VINAMILK - · PDF file3 | See Disclaimers at the end of the report G LO SSA RY The Company...

HOSE sticker: VNM | Including 5-year forecasts for 2012-2016 16/04/2012

VIETNAM I EQUITY RESEARCH Initiation of Coverage

1| See Disclaimers at the end of the report

BUY

CURRENT PRICE 91,000

TARGET PRICE 110,000

LAST T.PRICE 93,100

STOCK STATISTICS

Bloomberg Ticker VNM VN Equity

Outstanding shares (m) 555.8

Market Cap (VNDbn) 50,855

52W Price range 96-61.3

3M Average Volume 86,666

Beta 0.83

Foreign ownership (%) 49%

Source: Bloomberg

MAJOR SHAREHOLDERS

SCIC 45.04%

F&N Dairy Investments Ltd 9.53%

Dragon Capital 7.38%

SHARE PERFORMANCE (%)

Month Absolute

(VND’m)

Relative

(%)

1M (0.5) -1%

3M 10.5 13%

6M 5.7 7%

12M 29.6 48%

Le Trung Hieu

[email protected]

Luong Thi Thao, CFA

[email protected]

10

20

30

40

50

60

70

80

90

100

110VOLUME CLOSE

VINAMILK VINAMILK has been around for 30 years and is now leading the dairy industry in

Vietnam with more than 40% market shares and a production capacity far beyond

that of other competitors. VNM’s processing plants and almost 178,000 retailers are

scattered throughout the country at convenient locations, which helps distributing

perishable milk products to end-consumers in a timely fashion. Almost half of

domestic raw milk supply goes to VNM’s factories, giving the Company immense

power over product pricing. VNM offers a diverse product selection along with

affordable prices, which explains its total domination on some segments such as

condensed milk (~85% market shares) and yogurt (~90% market shares). Last but

not least, the Company is highly valued for its experienced management team,

especially madam Mai Kieu Lien.

2011 was an important breakthrough for VNM, as the Company brought home its

long-awaited 1 billion dollar revenue. The 2006-2011 periods were considered the

golden era for VNM: revenue was expanding at 28.2% CAGR while gross profit was

growing quickly at 33.3% CAGR; yet, the most impressive development was the

44.9% CAGR of net profit. The Company finances its capital structure mostly by

equity, thus liquidity has never been an issue for VNM.

VINAMILK plans for revenue of USD3billion dollars by 2017, which is both

ambitious and achievable in our opinions. Rapid urbanization in Vietnam and its

improving living condition will be the impetus for dairy demands. VNM will invest

VND10,000bn to ramp up its capacity from 677,150 (2010) to 1.6 million tonnes

(2016) among other things. Within our forecasting periods (2011-2016), we expect

revenue to grow by 26% CAGR (compared to 28.2% of the 2006-11 periods).

However, PAT will only grow by 17.6% CAGR (vs. 44.9% of the last period).

SBS recommends BUY with 12M target price of VND110,000/share. At the current

price of VND91,000/share, out 12M target price suggests a nice return of at least

20.9%. We raised our target price due to higher profit projection.

Company Financial Summary year-end December

(VNDbn) 2009 2010 2011 *2012F *2013F

Revenue 10,614 15,753 21,627 28,222 36,529

Net profit 2,376 3,616 4,218 5,068 6,146

% change YoY 90.0% 52.2% 16.6% 20.1% 21.3%

EPS (VND) 6,764 10,297 7,587 9,119 11,058

BV (VND) 18,380 22,678 22,441 28,641 34,590

DPS (VND) 3,000 4,000 4,000 3,000 n/a

Div. yield 4.3% 4.7% 4.6% 3.3% n/a

ROA 28.0% 33.6% 27.1% 26.3% 26.2%

ROE 35.8% 44.0% 32.9% 31.1% 31.2%

P/E (x) 10.30 8.24 11.40 10.03 8.27

P/BV (x) 3.79 3.74 3.85 3.19 2.65 Source: VNM, (*) SBS estimates

2 | See Disclaimers at the end of the report


G L O S S A R Y

The Company VINAMILK, its subsidiaries, and its affiliated companies as a whole

I N V E S T M E N T T H E S I S

Potential of the

dairy industry in

Vietnam

Roughly 54% (2010) of Vietnam’s population is under 30 year-old, and this demographic group is more inclined

to consume dairy products. Rapid urbanization (~3%) in Vietnam and its improving living standard (GDP per

capita grew by 13.5% CAGR during the 2006-2011 periods) will also be the impetus for dairy demands.

According to the master plan for the dairy industry in Vietnam, the total milk production will be 1.9 billion liters

by 2015, which will also bring the average annual milk consumption from the current 15 liters to 21 liters per

person.

Competitive

Advantages

Being around for 30 years, VINAMILK really understands the Vietnamese sense of taste. VNM is the market

leader with more than 40% dairy market shares and a production capacity far beyond that of other

competitors. VNM has its processing plants and almost 178,000 retailers scattered throughout the country at

convenient locations, which is a huge advantage considering milk is highly perishable product. VNM has access

to 50% of total domestic raw milk supply, giving the Company immense control over ex-farm prices. VINAMILK

stands among the most affordable brands on the shelves today while maintaining its domination on some

product segments such as condensed milk (~85% market shares) and yogurt (~90% market share). The

Company finances its capital structure mostly by equity, thus liquidity has never been an issue for VNM.

The Company is highly valued for its experienced management, especially madam Mai Kieu Lien, for she is the

inspiration and the visionary behind all of VNM’s development. She is going to accompany VNM for at least

another 5-year term. The management team does show exceptional transparency compared to most domestic

companies, which is a big investment incentive.

Growth outlook VINAMILK has laid out an ambitious plan for the 2012-2016 periods, in which the Company will achieve

revenue of USD3billion by 2017. Production capacity will double to 1.6 million tonnes per year by 2016. These

numbers may sound ambitious but also feasible. Within our forecasting periods (2011-2016), we have

estimated revenue to grow by 26% CAGR and PAT to grow by 17.6% CAGR. Our projections for 2012 revenue

and PAT stand at VND28,222bn and VND5,068bn respectively, which will then grow, also in that order, to

VND68,793bn and VND9,476bn by 2016.

Privilege of a

Blue-chip stock

Being one of the big cap companies, VNM has outperformed the VNIndex over the last 12 months with a rough

25% gain (versus approx. 6.5% for the VNIndex). The Company enjoys a fairly stable liquidity of 68,000 shares

per day over the last 6-month period.


V A L U A T I O N

Valuation

Method

We used the FCFF method as the centrepiece of our evaluation on VNM, with an overall weight of 70%. The

other supplemental method was P/E comparison (30% weight). The FCFF method gave VNM a rough value of

VND106.799/share. Our calculation was based on the following assumptions: an average risk-free rate (Rf) of

11%, a Beta of 0.83x (Bloomberg), a market premium of 10%, and an average cost of debt (Rd) of 8%. We have

estimated the cost of equity (Re) to be 19.32%, and subsequently the WACC of VNM to be 16.98%. The

perpetual growth rate is roughly 8%/year after 2016.

SUMMARY OF THE FCFF METHOD

(VND bn) 2012 2013 2014 2015 2016

FCFF 285.4 4,029.5 4,368.5 6,611.4 8,196.2

WACC 16.98%

PV of individual cash flows 244 2,945 2,729 3,530 3,741

PV of 5-year cash flows (2012 - 2016) 13,189

Growth rate (g) 8%

PV of perpetual cash flows 44,990

Present value of the Company 58,179

- Net liabilities -1,195

Present value of Equity 59,374

Number of shares (by year end) 555,940,315

Share price (VND) 106,799 Source: SBS

Sensitivity

Analysis

P/E GROWTH & WACC

P/E 2012 2013 2014 2015 2016 WACC \ g 7.0% 8.0% 9.0%

15.48% 117,558 130,623 147,719

11 102,010 123,706 145,617 168,627 190,750 15.98% 110,307 121,673 136,295

12 111,127 134,761 158,630 183,697 207,797 16.48% 103,832 113,791 126,413

13 120,243 145,816 171,644 198,766 224,843 16.98% 98,017 106,799 117,781

14 129,359 156,871 184,657 213,836 241,889 17.48% 92,767 100,555 110,179

15 138,475 167,926 197,670 228,905 258,936 17.98% 88,005 94,947 103,435

18.48% 83,667 89,884 97,412

Source: SBS

Relative

Comparison

There is no suitable domestic company for the P/E comparison test, thus we have chosen 5 regional companies

with similar business for such task. VINAMILK is relatively cheaper (P/E) than these regional companies given

its profitability (ROE) and EPS growth. In the long run, VNM should be able to align with these companies.

However, considering the outlook (12 months) of the Vietnam stock market (the VNIndex is trading at P/E of

11.2x as of April 13th 2012), we felt more comfortable with a conservative P/E of 13x. Thus, the relative

comparison method values VNM at VND120,243/share.

