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Dairy farms should achieve lower production costs and improve milk quality, thereby creating the conditions for more local raw milk demand from processors and consumers. Given the fragmented nature of the milk production from small-holders, any scale increases through co-operative is likely to lead to cost efficiencies and higher quality milk. And this is the critical factor for dairy farms being success. Dairy processor should focus in R&D for higher value products range to improve its profitability and competitive ability to international players. On the other hand, supporting local dairy farming development to have a better control on raw milk source. Both of those issues are critical factors for dairy processing. The Government can make a considerable contribution to this process by creating a favorable investment climate in the dairy sector, i.e. sharing profits all over the chain; improving milk quality; increasing subsidies and developing in infrastructure. We adopt a Reduce recommendation for Vinamilk and Hanoi Milk.
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CONTENTS
FRESH GRASS TO FRESH MILK .................................................................................. 1 INVESTMENT CASE ....................................................................................................... 4 DAIRY FARMING: AN ADVENTURE BUSINESS .......................................................... 6 Dairy development in Vietnam ...................................................................................... 7
The milestones of the Vietnamese dairy sector before 1990 ......................................................... 7 The milestones of the Vietnamese dairy sector after 1990 ............................................................ 7 Decision 167 ................................................................................................................................... 8 NDDP performance for the first phase for 2001 and 2005: ............................................................ 8 NDDP performance for the first phase for 2006 and 2015 ............................................................. 9
Collection Price ............................................................................................................ 11 Feeding cost is high and un-efficiency ...................................................................... 13 Milk collection and quality control ............................................................................. 13
Dutch Lady Milk Collection System............................................................................................... 14 Vinamilk Milk Collection System ................................................................................................... 14
General Conclusion ..................................................................................................... 20 DAIRY PROCESSOR IS DOMINANT OF WHOLE DAIRY VALUE CHAIN ................. 21 Who are the key players? ............................................................................................ 21
Vinamilk......................................................................................................................................... 21 Dutch Lady Vietnam ...................................................................................................................... 23 Nestl Vietnam .............................................................................................................................. 23 Hanoi Milk Shareholding Company............................................................................................... 24 Campina ........................................................................................................................................ 24 Imported brands ............................................................................................................................ 25
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FOOD & BEVERAGE Distribution network .................................................................................................... 25 Product & trade margin ............................................................................................... 26 Facility supplier ............................................................................................................ 27
Tetra Pak was the sole facility supplier for last ten years in Vietnam ........................................... 27
VIETNAMESE DAIRY CONSUMER .............................................................................. 32 Low dairy consumption ............................................................................................... 32 No milk drinking habit.................................................................................................. 32
SCHOOL MILK PROGRAM AND NATIONAL DAIRY DEVELOPMENT...................................... 33
Milk quality awareness ................................................................................................ 37 Milk Price in Vietnam ................................................................................................... 38 Dairy consumption in the context of high inflation .................................................. 40 Vietnam dairy market next three years ...................................................................... 40 Conclusion .................................................................................................................... 41 COMPANY SHEETS...................................................................................................... 42
Hanoi Milk JSC.............................................................................................................................. 42 Vietnam Dairy Products JSC ........................................................................................................ 59
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INVESTMENT CASE
Main objective of this report is to understand the whole value chain of the Vietnam dairy industry from Dairy farming to Dairy products processes and finally Marketing dairy products to end consumers. Through the understanding, we will find out competitive position & potentials in each section and in the whole chain. Vietnam Dairy Chain
The structure of the Vietnam dairy chain does not deviate to a great extent from any dairy chain around the world. With the exception:
Large imported dairy ingredients up to 72% of the total market demand for dairy products. Imported milk ingredients are recombined them into UHT milk, yogurt, condensed milk, and powder milk for baby; Milk processors are dominant players in the entire dairy value chain. This means that milk processing is the most profitable business in the value chain.
Dairy farming in Vietnam is small in scale compared to other industries and only has developed efficiently since 2006:
Cow yield ton per year reached a level comparable to that of regional. Dairy farming becomes a profitable business.
