VIETNAM I EQUITY RESEARCH Initiation of Coverage

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

BUY CURRENT PRICE TARGET PRICE LAST T.PRICE STOCK STATISTICS
Bloomberg Ticker Outstanding shares (m) Market Cap (VNDbn) 52W Price range 3M Average Volume Beta Foreign ownership (%) Source: Bloomberg VNM VN Equity 555.8 50,855 96-61.3 86,666 0.83 49%

VINAMILK
VINAMILK has been around for 30 years and is now leading the dairy industry in Vietnam with more than 40% market shares and a production capacity far beyond that of other competitors. VNMs processing plants and almost 178,000 retailers are scattered throughout the country at convenient locations, which helps distributing perishable milk products to end-consumers in a timely fashion. Almost half of domestic raw milk supply goes to VNMs factories, giving the Company immense power over product pricing. VNM offers a diverse product selection along with affordable prices, which explains its total domination on some segments such as condensed milk (~85% market shares) and yogurt (~90% market shares). Last but not least, the Company is highly valued for its experienced management team, especially madam Mai Kieu Lien. 2011 was an important breakthrough for VNM, as the Company brought home its long-awaited 1 billion dollar revenue. The 2006-2011 periods were considered the golden era for VNM: revenue was expanding at 28.2% CAGR while gross profit was growing quickly at 33.3% CAGR; yet, the most impressive development was the 44.9% CAGR of net profit. The Company finances its capital structure mostly by equity, thus liquidity has never been an issue for VNM. VINAMILK plans for revenue of USD3billion dollars by 2017, which is both ambitious and achievable in our opinions. Rapid urbanization in Vietnam and its improving living condition will be the impetus for dairy demands. VNM will invest VND10,000bn to ramp up its capacity from 677,150 (2010) to 1.6 million tonnes (2016) among other things. Within our forecasting periods (2011-2016), we expect revenue to grow by 26% CAGR (compared to 28.2% of the 2006-11 periods). However, PAT will only grow by 17.6% CAGR (vs. 44.9% of the last period). SBS recommends BUY with 12M target price of VND110,000/share. At the current price of VND91,000/share, out 12M target price suggests a nice return of at least 20.9%. We raised our target price due to higher profit projection. Company Financial Summary (VNDbn) 2009 Revenue 10,614 Net profit 2,376 % change YoY 90.0% EPS (VND) 6,764 BV (VND) 18,380 DPS (VND) 3,000 Div. yield 4.3% ROA 28.0% ROE 35.8% P/E (x) 10.30 P/BV (x) 3.79
Source: VNM, (*) SBS estimates

91,000 110,000 93,100

MAJOR SHAREHOLDERS
SCIC F&N Dairy Investments Ltd Dragon Capital 45.04% 9.53% 7.38%

SHARE PERFORMANCE (%)

Month 1M 3M 6M 12M
VOLUME 110 100 90 80 70 60 50 40 30 20 10

Absolute (VNDm)

Relative (%)

(0.5) 10.5 5.7 29.6

CLOSE

-1% 13% 7% 48%

2010 15,753 3,616 52.2% 10,297 22,678 4,000 4.7% 33.6% 44.0% 8.24 3.74

2011 21,627 4,218 16.6% 7,587 22,441 4,000 4.6% 27.1% 32.9% 11.40 3.85

year-end December *2012F *2013F 28,222 36,529 5,068 6,146 20.1% 21.3% 9,119 11,058 28,641 34,590 3,000 n/a 3.3% n/a 26.3% 26.2% 31.1% 31.2% 10.03 8.27 3.19 2.65

Le Trung Hieu hieu.lt@sbsc.com.vn Luong Thi Thao, CFA thao.lt@sbsc.com.vn

1| See Disclaimers at the end of the report

2 | See Disclaimers at the end of the report

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

INVESTMENT THESIS
Potential of the dairy industry in Vietnam Roughly 54% (2010) of Vietnams population is under 30 year-old, and this demographic group is more inclined to consume dairy products. Rapid urbanization (~3%) in Vietnam and its improving living standard (GDP per capita grew by 13.5% CAGR during the 2006-2011 periods) will also be the impetus for dairy demands. According to the master plan for the dairy industry in Vietnam, the total milk production will be 1.9 billion liters by 2015, which will also bring the average annual milk consumption from the current 15 liters to 21 liters per person.

Competitive Advantages

Being around for 30 years, VINAMILK really understands the Vietnamese sense of taste. VNM is the market leader with more than 40% dairy market shares and a production capacity far beyond that of other competitors. VNM has its processing plants and almost 178,000 retailers scattered throughout the country at convenient locations, which is a huge advantage considering milk is highly perishable product. VNM has access to 50% of total domestic raw milk supply, giving the Company immense control over ex-farm prices. VINAMILK stands among the most affordable brands on the shelves today while maintaining its domination on some product segments such as condensed milk (~85% market shares) and yogurt (~90% market share). The Company finances its capital structure mostly by equity, thus liquidity has never been an issue for VNM. The Company is highly valued for its experienced management, especially madam Mai Kieu Lien, for she is the inspiration and the visionary behind all of VNMs development. She is going to accompany VNM for at least another 5-year term. The management team does show exceptional transparency compared to most domestic companies, which is a big investment incentive.

Growth outlook

VINAMILK has laid out an ambitious plan for the 2012-2016 periods, in which the Company will achieve revenue of USD3billion by 2017. Production capacity will double to 1.6 million tonnes per year by 2016. These numbers may sound ambitious but also feasible. Within our forecasting periods (2011-2016), we have estimated revenue to grow by 26% CAGR and PAT to grow by 17.6% CAGR. Our projections for 2012 revenue and PAT stand at VND28,222bn and VND5,068bn respectively, which will then grow, also in that order, to VND68,793bn and VND9,476bn by 2016.

Privilege of a Blue-chip stock

Being one of the big cap companies, VNM has outperformed the VNIndex over the last 12 months with a rough 25% gain (versus approx. 6.5% for the VNIndex). The Company enjoys a fairly stable liquidity of 68,000 shares per day over the last 6-month period.

3 | See Disclaimers at the end of the report

VALUATION
Valuation Method We used the FCFF method as the centrepiece of our evaluation on VNM, with an overall weight of 70%. The other supplemental method was P/E comparison (30% weight). The FCFF method gave VNM a rough value of VND106.799/share. Our calculation was based on the following assumptions: an average risk-free rate (Rf) of 11%, a Beta of 0.83x (Bloomberg), a market premium of 10%, and an average cost of debt (Rd) of 8%. We have estimated the cost of equity (Re) to be 19.32%, and subsequently the WACC of VNM to be 16.98%. The perpetual growth rate is roughly 8%/year after 2016. SUMMARY OF THE FCFF METHOD (VND bn) FCFF WACC PV of individual cash flows PV of 5-year cash flows (2012 - 2016) Growth rate (g) PV of perpetual cash flows Present value of the Company - Net liabilities Present value of Equity Number of shares (by year end) Share price (VND) Sensitivity Analysis
P/E P/E 11 12 13 14 15
Source: SBS

2012 285.4 16.98% 244 13,189 8% 44,990 58,179 -1,195 59,374 555,940,315 106,799

2013 4,029.5 2,945

2014 4,368.5 2,729

2015 6,611.4 3,530

2016 8,196.2 3,741

Source: SBS

2012 102,010 111,127 120,243 129,359 138,475

2013 123,706 134,761 145,816 156,871 167,926

2014 145,617 158,630 171,644 184,657 197,670

2015 168,627 183,697 198,766 213,836 228,905

2016 190,750 207,797 224,843 241,889 258,936

WACC \ g 15.48% 15.98% 16.48% 16.98% 17.48% 17.98% 18.48%

GROWTH & WACC 7.0% 8.0% 117,558 130,623 110,307 121,673 103,832 113,791 98,017 106,799 92,767 100,555 88,005 94,947 83,667 89,884

9.0% 147,719 136,295 126,413 117,781 110,179 103,435 97,412

Relative Comparison

There is no suitable domestic company for the P/E comparison test, thus we have chosen 5 regional companies with similar business for such task. VINAMILK is relatively cheaper (P/E) than these regional companies given its profitability (ROE) and EPS growth. In the long run, VNM should be able to align with these companies. However, considering the outlook (12 months) of the Vietnam stock market (the VNIndex is trading at P/E of 11.2x as of April 13th 2012), we felt more comfortable with a conservative P/E of 13x. Thus, the relative comparison method values VNM at VND120,243/share. Location 1 2 3 4 5 UNI-PRESIDENT ENTERPRISES CO CHINA MENGNIU DAIRY CO INDOFOOD SUKSES MAKMUR TBK P NESTLE (MALAYSIA) BERHAD MEGMILK SNOW BRAND CO LTD Average VINAMILK Taiwan Hong Kong Indonesia Malaysia Japan Vietnam Market Cap. (USD m) 6,242.9 5,281.4 4,495.4 4,277.5 1,306.4 4,320.7 2,439.7 P/E current 19.5 20.8 13.6 28.8 11.3 18.8 11.8 ROE 13.2% 15.0% 17.0% 72.8% 9.3% 25.5% 41.3% EPS growth -0.7% 16.8% -27.1% 21.1% -22.7% 6.2% 13.1%

Source: Bloomberg, SBS

4 | See Disclaimers at the end of the report

BUY

Combining the two methods with the predefined weights, we came up with a fair value of VND110,000/share for the Company, which is about 18% higher than our last target price of VND93,100/share (11th Jan 2011) since we used only simple P/E comparison method to value VNM at that time. At the current price of VND91,000/share, our new 12M target price suggests a nice return of 20.9%. Therefore, we recommend BUY.