Location Market Cap. (USD m)

P/E current

ROE EPS growth

1 UNI-PRESIDENT ENTERPRISES CO Taiwan 6,242.9 19.5 13.2% -0.7%

2 CHINA MENGNIU DAIRY CO Hong Kong 5,281.4 20.8 15.0% 16.8%

3 INDOFOOD SUKSES MAKMUR TBK P Indonesia 4,495.4 13.6 17.0% -27.1%

4 NESTLE (MALAYSIA) BERHAD Malaysia 4,277.5 28.8 72.8% 21.1%

5 MEGMILK SNOW BRAND CO LTD Japan 1,306.4 11.3 9.3% -22.7%

Average 4,320.7 18.8 25.5% 6.2%

VINAMILK Vietnam 2,439.7 11.8 41.3% 13.1% Source: Bloomberg, SBS


BUY Combining the two methods with the predefined weights, we came up with a fair value of VND110,000/share

for the Company, which is about 18% higher than our last target price of VND93,100/share (11th Jan 2011)

since we used only simple P/E comparison method to value VNM at that time. At the current price of

VND91,000/share, our new 12M target price suggests a nice return of 20.9%. Therefore, we recommend BUY.

R I S K S T O O U R V A L U A T I O N

Shortage of raw

material

The current immensity of dairy production requires VNM to outsource most of its materials (making up 60-70%

of COGS), since domestic sources can only supply up to 25%. Such dependence on foreign powdered milk may

expose VNM to excessive forex risks (the Company has not yet recorded any forex loss so far) along with the

inability to effectively attune its selling price. We could definitely see the huge jump in prices of importing milk

in 2010, and VINAMILK could certainly not raise its selling price by the same extent.

OCEANIA REGION: (AVERAGE) FOB SPOT PRICE OF POWDERED MILK

2007 2008 2009 2010 2011 4M/2012 CAGR 2007-11

Whole powdered milk 4,167 3,913 2,436 3,460 3,878 3,557 -3.1%

% growth 90.6% -6.1% -37.8% 42.1% 12.1% -8.3%

Skim powdered milk 4,316 3,330 2,280 3,123 3,660 3,323 -5.1%

% growth 95.3% -22.9% -31.5% 37.0% 17.2% -9.2% Source: Bloomberg

Growing

competitions

The competition with high-end foreign brand names such as Abbott, Mead Johnson, Dutch Lady, etc. will only

get worse. At the same time, more domestic companies are also putting their names to the challenge. One of

the prominent cases was TH True Milk, a domestic company who has already invested USD350m in almost

45,000 dairy cows.

A few years back, the melamine scandal has left an unhealable scar on the dairy industry. As consumers get

more conscious about their dairy choices, product quality and brand image are apparently becoming more

important. High-end consumers in Vietnam tend to favour foreign brand names over domestic ones, and that is

a challenge VNM will need to face in order to win over those market shares.

Regulations Given the influence of VINAMILK on the dairy market, the Government may put a constraint on its ability to

raise selling price, considering its impacts on the scorching inflation. However, we have seen signs of

decelerating inflation recently, thus this concern may be put to rest after all.

Management

Transition

The prodigious influence of madam Mai Kieu Lien also casts a shadow over the Company as she approaches her

retiring age (she is now 59). Her withdrawal from the front may cause serious impact to the Company.

However, the next 5 years are still in clear view with madam Lien engineering the whole capacity & market

expansion. Nevertheless, the subsequent pressure of finding a capable successor is truly overwhelming.


T H E C O R E B U S I N E S S

T H E V I E T N A M D A I R Y I N D U S T R Y

Overview The dairy industry in Vietnam has been suffering from shortages of fresh material, and more than 75% of raw

ingredients are imported. Also, a substantial amount of produced fresh milk is not delivered to big processers,

but is rather consumed in local markets. Currently, Vietnam can produce roughly 350,000 tonnes of fresh milk,

satisfying only 20% of its internal demand. The country hopes to self-produce 660,000 tonnes of fresh milk by

2015, serving around 35% of total demand.

VIETNAM: DAIRY STATISTICS

2006 2007 2008 2009 2010 2011E CAGR

Numbers of dairy cow 113,215 98,659 107,983 115,518 128,572 145,455 5.1%

Produced Fresh Milk (tonnes) 215,953 234,438 262,160 278,190 306,662 345,608 9.9% Source: The Ministry of Industry and Trade

Poor infrastructure and obsolete technology are also hindrances on the fragmented local farming, thus the

current husbandry is still expensively inefficient, and hence the yields and quality of these perishable raw

materials tends to be inferior to those of other countries. Being the market leader, VINAMILK gains access to

almost 50% of the local raw supply, and thus can really benefit for controlling the ex-farm prices. Apparently,

milk processors such as VNM and TH Milk are making huge investments in dairy farming.

VIETNAM: MASTER PLAN FOR DAIRY INDUSTRY

2010 2015F 2020F 2025F CAGR 10-15

Fresh milk production: Total (million liters) 1,300 1,900 2,600 3,400 7.9%

Fresh milk production: Domestic (million liters) 307 660 1,000 1,400 16.6%

Fresh milk production: Self-sufficiency (%) 24% 35% 38% 41% Source: The Ministry of Industry and Trade (June, 2010)

Consumption

Behaviors

Milk was once sold exclusively for the children; however, things have changed as the general public is more

informed about the benefits of dairy consumption. The young adult consumers are catching more attention of

milk producers, and thus more products will be pushed toward this direction. The traditional consumers of milk

products usually live in big cities, earn higher incomes, and have more education about the benefits of milk

than those living in the countryside. However, it seems today that more advertisements and distribution

efforts are being made toward the rural areas of the country, in order to raise the awareness of dairy products

as well as potential demands.

VIETNAM: POPULATION BY GEOGRAPHY

(thousand people) 2006 2007 2008 2009 *2010 CAGR

Urban area 23,046 23,747 24,674 25,466 26,224 3.3%

Rural area 60,267 60,474 60,449 60,559 60,703 0.2%

Total 83,313 84,221 85,122 86,025 86,928 1.1%

Rural area/total 72.3% 71.8% 71.0% 70.4% 69.8% Source: General Office for population family planning *these are preliminary statistics for 2010


Growth

Potential

Dairy consumption in Vietnam increased significantly during the 2000-2009 periods, from 8.1 liters to 15.2

liters per person every year, signifying an average growth of 7.2% CAGR. However, fresh milk consumption in

Vietnam is still much lower than that in regional countries. An average Vietnamese person consumes 15 liters

of milk per year, while the figures are 23 liters in Thailand and 25 liters in China.

VIETNAM: MASTER PLAN FOR DAIRY INDSUTRY (cont.)

(liters/person) 2000 2010 2015 2020 2025 CAGR 10-15 CAGR 15-20

Dairy consumption 8 15 21 27 34 6.7% 5.2% Source: The Ministry of Industry and Trade (June, 2010)

Vietnam is the 13th populated country in the world with an average growth rate of 1.1% CAGR (2006-2010

periods). Vietnam is also a very young country with roughly 54.1% (2010) of total population under 30 years

old (source: General Office for population family planning), and their maturations will be the fueling force

behind dairy consumption. This demographic group is generally more receptive to Western cultures, and hence

they are more inclined to consume dairy products. Rapid urbanization (more than 3%), along with improving

living standard and growing health awareness will also be the impetus for dairy demands.

VIETNAM: INCOME PER CAPITA

2006 2007 2008 2009 2010 2011 CAGR

GDP per capita (USD) 724.0 835.1 1,047.9 1,068.3 1,173.5 1,361.6 13.5%

GDP per capita, PPP (USD) 2,364.1 2,607.5 2,799.9 2,944.7 3,143.0 3,354.8 7.3% Source: International Monetary Fund, estimate after 2007

V I N A M I L K A N D I T S D A I R Y B U S I N E S S

VNM preserves most of its potency on the dairy frontier, while giving some attentions to other segments such

as fruit juice, beer, etc. VNM relies mostly on domestic consumptions (generating more than 85% of revenue),

while earning extras from international markets including the USA, Australia, Canada, Russia, the Middle East,

Cambodia, Laos, and Philippines. Specifically, in 2011, the Company made over USD140m (+67.4% yoy) on

exports alone, contributing to 12.8% of total revenue. The Company will continue enlarging its exportation this

year while exploiting domestic resources.

Market Position VINAMILK currently stands among the 68 largest dairy companies in the world. The Company dominates the

dairy industry in Vietnam with more than 40% market shares based on sale volume, in which some sub-

segments have almost absolute domination such as condensed milk (~85% market shares) and yogurt (~90%

market share).

