HSC - VNM Report

Company Report
BUY July 2nd, 2008
Chart 1A - Price Chart Chart 1 - Earnings model
(mil VND) FY 2005A yoy F Y 2006A yoy FY 2007 yoy FY 2008F yoy
180
Revenues 5,638,784 49.4% 6
,245,619 10.8% 6,648,193 6.4% 8,247,326 24.1%
160
Profit before tax 602,600 30.6% 662,774 10.0% 955,381 44.1% 1,401,835 46.7%
140
Net Profit 605,484 31.2% 659,890 9.0% 963,448 46.0% 1,205,578 25.1%
120
Pre-tax Profit Margin 10.7% -12.6% 10.6% -0.7% 14.4% 35.4% 17.0% 18.3%
100
Net Profit Margin 10.7% -12.2% 1
0.6% -1.6% 14.5% 37.2% 14.6% 0.9%
80
EPS (VND) 3,808 NA 4,150 NA 5,585 34.6% 6,836 22.4%
31-Mar-08
4-Mar-08
30-May-08
29-Jan-08
26-Jun-08
2-Jan-08
25-Apr-08
BVPS (VND) 14,132 NA 1

7,223 NA 24,624 43.0% 29,377 19.3%
P/E 29.4 NA 27.0 NA 20.1 -25.7% 16.4 -18.3%

Source: HOSE P/B 7.9 NA 6.5 NA 4.5 -30.1% 3.8 -16.2%
(mil VND) FY2009F yoy FY 2010F yoy FY 2011F yoy FY 2012F yoy

Chart 1B - Stock Data
Revenues 9,549,805 15.8% 1
0,949,100 14.7% 12,587,252 15.0% 14,388,959 14.3%
Profit before tax 1,500,181 7.0% 1,674,044 11.6% 1,795,570 7.3% 2,050,167 14.2%
Price VND 112,000
Net Profit 1,125,135 -6.7% 1,255,533 11.6% 1,346,678 7.3% 1,537,626 14.2%
Outstanding shares 175,275,670
Pre-tax Profit Margin 15.7% -7.6% 15.3% -2.7% 14.3% -6.7% 14.2% -0.1%
Forward P/E 16.4
Net Profit Margin 11.8% -19.4% 11.5% -2.7% 10.7% -6.7% 10.7% -0.1%
Forward P/B 3.8
EPS (VND) 6,114 -10.6% 6,822 11.6% 7,317 7.3% 8,355 14.2%
52 Week Range 90,000 - 198,000
BVPS (VND) 30,011 2.2% 31,067 3.5% 32,417 4.3% 34,384 6.1%
Performance (12 months) -29%
P/E 18.3 11.8% 16.4 -10.4% 15.3 -6.8% 13.4 -12.4%
Market Capitalization VND 19,630,875,040,000
P/B 3.7 -2.1% 3.6 -3.4% 3.5 -4.2% 3.3 -5.7%
US$ 1,165,382,905
Source: Vinamilk, HSC
Source: HSC
Chart 1C - Key Numbers

(VNDmm)
Total assets
2005
3,897,936 3,600,533
2006
5,425,117
2007
Vietnam Dairy Products Corporation (Vinamilk)
Owner’s Equity 2,246,917 2,738,383 4,315,937
Revenue 5,638,784 6,245,619 6,648,193 We initiate coverage on Vinamilk with a BUY rating and a target price of
Pre-tax profit 602,600 662,774 955,381 VND147,000.
After-tax profit 605,484 659,890 963,448
• The stock price is cheap at current levels - on a forward P/E of 16.4x, in
Source: Vinamilk
comparison with average P/E of 22.6x for regional peers.
Chart 1D - Main Ratios
• We forecast FY2008 net profit growth of 25.1% driven by increasing
Ratio 2005 2006 2007
market share in core businesses, entry into new segments and improving
Liquidity ratios
profit margins.
- Current ratio 1.6 2.6 3.4
- Quick ratio 0.9 1.4 1.6

• Vinamilk has made significant market share gains due to a marketing
Profitability Ratios
revolution and rebranding policy initiated in FY2007. We expect further
- Gross margin 22.3% 26.5% 27.3%
market share gains going forward.
- Net profit margin 10.7% 10.6% 14.5%
- ROE 29.5% 26.5% 27.3%

• Impressive historical performance with 2-yrs growth rate of net
- ROA 18.8% 17.6% 21.3%
profit and ROE at 27.5% and 26.9% respectively. However EPS
Operating Efficiency Ratios
growth for the next three years might be dented by full tax obligation.
- Receivable turnover 12.7 10.3 11.4
- Inventory turnover 4.7 4.6 3.7

• Growth drivers are a huge product range, an extensive distribution
- Asset turnover 1.7 1.7 1.5
network, good pricing power, strong brand name supported by much
- Equity turnover 2.8 2.6 1.9
improved marketing and growth and margin expansion strategy.
Source: HSC
• Our main concerns for Vinamilk are its high dependence on imported raw
Analyst
materials, soaring raw milk price and tougher competition.
Tran Huong My
(84 8) 823 3299
[email protected]
1 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report
Company Report
BUY July 2nd, 2008
Executive Summary (1) Volume growth due to an increasing market share in

existing core businesses such as fresh milk and pow-
dered milk combined with strong sales from other prod-
Snapshot ucts such as yoghurt and condensed milk; (2) Margin
growth via restructuring cost savings especially on raw
Vinamilk is the largest dairy producer in Vietnam in terms
material costs and a better brand mix with a focus on
of market share, brand name, production capacity and
higher margin products; (3) Expanding operations into
distribution network. In 2007, Vinamilk held a dominant
new asset classes such as financial investments.
90% share in the yoghurt market, a 35% share in liquid
milk, a 79% share in sweetened condensed milk and
a 14% share in the powdered milk market. We believe Valuation
that over the next five years Vinamilk can post 16.8% in
annual average sales, in line with the whole industry. We value Vinamilk at VND147,031 per share based on
average regional comparables P/E. We think the stock
Business environment deserves neither a premium nor a discount to its region-
al peers. On the one hand it has an undisputed lead in
its local market but on the other hand its is strictly a one
Over the next few years, we see two key drivers under-
country play.
pinning dairy industry growth - a boom in dairy products
as a growing urban market consumes more dairy prod-
The share price has declined to VND112,000, down
ucts and fiercer competition between current players.
47.2% from its high and this values the company at a
The dairy industry will continue to see strong growth but
historical FY2007 P/E of 20.1x and 16.4x 2008 estimat-
competition will get even tougher and we may see some
ed earnings. At our price target, Vinamilk would trade
consolidation and even the possibility of new entrants
at 22.6x forward P/E. Vinamilk does not have any Vi-
from 2010.
etnam-listed direct comparables; outside Vietnam other
listed dairy producers include twelve companies that
Amongst the existing players Vinamilk is the most likely
are trading at an aggregated average 22.6x forward P/E
beneficiary of any consolidation trend over the medium
for FY2008.
term but its long term success depends on its ability to
leverage its strengths in distribution and more recently
in marketing in order to build a dominating position in Foreign Ownership ratio
the most profitable market segments. Given their recent
performance they have a good shot. Currently the foreign ownership ratio is 45.5% as of July
2nd. This gives room of just 820,438 shares. However
we notice that over the last 15 trading days foreigners
Growth strategy have bought an average of 80,258 shares and sold an
average of 60,955 shares. So we see healthy two way
We expect Vinamilk’s earnings growth to be driven by:
trading amongst foreigners in the stock.
Chart 2 - Comparable Valuation Approaches
Company Stock Exchange Market P/E P/E EPS EPS EPS

(US$ m) Cap 2007 2008F 2007 2008F growth
Dutch Lady (Malaysia) Bhd Malaysia 239 16.9 16.5 0.21 0.22 7.3%
Nestle (Malaysia) Bhd Malaysia 2,028 22.2 20.4 0.34 0.39 13.0%
Fraser & Neave Singapore 4,631 16.8 15.0 0.20 0.20 -0.5%
China Mengniu Dairy Company Ltd HongKong 4,042 33.3 27.5 0.08 0.09 5.1%
Bright Dairy & Food Company China 1,045 33.7 40.0 0.02 0.03 30.8%
Meiji Dairies Corporation Japan 1,655 27.1 21.9 0.32 0.19 -42.2%
Morinaga Milk Industry Co., Ltd Japan 660 20.9 19.3 0.12 0.13 8.5%
Snow Brand Milk Products Japan 1,093 22.2 22.0 0.16 0.16 1.0%
Maeil Dairy Industry Korea 168 7.0 6.4 1.80 1.95 8.7%
NamYang Dairy Products Co. Korea 502 8.8 8.0 79.47 87.41 10.0%
Nestle India Limited India 3,605 37.4 28.9 1.00 1.29 29.2%
Ultrajaya Milk Ind & Trading Indonesia 217 5.8 5.2 0.01 0.01 10.0%
AVERAGE 19,885 26.2 22.6 0.20 0.18 2.2%
Vinamilk Vietnam 1,165 20.1 16.4 0.33 0.41 22.4%
Source: Bloomberg, HSC
Company Report
BUY July 2nd, 2008
Chart 3 - Dairy consumption per capita (value) and region averages. We see five key macro drivers.
2007 229
461 These are population growth; favourable demograph-
35
12.0 ics; strong income growth; urbanisation; and lifestyle
436
Europe
changes. In addition we see some micro drivers such
2006 225
9.6
32
North America
as; (1) a change in people’s eating habits away from
407
traditional foods; and (2) an increase in the consumption
Asia
2005 29
214 of dairy products, due to greater consumer awareness
7.8 Vietnam
of the perceived nutritional and health benefits of eating
382
2004 201 more dairy products. This is especially true for younger
27
5.5 consumers.
0 100 200 300 400 500
USD per annum
Dairy Sector- growth assumptions by product:
Source: Euromonitor, HSC • Condensed milk will see slow growth due to a fun-
damental shift in demand towards liquid milk. In 2007
condensed milk market was worth VND2,781 billion
Earnings Model and we assume growth in this segment will reach 9%
this year, and then 8% in 2009, 7% in 2010 and re-
1. Sales assumptions
main stable from 2011 to 2012.
Industry forecast • Liquid milk (including fresh milk and sterilized
milk) will be the fastest segment in our opinion sup-
We believe that the long term prospects for dairy prod- ported by better consumer awareness. Fresh milk
uct consumption are excellent. Vietnam’s boasts incom- products have a favourable image given their per-
parable demographics. It has a large population of 85 ceived health benefits and are also increasing seen
million people and more than half of them are under the as a vital element in infant nutrition. However, the
age of 25. Furthermore the country is urbanising rapidly market is maturing and growth rates were unchanged
with urban growth CAGR of 3.2% from 2000 to 2007 at 23.3% in 2006 and 24% in 2007, worth a total of
in comparison with growth of 0.7% in the rural popula- VND4,960 billion. We forecast the liquid milk market
tion. A growing urban population is strongly correlated will grow 22% in 2008 and then growth rates will tail
with a higher per capita dairy consumption. And given off to 18% in 2012. Still, these are good numbers for
that existing per capita consumption is currently very an F&B segment.
low at US$12 per annum we believe double digit annual
growth is virtually built-in to the market. The market is • Powdered milk - powdered milk is a niche segment
still relatively immature but it is certainly large enough. mainly for children. However due to a shortage of
substitutes, powdered milk has the lowest elasticity
Dairy products consumption grew at a CAGR of 31.5% amongst all dairy segments. Thus its growth poten-
between 2004 and 2007, well above the regional av- tial is both lower but also more stable than fresh milk.
erage growth rate of 14 - 15%. Going forward, we ex- We see growth of 20% in 2008 and a slight decline to
pect growth to be sustained at above average regional about 18% in 2009 and then stable thereafter. Last
growth rates of around 16.9%. The main drivers would year the market was worth VND7,555 billion.
be incremental increases in per-capita consumption
which is now only 9 kg annually, well below the global
Chart 4 - Industry growth forecast by product

