VIETNAM NATIONAL UNIVERSITY – HCMC

INTERNATIONAL UNIVERSITY
SCHOOL OF ECONOMICS, FINANCE, AND ACCOUNTING

INVESTMENT BANKING
M&A DEAL: LONG CHÂU AND FPT RETAIL

Course Lecturers: Dr. Trinh Thu Nga - Msc. Vu Thuy Mai Uyen

Group Members:
Full Name Student ID
Phạm Võ Như Ngọc BAFNIU20141
Nguyễn Hồng Anh BAFNIU20242
Trần Thị Hồng Phúc BAFNIU20092
Trần Thị Linh Chi BAFNIU20258
Đào Nhật Hưng BAFNIU20296

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 TABLE OF CONTENTS
I. INTRODUCTION ..............................................................................................................................................3
1. Core Business: ...............................................................................................................................................3
2. Motivations for the transaction:...................................................................................................................3
3. Type of transaction: ......................................................................................................................................5
4. Friendliness of the transaction: ....................................................................................................................6
5. Time for completion of transaction: ............................................................................................................6
6. Estimated purchase price for transaction: ..................................................................................................6
II. SYNERGIES AND DUE DILIGENCE PROCESS ....................................................................................7
1. Synergies the two combined firms expected to achieve: ............................................................................7
1.1. Operational revenue synergies: ..................................................................................................................8
1.2. Operational cost synergies: .........................................................................................................................9
2. Considered factors in due diligence process before doing the M&A deal: .............................................10
2.1. Target Company Overview: ......................................................................................................................10
2.2. Financials:...................................................................................................................................................11
2.3. Legal Issues: ...............................................................................................................................................11
2.4. Strategic Fit: ...............................................................................................................................................12
2.5. Management and Workforce: ...................................................................................................................12
2.6. Information Technology (IT) Infrastructure: .........................................................................................13
III. VALUE THE TARGET COMPANY ........................................................................................................13
1. Overview of Vietnam's pharmaceutical industry .....................................................................................13
1.1. The nature of Vietnam's pharmaceutical industry (In 2016 and earlier) .............................................13
1.2. Market competition context (In 2016 and earlier) ..................................................................................15
1.3. The retail pharmacy industry – The comprehensive picture .................................................................16
1.4. Potential of pharmaceutical industry and pharmaceutical retail ..........................................................18
2. Assumptions in Long Chau valuation: ......................................................................................................19
2.1. Long Chau before acquisition: A pharmacy chain with four stores in Ho Chi Minh City. .................19
2.2. Type of business and tax rate according to regulations: ........................................................................21
3. Long Chau Valuation:.................................................................................................................................22
3.1. Pricing based on Discount Cash Flow valuation method: ......................................................................24
3.2. Pricing based on Comparable Companies Analysis valuation method: ................................................27
IV. VALUE THE M&A TRANSACTION OUTCOMES ..............................................................................28
1. Overview of Long Chau's development orientation after being acquired: ............................................28
2. Review Long Chau's financial statements: ...............................................................................................30

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 I. INTRODUCTION

The mergers and acquisitions transaction between FPT Retail (FRT) and Long Châu is one of the
successful transactions with rapid improvement when opening more than 1000 drugstores over
63 provinces of Vietnam.

The transaction was completed by two sides: the acquired firm - Long Châu and acquiring firm -
FPT Retail.

1. Core Business:
Long Châu - acquired firm, which appeared in the form of a prominent pharmacy chain in Ho
Chi Minh City in 1990. Starting with just 4 drugstores, but all of them are in Hai Ba Trung Street
which is a crowded and populated area. Long Châu can be proud of their strong reputation for
high-quality, genuine medication and healthcare products. Dedication to excellent customer
service and professional proficiency has established a loyal customer base.

FPT Retail, formerly known as FPT Digital Retail Joint Stock Company (HoSE: FRT) -
acquiring firm, which was established in 2012, FRT is one of the large consumer electronics and
appliance retailers in Vietnam, operating through its extensive FPT Shop chain, specializing in
electronics, gadgets, and consumer goods. Until 2017, FRT expanded the score of products when
intruding in the pharmacy industry and accessed more target customers.

2. Motivations for the transaction:

In terms of buy-side – FRT, there are some largely potential benefits when agreeing to buy
Long Chau pharmacy chain.

Market expansion:
The most important benefit FRT can gain is to participate in the pharmacy industry - which was
experiencing strong growth in 2016. With strong growth, the pharmacy industry carried
substantial potential for growth and income. Vietnam's pharmacy industry in 2016 had strong
growth among Southeast Asian countries. Vietnam's pharmaceutical industry has great
opportunities because the domestic pharmaceutical market is the fastest growing market in Asia.

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As well as divaricating the product line when adding pharmacy services for the company, which
allow FRT to reach more potential clients.

Established brand and expertise:

The second motivation for FRT to buy Long Châu is their brand and expertise. Long Chau can
be seen as a pharmacy chain that gained population and owned skillfully professional labor.
Thanks to strong brand recognition and experienced staff, Long Chau had an instant foothold in
the pharmaceutical sector. It is also a key point for the director of FRT to purchase Long Chau
for conducting a new strategy with the pharmacy industry.