Distribution &

Marketing

strategy

The Company truly benefits from its nationally dispersed distribution system, since domestic sales make up the

majority of revenue. Despite its constant expansion of traditional distribution channels, the Company still

focuses on modern distribution channels for their enlarging contributions to the total value of FMCG (roughly

13%). According to VNM, the contribution of rural areas to the total value of FMCG was 46% at the end of

2010; thus potential demand from the rural areas is still prominent.

VINAMILK: DISTRIBUTION SYSTEM

2008 2009 2010 2011 CAGR 08-11

Numbers of distributor - - - 232 -

Numbers of retailer 125,000 135,000 140,000 178,000 12.5% Source: VNM


Business

advantages

The privileges of size and experience: VNM has been watching over the Vietnamese dairy market for almost

30 years and has thus understood what makes people tick. The Company is able to capture a wide market

range with its abundant number of products. The mere size of VNM (in terms of assets and capacity) is the

foremost factor that differentiates itself from other competitors.

Control over domestic supplies of raw material: More than half of the domestic supply of raw milk (~370

tonnes/day) is processed in VNM’s factories. Such immense influence still gives the Company more power over

pricing compared to other competitors in Vietnam. Out of all milk products on the shelves today, VINAMILK

stood among the most affordable ones.

Good management: The CEO, madam Mai Kieu Lien, has been doing a great job building up the Company, and

shareholders trust her visions completely. She was nominated as one of the 50 most powerful businesswomen

in Asia by Forbes. The good news is, at the 2012 AGM, she was re-elected to be the CEO for another 5-year

term, putting an end to the anxiety that she may retire soon.

V I N A M I L K : P R O D U C T I O N C A P A C I T Y

Overview The Company has greatly improved its production capacity since the acquisitions of Lam Son Milk JSC and F&N

Vietnam Ltd. By year-end 2010, VNM has 9 operational milk facilities, with a total production of 677,150

tonnes/year. On average, VNM utilizes 70%-100% of its plants, which is usually dependent on climate changes.

Developments SUMMARY OF NEW FACTORIES

Dairy

Factory

Location Investment

by 2016

Operation

Date

Capacity

Da Nang Da Nang VND421bn 2Q/2012 70mn liter/year (fresh milk)

24mn liter/year (yogurt)

Vietnam Ben Cat,

Binh Duong

VND2,349bn 1M/2013

2017 (2nd phase)

400mn liter/year (liquid milk) - 1st phase

800mn liter/year total - 2nd phase

Dielac 2

Thuan An,

Binh Duong

VND1,906bn 4M/2013 54,000 tonnes/year (powdered milk)

Source: VNM

VNM is waiting for a few investments to bear fruit: (i) The Da Nang factory will be ready by Q2/2012, (ii) the

Vietnam fairy factory in Binh Duong and the Dielac 2 factory should be operational by 2013. The Company has

projected that, by 2016, its current capacity of liquid milk will be double, while that of yogurt and powdered

milk will increase by 30% and 125% respectively. The total annual capacity will then be 1.6 million tonnes.

Material supply VNM expects to multiply its herd to 30,000 dairy cows by 2020 and will thereby self-supply 100,000 tonnes of

fresh milk per year. As of 31st December 2010, the Company had 5 farms in Tuyen Quang, Nghe An, Binh Dinh,

Lam Dong, and Lam Son, with a total of 5,667 cows. The number of pregnant cows and calves imported during

2010 was 2,240 (mostly from Australia and New Zealand). By the end of 2011, the total number of dairy cow

has risen to 6,721 (+18% yoy), supplying roughly 12.5 million liters of fresh milk (+52% yoy). In 2011, VINAMILK

purchased a total of 144 thousand tonnes of fresh milk (+11% yoy) from domestic sources.

The Company has expanded its raw material source to New Zealand via the NZD12.5m investment in Miraka

(equivalent to 19.3% equity), whose factories can process 210 million liters of fresh milk and produce up to

32,000 tonnes of powdered milk per year. These factories have been operating since August 2011 with 80%

plant capacity. VNM already signed its first import contract with Miraka for 4,000 tonnes of powdered milk.


VINAMILK: DOMESTIC SUPPLY OF RAW MILK

(tonnes) 2007 2008 2009 2010 2011

Total domestic supply 234,438 262,160 278,190 306,662 - Total domestic supply to VINAMILK 104,526 119,369 124,900 133,322 143,987 % over total domestic supply 44.6% 45.5% 44.9% 41.3% - VINAMILK’S own supply (million liters) - - 7 8.3 12.5 Source: VNM, Dairy Vietnam, SBS estimate

V I N A M I L K : P R O D U C T S S T R U C T U R E

Overview Normally, more than 80% of revenue

belongs to liquid, powdered, and

condensed milk segments. Most

consumers will recognize Vinamilk, Dielac,

and Ridielac as the three dominant brand

names of VNM within the liquid and

powdered milk segments. The Company

captures most of the condensed milk

segment with its long-established

Longevity (Ong Tho) and the fairly younger

Northern Star (Ngoi Sao Phuong Nam).

Meanwhile, Vfresh is a popular brand

name for soymilk and various fruit juices.

VINAMILK: BREAKDOWN OF REVENUE

(VND bn) 2006 2007 2008 2009 2010 CAGR

Drinking milk 3,660 3,320 4,597 6,068 9,434 26.7% Liquid Milk 1,469 1,736 2,216 3,276 5,078 36.4% Powdered Milk 2,191 1,584 2,381 2,792 4,356 18.7% Other Milk Products 2,586 3,218 3,612 4,545 6,319 25.0% Condensed Milk 1,690 2,332 2,381 2,690 3,443 19.5% Yogurt 634 698 985 1,494 2,391 39.4% Others (ice-cream, cheese, fruit juice) 262 188 246 361 485 16.6%

Total revenue 6,246 6,538 8,209 10,614 15,753 26.0% Source: VNM

According to EMI (2011), the total sale value of drinking milk products in Vietnam reached VND10,700.2bn in

2010, in which VNM held almost 41% market shares; following closely behind is FrieslandCampina Vietnam Co

Ltd and its widely known Dutch Lady with roughly 23.5% market shares. In terms of brand name market shares,

Vinamilk still stands firm at the highest position with 25.5% market shares, and right below is Dutch Lady with

18.5% shares. Also according to EMI, total sales of drinking milk in Vietnam grew by 15.8% CAGR during the

2006-2010 periods, while VINAMILK was treading at 26.7% CAGR (accounting only for drinking milk).

VIETNAM DRINKING MILK PRODUCTS: COMPANY MARKET SHARES

% retail value 2006 2007 2008 2009 2010

Vietnam Dairy Products JSC (Vinamilk) 27.3 30.1 33.5 38.7 40.9 FrieslandCampina Vietnam Co Ltd - - - 25.2 23.5 Nestlé Vietnam Ltd 7.1 7.3 7.4 7.2 7.4 Hanoi Milk JSC 2.6 2.7 3.2 3.4 3.5 Mead Johnson Nutrition (Vietnam) Co Ltd 2.9 3.1 3.2 3.2 3.2 Others 60.1 56.8 52.7 22.3 21.5

Total 100 100 100 100 100 Source: Euromonitor International, 2011

26.6% 27.0% 30.9% 32.2%

24.2% 29.0% 26.3% 27.7%

35.7% 29.0% 25.3% 21.9%

10.7% 12.0% 14.1% 15.2%

2.9% 3.0% 3.4% 3.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010

Others

Yogurt

Condensed Milk

Powdered Milk

Liquid Milk


Liquid milk There are 3 main products: (i) the fresh/pasteurized milk, (ii) UHT milk, and (iii) drinking yogurt. In 2010, this

group generated VND5,077.6bn in sales (+55% yoy), making up almost 1/3 of total revenue. In just 8 years,

contribution of this group on total revenue has increased remarkably from 18.9% (2003) to 32.2% (2010). For

2011, we have estimated revenue of VND7,616.4bn (+50% yoy), equivalent to 35.2% of total revenue.

VINAMILK has been placing liquid milk at the center of its development, which is depicted by the strong 39.0%

CAGR we have estimated for the 2006-2011 periods.

Ever since the VNM’s entry to the pasteurized milk market in July 2010, this segment is no longer considered

the domain of only small players. The pasteurized milk may not last as long as the traditional UHT milk, yet its

nutritional elements are better preserved and its delicious buttery taste is more appealing. The rising

consumer awareness of pasteurized milk will help pushing sale for this group.

Competitions are particularly harsh within this segment. VINAMILK has to face Dutch Lady, its lifelong rival,

along with other well-known domestic brands, namely TH True Milk, Hanoimilk, Long Thanh, Moc Chau, and a

few other imported brands. However, VNM does have certain advantages, including (1) a well-established

brand name, (2) secure controls over domestic supplies of raw milk (roughly 50%), (3) widely dispersed

distribution channels which help bringing products to the end consumer in a timely fashion, (4) a system of

modern processing plants throughout Vietnam which help minimizing transportation cost. The Company is

holding at least 45% market shares.

