2014 07 09 Vinamilk final - jcapitalresearch.com

1 Disclaimers: Last page

July 9, 2014

Vietnam | Consumer

Vinamilk (VNM VN)

Initiation Jeff Dorr +852 6939 6744 [email protected] Vinamilk (VNM VN) one-year share price in thousand VND (blue) and volume (gold, in mln shares)

Source: Bloomberg, July 9, 2014

Vinamilk (VNM VN) Price VND 128,000 Rating BUY Price target VND 175,000 Difference 36.7% Market Cap VND 106.6 tln Simple Moving Avg. 0.13 mln P/E 16.6x

Source: Bloomberg, July 9, 2014

Utterly profitable + Dominant franchise

Vinamilk is the state-owned dairy monopoly in Vietnam, with roughly 50% share across the dairy segment. We believe that revenues will double by 2017, making the forward P/E of 16.5x very attractive relative to dairy peers in SE Asia and globally. Growth will be driven by higher consumption in Vietnam and a recently completed expansion in capacity. We anticipate that margins may expand with greater product mix in high margin categories. We think that earnings can probably compound at around 17-18% through 2018. Dairy consumption per capita in Vietnam, at 15 kg per year, remains one of the lowest both in Asia and globally, and is expected to double by 2020.

+ Capex complete Vinamilk roughly doubled its production capacity in the last year, expanding liquid milk capacity from 400 mln liters to 800 mln liters, and milk powder capacity from 50,000 tons to approximately 100,000 tons. The company used its own operating cash flow for the investment, and Vinamilk comfortably remains net cash. Now that the capital outlay is complete, Vinamilk will have rich flows of operating cash. This will likely translate to higher dividends, or possibly share repurchases.

+ Entry point While revenue growth and share price appreciation will undoubtedly slow from historical trend, we feel that the recent pullback is unjustified, providing investors with an attractive entry point for long-term ownership.

+ Initiate with a BUY; PT of VND 175,000 Vinamilk trades at an attractive discount to global peers. We attribute this discount to lower liquidity, lack of coverage by most international banks, and street analyst focus on larger markets such as China and India. We value Vinamilk on a DCF basis. Using a 12% discount rate and 15x terminal multiple, we arrive at a valuation of approx. VND 175,000 per share, representing a 35% upside to today’s share price of VND 128,000.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jun-13 Oct-13 Feb-14 Jun-14

Mill

ares

Vinamilk (VNM VN) Jeff Dorr +852 6939 6744 [email protected]

2 Disclaimers: Last page July 9, 2014

Table of Contents

SUMMARY VIEW 3 HISTORY AND OWNERSHIP 3 VIETNAM’S POPULATION DEMOGRAPHICS 4 COMPETITIVE ADVANTAGES 6

VINAMILK BRAND 6 VINAMILK DISTRIBUTION 7

BUSINESS UNITS AND MARKET SHARE 10 MILK POWDER 12 CONDENSED MILK 14 YOGURT 15 EXPORTS 16

THE CURRENT DOWNTURN 18 VALUATION 22 RISKS 23

INFLATION 23 CURRENCY 24 COMPETITION AND LOSS IN MARKET SHARE 26 ACCOUNTING 26 SUCCESSION PLANNING 27 VALUATION 27 ACQUISITIONS 27

PROFORMA FINANCIALS 29

DISCLAIMER 33



The 2x expansion has already been paid for, and,

from now on, free cash flows should rise rapidly.

Summary view Vinamilk is the No. 1 consumer brand in Vietnam, ranked above Coca Cola in the beverage segment. In addition to its strong branding, Vinamilk has the most extensive distribution system of any consumer franchise in Vietnam, with 90% of sales from outside the supermarket channel. For the coming five years at least, the traditional distribution channel consisting of small groceries will comfortably remain the lion's share of sales.

Dairy consumption per capita in Vietnam, at 15 kg per year, remains one of the lowest both in Asia and globally and is expected to double by 2020. With capital outlays complete on the new factories, Vinamilk stands on the verge of generating gobs of free cash, which should translate to dividend hikes and increased valuation.

2014 will prove a challenging year for VNM as revenues slow from weak consumer demand and high costs of imported milk powder crimp margins. But these are temporary blips in a longer-term story. Consumer demand will recover, imported milk prices normalize, and the business mix will slowly shift toward premium, high-margin products, to the advantage of VNM.

History and ownership Vinamilk’s business commenced in 1976, beginning operations after the Vietnam war as the state-owned Southern Coffee-Dairy Company. The original purpose of the company was to take over and consolidate the three privately owned dairy factories in southern Vietnam, including Thống Nhất (which belonged to Chinese owners), Trường Thọ (formerly owned by Friesland Foods and known for its condensed milk across the South), and Dielac (Nestlé).1 Vinamilk has been the largest dairy company in Vietnam for the past 37 consecutive years and currently occupies about 50% of the dairy market in Vietnam. The company was listed on the Ho Chi Minh exchange in 2006. Today, Vinamilk has the second-largest market cap on the Vietnam stock market, with a market cap of USD 5 bln.

Foreign shareholders own 49% of the company, local shareholders 6%, and the State Capital Investment Corporation (SCIC) owns the

1 http://en.wikipedia.org/wiki/Vinamilk



We think the recent contraction in sales and

margins results from Vietnam’s continuing

economic distress and will turn around from next

year. As a result, it is a buying opportunity for

Vinamilk.

remaining 45%. Significant foreign shareholders include Fraser & Neave (which holds a board seat), and Deutsche Bank.

Chart 1. Vinamilk ownership

Source: Vinamilk filings

In spite of its storied history, Vinamilk remains on a growth trajectory. Over the next three years, the company intends to double 2013 sales to reach USD 3 bln in revenue, making itone of the largest 50 dairy producers in the world.

Vietnam’s population demographics Dairy consumption per capita in Vietnam is one of the lowest globally. Estimates frequently peg consumption per capita at around 14-16 kg per capita. Consumption per capita is expected to largely double to approx. 28 liters per capita by 2020.2 Even relative to other Asian peers, Vietnam has one of the lowest rates of dairy consumption per capita.

2 http://en.vbcsd.vn/detail.asp?id=476

45%

6% 10% 5%

34%

SCIC (Local)

Local Shareholders (Local)

F&N Dairy Investment (Foreign)

Deutsche Bank (Foreign)

Other Foreign Shareholders (Foreign)



Chart 2. Dairy consumption per capita

Source: BSC Research, Tetra Pak, Kim Eng, Food and Policy Research Institute (FARPI), USDA.gov, J Capital analysis

Population in Vietnam is also growing favorably in relation to SE Asian peers and other developed markets.

Chart 3. Population growth by country (2012)

Source: World Bank

319 300 292

169 146

125 121

80 52

34 28 22 15 13

0

50

100

150

200

250

300

350 Kg per capita

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0% Percent



Drought in New Zealand and cold in Europe have

distorted the cost of raw milk, but, as a global commodity, its price

should stabilize.