Tech integration:

In addition, according to the annual report of FRT, the company always aims to advance in the
software domain, offering comprehensive solutions in various specialized areas, including
healthcare. FRT possessed cutting-edge technology platforms aimed at enhancing human life.
Consequently, FPT Retail aimed to leverage its technological prowess to modernize Long Chau's
operations and customer experience. (Annual report 2016)

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Moreover, in a scenario where the market for phones and laptops is nearing saturation, FPT
Retail has opted for the pharmaceutical retail sector as its next strategic move to sustain growth.
(Annual report 2018)

In terms of sell-side - Long Chau, the pharmacy chain has gained advantages from this
transaction.

Capital and resources:

The first motivation for Long Chau to accept this business deal is expanding capital and
resources. Benefiting from substantial backing from a prominent technical retail company like
FRT, Long Chau is assured of expanding and growing, along with the provision of training for
skilled personnel with extensive experience in both retail and education sectors.

Branding and reach:

With the aid of extending the scope of business, Long Chau can easily connect with a wider
customer base through extensive coverage, spanning from urban to rural areas.

3. Type of transaction:

The merger and acquisitions transaction between FRT and Long Chau pharmacy chain is
classified as conglomerate acquisition. FRT and Long Chau operated in two different fields:
technology and pharmacy respectively.

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Before purchasing Long Chau drugstores, while FRT just concentrated on the retail sector of
technology and educational products, Long Chau was known as a retail drugstores chain to
supply both ETC (Ethical drugs) and OTC (Over-the-counter drugs) for citizens.

4. Friendliness of the transaction:

The deal was characterized as friendly, involving cooperative negotiations and an agreement
between FPT Retail and Long Chau. The collaborative nature of the transaction suggests mutual
understanding and a positive relationship between the two entities. The M&A transaction took
the form of an equity acquisition. FPT Retail strategically increased its stake in Long Chau over
multiple phases, ultimately gaining majority control.

5. Time for completion of transaction:

"Rumors" of FPT Retail investing in pharmaceutical retail spread in early 2017. Starting from
January 2017, the company engaged in buying, selling, and merging (M&A) several stores in
new industries, and successfully completed the software maintenance phase. FPT Retail also
expanded its business by opening 1-2 additional stores in the same industry. (Ms. Nguyen Bach
Diep - CEO of FRT Retail said)

Until the third quarter of 2018, FPT Retail officially established a subsidiary named FPT Long
Chau Pharmaceuticals.

6. Estimated purchase price for transaction:

The significant increase (11.4%) in FRT Retail's total assets after the acquisition, amounting to
1,196.3 billion VND, can be used for rough estimation. Assuming a typical asset turnover ratio
for the retail sector of around 2, we can estimate the additional revenue generated by these new
assets at around 2,392.6 billion VND. In the third quarter alone, the chain surpassed its 2023
target by opening 447 pharmacies. The chain's operating efficiency is evident with an average
revenue of nearly VND1.1 billion ($44,770) per pharmacy per month. These impressive figures,
coupled with the FPT Shop chain's revenue decline of 20% YoY, yet the FPT Long Chau chain's
revenue increase of 69%, justify the estimated purchase price range of 2,000 to 4,000 billion
VND, representing 40% to 80% of Long Chau's estimated annual revenue.

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=> In summary, the method of payment for the Long Chau and FRT Retail M&A transaction
involved a combination of cash and stock. The information suggests that both components were
significant in the overall consideration for the acquisition.

II. SYNERGIES AND DUE DILIGENCE PROCESS

1. Synergies the two combined firms expected to achieve:

Expected synergies in the case of FPT Retail and Long Chau: Operational synergies.

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Operational revenue synergies: Long Chau's well-established pharmaceutical retail network,
with a monthly revenue per store exceeding 2 billion VND, provides a solid foundation for
revenue generation. FPT's technology-centric operations can enhance Long Chau's customer
experiences, introduce digital solutions, and potentially increase sales through cross-selling
opportunities. The combination is expected to create a diversified product portfolio, attracting a
broader customer base, and driving overall revenue growth.
Operational cost synergies: FPT Retail planned to merge individual pharmacies into FPT
Pharma, streamlining operations and potentially reducing costs.

1.1. Operational revenue synergies:

The combination of Long Chau's revenue performance and FPT Retail's expansion
strategy contributes to overall revenue growth.
The M&A between Long Chau and FPT Retail holds promise for substantial revenue growth,
combining the strengths of Long Chau's robust revenue performance and FPT Retail's strategic
expansion initiatives. Long Chau, with its extensive network of pharmaceutical retail stores, has
established a commendable monthly revenue per store, surpassing 2 billion VND, solidifying its
position as a valuable asset in the M&A and laying a strong foundation for revenue generation.
FPT Retail, originating in the mobile phone retail sector with FPT Shop, strategically diversified
its business in response to challenges in electronics retail, exemplified by the 2019 acquisition of
Long Chau. This reflects FPT Retail's proactive response to market dynamics, seeking new
avenues for growth in the pharmaceutical retail industry. The synergy between Long Chau and
FPT Retail, operating in different sectors, creates opportunities for cross-selling and expanded
market reach. Through the integration of Long Chau's pharmaceutical offerings with FPT Retail's
portfolio, the conglomerate can capitalize on diversified product lines, attracting a broader
customer base. FPT Retail's strategic move into pharmaceutical distribution aligns with the
growing healthcare sector, positioning the conglomerate for market expansion and providing a
competitive edge in a sector with promising growth potential.