REVENUE OF MAJOR MILK PRODUCT

CAGR 2006 - 2011

Liquid Milk 39.0%

Powdered Milk 21.3%

Condensed Milk 20.6%

The 2011 figures were based on SBS’s preliminary estimates. Others are actual numbers disclosed by VNM.

Source: VNM

Powdered milk

and nutrient

powder

The basic consumers of this segment are mostly infants, children, expectant & breast-feeding mothers, and the

elderly. Powdered milk was used to be the biggest cash cow for VNM, generating as much as 40.6% of revenue

(2003); however the current situation has pulled this segment down to the second place with a rough

contribution of 27.7% (2010). By year end 2010, this group has generated VND4,356bn (+56% yoy) in revenue,

which may have possibly rolled over to VND5,750bn by year-end 2011 (+32% yoy) according to our estimate.

Competitions among domestic and foreign brand names have been going on for years, and the result has not

turned out well for the home players. The majority of powdered milk segment belong to foreign companies

such as FrieslandCampina, Mead Johnson, Abbott, etc. Nevertheless, Vinamilk still dominates the lower-end

segment with its Dielac and Ridielac products, whose prices are significantly lower than that of the foreign

brands. VNM is holding a rough market share of 20%.

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Liquid Milk Powdered Milk Condensed Milk

VND bn

2006 2007 2008 2009 2010 2011E


Condensed milk This segment ranks third in terms of revenue generation with a contribution of roughly 21.9% in 2010,

equivalent to VND3,443bn (+28% yoy). Condensed milk was the first product VINAMILK ever produced and has

always been the most dedicated revenue generator. However, the significance of this segment has been

lessened over the years as the powdered & liquid milk radiate their proliferation. In 2011, we estimated that

this group made VND4,304bn in sales, equivalent to 25% of total revenue.

VINAMILK controls 85% of the condensed milk industry, and no other companies can stand facing such

intimidation perhaps except for Dutch Lady - the other giant of the condensed milk duopoly. Condensed milk is

usually served as the base ingredient in various foods and beverages such as coffee, ice cream, fruit shakes,

cake, etc., and thus consumptions should be steady for years to come. However, domestic growth potential is

not as high in this segment as it may be in others, which is why the contribution of condensed milk on revenue

will deteriorate over time. Nevertheless, condensed milk has been well received by the international markets,

and this segment may derive more growth thusly.

Yogurt VINAMILK is well known for its spoon yogurt, which comes in various tasty flavours and reasonable prices. The

segment made up approximately 15.2% of total revenue in 2010, or an absolute VND2,391bn (+60% yoy). We

have estimated revenue of VND4,289bn for 2011 (+38% yoy). The contribution of yogurt on total revenue has

certainly become much more significant over the years, from just 7.6% in 2003 to around 15.3% in 2011.

In the past, yogurt was either homemade or manufactured in small factories, and VNM was the first large

company to change that perception. Since then, VNM has been the leader of this segment, and it is easy to

notice its influence on the shelves today. VNM pretty much enjoys uncontested domination with market shares

of almost 90%. Yet, the battles are still unsettled between the Company and other competitors such as

International Dairy JSC (Bavi milk), KIDO, and other imported products.

The benefit of yogurt, such as good bacteria probiotics, animal protein, and other common nutrients found in

dairy food, has become general knowledge among other health & beauty concepts. Hence, health-conscious

people, especially women, have made yogurt consumption their daily routine, and the numbers are growing.

Other Products The major products of this segment include soy milk, 100% natural fruit juice, and fruit juice blended with milk.

However, it has not always been that way. In the past, the Company also had its coffee Moment and its 50%

shares in SABMiller beer. Recently, VNM has transferred its entire shares in SABMiller to SABMiller Asia (2009)

and its whole coffee production to Trung Nguyen (2010). Thus, the Company is now focusing exclusively on

cold beverage with its Vfresh products.

In 2010, these products brought back VND485bn (+34.3% yoy), making up only 3.1% of total revenue which

was fairly small compared to other segments. We have estimated the 2011 revenue to be around VND657bn

(+35.6%), equivalent to 3.0% of total sales.


V I N A M I L K : I N V E S T M E N T A C T I V I T I E S & F I N A N C I A L P O S I T I O N

Having on hand a large amount of cash has induced VNM to engage in many financial investments, mostly in

the form of bank deposits, investments in affiliated companies, and securities trading.

INVESTMENT ACTIVITIES

(VND m) 2007 2008 2009 2010 2011

Investment portfolio: Overall 1,055,503 944,659 2,916,732 3,234,058 1,582,747

Short term Investments 654,485 374,002 2,314,254 2,092,260 736,033

Bond 15,410 2,405 3,240 100,000 250,000

Non-listed stocks 147,158 82,284 82,284 82,284

Listed stocks 33,071 87,537 24,994 24,994

Provision for losses (175) (122,996) (86,507) (70,658) (79,244)

Bank Deposits (<1 year) 5,400 106,396 2,227,700 1,955,640 440,000

Loans to affiliated companies 197,397 207,968 - - 18,000

Long term Investments 401,018 570,657 602,479 1,141,798 846,714

Bond 5,645 3,240 200,000 600,000 350,000 Listed stocks 277,933 223,520 206,996 206,996

INVESTMENT ACTIVITIES (cont.)

Non-listed stocks 36,632 20,062 - - Investment fund 106,350 106,350 106,350 106,350 Provision for losses (96,405) (108,580) (142,351) Bank Deposits (over 1 year) 50,000 - - - - Other 269,241 122,800 122,800 122,800 120,300

Source: VNM, SBS

The contribution of financial activities has been really beneficial to VNM ever since 2007, except for 2008 when

the stock market plummeted and the Company had to set aside massive provision for losses of almost

VND123bn (which resulted in a financial loss of VND6.8bn in 2008).

OVERALL FINANCIAL POSITIONS

Source: VNM

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Cash & Cash Equivalent

Bank Deposits Bond investment Stock investment Provision for losses

Others

2008 2009 2010 2011


VNM has been reducing the size of its short term stock portfolio from VND180.2bn (in 2008) to VND107.3bn by

2011. As a safer investment instrument, bonds started to have more weights on the portfolio. The year of 2011

was considered the bottom of the stock market crash, and thus we can expect lesser provisions for losses in

later years. Supposedly, the Company will focus exclusively on their dairy business.

FINANCIAL INCOMES

Source: VNM

In 2011, the Company took advantage of its sizable cash and the high interest rates to pocket a hefty amount

of VND369bn, making up 85.1% of total financial income (VND434bn). Despite the fact that VINAMILK might

get into huge forex losses for importing raw material and machinery every year, its earnings from exportation

(USD140m in 2011) would be more than enough to offset those losses. Thus, the appreciation of USD against

the VND will be favourable to the Company.

FINANCIAL EXPENSES

Source: VNM

-

50

100

150

200

250

300

350

400

Interest incomes Stock porfolio Forex gain Others

2007 2008 2009 2010 2011

(20)

-

20

40

60

80

100

120

140

160

180

Interest expenses Stock trading losses/provision

Forex loss Others

2007 2008 2009 2010 2011


F I N A N C I A L A N A L Y S I S

V I N A M I L K : H I S T O R I C A L P E R F O R M A N C E

Assessments on

the top line and

gross profits

The golden era of development: During the 2006-2011 periods, revenue was moving forward at 28.2% CAGR

while gross profit was growing quickly at 33.3% CAGR, yet the most impressive development was the 44.9%

CAGR of net profit. The Company was able to manage its gross profit margin (GPM) well enough to peak at

36.5% by 2009 (from 25.1% in 2006).

VINAMILK participated in a price stabilizing program as inflation took over the scarce income, thus the

Company was committed not to put much pressure on dairy consumer. As a result, COGS has outgrown

revenue over the last two years, and hence the GPM has contracted to 30.5% by the end of 2011. Furthermore,

the increasing weight of exportation (with much lower GPM) on total revenue will drag the overall GPM down

even more.

REVENUE & GROSS PROFIT

CAGR 2006 - 2011

Revenue 28.2%

Gross Profit 33.3%

Annual Growth

Revenue Gross

Profit

2007 4.7% 8.6%

2008 25.6% 52.7%

2009 29.3% 49.3%

2010 48.4% 33.4%

2011 37.3% 27.3%

Source: VNM

The year of 2011 was an important development breakthrough for VNM, as the Company brought home its

long-awaited one billion dollar revenue. Specifically, sales in 2011 accumulated to VND21,627.4bn (+37.3%

yoy), which was unfortunately worn away by the faster-growing COGS of VND15,039.3bn (+42.2%).

