INDUSTRY ANALYSIS

The consumer electronics distribution industry includes a wide diversity of products

such as mobile phones, laptops, household appliances, tablets as well as office
equipment. The growth of the global technology has made an increase in the growth
rate of the industry, especially in the retail segments. There is now a severe competition
among Vietnamese distributors themselves and among distributors and retailers. The
retail segment takes the advantages and reaches a higher growth rate than the
distributors.

Mobile World Investment Corporation (MWG) is the largest scale of retail chain in this
industry. The service quality, inventory management, human resource policies have
made MWG stand out from those small traditional retail stores, grow gradually and
increase in segment proportion.

FIVE FORCES MODEL

Competitive Force 1: Rivalry among Existing Firms: Moderate.
- Industry Growth Rate: Recently, the electronics retail industry grows gradually
with high consumer demand in mobile phone segment due to the switching
from feature phones to smart phones.
- High degree of Concentration: Even though there is development in
expanding stores, service quality improvement in those mobilephone retailers
like Viettel, VienthongA, FPT Shop,… the crown still belongs to MWG.
- Low degree of Differentiation and high switching cost: Switching cost is high
due to the similar products. MWG focuses on building stores nationwide to
enhance brand identification, improving service quality as well as HR policies.
- High Ratio of Fixed to Variable cost: Because of building many store chains.

Competitive Force 2: Threat of New Entrants: Moderate

- Large economies of Scale: There are large economies of scale in the consumer
electronics retailing industry. This requires a huge amount of capital to
compete with the well-known retail chains, which makes it impossible for new
entrants or small traditional stores to grab the market segments.
- Access to Channels of Distribution and Relationship: A wide range of
distribution channels of MWG in 63 cities and provinces has made big barriers
for new entrants to enter this field.
Competitive Force 3: Threat of Substitute Products: High
- The market of consumer electronics retail has grown rapidly with the rocket
rise from FPT Shop, VienthongA, Nguyen Kim… To maintain the lead position,
MWG has to speed up and gain more capital by joining the stock market. They
use the capital gained to utilize technology, expanding stores nationwide,
enhancing quality to make their service stand out from the same one of those
competitors.
- There is a rise of products from China, the lower price is pleased the low
income customers. Although the quality is not that good but they are satisfied
with that low price, especially in the rural.

Competitive Force 4: Bargaining Power of Buyers: High

- Price Sensitivity: Due to its kind of industry, the products are the same, the
only differentiation is that the quality of customer services like delivery,
customer care, discount campaigns,…This leads to more sensitive in price.
- High relative Bargaining Power: There are many substitutes to choose from,
and the switching costs are relatively low.

Competitive Force 5: Bargaining Power of Suppliers: High

High bargaining power of suppliers such as Apple, Samsung,… Recently,
Mobile World has been the largest consumer electronics retailer in Vietnam,
and now they are trying to be the distributors directly from foreign suppliers
like Apple, Samsung, LG,… Therefore, the barriers from the Vietnamese
distributors, the former suppliers for MWG, are now lower.

KEY SUCCESS FACTORS

CORE STRENGTHS
MWG is one of the leading companies in the Vietnamese telephone market with
nationwide retail system. Currently MWG owns more than 30% market share in the
telephone retail market, and the company has more than 390 Thegioididong stores and
22 Dien May Xanh supermarkets. With its abundant human resources and good
customer service and sales, it contributes to the confidence of consumers, always at the
top of the believed and beloved brand.

Besides that, MWG has established a good relationship with most major distributors and
operators in the market. Specifically, MWG directly imports all products from telephone
service providers (except for Apple products) and is currently associated with the three
largest network service providers in the Vietnam (Mobifone, Vinaphone, and Viettel). In
addition, setting up the Enterprise Resource Planning (ERP) system has helped
businesses streamline their working capital and optimize business operations.

CORE WEAKNESSES
Firstly, the competition in the industry increased, so the company may have to reduce
profit margin to increase incentives and services for customers. The company's revenue
is dependent on the sales of its telephony products as it accounts for about 90% of
MWG revenue. Therefore, the operation of the MWG will be significantly affected if in
the future the growth of the phone is not as good as it is today.

Secondly, Dienmayxanh's business has not yet established a solid position in the
industry. Since there are many high reputation competitors, such as Nguyen Kim, the
cost of investing in supermarkets is much higher than the cost of investing in
thegioididong.com, but the profit margins are lower than the sales of telephones.

