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Researcher

& Educator

Due Diligence In Vietnamese Practice

Professional Auditors - PA

AFA Researcher & Educator

Information
First Name: Long Family Name: Phan Occupation: Auditor, Finance & Banking Consultant Firm: National Auditing Group Position: Deputy General Director and Partner Main Qualification: Master of Business (Monash Uni, Aus), CMA, CPA Cell: 0906816226 e-mail: long@mekongnag.vn

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Agenda

What you have learnt? Due diligence in Vietnamese practice Firm valuation issues Industry analysis Case studies

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What you have learnt?

In business, due diligence refers to investigating all areas of an organization before agreeing to an important transaction or merger. The term "due diligence" first came into common use as a result of the United States' Securities Act of 1933.
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Some DD aspects Due diligence can be:

The examination of a potential target for merger, acquisition, privatization, or similar corporate finance transaction normally by a buyer (acquirer). A reasonable investigation focusing on material future matters. An investigation on the current practices of process and policies. An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis.
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Questions asked An examination being achieved by asking certain key questions: How do we buy?

How do we structure the acquisition?

How much do we pay?

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We need information
Key Early Issues and Alarms Ownership and Capital Structure Directors and Governance Management Products and Services Research & Development and Technology Markets and Customers Competition Marketing, Selling, and Distribution

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We need information (contd)

Pricing Advertising Public and Investor Relations Manufacturing Purchasing and Outsourcing Human Resources and Employees Employee Compensation and Benefits Retirement Plans and ESOPs Culture of the Business Legal and Regulatory Affairs Government Business, Lobbying, and Politics
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We need information (contd)

Asset valuation key issues: Cash and Cash Management Accounting: General Questions Accounting: Policies Accounts and Notes Receivable Taxes Inventory Fixed and Other Assets Liabilities Cost of Sales and Gross Profit Selling and General and Administrative Expenses
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We need information (contd)

Asset valuation key issues (contd): Income Recognition and Backlog Intracompany Transactions Real Estate Investment Questions and Issues Off-Balance Sheet Items Assets and Liabilities Excluded Financial Ratios and Trends

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DD in Vietnamese Practice Mainly focus on Legal and Financial Due Diligence Legal DD done by Lawyers Financial DD done by Auditors Financial DD is to answer the question How much will we pay?
Net asset method Discounted Cash Flow (DCF)
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DD in Vietnamese Practice (Contd)

Main players in Vietnamese DD services market

Big4 Second tier audit firm Legal firms

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DD in Vietnamese Practice (Contd)

Documents request list for Financial DD Documents request list for Legal DD Luvina DD Report Bigbang DD Report

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Key issues in asset valuation in VN

Net asset value = Real assets - Real Liabilities

Real assets Virtual assets Real liabilities Contingent liabilities

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Key issues in asset valuation in VN

Real assets
Cash and cash equivalents Receivables Inventories Investments Fixed assets

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Key issues in asset valuation in VN

Real assets (contd)

Cash and cash equivalents
Cash count Bank confirmation Forex translation

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Key issues in asset valuation in VN

Real assets (contd)

Receivables
Validity of account receivables Aging analysis and provision for bad and doubtful debts Assessment of recoverable

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Key issues in asset valuation in VN

Real assets (contd)

Inventories
Cost vs. Net realizable value (NRV) Provision for devalued inventories

Investments
Fair value of investments
Listed equity OTC Long-term investments
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Key issues in asset valuation in VN

Real assets (contd)

Fixed assets
Net book value = Cost Accumulated depreciation Actual situation Actual capacity Market or fair value o FA

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Key issues in asset valuation in VN

Real liabilities
Account payables Short and long-term loans
A/P and loans: confirmations

Tax payables: Tax DD Employee payables: Human Resource DD

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Sample adjustments
Unit: VND Items Booked net ass et value (end of December 2010) 1 2 3 4 5 6 7 8 Write off the bad debts which were provisioned as doubtful debts at 31 December 2010 Write off the bad debts which were not provisioned as at 31 December 2010 Provis ion for doubtful debts as at 31 December 2010 Write off prepayment to suppliers which can not be recovered Write off the receivable amount from Boramtek (Contract No. 011996) and can not be claimed back and PIT Eliminate the overstated amount in other receivable and payble to employee Reclass ification of golf membership fee from other receivables to long term prepaid expense Provis ion for devalued inventory as at 31 December 2010 Amount 97,132,348,964 (1,309,056,022) (2,211,949,185) (1,251,759,968) (1,459,815,910) (317,343,200) (214,394,082) (855,078,334) (1,806,820,982) (9,426,217,682) 87,706,131,282 Notes

9 Write off advance to employees which can not be recovered 10 Write off deposit which can not be recovered 11 Provis ion for severance allowance 12 Record the foreign exchange rate difference to profit and los s account in 2010 Total amount Adjusted net asset value (end of December 2010)

Bigbang DD report

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Case study - RIC Read 3 recent years RICs financial statements Comments on factors that can affect net real asset value of the firm 15 minutes for reading 15 minutes for discussion