REVENUE STRUCTURE: DOMESTIC SALES VS. EXPORT

CAGR 2006 - 2011

Domestic Sales 28.2%

Export 33.3%

Annual growth

Domestic

Sales

Export

2007 25.4% -62.6%

2008 42.5% 196.4%

2009 55.7% 5.4%

2010 37.3% -6.5%

2011 24.6% 67.8%

Source: VNM

10.6%

14.7% 15.2%

22.4% 23.0%

19.5%

25.1% 26.0%

31.6%

36.5%

32.8%30.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011

VND bn

Revenue Gross Profit % Net Profit margin % Gross Profit margin

80.2% 89.6% 85.2% 88.7% 89.5% 87.2%

19.8%10.4% 14.8% 11.3% 10.5% 12.8%

25.3% 27.1%

32.4%

37.5%34.4%

32.0%

23.4%

16.5%

27.3% 29.2%

19.7% 19.8%

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Domestic sales Export % GPM Domestic sales % GPM Export


Extraordinary

incomes & their

significances

In 2009, the Company received VND139.6bn in financial income for transferring its 50% ownership in SABMiller

Vietnam to SABMiller Asia who now owns 100% of this used-to-be-a-joint-venture. In 2011, net financial gain

was 46.9% higher than that of 2010, mostly due to the increment on interest incomes (from VND196.9bn to

VND368.9bn, +87.4% yoy) which was somewhat expected. The total amount of cash equivalent and short-term

investment has already piled up to VND2,811.5bn (+99% yoy) by third quarter, indicating a huge potential on

interest incomes. By year end, this figure has turn into VND3,181.3bn (+46.1% yoy).

FINANCIAL PROFITS AND OTHER INCOME

CAGR 2006 - 2011

Financial gain 76.9%

Other income 34.8%

The above figures are derived

from the assumption that we

exclude the huge capital gain of

stock investment in 2007, and

the abnormal income in 2010

Source: VNM

Other incomes of 2011 appeared to be significantly lower than that of 2010 (-61% yoy), which stemmed from

the fact that the Company received an abnormal gain (approx. VND353bn) in 2010 for transferring its instant

coffee factory to Trung Nguyen; otherwise the yearly difference would be -7.3%.

Interpretation

of deteriorating

expenses

As mentioned above, VNM could not pass most of the cost upsurge onto consumers, and as a result the

Company had to cut expenses elsewhere, which was why the weights of both selling expense and

administration expense on revenue have been deteriorating over the years.

In 2011, selling expense and G&A expense grew by 25.9% and 18.4% respectively (compared to 15.5% and

32.5% in 2010), yet their weights on revenue have dropped to, in that order, 8.4% and 2.1% (compared to the

previous 9.1% and 2.5%).

SELLING & ADMINISTRATION EXPENSES ADVERTISEMENT & TRADE MARKETING EXPENSES

Source: VNM, SBS

VINAMILK has been on very good terms with its distributors and retailers, which can be easily perceived by the

generous sale promotion expenses made every year; in 2011, the Company spent almost VND831.9bn on its

trade marketing activities, equivalent to 3.8% of total revenue. On the other hand, the weight of advertisement

expense on total revenue is contracting over times (from 4.1% in 2007 to 1.9% in 2011); obviously, VNM has

been very efficient with its marketing scheme while maintaining exceptional revenue growth. In 2011, the

Company spent VND400.2bn (-17.4% yoy) on advertisement as compared to the previous VND484.7bn.

-

200

400

600

800

Financial gain/loss Other income

VND bn

2006 2007 2008 2009 2010 2011

13.8% 13.2% 12.8%11.7%

9.1%8.4%

1.8%3.1% 3.6%

2.8% 2.5% 2.1%

0%

5%

10%

15%

2006 2007 2008 2009 2010 2011

Selling expense/revenue G&A expense/revenue

4.1% 4.3%3.5% 3.1%

1.9%

7.9%

5.3%4.8%

3.2%3.8%

0%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011

Advertisement/revenue Trade Marketing/revenue


The profitability

of VINAMILK

PROFITS MOVEMENT

CAGR 2006 – 2011

PAT 44.9%

EBIT 49.7%

EBIDTDA 48.0%

Annual Growth

PAT EBIT EBITDA

2007 46.0% 44.1% 42.7%

2008 29.8% 43.5% 42.2%

2009 90.0% 99.2% 93.7%

2010 52.2% 55.6% 54.1%

2011 16.6% 17.1% 17.4%

Source: VNM

The Company achieved its highest

net profit margin during the 2009-

2010 periods mostly due the

climax of GPM and contributions

of extraordinary incomes. In 2011,

the Company recorded a lesser

gain of 16.6% yoy on PAT, as

compared to the 52.2% yoy of the

year before. If we exclude the

abnormal income in 2010, net

profit would have grown by

almost 29% yoy.

Capital

Structure

Analysis

Over the last 5 years, the Company has continuously increased its chartered capital and extended its capital

structure. Equity has grown on average by 36.2%/year, which was slightly higher than the expansion rate of

assets in the same periods (34%). VINAMILK has never relied much on liabilities to build up its capital structure,

which is illustrated by the consistently low leverage, and thus liquidity as well as solvency has never been a

problem to the Company especially during the harsh period of high interest-bearing loans. Both current and

quick ratios have gone up to 3.6 and 2.4 respective (2011), which are already beyond the safety point; a cash

ratio of 1.5 (2011) should be able to cover all short-term liquidity concern.

ASSESSMENT ON LEVERAGE EXTENT

The borrowing hike in 2010

stemmed from the fact that

VNM took out 5 loans

(USD30m) in a foreign bank

to settle its obligation with a

foreign supplier. In 2011, the

Company has completely

paid off all above loans.

Source: VNM

-

2,000

4,000

6,000

PAT EBIT EBITDA

VND bn

2006 2007 2008 2009 2010 2011

28.7% 29.4%33.3%

43.4%

55.7%

43.3%

18.4% 17.6%23.0%

32.2%

39.5%

32.0%

0%

10%

20%

30%

40%

50%

60%

2006 2007 2008 2009 2010 2011ROAE ROAA EBIT/Equity EBIT/Asset

31.6%

24.9% 24.2%27.3%

31.0%

21.5%

24.0%

19.8% 19.3%21.3%

23.7%

17.7%

0%

5%

10%

15%

20%

25%

30%

35%

-

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011

VND bn

T. Liabilities T. Borrowing Liabilities/Equity Liabilities/Asset


The capital structure of VINAMILK went through major re-modification. In May 2011, VNM successfully issued

10.7 million new shares at an average price of VND129.4/share (+32% higher than the prevailing market price),

resulting in a capital surplus of VND1,277bn and maxing out rooms for foreign investors (49%). Also during the

first half of 2011, the Company issued more than 7 million shares to employees under its Employee Stock

Ownership Plan (ESOP) for 2010 and 2011. By the end of 2011, the Company issued bonus shares to existing

shareholders with a 2:1 ratio, bringing its current chartered capital to VND5,561bn.

QUICK GLANCE AT CAPITAL STRUCTURE

CAGR 2006 – 2011

Equity 36.2%

Chartered Capital 28.5%

Total Asset 34.0%

Annual Growth

Equity Chartered

Capital

Total

Assets

2007 57.6% 10.2% 50.7%

2008 10.3% 0.0% 10.0%

2009 39.4% 100.4% 42.2%

2010 23.9% 0.5% 27.0%

2011 55.9% 57.5% 44.6%

Source: VNM

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Equity Chartered Capital Total Assets

VND bn

2006 2007 2008 2009 2010 2011


V I N A M I L K ’ S O W N P R O J E C T I O N & D E V E L O P M E N T O U T L O O K

Overall

Projection

The Company will continue streaming its investments toward capacity expansion, products R&D, and

distribution development to assure its brand image not only within Vietnam but also all over the world. VNM

has envisioned being among the top 50 largest dairy companies by 2017 with revenue of 3 billion dollars, and

not a single shareholder at the 2012 AGM showed even a slight frown of doubt.

Earning

Projection

The year of 2011 was not exactly ideal for business all around, especially for the food & beverage industry, and

inflation (almost 18.6% yoy) was eating up most of the disposable income that could have otherwise flown into

dairy consumption. Milk and other staple foods were under strict governmental supervision in order to keep

inflation at bay, and VNM was committed not to raise its selling prices; however, upon 2012, the Company has

already raised prices once in January (by 5-7%). There is still room to grow for the rest of this year.

VINAMILK: 5 YEAR PROJECTION ON EARNINGS

(VND bn) 2012 2013 2014 2015 2016 CAGR

Total Revenue 26,480 31,780 38,130 45,760 54,900 20.0%

Before-tax Profit 5,625 6,355 7,180 8,115 9,170 13.0%

After-tax Profit 4,690 5,230 5,720 6,180 6,870 10.0% Source: VNM

CAPEX plan Last year, the Company planned to invest VND8,730bn in capacity expansion and office renovation. However,

VNM has revised its plan this year and decided to add another VND1,545bn to its CAPEX plan for the 2012-

2016 periods, bringing the total estimated investment to VND10,275bn.