Potential market share increases and competitive advantages.

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By combining FPT's technological expertise with Long Chau's well-established presence in the
pharmaceutical retail sector, the conglomerate gains a diversified portfolio that can appeal to a
broader customer base. FPT's strong brand recognition and extensive retail network, coupled
with Long Chau's robust revenue performance and pharmaceutical offerings, create synergies
that can lead to increased market share. The M&A can leverage cross-selling opportunities,
offering customers a comprehensive range of products and services. Furthermore, the strategic
move into pharmaceutical distribution aligns with the growing healthcare sector, providing a
competitive edge and positioning the conglomerate for sustained growth. The acquisition of
Long Chau not only expands FPT Retail's business into a new industry but also positions the
conglomerate as a formidable player in the pharmaceutical retail market, enhancing its overall
competitiveness and potential for long-term success.

1.2. Operational cost synergies:

The rationale behind merging individual pharmacies into FPT Pharma.

The decision to combine independent pharmacies into FPT Pharma is based on a strategic
objective to improve operational efficiency, consolidate market presence, and match FPT Retail's
overall diversification strategy. FPT Pharma expects to increase the utilization of resources and
supply chain management by streamlining operations, standardizing procedures, and leveraging
economies of scale through this integration. The combination also solves the pharmaceutical
retail sector's fragmentation, allowing FPT Pharma to build a more cohesive market presence,
compete effectively, and benefit from synergies within a consolidated network. This strategic
move aligns with FPT Retail's fundamental business goals, allowing the conglomerate to expand
into the pharmaceutical retail sector, tap into the rapidly growing healthcare market, investigate
cross-selling opportunities, and position itself as a comprehensive healthcare solution provider in
response to changing market demands.

How operational efficiency gains could impact the overall performance of the combined
entities.
The operational efficiency gains resulting from the merger between Long Chau and FPT Retail
can have a transformative impact on the overall performance of the combined entities. By

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streamlining operations, standardizing processes, and leveraging economies of scale, the merged
entity, FPT Pharma, can achieve cost synergies. This reduction in operational costs can
contribute to improved profit margins, enhancing financial performance. Additionally,
operational efficiency gains may lead to optimized supply chain management, ensuring timely
and cost-effective procurement of pharmaceutical products. This, in turn, could positively impact
inventory turnover and reduce carrying costs. Improved efficiency can also enhance customer
service and satisfaction, fostering loyalty and attracting a broader customer base. Furthermore,
the consolidation of operations allows for better resource allocation, potentially enabling
investments in technology and innovation, further enhancing competitiveness in the
pharmaceutical retail sector. Overall, the pursuit of operational efficiency aligns with the
strategic goals of the combined entities, contributing to a more robust and sustainable
performance in the evolving market landscape.

2. Considered factors in due diligence process before doing the M&A deal:
As a member of the task force responsible for the merger and acquisition (M&A) of Long Châu
by FPT Retail (FRT) I would meticulously examine several critical factors during the due
diligence process.

2.1. Target Company Overview:

Motivations for Selling: Understanding why Long Châu's owners are selling is crucial. Are they
seeking an exit due to personal reasons, financial challenges, or strategic shifts?
-> Understanding the motivations behind Long Châu's decision to sell is crucial to evaluate the
potential risks and benefits of the deal. By uncovering the reasons behind the sale, the acquiring
firm can assess if the motivations align with its own strategic objectives. For instance, if Long
Châu is experiencing financial challenges, it may pose integration difficulties or require
additional resources to stabilize its operations.

Business Model Compatibility: Assess how Long Châu's business model aligns with FRT's
existing operations. Consider synergies and potential areas for improvement.

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-> Evaluating the compatibility of Long Châu's business model with FRT's existing operations is
crucial to assessing the potential synergies and areas for improvement. Analyzing the similarities
and differences in the business models will help determine if the combined entity can achieve
economies of scale, cost savings, or expanded market reach. It also helps identify if any
adjustments or changes are necessary for successful integration.

2.2. Financials:

Historical Financial Statements: Scrutinize Long Châu's balance sheets, income statements,
and cash flow reports. Look for trends in revenue growth, profitability, and liquidity.
-> Scrutinizing Long Châu's historical financial statements, including balance sheets, income
statements, and cash flow reports, provides valuable insights into the company's financial health
and performance over time. By analyzing trends in revenue growth, profitability, and liquidity,
the acquiring firm can assess the target company's historical financial stability and identify any
potential red flags or areas of concern.

