a
breakthrough in the pharmaceutical manufacturing technology in Vietnam. In
particular, the success in implementing new eye drops showed that: Vietnam's
pharmaceutical industry is fully capable of investing and mastering the most advanced
pharmaceutical technologies in the world to create highly effective pharmaceutical
products.
Pioneering in investment, research and application of advanced technology, application
of 4.0 in the management of production - distribution of pharmaceuticals are the very
important factors to affirm the status of Traphaco - the only enterprise in Vietnam
Pharmaceutical industry to have 3 consecutive years in Top 10 Sustainable Enterprises
voted by Vietnam Sustainable Development Council. With that pioneering spirit,
Traphaco brand is regarded by pharmacies as a reputed and safe enterprise in business,
trusted and loved by consumers over the past 46 years.
VISION
Vision 2020 to become No. 1 Enterprise Vietnam Pharmaceutical industry in terms of
revenue, profit and market capitalization.
MISSION
Our mission is to pioneer in the development of green pharmaceuticals to protect
human health.
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CORE VALUES: PIONEERING - CREATIVITY - RESPONSIBILITY -
IDENTITY
01: Pioneering: Take a lead in governance of green value chains, innovation and
application of new technologies and knowledge.
02: Creativity: Create high-quality products and services that are unique in the
Traphaco's achievements.
03: Responsibility: Make commitments and keep the commitments for the society,
shareholders, customers, partners and workers on the principle of profit sharing.
04: Identity: Traphaco's unique culture and people: Desire, passion and dedication.
 STRATEGY
In 2018, Traphaco has completed many tasks to prepare for future development:
planning long-term strategies, specifically each short-term development stage,
assessing objectively, frankly and in detail each achieved or unfulfilled strategic target
from which to make quickly and flexible adjustment for next steps ... are what being
applied by Traphaco in the sustainable development strategy for the period of 2017-
2020
1. Focusing growth on domestic market, creating breakthrough in the south.
2. Diversifying concentric products on the balance of capabilities among r&d -
production - distribution, ultimately upholding the comparative advantage of traphaco.
3. Modernizing supply chain based on advanced technology and modern management
systems.
4. Developing trade alliances and connections on extensive and steady distribution
system.
5. Balancing resources, synchronizing and resonance which creates the competitive
advantages based on the core competence for sustainable development
2.2 Operation
a. Corporate’s subsidiaries

Traphaco joint stock company includes 4 subsidiaries:

TRAPHACO SAPA LIMITED LIABILITY CO., LTD.
- Headquarter: Group 9, Sapa Town, Sapa District, Lao Cai Province
- Charter capital: VND 25 billion

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 - Main functions: Processing raw materials, input medicine, GACP research
practice of Traphaco. At the same time, it is the center for developing the
medicinal plant areas to supply raw materials for Traphaco

TRAPHACO HUNG YEN CO., LTD.

- Headquarter: Tan Quang Commune, Van Lam District, Hung Yen Province
- Charter capital: VND 250 billion
- Main functions: Manufacturing drugs, pharmaceuticals, medicines.

TRAPHACO HIGH TECH JOINT STOCK COMPANY (TRAPHACO CNC)

- Headquarter: Tan Quang Commune, Van Lam District, Hung Yen Province
- Charter capital: VND 94,703,570,000
- Main functions: Processing products and finished products of Traphaco

DAKLAK PHARMACEUTICAL - MEDICAL SUPPLIES JOINT STOCK

COMPANY (BAMEPHARM)
- Headquarter: 9A Hung Vuong Street, Buon Ma Thuot City, Daklak Province
- Charter capital: VND 19,415,880,000
- Main functions: Specializing in distribution of pharmaceutical products -
medical supplies in 02 provinces of Daklak and Dak Nong
b. Corporate culture

The message of the final year of the term, 2015 “Develop corporate culture”, focus on
the theme: “Cooperate in work – Share benefits – Commit to targets – Honor all
commitments” with the objective all individuals and departments in the entire
Traphaco network understand the activities of the Company, united for an objective,
cooperated to create synergized power, which will be the catapult to launch Traphaco
into a strong growth trajectory in the coming term.
The emulation campaign attracted 100% of employees to participate: with 200 signed
projects, 20 winners, total prize value of over VND1 billion. Many projects develivered
great results for the Company. Among which, the first prize belong to the project
“Apply KPI in the management of the enterprise”.
Activities in rallying the Company’s tradition day: Selected 20 most outstanding
individual to be acknowledged and given a prize, which is a trip to visit Bali –
Indonesia and Singapore; Organized many activities, sports and art shows with the