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Short Group Presentation Homework

Find 3 recent years audited financial statements of KMR (Cong ty Co phan Mirea - HOSE) Investigate relevant information of KMR

Comments on factors that can affect net real asset value of the firm Group presentation:
2 group will do presentation 10 minutes for each groups presentation 10 minutes for discussion among class

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Virtual Assets
Firm value do not only include net real assets but also virtual assets that results from: Value of human resource including management R&D Brandname Distribution channel Others These virtual assets were not recorded in the balance sheet of the firm.
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Contingent liabilities
Potential penalties Warranty obligations Guaranties Legal disputes Potential tax obligations Business commitments Contingent liabilities were not recorded in the balance sheet of the firm
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Discounted Cash Flow (DCF) Determine forecasted free cash flow of the firm Normally, at least 5 years in the future Using WACC as discounted rate WACC depends on risk of the firm

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Discounted Cash Flow (DCF) WACC = E/(D+E) x Re + D/(D+E) x Rd In which:

E: Market value of equity D: Market value of debts Re: Cost of equity determined by equity investors desire using CAPM model Rd: Cost of Debts determined by loan interest, firm ratings
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Phn tch Ngnh (5-Forces Model)

Mt doanh nghip b hn ch vi c im ngnh kinh doanh m doanh nghip ang hot ng Xc nh ngnh kinh doanh
Ngnh kinh doanh rng Ngnh kinh doanh hp Xc nh theo vng a l (V d: cn thp min bc v min nam, Bt ng sn H Ni, TP.HCM)

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Phn tch Ngnh (5-Forces Model)

Mt doanh nghip b hn ch vi c im ngnh kinh doanh m doanh nghip ang hot ng Xc nh ngnh kinh doanh
Ngnh kinh doanh rng (Ngnh vin thng) Ngnh kinh doanh hp (Ngnh dch v internet) Xc nh theo vng a l (V d: cn thp min bc v min nam, Bt ng sn H Ni, TP.HCM)

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Phn tch Ngnh (5-Forces Model)

Mt doanh nghip b hn ch vi c im ngnh kinh doanh m doanh nghip ang hot ng Xc nh ngnh kinh doanh
Ngnh kinh doanh rng (Ngnh vin thng) Ngnh kinh doanh hp (Ngnh dch v internet) Xc nh theo vng a l (V d: cn thp min bc v min nam, Bt ng sn H Ni, TP.HCM)

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Phn tch ngnh: S cn thit

Cu trc vn

Cu trc vn ny tt hay khng tt?

Cng ty kim ton Viettel Vinaconex Vietcombank

Vn vay 90%

Vn ch 10%

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Phn tch ngnh: Chu k ngnh

$
Khi ng Tng trng Bo ho Suy thoi

Kim ton

Vin thng di ng

Hng khng
Doanh thu Li nhun

Thi gian

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Phn tch ngnh: Cnh tranh - M hnh 5F

M hnh 5 nhn t cnh tranh ca Michael E. Porter Mc cnh tranh gia cc doanh nghip

S e do ca i th mi

T sut sinh li

S e do ca sn phm thay th

Quyn m phn ca khch hng

Quyn m phn ca nh cung cp

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M hnh 5 nhn t cnh tranh

Nhn t 1: Mc cnh tranh gia cc doanh nghip trong cng ngnh
T l tng trng ngnh (Ph thuc vo chu k ngnh) Mc tp trung trong ngnh: 4 doanh nghip dn u chim 60% th phn th c coi l mc tp trung cao Kh nng to khc bit (Differentiation) Chi ph chuyn nh cung cp Kh nng tn dng li th v quy m Chi ph thoi lui (Exit barriers)

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M hnh 5 nhn t cnh tranh (Tip) Nhn t 2: S e do ca i th mi

Kh nng tn dng li th v quy m Kh nng gia nhp vo h thng phn phi Cc ro cn php l

Nhn t 3: S e do ca sn phm thay th

So snh gia gi v kh nng p ng nhu cu (V d: hng khng v ng st, GSM v 3G, ) Kh nng chuyn i sang s dng sn phm thay th ca khch hng

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M hnh 5 nhn t cnh tranh (Tip) Nhn t 4: Quyn m phn ca khch hng
Mc nhy cm v gi ca khch hng Chi ph chuyn sang nh cung cp mi ca khch hng Kh nng to khc bit ho (iPhone) s lng khch hng Khi lng trung bnh mua bi mt khch hng

Nhn t 5: Quyn m phn ca nh cung cp

Mc nhy cm v gi ca khch hng Chi ph chuyn sang nh cung cp mi ca khch hng Kh nng to khc bit ho (iPhone) s lng nh cung cp Khi lng trung bnh bn bi mt nh cung cp

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Phn tch ngnh: V th trong ngnh

Viettel?

Tc tng trng c a ngnh

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Th phn tng i so vi i th cnh tranh gn nht

Researcher

& Educator

www.kiemtoan.com.vn

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