Future Projections: Project Long Châu's financial performance based on historical data.
Compare it to industry benchmarks and assess growth potential.
-> Projecting Long Châu's financial performance based on historical data and comparing it to
industry benchmarks allows the acquiring firm to assess the target company's growth potential.
This analysis helps determine if the merger is financially viable and if the anticipated future
financial performance aligns with the acquiring firm's strategic objectives. Additionally,
comparing Long Châu's projections with industry standards provides further context for
understanding the target company's competitive positioning and potential market opportunities.

2.3. Legal Issues:

Contracts and Compliance: Review Long Châu's contracts, licenses, and permits. Ensure
compliance with regulations.
-> Reviewing Long Châu's contracts, licenses, and permits is essential to determine if they are in
compliance with applicable regulations. Ensuring that Long Châu has properly documented

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agreements and meets the required legal obligations reduces the risk of future disputes or non-
compliance issues.

Litigation and Liabilities: Identify any legal risks, pending litigation, or environmental
liabilities.
-> Identifying any legal risks, pending litigation, or environmental liabilities associated with
Long Châu is crucial for assessing potential financial and reputational risks for FRT.
Understanding and quantifying these risks allows for informed decision-making and appropriate
risk mitigation strategies, if necessary.

2.4. Strategic Fit:

Alignment with FRT's Objectives: Analyze how Long Châu fits into FRT's overall strategy.
Consider market presence, customer base, and product offerings.
-> Analyzing how Long Châu fits into FRT's overall strategy helps assess the compatibility of
the two companies. Evaluating factors such as market presence, customer base, and product
offerings is essential to determine if the merger aligns with FRT's strategic goals and if Long
Châu can contribute meaningfully to FRT's business objectives. This analysis helps ensure that
the merger is a strategic fit and has the potential to create value for both companies.

Synergies: Identify areas where Long Châu and FRT can collaborate on post-merger. Can they
leverage each other's strengths?
-> Identifying areas of potential collaboration and synergy between Long Châu and FRT post-
merger is important to understand the potential benefits and value creation opportunities.
Assessing how the two companies can leverage each other's strengths, resources, and capabilities
helps determine if the combined entity can achieve economies of scale, enhanced market
positioning, expanded product offerings, or improved operational efficiency. Identifying
synergies ensures that the merger can generate added value beyond what each company could
achieve individually.

2.5. Management and Workforce:

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Leadership Team: Assess Long Châu's leadership capabilities. Will they integrate well with
FRT's management style?
-> Assessing Long Châu's leadership capabilities helps evaluate if they have the necessary skills,
experience, and vision to drive the merged entity forward. Understanding how well the
leadership of Long Châu can integrate with FRT's management style is crucial for effective post-
merger integration and collaboration.

Cultural Considerations: Be aware of any cultural differences that may impact post-merger
integration.
-> Recognizing and being aware of any cultural differences between Long Châu and FRT is vital
as these differences can impact the success of the integration process. Understanding the cultural
nuances and actively addressing any potential challenges helps ensure a smooth transition and
facilitates effective collaboration between the employees of both companies.

2.6. Information Technology (IT) Infrastructure:

Systems Assessment: Evaluate Long Châu's IT systems, cybersecurity measures, and data
management practices.
-> Evaluating Long Châu's IT systems, cybersecurity measures, and data management practices
helps identify any vulnerabilities or weaknesses that may impact the merged entity's operational
efficiency, data security, or compliance with regulatory requirements.

Compatibility: Ensure Long Châu's IT infrastructure aligns with FRT's existing systems.
-> Ensuring compatibility between Long Châu's IT infrastructure and FRT's existing systems is
important for facilitating a seamless integration of technology platforms. Assessing compatibility
helps identify any potential technical challenges, integration costs, or opportunities for
consolidation and optimization of IT systems.

III. VALUE THE TARGET COMPANY

1. Overview of Vietnam's pharmaceutical industry
1.1. The nature of Vietnam's pharmaceutical industry (In 2016 and earlier)

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Based on IMS Health's assessment, Vietnam is currently in the group of 17 countries with a
developing pharmaceutical industry (pharmerging countries) with the main observation: "The
country has a dynamic domestic pharmaceutical industry group, capable of producing generic
drugs and import and export of some pharmaceuticals.

The pharmaceutical industry value chain currently categorized into three main groups:

• Manufacturing group: Suppliers (foreign and domestic companies), generic drug

manufacturing companies and drug importing companies.

• Distribution group: Wholesale and retail distribution company and wholesale market system
(mainly in Ho Chi Minh)

• Retail group: Hospitals, private pharmacies, and private clinics.

Figure 1: Overview of the pharmaceutical industry value chain

Source: Team Analysis

According to statistics from the Ministry of Health in 2013, Vietnam's pharmaceutical industry is
heavily dependent on foreign markets (especially India and China) at the beginning of the value
chain. Quoting data from the General Department of Customs in the same year, it was noted that
only 10% of raw materials for drug production were domestic, of which mainly focused on
herbal and traditional medicine groups. Currently, the pharmaceutical industry in general is still

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standing at a crossroads in its development orientation when it is unclear which group in the
value chain it is appropriate to focus development resources on.