As of 2010, 24% of the population in Vietnam was under 15 years of age. This age distribution is lower than India (31%) and Bangladesh (31%), but on par with Thailand (21%), Malaysia (27%), Sri Lanka (25%), and Indonesia (27%), and above that of the United States (20%). This demographic lends favorable growth characteristics to Vinamilk—particularly in comparison with more mature markets in Europe and Japan, where as little as 13-15% of the population is under 15.

Competitive advantages

Vinamilk brand

Vinamilk’s competitive advantages reside in its brand name and distribution network. Different market research firms including TNS, AC Nielsen, and Nikkei vary in their ranking of Vietnam’s lower tier brands, but Vinamilk is consistently recognized as Vietnam’s top consumer brand across the majority of surveys. According to Kantar World Panel, Vinamilk reaches 94% of households in Vietnam, and is the number one FMCG brand in the country.3 Similarly, data from AC Nielson pegs Vinamilk as the most valuable beverage brand in Vietnam—even above multinationals such as Coca Cola, Heineken, and Pepsi.

Table 1. Vietnam’s top beverage brands

Brand Rank Vinamilk 1 Coca Cola 2 Heineken 3 Tra Xanh 0 do 4 Dutch Lady 5 Pepsi 6 Trung Nguyen 7 Red Bull 8 Hanoi Beer 9 Number 1 10

Source: AC Nielson4

We note that, unlike other food brands in Vietnam (such as Kinh Do and Masan), Vinamilk frequently references the Vinamilk brand on its product packaging, which we believe helps consumers identify with the flagship brand.

3 http://www.kantarworldpanel.com/vn/news/Vinamilk-is-the-Most-Chosen-FMCG-Brand-in-Vietnam-while-Coca-Cola-leads-the-global-ranking 4 http://awareness.com.vn/enUS/zone/254/news/675-vietnam-focus-top-10-brands-by-nielsen.aspx



Vinamilk’s strength is its reach through all the mom-and-pop outlets

across the country.

Vinamilk packaging

Source: Vinamilk

Vinamilk distribution

Vinamilk has Vietnam’s most extensive distribution network,5 a critical competitive advantage over peers. Vinamilk distributes through 266 exclusive distributors as well as 600 supermarkets. We believe that Vinamilk has less of a competitive edge in the supermarket channel, and that Vinamilk’s competitors, such as Friesland Campina and TH Milk, are well entrenched in this channel. Supermarkets in Vietnam, however, are primarily located in high-income urban areas, while the majority of the country’s population resides in rural areas. Vinamilk’s posturing in rural areas bodes well for future growth, as only 10% of its domestic sales are transacted through the supermarket channel.6

This distribution strength may explain why Vinamilk has succeeded in taking share from its major competitor, Friesland Campina Vietnam, over the last decade. Friesland Campina is a large Dutch company, listed in the Netherlands. Its first factory was completed in Vietnam in 1997, although sales of the Dutch Lady brand date back in Vietnam as early as 1924.7 However, Dutch Lady has not built access to the rural channels as successfully as Vinamilk.

Vinamilk’s exclusive relationship with 266 distributors around the country allow the company to market its products in 224,000 retail outlets around Vietnam, many of which are in rural areas. This compares favorably to Friesland Campina, which has 170 distributors, which reach 170,000 retail outlets.8 We believe that

5 CIMB, 2014 6 Vinamilk 2013 AR 7 http://www.frieslandcampina.com/english/about-us/worldwide-locations/asia-and-australia/vietnam.aspx; http://essay.utwente.nl/60872/1/BSc_Ronald_Vollebregt.pdf; http://www.wordhcmc.com/features/the-perspectives/the-dutch-lady 8 http://www.just-food.com/management-briefing/milking-the-growth-of-vietnams-dairy-sector_id126945.aspx



Vinamilk’s strong presence in rural areas has allowed the company to take share in the dairy market, as Vietnam’s income growth has gradually expanded out from cities into rural areas, where incomes are expanding from a very low base.9 For example, in 2008, Vinamilk’s overall share in Vietnam’s dairy market stood at approximately 37%.10 As of 2013, Vinamilk’s share had expanded to approx. 48% of the market, primarily on account of brand execution as well as the company’s access to rural regions of Vietnam. Data for Friesland Campina’s Vietnam business unit are difficult to pinpoint, but we note the following from the group’s 2011 AR:

“. . . Friesland Campina Vietnam experienced the consequences of high inflation. For the first time in years demand for food shrunk in this Asian country and, as a result, price competition rose as did the market demand for cheaper products. The market shares of the premium Dutch Lady brands, and to a lesser degree Friso, came under pressure. Revenue, volume, and operating profit were all lower than in 2010 . . .” 11

Critically, revenue for Vinamilk in the same year grew by 37%, and operating profits by 30%. While some might attribute the disparity to pricing strategies between the two competitors, we feel that Vinamilk competes in all pricing tiers of the market, which makes it difficult for us to chalk up the discrepancy in business performance to pricing alone. Rather, we believe that Vinamilk’s expansion of its distribution channel is the more important driver behind its business results. For example, since 2010, Vinamilk has grown its distribution channel and exposure to retail outlets at a faster rate than Friesland Campina:

Table 2. Friesland Campina distribution

Friesland Campina 2010 2013 Delta Distributors 150 170 +20 Retail outlets 150,000 170,000 +20,000

Source: Demand Management at Friesland Campina Vietnam; Just-Food.com 12

Table 3. Vinamilk distribution

Vinamilk 2010 2013 Delta Distributors 232 (2011)* 266 +34 Retail outlets 140,000 224,000 +84,000

Source: Vinamilk filings. Note: * 2010 Data unavailable

9 CIMB, 2014 10 Vinamilk 2008 AR 11 Friesland Campina 2011 AR 12 http://essay.utwente.nl/60872/1/BSc_Ronald_Vollebregt.pdf; http://www.just-food.com/management-briefing/milking-the-growth-of-vietnams-dairy-sector_id126945.aspx



Vinamilk supports its

distributors with freely leased cold storage equipment, making

difficult for small scale competitors to win share in chilled milk and yogurt

Notably, Vinamilk supports its distributors by providing them with freely leased cold storage equipment. This capital intensive strategy has made it difficult for competitors with smaller scale to win share from Vinamilk outside of the supermarket channel—particularly in fast growing categories such as chilled milk and yogurt. As of 2013, Vinamilk had spent VND 150 bln supplying distributors with 30,000 fridges/coolers and 500 refrigerated minivans.13

We believe that Vinamilk’s exposure to rural population positions it favorably for growth in years to come. It is estimated that some 10% of Vietnam’s population residing in Ho Chi Minh and Hanoi comprises nearly 80% of dairy consumption in Vietnam.14 As rural incomes increase and consumption of dairy products grows more balanced across the broader geographic population, we expect companies such as Vinamilk to benefit. Furthermore, margins may expand as rural consumption shifts from low price, low margin products such as condensed milk to higher priced, high margin products such as liquid milk, milk powder, and yogurt.