RISKS TO OUR VALUATION

Shortage of raw material The current immensity of dairy production requires VNM to outsource most of its materials (making up 60-70% of COGS), since domestic sources can only supply up to 25%. Such dependence on foreign powdered milk may expose VNM to excessive forex risks (the Company has not yet recorded any forex loss so far) along with the inability to effectively attune its selling price. We could definitely see the huge jump in prices of importing milk in 2010, and VINAMILK could certainly not raise its selling price by the same extent. OCEANIA REGION: (AVERAGE) FOB SPOT PRICE OF POWDERED MILK 2007 2008 2009 2010 2011 Whole powdered milk 4,167 3,913 2,436 3,460 3,878 % growth 90.6% -6.1% -37.8% 42.1% 12.1% Skim powdered milk 4,316 3,330 2,280 3,123 3,660 % growth 95.3% -22.9% -31.5% 37.0% 17.2%
Source: Bloomberg

4M/2012 3,557 -8.3% 3,323 -9.2%

CAGR 2007-11 -3.1% -5.1%

Growing competitions

The competition with high-end foreign brand names such as Abbott, Mead Johnson, Dutch Lady, etc. will only get worse. At the same time, more domestic companies are also putting their names to the challenge. One of the prominent cases was TH True Milk, a domestic company who has already invested USD350m in almost 45,000 dairy cows. A few years back, the melamine scandal has left an unhealable scar on the dairy industry. As consumers get more conscious about their dairy choices, product quality and brand image are apparently becoming more important. High-end consumers in Vietnam tend to favour foreign brand names over domestic ones, and that is a challenge VNM will need to face in order to win over those market shares.

Regulations

Given the influence of VINAMILK on the dairy market, the Government may put a constraint on its ability to raise selling price, considering its impacts on the scorching inflation. However, we have seen signs of decelerating inflation recently, thus this concern may be put to rest after all.

Management Transition

The prodigious influence of madam Mai Kieu Lien also casts a shadow over the Company as she approaches her retiring age (she is now 59). Her withdrawal from the front may cause serious impact to the Company. However, the next 5 years are still in clear view with madam Lien engineering the whole capacity & market expansion. Nevertheless, the subsequent pressure of finding a capable successor is truly overwhelming.

5 | See Disclaimers at the end of the report

THE CORE BUSINESS

THE VIETNAM DAIRY INDUSTRY Overview The dairy industry in Vietnam has been suffering from shortages of fresh material, and more than 75% of raw ingredients are imported. Also, a substantial amount of produced fresh milk is not delivered to big processers, but is rather consumed in local markets. Currently, Vietnam can produce roughly 350,000 tonnes of fresh milk, satisfying only 20% of its internal demand. The country hopes to self-produce 660,000 tonnes of fresh milk by 2015, serving around 35% of total demand. VIETNAM: DAIRY STATISTICS Numbers of dairy cow Produced Fresh Milk (tonnes)
Source: The Ministry of Industry and Trade

2006 113,215 215,953

2007 98,659 234,438

2008 107,983 262,160

2009 115,518 278,190

2010 128,572 306,662

2011E 145,455 345,608

CAGR 5.1% 9.9%

Poor infrastructure and obsolete technology are also hindrances on the fragmented local farming, thus the current husbandry is still expensively inefficient, and hence the yields and quality of these perishable raw materials tends to be inferior to those of other countries. Being the market leader, VINAMILK gains access to almost 50% of the local raw supply, and thus can really benefit for controlling the ex-farm prices. Apparently, milk processors such as VNM and TH Milk are making huge investments in dairy farming. VIETNAM: MASTER PLAN FOR DAIRY INDUSTRY Fresh milk production: Total (million liters) Fresh milk production: Domestic (million liters) Fresh milk production: Self-sufficiency (%)
Source: The Ministry of Industry and Trade (June, 2010)

2010 1,300 307 24%

2015F 1,900 660 35%

2020F 2,600 1,000 38%

2025F 3,400 1,400 41%

CAGR 10-15 7.9% 16.6%

Consumption Behaviors

Milk was once sold exclusively for the children; however, things have changed as the general public is more informed about the benefits of dairy consumption. The young adult consumers are catching more attention of milk producers, and thus more products will be pushed toward this direction. The traditional consumers of milk products usually live in big cities, earn higher incomes, and have more education about the benefits of milk than those living in the countryside. However, it seems today that more advertisements and distribution efforts are being made toward the rural areas of the country, in order to raise the awareness of dairy products as well as potential demands. VIETNAM: POPULATION BY GEOGRAPHY (thousand people) 2006 Urban area 23,046 Rural area 60,267 Total 83,313 Rural area/total 72.3%
Source: General Office for population family planning *these are preliminary statistics for 2010

2007 23,747 60,474 84,221 71.8%

2008 24,674 60,449 85,122 71.0%

2009 25,466 60,559 86,025 70.4%

*2010 26,224 60,703 86,928 69.8%

CAGR 3.3% 0.2% 1.1%

6 | See Disclaimers at the end of the report

Growth Potential

Dairy consumption in Vietnam increased significantly during the 2000-2009 periods, from 8.1 liters to 15.2 liters per person every year, signifying an average growth of 7.2% CAGR. However, fresh milk consumption in Vietnam is still much lower than that in regional countries. An average Vietnamese person consumes 15 liters of milk per year, while the figures are 23 liters in Thailand and 25 liters in China. VIETNAM: MASTER PLAN FOR DAIRY INDSUTRY (cont.) (liters/person) 2000 2010 2015 Dairy consumption 8 15 21
Source: The Ministry of Industry and Trade (June, 2010)

2020 27

2025 34

CAGR 10-15 6.7%

CAGR 15-20 5.2%

Vietnam is the 13th populated country in the world with an average growth rate of 1.1% CAGR (2006-2010 periods). Vietnam is also a very young country with roughly 54.1% (2010) of total population under 30 years old (source: General Office for population family planning), and their maturations will be the fueling force behind dairy consumption. This demographic group is generally more receptive to Western cultures, and hence they are more inclined to consume dairy products. Rapid urbanization (more than 3%), along with improving living standard and growing health awareness will also be the impetus for dairy demands. VIETNAM: INCOME PER CAPITA GDP per capita (USD) GDP per capita, PPP (USD) 2006 724.0 2,364.1 2007 835.1 2,607.5 2008 1,047.9 2,799.9 2009 1,068.3 2,944.7 2010 1,173.5 3,143.0 2011 1,361.6 3,354.8 CAGR 13.5% 7.3%

Source: International Monetary Fund, estimate after 2007

VINAMILK AND ITS DAIRY BUSINESS VNM preserves most of its potency on the dairy frontier, while giving some attentions to other segments such as fruit juice, beer, etc. VNM relies mostly on domestic consumptions (generating more than 85% of revenue), while earning extras from international markets including the USA, Australia, Canada, Russia, the Middle East, Cambodia, Laos, and Philippines. Specifically, in 2011, the Company made over USD140m (+67.4% yoy) on exports alone, contributing to 12.8% of total revenue. The Company will continue enlarging its exportation this year while exploiting domestic resources.

Market Position

VINAMILK currently stands among the 68 largest dairy companies in the world. The Company dominates the dairy industry in Vietnam with more than 40% market shares based on sale volume, in which some subsegments have almost absolute domination such as condensed milk (~85% market shares) and yogurt (~90% market share).