2008F- 2012F
2008F 2009F 2010F 2011F 2012F average
Condensed milk 9.0% 8.0% 7.0% 7.0% 7.0% 7.6%
Liquid milk 22.0% 21.0% 20.0% 19.0% 18.0% 20.0%
Powdered milk 20.0% 18.0% 18.0% 18.0% 18.0% 18.4%
Yoghurt 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Other products 18.1% 16.9% 16.6% 16.4% 16.3% 16.9%
Whole industry 18.1% 16.9% 16.6% 16.4% 16.3% 16.9%
Source: HSC
Company Report
BUY July 2nd, 2008
Chart 5 - Vinamilk’s sales growth forecast by product
2008F 2009F 2010F 2011F 2012F 2008F-2012F

average
Domestic sales 17.7% 16.8% 15.4% 15.7% 15.0% 16.1%
Condensed milk 9.0% 8.0% 7.0% 7.0% 7.0% 7.6%
Liquid milk 25.5% 24.4% 23.2% 22.1% 21.0% 23.2%
Powdered milk 24.3% 23.8% 21.9% 21.8% 18.0% 22.0%
Yoghurt 7.0% 4.6% 3.4% 4.5% 3.1% 4.5%
Coffee NA 100.0% 30.0% 30.0% 30.0% 47.5%
Other products 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Export sales 80.0% 10.0% 10.0% 10.0% 10.0% 24.0%
Total sales
24.1% 15.8% 14.7% 15.0% 14.3% 16.8%
Source: HSC
• Yoghurt - In spite of its fairly small size at VND775 segment are expected to grow with the market. This
billion in 2007, the yoghurt market has recorded market is maturing and it will be hard for Vinamilk to win
dramatic growth thanks to increasing awareness of more market share.
the health and nutritional benefits of eating yoghurt.
However, it seems that the yoghurt has matured • Liquid milk (VND1,736 billion of sales; 35%
quickly with modest growth of 5.7% last year, drasti- market share in FY2007)
cally down from 22.2% in 2005 and 49.2% in 2006.
Based on that, we forecast yoghurt will grow by 7% For the time being Dutch Lady holds a 37.2% market
in 2008 and remain stable for the next few years. share in the liquid milk market, slightly ahead of Vinamilk.
Dutch Lady has always been strong in marketing. How-
Vinamilk - Sales assumptions by product ever its market share has declined continuously from
49.8% in 2004 to 45.1% in 2005, 45.2% in 2006 and
Vinamilk has posted steady growth over the past few only 37% in 2007. This is due to Vinamilk’s steady ex-
years and due to secular growth trends in the dairy in- pansion into this market and the entry of smaller players
dustry and some market share gains. Going forward we such as Hanoimilk, Nutifood and F&N.
believe that Vinamilk can continue to show double digit
sales growth over the medium term. We forecast aver- After a comprehensive brand review and heavy adver-
age domestic sales growth of 16.1% with the highest tising, particularly for fresh milk brands, Vinamilk is
growth coming from two key product segments: liquid now more confident it can take more market share from
milk and powdered milk. Dutch Lady. In FY2007, Vinamilk’s “marketing revolu-
tion” scored a resounding success by establishing a new
• Condensed milk (VND2,197 billion of sales; 79% fresh image for all its main brands. To a great extent, this
market share in FY2007) helped to restore brand trust which had been damaged
by the “fresh milk scandal” in 2006. Consumers have
For condensed milk, we forecast annual sales will grow been impressed by the new brand “100% sterilized fresh
at 7.6% on average over the five year period from 2008
- 2012. With its dominant position, Vinamilk sales in this
Chart 6 - Vinamilk market share and sales growth, condensed Chart 7 - Vinamilk market share and sales growth, liquid milk
milk
100%
100%
79. 0% 79. 0% 79. 0% 79. 0% 79. 0%
80%
80%
60%
60% 39%
36% 37% 38% 40%
40%
40% 25. 5% 24. 4% 23. 2% 22. 1% 21. 0%
20%
20% 9. 0% 8. 0%
7. 0% 7. 0% 7. 0%
0%
0%
2008F 2009F 2010F 2011F 2012F
2008F 2009F 2010F 2011F 2012F
M arket share Salesgrowt h M ar ket shar e Salesgr owt h
Source: HSC Source: HSC
Company Report
BUY July 2nd, 2008
Chart 8 - Market share and sales growth, powdered milk Chart 9 - Market share and sales growth, yoghurt
100%
100% 90% 88% 85%
83%
80%
80% 80%
60% 60%
40% 40%
24. 3% 23. 8% 21. 9% 21. 8% 18. 0%
20% 14. 3% 15. 0% 15. 5% 16. 0% 16. 0% 20%
7% 4%
5% 3% 3%
0% 0%
2008F 2009F 2010F 2011F 2012F 2008F 2009F 2010F 2011F 2012F
M ar ket shar e Salesgr owt h
M ar ket shar e Salesgr owt h
Source: HSC

Source: HSC
milk” which clearly differentiates itself from Dutch Lady network.

and other fresh milk brands.
On the other hand, the company faces a tough fight
In addition, Vinamilk has been able to take advantage against the branding power of multinationals which
of its stockpile of raw materials, large capacity and wide have a leading position in the local market. Therefore
distribution network in the fight with Dutch Lady. How- last year, Vinamilk’s domestic powdered milk sales grew
ever, future growth is constrained by access to enough by only 10% despite a heavy marketing spend.
local raw fresh milk. Therefore, we forecast Vinamilk’s
Taking all of this into account we assume that Vinamilk
market share will increase to 36% for 2008 and rise in-
can capture additional market share of about 2% over
crementally to 37% in 2009, 38% in 2010, 39% in 2011
the next five years. Based on that and our prior esti-
and 40% in 2012.
mates on overall industry growth, we forecast this seg-
ment will see rapid growth of around 24.3% in 2008 and
Based on industry growth and market share forecasts,
thereafter we see the growth rate gradually tailing off to
we project sales of liquid milk will grow by 23.2% on
18% by 2012.
average for the period 2008 - 2012.
• Powdered milk and infant cereals (VND1,042 bil- • Yoghurt (VND698 billion of sales; 90% market
lion of sales; 13.8% market share in FY2007) share in FY2007)
Benefiting from a fast rising market price, powdered In the yoghurt market, Vinamilk enjoys near monopoly
milk has the highest gross margin of all dairy products. status with a market share of about 90%. However, new
This is one of the key segments Vinamilk wants to fo- participants are a threat for Vinamilk and we believe that
cus on over the next few years. We believe powdered they will lose market share over the next few years. We
milk sales will grow as the company continues to launch have assumed that Vinamilk’s market share from 2008
new products backed by a considerable advertising and to 2012 will be fall from 90% to 80%. Correspondingly,
R&D effort and at the same time broaden its distribution there will be a significant decrease in annual growth
Chart 10 - Vinamilk’s sales forecast by product

(VND million) 2008F 2009F 2010F 2011F 2012F
Domestic sales 7,029,230 8,209,899 9,475,204 10,965,966 12,605,545

Condensed milk 2,394,355 2,585,903 2,766,917 2,960,601 3,167,843
Liquid milk 2,178,432 2,709,122 3,338,810 4,077,742 4,935,113
Powdered milk 1,296,480 1,604,734 1,956,706 2,383,394 2,812,405
Yoghurt 746,860 781,382 807,576 843,774 870,205
Coffee 100,000 200,000 260,000 338,000 439,400
Other products 313,103 328,758 345,196 362,455 380,578
Export sales 1,218,096 1,339,906 1,473,896 1,621,286 1,783,414
Total sales 8,247,326 9,549,805 10,949,100 12,587,252 14,388,959
Source: HSC
Company Report
BUY July 2nd, 2008
Chart 11 - Revenue, gross margin and operating margin Chart 12- Net profit and net profit margin
8,000 40% 1,000 40%

35% 35%
6,500 6,648 800
3 0 . 1% 30% 30%
6,246 27.3%
5,000 24.6% 5, 6 3 9
25% 600 963.4 25%
26.5%
3,500 22.3% 20% 6 0 5. 5 20%
3 , 775
400 4 56 . 3 4 6 1. 5 6 59 . 9
18 . 8 %
13 . 0 %
15%
15%
2,000
9.9% 13 . 6 % 12 . 2 % 14 . 5% 10%
3 , 3 58 10% 200 10 . 7% 10 . 6 %
11. 9 %
500 9.9% 5%
5%
0 0%
-1,000 2003 2004 2005 2006 2007 0%
2003 2004 2005 2006 2007
Revenue Gr ossmar gin Oper at ing mar gin Net prof it Net prof it margin

Source: Vinamilk, HSC Source: Vinamilk, HSC
rates from 7% in 2008 to 3.1% in 2012.