MARKET OPPORTUNITIES
According to market research firm GfK, Vietnam's electronics and electrical appliance
market closed in 2015 with sales of $ 6.1 billion. In particular, the smartphone market in
Vietnam will be ranked 9th in the world in terms of value growth. In addition, according
to market research firm TNS, Vietnam smartphone penetration will increase to 50%
from the current 36%. In short, the phone market is still growing well in the short term.

The electronics retail market in provinces still has a potential for expanding. At present,
large chain stores such as Nguyen Kim, Cho Lon Electronic Appliances Supermarket have
not penetrated deep into the provincial market. For example, Nguyen Kim newly
opened in Ho Chi Minh, Hanoi and 9 southern provinces (mainly in the East and South
West); dienmaycholon.com is available in Ho Chi Minh City and 10 provinces in the
south-western region and 2 central provinces.

MARKET THREATS
There are three major threats that the MWG will face in the coming years. Firstly,
competitors grab the market share, the similar selling system of MWG is expanding such
as FPT Shop, Nguyen Kim ... Secondly, it must be mentioned that the growth of
electricity market Voice is approaching the saturation threshold. In the medium and
long term, the penetration rate of smartphones in Vietnam will move up to the average
of countries that have developed smartphones before. Finally, electrical products have a
replacing life-cycle for more than five years while the replacement rate for telephones is
only about two years. The profit margin of electronic products is 2-4% lower than the
telephone business. Thus, selling electrical appliances is riskier than selling phones.

COMPETITIVE STRATEGY ANALYSIS

MWG is now the leading retail and creative group in Vietnam, always providing
customers with interesting, friendly and trusting experiences. So, what power has made
the Mobile World pass a series of big names like Vinamilk or Masan to dominate the Top
50 ranking of 2015? The strategy of the company is targeted at cost leadership.

With a solid foundation that has the advantage of the company over its rival in the retail
industry, pioneering new markets. Specifically, more than 5,000 direct sales staffs are
trained to meet the same customer service culture throughout the system, and more
than 100 IT staffs maintain technology systems that meet management requirements
and business expansion, with the outstanding product, is the internal ERP system built.
Along with that, the store chain is always expanding nationwide. Currently,
thegioididong.com has about 334 stores, with a distribution proportion of about 70% in
cities and 30% in the rural. Dien May Xanh has also been expanded to implement
business strategy directed at the average price segment. From the early days of
establishment in 2004, the management of the company has oriented to build the ERP
system to ensure the best preparation for the expansion of the company in the future.
This helps the Company reduce fixed costs, improve the efficiency of remote
management when expanding its operations and contribute to differentiating between
MWG and its competitors such as import and inventory management make the smooth
distribution of goods from South to North and, arrange shift staff hours to optimize
labor costs and, management can update the business situation of each employee, each
store regardless of geographic distance.

ACCOUNTING ANALYSIS

STEP 1: Identify Principal Accounting Policies

MWG is always one of the top retailers in the retail industry. Because the key business
of MWG is trading mobile phones, tablets, laptops, and accessories, sim-cards, network
services, televisions, refrigerators, washing machines, air-conditioners, microwaves and
other digital and electronic products; the main accounting policies of MWG is inventory
management.
From 2005, MWG started applying ERP (Enterprise Resource Planning), which was
contributed by MWG’s IT department, and has been developing continuously. ERP has
supported MWG in recording and solving sale management, finance and accounting,
trading, and stock management, etc. By using ERP, MWG could be able to manage
inventory easily and control every complicated activities of the firm.
Besides, MWG also applies FIFO method for inventory, which helps employees to trace
and manage inventories more easily.
STEP 2: Assess Accounting Flexibility
Due to Vietnamese accounting standard, MWG has limited accounting flexibility.
However, there are some accounting policies that MWG can be flexible.

Flexible accounting Policies

Accounting Policies Degree of flexibility

Brand image (Advertising) None

Inventory policies* Moderate
Revenue recording Moderate
Provision policies Moderate to High

MWG can freely choose the method for valuation inventory. Specifically, MWG uses
FIFO method for mobile phones, laptops and digital and electronic equipment, in order
to estimate and manage inventory cost effectively.

Revenue and provision policies are flexible for MWG to record, as long as it is
reasonable.
Finally, MWG has determined one of its key factors as brand image, so marketing has
become an important part in the corporation. Unfortunately, MWG is not allowed to
capitalize its advertising costs; therefore, these costs must be expensed as incurred,
which means MWG has no flexibility in this area.