VINAMILK: CAPEX PLAN (2012-2016)

(VND bn) Total

investment

Previous

disbursement

Disbursement

plan (2012)

Disbursement

plan (2013-2016)

TOTAL 10,275 2,572 4,537 3,166

VINAMILK 7,916 2,489 3,707 1,720

Vietnam Dairy Factory (Binh Duong) 2,349 415 1,651 283

Dielac II factory 1,906 569 958 379

Da Nang factory 421 204 176 40

Others 3240 1300 922 1018

LAMSONMILK LTD. 253 47 181 25

VIETNAM DIARY COW LTD. 2,006 36 646 1,323

INTERNATIONAL REAL ESTATE LTD 100 0 2 98 Source: VNM


F O R E C A S T S

I N I T I A L A S S U M P T I O N

VNM will continue focusing on its core business, in which milk and other dairy related products will make up

the majority of revenue of profits.

VNM will carry out its capacity expansion plan for the 2012-2016 periods accordingly. No other large

investment in fixed asset will occur within this reviewing period. Therefore, the total investment for the 2011-

2016 periods will be around VND10,000bn (±10%).

Operations of new processing plant will be on schedule.

We have not accounted for any disastrous event such as fire damage, natural catastrophe, food hygiene

scandal, etc. that may impact severely to the operation of the Company.

Our profit forecasts include neither reversals of provision for losses nor proceeds from stock trading.

F O R E C A S T : R E V E N U E We have separated revenue of VINAMILK into 5 main categories for the purpose of sales projection, namely

liquid milk, powdered milk, condensed milk, and other dairy products (ice-cream, fruit juice, cheese, etc.). Our

forecasting period (FP) is from 2011 to 2016.

Liquid Milk Production capacity will soon be doubled upon operations of the Da Nang milk factory and the Vietnam Dairy

Factory in Binh Duong, especially the latter is supposed to be the largest and most advanced fully-automatic

dairy processing plant in Indochina.

We expect average selling prices (ASP) of this segment to pace at +5%-7% per year, and thus its respective

revenue will grow at 30.5% CAGR (2011-2016 periods) which is much lower than the previous 39% CAGR

(2006-2011 periods). The majority of sales come from this segment (36%-45%), and its overall weight is just

getting larger every year. We assume a rough revenue contribution ratio of 39.5% within our FP.

Powdered Milk As the Dielac 2 factory comes into play, the capacity of powdered milk will increase tremendously (from

18,000 tonnes to 72,000 tonnes per year). The spray drying capacity will increase 4.5 times and the production

of powdered mixture will be 125% higher. The Company has certain competitive edges on this segment;

although VINAMILK’s product quality is on par with that of foreign brand name, its selling price is much lower

(some products are only half as much). Furthermore, dairy consumers are directing their purchases more

toward domestic brand names since foreign products are getting out of their price range.

Besides the above advantages on domestic front, the Company will pursue higher export value. Thus, we

considered revenue growth of 28.9% CAGR for the 2011-2016 periods (as compared to the 21.3% CAGR within

the 2006-2011 periods). Overall, this segment will constitute roughly 28% of total revenue within our FP.

Condensed Milk The Company has purposely left this segment out of the expansion plan, because its capacity has not yet been

maxed out and the stagnant demand growth does not provide as much economic incentives compared to that

of other segments. However, exportation has been the alternate route for this segment (especially after the

recent flood in Thailand).

We suppose this segment can grow as fast as 26% in 2012 and much slower in later years, averaging at a

13.1% CAGR within the 2011-2016 periods, which is far inferior to the 20.6% CAGR of the 2006-2011 periods.

Thus, this group will compose 15% of total revenue within our FP.

Yogurt The addition of new processing plant will add another 30% on top of the current capacity. We expect this

segment to comprise 14.2% of total revenue within our FP. We have adjusted its respective growth from the

previous 39.1% CAGR (2006-2011 periods) down to 22.9% CAGR (2011-2016 periods) as growing competitions

stir up the air, because nobody wants to miss out such a high-margin segment. Since VINAMILK holds the

majority of market share (~ 90%), its growth should be close to that of the industry.


Other Products The Company will maintain its advertisement focus on other products such as Vfresh fruit juice & soymilk, cheese, and ice-cream. Contribution of this segment to total sales is not as significant as others, despite the unused capacity. We assume a growth rate of 28.3% CAGR in our FP, which is higher than the 20.2% CAGR of the last period (2006-2011).

The final picture

Based on above estimates, revenue growth within our forecasting period boils down to 26% CAGR. Revenue will thereby reach VND68,794bn by 2016, of which export will make up 14.5% to 16.5% of the total figure while marching at 32.6% CAGR (which is far greater than the 16.7% CAGR of 2006-2011). Domestic sales will pace slower at 25% CAGR as compared to the 30.4% CAGR of the last period. This year, the Company only targets revenue of VND26,480bn (+22.4% yoy) and a PAT of VND4,690bn (+11.2% yoy), which seemed to be a little cautious (as compared to our forecast). Despite the low season, within the first two months of 2012 VNM has already grown its revenue by 30% yoy which were then translated into a 22% yoy growth on pre-tax profit, said Mrs Mai Kieu Lien during the AGM. We expect the Company to reach revenue of VND28,222bn (+30.5% yoy) by year end 2012, which is 6.6% higher than the VNM’s target.

F O R E C A S T : G R O S S P R O F I T

We derive the overall gross profit based on the individual gross profits margin of domestic sale and export,

which we have estimated for the forecasting period.

Exports vs.

Domestic sales

Initially, we used the export GPM of 2011, which was around 19.8%, as a caliber to gauge that of 2012. Then,

we figure this ratio should move toward 20% as VINAMILK establishes a stronger brand name on the

international frontier. The downward trend on domestic GPM was obvious in 2011 (from 34.5% in Q1/2011 to

31% by Q3/2011 and to 30.4% by Q4/2011). However, we expect the current domestic GPM to steady around

32% for 2012, which is similar to that of 2011, and to gradually fade toward 30%.

We based our assumption on several supportive factors, including an early boost on selling price from 5% to

7%, positive movements of inputting material (within the first 3 months of 2012, prices of powdered whole

milk and powdered skim milk contracted by 8% to 9% as compared to the end of 2011), the USD/VND

stabilization, and the retracting inflation. In later years, additions of new processing plants will jack up

depreciation expenses, thus lowering the overall GPM. Furthermore, we suspect that VNM may willingly accept

lower GPMs to sustain its revenue growth and market share, especially amid the growing competition.

Overall gross

profit margin

The current GPM may dwindle slightly to 30.2% by the end of 2012 as compared to the 30.5% of 2011. As

domestic sales slowly lose profit traction and exports (whose GPM is inferior to that of domestic sales) play a

bigger role in revenue structure, the overall GPM may withdraw little by little to 28.4% by 2016.

F O R E C A S T : R E M A I N I N G P & L I T E M S

Selling and G&A

Expenses

Based on the current development plan of VNM, we suspect that both of these items may outgrow revenue by

a small margin; however, their weights on revenue will align with the historical figures.

The inception of new processing plants will definitely incur higher G&A expenses, and thus we have anticipated

a 31.2% CAGR on this item for the 2011-2016 periods, which is more or less indifferent from that of the 2006-

2011 periods. The weight of G&A expense on revenue will thereby hinge around an average 2.4% (as compared

to 2.1% in 2011).

The ambitious revenue plan would require intensive upkeeps, and thus the Company really needs to step up its

advertisement and trade marketing expenses in order to make those sales. VNM has a reputation for how

much it usually spends on advertisement, and we are convinced that selling expense will increase rapidly,

specifically by 28.7% CAGR. The magnitude of selling expense on revenue may climb from 8.4% in 2011 to 9.3%

in 2016, averaging at a reasonable 9% during the 2011-2016 periods (as compared to other double-digit figures

in the past).


Financial

Income

Although stock portfolio may not incur much provision this year like it did in 2011, we still expect a 27.9% reduction on net financial income this year due to the slimier inflow. VNM will definitely pour a large amount of cash onto project development, and thus leaving a smaller cash base for bank deposit. Also, the ongoing cap on bank deposit rate will surely limit further the extent of interest income. However, the Company will improve its cash base in later years, and thus we assume, on average, financial income will contribute around 6.13% of pretax profit.

Corporate tax

A few subsidiaries will max out their tax advantages by 2012 and by 2014, and thus the overall CIT should be adjusted accordingly. We assume the tax rate to increase sequentially from 15.3% (2011) to almost 16.6% by year-end 2012 and to roughly 23% by 2016.