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intention to build corporate culture, enhance the cooperation between
departments/individuals within the Company for example:
The contest “bonding to show talents”, the soccer tournament, the tennis championship
to improve the morale of the employees and motivate them at work.
c. Applying technology: Traphaco catches up with Pharma
 Modern pharmaceutical technology: The plant is built on an area of 46,288
m2 including 3 workshops and 5 production lines. With the application of information
technology in management and production operation, the plant manufacturing chains
are fully synchronized and fully automated: The line of eye-nose drops of BFS
technology - the most advanced in the pharmaceutical industry; the line of pill
production is equipped with the automatic and consecutive system, which is operated
by the European standards for robotic arms. Large-capacity syrups medicine and syrup
chains are fully synchronized and automatically connected. Based on the principle of
"No touch, No dust" in production (no human impact and no dust generation), the
whole line minimizes human intervention in production, improving product quality.
 Exploiting the integrated platform: The ERP platform allows the Company to
manage the process seamlessly (from forecasting, ordering and manufacturing to
distribution planning), connecting components within a common system. In the near
future, the ERP project allows Traphaco to monitor and digitize most operations to
solve common challenges in the pharmaceutical industry: manage products expiration
dates, track products in the supply chain, update prices for different sales channels,
forecast demand... This is an inevitable trend replacing separate management software
as before.
 Optimize distribution activities: Traphaco is the first pharmaceutical company
in Vietnam to apply DMS solution in distribution system management. In 2014,
Traphaco was the first pharmaceutical company in Vietnam to apply DMS solution in
distribution system management. The DMS allows exploitation in many aspects:
expand points of sale, closely monitor the sell-out situation, timely capture inventory at
each point of sale to balance inventory of both supply chain, monitor order data and
actual delivery to agents to fully exploit market potentials, optimally implement
promotion programs (display, accumulate points) to clients, measure performance...
Currently, Traphaco is making good use of DMS in managing over 27,000 pharmacies,
becoming a distribution partner for many international pharmaceutical and health care

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companies such as Kobayashi (Japan), Natural Factors - Factors Group (Canada),
Westland - Pure Nutrition (New zealand)

3. Industry analysis
3.1 Product Life Cycle
Pharmaceutical is a specific industry that
requires professional point of view. Traphaco
is a manufacturing company with an ultimate
goal: to provide green medicines for the sake
of people’s health.
The pharmaceutical product life
cycle comprises all the pharmaceutical
processes from drug discovery through launch
to access. These activities are monitored
closely by the regulators, who intercept at the
strategic decision points.

3.2 Porter’s 5 Forces

a) Rivalry among existing firms (Low)
- High entry barriers due to costs associated with research & development of new drugs
(i.e. years of investment in R&D for a drug that may/may not work)
- Vietnamese government regulation over health-related products are very strict, which
may cause new comers a tough time with tons of paperwork and requirement to meet.
- Expenses for R&D in studying new product are considerable. Medicines are of
importance, which directly relate to the matter of life and death. As a result, they need
clinical study and approval from the government drug administration.
- The threat of entry posed by new or potential competitor is a low competitive force
due to the above entry barriers & regulatory constraints.
- However, there has been a trend in imported supplements as the higher demand of
Vietnamese people. With the growth of living standards and their preference for
foreign made products, foreign competitors may find Vietnam as a dynamic market to
infiltrate.

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 b) Threat of new entrants (High)
- High rivalry among main companies in the industry. For example the current rivalry
in the erectile dysfunction space where Bayer & GlaxoSmithKline claim that Levitra
works faster or Eli Lilly & ICOS claim that Cialis works longer than Pfizer’s Viagra
- This means that in the area of pharamaceuticals Vietnam has been or will be reducing
its import tax to an average of 2.5% within 5 years of the accession. In addition, the
domestic pharmaceutical industry also see improvements as counterfeit activity and
intellectual property theft is clamped down on. This should therefore improve
competition in the local marketplace, with pharamaceuticals expected to become much
more competitive in the long term. Local consumers should benefit from this
competition in terms of product quality improvements, price reductions and a wider
product choice.
- The degree of rivalry among existing firms is a high competitive force
c) Bargain power of buyers (Medium)
- Hospitals & other health care organizations buy in bulk quantities and exert pressure
on pharmaceutical companies to keep prices in check
- Regular patients have lost bargaining power due to price increases in generic drugs
- As pharmaceutical products are necessary for their health, the demand for this type is
unavoidable and not negotiable.
- The bargaining power of buyers is a medium competitive force.
d) Bargain power of suppliers (Low)
- Sales for the pharmaceutical industry concentrate in a handful of large players and
that has decreased the bargaining power of suppliers.
- Most of the local manufacturers do import semi-finished products then to label with
their brands and distribute to professional and patients. Most of suppliers are
multinational pharmaceutical companies. After WTO accession, the power of supplier
will be reduced thanks to multiple suppliers with competitive price
- The bargaining power of suppliers is a low competitive force
e) Threat of substitute products (High)
- Demand for generic versus brand name drugs has increased because of the costs
- Generic drug companies do not have the high costs associated with the research &
development of new drugs and that allows them to sell at cheaper prices
- The closeness of substitute products is a high competitive force

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Overall and based on the above analysis of Porter’s Five Forces, we can conclude that
the pharmaceutical industry is not attractive for new entrants. It is every strategist’s job
to evaluate company’s competitive position in the industry and to identify what
strengths or weakness can be exploited to strengthen that position. The tool is very
useful in formulating firm’s strategy as it reveals how powerful each of the five key
forces is in a particular industry.