Distribution & Marketing strategy

The Company truly benefits from its nationally dispersed distribution system, since domestic sales make up the majority of revenue. Despite its constant expansion of traditional distribution channels, the Company still focuses on modern distribution channels for their enlarging contributions to the total value of FMCG (roughly 13%). According to VNM, the contribution of rural areas to the total value of FMCG was 46% at the end of 2010; thus potential demand from the rural areas is still prominent. VINAMILK: DISTRIBUTION SYSTEM Numbers of distributor Numbers of retailer
Source: VNM

2008 125,000

2009 135,000

2010 140,000

2011 232 178,000

CAGR 08-11 12.5%

7 | See Disclaimers at the end of the report

Business advantages

The privileges of size and experience: VNM has been watching over the Vietnamese dairy market for almost 30 years and has thus understood what makes people tick. The Company is able to capture a wide market range with its abundant number of products. The mere size of VNM (in terms of assets and capacity) is the foremost factor that differentiates itself from other competitors. Control over domestic supplies of raw material: More than half of the domestic supply of raw milk (~370 tonnes/day) is processed in VNMs factories. Such immense influence still gives the Company more power over pricing compared to other competitors in Vietnam. Out of all milk products on the shelves today, VINAMILK stood among the most affordable ones. Good management: The CEO, madam Mai Kieu Lien, has been doing a great job building up the Company, and shareholders trust her visions completely. She was nominated as one of the 50 most powerful businesswomen in Asia by Forbes. The good news is, at the 2012 AGM, she was re-elected to be the CEO for another 5-year term, putting an end to the anxiety that she may retire soon.

VINAMILK: PRODUCTION CAPACITY Overview The Company has greatly improved its production capacity since the acquisitions of Lam Son Milk JSC and F&N Vietnam Ltd. By year-end 2010, VNM has 9 operational milk facilities, with a total production of 677,150 tonnes/year. On average, VNM utilizes 70%-100% of its plants, which is usually dependent on climate changes. SUMMARY OF NEW FACTORIES Dairy Location Investment Factory by 2016 Da Nang Da Nang VND421bn Vietnam Dielac 2
Source: VNM

Developments

Operation Date 2Q/2012 1M/2013 2017 (2nd phase) 4M/2013

Capacity 70mn liter/year (fresh milk) 24mn liter/year (yogurt) 400mn liter/year (liquid milk) - 1st phase 800mn liter/year total - 2nd phase 54,000 tonnes/year (powdered milk)

Ben Cat, Binh Duong Thuan An, Binh Duong

VND2,349bn VND1,906bn

VNM is waiting for a few investments to bear fruit: (i) The Da Nang factory will be ready by Q2/2012, (ii) the Vietnam fairy factory in Binh Duong and the Dielac 2 factory should be operational by 2013. The Company has projected that, by 2016, its current capacity of liquid milk will be double, while that of yogurt and powdered milk will increase by 30% and 125% respectively. The total annual capacity will then be 1.6 million tonnes.

Material supply

VNM expects to multiply its herd to 30,000 dairy cows by 2020 and will thereby self-supply 100,000 tonnes of fresh milk per year. As of 31st December 2010, the Company had 5 farms in Tuyen Quang, Nghe An, Binh Dinh, Lam Dong, and Lam Son, with a total of 5,667 cows. The number of pregnant cows and calves imported during 2010 was 2,240 (mostly from Australia and New Zealand). By the end of 2011, the total number of dairy cow has risen to 6,721 (+18% yoy), supplying roughly 12.5 million liters of fresh milk (+52% yoy). In 2011, VINAMILK purchased a total of 144 thousand tonnes of fresh milk (+11% yoy) from domestic sources. The Company has expanded its raw material source to New Zealand via the NZD12.5m investment in Miraka (equivalent to 19.3% equity), whose factories can process 210 million liters of fresh milk and produce up to 32,000 tonnes of powdered milk per year. These factories have been operating since August 2011 with 80% plant capacity. VNM already signed its first import contract with Miraka for 4,000 tonnes of powdered milk.

8 | See Disclaimers at the end of the report

VINAMILK: DOMESTIC SUPPLY OF RAW MILK (tonnes) Total domestic supply Total domestic supply to VINAMILK
% over total domestic supply VINAMILKS own supply (million liters)
Source: VNM, Dairy Vietnam, SBS estimate

2007 234,438 104,526

44.6%

2008 262,160 119,369

45.5%

2009 278,190 124,900

44.9%

2010 306,662 133,322

41.3%

2011 143,987
-

8.3

12.5

VINAMILK: PRODUCTS STRUCTURE Overview Normally, more than 80% of revenue belongs to liquid, powdered, and condensed milk segments. Most consumers will recognize Vinamilk, Dielac, and Ridielac as the three dominant brand names of VNM within the liquid and powdered milk segments. The Company captures most of the condensed milk segment with its long-established Longevity (Ong Tho) and the fairly younger Northern Star (Ngoi Sao Phuong Nam). Meanwhile, Vfresh is a popular brand name for soymilk and various fruit juices. (VND bn) Drinking milk Liquid Milk Powdered Milk Other Milk Products Condensed Milk Yogurt Others (ice-cream, cheese, fruit juice) Total revenue
Source: VNM

VINAMILK: BREAKDOWN OF REVENUE

100%
90% 80% 70% 60% 50% 40% 30% 20% 10% 26.6% 24.2% 29.0% 26.3% 27.7% Condensed Milk Powdered Milk 35.7% 29.0% 25.3% 21.9% 2.9% 10.7% 3.0% 12.0% 3.4% 14.1% 3.1% 15.2% Others

Yogurt

27.0%

30.9%

32.2%

Liquid Milk

0%
2007 2008 2009 2010

2006 3,660 1,469 2,191 2,586 1,690 634 262 6,246

2007 3,320 1,736 1,584 3,218 2,332 698 188 6,538

2008 4,597 2,216 2,381 3,612 2,381 985 246 8,209

2009 6,068 3,276 2,792 4,545 2,690 1,494 361 10,614

2010 9,434 5,078 4,356 6,319 3,443 2,391 485 15,753

CAGR 26.7% 36.4% 18.7% 25.0% 19.5% 39.4% 16.6% 26.0%

According to EMI (2011), the total sale value of drinking milk products in Vietnam reached VND10,700.2bn in 2010, in which VNM held almost 41% market shares; following closely behind is FrieslandCampina Vietnam Co Ltd and its widely known Dutch Lady with roughly 23.5% market shares. In terms of brand name market shares, Vinamilk still stands firm at the highest position with 25.5% market shares, and right below is Dutch Lady with 18.5% shares. Also according to EMI, total sales of drinking milk in Vietnam grew by 15.8% CAGR during the 2006-2010 periods, while VINAMILK was treading at 26.7% CAGR (accounting only for drinking milk). VIETNAM DRINKING MILK PRODUCTS: COMPANY MARKET SHARES % retail value 2006 2007 Vietnam Dairy Products JSC (Vinamilk) 27.3 30.1 FrieslandCampina Vietnam Co Ltd Nestl Vietnam Ltd 7.1 7.3 Hanoi Milk JSC 2.6 2.7 Mead Johnson Nutrition (Vietnam) Co Ltd 2.9 3.1 Others 60.1 56.8 Total 100 100
Source: Euromonitor International, 2011

2008 33.5 7.4 3.2 3.2 52.7 100

2009 38.7 25.2 7.2 3.4 3.2 22.3 100

2010 40.9 23.5 7.4 3.5 3.2 21.5 100

9 | See Disclaimers at the end of the report

Liquid milk

There are 3 main products: (i) the fresh/pasteurized milk, (ii) UHT milk, and (iii) drinking yogurt. In 2010, this group generated VND5,077.6bn in sales (+55% yoy), making up almost 1/3 of total revenue. In just 8 years, contribution of this group on total revenue has increased remarkably from 18.9% (2003) to 32.2% (2010). For 2011, we have estimated revenue of VND7,616.4bn (+50% yoy), equivalent to 35.2% of total revenue. VINAMILK has been placing liquid milk at the center of its development, which is depicted by the strong 39.0% CAGR we have estimated for the 2006-2011 periods. Ever since the VNMs entry to the pasteurized milk market in July 2010, this segment is no longer considered the domain of only small players. The pasteurized milk may not last as long as the traditional UHT milk, yet its nutritional elements are better preserved and its delicious buttery taste is more appealing. The rising consumer awareness of pasteurized milk will help pushing sale for this group. Competitions are particularly harsh within this segment. VINAMILK has to face Dutch Lady, its lifelong rival, along with other well-known domestic brands, namely TH True Milk, Hanoimilk, Long Thanh, Moc Chau, and a few other imported brands. However, VNM does have certain advantages, including (1) a well-established brand name, (2) secure controls over domestic supplies of raw milk (roughly 50%), (3) widely dispersed distribution channels which help bringing products to the end consumer in a timely fashion, (4) a system of modern processing plants throughout Vietnam which help minimizing transportation cost. The Company is holding at least 45% market shares. REVENUE OF MAJOR MILK PRODUCT
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Liquid Milk 2006
Source: VNM The 2011 figures were based on SBSs preliminary estimates. Others are actual numbers disclosed by VNM.