1.2. Market competition context (In 2016 and earlier)

In our opinion, the pharmaceutical industry in general is a highly fragmented industry and the
market share of the first two groups of the value chain is mostly in the hands of foreign giants.
Excerpt from the IQVIA report (2016) shows that 65% of drugs circulating on the market today
are imported, and 35% of domestic drugs are mainly still in the generic group and traditional
medicine group. There are currently only 15 large domestic enterprises operating in the
pharmaceutical industry and are mainly in the Distribution Group or Production Group (mainly
generic drugs), with the scope of operations concentrated in large cities in Northern and Southern
Vietnam.

According to research reports, the pharmaceutical industry is considered a highly particular

industry, the highest profit margin of the chain is mainly concentrated in companies importing
raw materials for production and manufacturing companies (accounting for from 50% - 80% of
cost of sales). However, if we look at the reality of our country's pharmaceutical industry at this
point, Vietnam mostly only recognizes strengths concentrated in the second group in the value
chain. The lack of proactive approach in terms of input materials and weaknesses in production
capabilities and technologies among businesses operating in the current market are a concerning
reality.

Figure 2: Market and Areas of Operation of large domestic companies

Source: Team Analysis

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1.3. The retail pharmacy industry – The comprehensive picture

The current status of the distribution system (In 2016 and earlier)

Currently, drug distribution in Vietnam is still carried out in two main market groups: ETC
(Hospital Channel) and OTC (Pharmacy Channel), with market shares according to Nielsen
statistics (2016) recorded as respectively 20% and 80%. However, when looking at revenue,
according to VCSC pharmaceutical industry report (2016), the hospital channel currently
accounts for 74% of revenue, with a profit margin 40%-60% higher than the pharmacy channel.
The causes leading to this imbalance are mainly due to:

1) "Low price" priority bidding mechanism - according to Circular 37/2013/TT-BYT.

2) The number of patients is very large; most of the medicine they need is only provided at
the hospital.
3) Pharmaceutical prices are often higher than other sales channels, as they do not go
through multiple retail distributors -> resulting in the lowest possible discount prices
among these channels.

Table 1: Comparison of two main retail channels (Hospital and Pharmacy)

HOSPITAL CHANNEL (74% INDUSTRY PHARMACY

REVENUE) CHANNEL (26%
INDUSTRY
REVENUE)
Main Specialized Antibiotics Specific Non-prescription
products medicine antibiotics and drugs, generic
other drugs,
specialized prescription drugs
medicines (for (specialized
surgical treatment), and
purposes) functional foods
Distribution Bidding is the main method Imported from
mechanism distribution

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 companies and
wholesale drug
markets.
Strengths Distribution The number of Easy control and
channels are customers is very access to sources
usually leading large and almost and quantities of
businesses in the guaranteed. products.
chain Customers have Easy access to a
little choice in large number of
medicine and must potential
follow the customers
prescription. Small scale, easy
to manage, low
operating cost.
Weaknesses The structure of Unable to control Complex scale, Profit margin
the drug import the desired source revenue channel depends heavily on
system is of products from drug sales discount level..
cumbersome and is not the main
governed by source.
many levels

Source: VCSC, Team Analysis

Pharmaceutial Channel (OTC)

With a market share of more than 80%, this is the most popular distribution channel in Vietnam
today. Excerpted from FPTS Pharmaceutical Industry Report 2015: "Vietnam's retail drug
market is seriously fragmented, most pharmacies are small-scale, family-run." Accordingly, the
pharmacy channel market, as of 2016, is still a channel that has not yet had a clear picture of

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development and distribution. Businesses operate mainly on a small, household scale, with
uneven quality.

1.4. Potential of pharmaceutical industry and pharmaceutical retail

A market that is growing at a high speed

An excerpt from BSC's 2014 Cuu Long Pharmaceutical analysis report noted: "Vietnam is
currently ranked 13th out of 137 countries with the fastest pharmaceutical industry growth rate in
the world, with a 2009-2013 CAGR of 24.3%.”. Similarly, according to IMS Health's forecast
for Vietnam for the Pharmerging Countries group in 2013-2018, it will reach an average of
17.5%, with the second highest growth forecast in the group.

The growth potential is abundant in the context of low drug spending per capita.

In the FPTS report, the pharmaceutical industry noted that Vietnamese people's spending on
pharmaceutical products is still at a low level. Specifically, in 2014, the average spending on
medicine in Vietnam was only 31.63 USD/year, 18.6% lower than the average in Asia (45
USD/year).

Figure 3: Growth data on population and drug spending of Vietnamese people (2005-2020)

Source: FPTS

According to BMI and IMS, Vietnam's health spending is forecast to increase to about 57
USD/person in 2017, corresponding to a CAGR of 14.63% from 2012-2017. This is due to

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increased income, increased life expectancy and increased awareness of health care among
people.

2. Assumptions in Long Chau valuation:

Quoting Ms. Nguyễn Bạch Điệp, Chairwoman of FRT, during the Q1/2017 annual meeting: "In
January 2017, the company acquired Long Châu, which had 4 stores in District 1, with an
independent household management scale."