4. Internal environment analysis

4.1 Corporate Governance
a) Corporate Governance analysis
Role of governance to traphaco’s development
Corporate governance is considered the key for sustainable growth and development in
long-term by TRAPHACO. Beside building a strong governance structure based on
obeying Vietnam’s law and application of international practices, TRAPHACO has
adopted internal management regulations with the aim to create a coherent process to
control and supervise the Company’s activities professionally, clearly and efficiently,
contributing to ensure shareholders’ interest in harmony with other stakeholders’
including clients, employees and community
Governance principles

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Governance model at Traphaco

Governance structure at traphaco is as follows:

General Assembly of Shareholders include all shareholders with voting right. This is
the most powerful body to make decisions of Traphaco.
Board of Supervisors is responsible for implementing duties assigned by General
Assembly of Shareholders, supervising Board of Directors and CEO’s activities in

11
managing and operating Traphaco’s business. Board of Supervisors is totally
independent from Board of Directors and CEO.
Board of Directors is the managing body of Traphaco. It can represent Traphaco to
make decisions and conduct rights and responsibilities of Traphaco that do not belong
to GAS’s authority.
Supporting sub-committees for Board of Directors: Board of Directors set up sub-
committees to advise, recommend and support activities of Board of Directors.
Secretariat: Office of Board of Directors functions as the Company’s secretariat in
order to support managing activities and make them more efficient. The office is in
charge of organizing meetings for Board of Directors, Board of Supervisors and
General Meeting of Shareholders, ensuring drafting, obeisance and periodical
evaluation of managing policies and practices, providing fiscal information, copy of
minutes of Board of Directors’ meetings and other information for members of Board
of Directors and Board of Supervisors as well as conducting other duties as regulated
by Law, Internal Managing Policies and The Company’s charter.
CEO and Executive Board are responsible for managing and directing business
activities of the company by decentralizing power for divisions/sections managers of
the company’s office to directly deal with specific tasks as well as support other
subsidiaries in business.

Legal framework
- Obey vietnam’s law of corporate governance and information disclosure: In addition
to building corporate governance frame based on obeisance of Vietnam’s law and
application of international and regional practices, Traphaco has drafted and published
internal regulations to create a coherent management structure in order to control and
supervise Traphaco’s activities professionally and clearly. In 2018, Traphaco will
amend the charter and publish (new) internal regulations of corporate governance
pursuant to decree 71/2017/NĐ-CP on corporate governance applied for public
companies and circular 95/2017/TT-BTC on instruction on some articles of decree
71/2017/NĐ-CP.
.............- Enhance governance capability based on application of the best international
practices: For Traphaco, enhancing the quality of corporate governance is essential to
its development strategy which aims to build up a strong governance system based on
application of the best international practices along with power of internal resources in
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order to control and supervise the Company’s activities more responsibly, transparently
and effectively.
- Apply governance criteria pursuant to ASEAN governance scorecard: This was the
3rd time that Traphaco applied and compared criteria pursuant to ASEAN scorecard
with the Company’s activities in order to enhance governance capability and support
members of Board of Directors, Executive Board and Board of Supervisors in
understanding and applying principles pursuant to governance scorecard in terms of
shareholders’ rights, stakeholders’ roles, information disclosure and transparency,
Board of Directors’ responsibility so that the Company can develop sustainably in
long-term.
- Enhance governance capability for members of bod, board of supervisors, executive
board and managers by training courses of corporate governance and sustainable
development: Strengthening training for Senior Managers of Corporate Governance
pursuant to international standards was one of Traphaco’s main focuses. Therefore, in
2017, the Company organized training course of Corporate Governance for all Senior
Managers with the aim to improve knowledge and skills of corporate governance
pursuant to Vietnam’s law and international standards for members of Board of
Directors, Executive Board, Board of Supervisors and other leaders of Traphaco and its
subsidiaries.
In 2018, BoD members has joined programs on ‘corporate governance’, in particular:
 Building and implementing effective Board activities: The role of
Chairperson and the succession plan.
 Whistleblowing system and the application of UK Governance Rules for
Vietnamese enterprises.
 Middle manager and leader mindset.
 What businesses need to do to attract strategic investors through M&A
transactions

In 2019, the highlighted focus is governance projects to achieve the following

goals:
- Reform all governance system and principles based on best practices and yet
ensure the Company’s identity, culture and core values;

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 - Contribute to actualizing the development strategy thanks to application of ERP
management system, optimize products of New Factory Projects, exclusively
distribute and boost governance of green value chain;
- Apply modern technology and tools to increase operation efficiency and
productivity, cut cost, improve competitiveness and maximize employees’
ability
b) The Board of Directors
Rights and duties of board of directors
Pursuant to the Law on Enterprise and Traphaco’s Charter, Board of Directors of
Traphaco is the managing body of Traphaco. It can represent Traphaco to make
decisions and conduct rights and responsibilities of Traphaco that do not belong to
GAS’s authority.
Performing roles and duties of Board of Directors, in 2018, the Board of Directors of
Traphaco supervised and directed the following tasks within its rights:
 Corporate governance and senior personnel activities of the Company;
 Direct the formulation and approve the business proposal and strategy of the
Company;
 Audit financial reports of the Company;
 Organize Annual General Meeting (AGM), report and get GAS’s approval of
issues regulated in the Charter;
 Direct dealing with specific issues within its right based on CEO’s proposal to
timely implement daily business of the Company;
 Supervise CEO and other managers

Member structure of board of directors

BoD maintains its operation in pursuant to regulations in the Company’s Charter and
BoD’s operating rules with 07 (seven) members. The followings are list of BoD
members as of December 31st, 2018:

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List of BoD members for the 2016 – 2020 period (as of December 31st, 2018)
Following the guidance in Decree 71/2017/NDCP dated 06/06/2017, guidelines on
corporate governance apply to public companies. Traphaco's Board of Directors for the
2016-2020 term consists of 07 members, including 02 independent Board members and
4 non-executive members who are experts in strategy, economics and have practical
management experience at domestic and foreign companies and corporations. This
helps to ensure independence of BoD in evaluating, approving and making decision for
issues proposed by Executive Board.