VND bn

CAGR 2006 - 2011 Liquid Milk Powdered Milk Condensed Milk

39.0% 21.3% 20.6%

Powdered Milk 2007 2008 2009 2010

Condensed Milk 2011E

Powdered milk and nutrient powder

The basic consumers of this segment are mostly infants, children, expectant & breast-feeding mothers, and the elderly. Powdered milk was used to be the biggest cash cow for VNM, generating as much as 40.6% of revenue (2003); however the current situation has pulled this segment down to the second place with a rough contribution of 27.7% (2010). By year end 2010, this group has generated VND4,356bn (+56% yoy) in revenue, which may have possibly rolled over to VND5,750bn by year-end 2011 (+32% yoy) according to our estimate. Competitions among domestic and foreign brand names have been going on for years, and the result has not turned out well for the home players. The majority of powdered milk segment belong to foreign companies such as FrieslandCampina, Mead Johnson, Abbott, etc. Nevertheless, Vinamilk still dominates the lower-end segment with its Dielac and Ridielac products, whose prices are significantly lower than that of the foreign brands. VNM is holding a rough market share of 20%.

10 | See Disclaimers at the end of the report

Condensed milk

This segment ranks third in terms of revenue generation with a contribution of roughly 21.9% in 2010, equivalent to VND3,443bn (+28% yoy). Condensed milk was the first product VINAMILK ever produced and has always been the most dedicated revenue generator. However, the significance of this segment has been lessened over the years as the powdered & liquid milk radiate their proliferation. In 2011, we estimated that this group made VND4,304bn in sales, equivalent to 25% of total revenue. VINAMILK controls 85% of the condensed milk industry, and no other companies can stand facing such intimidation perhaps except for Dutch Lady - the other giant of the condensed milk duopoly. Condensed milk is usually served as the base ingredient in various foods and beverages such as coffee, ice cream, fruit shakes, cake, etc., and thus consumptions should be steady for years to come. However, domestic growth potential is not as high in this segment as it may be in others, which is why the contribution of condensed milk on revenue will deteriorate over time. Nevertheless, condensed milk has been well received by the international markets, and this segment may derive more growth thusly.

Yogurt

VINAMILK is well known for its spoon yogurt, which comes in various tasty flavours and reasonable prices. The segment made up approximately 15.2% of total revenue in 2010, or an absolute VND2,391bn (+60% yoy). We have estimated revenue of VND4,289bn for 2011 (+38% yoy). The contribution of yogurt on total revenue has certainly become much more significant over the years, from just 7.6% in 2003 to around 15.3% in 2011. In the past, yogurt was either homemade or manufactured in small factories, and VNM was the first large company to change that perception. Since then, VNM has been the leader of this segment, and it is easy to notice its influence on the shelves today. VNM pretty much enjoys uncontested domination with market shares of almost 90%. Yet, the battles are still unsettled between the Company and other competitors such as International Dairy JSC (Bavi milk), KIDO, and other imported products. The benefit of yogurt, such as good bacteria probiotics, animal protein, and other common nutrients found in dairy food, has become general knowledge among other health & beauty concepts. Hence, health-conscious people, especially women, have made yogurt consumption their daily routine, and the numbers are growing.

Other Products

The major products of this segment include soy milk, 100% natural fruit juice, and fruit juice blended with milk. However, it has not always been that way. In the past, the Company also had its coffee Moment and its 50% shares in SABMiller beer. Recently, VNM has transferred its entire shares in SABMiller to SABMiller Asia (2009) and its whole coffee production to Trung Nguyen (2010). Thus, the Company is now focusing exclusively on cold beverage with its Vfresh products. In 2010, these products brought back VND485bn (+34.3% yoy), making up only 3.1% of total revenue which was fairly small compared to other segments. We have estimated the 2011 revenue to be around VND657bn (+35.6%), equivalent to 3.0% of total sales.

11 | See Disclaimers at the end of the report

VINAMILK: INVESTMENT ACTIVITIES & FINANCIAL POSITION Having on hand a large amount of cash has induced VNM to engage in many financial investments, mostly in the form of bank deposits, investments in affiliated companies, and securities trading. INVESTMENT ACTIVITIES (VND m) Investment portfolio: Overall Short term Investments Bond Non-listed stocks Listed stocks Provision for losses Bank Deposits (<1 year) Loans to affiliated companies Long term Investments Bond Listed stocks INVESTMENT ACTIVITIES (cont.) Non-listed stocks Investment fund Provision for losses Bank Deposits (over 1 year) Other
Source: VNM, SBS

2007 1,055,503 654,485 15,410

2008 944,659 374,002 2,405 147,158 33,071 (122,996) 106,396 207,968 570,657 3,240 277,933 36,632 106,350

2009 2,916,732 2,314,254 3,240 82,284 87,537 (86,507) 2,227,700 602,479 200,000 223,520 20,062 106,350 (96,405) 122,800

2010 3,234,058 2,092,260 100,000 82,284 24,994 (70,658) 1,955,640 1,141,798 600,000 206,996 106,350 (108,580) 122,800

2011 1,582,747 736,033 250,000 82,284 24,994 (79,244) 440,000 18,000 846,714 350,000 206,996 106,350 (142,351) 120,300

(175) 5,400 197,397 401,018 5,645

50,000 269,241

122,800

The contribution of financial activities has been really beneficial to VNM ever since 2007, except for 2008 when the stock market plummeted and the Company had to set aside massive provision for losses of almost VND123bn (which resulted in a financial loss of VND6.8bn in 2008). OVERALL FINANCIAL POSITIONS
3,500 3,000 2,500 2,000 1,500 2008 2009 2010 2011

1,000
500 (500) Cash & Cash Equivalent
Source: VNM

Bank Deposits Bond investment Stock investment

Provision for losses

Others

12 | See Disclaimers at the end of the report

VNM has been reducing the size of its short term stock portfolio from VND180.2bn (in 2008) to VND107.3bn by 2011. As a safer investment instrument, bonds started to have more weights on the portfolio. The year of 2011 was considered the bottom of the stock market crash, and thus we can expect lesser provisions for losses in later years. Supposedly, the Company will focus exclusively on their dairy business. FINANCIAL INCOMES
400 2007 350 300 250 200 150 2008 2009 2010 2011

100
50 Interest incomes
Source: VNM

Stock porfolio

Forex gain

Others

In 2011, the Company took advantage of its sizable cash and the high interest rates to pocket a hefty amount of VND369bn, making up 85.1% of total financial income (VND434bn). Despite the fact that VINAMILK might get into huge forex losses for importing raw material and machinery every year, its earnings from exportation (USD140m in 2011) would be more than enough to offset those losses. Thus, the appreciation of USD against the VND will be favourable to the Company. FINANCIAL EXPENSES
180 160 140 120 100 80 60 40 20 (20) Interest expenses
Source: VNM

2007

2008

2009

2010

2011

Stock trading losses/provision

Forex loss

Others

13 | See Disclaimers at the end of the report

FINANCIAL ANALYSIS
VINAMILK: HISTORICAL PERFORMANCE Assessments on the top line and gross profits The golden era of development: During the 2006-2011 periods, revenue was moving forward at 28.2% CAGR while gross profit was growing quickly at 33.3% CAGR, yet the most impressive development was the 44.9% CAGR of net profit. The Company was able to manage its gross profit margin (GPM) well enough to peak at 36.5% by 2009 (from 25.1% in 2006). VINAMILK participated in a price stabilizing program as inflation took over the scarce income, thus the Company was committed not to put much pressure on dairy consumer. As a result, COGS has outgrown revenue over the last two years, and hence the GPM has contracted to 30.5% by the end of 2011. Furthermore, the increasing weight of exportation (with much lower GPM) on total revenue will drag the overall GPM down even more. REVENUE & GROSS PROFIT
25,000 20,000 25.1% 15,000 10,000 5,000 2006 Revenue
Source: VNM

VND bn 31.6% 26.0%

36.5% 32.8% 30.5%

40.0% 35.0% 30.0%

CAGR 2006 - 2011 Revenue Gross Profit Annual Growth Revenue 2007 2008 2009 2010 2011 4.7% 25.6% 29.3% 48.4% 37.3%

28.2% 33.3%

22.4% 14.7% 10.6% 15.2%

23.0% 19.5%

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Gross Profit 8.6% 52.7% 49.3% 33.4% 27.3%