Chart 4. Dairy consumption in Vietnam by demographic (2010)

LHS - Population (HCMC & Hanoi vs. rural) RHS - Dairy consumption (HCMC & Hanoi vs. rural)

Source: Vietnam-Belgium Dairy Project, VinaSecurities Research

13 Maybank 2014, CIMB 2014, VNDirect 14 Vietnam-Belgium Dairy Project, VinaSecurities Research

10%

90%

0%

20%

40%

60%

80%

100%

HCMC & Hanoi Rural

78%

22%

0%

20%

40%

60%

80%

100%

HCMC & Hanoi Rural



We estimate that liquid

milk will act as Vinamilk’s most important revenue driver over the next five

years

Business units and market share Vinamilk produces a wide variety of dairy products, including liquid milk, milk powder, condensed milk, and yogurt. Vinamilk does not disclose revenue contribution or margins for any of these products, but we estimate sales in 2013 roughly according to the following breakdown: liquid milk (35%); powdered milk (30%); condensed milk (18%); yogurt (17%); and exports (14%).

Liquid milk

Liquid milk is most likely Vinamilk’s most important revenue driver, comprising some 35% of domestic sales, and a key contributor of profit to the company. Key brands include ADM+, Flex, Fino Star, and Twin Cows. For the liquid milk category, Vinamilk controls some 46-48% of the market. Notably, Vinamilk has steadily increased its market share in the liquid milk space over its main competitor, Friesland Campina, in recent years. Vinamilk believes that it can ultimately control ~60% of the liquid milk market in Vietnam.

Chart 5. Liquid Milk Share by Competitor

Source: Euromonitor, VPBS Research

VNM’s primary product in liquid milk is UHT milk, which is formed by combining imported whole milk powder (WMP) or skim milk powder (SMP) with water and other ingredients, and heat-treating the product for storage. UHT milk has a shelf life of roughly 6-9 months. We estimate UHT milk comprises over 2/3 of VNM’s liquid milk sales. The remaining 1/3 of liquid milk sales is comprised of fresh milk, which is then processed into UHT product. Unlike milk reconstituted from WMP and SKM, fresh milk is sourced from cows

38.7% 40.9% 43.3% 45.5%

25.2% 23.5% 22.3% 20.3%

7.2% 7.4% 7.3% 7.4%

28.9% 28.2% 27.1% 26.8%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2010 2011 2012 2013

Vinamilk Friesland Campina Nestle Vietnam Others



Vinamilk has access to 50-60% of all the fresh milk

produced in Vietnam.

locally in Vietnam. Relative to reconstituted milk, fresh milk is relatively higher margin, higher ASP product, and thus a desirable category for Vinamilk.

Within fresh milk, Vinamilk primarily competes with local companies, since local cows are needed to supply raw milk. Vinamilk competes with TH Milk, IDP, and Da Lat Milk in the fresh milk category. In order to compete effectively and grow share in this category, access to locally supplied milk is critical. As of January 2014, Vinamilk owned 9,000 cows in Vietnam and contracts with farmers that have another 65,000 cows (which produce roughly 50-60% of all fresh milk in Vietnam). Overtime, Vinamilk intends to import cows from Australia and New Zealand, expanding its ownership to some 45,000 cows by 2017, which it hopes can supply 30-40% of its fresh milk requirements. Vinamilk plans on spending VND 120 bln this year (approx. USD 6 mln) to further develop its cow farms. However, competitors are also ramping in this area. TH Milk has about 30,000 cows and Friesland is also in the process of developing their own sources of fresh milk.15

Within fresh milk, a small but growing category is pasteurized fresh milk. Pasteurized fresh milk isn’t heated to the same extent as UHT milk, and thus retains more nutrients and flavor. However, pasteurized milk requires refrigeration and has a relatively short shelf life of 2-3 weeks. Pasteurized fresh milk only comprises an estimated 3% of liquid milk sales, but has gross margins up to 10 percentage points higher than UHT milk.16 Due to Vinamilk’s build out of infrastructure in coolers and freezers for the distribution of yogurt, the company enjoys strong barriers to entry in this segment.

Though difficult to pinpoint a firm number, gross margins in liquid milk are clearly higher than the corporate average for Vinamilk—we estimate roughly 32% for FY 2014. Importantly, this category should be Vinamilk’s chief revenue driver over the next 5 years, which we estimate to grow at a CAGR of 20-22% through 2017. Vinamilk’s completion of its new mega liquid milk factory in Binh Duong province in September 2013 allows for substantial future growth. The plant doubled Vinamilk’s capacity for liquid milk from 400 mln to 800 mln liters, and provides the option to further expand an additional 400 mln liters in a second phase if needed. The initial plant capex of USD 120 mln has been paid in full, and

15 CIMB, 2014 16 CIMB, 2014



Vinamilk’s overall gross

margins through 2018 will be benefited by a larger

composition of sales from liquid milk, milk powder,

and higher plant utilization.

Vinamilk should not require additional capacity at least through 2018. The expansion to another 400 mln liters should only cost USD 40-50 mln, making the next segment of expansion substantially cheaper for long-term shareholders.

We believe that a larger composition of sales from liquid milk and higher plant utilization should benefit Vinamilk’s overall gross margins through 2018. Furthermore, an increasing contribution of fresh and pasteurized milk in the category, as well as an increasing proportion of milk sourced from self-owned cows, should boost gross margins. We believe an incremental three to four percentage points of gross margin expansion through 2018 to be achievable in liquid milk sales on account of the above drivers.

Milk powder

Milk powder is comprised primarily of high margin infant formula, and to a lesser extent, more commoditized milk powders for adult consumption. Milk powder is another large revenue driver for Vinamilk, and most likely comprises ~30% of domestic sales. Key brands for Vinamilk in this segment include Dielac (powdered formula), Ridelac (nutrition powdered formula), Sure Prevent, CanxiPro, and Diecerna.

Unlike every other segment of the dairy market, the powdered milk market in Vietnam is dominated by multinationals and not Vinamilk. This state of affairs can likely be explained by two factors. For one, Vietnamese families typically associate higher quality products and food safety with foreign brands (despite Vinamilk’s impeccable track record in the category to date). Secondly, canned infant formula products have a long shelf life and are easy to distribute and store, which limit Vinamilk’s inherent advantages in distribution. Consumers have a strong embedded perception that foreign brands offer more nutritious products for their children, and typically pay a 50% premium over Vinamilk’s brands. Vinamilk’s products thus account for 35% of the industry volume, but due to its focus on lower priced powdered milk, its market share by value is approx. 14%.