After-tax profit All in all, a combination of diminishing gross profit, enlarging expenses, and higher taxes results in slower growth on the bottom line: 17.6% CAGR (2011-2016) versus 44.9% CAGR (2006-2011). As gross profit margin starts shrinking so does net profit margin (from 19.5% by 2011 to 13.8% by 2016). We expect VNM to achieve a PAT of 5,068bn (+20.1% yoy) by year end 2012, which is 8.1% higher than its own target.

SUMMARY OF 5-YEAR PROJECTION: PROFIT AND LOSS

(VND bn) 2011 2012F 2013F 2014F 2015F 2016F CAGR 11-16

Total Revenue 21,627 28,222 36,529 46,958 58,130 68,794 26.0%

Gross Profit 6,588 8,532 10,871 13,756 16,753 19,503 24.2%

% gross profit margin 30.5% 30.2% 29.8% 29.3% 28.8% 28.4%

Selling expense 1,812 2,427 3,215 4,226 5,348 6,398 28.7%

G&A expense 459 621 840 1,127 1,453 1,789 31.2%

Profits from operation 4,317 5,484 6,816 8,403 9,952 11,317 21.3%

Before-tax Profit 4,979 6,078 7,468 9,081 10,741 12,308 19.8%

After-tax Profit 4,218 5,068 6,146 7,235 8,378 9,477 17.6%

% net profit margin 19.5% 18.0% 16.8% 15.4% 14.4% 13.8% Source: VNM, SBS estimates after 2011

SUMMARY OF 5-YEAR PROJECTION: BALANCE SHEET

(VND bn) 2011 2012F 2013F 2014F 2015F 2016F CAGR 11-16

TOTAL ASSETS 15,583 19,238 23,474 27,709 32,406 37,698 19.3%

Current Asset 9,468 10,888 13,526 16,562 21,450 27,044 23.4%

Cash & cash equivalent 3,157 844 1,070 920 1,911 2,300

Short-term Investment 736 2,706 3,251 4,189 6,187 9,720

Long-term Asset 6,115 8,350 9,947 11,147 10,956 10,654 11.7%

Fixed Asset 3,750 7,189 8,631 9,690 9,321 8,788

Long-term Investment 847 945 1,052 1,171 1,367 1,615

TOTAL LIABILITIES 2,759 2,918 3,785 3,660 3,513 3,518 5.0%

Current Liabilities 2,600 2,759 3,626 3,501 3,355 3,359 5.3%

Short-term borrowing - - - - - -

Long-term Liabilities 159 159 159 159 159 159

Long-term borrowing - - - - - -

EQUITY 12,824 16,320 19,689 24,048 28,892 34,181 21.7%

Owner's equity 12,477 15,923 19,230 23,517 28,278 33,471 21.8%

Share Capital 5,561 5,562 5,562 5,562 5,562 5,562

Retained Earning 4,177 7,119 9,812 13,376 17,299 21,545

Other reserve 346 397 459 531 615 709 15.4% Source: VNM, SBS estimates after 2011


C O M P A N Y O V E R V I E W

The Company was established in 1976, but only upon its equitization in 2003 did the Company change its name

to Viet Nam Dairy Products Joint Stock Company (with an initial chartered capital of VND1,250bn). Originally,

VINAMILK was only producing condensed milk and coffee, and with time comes its expansion to other

segments. VNM has been the leading dairy company for years and will remain so for years to come. The

Company was quoted as VNM on the HOSE in 2006, and is now the leading dairy manufacturer in Vietnam. The

company’s chartered capital rose to VND3,531bn by December 2010 and to VND5,561bn by the end of 2011,

right after the issuance of 185 million bonus shares to existing shareholders.

CHARTERED CAPITAL SHAREHOLDER STRUCTURE

INCREMENT OF CHARTERED CAPITAL (2011)

Description of share issuance Number of shares Subsequent chartered capital

(VND bn)

Employee Stock Ownership Plan 2010 3,498,520 3,565,706,400

Issuance of new shares 2011 10,700,000 3,672,706,400

Employee Stock Ownership Plan 2011 3,554,910 3,708,255,500

Bonus shares to existing shareholders (ratio 2:1) 185,289,204 5,561,147,540

Source: VNM

By year end 2011, the Company had a total of 556m outstanding shares, and all of its room for foreign

ownership has been completely filled (49%). The State Capital Investment Corporation (SCIC) in VINAMILK has

reduced its holding from 47.3% (2010) to 45.04% (2011). Other major shareholders include F&N Dairy

Investment (9.5%) and Dragon Capital’s investment funds (7.3%).

1,590 1,753 1,753

3,512 3,512

5,560

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011

VND bn

45.04%

48.99%

5.97%

2011

SCIC

Foreign Investors

Other Domestic Investors


BOARDS OF DIRECTORS AS SHAREHOLDERS (16th April 2012)

Names Position Holding (shares) Holding (%)

Ms. Mai Kieu Lien Chairwoman & General Director 1,510,320 0.27%

Ms. Ngo Thi Thu Trang Member & CFO 443,055 0.08%

Mr. Le Anh Minh Member 35,175 0.04%

Mr. Le Song Lai Member - -

Mr. Wang Eng Chin Member - -

Source: Cafef

SUBSIDIARIES & AFFILIATED COMPANIES (2011)

Company Business VINAMILK’s

Stakes

Chartered Capital

(VNDbn)

Subsidiary

Vietnam Dairy Cow SMLLC Dairy livestock 100.00% 840

Lam Son Dairy SMLLC Dairy products & soft drinks 100.00% 80

International Real Estate Investment SMLLC Real estate 100.00% 160

Dielac Milk SMLLC Dairy products 100.00% 146

Associated company

Asia Saigon Food Ingredients JSC Crème powder for food 15.79% 114

Miraka LTD Dairy products 19.30% (VND173bn) 55 (NZD m)

Source: VNM, SBS

CURRENT VINAMILK’S 9 FACTORIES (2011)

Entities Location Investment (VNDbn)

Truong Tho Dairy Factory Thu Duc district, Ho Chi Minh city 291

Thong Nhat Dairy Factory Thu Duc district, Ho Chi Minh city 168.6

Dielac Dairy Factory Bien Hoa city, Dong Nai Province 140.5

Binh Dinh Dairy Factory Quy Nhon, Binh Dinh Province 51.8

Nghe An Dairy Factory Cua Lo town, Nghe An 62.9

Sai Gon Dairy Factory District 2, Ho Chi Minh city 195.2

Can Tho Dairy Factory Binh Thuy District, Can Tho city 72.4

Tien Son Dairy Factory Tien Du District, Bac Ninh Province 380

Vietnam Beverage factory Ben Cat District, Binh Duong Province 300

TOTAL 1,662.4 Source: VNM


12-MONTH PERFORMANCE OF VNM & THE VNINDEX

Source: Bloomberg, SBS

BALANCE SHEET (VND bn) YEARLY RATIOS

2009 2010 2011 2009 2010 2011

Assets 8,482.0 10,773.0 15,582.7 Growth rate

Current assets 5,069.2 5,919.8 9,467.7 Revenue growth rate 29.3% 48.4% 37.3%

Long-term assets 3,412.9 4,853.2 6,115.0 Gross profit growth rate 49.3% 33.4% 27.3%

Fixed assets 2,525.0 3,428.6 5,044.8 Net profit growth rate 90.0% 52.2% 16.6%

Long-term investments 602.5 1,141.8 846.7 Total asset growth rate 42.2% 27.0% 44.6%

Resources 8,482.0 10,773.0 15,582.7 Equity growth rate 38.4% 23.4% 56.7%

Liabilities 1,808.9 2,549.2 2,759.1 Profitability ratios

Current liabilities 1,552.6 2,385.6 2,600.2 Gross profit margin 36.5% 32.8% 30.5%

Long-term borrowings and liabilities 256.3 163.6 158.9 EBIT margin - - 23.1%

Equities 6,637.7 8,223.8 12,823.6 Profit before tax margin 25.7% 27.0% 23.0%

Owner's equity 6,455.5 7,964.4 12,477.2 Net profit margin 22.4% 23.0% 19.5%

Contributed capital 3,512.7 3,530.7 5,561.1 ROA 28.0% 33.6% 27.1%

Capital surplus 1,277.0 ROE 36.8% 45.4% 33.8%

Retained profits/(accumulated losses) 892.3 1,909.0 4,177.4 Dupont Analysis

Net profit margin(1) 22.4% 23.0% 19.5%

INCOME STATEMENT (VND bn) Asset turnover (2) 125.1% 146.2% 138.8%

2009 2010 2011 Equity multiplier (3) 131.4% 135.3% 124.9%

Net sales 10,613.8 15,752.9 21,627.4 ROE = (1)x(2)x(3) 36.8% 45.4% 33.8%

COGS 6,735.1 10,579.2 15,039.3 Management ratios

Gross profit /(loss) 3,878.7 5,173.7 6,588.1 Receivable outstanding days 17.7 13.6 19.3