2007 Gross Profit

2008 2009 2010 % Net Profit margin

2011 % Gross Profit margin

The year of 2011 was an important development breakthrough for VNM, as the Company brought home its long-awaited one billion dollar revenue. Specifically, sales in 2011 accumulated to VND21,627.4bn (+37.3% yoy), which was unfortunately worn away by the faster-growing COGS of VND15,039.3bn (+42.2%). REVENUE STRUCTURE: DOMESTIC SALES VS. EXPORT
100% 19.8% 80% 32.4% 60% 40% 20% 80.2% 0% 2006 2007 2008 Domestic sales Export
Source: VNM

10.4%

14.8%

11.3% 37.5%

10.5% 34.4%

55.0% 12.8% 45.0% 32.0% 35.0% 25.0%

CAGR 2006 - 2011 Domestic Sales Export Annual growth Domestic Sales 2007 25.4% 2008 42.5% 2009 55.7% 2010 37.3% 2011 24.6%

28.2% 33.3%

25.3% 23.4%

27.1% 27.3% 16.5% 89.6% 85.2% 88.7% 29.2% 19.7% 19.8%

Export -62.6% 196.4% 5.4% -6.5% 67.8%

15.0% 5.0%

89.5%

87.2% -5.0% 2011 % GPM Export

2009 2010 % GPM Domestic sales

14 | See Disclaimers at the end of the report

Extraordinary incomes & their significances

In 2009, the Company received VND139.6bn in financial income for transferring its 50% ownership in SABMiller Vietnam to SABMiller Asia who now owns 100% of this used-to-be-a-joint-venture. In 2011, net financial gain was 46.9% higher than that of 2010, mostly due to the increment on interest incomes (from VND196.9bn to VND368.9bn, +87.4% yoy) which was somewhat expected. The total amount of cash equivalent and short-term investment has already piled up to VND2,811.5bn (+99% yoy) by third quarter, indicating a huge potential on interest incomes. By year end, this figure has turn into VND3,181.3bn (+46.1% yoy). FINANCIAL PROFITS AND OTHER INCOME
800 VND bn
CAGR 2006 - 2011 Financial gain Other income 76.9% 34.8%

600
400 200 Financial gain/loss 2006 2007 2008
Source: VNM

The above figures are derived from the assumption that we exclude the huge capital gain of stock investment in 2007, and the abnormal income in 2010

2009

Other income 2010 2011

Other incomes of 2011 appeared to be significantly lower than that of 2010 (-61% yoy), which stemmed from the fact that the Company received an abnormal gain (approx. VND353bn) in 2010 for transferring its instant coffee factory to Trung Nguyen; otherwise the yearly difference would be -7.3%. Interpretation of deteriorating expenses As mentioned above, VNM could not pass most of the cost upsurge onto consumers, and as a result the Company had to cut expenses elsewhere, which was why the weights of both selling expense and administration expense on revenue have been deteriorating over the years. In 2011, selling expense and G&A expense grew by 25.9% and 18.4% respectively (compared to 15.5% and 32.5% in 2010), yet their weights on revenue have dropped to, in that order, 8.4% and 2.1% (compared to the previous 9.1% and 2.5%). SELLING & ADMINISTRATION EXPENSES
15% 13.8% 13.2% 12.8% 11.7% 9.1% 8.4%

ADVERTISEMENT & TRADE MARKETING EXPENSES

10% 8% 6% 4% 2.5% 2.1% 2% 0% 4.1% 4.3% 3.5% 5.3% 4.8% 3.2% 3.1% 1.9% 2007 2008 2009 2010 2011 3.8% 7.9%

10% 3.6%

5%

1.8%

3.1%

2.8%

0% 2006 2007 2008 2009 2010 2011

Selling expense/revenue
Source: VNM, SBS

G&A expense/revenue

Advertisement/revenue

Trade Marketing/revenue

VINAMILK has been on very good terms with its distributors and retailers, which can be easily perceived by the generous sale promotion expenses made every year; in 2011, the Company spent almost VND831.9bn on its trade marketing activities, equivalent to 3.8% of total revenue. On the other hand, the weight of advertisement expense on total revenue is contracting over times (from 4.1% in 2007 to 1.9% in 2011); obviously, VNM has been very efficient with its marketing scheme while maintaining exceptional revenue growth. In 2011, the Company spent VND400.2bn (-17.4% yoy) on advertisement as compared to the previous VND484.7bn.

15 | See Disclaimers at the end of the report

The profitability of VINAMILK

PROFITS MOVEMENT
6,000 VND bn 4,000 2,000 PAT 2006
Source: VNM

CAGR 2006 2011 PAT EBIT EBIDTDA Annual Growth PAT 2007 46.0% 2008 29.8% 2009 90.0% 2010 52.2% 2011 16.6%

44.9% 49.7% 48.0%

2007

EBIT 2008 2009

2010

EBITDA 2011

EBIT 44.1% 43.5% 99.2% 55.6% 17.1%

EBITDA 42.7% 42.2% 93.7% 54.1% 17.4%

The Company achieved its highest net profit margin during the 20092010 periods mostly due the climax of GPM and contributions of extraordinary incomes. In 2011, the Company recorded a lesser gain of 16.6% yoy on PAT, as compared to the 52.2% yoy of the year before. If we exclude the abnormal income in 2010, net profit would have grown by almost 29% yoy. Capital Structure Analysis

60% 50% 40% 30% 20% 10% 18.4% 28.7% 29.4% 33.3% 43.4%

55.7% 43.3% 39.5% 32.2% 23.0% 32.0%

17.6%

0%
2006 ROAE 2007 ROAA 2008 2009 EBIT/Equity 2010 2011 EBIT/Asset

Over the last 5 years, the Company has continuously increased its chartered capital and extended its capital structure. Equity has grown on average by 36.2%/year, which was slightly higher than the expansion rate of assets in the same periods (34%). VINAMILK has never relied much on liabilities to build up its capital structure, which is illustrated by the consistently low leverage, and thus liquidity as well as solvency has never been a problem to the Company especially during the harsh period of high interest-bearing loans. Both current and quick ratios have gone up to 3.6 and 2.4 respective (2011), which are already beyond the safety point; a cash ratio of 1.5 (2011) should be able to cover all short-term liquidity concern. ASSESSMENT ON LEVERAGE EXTENT
3,000 2,500 2,000 24.0% 1,500 1,000 500 2006 T. Liabilities
Source: VNM

VND bn 31.6% 24.9% 27.3% 24.2%

31.0%

35% 30% 21.5% 25% 20% 17.7% 15% 10% 5% 0%

19.8%

19.3%

21.3%

23.7%

The borrowing hike in 2010 stemmed from the fact that VNM took out 5 loans (USD30m) in a foreign bank to settle its obligation with a foreign supplier. In 2011, the Company has completely paid off all above loans.

2007 2008 T. Borrowing

2009 2010 Liabilities/Equity

2011 Liabilities/Asset

16 | See Disclaimers at the end of the report

The capital structure of VINAMILK went through major re-modification. In May 2011, VNM successfully issued 10.7 million new shares at an average price of VND129.4/share (+32% higher than the prevailing market price), resulting in a capital surplus of VND1,277bn and maxing out rooms for foreign investors (49%). Also during the first half of 2011, the Company issued more than 7 million shares to employees under its Employee Stock Ownership Plan (ESOP) for 2010 and 2011. By the end of 2011, the Company issued bonus shares to existing shareholders with a 2:1 ratio, bringing its current chartered capital to VND5,561bn. QUICK GLANCE AT CAPITAL STRUCTURE
18,000
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2006
Source: VNM

VND bn

CAGR 2006 2011 Equity Chartered Capital Total Asset Annual Growth Equity 2007 2008 2009 2010 2011 57.6% 10.3% 39.4% 23.9% 55.9%

36.2% 28.5% 34.0%

Equity 2007

Chartered Capital Total Assets 2008 2009 2010 2011

Chartered Capital 10.2% 0.0% 100.4% 0.5% 57.5%

Total Assets 50.7% 10.0% 42.2% 27.0% 44.6%

17 | See Disclaimers at the end of the report

VINAMILKS OWN PROJECTION & DEVELOPMENT OUTLOOK Overall Projection The Company will continue streaming its investments toward capacity expansion, products R&D, and distribution development to assure its brand image not only within Vietnam but also all over the world. VNM has envisioned being among the top 50 largest dairy companies by 2017 with revenue of 3 billion dollars, and not a single shareholder at the 2012 AGM showed even a slight frown of doubt.