Meetings of BoD focused on key matters as followed:

Providing concrete guidance to the implementation of the Sustainable Development
Strategy for the 2017-2020 period; developing some component strategies; developing
Business Plan for the year of 2018 and 2019;
 Providing concrete guidance to the implementation of business plan and
Resolution of the General Shareholders Meeting for the 2016-2020 term,
Resolution of the 2018 annual general meeting;
 Directing the amendment of the Company's Charter and promulgating the
internal regulations on corporate governance under Decree 71, Circular 95;
 Directing the operation according to the schedule of Vietnam Pharmaceutical
Plant, directing and supervising the registration of EU-GMP standards for the
plant, monitoring the progress of implementing ERP projects (Enterprise
Resource Planning);
 Directing the assessment on Traphaco’s brand health;
 Directing the strengthening of the Southern branch's capacity, advising on
revenue growth and creating breakthroughs in the Southern market;
 Consolidating the senior leadership of the Company, expand/ develop branches
and restructure its divisions, committees;
 Directing policy focus for ETC channel, establishing hospital sales division;
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  Directing and supervising the growth of imported products and signing
distribution contracts with large pharmaceutical companies;
 Strengthening relationship with investors;
 Carrying out activities to celebrate the 46th anniversary of the Company’s
traditional day;
c) Shareholders Analysis
Shareholder information

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Shareholder relationship

- Strengthening information transparency, improving the reliability of

information providing to the market

Diversifying information channels for shareholders and investors Information is the

foundation of all investment decisions because Traphaco strives to diversify and
improve the quality of information channels to facilitate shareholders and investors to
access information fully and promptly for timely strategic orientation, business
performance results, corporate governance situation
In addition to the disclosing of information in accordance with the provisions of
Circular 155/2015/TT-BTC, Traphaco also proactively announced timely information
that is considered critical, which may affect investors' interests; Actively publish
information about the situation of production and business activities, major events of
17
the Company so that investors can catch up with information related to Traphaco's
activities. Traphaco has invested in developing Investor Relations application on
Mobile apps. With this application, investors can easily access and look up information
about Traphaco, promptly update and analyze information about business activities and
management situation at Traphaco and its subsidiaries.
- Protect shareholders' rights and ensure equality among shareholders

The implementation of policies to protect shareholders' interests to ensure equality

between major and minor shareholders is always focused by Traphaco so that
shareholders are provided with the same information, including information regarding
the time and rate of dividend payment, issuance time, annual and extraordinary General
Meeting of Shareholders, and facilitated voting rights of shareholders...
- Standardize the process of organizing the agm in accordance with current
regulations and international practices

On the basis of compliance with the current legal regulations and the application of the
best international practices on corporate governance such as the ASEAN Governance
Scorecard, OECD and IFC Corporate Governance Principles, Traphaco continues to
standardize the process of procedures for convening meetings and voting at the General
Meeting of Shareholders, posting invitations for meetings on three consecutive terms
of a newspaper with a nationwide distribution scope, and fully publishing meeting
documents according to the regulations on the website 15 days before organizing the
meeting and guiding shareholders to access the documents as a basis for discussion and
voting at the General Meeting. In addition, Traphaco always encourages shareholders
to be more aware of their rights including voting rights, rights to receive dividends, and
the right to nominate candidates to the Board of Directors, Board of Supervisors, and
the right to approve annual financial report and right to access information about
Traphaco's activities.
- Maintain regular cash dividend policy over the years

Traphaco understands that one of the most important rights of shareholders is the right
to receive dividends. Through regular cash dividend policy since being listed, Traphaco
wants to ensure periodic dividends and ensure a stable income for shareholders. In
2018, with more than VND 124 billion of dividend payment, the total amount of

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dividends paid by Traphaco to shareholders since being listed were up to nearly VND
1,000 billion.
4.2 Position Assessment: Using BCG’s Matrix
BCG’s matrix is a method which evaluate an enterprise’s attractiveness via 2 criteria:
the relative market share and the market’s ability to grow. Each operation will be
located base on these criteria. The matrix has 2 axis: the column is the market’s ability
to grow or Growth rate, and the horizontal axis is the Relative Market share.

a) Estimating Growth rate

We can use “Growth rate” term to measure lots of index. However, in BCG’s matrix,
it’s common to use revenue as a criteria to calculate the change. The average growth
rate can vary depending upon whether it is an arithmetic average or a geometric
average. However, there are some negative change in revenue, and Measures of
historical growth are distorted by the presence of these numbers. So we will choose
arithmetic average growth rate which has the formula as follow:
n

Arithmetic Average = ∑ g t where gt = Growth rate in year t

t =1
n

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Due to scarce resources, we only estimate the growth rate of Traphaco in 4-years
period from 2015 to 2018.