SGA expense
• Export sales (VND677 billion of sales, -47% Last year VND975 billion was spent on marketing and
growth yoy) sales increasing SGA expenses from 15.6% to 17.7% of
sales. FY2007 was a milestone for Vinamilk’s marketing
Export revenue has fluctuated widely in the past and revolution with many important advertising campaigns.
Vinamilk lacks a clear export strategy. One reason is Therefore many of these expenses are non-recurring.
low margins. The export division is still overly depend- For FY2008 and FY2009 we forecast that SGA expens-
ant on one key contract, namely sales to Iraq. In 2005 es will decrease to 13.1% of sales and then rise back to
export revenue increased sharply by 109.7% yoy in 15.1% in FY2010.
2005, then fell back to 7.7% in 2006 and then dropped
by 47% in 2007. Gross margins for export products Over the medium term, we forecast administrative ex-
were only 16.5% in 2007, which is far lower than the pense/net sales at 2.1% of sales, the average of the
28.5% margin for domestic sales. This year export rev- past three years.
enue are expected to rise 80% due to already signed
contracts with traditional customers in the Middle East Financial income and expense
will be worth around VND1,200 billion. Growth may sta-
bilise from now on and we assume 10% annual growth The company currently has a portfolio of stocks worth
thereafter. VND705.7 billion as of the end of FY2007. These in-
clude holdings in Bourbon Tay Ninh Sugar, Bien Hoa
2. Profits and margins Sugar, Bao Viet Insurance, and some other short-term
and long-term equity investments. Last year Vinamilk
Gross margin reported a total of VND232 billion in net financial income
(24.3% of pretax profits).
We project that gross margins will climb from 27.3%
to 28.5% in 2008. Raw milk input prices have slowed This year so far there was a capital gain of VND125-
down recently but are still high compared to early 2007. billion which was booked in Q1. Given the high-cost of
Major buyers like Dutch Lady and Nutifood have suf- the portfolio we believe there will be no capital gain in
fered accordingly. However Vinamilk is in a far better FY2008. We also assume no capital gains in subse-
position than most of its competitors having secured quent years.
supplies of raw milk on a long term contract last year.
This should last them until the end of 2008. In Q1 Vinamilk made a loss provisions of VND73 billion
to cover its holdings in An Binh Bank and some other
Therefore in Q1 they were actually able to boost gross holdings. Recently the company has written down an
margins by 3% to 30% due to higher selling prices and extra provision of VND27 billion, so the current loss pro-
a better product mix. However, going forward some im- visions for securities losses totals VND100billion.
pact from high inflation on gross margin is unavoidable
and we believe gross margin for FY2008 will average The company has debts of VND42.3 billion, including
28.5%. From FY2009 the company will have to negoti- VND9.96 billion in short term debt. It also had a cash po-
ate a new raw material supply contract at market prices sition of VND117.8 billion. Last year Vinamilk had net in-
so margins may fall slightly to about 27.8%. We fore- terest income of VND87.6 billion. Furthermore Vinamilk
cast gross margins will stabilise at 28% in 2010.
Company Report
BUY July 2nd, 2008
Chart 13 - FY2006 & FY2007 earnings breakdown

(in VND million) FY2006 FY2007
Domestic sales 4,965,816,000,000 5,971,473,000,000

Domestic contribution 79.5% 89.8%
Domestic gross margin 25.5% 28.5%
Export sales 1,279,803,000,000 676,720,000,000

Export contribution 20.5% 10.2%
Export gross margin 23.4% 16.5%

receives dividends from its holdings in various compa- curities gain was VND161,949 million accounted for
nies, and last year this amounted to VND9.7 billion. 62.8%. There was VND150,901 million of capital gain of
which VND130,000 million was earned in the first nine
For our model we assume that financial income will months and the remaining was booked in the last quar-
mainly come from interest and dividend income. Based ter last year.
on that, we forecast net financial income at VND23 bil-
lion, -VND29 billion, VND8 billion, VND6.2 billion and • Q1 FY2008 result
VND4.7 billion respectively for 2008-2012 period.
Q1 sales rose 31% yoy and profit before tax was 6.7%
higher than that of Q1 2007. Due to seasonal factors,
3. Tax
Q1 sales dropped slightly by 3.3% over the Q4 FY2007
but profits before tax increased dramatically by 69.2%
Vinamilk is enjoying a corporate income tax reduction of
q/q. The company has fulfilled 22.1% of its FY2008
50% this year but from 2009 the tax incentive will expire
sales target and 27.1% of the net profit target.
and Vinamilk will pay the full tax rate of 25%. Therefore
EPS growth rates will slow down in the future. The most interesting point is that gross margins im-
proved a lot from 26.8% in Q4 2007 and 27.3% for the
4. Historical performance full year 2007 to 30% for Q1 2008. What are the rea-
sons behind this? If you recall, Vinamilk secured a long
Historical performance had been strong for several term supply of fixed-price milk powder at the beginning
years. Growth rates were high; the 3-yrs average growth of 2007 enabling higher selling prices to flow directly
for total sales and net profit came to 22.2% and 28.7% to the bottom line. Besides that, the company is now
respectively. ROE looks healthy too with a 3-year aver- focusing more on higher margin products such as fresh
age ROE of 27.2%. milk. However Vinamilk has not provided any detailed
numbers related to quarterly sales breakdown.
• FY2007 result
Pre-tax margin also jumped from 14.4% in FY2007 to
Vinamilk posted FY2007 full year net profits of 19.1% in Q1 2008 primarily due to a decrease in sell-
VND963,448 million (+46.0% yoy) on revenue of ing expense. Last year selling expense accounted for
VND6,648,193 million (+6.4% yoy) propelled by an 14.7% of net sales but in Q1 2008 this ratio declined to
20.3% increase in domestic sales and a 47.1% drop in only 11.3% as the company reduced marketing budget.
export sales. Gross margin, pre-tax margin and net mar-
gin all improved to 27.3% (+2.2 ppt), 14.4% (+3.8 ppt) In Q1, financial income was VND129 billion, of which
and 14.5% (+3.9 ppt) respectively. capital gains came to VND125 billion and the balance
was due to dividends and interest income. Financial ex-
Sales growth was sluggish as the company cut export pense came to VND87 billion of which the bulk, VND73
sales to save low cost materials for domestic production billion was a write down of its securities portfolio. So the
enables the company sell products at higher price. Last gain was mostly cancelled out. We believe the company
year selling prices increased several times (10% on av- has no more low-cost securities in store so there will be
erage) and this led to a big improvement in gross mar- no future capital gains in FY2008. Financial provisions
gins. Meanwhile, financial investment also contributed will in fact have to increase increase if the stock mar-
considerably to company profit. In FY2007, net financial ket continues to fall. Clearly securities investment is no
income grew amazingly at 827% yoy and accounted for longer the cash cow it was in FY2007.
24.3% of profit before tax.
So, unlike FY2007, strong core business results was
Of which VND257,865 million of financial income, se- the real driver in Q1. And with such a high gross margin,
Company Report
BUY July 2nd, 2008
Chart 14 - Income Statement
Items Audited Audited Forecast Forecast Forecast Forecast Forecast

2006 2007 2008F 2009F 2010F 2011F 2012F
Net sales 6,245,619 6,648,193 8,247,326 9,549,805 10,949,100 12,587,252 14,388,959
Cost of sales (4,678,114) (4,835,772) (5,896,838) (6,894,959) (7,883,352) (9,062,821) (10,360,050)
Gross profit 1,567,505 1,812,421 2,350,488 2,654,846 3,065,748 3,524,430 4,028,908
Financial income 74,253 257,865 172,026 32,100 18,600 17,600 17,600
Financial expense (49,227) (25,862) (148,803) (61,404) (10,557) (11,417) (12,949)
In which, interest expenses - (11,667) (32,148) (31,404) (10,557) (11,417) (12,949)
Market price (859,396) (974,805) (907,206) (1,050,479) (1,313,892) (1,636,343) (1,870,565)

General & administration expense (112,888) (204,192) (173,342) (200,717) (230,127) (264,558) (302,426)
Operating profit 620,247 865,427 1,293,163 1,374,346 1,529,772 1,629,713 1,860,569
Other income 107,242 - - - - - -
Other expense (1,210) - - - - - -
Other income 51,397 120,492 108,672 125,834 144,273 165,858 189,598
Income before tax 662,774 955,381 1,401,835 1,500,181 1,674,044 1,795,570 2,050,167
Business income tax (2,884) - (196,257) (375,045) (418,511) (448,893) (512,542)
Net income 659,890 963,448 1,205,578 1,125,135 1,255,533 1,346,678 1,537,626

Vinamilk can reach its full year targets even without any cream, powdered milk and milk tablets. The Com-
contribution from the securities-side. Provided of course pany has an aggregate annual production capacity
that provisioning doesn’t take too big a bite. of 2.78 million tons.
Comparables • Bright Dairy & Food Co., Ltd is principally engaged in

the production and sale of dairy products. The com-
There are no direct Vietnam-listed comparables for pany is also involved in the wholesaling and retailing
Vinamilk. For regional comparison, we selected twelve of food and e-business. It offers various products,
companies based on their business lines and compara- consisting of milk; yoghurt; milk powder; butter and
ble market capitalization. cheese and juice.
• Nestle (Malaysia) Berhad has a wide range of busi- • Inner Mongolia Yili Industrial Group Co., Ltd is princi-
nesses including beverages, milk, ice cream, chilled pally engaged in the manufacture of dairy products,
dairy, confectionery and food services. The company instant food and mixed feed products. Headquar-
was publicly listed on the KLSE in 1989. Its brand tered in Hohhot, Inner Mongolia Autonomous Re-
names such as Milo, Nescafe, Maggi, Nespray gion, China, the company offers four types of dairy
and Kit Kat are well-known all over the country. In products, including liquid milk, milk powder, yoghurt
FY2007, the company has US$983 million of rev- and ice cream. During the year ended December 31,
enue and US$76 million of net profit. 2007, the company obtained most of its total revenue
from dairy products.
• Fraser and Neave Limited is engaged in the pro-
duction and sale of soft drinks, beer, stout, dairy • Meiji Dairies Corporation is a Japanese company
products and glass containers; development of and that is mainly engaged in the manufacturing and sale
investment in property, and investment in and man- of dairy products. Through its subsidiaries, the Com-
agement of real estate investment trusts (REIT), as pany focuses on two business segments. The food
well as printing and publishing. segment produces milk, drinks, yogurt, ice cream,
margarine, frozen foods, agricultural and marine
• China Mengniu Dairy Company Limited is a top Chi-
processed products, and stock breeding products.
nese milk producer. The company manufactures and
distributes dairy products in China, Hong Kong and • Morinaga Milk Industry Co.,Ltd. is a Japanese dairy
Macau under the MENGNIU brand. China Mengniu company. Together with its subsidiaries and affiliates,
Dairy Company Limited’s products include ultra heat
treated (UHT) milk, yoghurt, milk beverages, ice
Company Report
BUY July 2nd, 2008
Chart 15 - Industry sales growth by product 2004-2007