Earning Projection

The year of 2011 was not exactly ideal for business all around, especially for the food & beverage industry, and inflation (almost 18.6% yoy) was eating up most of the disposable income that could have otherwise flown into dairy consumption. Milk and other staple foods were under strict governmental supervision in order to keep inflation at bay, and VNM was committed not to raise its selling prices; however, upon 2012, the Company has already raised prices once in January (by 5-7%). There is still room to grow for the rest of this year. VINAMILK: 5 YEAR PROJECTION ON EARNINGS (VND bn) 2012 2013 Total Revenue 26,480 31,780 Before-tax Profit 5,625 6,355 After-tax Profit 4,690 5,230
Source: VNM

2014 38,130 7,180 5,720

2015 45,760 8,115 6,180

2016 54,900 9,170 6,870

CAGR 20.0% 13.0% 10.0%

CAPEX plan

Last year, the Company planned to invest VND8,730bn in capacity expansion and office renovation. However, VNM has revised its plan this year and decided to add another VND1,545bn to its CAPEX plan for the 20122016 periods, bringing the total estimated investment to VND10,275bn. VINAMILK: CAPEX PLAN (2012-2016) (VND bn) TOTAL VINAMILK Vietnam Dairy Factory (Binh Duong) Dielac II factory Da Nang factory Others LAMSONMILK LTD. VIETNAM DIARY COW LTD. INTERNATIONAL REAL ESTATE LTD
Source: VNM

Total investment 10,275 7,916 2,349 1,906 421 3240 253 2,006 100

Previous disbursement 2,572 2,489 415 569 204 1300 47 36 0

Disbursement plan (2012) 4,537 3,707 1,651 958 176 922 181 646 2

Disbursement plan (2013-2016) 3,166 1,720 283 379 40 1018 25 1,323 98

18 | See Disclaimers at the end of the report

FORECASTS
INITIAL ASSUMPTION VNM will continue focusing on its core business, in which milk and other dairy related products will make up the majority of revenue of profits. VNM will carry out its capacity expansion plan for the 2012-2016 periods accordingly. No other large investment in fixed asset will occur within this reviewing period. Therefore, the total investment for the 20112016 periods will be around VND10,000bn (10%). Operations of new processing plant will be on schedule. We have not accounted for any disastrous event such as fire damage, natural catastrophe, food hygiene scandal, etc. that may impact severely to the operation of the Company. Our profit forecasts include neither reversals of provision for losses nor proceeds from stock trading. FORECAST: REVENUE We have separated revenue of VINAMILK into 5 main categories for the purpose of sales projection, namely liquid milk, powdered milk, condensed milk, and other dairy products (ice-cream, fruit juice, cheese, etc.). Our forecasting period (FP) is from 2011 to 2016. Liquid Milk Production capacity will soon be doubled upon operations of the Da Nang milk factory and the Vietnam Dairy Factory in Binh Duong, especially the latter is supposed to be the largest and most advanced fully-automatic dairy processing plant in Indochina. We expect average selling prices (ASP) of this segment to pace at +5%-7% per year, and thus its respective revenue will grow at 30.5% CAGR (2011-2016 periods) which is much lower than the previous 39% CAGR (2006-2011 periods). The majority of sales come from this segment (36%-45%), and its overall weight is just getting larger every year. We assume a rough revenue contribution ratio of 39.5% within our FP. As the Dielac 2 factory comes into play, the capacity of powdered milk will increase tremendously (from 18,000 tonnes to 72,000 tonnes per year). The spray drying capacity will increase 4.5 times and the production of powdered mixture will be 125% higher. The Company has certain competitive edges on this segment; although VINAMILKs product quality is on par with that of foreign brand name, its selling price is much lower (some products are only half as much). Furthermore, dairy consumers are directing their purchases more toward domestic brand names since foreign products are getting out of their price range. Besides the above advantages on domestic front, the Company will pursue higher export value. Thus, we considered revenue growth of 28.9% CAGR for the 2011-2016 periods (as compared to the 21.3% CAGR within the 2006-2011 periods). Overall, this segment will constitute roughly 28% of total revenue within our FP. The Company has purposely left this segment out of the expansion plan, because its capacity has not yet been maxed out and the stagnant demand growth does not provide as much economic incentives compared to that of other segments. However, exportation has been the alternate route for this segment (especially after the recent flood in Thailand). We suppose this segment can grow as fast as 26% in 2012 and much slower in later years, averaging at a 13.1% CAGR within the 2011-2016 periods, which is far inferior to the 20.6% CAGR of the 2006-2011 periods. Thus, this group will compose 15% of total revenue within our FP. The addition of new processing plant will add another 30% on top of the current capacity. We expect this segment to comprise 14.2% of total revenue within our FP. We have adjusted its respective growth from the previous 39.1% CAGR (2006-2011 periods) down to 22.9% CAGR (2011-2016 periods) as growing competitions stir up the air, because nobody wants to miss out such a high-margin segment. Since VINAMILK holds the majority of market share (~ 90%), its growth should be close to that of the industry.

Powdered Milk

Condensed Milk

Yogurt

19 | See Disclaimers at the end of the report

Other Products

The Company will maintain its advertisement focus on other products such as Vfresh fruit juice & soymilk, cheese, and ice-cream. Contribution of this segment to total sales is not as significant as others, despite the unused capacity. We assume a growth rate of 28.3% CAGR in our FP, which is higher than the 20.2% CAGR of the last period (2006-2011). Based on above estimates, revenue growth within our forecasting period boils down to 26% CAGR. Revenue will thereby reach VND68,794bn by 2016, of which export will make up 14.5% to 16.5% of the total figure while marching at 32.6% CAGR (which is far greater than the 16.7% CAGR of 2006-2011). Domestic sales will pace slower at 25% CAGR as compared to the 30.4% CAGR of the last period. This year, the Company only targets revenue of VND26,480bn (+22.4% yoy) and a PAT of VND4,690bn (+11.2% yoy), which seemed to be a little cautious (as compared to our forecast). Despite the low season, within the first two months of 2012 VNM has already grown its revenue by 30% yoy which were then translated into a 22% yoy growth on pre-tax profit, said Mrs Mai Kieu Lien during the AGM. We expect the Company to reach revenue of VND28,222bn (+30.5% yoy) by year end 2012, which is 6.6% higher than the VNMs target.

The final picture

FORECAST: GROSS PROFIT We derive the overall gross profit based on the individual gross profits margin of domestic sale and export, which we have estimated for the forecasting period. Initially, we used the export GPM of 2011, which was around 19.8%, as a caliber to gauge that of 2012. Then, we figure this ratio should move toward 20% as VINAMILK establishes a stronger brand name on the international frontier. The downward trend on domestic GPM was obvious in 2011 (from 34.5% in Q1/2011 to 31% by Q3/2011 and to 30.4% by Q4/2011). However, we expect the current domestic GPM to steady around 32% for 2012, which is similar to that of 2011, and to gradually fade toward 30%. We based our assumption on several supportive factors, including an early boost on selling price from 5% to 7%, positive movements of inputting material (within the first 3 months of 2012, prices of powdered whole milk and powdered skim milk contracted by 8% to 9% as compared to the end of 2011), the USD/VND stabilization, and the retracting inflation. In later years, additions of new processing plants will jack up depreciation expenses, thus lowering the overall GPM. Furthermore, we suspect that VNM may willingly accept lower GPMs to sustain its revenue growth and market share, especially amid the growing competition. The current GPM may dwindle slightly to 30.2% by the end of 2012 as compared to the 30.5% of 2011. As domestic sales slowly lose profit traction and exports (whose GPM is inferior to that of domestic sales) play a bigger role in revenue structure, the overall GPM may withdraw little by little to 28.4% by 2016. FORECAST: REMAINING P&L ITEMS Selling and G&A Expenses Based on the current development plan of VNM, we suspect that both of these items may outgrow revenue by a small margin; however, their weights on revenue will align with the historical figures. The inception of new processing plants will definitely incur higher G&A expenses, and thus we have anticipated a 31.2% CAGR on this item for the 2011-2016 periods, which is more or less indifferent from that of the 20062011 periods. The weight of G&A expense on revenue will thereby hinge around an average 2.4% (as compared to 2.1% in 2011). The ambitious revenue plan would require intensive upkeeps, and thus the Company really needs to step up its advertisement and trade marketing expenses in order to make those sales. VNM has a reputation for how much it usually spends on advertisement, and we are convinced that selling expense will increase rapidly, specifically by 28.7% CAGR. The magnitude of selling expense on revenue may climb from 8.4% in 2011 to 9.3% in 2016, averaging at a reasonable 9% during the 2011-2016 periods (as compared to other double-digit figures in the past).