Year 2018 2017 2016 2015

Revenu 1.808.372.414.400 1.880.138.568.64 2.005.540.489.832 1.976.972.983.547
e 0
% -3.8% -6.3% 1.4%
change
Arithmetic Average -2.9%

Traphaco is estimated to have negative growth rate, so they need to change their
products or strategy to be more profitable.

b) Estimating Relative Market Share

We apply the simple method:
Total sales of Traphaco
Relative market share =
Total sales of pharmaceutical industry
7
6.42

6 5.81
5.24
5 4.72
4.22
4

0
2015 2016 2017 2018 2019F

Revenue (billion USD)

Figure 1: Total market value of pharmaceutical industry in Vietnam (2015-2019).

Source: Business Monitor International – BMI

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 Market share of Traphaco is 1.34%. This proportion is quite small, because the
company mainly focuses on Oriental medicament, which only take 1-1.5% of total
medicines in the market.

c) Position Assessment
Due to these valuations above, we think that Traphaco should lie on Dog field.
However, Traphaco is the biggest player in their Oriental medicament market, so they
have unique competitive advantage compared with other firms. As the giant in this
field, they did not really care about the market share index, but try to generate as much
profit as possible same as a Cash Cow than a Dog. That what the did in the past, but
now “the Cow are being squeezed milk” that led them to make a change in strategy and
move their position closer to the Question Mark box.

5. Financial analysis
5.1 Balance sheet
a. Assets
One of the giant in Vietnam pharmaceutical market compared with Traphaco is Duoc
Hau Giang (DHG). Therefore we choose DHG to make some analysis about Traphaco
clearer and more comparative. A closer look on their balance sheet shows that DHG’s
current assets is 3.15 trillion VND, but the growth rate is almost unchanged. In 2018,
the growth rate of cash and cash equivalents and acount receivables (A/R) decreased
whereas short-term investment increased, indicated that the company’s sales are
stagnanting or this company is focusing on turning to financial investment projects.
This is also true in examining long-term accounts such as investment properties and
long-term investments.

With Traphaco, this company’s current assets increased 113.54 billion VND or 15.2%
compared to 2017, with the most contributor is cash and cash equivalents accounts.
This resulted in the improvement in total assets (increased 80.16 billion VND).
Current assets
Moreover, the ratio = 54.1% is relatively small to other firms in the
Total assets
industry (DHG’s is 74.8%, Pymepharco’s is 80.2%), showing that non-current assets,
especially fixed-assets, still account for a large proportion. This partly proves that
21
Traphaco is operating inefficiently in sales. Take a close look at some asset
efficiently ratio as below:

Ratio Formula Traphaco DHG

(2018)
2018 2017 2016 2015

Asset Sales 1.21 1.24 1.46 1.52 1.05

Total assets
turnover
Fixed asset Sales assets ¿ 2.76 2.74 8.18 8.40 4.53
turnover Total ¿

Inventory COGS 2.56 2.49 3.29 3.41 2.43

Inventory
turnover
Receivable Credit sales 11.78 9.40 6.88 6.64 6.60
turnover Account receivable

As can be seen, from 2015 to 2018, Traphaco’s asset turnover is much larger than that
of DHG. This shows that the efficiency in Traphaco’s assets using is better in
general. However, this ratio has been declining year by year. This may be due to the
emergence of many new domestic enterprises along with the globalization which
makes competition in this industry become increasingly fierce.

Traphaco's fixed asset turnover decreased for the same reason as above. Unusually, the
company's ratio in 2017 has decreased by more than 3 times compared to 2016. This
can be explained by the construction and inauguration of a new western medicine
factory in Hung Yen, leading to a sharp increase in fixed assets. Inventory turnover
decreased from 3.41 in 2015 to 2.56 in 2018, leading to an increase in inventory days,
capital turnover time.

b. Liabilities

22
Liquidity picture of Traphaco is shown via 2 ratios: current ratio = 2.75 and quick ratio
= 1.67. Both ratios increased compared to the previous year (2017: current ratio = 1.95
and quick ratio = 1.08), showing that the solvency of the business is improving. This
is because the company owns more cash and some short-term payables have been paid.
However, 2.75 is a fairly large number, this may imply that the resources are not
being fully utilized. The company is keeping more than the required ‘Margin of
Safety’ and, in turn, hampering its growth. This implies that the resources may be tied
up in the working capital of the company and are not put to use in profitable ways. In
this case, the company needs to stop playing safe and reduce it, so as to have the
optimum liquidity position.

Long-term loans and finance lease obligations increased nearly 17 times compared to
2017, contributing most for the company’s liabilities. This is a low-risk channel to
quickly increase long-term capital of businesses. Moreover, depreciation from financial
assets will be recorded as operating expenses, leading to a decrease in profit before tax,
and the enterprise will pay less tax.

c. Equity
Analyzing capital structure by leverage ratios of Traphaco in the last few years:

Ratio Formula Traphaco DHG

(2018)
2018 2017 2016 2015

Debt-to- Total liabilities 0.44 0.35 0.36 0.34 0.34

Total equity
equity
Debt-to- Total liabilities 0.30 0.26 0.26 0.25 0.25
asset Total assets

Equity Total assets 1.44 1.35 1.36 1.34 1.34

Total equity
multiplier
Interest EBIT 17.72 124.9 315.3 177.1 25.66
coverage Interest expense 1 8 0
EBIT: Earnings before interests &

23
ratio taxes

Traphaco's capital structure has been stable for 3 years from 2015-2017 with DTA ratio
(debt-to-asset) fluctuating at the threshold of 0.25, leading to the financial leverage
maintained at 1.35, proving that only 35% of assets are financed by debts. This ratio
increased even more in 2018, as the company made long-term loans and finance lease
obligations from banks, leading to liabilities that account for more than% of the total
capital. Moreover, interest expense payment for this loan, along with revenue in 2018
decreased compared to 2017, leading to a decrease of VND 106.82 billion in EBIT,
which has reduced the Interest coverage ratio, proving the ability of the enterprise to
pay debts has reduced.