Product 2005/2004 growth 2006/2005 growth 2007/2006 growth 2004 -2007 CAGR
Condensed milk 22.2% 8.2% 19.7% 16.6%

Liquid milk 55.4% 23.3% 38.2% 38.3%
Powdered milk 46.8% 34.3% 25.7% 35.3%
Yoghurt 49.2% 22.2% 5.7% 24.4%
Whole industry 43.1% 24.9% 27.0% 31.4%

Source: HSC estimates
the company is principally involved in the process- der and ghee, Milkmaid sweetened condensed milk
ing, manufacture and sale of milk, ice cream, bever- and Cerelac weaning foods. Nestle’s beverages

ages and other food products.
• Snow Brand Milk Products Co., Ltd. is a Japan-based
include Nescafe and Sunrise coffee and Nesfit en-
riched glucose powder. Nestle also manufactures
Maggi noodles, soups and sauces.
company engaged in the food industry. The Compa-
ny has three business segments. The Food Products • PT Ultrajaya Milk Industry and Trading Company
segment is engaged in the production and sale of Terbuka is the Indonesian leading producer of asep-
dairy and processed food products. The Feedstuffs tic beverage, long-life foods and dairy products for
and Seeds segment is involved in the manufacture both domestic and international markets. It produces
and sale of feedstuffs and crop seeds. The Others and distributes over 60 types of beverages and food
segment is engaged in the provision of delivery serv- products, including ultra-high temperature (UHT)
ices, the manufacture and sale of manufacturing ma- milk, fruit juices, fruit juice concentrates, tea, health
terials, as well as the operation of restaurants and drinks, cheese, butter, full cream milk powder and
sales stores. sweetened condensed milk.
• Maeil Dairy Industry Company is a Korea-based Compared to its Asian peers, Vinamilk trades at a
company engaged in the production and sale of discount of 27.6% in forward P/E. Furthermore, due
milk products. The Company provides four catego- to an immature market and low per capita dairy con-
ries of products: baby food, including delicatessen sumption, the potential growth rate of the Vietnam
food, weaning diet, special powdered milk, nutrition, dairy industry clearly far exceeds that of other Asian
soybean milk and drinks for infants under the brand countries. So we believe this makes the stock cheap
names baby well, Absolute and others; milk, consist- at that moment. Using the average forward P/E of
ing of regular milk, low-fat milk, high-calorie milk, the above comparables, we have a target price of
vitamin-enriched milk and calcium-enriched milk; VND147,031 for Vinamilk
fermented milk, including yogurt, liquid yogurt and
other yogurt products under the brand names gut,
lassi and others, and drinks, consisting of juice, soy-
INDUSTRY ANALYSIS
bean milk and other beverage products, as well as
cheese, nourishing meals for pregnant women, but-
ter, creams, condensed milk and imported products
Industry Overview
such as chocolate, olive oil and grapes tone oil. In the last few years, dairy products have been one of
the fasting growing segments within the packaged food
• Namyang Dairy Products Co., Ltd. is a Korea-based
industry in Vietnam. Year on year growth of the dairy
company engaged in the provision of infant food
industry in 2005, 2006, 2007 was 43.2%, 26.4% and
and related products. The Company produces pow-
25.6% respectively.
dered milk, baby food, milk products, yogurts, yogurt
drinks, soybean milk, cheese and beverages mainly And the general trend is to consume more fluid milk than
for infant and children, as well as adults. The Com- condensed milk. While condensed milk grew at a rate of
pany also operates a website (www.namyangi.com) 16.6%, liquid milk sales rose very fast with 38.3% CAGR
to sell its products and provide content for infant and over the last three years. Powdered milk and yoghurt
children care. It exports powdered milk and bever- also recorded their high growth at 35.3% and 24.4% of
ages to other countries. CAGR respectively.
• Nestle India Ltd. manufactures brand name milk According to the Ministry of Agriculture and Rural Devel-
products and other food products. The Company’s opment (MARD), in 1990, dairy consumption per-capita
products include Everyday dairy whitener, milk pow- in Vietnam was just 0.47 kilogram. This figure has in-
Company Report
BUY July 2nd, 2008
Chart 17 - Vietnam per capita GDP Chart 18 - Dairy consumption per capita (volume)
800 120
101
671 100 92
700 630
80
545 75
600 80 65
484 60 62
500 439 60 48 52 48
410 46
kg
380
USD
400 348
320 40
285 24
300 250
220 20 9
200
0
100
UK
a
o
m
nds
n
ce
li a
d
nd
y
in
nad
xic
an
US
rwa
tn a
a
n
Jap
0
Ch
rla
rla
str
Fra
Me
al
Ca
Vi e
No
i tz e
Ze
th e
Au
95 96 97 98 99 00 01 02 03 04 05 06
Sw
w
Ne
Ne
Source: Vietnam General Statistics Office Source: Vietnam General Statistics Office, International Dairy Federation,

creased steadily to 6.5 kilograms in 2000, 7.0 kilograms
Agriculture and Agri-food Canada
has changed radically and the number of products has

by 2001, 8.2 kilograms by 2003 and 9 kilograms by also increased dramatically. People now associate dairy
2005. Per-capita consumption by 2005 had increased a products with a healthy and affluent lifestyle.
whopping 19x since 1990. Local raw milk and imported
milk powder are a major source of raw materials for the We believe the dairy industry will continue to see strong
dairy industry. growth in the future as Vietnam still has a low per capita
consumption of milk at only 9 kilogram per year. This
Its not enough. Local raw milk volume reached 235,000 compares to 24 kilograms per year in China and 60 kilo-
tons in 2007 which satisfied just 30% of dairy producers’ grams per year in Europe. The US also has an aver-
demand. And the domestic dairy industry is character- age annual consumption of about 60 kilograms per year.
ised by small scale inefficient producers. This fact shows that we still see tremendous potential
for future growth in dairy demand.
Currently dairy firms must import about 70% of their raw
material needs. And this makes them vulnerable. Pric- There are about 50 dairy firms in Vietnam and most of
es of raw milk rose 100% in 2007 before falling back. them are SME. Large scale producers include Vinamilk,
Currently raw milk is about US$3,500 per ton of skim Dutch Lady Vietnam, Nestle Vietnam, Nutifood, F&N Vi-
milk powder which is 20% higher than the price at the etnam and Hanoi Milk. But the market is very concen-
beginning of 2007. This burden has fallen squarely on trated and 60% of the market share belongs to the top
domestic producers, particularly those without long term two producers; Vinamilk and Dutch Lady with 36% and
contracts on place. 24% respectively. Imported products have about 30%
of the market and the rest including Nestle, Nutifood,
Strong sales of dairy products are closely linked to F&N, Hanoimilk, Long Thanh, Moc Chau, Elovi, Tan Viet
growing urbanisation and the steady improvement in Xuan, etc. scrap for the remaining 7%. Each of them
the standard of living. Rising awareness of the health has no more than a 3% market share.
benefits for young people and aggressive marketing
have also played important roles. In the mid -1990s, Alongside the local producers, the presence of a lot of
dairy products were still considered luxury items by the famous brands mostly imported from USA, Australia,
vast majority of Vietnamese consumers. New Zealand, Japan and Europe has made the dairy
market very competitive. Large global companies such
Milk consumption consisted almost entirely of imported as Abbott, Mead Johnson, Dumex, Meiji, Snow Brand,
powdered milk. These products were often low quality, Namyang have all established representative offices to
and due to the lack of supply, they were also quite ex- build up and maintain their distribution system. Nearly
pensive. As living standards have improved, dairy prod- all imports are premium powdered milk products.
ucts have become much more affordable. The market
Chart 16 - Raw fresh milk output
Product 2001 2002 2003 2004 2005 2001-2005 8/2006-
(tons) CAGR 8-2007
Whole country 64,703 78,453 126,697 151,314 197,679 32.2% 234,438
North 8,984 11,615 16,281 22,633 28,812 33.8% 23,595
Central 1,365 2,089 4,042 4,810 12,100 72.5 % 6,903
South 54,354 64,749 106,374 123,871 156,856 30.8% 203,940
Source: Vietnam General Statistics Office
Company Report
BUY July 2nd, 2008
suppliers of milk powder worldwide, suppliers have the

Government’s efforts to develop the dairy in- power to set prices thanks to the limited production of
dustry fresh milk and increasing demand around the world.
Vietnam’s government is implementing a development Currently, the gross margin enjoyed by dairy producers
plan to promote healthy bodies through the higher con- is still high relative to other sectors. This makes the in-
sumption of milk. One aim of the plan is to develop the dustry more attractive for entrants. Low barriers to en-
domestic dairy industry by raising the size of the cow try is another factor attracting new entrants. However,
stock to over 200,000 head of cattle (more than double small firms usually do not have the resources to build a
the current herd size) and boost fresh milk production to nationwide distribution network.
350,000 tones by 2010.
Another key issue for new entrants is the strong brand
The intention is to create a domestic industry independ- identity of current players such as Dutch Lady and
ent of imports. In 2001, the domestic supply of fresh Vinamilk thanks to their long-standing presence in the