STEP 3: Evaluate Accounting Strategy

MWG’s accounting strategy is generally similar to other retailers. For example, FPT also
uses FIFO method to record inventories absolutely. This accounting strategy is the most
suitable method for this kind of companies. The managers face quite weak incentives,
holding a few of stocks, to use accounting discretion to manage earning for their self-
interest. Besides, the accounting policies of MWG have been unchanged, indicating
there is no effort to artificially inflate revenues or deflate expenses. However, recently,
MWG has had a problem with a large number of inventories since 2015 because of
investment in Bachhoaxanh – the new field. Almost deals of MWG are internal
 transactions or with FPT, which shows that there is no achievement to take fraud to
meet accounting objectives.
STEP 4: Evaluate the Quality of Disclosure
The market in Vietnam has developed and the bare minimum of disclosures is basically
satisfied within the various statements filed. MWG is the same. In annual report, MWG
has Letter to the Shareholders to clearly lay out the firm’s industry conditions, its
competitive position, and management’s plans for the future. However, the footnote
didn’t explain specifically their choices. It can be understandable that MWG, as well as
other companies, wants to protect its information against its competitors.
STEP 5: Identify potential Red Flags
In 2016, revenue of MWG has risen steadily for several years, and more sharply in 2016,
which states that the financial situation of MWG, regarding accounting, is on the
upward trend.

2012 2013 2014 2015 2016

Net sales $7,374,966,389,042 $9,498,849,317,343 $15,756,725,856,676 $25,252,733,079,244 $44,613,332,672,988
Increase in
$87,414,920,229 $340,163,891,869 $948,838,589,256 $2,756,191,562,693 $4,503,949,077,200
inventories
Increase
(decrease) in $(56,282,285,044) $116,625,906,539 $69,681,219,038 $476,685,311,770 $989,517,728,630
receivables
Increase in
inventories/net 0.012 0.036 0.060 0.109 0.101
sales
Increase in
receivables/net - 0.008 0.012 0.004 0.019 0.022
sales
Profit before
$168,468,944,587 $350,787,629,564 $868,197,443,094 $1,385,783,787,694 $2,005,914,114,923
tax
Net cash flow
$(26,798,261,073) $103,929,328,433 $99,664,733,508 $(641,471,376,080) $(586,481,629,900)
from operating

Taxable profit $179,018,369,398 $356,689,997,531 $925,026,327,157 $1,420,958,910,552 $2,472,910,231,730

The data from the table indicates that inventories have gone up rapidly in relation to
sales increase. Otherwise, accounts receivable has also risen considerably since 2012.
Therefore, it can be supposed that MWG may have had a large number of inventories in
the storage, and the company has been relaxing its credit policy in order to motivate
sales, which leads to an increase in accounts receivable in the recent years. On the other
hand, because revenue primarily came from credit sales, there has been a distance
between profit before tax and net cash flow from operating. The gap between
accounting profit before tax and taxable profit also looks larger gradually, which
indicates that financial reporting to shareholders may have become more aggressive.
Apart from things mentioned, the accounting system of MWG seems generally good. In
2016, there was no special change in the accounting policy, excepting the Corporate
Income Tax rate has altered from 22% to 20% in 2016. There are also no significant asset
write-offs. Besides, all intra-company balances, income, expenses and unrealized gains
or losses result from intra-company transactions are eliminated in full, and the
consolidated financial statements of the MWG has been audited by EY with unqualified
opinion.

STEP 6: Undo Accounting Distortions

After carrying out the consolidated financial statement and other footnotes of MWG
with consideration, it is suggested that there is no accounting distortions which need to
be corrected. Consolidated financial statements of MWG have complied fairly to
accounting standards, along with several suitable flexibility.

FINANCIAL RATIO ANALYSIS

TREND ANALYSIS
2012 2013 2014 2015 2016
Sales Growth (%) 36.9% 28.8% 65.9% 60.3% 76.7%
Net Profit Growth (%) - 104.80% 160.70% 59.70% 46.70%
Liquidity Ratios
Current ratio 1.1 1.4 1.5 1.3 1.1
Quick ratio 0.2 0.4 0.3 0.2 0.2
Cash ratio 0.1 0.2 0.1 0.1 0.1
Operating Efficiency
Inventories Turnover 54.4 51.4 48.7 61.9 70.2
Days of supply inventory 6.7 7.1 7.5 5.9 5.2
Account Receivables Turnover 0.7 1.2 1.1 0.9 1.3
Days of receivables 490.0 303.0 341.6 416.1 278.5
Profitability Ratios
Gross Profit Margin 16.2% 14.8% 15.2% 15.5% 16.2%
Operating Margin 2.3% 3.7% 5.5% 5.6% 4.5%
Net Profit Margin 1.7% 2.7% 4.3% 4.4% 3.5%
Asset turnover 4.7 5.0 5.6 4.7 4.0%
ROE 32.9% 40.7% 58.7% 54.2% 49.9%
ROA 8.0% 13.4% 23.7% 20.1% 14.3%
Capital Structure Analysis
Interest Coverage Ratios 5.0 14.0 38.9 35.0 17.6
(time)
Debt/Equity 2.5 1.8 1.3 1.2 1.1
Liabilities/Total Assets 0.7 0.6 0.6 0.7 0.7
Liabilities/Equity 2.5 1.8 1.3 1.9 2.9