It can be seen that, despite the growth over the years, the liability is quite low
compared to quity. This is a fairly safe financial structure and it seems to be the
familiar style of Traphaco for many years. This difference leads to low DTA which in
principle make companies face less financial risk. However, this ratio is too low,
indicating that the company does not really know how to borrow to do business and
make optimal use of its financial resources. In other words, the company has not yet
optimized its financial leverage. Therefore, in recent years, the company's
management has recognized the problem and tried to improve the financial structure of
the company. This leverage will affect an important ratio of Return on Equity (ROE)
which we will analyze in more detail below.

5.2. Income statement

a. Business scale
Analyze the indicators of revenue and profit of the company through the years using
trend analysis:

Items 2018 2017 2016 2015

Revenue 1.808.372.414.4 1.880.138.568.64 2.005.540.489.8 1.976.972.983.5
from 00 0 32 47
SG&RS
% 91.5% 95.1% 101.4% 100%
Deductio 10.022.748.108 9.696.711.713 7.206.269.642 2.971.145.364
24
ns
Net 1.798.349.666.2 1.870.441.856.9 1.998.334.220.1 1.974.001.838.1
revenue 92 27 90 83
from
SG&RS
% 91.1% 94.7% 101.2% 100%
COGS 863.658.955.81 829.783.773.50 1.003.653.137.6 1.064.756.821.2
4 1 37 56
% 81.1% 77.9% 94.3% 100%
Gross 934.690.710.47 1.040.658.083.4 994.681.082.55 909.245.016.92
profit 8 26 3 7
from
SG&RS
% 102.8% 114.5% 109.4% 100%
(SG&RS: sale of goods & rendering of services)

2
1.8
1.6
Value (thousand billion VND)

1.4
1.2
1
2017
0.8 2018
0.6
0.4
0.2
0
Total sales Gross profit Operating Net income
profit

Looking at the gloomy overall situation of the pharmaceutical industry in 2017 and
2018, Traphaco also could not avoid that trend when not recording revenue and profit
growth over the same period. Specifically, revenue in general peaked in 2016, then
sharply decreased after 2017 at an alarming rate (more than 125 billion VND lost after
only one year).

25
In contrast, COGS was optimized during this period, indicating that the company had
relatively good control of production costs. This is probably the brightest point in the
company's income statement in recent years. The main reason is that Traphaco's main
sources of income are traditional medicine products, the main activities are Hoat Huyet
Duong Nao and Boganic, in addition to western medicines and exploited goods
(products of export and import companies, mining company, ...). In 2018, traditional
medicines accounted for more than 70% of total drug production and more than 80% of
profits. Traditional medicine products are usually made from domestic materials,
which helps reduce input costs. However, with the gradual expansion into new western
products, as evidenced by the construction of a large capacity western medicine factory
in 2017, it has gone against the company's profit-making philosophy. This causes raw
material prices to rise, leading to increased COGS which reduces profitability.

Based on the numbers, we are more certain about the company's current business
situation:

Ratio Formula Traphaco DHG

(2018)
2018 2017 2016 2015

Gross margin Gross profit 0.52 0.55 0.50 0.46 0.39

Sales

Operating EBIT 0.13 0.17 0.14 0.13 0.17

Sales
margin
Net profit Net income 0.10 0.14 0.11 0.10 0.15
margin Sales

Traphaco's business results after the end of 2018 recorded a decline of more than 3.8%
in sales and a 4% increase in COGS, leading to a decrease in gross profit. An increase
in operating expenses, including selling expenses & administration expenses, along
with a change in gross profit, is the reason for the decrease in operating profit. The
positive point is that finance expense is only 12 billion VND compared to 82 billion
VND in 2016, showing that the company is reducing the use of loans in its production

26
and business activities. This helps to pull back a part of the company's profits at the
moment, as well as minimize the risk of interest payment in the following years.

Similarly to Traphaco, many other big players such as Pymepharco (PME), Hau Giang
Pharmaceutical (DHG), OPC Pharmaceutical (OPC) all showed that business activities
did not prosper in 2018. Considering the case of DHG Pharma Giang (DHG), the
financial statements showed that total sales decreased by more than VND 100 billion,
or 3.2% compared to the same period last year. However, this company focuses on
producing diverse products and providing services to households in Vietnam, while
Traphaco has strategic herbal products familiar to consumers. The difference in
product structure and business strategy makes the COGS of the two companies also
have a big difference. Traphaco's gross margin is many times larger than DHG (0.52
with 0.39 in 2018), showing that the rest of DHG's sales revenue (mainly COGS)
accounts for a large proportion. From the case of these two companies, it can be
predicted that many companies are aiming to diversify products and create new
values, not just a pharmaceutical manufacturers, regardless of increase in input
cost.