milk accounted for only 8% of the production demand.
By August 2007, the ratio had improved to 30% and
Vietnamese market. Therefore Vinamilk’s biggest threat
comes from multinational dairy companies because of
herd size has expanded to over 98,659 heads, accord- their huge financial resources and global brand names.
ing to the General Statistics Office.
Major dairy companies
Competitive environment
• Dutch Lady Vietnam
Currently the dairy industry, excluding powdered milk, Dutch Lady Vietnam Food and Beverage Company
is an oligopoly with two large firms dividing the mar- Limited is a joint venture enterprise between Friesland
ket between them: Vinamilk and Dutch Lady. Although Foods Vietnam Holding B.V, whose ultimate parent com-
Vinamilk has larger capacity (507,406 tonnes per year), pany is Royal Friesland Foods Holding N.V, a company
there is no big difference in market share between of Neitherlands, and Song Be Manufacturing, Importing
Vinamilk and Dutch Lady. and Exporting Company, a company of Vietnam.
In the powdered milk market, rivalry has intensified due Dutch Lady Vietnam has a diversified products strategy
to the presence of many producers both local and over- and focuses on long-life milk, drinking yoghurt, pow-
seas. dered milk and condensed milk. Its main brands are
As the dairy market has seen rapid growth, existing Dutch Lady, Yomost and Friso. Last year Dutch Lady
firms are able to improve revenues simply because of products had a 24% share in the domestic dairy mar-
the expanding market. As they enjoy high growth rates, ket with approximately VND4,000 billion in sales and
smaller firms are not really competing to boost market VND500 billion in net profit. Total sales in 2007 rose by
share. As for new entrants, they find very difficult to 10% yoy due to higher revenues from powdered milk.
penetrate a highly concentrated market dominated by This success can be attributed to the improved position-
the big two. Because buyers of consumer products like ing of the Friso label. But net profit was down 7.4% yoy,
dairy are very fragmented, no buyer has any particular however, chiefly as a result of higher advertising and
influence on product or price. promotional expenses, and the inability to fully pass on
According to MARD, at the end of 2005, there were increases in the cost of raw materials to the consumer.
about 196,000 dairy farmers in 33 provinces and the av-
Dutch Lady Vietnam serves approximately 80,000 sales
erage number of cows per farm was just 5.3. Most farm-
points from three distribution centres and five sales of-
ers are very small scale producers serving only the two
fices. With a dense distribution network, the company
main manufacturers. Vinamilk purchases around 40%
products are now obtainable virtually everywhere, in
of domestic output and Dutch Lady purchases around
both cities and rural areas.
20%. In some provinces, farmers sell raw milk to a few
scattered small-size household factories but the volume In April 2008, Friesland Foods launched a second fac-
is quite small. Therefore Vinamilk and Dutch Lady set tory costing US$40 million in the North of Vietnam with
the price. Furthermore, substitutes for fresh milk are capacity of 200,000 tonnes per annum. This new facility
available as dairy firms can use imported milk powder will help to accommodate a production increases and
instead. improve logistical.
But the situation is very different in the milk powder • Nutifood

market. Although importers can easily find alternative
Company Report
BUY July 2nd, 2008
Chart 19 - 2006 sales breakdown Chart 20 - 2007 sales breakdown
E xpo r t
s al es E xpo r t s al es
17. 0% C o ndens e Ot her 10. 2%
d mi l k pr o duc t s
Ot her 27. 7% 4. 5% C o ndens ed
pr o duc t s mi l k
4. 4% Y o ghur t 33. 0%
10. 5%
Y o ghur t
10. 6%
P o wder ed
Li qui d mi l k
P o wder ed mi l k 15. 7%
mi l k 24. 6% Li qui d
15. 8% mi l k

26. 1%
Source: Vinamilk Source: Vinamilk
Nutifood is a fairly new Vietnam-based dairy company tered the Vietnam market in 1993. The main products
established in May 2000. Nutifood’s main products are consist of instant coffee and flavored powdered milk
infant cereals and powdered milk. Targeting the low drinks under the Milo brand. Nestea and Maggi soy
income segment, Nutifood holds a 2.9% share of the sauce are other well-known products in Vietnam. So far
whole dairy market and enjoys a 5% market share for Nestle has invested around US$45 million in the coun-
powdered milk and infant cereals. In September 2007, try. Nestle also produces powdered milk and yoghurt but
30% of the equity capital was transferred to Kinh Do these products have not contributed much to total rev-
Corporation, one of Vietnam’s leading food producers. enues. Sales of dairy products came to VND300 billion
back in 2006.
Nutifood FY2007 revenue reached VND476.5 billion,
up 28.4% yoy and net profit was VN7.4 billion, down Nestle Vietnam has a head office in Ho Chi Minh City
significantly by 67.5% yoy. Although last year the com- and two factories in Dong Nai in the South and Ba Vi in
pany saw very high sales growth due to marketing and the North.
sales efforts, profitability was affected by more expen-
sive imported materials (up 80% yoy) and higher SGA
expenses to enhance brand position in a competitive COMPANY ANALYSIS
environment (up 52% yoy). Net margin in FY2007 was
only 1.5%, dropped 4.6 ppt, and far below Vinamilk and Sales breakdown
Dutch Lady.
Vinamilk’s products are sold under more than 150
With high growth and improved market share, Nutifood brands catering to a very wide range of customer seg-
is an aggressive player in the dairy sector but it is still ments. Products are produced in 9 key production fa-
small size and has low profitability. cilities with a combined capacity of 570,406 tonnes per
annum located in North, Central and South Vietnam.
• Nestle Vietnam
Nestle Vietnam is a 100% foreign owned enterprise en-
Chart 21 - Vinamilk’s sales by product
(VND million) FY2006 y/y growth FY2007 y/y growth
Domestic sales 4,965,816 16.8% 5,971,473 20.3%

Condensed milk 1,689,855 6.2% 2,196,656 30.0%
Liquid milk 1,469,000 27.9% 1,736,000 18.2%
Powdered milk 943,505 28.2% 1,042,624 10.5%
Yoghurt 634,545 24.4% 698,000 10.0%
Other products 228,910 -14.1% 298,193 30.3%
Export sales 1,279,803 -7.7% 676,720 -47.1%
Source: Vinamilk
Company Report
BUY July 2nd, 2008
local brands belonging to Vinamilk and Dutch Lady only
• Condensed milk
make up for 13.8% and 11.3% respectively. The impres-
Condensed milk is Vinamilk’s most successful product. sive performance of imported powdered milk is driven
With VND2,332 billion in sales last year, condensed milk by their strong brand names, outstanding quality and
made the greatest contribution to Vinamilk’s total rev- higher selling prices. Vinamilk has the largest output
enue (35.1%). In FY2007, 94% of condensed milk sales but focuses mainly on middle income customers.
was made in the Vietnamese market, the remainder was The infant cereals market is less competitive as the mar-
exported. Therefore, condensed milk also contributed ket has few participants with just Vinamilk, Dutch Lady,
the most to domestic revenue with VND2,197 billion in Nutifood and Nestle fighting it out. There are also some
sales and grew 30% yoy. imported products but their market share is very small.
The condensed milk market is very concentrated. • Liquid milk
Vinamilk dominates the local market with a 79% market
share while the balance of 21% belongs to Dutch Lady Liquid milk is the second big cash cow of Vinamilk

(as of FY2007). Vinamilk’s “Ong Tho” brand is the most
well-known brand.
with a sales weight of 26.1% and sales value of about
VND1,736 billion in 2007. Main products consist of UHT
fresh milk, UHT milk and Milk Kid. UHT fresh milk is tar-
In parts of Asia and also Vietnam, sweetened con- geted at the premium market and manufactured using
densed milk is used to add to coffee and fruit shakes. 100% raw fresh milk.
Condensed milk is also often used in baking or with
cakes as a dessert. This explains why condensed milk, Liquid milk is also the second fastest growing segment,
usually known as a side dish, is not growing as fast as recording a heady 18.2% growth in 2007. This rate was
more nutritious milk products such as fresh and pow- due to strong demand and rising market share. How-
dered milk. ever at the end of 2007 Vinamilk was still behind Dutch
Lady in terms of market share (35% vs. 37%).
• Powdered milk and infant cereals
Until recently Dutch Lady had a stronger marketing
Sales from powdered milk and infant cereals in FY2007 strategy than Vinamilk. However, this advantage is be-
came to VND1,584 billion, contributed 23.8% of total ing eroded as Vinamilk is now focusing more on adver-
sales. Domestic sales of powdered milk and infant cere- tising and brand building. This is one segment where
als in FY2007 was VND1,042,624 billion, and grew at a the new marketing focus is starting to pay-off.
10.5% rate yoy.
In FY2007 selling and advertising expenses came to
In Vietnam, competition in the powdered milk market is VND974,805 biilion, accounting for 14.7% of total net
tougher than for other dairy segments because of a great revenue and up 13.5% yoy. And Vinamilk has access
number of participants, both local and overseas. New to a larger source of raw milk from local farmers which
products aimed at different age groups are launched is another key competitive edge. For these reasons we
frequently amid heavy advertising. believe Vinamilk can overtake Dutch Lady in the liquid
milk market.
Foreign brands currently lead domestic brands in terms
of sales value. According to our estimates, imported
products account for 65.1% of the total market, while
Chart 22 - Condensed milk market share 2007 Chart 23 - Powdered milk market share 2007
65.1%
21%
4.4%
Vinamilk
Vinamilk
5.0% Dutch Lady
Dutch Lady
Nutifood
11.3%
Nestle
Imports
79%
13.8%
Source: HSC & Vinamilk Source: HSC & Vinamilk
Company Report
BUY July 2nd, 2008
Chart 24 - Liquid milk market share 2007 Chart 25 - Yoghurt market share 2007
10%
28%
35%
Vinamilk
Vinamilk
Dutch Lady
Others
Others
37% 90%
Source: HSC & Vinamilk Source: HSC & Vinamilk

• Yoghurt and distribution, minimize business risks and maximise
available facilities. Due to their existing resources, they
Last year, with VND698 billion in sales, this line contrib- can introduce new products quickly, and cheaply.
uted only 10.5% of total sales and grew at 10% yoy.
The company currently produces two types of yoghurt: 2. Extensive distribution network
spoon yoghurt and drinking yoghurt. In 2007, Vinamilk
held a commanding 90% share in yoghurt sales, in An extensive distribution network covering all provinces
which its market share for spoon yoghurt and drinking is arguably the most important competitive advantage
yoghurt came to 97% and 26% respectively. The sec- Vinamilk enjoys over all comers. There are two chan-
ond and third positions were filled by Nestle and Dutch nels networks both spread out nationwide: the indirect
Lady Vietnam. agency channel and the direct channel.
Growth drivers • Indirect channel (traditional trade): Vinamilk has built

up and maintains an indirect channel of 201 distribu-
1. Huge product range covers all bases: tors and 141,000 retailers in all 64 provinces which
sells more than 90% of the company’s total output.
Vinamilk has a well-diversified portfolio of dairy products In rural areas, Vinamilk has agencies in most com-
with different types and flavours of powdered milk, infant munes. In the cities, Vinamilk’s products are avail-
cereals, UHT liquid milk, UHT drinking yoghurts, spoon able at nearly all grocery stores on the main street.
yoghurt, sweet condensed milk and cheese. This huge The company has already set up a distribution sys-
range is targeted at a wide spectrum of consumers, tem in some foreign markets like the Middle East,
from young children, young adults, the elderly; general Cambodia and Maldives over the last few years.
households; and commercial outfits.
• Direct channel (modern trade): Including supermar-
Vinamilk reaches into every key market segment with kets, showrooms, schools and hotels, this is an aux-
a full product offering. It’s this huge variation and depth iliary channel which consumes only 10% of the com-
that makes it such a tough competitor. You can beat pany’s total output every year. However this channel
them in certain segments but not in all. will grow in importance as large scale retailers take
Moreover, the company has expanded into two new an increasing market share.
food segments: beer and coffee. A joint venture between
Vinamilk and SAB Miller Asia B.V was set up in June Vinamilk also has a readily available network of refriger-
2006 to produce beer - a highly profitable product seg- ated coolers. Moreover, the dairy company intends to
ment in Vietnam. That beer factory has initial capacity of co-operate with PepsiCo. to exploit their current retail
50 million liters per year. Vinamilk hopes to increase ca- system of 40,000 shops with installed refrigerated cool-
pacity to 100 million liters per year soon. “Zorok” beer– a ers. The availability of coolers is a high barrier of entry
new brand name was launched in early 2007 and an for competitors as creating a refrigerated cooler network
international brand of SAB Miller will be launched next requires a substantial amount of capital expenditure.
year. So far sales seem to be within expectations. And The company also employs a large sales force of 1,800
the coffee factory will produce 1,500 tons of instant cof- people across the country.
fee and 2,400 tons of roasted coffee per year.
By implementing a product diversification strategy,