Vinamilk was recently approved by the FDA to

sell its products in the US.

Chart 6. Milk powder share by competitor


Within the milk powder segment, Abbott leads the market, followed by Friesland Campina. Vinamilk is positioned roughly in third place with Mead Johnson.

In August 2013, perception of Vinamilk’s milk powder products benefitted from a recall of Fonterra whey protein concentrate (WPC), which was contaminated with botulism-causing bacteria. Multinationals including Abbott and Danone, which used Fonterrra’s WPC in infant their formulas, had to recall products. Vinamilk’s WPC is sourced from the EU and the U.S., and was not affected at the time. This event, in addition to Vinamilk’s recent approval from the FDA to sell its products in U.S.A. may help boost consumer confidence in the brand’s powder products.

Milk powder is Vinamilk’s most profitable segment, and Vinamilk hopes to increase its share in this market from 30% by volume currently to 50%. If successful, that would indicate that Vinamilk would occupy some 25% of Vietnam’s milk powder market by value. Vinamilk’s new milk powder plant, completed in April 2013 at a cost of USD 100 mln, will help the company realize this goal. The new plant has a capacity of 54,000 tons of powder per year, which essentially doubled Vinamilk’s production capacity to 100,000 tons of milk powder per year.

We estimate that powdered milk comprises 30% of Vinamilk’s domestic sales mix, with gross margins around 45%. We anticipate that sales in this category will be in line with the broader market of ~17-18% annual growth through 2018.

23.3% 23.8% 24.2% 24.5%

13.9% 14.1% 14.0% 14.2%

14.3% 14.3% 14.3% 14.4%

18.0% 18.5% 18.7% 19.0%

30.5% 29.3% 28.8% 27.9%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 Abbott Friesland Campina Mead Johnson Vinamilk Others



Vinamilk accounts for roughly 80% of Vietnam’s

condensed milk market share.

Condensed milk

Condensed milk is a low cost dairy product with a long shelf life. In countries with low per capita income, it is traditionally the main source of dairy nutrition. Nowadays in Vietnam’s cities, condensed milk is principally used as an additive food ingredient and sweetener for coffee and tea, although in rural areas it is still likely consumed for nutritional value.

The market for condensed milk in Vietnam is a duopoly between Vinamilk (with brands including Southern Star and Longevity) and Friesland Campina (with brands including Dutch Lady and Completa). Vinamilk dominates this market, with roughly 80% share. The remaining 20% of the market is controlled by Friesland Campina. Market share for both competitors has been steady for at least 5 years.

Chart 7. Condensed milk share by competitor


Demand for condensed milk is growing slowly, with 2-3% annual growth in Vietnam. The category is also a low margin segment, with estimated 20% gross margins. Due to slow growth and low margins, Friesland Campina has largely stopped investing in marketing in this segment, and no new entrants will be entering the space. This comfortable duopoly means that Vinamilk will most likely need to spend less on marketing and advertising over time in this segment, which may marginally improve earnings for the category. We estimate that condensed milk currently comprises roughly 18% of Vinamilk’s domestic sales.

80%

20%

Vinamilk

Friesland Campina



Vinamilk controls about 75% of Vietnam’s market

in yogurt.

Competition is intensifying

in the yogurt market due to its high margins and

fast growth.

Yogurt

Vinamilk controls some three quarters of Vietnam’s market in yogurt, with key brands including Susu, Probiotic, and Probeauty. Because Vinamilk provides free leases of refrigeration equipment to retailers and distributors, the company has unparalleled access to the distribution channel in Vietnam, which should allow it to largely maintain its dominant market share.

Chart 8. Yogurt share by competitor


The yogurt segment in Vietnam is small but growing quickly, with some 30% annual growth. We estimate that yogurt currently comprises 15-20% of Vinamilk’s domestic sales, with gross margins hovering around 40-45%.

High margins and fast growth in the space are bound to attract competition, and two local competitors—IDP Ba Vi Milk and TH Milk—are both encroaching on this market. Although both have garnered some share, we feel that they likely lack the financial resources and scale necessary to build out a nationwide distribution system for chilled products. Of the two local competitors, TH Milk will most likely have to be watched more closely due to its vertical integration with ownership of 30,000 cows and its presence in fresh milk sales. In addition, Friesland Campina has recently entered the space, launching pasteurized yogurt in May 2014.17 We anticipate that Friesland Campina will emerge as a viable competitor to Vinamilk in the yogurt space over

17 english.thesaigontimes.vn/34354/FrieslandCampina-launches-pasteurized-yogurt.html

73%

8%

6%

13% Vinamilk

IDP Ba Vi Milk

TH Milk

Others



Vinamilk exports about USD 200 mln of dairy

products per year.

time, and we intend to continue monitoring the company’s progress.

Exports

In addition to domestic sales, Vinamilk also exports approx. USD 200 mln of dairy products annually to 31 countries around the globe. Its largest export markets are Iraq, Cambodia, and Laos. Interestingly, Vinamilk’s presence in Iraq dates back to the Iraq war, when the company supplied powdered milk as part of the UN oil-food program.18 Today, Vinamilk’s products are still in demand in the country—primarily in the form of milk powder. Exports represent roughly 14% of Vinamilk’s revenue, but a smaller portion of profit.

Chart 9. Revenue (domestic vs. export)


Profits are higher for domestic revenue on account of higher sales of infant powder and liquid milk, which are inherently high margin categories. Exports are primarily dominated by sales of condensed milk (relatively low gross margins) and milk powder.

18 http://www.finansa.com/corporate/files/dataroom/VietnamEquityFund(VEF)/Investment%20Info%20Memo/Vinamilk.pdf

86%

14%

Domestic

Export



Vinamilk is building a new a new plant in Cambodia,

the first domestic dairy production facility in the

country

Chart 10. Gross profit (domestic vs. export)


We understand that, annually, Vinamilk exports USD 40-50 mln of condensed milk to Cambodia. Because of Cambodia’s proximity to Vietnam, VNM’s existing sales channels, and the lack of any dairy producing facilities in the country, Vinamilk has decided to construct a new plant in Phnom Penh. We view this an attractive long-term value proposition for Vinamilk shareholders, as it expands Vinamilk’s presence into a country with a population of 14 mln people who are familiar with the Vinamilk brand name, and who have some of the lowest consumption of dairy products per capita in the world.

In January 2014, Vinamilk established a new 51%-owned subsidiary called Angkor Milk Dairy Products in Phnom Penh, Cambodia. Construction on the plant has likely already begun, and the plant should be operational by July 2015. The plant will be jointly owned and operated by Vinamilk (51%) and its Cambodian partner (Angkor Dairy Products Company). The plant will have annual production of 80 million cans of condensed milk, 64 million cups of yoghurt, and 19 mln liters of UHT milk. The plant is the first dairy manufacturing facility in Cambodia, and will reduce transport costs and import taxes for Vinamilk’s current products in the country. The plant is expected to reach USD 35 mln of revenue in 2015, and USD 54 mln in 2017.19 Vinamilk has earmarked VND 220 bln (or approx. USD 11 mln) to inject into the JV in 2014, which should cover the vast majority of its contribution to the USD 23 mln plant.