Based on these two points, we perceive Long Châu in two aspects:

2.1. Long Chau before acquisition: A pharmacy chain with four stores in Ho Chi Minh
City.

Based on market conditions and the Long Chau model prior to acquisition, we assume the
following assumptions for Long Chau's valuation:

• Considering revenue factors:

Annual revenue will be estimated based on:

(Average number of customers a pharmacy can serve) * (Average spend estimate)

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑟𝑒𝑠𝑖𝑑𝑒𝑛𝑡𝑠 𝑖𝑛 𝐻𝑜 𝐶ℎ𝑖 𝑀𝑖𝑛ℎ 𝐶𝑖𝑡𝑦 (2014−2016)

* of which, the average number of customers = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝ℎ𝑎𝑟𝑚𝑎𝑐𝑖𝑒𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑐𝑖𝑡𝑦

• Considering the cost of goods sold (COGS):

For a small pharmacy chain, the main selling costs are the business's Discount Cost (Material
Discount) and other import/transportation costs (Fulfillment).

Discount costs are estimated based on: The average discount level of 15 pharmaceutical
distribution enterprises listed on the stock exchange (in the years 2014-2016)

Other import/transportation costs = 5% (excerpt from Pharmaceutical industry report - VCSC)

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 Table 2: Estimated discount rate of pharmaceutical businesses.

• Considering the operating expense factor:

With a small scale, family-managed chain, we estimate Long Chau's operating cost structures
mainly in 3 main groups: Labor costs / Fixed costs for GPP certification (annual) / Other
expenses (electricity, water, rent and other expenses)

Labor Cost GPP Certificate Fee Other Operation

Expense
Estimated based on Include: Rent, Electricity
GSO: and other expense

- Salary in HCM in With rent we assumed

medical field: 27.5% 10 mil / year that:
higher than other area
Average rent: 30 mil
-Salary for private VND (CBRE
enterprise: 3.2% higher report_2014) → estimate

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 --> With average salary 2 stores were own and 2
for medical field in stores were rented
Vietnam (2014-2016):
5.8 mil Other Operating
Expense: 60 mil
--> Salary from LC =
5.8 + (5.8*27.5%) +
(5.8*3.2%) = 7.6
mil/month

2.2. Type of business and tax rate according to regulations:

Type of Business: We currently do not have specific information about the type of business
registered by Long Chau before 2017, however, with a similar model to Long Chau (Phuc An
Khang, Huu Nghi, My Chau) we Recognizing that Long Chau is One member limited liability
companies. And the assumption is reinforced by 2 factors: One-member LLC is allowed to
transfer + suitable for family-oriented pharmacy model.

According to Clause 6, Article 1 of Law No. 32/2013/QH13 - Law on Corporate Income Tax,
issued on June 19, 2013, effective from January 1, 2014, The corporate income tax rate is as
follows:

o The corporate income tax rate is 20% for businesses with total revenue of the previous year not
exceeding 20 billion.

o The corporate income tax rate is 22% for businesses with total revenue of more than 20 billion
in the previous year.

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 Table 3: Assumption in Long Chau (2014-2016)

• Considering the Debt factor:

For small-scale and family-run businesses like Long Chau, we do not have any evidence related
to the business debt structure before being acquired. However, at the small business level, we
assume that Long Chau currently does not have any debt.

• Considering the Asset factor:

With a small scale and almost no clarity on the company's assets, we provide estimates of Long
Chau's assets as follows:

o Short-term assets: Mainly on Goods (Inventory)

3. Long Chau Valuation:

First, for Free Cash Flow, we have an estimate of the Long Chau data as follows:

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 Table 4: Unlevered Free Cash Flow of Long Châu (2014-2021)

In particular, the assumption of revenue growth from 2017 to 2021 is calculated based on the
assumption that the number of Long Chau products will expand after FRT's acquisition and the
growth rate in the number of customers. However, since 2016, we have not recorded any
statements from FRT regarding the expansion of Long Chau. Therefore, we will consider our
estimate of the expansion rate based on the expansion history of the FPT shop chain within the
same corporation.

According to the 2011 annual report, FPT shop began recording the investment expansion
process in 2011, with the estimated plan summarized as follows:

2011 2012 2013 2014 2015 2016

FPT shop 19 50 100 163 252 385
% growth 263% 200% 163% 155% 153%
187%

In particular, the chain expansion plan will be accelerated and fastest in 3 years (2012 to 2014),
with an estimate of reaching more than 150 stores by the end of 2014 (actually 163). Based on
calculations about the expansion speed of the FPT shop chain, we use it to simultaneously
estimate Long Chau's expansion plan. Specifics are provided below:

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 Table 5: Estimated factors for Long Chau's revenue growth (after acquisition)

*% Growth in Customer = %increase in population * % increase in pharmacist labor*

3.1. Pricing based on Discount Cash Flow valuation method:

According to the DCF valuation method, we estimate Long Chau's price to be 3,816,576,458,199
VND after forecast growth in the next 5 years. (in words: three trillion, eight hundred and sixteen
billion, five hundred seventy-six million, four hundred years twenty-eight thousand, one hundred
and ninety-nine dong).