Vinamilk is hoping to leverage its strengths in marketing
Company Report
BUY July 2nd, 2008
Chart 26 - Vinamilk distribution system
Vinamilk
Distributors
Wholesalers
Supermarkets,

showrooms,..
Retailers
Consumers
Source: Vinamilk
3. Power with local dairy farmers sitive product price-wise.

Nonetheless Vinamilk has been able to pass on price in-
Vinamilk, buys 40% of all the fresh milk produced in Vi- creases so far. In 2007 there were three waves of price
etnam, and owns the largest direct source of fresh milk hikes of Vinamilk’s milk products and price will be raised
supply. This is another major competitive advantage. All a further 10% this year according to the company plan.
dairy producers in Vietnam are critically short of fresh This was triggered by an increase in price for imported
milk supply. Therefore they have to substitute expensive milk powder and other inputs. However even after dairy
imported powdered milk. This hurt in 2007 when import producers switched from expensive imports to cheaper
prices almost doubled. Vinamilk, with its large and sta- local sources, selling prices have not been reduced.
ble supply of domestically sourced fresh milk, enjoys This has enabled Vinamilk to boost gross margins.
lower production costs and more stable product quality.
5. Strong brand name supported by much improved
Vinamilk also enjoys very strong bargaining power with marketing
local farmers because they buy the largest volume and
many farmers have become dependent on them. Ac- Vinamilk have established a strong presence over 30
cordingly, raw milk prices were low and stable for a long years, so brand recognition in the domestic market is
time and Vinamilk has benefitted from this. Going for- very strong. The brand “Vinamilk” is familiar to all Vi-
ward the price of raw material may increase medium etnamese in both urban and rural areas. Vinamilk was
term but as we mentioned Vinamilk is building its own ranked first in the “Top ten Vietnamese High-quality
direct supply at a substantial discount to the market. Goods” in successive years from 1995 to 2007 (voted
by the readers of Saigon Marketing Magazine). In 2000
4. Good pricing power and 2004, the company also won the “Technology and
Science Creation Award” of the World Intellectual Prop-
Vinamilk completely dominates two key market seg- erty Organization (WIPO).
ments; yoghurt and condensed milk. This dominance
gives Vinamilk strong pricing power to pass on any Vinamilk brand portfolio consists of four mega - brands:
cost increase to consumers. And a third segment, the Vinamilk - Beautiful Life, Dielac - Mum’s Love, Café
fresh milk segment is a virtual oligopoly. So even there Moment - Passion to Win and VFresh - Natural Fresh-
Vinamilk has some pricing power. ness. The recent re-branding has been masterminded
by a large professional marketing team recruited when
However there is an important caveat, the government Vinamilk implemented a major re-structuring in 2006.
has shown its reluctance recently to sanction price in- Thanks to this exercise, Vinamilk’s brands have been
creases given its inflationary impact. Milk is seen as a given a makeover and have become more attractive to
staple food especially for infants and has become a sen- consumers. Market share gains have followed.
Company Report
BUY July 2nd, 2008
The new marketing team has nearly 40 people, headed The prospects for the dairy cow breeding industry are
by Mr. Tran Bao Minh and Mr. Nguyen Tuan Anh, for- still rather vague, but we pin our hopes on Vinamilk’s
merly the top marketing executives of PepsiCo. Apart ability to develop its own source of materials. In early
from building up four mega- brands with highly convinc- 2007 Vinamilk acquired the Phu Lam Dairy Farm in
ing slogans, the team has done a makeover for most Tuyen Quang province as the first step in its breeding
key products including fresh milk, powdered milk, drink- program. The farm has 1,360 cows capable of produc-
ing yoghurt, fruit juices and coffee. In addition, infant ing 10 tons of fresh milk per day. Vinamilk plans to have
formula has been re-structured by age (0-6 months, 4,000 cows at year end after restructuring and expand-
6-12 months, 1 years old, etc.). The marketing team is ing the herd size. The farm provides better quality fresh
also responsible for drawing up a new product strategy milk and the company enjoys a 40% price discount com-
which is in our view the best so far. pared to outside suppliers.
6. Growth and margin expansion strategy Last year Vinamilk also acquired 55% stake in Lam Son

Milk Company in Thanh Hoa Province. With this acquisi-
Vinamilk is pursueing a business growth strategy with tion, Vinamilk now has a total of 2,000 cows accounting
the following goals: for 5% of the local fresh milk supply. Vinamilk will build
• Expansion of market share in existing and new mar- up another two farms in Nghe An and Binh Dinh where
kets; its factories are located with initial capacity of 1,000
cows for each farm. However, even after the new farms
• Develop a comprehensive portfolio of dairy products coming on stream, the farms will contribute only 10%
to target a broader consumer base and expand into of the local supply of fresh milk. It will take 4-5 years
higher margin value-added dairy products; for Vinamilk to build-up its own supply therefore this is
clearly a long term solution.
• Development of new product lines to satisfy different
consumer preferences;
Concerns
• Brand cultivation;
1. High dependence on imported raw materials
• Continuously enhancing supply chain management;
Dependence on expensive foreign raw materials is a
• Development of raw materials sources to ensure a
major concern for Vinamilk and its competitors. The do-
reliable and consistent fresh milk supply base.
mestic market can supply only a fraction of local pro-
We are particularly impressed by two of the above, duction for several reasons. Firstly, large buyers enjoy
the plan to (1) expand into higher margin value-added strong pricing power and forced farmers to accept price
dairy products and (2) develop a fresh milk supply base. that are uneconomic. Secondly, the small size of the av-
Vinamilk is focusing more on premium products with erage cow herd has meant that economies of scale do
higher margins such as fresh milk and reducing produc- not apply. Furthermore, most cattle breeders lack ex-
tion of low margin condensed milk. perience and international standard facilities, thus their
fresh milk is not of particularly good quality. Rising costs
We think this makes a lot of sense as the company can allied with low returns have led many dairy farmers to
take advantage of its large source of raw fresh milk to quit the business.
produce fresh milk of better quality than it’s competitors.
And turning that ready supply into products with the As a result of this and rising consumer demand, the
highest possible margins will ensure profit growth. Re- shortage of raw milk has became even more severe.
ducing the sales weight of low margin products will also Every day Vinamilk purchases 260 tonnes of local fresh
help to improve gross margin. Furthermore Vinamilk is milk but this can only satisfy about 30% of company’s
looking to enter new lucrative segments with products demand. The situation has compelled Vinamilk and oth-
such as probiotics yoghurt. er dairy producers to import milk powder to make up the
difference.
Vinamilk also plan to concentrate production in just two
locations in order to access economies of scale, particu- 2. Soaring raw materials price
larly transportation cost. According to this plan, there will
be only two huge production facilities, one in the North The price of raw milk has soared worldwide due to surg-
and one in the South, instead of the current nine facto- ing demand for milk products in Asia and Eastern Eu-
ries. Once executed Vinamilk will be able to boost gross rope. The cost of skimmed milk powder, used widely by
margins further over the long-term. the dairy processing industry, soared from $3,000 per
ton at the beginning of 2007 to $5,500 per ton in the
Company Report
BUY July 2nd, 2008
Chart 27 - Skim milk powder (1.25% butterfat) FOB port spot Chart 28 - Skim milk powder (1.25% butterfat) FOB port spot
price - Western Europe (5 Jan 06 - 19 Jun 08) price - Oceania (5 Jan 06 - 19 Jun 08)
6000 5500
5500 5000
5000 4500
4500
USD/tonne
USD/tonne
4000
4000
3500
3500
3000
3000
2500 2500
2000 2000
5- 27- 16- 5- 25- 14- 6- 26- 15- 4- 25- 14- 5- 27- 16- 5- 25- 14- 6- 26- 15- 4- 25- 14-