19 http://www.talkvietnam.com/2014/01/vinamilk-licensed-to-build-23-mln-milk-plant-in-cambodia/

91%

9%

Domestic

Export



2014 will prove a difficult year for Vinamilk, but we

believe this is a short-term trend, and should not

obscure the long-term outlook.

The current downturn Shares in Vinamilk have come under pressure in recent weeks, as revenue growth in Q1 disappointed, and margins have contracted under pressure from high imported-milk prices and increased selling expenses.

Chart 11. Vinamilk share price (2006-present)

Source: Bloomberg

Examining 2014 Q1 financials, domestic revenue (~86% of sales) grew only 4% YoY. Considering that Vinamilk implemented a price hike of 7% in February 2013, 4% sales growth implies volume decline in Vinamilk’s core domestic business. Export growth in Q1 was strong, at 123% growth YoY, but this remains a smaller proportion of sales (approx. 14%). In addition, we suspect that the uptick in export growth is likely attributable to Vinamilk’s USD 7 mln acquisition of Driftwood (a U.S. based subsidiary) at the end of 2013.

As revenue slowed, gross margins at the group level contracted to 33% in Q1 2014 from an average 37% in the prior year due to higher input costs of milk powder. Selling expenses also increased to approx. 11% from a three-year historical average of 8-9% on account of higher advertising and promotional costs.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

31-Jan-06 28-Nov-08 30-Sep-11 4-Jul-14

VND



Chart 12. Vinamilk operating margins

Source: Company filings

For full-year 2014, Vinamilk is guiding sales growth of 15%, but net profit to trend negative 8% YoY on account of lower margins. Vinamilk’s guidance suggests net margins of 16.5% in 2014, the lowest level since 2008. Vinamilk historically forecasts quite conservatively at their AGM meetings, and we expect profit levels to be flat YoY.

In spite of the bleak outlook for 2014, we believe that these issues are short-term in nature, and obscure the longer-term picture for the business. Vietnam as an economy is currently experiencing a depressed consumer environment, which is crimping sales for all businesses. Retail sales in goods and services grew by 10.2% YoY in 2014 Q1 according to the Vietnam General Statistics Office. Excluding inflation of 5.1%, underlying growth was a meager 4.8%. This figure seems to be improving slowly, with full-year retail sales inching up to 11% growth YoY (or 6% real growth) in the first five months of 2014.20

We believe that management is taking the appropriate measures in the current economic environment by keeping price hikes minimal and maintaining market share, despite temporary pressure on margins. We admonish management’s capacity to think long term about the business, while sacrificing short-term share performance. Management has been transparent with investors on their strategy:

20 http://www.gso.gov.vn/default_en.aspx?tabid=501&thangtk=05/2014

0%

5%

10%

15%

20%

25%

30%

2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1

Percent



Unique weather patterns

affected milk production in 2013, driving prices up, but pricing is gradually

returning to its historical norm.

“. . . When purchasing power falls, competition becomes fiercer. In such an instance, maintaining market share instead of eyeing higher profits is the correct thing to do . . . ” 21

Mai Kieu Lien, CEO

While we anticipate revenue growth to resume a more positive trajectory in Q2 and Q3, margins will likely take longer to recover. Vinamilk hiked prices some 6% in February, but well below the ~30% increase in cost of raw materials it is experiencing from imported milk powder. Because Vinamilk imports three-quarters of its raw materials (principally from New Zealand and Australia), margins are often at the mercy of price fluctuations in whole-milk powder (WMP) and skim milk powder (SMP). 2013 was an unusual year in global production of milk powder, as demand remained firm, but a drought in New Zealand, cold spring weather in Europe and high feed prices crimped international supply, driving prices higher. Over the long term, we expect weather patterns to normalize and production volumes to sync with demand, which should lead to more predictable prices. Over the long term, raw-milk powder producers should earn a relatively narrow spread over their cost of production. In 2014, milk prices have already adjusted to a degree toward their historical norm.

Chart 13. Whole milk powder spot (Oceania)

Source: Bloomberg

21 http://www.vir.com.vn/news/en/corporate/vinamilk-grasps-market-share-rather-than-profits.html

0

1,000

2,000

3,000

4,000

5,000

6,000

30-Jan-04 31-Jul-07 31-Jan-11 3-Jul-14

USD/ton



Vinamilk does not hedge for currency or pricing

fluctuations in imported milk powder, which can make quarterly results

lumpy.

Chart 14. Skim milk powder spot (Oceania)

Source: Bloomberg

Vinamilk does not hedge for currency or pricing fluctuations in milk, which can make for bumpy quarterly results. Vinamilk does, however, change the length of contracts to some degree based on its expectations of price fluctuations. For 2013 H1, Vinamilk was able to maintain high margins on milk sales due to fixed price contracts with suppliers, which locked in prices for 3-6 months. As those contracts began to expire, however, margins began falling in 2013 Q3 and Q4.

Chart 15. Vinamilk gross margins

Source: Company filings

0

1,000

2,000

3,000

4,000

5,000

6,000

30-Jan-04 31-Jul-07 31-Jan-11 3-Jul-14

USD/ton

20%

25%

30%

35%

40%

2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1

Percent



We believe the recent correction in VNM’s share price offers investors the

opportunity to own a high quality, dominant and

growing consumer franchise in Vietnam at an

attractive multiple.

We understand that currently, most contracts are on a 6-month duration. We note that prices of milk powder have come down substantially in recent months, which if sustained into 2014 2H, will have a positive impact on Vinamilk’s margins toward the end of the 2014. Regardless, Vinamilk and its competitors source their raw materials from the same markets, and the strength of Vinamilk’s brand should give it the ability to pass on costs of inflation to consumers over time. Furthermore, as Vinamilk increases the composition of its sales from higher margin products like liquid milk and milk powder, we believe margins should improve over time.

We believe that the recent correction in share price offers investors the opportunity to own a high quality, dominant and growing consumer franchise in Vietnam at an attractive multiple. Vinamilk has targeted doubling revenue to USD 3 bln by 2017, which implies revenue growth of approx. 20% from 2014-2017. Over this period of time, we believe that profits are likely to grow in step with revenue, and perhaps expand as Vinamilk’s product mix shifts toward fast growing, higher margin categories including liquid milk, milk powder, and yogurt and away from lower margin products such as condensed milk. A business which can grow earnings at 17-20% annually and that trades at forward P/E of 16-17x appears an attractive value proposition.

Valuation In spite of its superior growth prospects, dominant scale, distribution, and branding, Vinamilk trades at a discount to regional (and global) peers.