LIQUIDITY / OPERATING EFFICIENCY ANALYSIS

In general, the liquidity ratios of MWG have begun to fluctuate in recent years. In
particular, liquidity ratios show good signs in the first three years (2012, 2013, 2014),
which refers to the current ratio of MWG increase continuously, but increasing speed is
not fast. The notion of this rate is to determine if a company's short-term assets are
available to pay off its short-term liabilities. It suggests that the current assets of the
company are sufficient to repay short-term debt. However, by 2015 and 2016, the
liquidity ratio has signs of bad due to a slight decrease in current ratios and quick ratio.
Quick ratio is a short-term measure of the company's ability to measure its ability to meet
its short-term obligations with highly liquid assets. This expresses their rapid asset
management and leads to reduce solvency of other companies in the same industry. This
will in part affect the decision of the owners and creditors. However, inventory turnover
to the present time (2016) increased significantly, which means the company has
managed the inventory effectively and don't put the goods stagnated much in the storage.
Regarding account receivable turnover, there is a decline from 2013 but up to 2016
increased sharply. It can be said that the company has been paid by customers quickly,
but if the rapid rise continues to occur, the company may lose their customers because of
other competitors. In general, the liquidity ratios of the MWG are good because the
current ratio and quick ratio are only slightly negligible and inventory management
policies remain good.

PROFITABILITY
Profitability ratios demonstrate MWG's ability to earn satisfactory profits so that
investors and shareholders will continue to provide capital. MWG has shown a gradual
improvement in profitability and quite satisfactory compared to its industry peers in the
region now. Gross Profit Margin in 2016 has improved, with an increase of nearly 0.7%
compared to 2013 since the sharp decline in 2013 (from 16.2% to 14.8%). This
contributes to the consequence of the scale advantage of MWG, which increased
investment efficiency in term of growth. Specifically, the proportion of cost of goods sold
on the turnover is in the downward trend compared with the increase in revenue scale.
The company's operating profit margin and net profit margin have also improved
significantly. These two indicators of the MWG increase continuously from 2012 to 2015
and tend to decrease slightly in 2016. It is evident that from 2012 to 2015, MWG is in the
beneficiary phase due to making good use of economies of scale. However, they tend to
go down in 2016. This may be due to the competition of phone manufacturers, the selling
price of the product is on the downward trend, and the company may have to reduce the
profit margins to increase attractiveness and provide better services for customers.
Finally, MWG has a downward trend in term of asset turnover, return on assets and
return on equity. This could become more serious in the future as market demand
becomes saturated and new product development speed is faster.

CAPITAL STRUCTURE ANALYSIS

Capital structure ratios are used to assess the finance risk of a business (long term
solvency). Capital Structure refers to the different ways in which a company raises the
capital needed to establish and grow its business activities. The ratio of debt/equity has
been improved. The debt-to-equity ratio reflects the debt management capacity and the
financial size of the business. MWG tends to consider using equity finance to grow its
operations. In general, the downward trend over the past five years is a good signal and
may be considered less risky. However, based on the above ratios, the MWG's capital
structure primarily uses debt as a means of financing because total debt is still greater
than total equity in 2016. Even though the gap between total debt and equity is small and
MWG has no long-term debt over the past few years, MWG should be more flexible in
long-term debt if it is required to fund for future activities.

SALE GROWTH
Sale growths of MWG in 2016 was twice as much as 2012, which demonstrates that
market demand for the phone product is expected to continue to grow well in 2017,
thanks to the trend of users switching to mordern electronic equipments. At the same
time, the growth rate of Vietnamese population in the middle class is high, buyers are
more likely to make purchasing decisions and have higher demand for used products such
as telephones or computers. This is very beneficial for retail businesses to gain high
market shares, such as MWG owning a large number of potential old customers.
Consequently, sales from this number of customers will help MWG to maintain the
revenue as well as creating competitive advantages to be over its competitors. In addition,
the financial situation of MWG is stable and expanding the system of new supermarkets
is expected to continue to increase in the future.

SOURCE:
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