Exports vs. Domestic sales

Overall gross profit margin

20 | See Disclaimers at the end of the report

Financial Income

Although stock portfolio may not incur much provision this year like it did in 2011, we still expect a 27.9% reduction on net financial income this year due to the slimier inflow. VNM will definitely pour a large amount of cash onto project development, and thus leaving a smaller cash base for bank deposit. Also, the ongoing cap on bank deposit rate will surely limit further the extent of interest income. However, the Company will improve its cash base in later years, and thus we assume, on average, financial income will contribute around 6.13% of pretax profit. A few subsidiaries will max out their tax advantages by 2012 and by 2014, and thus the overall CIT should be adjusted accordingly. We assume the tax rate to increase sequentially from 15.3% (2011) to almost 16.6% by year-end 2012 and to roughly 23% by 2016. All in all, a combination of diminishing gross profit, enlarging expenses, and higher taxes results in slower growth on the bottom line: 17.6% CAGR (2011-2016) versus 44.9% CAGR (2006-2011). As gross profit margin starts shrinking so does net profit margin (from 19.5% by 2011 to 13.8% by 2016). We expect VNM to achieve a PAT of 5,068bn (+20.1% yoy) by year end 2012, which is 8.1% higher than its own target. SUMMARY OF 5-YEAR PROJECTION: PROFIT AND LOSS (VND bn) 2011 2012F 2013F Total Revenue 21,627 28,222 36,529 Gross Profit 6,588 8,532 10,871 % gross profit margin 30.5% 30.2% 29.8% Selling expense 1,812 2,427 3,215 G&A expense 459 621 840 Profits from operation 4,317 5,484 6,816 Before-tax Profit 4,979 6,078 7,468 After-tax Profit 4,218 5,068 6,146 % net profit margin 19.5% 18.0% 16.8%
Source: VNM, SBS estimates after 2011

Corporate tax

After-tax profit

2014F 46,958 13,756 29.3% 4,226 1,127 8,403 9,081 7,235 15.4%

2015F 58,130 16,753 28.8% 5,348 1,453 9,952 10,741 8,378 14.4%

2016F 68,794 19,503 28.4% 6,398 1,789 11,317 12,308 9,477 13.8%

CAGR 11-16 26.0% 24.2% 28.7% 31.2% 21.3% 19.8% 17.6%

SUMMARY OF 5-YEAR PROJECTION: BALANCE SHEET (VND bn) 2011 2012F 2013F TOTAL ASSETS 15,583 19,238 23,474 Current Asset 9,468 10,888 13,526 Cash & cash equivalent 3,157 844 1,070 Short-term Investment 736 2,706 3,251 Long-term Asset 6,115 8,350 9,947 Fixed Asset 3,750 7,189 8,631 Long-term Investment 847 945 1,052 TOTAL LIABILITIES Current Liabilities Short-term borrowing Long-term Liabilities Long-term borrowing EQUITY Owner's equity Share Capital Retained Earning Other reserve
Source: VNM, SBS estimates after 2011

2014F 27,709 16,562 920 4,189 11,147 9,690 1,171 3,660 3,501 159 24,048 23,517 5,562 13,376 531

2015F 32,406 21,450 1,911 6,187 10,956 9,321 1,367 3,513 3,355 159 28,892 28,278 5,562 17,299 615

2016F 37,698 27,044 2,300 9,720 10,654 8,788 1,615 3,518 3,359 159 34,181 33,471 5,562 21,545 709

CAGR 11-16 19.3% 23.4%

11.7%

2,759 2,600 159 12,824 12,477 5,561 4,177 346

2,918 2,759 159 16,320 15,923 5,562 7,119 397

3,785 3,626 159 19,689 19,230 5,562 9,812 459

5.0% 5.3%

21.7% 21.8%

15.4%

21 | See Disclaimers at the end of the report

COMPANY OVERVIEW
The Company was established in 1976, but only upon its equitization in 2003 did the Company change its name to Viet Nam Dairy Products Joint Stock Company (with an initial chartered capital of VND1,250bn). Originally, VINAMILK was only producing condensed milk and coffee, and with time comes its expansion to other segments. VNM has been the leading dairy company for years and will remain so for years to come. The Company was quoted as VNM on the HOSE in 2006, and is now the leading dairy manufacturer in Vietnam. The companys chartered capital rose to VND3,531bn by December 2010 and to VND5,561bn by the end of 2011, right after the issuance of 185 million bonus shares to existing shareholders.

CHARTERED CAPITAL
6,000 VND bn 5,000 5,560

SHAREHOLDER STRUCTURE

SCIC
5.97%

4,000 3,000 2,000 1,000 2006 2007 2008 1,590 1,753 1,753

3,512

3,512

Foreign Investors

2011
48.99%

45.04%

Other Domestic Investors

2009

2010

2011

INCREMENT OF CHARTERED CAPITAL (2011) Description of share issuance Employee Stock Ownership Plan 2010 Issuance of new shares 2011 Employee Stock Ownership Plan 2011 Bonus shares to existing shareholders (ratio 2:1)
Source: VNM

Number of shares 3,498,520 10,700,000 3,554,910 185,289,204

Subsequent chartered capital (VND bn) 3,565,706,400 3,672,706,400 3,708,255,500 5,561,147,540

By year end 2011, the Company had a total of 556m outstanding shares, and all of its room for foreign ownership has been completely filled (49%). The State Capital Investment Corporation (SCIC) in VINAMILK has reduced its holding from 47.3% (2010) to 45.04% (2011). Other major shareholders include F&N Dairy Investment (9.5%) and Dragon Capitals investment funds (7.3%).

22 | See Disclaimers at the end of the report

BOARDS OF DIRECTORS AS SHAREHOLDERS (16th April 2012) Names Position Ms. Mai Kieu Lien Chairwoman & General Director Ms. Ngo Thi Thu Trang Member & CFO Mr. Le Anh Minh Member Mr. Le Song Lai Member Mr. Wang Eng Chin Member
Source: Cafef

Holding (shares) 1,510,320 443,055 35,175 -

Holding (%) 0.27% 0.08% 0.04% -

SUBSIDIARIES & AFFILIATED COMPANIES (2011) Company Business Subsidiary Vietnam Dairy Cow SMLLC Lam Son Dairy SMLLC International Real Estate Investment SMLLC Dielac Milk SMLLC Associated company Asia Saigon Food Ingredients JSC Miraka LTD
Source: VNM, SBS

VINAMILKs Stakes 100.00% 100.00% 100.00% 100.00% 15.79% 19.30% (VND173bn)

Chartered Capital (VNDbn) 840 80 160 146 114 55 (NZD m)

Dairy livestock Dairy products & soft drinks Real estate Dairy products Crme powder for food Dairy products

CURRENT VINAMILKS 9 FACTORIES (2011) Entities Location Truong Tho Dairy Factory Thu Duc district, Ho Chi Minh city Thong Nhat Dairy Factory Thu Duc district, Ho Chi Minh city Dielac Dairy Factory Bien Hoa city, Dong Nai Province Binh Dinh Dairy Factory Quy Nhon, Binh Dinh Province Nghe An Dairy Factory Cua Lo town, Nghe An Sai Gon Dairy Factory District 2, Ho Chi Minh city Can Tho Dairy Factory Binh Thuy District, Can Tho city Tien Son Dairy Factory Tien Du District, Bac Ninh Province Vietnam Beverage factory Ben Cat District, Binh Duong Province TOTAL
Source: VNM

Investment (VNDbn) 291 168.6 140.5 51.8 62.9 195.2 72.4 380 300 1,662.4

23 | See Disclaimers at the end of the report

12-MONTH PERFORMANCE OF VNM & THE VNINDEX

VNINDEX 40% 30% 20% 10% 0% -10% -20% -30% VNM

Source: Bloomberg, SBS

BALANCE SHEET (VND bn)

2009 Assets Current assets Long-term assets Fixed assets Long-term investments Resources Liabilities Current liabilities Long-term borrowings and liabilities Equities Owner's equity Contributed capital Capital surplus Retained profits/(accumulated losses)
8,482.0 5,069.2 3,412.9 2,525.0 602.5 8,482.0 1,808.9 1,552.6 256.3 6,637.7 6,455.5 3,512.7 892.3

YEARLY RATIOS
2010
10,773.0 5,919.8 4,853.2 3,428.6 1,141.8 10,773.0 2,549.2 2,385.6 163.6 8,223.8 7,964.4 3,530.7 1,909.0

2011
15,582.7 9,467.7 6,115.0 5,044.8 846.7 15,582.7 2,759.1 2,600.2 158.9 12,823.6 12,477.2 5,561.1 1,277.0 4,177.4