For two important factors of DCF valuation, WACC and Growth rate, we estimate as follows:

➢ About WACC:
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While Long Chau is currently a small business, the business scale is only family-oriented and not
yet listed on the stock exchange, WACC will be estimated based on the industry average.

In the Discounted Rate factors for WACC, the data will be estimated as the table below:

Accordingly, the Cost of Debt coefficient will be estimated according to the following formula:

RD = Pre-tax RD x Levered Beta

* Levered Beta is an estimated index based on Median of the Pharmaceutical industry *

*The Median calculation data of the pharmaceutical industry is estimated based on the data of
the 5 largest companies in the industry. *

Based on calculations, the WACC index is estimated to be 9.5%.

➢ About Growth Rate:

The estimated Growth Rate will be calculated as follows:

Supported Factors Considered Risks

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 • Growth due to scale expansion: • Market risk: 20%
Estimated average 5-year growth • Expansion and model change
is 34.7% risk: 15%
• Pharmaceutical industry growth: • Interest rate risk: 5%
17.5% (IMS Health) • Management risk: 5%
• Growth in drug spending: • Legal-changing risk 5%
14.63% (FPTS) • General economic risk: 10%

➔ Estimated Growth rate = Supported Factors – Considered Risks

= 66.83% - 60% = 6.83% (rounding 7%)

Table 6: Specific analysis of risk factors

EXPLAINATION
Market risk - The pharmaceutical retail industry, according to the analysis
mentioned above, is mainly based on household scale, and
currently does not have any big players entering.
- However, there are no barriers to entering the industry. With the
overall potential of the industry, the participation of big players
and increasing competition is huge.
- According to the industry value chain, most of the pharmaceutical
industry's revenue lies mainly in the first two groups (production
and distribution) -> the profit margin of the pharmaceutical retail
industry depends greatly on the discount prices of the leading
businesses.
Risk of expansion - The transition from a family-oriented business model with a
and model change simple structure to an enterprise under FPT has many potential
risks in terms of scale.
- Changing from a traditional pharmacy chain to a modern
pharmacy chain -> risk of losing existing traditional customers.

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 - Expanding too quickly, but customer growth may not be
commensurate.
Interest rate risk Acquiring Long Chau and expanding Long Chau can be financed
by FRT using loan capital. Therefore, when interest rates are
volatile, it can affect FRT.
Management risk - FRT will have to rebuild the governance model for Long Chau.
- With rapid expansion, it is difficult to best manage the store
system.
Legal-changing - Legal changes in pharmaceutical import/export issues may affect
risk Long Chau's supply.
- Other legal changes.
General economic - If the economy is in recession, it will likely affect the value of
risk people's spending on medicine.
- Economic recession can affect Long Chau's import prices ->
affect profit margins

3.2. Pricing based on Comparable Companies Analysis valuation method:

For the Comparable Companies Analysis valuation method, Long Chau is recorded as follows:

We have filtered out 4 listed companies in the pharmaceutical industry that have small scale, and
business activities in pharmaceutical retail:

• Ben Tre Pharmaceutical Joint Stock Company (DBT): 3 GPP standard pharmacies (in
Ben Tre)

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 • Phong Phu Pharmaceutical Joint Stock Company (PPP): Has a chain of Pharma
pharmacies (in the West and HCM)
• Lam Dong Pharmaceutical Company (LDP): 5 pharmacies in Lam Dong and Bao Loc.
• At the same time, for the retail segment, we have added Mobile World Joint Stock
Company to the valuation comparison list.

Accordingly, the estimated average valuation of Long Chau is: 4,761,225 VND (Impiled Value
Per Share) and the industry average P/E level is: 13,228.

However, because this is a small, family-oriented company, to reflect the company more
accurately, we will apply a 25% discount to the above valuation. Accordingly, the after-discount
value of Long Chau is: 3,570,841 VND and P/E is at 9,921

IV. VALUE THE M&A TRANSACTION OUTCOMES

1. Overview of Long Chau's development orientation after being acquired:

According to our analysis, the medication retail channel now exists in three groups of models
with different advantages and disadvantages.

Table 8: Analyze the characteristics of three Vietnamese medicine retail models.

Hospital channel Pharmacy channel/ Large-scale

Small pharmacy chain pharmacy chain
channel
Product line 80% are ETC channel Mainly over-the-counter Includes both
drugs. (OTC) generic drugs. prescription (ETC)
and over-the-counter
The rest is functional Groups of generic drugs (OTC) drugs.
foods and other medical produced by domestic
equipment companies, functional Selling functional
foods and other medical foods, beauty
equipment

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 products and medical
equipment.
Price and The average price is high. Prices may be lower The price is between
Quality than hospital channels two channels:
Most drugs are but will not stabilize hospital and
proprietary, imported over time. traditional pharmacy.
directly from large
suppliers or leading Importing goods Import origin is clear,
manufacturing companies through many completely from
in the industry. intermediaries makes it large distribution
difficult to ensure origin companies.
and quality standards.
Customer Customers are mostly Customers are mainly The most diverse
segmentation patients walk-in guests. There is customer segments
no specific customer among the 3 channels
type (from patients to
normal customers).
Quality of Consulting staff are Most of them are Consulting
consulting mainly pharmacists with pharmacists with little pharmacists have
pharmacists formal and high-quality professional experience college degrees or
degrees. and low education level. higher.
In some cases, only
family instruction is There are internal
given. training courses for
Pharmacists
Additional None None There are after-sales
services and customer care
services.