Financial income 439.9 448.3 671.4 Inventory outstanding days 71.1 81.1 79.4

Financial expense 184.8 153.2 246.4 Payable outstanding days 1.6 1.1 2.8

Interest expense 13.9 Asset turnover 1.3 1.5 1.4

Selling expenses 1,245.5 1,438.2 1,811.9 Long-term asset turnover 3.1 3.2 3.5

G&A expenses 292.9 388.1 459.4 Fix asset turnover 4.2 4.6 4.3

Net operating profit /(loss) 2,595.4 3,642.4 4,741.8 Liquidity ratios

Other income 143.0 983.0 323.1 Current ratio 3.3 2.5 3.6

Other expenses 7.1 374.2 85.9 Quick ratio 2.4 1.5 2.4

Profit /(loss) before tax 2,731.4 4,251.2 4,979.0 Cash ratio 0.3 0.1 1.2

Corporate income tax 361.5 645.1 778.6 Capital Structure

Profit after tax 2,376.1 3,615.5 4,218.2 Total debt/Total Equity 28.0% 32.0% 22.1%

Net profit/(accumulated losses) 2,375.7 3,616.2 4,218.2 Total debt/Total Asset 21.3% 23.7% 17.7%

Total asset/Total Equity 131.4% 135.3% 124.9%

-30%

-20%

-10%

0%

10%

20%

30%

40%

VNINDEX VNM


CASHFLOW STATEMENT (VND bn) YEARLY RATIOS (cont.)

2009 2010 2011 Index per share 2009 2010 2011

Cash flows from operating activities PE 10.20 8.96 9.91

Profit/(loss) before tax 2,731.4 4,251.2 4,979.0 PBV 5.01 4.08 4.10

Depreciation and amortisation 234.1 290.1 414.6 PS 2.28 2.06 1.93

Allowances and provisions 62.0 (3.8) 46.2 EPS (VND per share) 9,024 10,268 9,279

Profits/(losses) from investing activities (23.1) (609.1) (460.8) Revenue/share (VND/share) 40,315 44,731 47,575

Operating profit before changes in WC 2,739.0 3,892.0 5,000.5 Book value (VND/share) 18,378 22,558 22,436

CF from operating activities 3,096.5 2,018.8 2,411.2

Cash flows from investing activities

Receipt/payments for additions to assets (654.8) (1,432.3) (1,767.2)

Receipt/payments for investments entities (2.5) (188.3)

CF from investing activities (2,476.3) (993.1) 6.0

Cash flows from financing activities

Proceeds from equity issued 3.6 18.1 1,454.5

Proceeds from long-term borrowings 3.3 967.1 624.8

CF from financing activities (532.7) (1,188.4) 126.2

Net CF during the period 87.5 (162.7) 2,543.4

Cash at the beginning 338.7 426.1 613.5

Cash at the end 426.1 263.5 3,156.5

BALANCE SHEET (VND bn) QUARTERLY RATIOS

QI-11 QII-11 QIII-11 QIV-11 QII-11 QIII-11 QIV-11

Assets 12,280.5 14,699.4 14,335.9 15,582.7 Growth rate

Current assets 7,327.5 9,519.9 8,979.1 9,467.7 Revenue growth rate (YoY) 36.1% 29.9% 43.9%

Long-term assets 4,953.0 5,179.5 5,356.8 6,115.0 Gross profit growth rate (YoY) 25% 20% 34%

Fixed assets 3,544.6 3,855.8 4,269.9 5,044.8 Net profit growth rate (YoY) 19% -7% 43%

Long-term investments 1,122.4 1,100.5 859.2 846.7 Profitability ratio

Resources 12,280.5 14,699.4 14,335.9 15,582.7 Gross margin 31.4% 29.4% 28.5%

Liabilities 3,180.4 3,114.9 2,507.8 2,759.1 EBIT margin 24.1% 22.1% 20.5%

Current liabilities 2,985.7 2,970.9 2,361.2 2,600.2 Net profit margin 20.4% 18.7% 17.4%

Long-term liabilities 194.7 144.0 146.6 158.9 ROA (4Q) 33.4% 30.0% 29.7%

Equities 9,100.1 11,584.5 11,828.1 12,823.6 ROE (4Q) 44.9% 39.3% 38.1%

Equity 8,905.2 11,323.2 11,539.8 12,477.2 Management ratio

Contributed capital 3,565.7 3,708.3 3,708.3 5,561.1 Receivable outstanding days 16 16 17

Capital surplus 1,277.0 1,277.0 1,277.0 Inventory outstanding days 100 79 70

Retained profits 2,667.3 3,500.0 3,572.2 4,177.4 Payable outstanding days 1 3 2

Liquidity ratio

INCOME STATEMENT (VND bn) Current ratio 2.3 1.8 1.9

QI-11 QII-11 QIII-11 QIV-11 Quick ratio 1.8 2.3 2.4

Total Revenue 4,629.4 5,537.9 5,812.7 6,090.5 Cash ratio 0.1 0.8 1.2

Net sales 4,535.4 5,420.4 5,696.5 5,975.1 Capital Structure

COGS 3,026.0 3,718.5 4,023.5 4,271.2 Total debt/Total equity 27.5% 21.7% 22.1%

Gross profit /(loss) 1,509.4 1,701.9 1,673.0 1,703.9 Total debt/total asset 21.2% 17.5% 17.7%

Financial income 132.8 194.8 169.2 174.6 Total asset/total equity 129.8% 124.2% 124.9%

Financial expense 99.5 82.4 22.9 41.7 Index per share

Interest expense PE 8.3 8.5 9.0

Selling expenses 342.4 418.8 504.5 546.1 EPS (VND per share) 11109 10768 10199

G&A expenses 89.3 113.8 119.6 136.7

Net operating profit 1,111.0 1,281.6 1,195.2 1,154.0

Other income 87.6 67.5 76.2 91.7

Other expenses 12.5 40.9 13.4 19.0

Profit /(loss) before tax 1,186.1 1,308.2 1,258.0 1,226.7

Corporate income tax 180.8 207.7 201.4 188.7

Profit after tax 1,006.5 1,107.2 1,062.5 1,042.0

Disclaimers


Report tracking

Reports issued Date Recommendation 12M target price at

issuing date (diluted)

Market price at issuing

date (diluted)

Company Note 01/11/2011 TAKE PROFIT 93,100 84,700

SBS Research Guide to Investment Ratings

Buy: Share price may exceed 15% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 15% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 15% over the next 12 months

Not Rated (NR): Stock is not within regular research coverage

The information and statements contained herein, including any expression of opinion, are based upon sources believed to be reliable but their

accuracy, completeness, and correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and

they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time.

Expressions of opinion contained herein are subject to change without notice. This document is not and should not be construed as, an offer or the

solicitation of an offer to buy or sell any securities. SBS and other related companies and/or their officers, directors and employees may have positions

and may have affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services

for these companies. No person is authorized to give any information or to make any representation not contained in this document and any

information or representation not contained in this document must not be relied upon as having been authorized by or on behalf of SBS. This

document is private circulation only and is not for publication in the press or elsewhere. SBS accepts no liabilities whatsoever for any direct or

consequential loss arising from any use of this document or its contents. The use of any information, statements forecasts and projection contained

herein shall be at the sole discretion and risk of the users. This document is confidential and is intended solely for the use of its recipient. Any

duplication or redistribution of this document is prohibited.

Sacombank Securities Company - Head office 278 Nam Ky Khoi Nghia Street, District 3 Ho Chi Minh City Vietnam

Tel: +84 (8) 6268 6868Fax: +84 (8) 6255 5957 www.sbsc.com.vn

Singapore DMG & Partner Cambodia Laos

DMG & Partners

Securities Pte. Ltd.

10 Collyer Quay

#09-08 Ocean Financial Centre

Singapore 049315

Tel : + (65) 6533 1818

Fax : + (65) 6532 6211

Sacombank Securities (Cambodia) PLC

56 PreahNorodom Blvd

Sangkat Chey Chumneas, Khan Daun Penh,

Cambodia

Tel: +855 23 999 890

Fax: +855 23 999 891

Lanexang Securities Public Company

5th Floor, LSX Building, Ban Phonthan

Vientiane Capital

The Lao P.D.R

Saigon Hanoi

63B Calmette Street

Nguyen Thai Binh Ward, District 1,

Ho Chi Minh City

Vietnam

Tel: +84 (8) 3821 4888

Fax: +84 (8) 3821 3015

6th

-7th Floor, 88 Ly Thuong Kiet Street

Hoan Kiem District

Hanoi

Vietnam

Tel: +84 (4) 3942 8076

Fax: +84 (8) 3942 8075

Email: [email protected]

mailto:[email protected]

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