Table 4. Peer Comps

Company

Mkt Cap (USD bln)

P/E (2014)

P/E (2015)

5 Year sales CAGR

Gross margin (2013)

OP margin (2013)

Vinamilk 5 17x 14x 30% 36% 23%

Danone 47 20x 18x 7% 48% 13%

Mead Johnson 19 25x 22x 8% 64% 24%

China Mengniu 9 26x 21x 13% 27% 4%

Fraser & Neave 2 28x 23x -1% 30% 9%

Nestle Malaysia 4.8 26x 24x 4% 35% 15%

Nestle India 7.9 38x 33x 16% N.A. 20%

Nestle Nigeria 5.1 32x 27x 21% 43% 21%

Source: Bloomberg



Inflation remains a persistent problem in

Vietnam and constitutes a risk for Vinamilk.

We value Vinamilk at VND 175,000 per share using a DCF methodology, representing an upside of ~35% from today’s share price. We assume a 12% discount rate, and a 15x terminal exit multiple (equivalent to a 1.3% terminal growth rate). We believe that our forecast of 18% annual growth through 2018 is conservative, as well as our assumptions of Vinamilk attaining gross margins of 36% in 2018 (in line with its five-year historical average of 36%) and OP margins of 21% (below its 5 year historical average of 22%) on account of higher long term selling expenses. We note that our VND 175,000 target price is equivalent to 22x our forecasted 2014 earnings.

Critically, investors should recognize that Vinamilk has effectively doubled its capacity for dairy production in the last year, remains net cash, and will require minimal capital expenditure over the next five years. This translates into increased free cash flow, which we anticipate will be mostly paid out as dividends to shareholders.

Risks

Inflation

Inflation in Vietnam has been a persistent problem, peaking at 23% in 2008 and reaching 18% as recently as 2011.

Chart 16. Consumer price index growth (2003-13)

Source: Asian Development Bank, CEIC, Citi Research

Since 2011, the government has since taken steps to address the issue by prudently shifting focus away from growth. Principally, the government has raised rates, cut credit and money supply growth,

0%

5%

10%

15%

20%

25%

2003 2005 2007 2009 2011 2013

Percent

Cien

tos



.

and also devalued the VND by 8.5% in 2011. The shift in policy has proven effective, and inflation has decreased to a more palatable 6-7% in 2012 and 2013 (though at the expense of GDP growth which remains at 5-6%). Inflation is widely anticipated to remain stable over the next several years.22

Currency

Since 1993, the VND has steadily depreciated against the USD at approximately 3.5% per year. In 1993, 1 US dollar was equivalent to VND 10,500. Today, 1 US dollar buys approximately VND 21,320.

Chart 17. VND/USD exchange rate (’93-present)

Source: Bloomberg

While we forecast profit growth for Vinamilk to outpace currency depreciation over the long term, currency movement in any given year can impact gross margins. Vinamilk does not hedge its currency exposure to imported commodities. As a result, investors must to understand that depreciation in the currency, as well as inflation in commodity prices, can have short-term negative impacts on earnings growth.

Imported milk powder purchased by Vinamilk accounts for ~70% of total milk purchased by the company, and around 30-40% of all production costs. As a result, currency shifts fall immediately to the bottom line. In 2011, for instance, gross margins at Vinamilk fell to 30%—their lowest in the last 5 years—on account of higher

22 http://www.citibank.com/transactionservices/home/about_us/online_academy/docs/vietnam_market.pdf

5,000

8,000

11,000

14,000

17,000

20,000

23,000 VND/USD



Vinamilk’s strong branding position should allow the

business to offset negative impacts of

currency movements and inflation.

commodity prices combined with a falling exchange rate. In that year, the VND depreciated 8.5% against the USD, leading to higher input prices.

Table 5. Vinamilk gross margins (2009-13)

2009 2010 2011 2012 2013

Gross margins 36.5% 32.8% 30.5% 34.2% 36.1% Source: Company filings

Over the long term, every competitor in Vietnam is subject to the same fluctuations in global commodity pricing, and we anticipate that Vinamilk’s strong branding position should allow the business to offset negative impacts of currency movements and inflation. Since 2009, for instance, profits at Vinamilk have increased 22% annually, while the currency has depreciated from VND 16,400 to VND 21,320, or 5.4% annually. At the same time, Vinamilk has made annual dividend payments to shareholders, roughly in the 3-4% yield range.

With regard to the macro environment, We note that Vietnam has experienced increasing inflows of FDI in recent years, which are likely to continue as Vietnam ramps as an increasingly important alternative to China in electronics manufacturing.

Source: WSJ | June 17, 2014 23

Exports of smartphones and electronics totaled USD 32 bln in 2013, accounting for a quarter of Vietnam's total exports, and an increase of more than 50% from 2012. In July, Samsung

23 http://online.wsj.com/articles/behind-vietnams-anti-china-riots-a-tinderbox-of-wider-grievances-1403058492



announced it will invest USD 1 bln in a high resolution display panel plant in Vietnam. The company also began construction a USD 2 bln complex in northern Vietnam earlier this year.24

Competition and loss in market share

To date, Vinamilk continues to take share in the dairy market’s two fastest growing segments—liquid milk and milk powder. Share in condensed milk has remained flat over time (at 80%) and Vinamilk’s share in yogurt remains at 75%. Besides Friesland Campina, which Vinamilk has been successfully competing against for decades, we feel that one competitor that deserves to be watched is local upstart TH Milk. TH Milk is heavily investing in local farms, and has already amassed 30,000 cows in Nghe An province, just south of Hanoi. TH Milk has traditionally focused on fresh milk, but began entering the yogurt space in 2013.25 It has also completed a USD 100 mln liquid milk facility. The company’s financing comes from Bac A Bank and its cow breeding technology is from Afimilk, which is Israel’s leading cow raising group.26 To date, TH Milk has only attained 8% share in liquid milk, and 5-6% share in yogurt, but we believe that it deserves the attention of investors, particularly as it is encroaching on the areas of highest profitability and growth in Vietnam’s dairy industry. If these competitors successfully encroach on Vinamilk’s market share, particularly in rural areas of the country, our assumptions around margins and revenue growth for Vinamilk may prove overly optimistic.

Due to increasing competition, we have built in room for increased budget in selling and advertising expenses. We forecast that selling expenses will expand to 11.5% of annual sales, up from a 2010-12 historical average of approx. 9%. We note that this still places Vinamilk with a sales budget in excess of any other dairy company in Vietnam.