Jan- Mar- Jun- Sep- Nov- Feb- May- Jul- Oct- Jan- Mar- Jun- Jan- Mar- Jun- Sep- Nov- Feb- May- Jul- Oct- Jan- Mar- Jun-
06 06 06 06 06 07 07 07 07 08 08 08 06 06 06 06 06 07 07 07 07 08 08 08
Source: Bloomberg Source: Bloomberg
middle of last year. Since then the milk powder price has And both Dutch Lady and Abbott have more experience
fallen back, but still remains at a relatively high level of in exploiting high-growth niche markets through sophis-
$3,700 per ton. ticated targeted marketing strategies.
At the beginning of 2007, however, Vinamilk signed long Due to attractive industry fundamentals, the dairy mar-
term contracts to buy a huge amount of milk powder ket is more crowded and competition is getting tougher.
enabling them to cover their entire production needs for Many locally-based dairy firms have been established,
the whole of 2007 and three quarters of 2008 at relative- focusing on only one or two segments such as fresh
ly cheap prices. Therefore for most of this year Vinamilk milk or powdered milk. Hanoimilk is a potential big rival
will not suffer any margin damage. Indeed they have to Vinamilk in the fresh milk for children segment, along-
seen 5%-10% higher margins for selected products be- side Dutch Lady. The same is true of Nutifood in the
cause of the higher selling price. powdered milk market. And some new entrants such as
Viet My have appeared in the North.
Meanwhile a shortage of raw material at competitive Vinamilk is also being challenged by imported products
prices has forced main competitors such as Dutch Lady following WTO accession commitments. A relief in import
and Nutifood to cut production. As Vinamilk’s capacity tariffs for dairy products has been applied since August
is far greater and their distribution network is wider this 2007 as an attempt by government to stop the milk price
has enabled Vinamilk to win some market share over soaring. Please refer to appendix 6 for details.
the short term.
However from next year the company will have to nego- Prospect for new products - Coffee and
tiate a new raw material supply contract at market prices Beer
and risks a big hike in cost in the process. We will watch
this closely as it is one of the biggest risks to FY2009 1. Coffee
margins.
The coffee market....
3. Tougher competition
For several years Vietnam has been the second biggest
global coffee producer. In 2007, export output was 1.2
Vinamilk’s prospects might be threatened by its biggest
million tonnes and export turnover was worth US$1.8
rivals: Dutch Lady Vietnam and Abbott. The former is
billion. Products include two kinds: coffee beans (whole
the strongest player in the liquid milk market and the lat-
coffee) and processed coffee, and coffee beans contrib-
ter is the leader in the powdered milk market. Supported
ute the most to total export turnover.
by capital inflows from its holding company, Dutch Lady
Vietnam does not have the same need to maintain prof- The processed coffee market is divided into two sepa-
itability, so its competitive strategy is more flexible than rate segments: roasted coffee and instant coffee. There
Vinamilk. are thousands of roasted coffee processors but most of
them target the domestic market, and only large compa-
Abbott also has strong financial power and its brands nies such as Trung Nguyen and Vinacafe are capable
enjoy a competitive advantage over all local producers.
Company Report
BUY July 2nd, 2008
Chart 29 - Instant coffee market share 2006 it is tough for Moment coffee to win market share from
top players Vinacafe and Nescafe.
Therefore, Vinamilk is now running a US$2 million mar-

7%
10% keting program to boost coffee sales. The program in-
Vinacafe
cludes a two-year agreement with the U.K football club,
Nescafe
45% Arsenal to advertise Moment coffee. On the other hand,
G7 a huge distribution network should give them an advan-
38%
Others tage over current coffee processors. Everything has just
begun, so it’s too early to say much about the outlook for
Vinamilk’s coffee division.
Source: VietnamNet
Vinamilk’s coffee plant is still under construction and will
of producing high quality roasted coffee with a natural come on stream in late 2008. The plant will have pro-

flavor, to meet the requirements of the export markets. duction capacity of 1,500 tonnes of instant coffee and
2,400 tonnes of roasted coffee. However, most of the
Consequently, nearly all of export output was coffee production will be exported to markets such as Australia
beans. However, roasted coffee is heavily consumed in and Europe. According to Vinamilk’s plan, exports will
the domestic market. According to the Vietnam Associa- contribute 80% of future coffee sales. VND100 billion
tion of Coffee and Cocoa, roasted coffee accounts for is the company’s target for coffee sales this year. And
two third of processed coffee output, the remaining one the annual sales target for the few next years is also
third is instant coffee, a higher growth segment. Last low, at around VND200 billion. Clearly, coffee is not a
year instant coffee output increased about 22% led by a short-term solution to foster growth, but a very long-term
consumer trend towards convenience foods. strategy.
In instant coffee market, three major producers, Vinaca- 2. Beer
fe, Nescafe and Trung Nguyen have 93% market share
between them, while the remaining 7% market share is Beer market
held by several small firms. This creates a very concen-
There are over 300 beer producers in Vietnam but near-
trated domestic market.
ly all are small firms with an average capacity under 50
Due to its fast development, the instant coffee market million litres focusing on unbranded products.
is attractive to new entrants, although competition is
Large producers including around 20 companies, such
fierce. Competition is toughest among the larger com-
as Sabeco, Habeco, Vietnam Brewing Ltd (VBL), Halida,
panies, with Vinacafe having the best understanding of
Huda etc. These companies dominate the market with
consumer demand and tastes, while Nescafe has the
total market share of 90%. Able to produce over 640
backing of the large multi-national, Nestle to help cre-
million litres per year and enjoying a 38% market share,
ate marketing and development strategies. Vinacafe
Sabeco with popular brands like Saigon and 333, is the
has pumped US$20 million into a new factory, which will
biggest player. The second position belongs to Viet-
produce up to 3,200 tons of instant coffee a year from
nam Brewery Limited (VBL), a subsidiary of Asia Pacific
2010. Meanwhile, Nestle started a campaign to have its
Brewery, which has a 15% market share by combining
products sold on every corner. The company has also
invested heavily in consumer studies and just launched Chart 30 - Vietnam beer sales (million litres)
an innovative instant coffee product called “Cafe Viet”
after two years research. 2012F 3,606
3,191
And Vinamilk’s coffee... 2010F 2,824
2,477
Vinamilk has set up a presence in the domestic coffee
2008F 2,173
market since December 2005 with two kinds of prod-
1,890
ucts: roasted coffee and instant coffee, under the Mo-
2006 1,548
ment brand. However initial results were not very posi- 1,369
tive. In FY2007 sales from coffee products was less than 2004 1,343
VND50 billion, or less than 1% of total revenues. This 1,119
is negligible when compared with Vinacafe’s FY2007 2002 940
sales of VND619 billion.
0 1000 2000 3000 4000
One reason is capacity as up to now the company has Source: Ministry of Industry, HSC
only one test production line for coffee products. And
due to its newcomer status and a rather unpopular taste,
Company Report
BUY July 2nd, 2008
Heineken, a global, premium brand, with Tiger, a strong prospect for Zorok to win significant market share due
regional brand and many other smaller brands. to inadaptability of consumers. In FY2007, the project
suffered a loss of VND39 billion.
The beer market is divided into 3 segments: premium,
mainstream and commodity segment. In the premium We feel that Zorok is just in the early stages of a long-
segment, Heineken is the number one brand. Sabeco’s term development strategy for SAB Millier in Vietnam. It
“Sai Gon” brands have led the mainstream segment for is likely that the third-largest global beer maker is nur-
years. Other mainstream brands include Tiger, Ha Noi, turing a greater ambition to attack the whole market,
Huda, Halida, Bierre Larue,... and there is also room for particularly the premium segment, after testing market
some “provincial” brands. reactions via Zorok. Though we do not expect too much
profit from the joint venture in the early years, we still
From 2002 to 2007, the sector’s CAGR was 15%. We strongly believe in its long-term future. This is due to the
expect the beer industry to grow at a CAGR of 14% be- excellent potential of the beer industry as well as the
tween 2008 & 2012. Vietnamese beer per-capita con- enormous branding power of this leading multinational.

sumption in 2007 was 22.2 litres per year, not a high
level in the region. Due to growing domestic income, the
And Vinamilk’s deep understandings of the local bev-
erage market are another major advantage. We have
booming tourism industry and high levels of investment heard from Vinamilk, that the joint venture will launch an
from current players, we believe this will accelerate in international beer brand in Vietnam this year. Then the
the next few years. We expect total industry capacity to fun begins.
reach around 3.6 billion litres by 2012.
Expected revenue for the JV in FY2008 is VND110 billion.
Vinamilk’s masterplan for beer Sales from the beer project are not included in Vinamilk’s
total sales because the project is considered a long-term
The joint venture between Vinamilk and SAB Miller
investment. Part of the JV profits will be allocated to
launched its first product, Zorok, in March 2007. In the
Vinamilk on a 50% basis.
early stage, Zorok has been sold mainly in HCMC and
the South. The brand is positioned in a mainstream seg-
ment which is dominated by Saigon Beer, but Zorok is
pitched at a slightly higher price segment. In addition,
the distribution system is different from the current play-
ers. Off-trade channel are used based on Vinamilk’s
agencies and retail network, and on-trade outlets are
mainly small restaurants and pubs. This strategy helps
the product not to compete directly with leading main-
stream brands but penetration will take time. Zorok has
an unusual light taste, and Vietnamese beer consumers’
taste is rather difficult to change. Therefore, the market-
ing effort must be strong and sustained enough to create
a new market segment. In the short-term, there is little
Company Report
BUY July 2nd, 2008
APPENDIX 3. Company business plan

Chart 36 - Company business plan for FY2008
1. Company ownership structure:
Items 2008 YoY (%)
As of July 2nd 2008, ownership structure is as follows:
• Government (SCIC): 47.6% Revenues 8,200,000 22.3%
• Other domestic investors: 7.2% Pre-tax profit 1,326,000 38.8%
Net profit 1,140,000 18.3%
• Foreign investors: 45.5%
EPS (VND) 6,464 15.7%
There are 0.5% left for foreign investors.
DPS (VND) 2,900 -
Chart 34 - Ownership structure Source: Vinamilk
4. Company labor structure
47. 6% Total number of employees is 3,927. Labor structure is

45. 5%
classified according to the level of education as below:
Chart 37 - Company labor structure
6. 9%
Level of Education Quantity Percentage
Government Domestic investors Foreign investors
Source: Vinamilk
University and post graduated 1,244 32.7%
Intermediate 489 12.9%
Skilled workers 1,487 39.1%
Unskilled workers 585 15.3%
Total 3,805 100%

2. Company management structure Source: Vinamilk
Chart 35 - Company Management Structure
SHAREHOLDERS MEETING
BOARD OF DIRECTORS
SUPERVISORY BOARD
GENERAL DIRECTOR
Director of
Internal Supervision
Deputy Deputy Deputy Deputy
General General General General
Director Director Director Director
cum cum cum cum Director

Director of
Director of Logistics Director Director
Marketing Sales Reseach and
Human Finance & of and of Of
Logistics Project Director Director Development
Resources Accounting Polyclinics Warehouse Factories Branches
Director Director Center
Director Director Enterprise
Source: Vinamilk
Company Report
BUY July 2nd, 2008
5. Company financial ratios
Chart 38 - Financial Ratios
Audited Audited Forecast Forecast Forecast Forecast Forecast

2006 2007 2008 2009 2010 2011 2012
WA no. of share 159,000,000 172,521,196 176,360,615 184,039,454 184,039,454 184,039,454 184,039,454

Valuation Ratios
Market price 112,000 112,000 112,000 112,000 112,000 112,000 112,000
EPS 4,150 5,585 6,836 5,869 6,549 7,025 8,021
P/E ratio 27.0 20.1 16.4 19.1 17.1 15.9 14.0
BVPS 17,223 24,624 29,377 30,089 31,231 32,674 34,747
P/B 6.5 4.5 3.8 3.7 3.6 3.4 3.2
Sales per share 39,281 38,536 46,764 51,890 59,493 68,394 78,184