2009 Growth rate Revenue growth rate Gross profit growth rate Net profit growth rate Total asset growth rate Equity growth rate Profitability ratios Gross profit margin EBIT margin Profit before tax margin Net profit margin ROA ROE Dupont Analysis Net profit margin(1) Asset turnover (2) Equity multiplier (3) ROE = (1)x(2)x(3) Management ratios Receivable outstanding days Inventory outstanding days Payable outstanding days Asset turnover Long-term asset turnover Fix asset turnover Liquidity ratios Current ratio Quick ratio Cash ratio Capital Structure Total debt/Total Equity Total debt/Total Asset Total asset/Total Equity
29.3% 49.3% 90.0% 42.2% 38.4% 36.5% 25.7% 22.4% 28.0% 36.8% 22.4% 125.1% 131.4% 36.8% 17.7 71.1 1.6 1.3 3.1 4.2 3.3 2.4 0.3 28.0% 21.3% 131.4%

2010
48.4% 33.4% 52.2% 27.0% 23.4% 32.8% 27.0% 23.0% 33.6% 45.4% 23.0% 146.2% 135.3% 45.4% 13.6 81.1 1.1 1.5 3.2 4.6 2.5 1.5 0.1 32.0% 23.7% 135.3%

2011
37.3% 27.3% 16.6% 44.6% 56.7% 30.5% 23.1% 23.0% 19.5% 27.1% 33.8% 19.5% 138.8% 124.9% 33.8% 19.3 79.4 2.8 1.4 3.5 4.3 3.6 2.4 1.2 22.1% 17.7% 124.9%

INCOME STATEMENT (VND bn)

2009 Net sales COGS Gross profit /(loss) Financial income Financial expense Interest expense Selling expenses G&A expenses Net operating profit /(loss) Other income Other expenses Profit /(loss) before tax Corporate income tax Profit after tax Net profit/(accumulated losses)
10,613.8 6,735.1 3,878.7 439.9 184.8 1,245.5 292.9 2,595.4 143.0 7.1 2,731.4 361.5 2,376.1 2,375.7

2010
15,752.9 10,579.2 5,173.7 448.3 153.2 1,438.2 388.1 3,642.4 983.0 374.2 4,251.2 645.1 3,615.5 3,616.2

2011
21,627.4 15,039.3 6,588.1 671.4 246.4 13.9 1,811.9 459.4 4,741.8 323.1 85.9 4,979.0 778.6 4,218.2 4,218.2

24 | See Disclaimers at the end of the report

CASHFLOW STATEMENT (VND bn)

2009 Cash flows from operating activities Profit/(loss) before tax Depreciation and amortisation Allowances and provisions Profits/(losses) from investing activities Operating profit before changes in WC CF from operating activities Cash flows from investing activities Receipt/payments for additions to assets Receipt/payments for investments entities CF from investing activities Cash flows from financing activities Proceeds from equity issued Proceeds from long-term borrowings CF from financing activities Net CF during the period Cash at the beginning Cash at the end
2,731.4 234.1 62.0 (23.1) 2,739.0 3,096.5 (654.8) (2.5) (2,476.3) 3.6 3.3 (532.7) 87.5 338.7 426.1

YEARLY RATIOS (cont.)

2010
4,251.2 290.1 (3.8) (609.1) 3,892.0 2,018.8 (1,432.3) (188.3) (993.1) 18.1 967.1 (1,188.4) (162.7) 426.1 263.5 6.0 1,454.5 624.8 126.2 2,543.4 613.5 3,156.5

2011
4,979.0 414.6 46.2 (460.8) 5,000.5 2,411.2 (1,767.2)

Index per share PE PBV PS EPS (VND per share) Revenue/share (VND/share) Book value (VND/share)

2009
10.20 5.01 2.28 9,024 40,315 18,378

2010
8.96 4.08 2.06 10,268 44,731 22,558

2011
9.91 4.10 1.93 9,279 47,575 22,436

BALANCE SHEET (VND bn)

QI-11 Assets Current assets Long-term assets Fixed assets Long-term investments Resources Liabilities Current liabilities Long-term liabilities Equities Equity Contributed capital Capital surplus Retained profits
12,280.5 7,327.5 4,953.0 3,544.6 1,122.4 12,280.5 3,180.4 2,985.7 194.7 9,100.1 8,905.2 3,565.7 2,667.3

QUARTERLY RATIOS
QII-11
14,699.4 9,519.9 5,179.5 3,855.8 1,100.5 14,699.4 3,114.9 2,970.9 144.0 11,584.5 11,323.2 3,708.3 1,277.0 3,500.0

QIII-11
14,335.9 8,979.1 5,356.8 4,269.9 859.2 14,335.9 2,507.8 2,361.2 146.6 11,828.1 11,539.8 3,708.3 1,277.0 3,572.2

QIV-11
15,582.7 9,467.7 6,115.0 5,044.8 846.7 15,582.7 2,759.1 2,600.2 158.9 12,823.6 12,477.2 5,561.1 1,277.0 4,177.4

QII-11 Growth rate Revenue growth rate (YoY) Gross profit growth rate (YoY) Net profit growth rate (YoY) Profitability ratio Gross margin EBIT margin Net profit margin ROA (4Q) ROE (4Q) Management ratio Receivable outstanding days Inventory outstanding days Payable outstanding days Liquidity ratio Current ratio Quick ratio Cash ratio Capital Structure Total debt/Total equity Total debt/total asset Total asset/total equity Index per share PE EPS (VND per share)
36.1% 25% 19% 31.4% 24.1% 20.4% 33.4% 44.9% 16 100 1

QIII-11
29.9% 20% -7% 29.4% 22.1% 18.7% 30.0% 39.3% 16 79 3

QIV-11
43.9% 34% 43% 28.5% 20.5% 17.4% 29.7% 38.1% 17 70 2

INCOME STATEMENT (VND bn)

QI-11 Total Revenue Net sales COGS Gross profit /(loss) Financial income Financial expense Interest expense Selling expenses G&A expenses Net operating profit Other income Other expenses Profit /(loss) before tax Corporate income tax Profit after tax
4,629.4 4,535.4 3,026.0 1,509.4 132.8 99.5 342.4 89.3 1,111.0 87.6 12.5 1,186.1 180.8 1,006.5

2.3
1.8 0.1 27.5% 21.2% 129.8% 8.3 11109

1.8
2.3 0.8 21.7% 17.5% 124.2% 8.5 10768

1.9
2.4 1.2 22.1% 17.7% 124.9% 9.0 10199

QII-11
5,537.9 5,420.4 3,718.5 1,701.9 194.8 82.4 418.8 113.8 1,281.6 67.5 40.9 1,308.2 207.7 1,107.2

QIII-11
5,812.7 5,696.5 4,023.5 1,673.0 169.2 22.9 504.5 119.6 1,195.2 76.2 13.4 1,258.0 201.4 1,062.5

QIV-11
6,090.5 5,975.1 4,271.2 1,703.9 174.6 41.7 546.1 136.7 1,154.0 91.7 19.0 1,226.7 188.7 1,042.0

25 | See Disclaimers at the end of the report

Disclaimers
Report tracking Reports issued Company Note Date 01/11/2011 Recommendation TAKE PROFIT 12M target price at issuing date (diluted) 93,100 Market price at issuing date (diluted) 84,700

SBS Research Guide to Investment Ratings Buy: Share price may exceed 15% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 15% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 15% over the next 12 months Not Rated (NR): Stock is not within regular research coverage
The information and statements contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy, completeness, and correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time. Expressions of opinion contained herein are subject to change without notice. This document is not and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SBS and other related companies and/or their officers, directors and employees may have positions and may have affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. No person is authorized to give any information or to make any representation not contained in this document and any information or representation not contained in this document must not be relied upon as having been authorized by or on behalf of SBS. This document is private circulation only and is not for publication in the press or elsewhere. SBS accepts no liabilities whatsoever for any direct or consequential loss arising from any use of this document or its contents. The use of any information, statements forecasts and projection contained herein shall be at the sole discretion and risk of the users. This document is confidential and is intended solely for the use of its recipient. Any duplication or redistribution of this document is prohibited.

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278 Nam Ky Khoi Nghia Street, District 3 Ho Chi Minh City Vietnam Tel: +84 (8) 6268 6868Fax: +84 (8) 6255 5957 www.sbsc.com.vn Singapore DMG & Partner DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore 049315 Tel : + (65) 6533 1818 Fax : + (65) 6532 6211 Saigon 63B Calmette Street Nguyen Thai Binh Ward, District 1, Ho Chi Minh City Vietnam Tel: +84 (8) 3821 4888 Fax: +84 (8) 3821 3015 Cambodia Sacombank Securities (Cambodia) PLC 56 PreahNorodom Blvd Sangkat Chey Chumneas, Khan Daun Penh, Cambodia Tel: +855 23 999 890 Fax: +855 23 999 891 Laos Lanexang Securities Public Company 5th Floor, LSX Building, Ban Phonthan Vientiane Capital The Lao P.D.R

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26 | See Disclaimers at the end of the report