Accounting

Two aspects in Vinamilk’s accounting remain which we have not been able to reconcile. Firstly, receivables on the balance sheet in 2013 show an increase in net accounts receivable of VND 482 bln, while the cash flow statement shows an outflow of only VND 38 bln. We have addressed this issue with IR, but have only managed to get a vague answer that the differences reside in adjustments

24 online.wsj.com/articles/samsung-wins-license-to-invest-1-billion-in-vietnam-1404356966 25 CIMB, 2014 26 http://www.afimilk.com/projects/vietnam-project



Should revenue growth and margins continue to

disappoint, investors may continue to sell and

temporarily drive down the share price.

from disposals of fixed assets, depreciation, unrealized forex gains and profits from investing activities. Investors may desire further clarification on these matters from the company.

Secondly, Vinamilk records an annual outflow of cash which it calls “Other payments on operating activities.” The line item is booked under cash from operations. The figures in 2012 and 2013 for this outflow were approximately USD 24 Mn and USD 32 Mn, respectively. We have attempted to get further clarity on this line item from management, but have not been successful.

Succession planning

CEO and Chairwoman, Mai Kieu Lien was born in France, and graduated from Moscow University of Meat & Milk Processing Technology in 1976. She has been working for Vinamilk since 1976, and has served as Chairwoman and CEO of the company since 2003. Throughout the company’s modernization, she has held leadership positions. In 2012, she was voted by Forbes as one of Asia’s most powerful businesswomen.27 At sixty years of age, the question of her succession has been on the minds of shareholders. In the 2012 AGM, she was re-elected to serve as CEO and Chairwoman through 2016. After 2016, however, the leadership of the company remains to be decided.

Valuation

Historically, Vinamilk was as low as 10x forward earnings through parts of 2009-2011. Provided Vinamilk continues to defend its market share and margins relative to competition, we feel that any de-rating of the stock is unwarranted and would present an increasingly attractive buying opportunity. However, should revenue growth and margins continue to disappoint in Q2 or persist throughout 2014, investors may continue to sell and temporarily drive down the share price.

Acquisitions

In December 2013, Vinamilk purchased 70% ownership of a California based company called Driftwood for USD 7 mln. Driftwood was established in 1920, and currently has roughly USD 100 mln in sales. Driftwood is reportedly unprofitable,28 but is the largest producer and distributor in California for fresh milk, soymilk, ice cream, and fruit juice for schools. Vinamilk’s intent is

27 http://www.forbes.com/lists/2012/13/power-women-asia-12_Mai-Kieu-Lien_KI0V.html 28 http://www.vietnambreakingnews.com/2013/12/vinamilk-buys-70-percent-stake-in-us-dairy-firm/



to absorb brands from Driftwood and market them in Vietnam, and similarly, to introduce its own successful products, such as yogurt, to the USA.29

What is less appreciated about the Driftwood acquisition is that Vinamilk also absorbed a small amount of net debt with the company. While the net debt absorbed is small (USD 500,000), we found that Vinamilk booked some USD 16 mln in total debt on the acquisition. Furthermore, one of the loans outstanding carried a 15% annual interest rate.

Table 6. VNM terms and conditions of long-term borrowings (2013)

Bank Loan Currency Annual interest

Year of Maturity

Amount(USD mln)

Wells Fargo Loan 1 USD 3.75% 2016 3.5 Wells Fargo Loan 2 USD 4.25% 2016 5.4 Wells Fargo Loan 3 USD 4.25% 2016 1.1 Lincoln National USD 15.00% 2015 6.2

Source: Vinamilk 2013 AR

We have verified with Vinamilk that this high interest loan has already been repaid, and that VNM as a whole remains comfortably net cash, but felt that the significant amount of debt relative to the acquisition price, high interest rate on the Lincoln National loan, and USD denominated debt exposure were worth flagging.

While a small investment for a company the size of Vinamilk, we remain slightly skeptical that Driftwood will bring significant value to Vinamilk in the long run. While we are positive on Vinamilk’s expansion into adjacent Cambodia (where the company is already booking USD 40-50 mln of sales), as well as its investments to secure further milk powder supplies (i.e. New Zealand and Poland), VNM’s acquisition strategy going forward will have to be monitored.

29 Maybank, 2014



Proforma financials Table 7. Balance Sheet

VND Bln 2013 2014 2015 2016 2017 2018 Current Assets: Cash and cash equivalents 2,745,645.00 2,608,226.00 4,723,264.00 8,025,336.00 12,404,439.00 18,099,647.00

Short-term investments 4,167,318.00 4,167,318.00 4,167,318.00 4,167,318.00 4,167,318.00 4,167,318.00 Accounts receivable 2,728,421.00 2,700,040.00 3,011,823.00 3,444,655.00 3,973,858.00 4,598,522.00 Inventories 3,217,483.00 4,037,984.00 4,770,160.00 5,660,168.00 6,790,898.00 8,076,469.00 Other current assets 160,063.00 160,063.00 160,063.00 160,063.00 160,063.00 160,063.00

13,018,930.00 13,673,630.00 16,832,628.00 21,457,539.00 27,496,576.00 35,102,017.00 Non-current Assets: AR: Other long-term receivables 737.00 737.00 737.00 737.00 737.00 737.00

Fixed assets 7,849,059.00 10,202,867.00 11,401,998.00 12,384,713.00 13,076,405.00 13,768,097.00 Intangible fixed assets 531,485.00 531,485.00 531,485.00 531,485.00 531,485.00 531,485.00 Construction in progress 537,872.00 537,872.00 537,872.00 537,872.00 537,872.00 537,872.00 Investment property 149,446.00 149,446.00 149,446.00 149,446.00 149,446.00 149,446.00 Long-term investments 318,308.00 318,308.00 318,308.00 318,308.00 318,308.00 318,308.00 Other long-term assets 295,113.00 295,113.00 295,113.00 295,113.00 295,113.00 295,113.00 Goodwill 174,464.00 174,464.00 174,464.00 174,464.00 174,464.00 174,464.00

9,856,484.00 12,210,292.00 13,409,423.00 14,392,138.00 15,083,830.00 15,775,522.00

Total Assets 22,875,414.00 25,883,923.00 30,242,051.00 35,849,677.00 42,580,406.00 50,877,539.00

Current Liabilities: Short-term borrowings 178,944.00 184,143.00 0.00 0.00 0.00 0.00 Accounts payable -- trade 1,968,257.00 2,557,390.00 3,021,101.00 3,584,773.00 4,300,902.00 5,115,097.00 Advances from customers 20,929.00 20,929.00 20,929.00 20,929.00 20,929.00 20,929.00 Taxes payable to State Treasury 456,726.00 456,726.00 456,726.00 456,726.00 456,726.00 456,726.00

Payables to employees 137,540.00 137,540.00 137,540.00 137,540.00 137,540.00 137,540.00 Accrued expenses 490,761.00 490,761.00 490,761.00 490,761.00 490,761.00 490,761.00 Other payables 1,341,763.00 1,341,763.00 1,341,763.00 1,341,763.00 1,341,763.00 1,341,763.00 Bonus and welfare fund 361,478.00 361,478.00 361,478.00 361,478.00 361,478.00 361,478.00