About net income:

800

700

600
Value (billion VND)

500

400 TRA
DHG
300

200

100

0
2015 2016 2017 2018

Traphaco's net income plummeted from VND 260 billion in 2017 to only VND 175
billion in 2018. It is known that this is the first time the company has recorded negative
profit growth since 2014. This deep decline is expected for a gloomy and difficult
future for corporate management when they have to review the effectiveness of

27
their previous decisions. As a result, EPS (Earnings per share) also dropped sharply to
3,352 , more than 1/3 lower than 2017. This may cause investors and shareholders to
be concerned about the performance of the company. reduce the capital invested and
make it harder for the company to recover. Therefore, it is necessary to demonstrate the
effectiveness of the change as soon as possible, first of all improving the sales to make
profits grow again. One of the key goals that the company has set out in 2019 is the
innovation of marketing methods, in order to reach the right customers for new
products as well as retain loyal customers.

For DHG, the company's net income increased slightly, resulting from the income from
the liquidation of fixed assets and the end of penalties from tax inspection results.
These amounts are temporary and do not take place every year, so basically the
situation of DHG is similar to the pharmaceutical market in general and Traphaco in
particular. However, a slight increase of 1.9% in EPS will attract investors to facilitate
the company's growth in the future.

Another important indicator of a company's profitability is Return on Equity (ROE).

The higher the ROE, the more stable it is, showing that the capital is being used
effectively and bringing more profits to the company. To further analyze this indicator,
we use DuPont Analysis:
Net income Net income Total sales Total assets
ROE = = × ×
Shareholder s Equity Total sales Total assets Shareholder s' Equity
'

= Net profit margin × Asset Turnover × Equity Multiplier

= 0.10 × 1.21 × 1.44 = 0.1742 = 17.42%

Ratio 2018 2017 2016 2015

Net profit margin 0.10 0.14 0.11 0.10
Asset turnover 1.21 1.24 1.46 1.52
Equity Multiplier 1.44 1.35 1.36 1.34
Return on Equity 17.42% 23.44% 21.84% 20.37%

It can be seen that Traphaco's ROE has always maintained and grown at a high level,
reaching a peak in 2017. After that, net profit margin and asset turnover decreased
simultaneously, showing that profitability on each revenue is decreasing and The
amount of new assets is not being used effectively. The figure of 17.42% is relatively
28
stable when compared to the criterion of evaluating an effective business of many
organizations by 15%, but it is supported by the financial leverage index. It should be
questioned whether this support will continue to offset the decline in business
efficiency in the coming years? Does Traphaco's financial capacity still guarantee
safety when trying to increase liability? It is clear that the focus on capital restructuring
to beautify financial statements is only a temporary solution. The important thing is
that businesses need to find some way to improve the business face and show a positive
signal in the long term, not in the next 1 or 2 years.

In summary, Traphaco's financial situation is showing signs of decline. There are three
main reasons for this:
- The general situation of the pharmaceutical market as more and more players
join and compete with each other, causing traditional players to face many
problems.
- The Board of Directors has set a new direction for the company when
focusing more on western products and services. Obviously, this will
increase costs and risks, further reduce sales efficiency when spread too
much, while traditional traditional products are still stable and profitable for
the company.
- The construction of a large factory to serve the above strategy has
significantly increased costs, increased loans and reduced resources to focus
production, so the scale and revenue have dropped sharply since 2017.

5.3 Cashflow statement

Items 2018 2017 Change in Change in

value %
Cash flows from operating 168.670 185.135 (16.465) -8.8%
activities
Cash flows from investment (43.150) (132.803) 89.653 -67.5%
activities
Cash flows from financing 29.710 (95.935) 125.645 -130.9%
activities
Net (decrease)/increase in 155.230 (43.603) 198.833 -456%

29
 cash
for the year

Net cash flow from operating activities did not change much. Specifically, the
depreciation of tangible fixed assets increased by 37.4 billion VND, due to the
construction of the factory as mentioned above. Adjustments in working capital are
relatively complicated and depend on a variety of causes, the amount of money earned
from current assets decreases, and the amount paid for debt and taxes also decreases.
This suggests that repayment may be dependent on converting existing assets into cash,
and this is clearly struggling. Liquidity and debt payment of the company are
problematic.

Cash from investing activities still recorded a negative figure but cash outflow has
dropped by 89.6 billion VND compared to last year. Financial activities also brought a
large amount of money to businesses when in 2018, the amount of money obtained
from external borrowing increased by 329 billion VND compared to 149 billion VND
in 2017. This cash flow was not used. to invest in production activities as seen above,
so it is used to pay the principal and interest due. In coming years, businesses will be
under very heavy pressure on the solvency of these loans.

It can be seen that the cashflow structure is unreasonable when the company
focuses too much on financial activities without improving business operations,
leading to the fact that although the money increases, this increase mainly comes from
borrowed capital. temporarily and negatively affect the financial health of the company
in the future.