Price to Sales 2.8 2.8 2.3 2.1 1.8 1.6 1.4

Dividends
DPS 1,900 2,900 2,900 3,000 3,000 3,000 3,000
Dividends (VNDm) 302,100 508,299 533,714 552,118 552,118 552,118 552,118
Yield 1.74% 2.66% 2.66% 2.75% 2.75% 2.75% 2.75%
Dividend Growth 11.8% 52.6% 0.0% 3.4% 0.0% 0.0% 0.0%
Payout Ratio 46% 53% 44% 51% 46% 43% 37%
Retention ratio 54% 47% 56% 49% 54% 57% 63%

Growth Rates (%)
Sales growth 10.8% 6.4% 24.1% 15.8% 14.7% 15.0% 14.3%
Pre-tax profit growth 10.0% 44.1% 46.7% 7.0% 11.6% 7.3% 14.2%
NPAT growth 9.0% 46.0% 25.1% -10.4% 11.6% 7.3% 14.2%
EPS growth NA 34.6% 22.4% -14.1% 11.6% 7.3% 14.2%

Internal Liquidity Ratios
Current Ratio 2.6 3.4 2.6 2.8 2.7 2.5 2.5
Quick Ratio 1.4 1.6 1.4 1.3 1.2 1.0 1.3
Cash Ratio 0.3 0.6 0.8 0.8 0.6 0.5 0.3
Receivable Turnover 10.3 11.4 11.2 10.9 10.8 10.8 10.8
Inventory Turnover 4.6 3.7 3.2 3.2 3.2 3.2 3.7
Payables Turnover 13.4 9.1 10.4 12.6 12.5 12.5 12.5
Current Asset Turnover 2.8 2.6 2.2 2.3 2.5 2.6 2.7
Cash Conversion Cycle (days) 88.1 91.2 110.1 117.6 118.6 118.4 104.3

Profitability Ratios (%)
Gross Profit Margin 26.5% 27.3% 28.5% 27.8% 28.0% 28.0% 28.0%
EBIT Margin 9.8% 12.4% 15.3% 14.1% 13.9% 12.9% 12.8%
Operating Profit Margin 9.9% 13.0% 15.7% 14.4% 14.0% 12.9% 12.9%
Pre-tax Margin 10.6% 14.4% 17.0% 15.7% 15.3% 14.3% 14.2%
Net Profit Margin 10.6% 14.5% 14.6% 11.3% 11.0% 10.3% 10.3%
Effective Tax Rate 0.4% 0.0% 14.0% 28.0% 28.0% 28.0% 28.0%
Return on Assets (ROA) 17.6% 21.3% 19.3% 15.3% 16.5% 16.7% 17.7%
Return on Assets - 2 Yr. Avg. 18.2% 19.5% 20.3% 17.3% 15.9% 16.6% 17.2%
Return on Equity (ROE) 26.5% 27.3% 24.8% 19.7% 21.4% 22.0% 23.8%
Return on Equity - 2 Yr. Avg. 28.0% 26.9% 26.1% 22.3% 20.5% 21.7% 22.9%

Operating Efficiency
Total Asset Turnover 1.7 1.5 1.3 1.4 1.5 1.6 1.7
Fixed Asset Turnover 6.8 4.9 4.6 5.0 5.6 6.2 7.0
Equity Turnover 2.6 1.9 1.7 1.8 2.0 2.2 2.4

Financial Risks
Debt to Equity Ratio 3.0% 2.6% 0.3% 0.2% 0.0% 0.0% 0.0%
Long-term Debt/Total Capital Ratio 3.8% 3.1% 0.4% 0.2% 0.0% 0.0% 0.0%
Total Debt Ratio 23.9% 19.8% 23.4% 21.8% 23.3% 25.0% 26.4%
Source: Vinamilk
Company Report
BUY July 2nd, 2008
6. Import tariffs for dairy products
Tax rate (%)

Description From 15
September 2006 to From 8 August
7 August 2007 2007
Milk and cream, not concentrated nor containing added sugar or other sweetening matter
- Of a fat content, by weight, not exceeding 1% 20 10
- Of a fat content, by weight, exceeding 1% but not exceeding 6% 20 10
- Of a fat content, by weight, exceeding 6% 20 10
Milk and cream, concentrated or containing added sugar or other sweetening matter

- In powder, granules or other solid forms, Of a fat content, by weight, not exceeding 1.5%:
- - Fit for human consumption:
- - - not containing added sugar or other sweetening matter, In powder form 10 5
- - - not containing added sugar or other sweetening matter, In other form 15 7
- - - Other, In powder form 30 15
- - - Other, In other form 30 15
- - Other:
- - - not containing added sugar or other sweetening matter, In powder form 10 5
- - - not containing added sugar or other sweetening matter, In other form 15 7
- - - Other, In powder form 30 15
- - - Other, In other form 30 15
- In powder, granules or other solid forms, Of a fat content, by weight, exceeding 1.5%:
- - Not containing added sugar or other sweetening matter,

--- In powder form
15 7
--- In other form
15 7
--Other
--- In powder form

30 15
--- In other form
30 15
- Other
- - Not containing added sugar or other sweetening matter, 15 7

--Other
30 15
Buttermilk, curdled milk and cream, yogurt, kephir and other fermented or acidified milk and
cream, whether or not concentrated or containing added sugar or other sweetening matter or
flavoured or containing added fruit, nuts
- Yoghurt
- - Containing fruit, nuts, cocoa or flavouring matter; liquid yogurt
- - - In liquid form, including condensed 30 15
- - - Other 30 15
- - Other:
--- In condensed form
30 15
---Other
30 15
- Other
--Buttermilk
30 15
--Other
30 15
Source: Ministry of Finance
Company Report
BUY July 2nd, 2008
Global Disclaimer
Copyright 2008 Ho Chi Minh Securities Corporation (HSC). All rights reserved. This report has been prepared
and issued by HSC or one of its affiliates for distribution in Vietnam and overseas. The information herein is be-
lieved by HSC to be reliable and is based on public sources believed to be reliable. With the exception of infor-
mation about HSC, HSC makes no representation about the accuracy of such information. Opinions, estimates
and projection expressed in this report represent the current views of the author at the date of publication only.
They do not necessarily reflect the opinions of HSC and are subject to change without notice. HSC has no obli-
gation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any
of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. The
information herein was obtained from various sources and we do not guarantee its accuracy or completeness.
Prices and availability of financial instruments are also subject to change without notice. This published research

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agement. HSC may trade for its own account as a result of short term trading suggestions from analysts and may
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Fiachra Mac Cana

[email protected]
Cell: 84 (0) 909 505 764
Tran Huong My
[email protected]
Cell: 84 (0) 913 960 879
Ho Chi Minh Securities Corporation

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Company Report

BUY July 2nd, 2008

Chart 1A - Price Chart Chart 1 - Earnings model

BVPS (VND) 14,132 NA 1

P/E 29.4 NA 27.0 NA 20.1 -25.7% 16.4 -18.3%

Chart 1C - Key Numbers

- Quick ratio 0.9 1.4 1.6

- ROE 29.5% 26.5% 27.3%

- Inventory turnover 4.7 4.6 3.7

Executive Summary (1) Volume growth due to an increasing market share in

Company Stock Exchange Market P/E P/E EPS EPS EPS

Chart 4 - Industry growth forecast by product

Whole industry 18.1% 16.9% 16.6% 16.4% 16.3% 16.9%

Chart 5 - Vinamilk’s sales growth forecast by product

2008F 2009F 2010F 2011F 2012F 2008F-2012F

Source: HSC Source: HSC

milk” which clearly differentiates itself from Dutch Lady network.

Chart 10 - Vinamilk’s sales forecast by product

Domestic sales 7,029,230 8,209,899 9,475,204 10,965,966 12,605,545

Total sales 8,247,326 9,549,805 10,949,100 12,587,252 14,388,959

8,000 40% 1,000 40%

rates from 7% in 2008 to 3.1% in 2012.

Chart 13 - FY2006 & FY2007 earnings breakdown

Domestic sales 4,965,816,000,000 5,971,473,000,000

Export sales 1,279,803,000,000 676,720,000,000

Source: Vinamilk, HSC

Chart 14 - Income Statement

Items Audited Audited Forecast Forecast Forecast Forecast Forecast

Net sales 6,245,619 6,648,193 8,247,326 9,549,805 10,949,100 12,587,252 14,388,959

Cost of sales (4,678,114) (4,835,772) (5,896,838) (6,894,959) (7,883,352) (9,062,821) (10,360,050)

Gross profit 1,567,505 1,812,421 2,350,488 2,654,846 3,065,748 3,524,430 4,028,908

Financial income 74,253 257,865 172,026 32,100 18,600 17,600 17,600

Financial expense (49,227) (25,862) (148,803) (61,404) (10,557) (11,417) (12,949)

In which, interest expenses - (11,667) (32,148) (31,404) (10,557) (11,417) (12,949)

Market price (859,396) (974,805) (907,206) (1,050,479) (1,313,892) (1,636,343) (1,870,565)

Operating profit 620,247 865,427 1,293,163 1,374,346 1,529,772 1,629,713 1,860,569

Other income 107,242 - - - - - -

Other expense (1,210) - - - - - -

Other income 51,397 120,492 108,672 125,834 144,273 165,858 189,598

Business income tax (2,884) - (196,257) (375,045) (418,511) (448,893) (512,542)

Net income 659,890 963,448 1,205,578 1,125,135 1,255,533 1,346,678 1,537,626

Comparables • Bright Dairy & Food Co., Ltd is principally engaged in

Chart 15 - Industry sales growth by product 2004-2007

Condensed milk 22.2% 8.2% 19.7% 16.6%

Whole industry 43.1% 24.9% 27.0% 31.4%

has changed radically and the number of products has

suppliers of milk powder worldwide, suppliers have the

But the situation is very different in the milk powder • Nutifood

Chart 19 - 2006 sales breakdown Chart 20 - 2007 sales breakdown

Nestle Vietnam is a 100% foreign owned enterprise en-

Chart 21 - Vinamilk’s sales by product

(VND million) FY2006 y/y growth FY2007 y/y growth

Domestic sales 4,965,816 16.8% 5,971,473 20.3%

Source: HSC & Vinamilk Source: HSC & Vinamilk

Source: HSC & Vinamilk Source: HSC & Vinamilk

Growth drivers • Indirect channel (traditional trade): Vinamilk has built

By implementing a product diversification strategy,

Chart 26 - Vinamilk distribution system