4,956,398.00 5,550,729.00 5,830,298.00 6,393,970.00 7,110,099.00 7,924,294.00 Long-term liabilities: Long-term trade payables 0.00 0.00 0.00 0.00 0.00 0.00 Other long-term liabilities 5,036.00 5,036.00 5,036.00 5,036.00 5,036.00 5,036.00 Long-term borrowings 184,143.00 0.00 0.00 0.00 0.00 0.00 Deferred tax liabilities 91,066.00 91,066.00 91,066.00 91,066.00 91,066.00 91,066.00 Provision for severance allowance 69,583.00 69,583.00 69,583.00 69,583.00 69,583.00 69,583.00



Unearned revenue 835.00 835.00 835.00 835.00 835.00 835.00

350,663.00 166,520.00 166,520.00 166,520.00 166,520.00 166,520.00

Total Liabilities 5,307,061.00 5,717,250.00 5,996,818.00 6,560,490.00 7,276,619.00 8,090,814.00

Equity: Share capital 8,339,558.00 8,339,558.00 8,339,558.00 8,339,558.00 8,339,558.00 8,339,558.00 Share premium 1,276,994.00 1,276,994.00 1,276,994.00 1,276,994.00 1,276,994.00 1,276,994.00 Treasury shares -5,069.00 -5,069.00 -5,069.00 -5,069.00 -5,069.00 -5,069.00 Investment and development fund 950,238.00 950,238.00 950,238.00 950,238.00 950,238.00 950,238.00

Financial reserve fund 833,956.00 833,956.00 833,956.00 833,956.00 833,956.00 833,956.00 Undistributed earnings 6,149,812.00 8,748,158.00 12,826,744.00 17,870,725.00 23,885,350.00 31,368,316.00

17,545,489.00 20,143,836.00 24,222,421.00 29,266,402.00 35,281,028.00 42,763,993.00

Minority Interest: 22,864.00 22,838.00 22,811.00 22,785.00 22,759.00 22,732.00

Total Equity 17,568,353.00 20,166,673.00 24,245,232.00 29,289,187.00 35,303,786.00 42,786,725.00

Source: Company data, J Capital Analysis

Table 8. Income Statement

VND Bln 2013 2014 2015 2016 2017 2018 Net revenue 30,948,602 36,515,348 43,562,462 52,219,097 62,803,152 75,296,426 Cost of sales -19,765,794 -24,227,901 -28,620,959 -33,961,007 -40,745,389 -48,458,811 Gross Profit 11,182,808 12,287,447 14,941,503 18,258,090 22,057,763 26,837,615

Selling expenses -3,276,432 -4,199,265 -5,009,683 -6,005,196 -7,222,362 -8,659,089 G&A -611,256 -730,307 -871,249 -1,044,382 -1,256,063 -1,505,929

EBIT 7,295,121 7,357,875 9,060,570 11,208,512 13,579,337 16,672,598

Financial Income 507,348 482,238 475,367 581,119 746,223 965,178 Financial Expense -90,791 -90,791 -90,791 -90,791 -90,791 -90,791 Net financial income 416,557 391,448 384,577 490,329 655,432 874,387

Other income 313,458 313,458 313,458 313,458 313,458 313,458 Other expenses -58,820 -58,820 -58,820 -58,820 -58,820 -58,820 Net 254,638 254,638 254,638 254,638 254,638 254,638

Share of profit in associates 43,941 43,941 43,941 43,941 43,941 43,941

Profit before tax 8,010,257 8,047,901 9,743,725 11,997,419 14,533,348 17,845,564



Income tax expense - current -1,483,448 -1,529,101 -1,753,871 -2,159,535 -2,616,003 -3,212,201

Income tax benefit - deferred 7,299 0 0 0 0 0

Net -1,476,150 -1,529,101 -1,753,871 -2,159,535 -2,616,003 -3,212,201

Net profit after tax 6,534,107 6,518,800 7,989,855 9,837,883 11,917,345 14,633,362

Minority interest -26 -26 -26 -26 -26 -26

Net profit 6,534,134 6,518,826 7,989,881 9,837,910 11,917,372 14,633,388

Earnings per share 7,839 7,821 9,586 11,803 14,298 17,556 Source: Company data, J Capital Analysis

Table 9. Statement of Cash Flows

VND Bln 2013 2014 2015 2016 2017 2018 From operations: PBT 8,010,257 8,047,901 9,743,725 11,997,419 14,533,348 17,845,564 Adjustments: D&A 786,433 912,884 1,089,062 1,305,477 1,570,079 1,882,411 Dividends and interest income -417,488 -417,488 -417,488 -417,488 -417,488 -417,488 (Profit)/loss from investing activity -34,454 0 0 0 0 0

Interest expense 104 14,523 7,366 0 0 0

391,616 509,919 678,939 887,989 1,152,591 1,464,923 Working capital adjustments: Change in receivables -38,409 28,381 -311,783 -432,832 -529,203 -624,664 Change in inventories 258,940 -820,501 -732,176 -890,008 -1,130,730 -1,285,570 Change in payables -272,225 589,132 463,712 563,672 716,129 814,195

-79,335 -202,987 -580,248 -759,168 -943,804 -1,096,040 Other Adjustments: Interest paid -104 -14,523 -7,366 0 0 0 Income tax paid -1,399,982 -1,529,101 -1,753,871 -2,159,535 -2,616,003 -3,212,201 Other payments -691,692 -691,692 -691,692 -691,692 -691,692 -691,692

-2,070,794 -2,235,317 -2,452,928 -2,851,228 -3,307,695 -3,903,894

Cash from operations 6,251,743 6,119,516 7,389,488 9,275,013 11,434,440 14,310,553

From investing: Additions of fixed assets -1,491,459 -2,575,000 -1,596,500 -1,596,500 -1,570,079 -1,882,411 Receipts of interests and dividends 307,719 417,488 417,488 417,488 417,488 417,488

-1,589,790 -2,157,512 -1,179,012 -1,179,012 -1,152,591 -1,464,923 From financing:



Repayments of borrowings 0 -178,944 -184,143 0 0 0 Payments for dividends -3,167,235 -3,920,480 -3,911,296 -4,793,929 -5,902,746 -7,150,423

-3,167,760 -4,099,424 -4,095,439 -4,793,929 -5,902,746 -7,150,423

Net cash for the year 1,494,193 -137,419 2,115,038 3,302,072 4,379,103 5,695,207

Source: Company data, J Capital Analysis



Disclaimer This publication is issued by J Capital Research (“J Capital”). This publication has been prepared for the general use of the clients of J Capital and unauthorized copying or distribution is prohibited. Nothing in this document shall be construed as a solicitation to buy or sell any security or product. In preparing this document, J Capital did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. J Capital accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this publication and/or further communication in relation to this document.

Documents

2014 07 09 Vinamilk final - jcapitalresearch.com