6. SWOT analysis
6.1 Strengths
- Traphaco is regarded as a prestigious brand, loved and trusted by clients. Besides
good product quality, it is also popular with Vietnamese customers thanks to a strong,
wide, deep, modern and professional distribution system
- Traphaco is the biggest player in their Oriental medicament market, so they have
unique competitive advantage compared with other firms

30
- Traphaco always attachs special importance to develop corporate culture which
objective all individuals and departments united for an objective, cooperated to create
synergized power. At Traphaco, generations of leaders have vision, enthusiasm,
innovation and employees have responsibilities, knowledge and morals.
- Advanced technology, IT-based goverance are applied for higher efficiency in the
operations of the company.
- Strong R&D capability, development of medicines extracted from medicinal herbs
- Financial stability is remarkable, as illustrated in the Financial analysis part
6.2 Weaknesses
- Low capital ownership ratio of employees
- Not-perfect distribution system in the South
- No effective exploitation of products in the portfolio

6.3 Opportunities
- Partnership in distribution, which gives an advantage to companies having mastered
the distribution system
- Growth opportunities are abundant because the market volumes remain high. Also,
the development of medicines and medical discoveries opens new doors for
pharmaceutical company to develop
- The population is large and aging; environmental pollution and morbidity are
increasing; the spending for medicines and supplements is swelling. Above 70% of
Vietnamese are from urban who has low standard of living, the demand for reasonable-
priced medicines is high. Therefore, domestic pharmaceutical enterprises are favorable.
6.4 Threats
- A fierce, escalating competition among pharmaceutical enterprises in terms of
production technology and distribution system
- The market is full of chaotic competition caused by small-sized companies who
pursue chasing strategies (especially in the market for traditional medicines)
Meanwhile, due to the competition among large companies, many of them have
switched their investments into traditional medicines industry
- Clients in each target group are more demanding which require activeness,
innovations and development from pharmaceutical companies

31
- The development strategy of the industry is expected to face plenty of changes; the
state regulations applied to the industry have not been encouraging for pioneers
- The market of raw materials is dependent on foreign ones, mostly on the Chinese
market
- Though being a leading enterprise in the market, it is shown that Traphaco does not
operate highly-efficiently in sales. The resources of the company are not being fully
utilized. The company is playing safe which is easy to understand for a big player like
Traphaco; however, in the future, competitiveness will increase which could be a threat
for Traphaco if the current situation is not changed

7. Recommendations
In recent years, Traphaco not only reaffirms its goal of leading the oriental medicine
market of Vietnam, but also aims to conquer the western medicine market. Based on
the company’s vision and target and its financial analysis, we would like to make
recommendations as belows:
Continue to focus on the key Oriental medicines
Traphaco is a favorite traditional medicine brand with key product lines which are
Oriental medicines (in particular, Liver tonic (Boganic) an Brain tonic (Cebration,
cerebral blood circulation improvement). In 2018, their market shares rank No.1 of
their treatment group. These are the products that will keep Traphaco remain its
leading position in the industry and bring the major profit to the company.
In this case, a product-focused strategy, beginning with creating the next great thing by
evolving products and services to deliver value is what needs for Traphaco.

Put more effort in developing Western medicines

For a big player in pharmaceutical industry as Traphaco, diversifying products at this
time is necessary. With the opening of “Smart western-medicine manufacturing plant”
in Hung Yen in 2018, Traphaco shows its desire to conquer the western medicine
market. However, this is all just the beginning. It is the fact that manufacturing western
medicines still do not bring more value (in terms of profitability and market share) to
Traphaco. Therefore, besides headlines about “Vietnam’s most modern pharmaceutical
factory” or “Desire of a smart pharmaceutical plant”, the company has to truly increase
brand awareness. Regarding the goal of upgrading Traphaco's brand to be at regional
level, the Company has now selected Nielsen as partner, signed a research contract on
32
brand health, confirmed the Company's brand to be firmly in position of the
pharmaceutical industry

Take risks if possible

Financial analysis shows that the company is playing too safely. In fact, it is a common
feature of many pharmaceutical enterprises. This may stem from the "industry-
specific" of the medical industry that many managers come from people who specialize
in medicine and pharmacy, so they always place high safety and prudence factors. Low
debt is an advantage of a pharmaceutical business, but it is also a disadvantage,
because in business, the assessment of a business with good governance capacity
reflects in whether or not the company really make the most of the company's
resources, of which financial resources are an extremely important factor. As one of the
large-scale pharmaceutical enterprises, the annual turnover of Traphaco reaches
thousands of billion VND, but in financial management, the company still has a large
amount of untapped potential. It is shown that with the scale of Traphaco's capital, if
bank loans increase to 4 times the current loan level, the total liabilities will still be
lower than the equity, within the necessary safety level. The Company will only need
to push the net revenue increase by a small percentage, it will offset the additional
portion of financial costs when increasing debt.

33
REFERENCE
 Traphaco Annual Report (2015,2016,2017,2018)
 Articles on Traphaco official website (Traphaco.com.vn/en), Traphaco review
its operation in 2018 and initialize 2019 plan, Traphaco review its operation in
2017 and lauches 2018 plan, Traphaco with the goal of a multi-field leading
company, Traphaco inaugurates Vietnam’s most modern pharmaceutical
factory, etc.
 Jonathan Berk & Peter Demarzo, Corporate Finance (Third Edition)

34