Have an online
business model

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 developed (app/e-
commerce platform)
Store model Areas ranging from 40m2 Most are under 40m2 Diverse in scale
to 80m2, however, (30m2-80m2).
mainly small kiosks in
hospitals Can be built as a drug
supermarket chain or
as a traditional
pharmacy model.

Accordingly, we predict that Long Chau will be developed by FRT under the third model group
(Large-scale pharmacy chain channel). However, at actual store sizes, we note that FRT mainly
focuses on building Long Chau like most other traditional pharmacies (medium to small scale).

Figure 4 : Current Long Chau pharmacies

2. Review Long Chau's financial statements:

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In order to properly reflect the assessment of this acquisition, we will focus on the assessment
from 2021 onwards for the following two main reasons:

1. We established a five-year timeline (2017–2021) for FRT to complete developing the Long
Chau chain system following the acquisition.
2. It will need a minimum of one year to completing the entire acquisition. Therefore, Long
Chau will truly become stable and develop as early as 2020.

At the end of each year, FRT must publish up to 4 different financial statements, including
audited consolidated financial statements, audited separate financial statements and 2 unaudited
financial statements. FRT is directly operating the FPT Shop chain and accounting for it in the
parent company's financial statements. In addition, FRT also holds 84.6% shares in FPT Long
Chau Pharmaceutical Joint Stock Company and 99.98% shares in Viet Han Friendship Joint
Stock Company (Photo 5) and merged these two companies into the consolidated financial
statements.

Looking at the departmental reports in FRT's consolidated financial statements, the "Other"
section (only Viet Han Friendship Joint Stock Company) shows that revenue, profits, assets, and
liabilities are very small and insignificant when compared to total revenue and total assets.

=> We will approximate the financial statements of Long Chau chain by subtracting the items on
the parent company's financial statements from the items on the consolidated financial
statements.

On the Asset side: Inventory (72% of total assets) and Tangible Fixed Assets (18% of total
assets).

With inventory worth 3,381 billion and at the end of Q3, Long Chau owned 1,384 stores, on
average each store stored 2.44 billion in inventory. This inventory level is much higher than An
Khang (1.16 billion/store), Pharmacity (1.3 billion/store) and most small drug stores (under 500
million/store).

➔ We pose the first concern for Long Chau's development: The large amount of inventory
is causing concerns about the process of optimizing operations and revenue of store chain
in the system.

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On the Capital side: Long Chau's debt is mainly short-term coming from Accounts payable and
Short-term loans.

According to DSC estimates, to open a new store, Long Chau needs a capital of about 2 billion
VND (including 560 million for premises setup, 2.44 billion for inventory, 1 billion for payables
to sellers and employees). With the opening rate of 300-500 new stores/year, Long Chau needs
an additional 600-1000 billion in annual capital to meet demand.

➔ Currently, Long Chau has borrowed nearly 2,000 billion from the bank, 3.33 times more
than the equity of about 600 billion.

With this debt structure and thin profit margin (1.35%), we are afraid that it is difficult for any
bank to confidently lend more capital to Long Chau. Therefore, in the matter of continuing the
expansion momentum of this pharmacy chain, we fear that the possibility of Long Chau being
able to access cheaper capital flows is very low.

By evaluating the success of this deal, according to our team's analytical opinion, Long Chau is
not a very successful case for FRT in the next 10 years. Although the enterprise is currently
operating in an industry with many potentials, according to the analysis and main characteristics
of the pharmaceutical industry, Long Chau is currently an enterprise located at the end of the
industry value chain, and this is also the point with the lowest profit scale.

Accordingly, FRT has not yet optimized the management process for Long Chau by Q3/2023.
According to estimates, the current inventory per store is up to 2.44 billion VND and most stores
are small-scale, the systemization here is giving investors many big question marks such as:

1. Why is the scale of each store still in the traditional pharmacy model but the inventory is 4.88
times higher than that of pharmacies and 1.8-2.1 times higher than that of competitors.

2. With a leading technology company like FPT behind it, is FRT really integrating most
technologies into Long Chau management?

3. Is the current large amount of inventory since the scale of Long Chau's customers is not
commensurate with the chain's rapid expansion rate?

At the same time, concerns about Long Chau's loan risks are also very large when Long Chau
has borrowed nearly 2,000 billion from banks, 3.33 times more than equity (about 600 billion).

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With this debt structure and thin profit margin (1.35%), the risk to Long Chau's finances is huge
and needs to be considered.

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