This is attributable to local farmers and milk processors. In addition, consumer awareness of real fresh milk creates incentives for milk processors to buy fresh milk. Due to limited supply of land for milk cow raising, dairy farming development is dependent on improvements in cow yield efficiency rather than a larger number of milk cows. However, governments role is insignificant in the reviewed period. Government has not fulfilled its duty as a quality monitor in both milk production and processing: 40% self-sufficiency target is not realistic. Dairy farming indirect subsidy from government is too little compared to allowed commitment under WTO agreement. The government has not carried out a long-term plan and industry policies consistently to develop raw milk areas to encourage farmers to invest in dairy farming. Co-ordination between government and farmers in developing dairy co-operatives is weak and as a result limited their bargaining power in dealing with milk processors. Milk processing has been developing strongly relative to dairy farming, representing 4 times larger than dairy farming in terms of value. This is driven by robust consumer demand over recent years. Currently milk processors are dominant players in the entire dairy value chain. This also means that milk processing is the most profitable business in the value chain. As a result, fierce competition exists in the segment amongst players. It is apparent to have 50 different milk processors whereas there are only a few which directly access to dairy farming.
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Consequently, majority of milk processors rely heavily on imported milk ingredients and then recombine them into UHT milk, yogurt, condensed milk. Even worse, they simply mix imported ingredients and package them for sale as baby milk. Powder milk premium segment is the most profitable one and dominated by international brands that claim to be of higher safety and hygiene standard. Power milk premium segment is also the fastest growing segment in the first half of 2008 when inflation reached its peak. UHT/ condense milk are dominated by Vinamilk and Dutch Lady Vietnam. Yoghurt is dominated by Vinamilk and recently started facing competition from Campina and Kido a subsidiary of Kinh Do Corporation which owns an ice-cream business and makes inroad into premium segmentation of dairy products. Subsequent to capturing market share through aggressive marketing and distribution activities, we believe that those processors can only maintain their market shares by significant and effective spending in R&D activities. Maintaining milk quality is also vital to a milk processor, especially after Chemical melamine scandal. The government needs to play a critical role in monitoring quality of dairy products from milk processors. Vietnams milk consumption per capita is still very low compared to regional and international norms. Currently, milk consumers are mainly from children in mid-income families. Children up to high school age accounts for 30% of the country population. However, only one-third of these children are milk consumers. Therefore, government plays an important role to promote milk consumption through milk programs at schools throughout the country. In 10-20 year period, these programs will create milk drinking habit for adults. In summary, we believe the market of the whole chain is still really fresh. Efforts need to focus at all levels: dairy farms, the government, and processor.
Dairy farms should achieve lower production costs and improve milk quality, thereby creating the conditions for more local raw milk demand from processors and consumers. Given the fragmented nature of the milk production from small-holders, any scale increases through co-operative is likely to lead to cost efficiencies and higher quality milk. And this is the critical factor for dairy farms being success. Dairy processor should focus in Research and Development for higher value products range to improve its profitability and competitive ability to international players. On the other hand, supporting local dairy farming development to have a better control on raw milk source. Both of those issues are critical factors for dairy processing. Governments role in the dairy chain: the government can make a considerable contribution to this process by create a favorable investment climate in the dairy sector in term of profit sharing for the chain; in improving milk quality; in subsidies; in infrastructure; and long-term consistency in plan and industry policies implementation.
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Looking to our nearest neighbors from Asean group where most of the members are having the same weather conditions of humid and dry an unfavorable factor for cow yield, there are three best places producing milk in Thailand, Indonesia, Malaysia, etc. Their performances in dairy are shown in picture Vietnam Dairy Neighbors.
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Of the three countries, Thailand is very often chosen as a comparative model in Vietnam:
At the present Thailand's trade with Vietnam ranks 6th in the list of large trading partners of Vietnam after China, Japan, Singapore, Taiwan, and Republic of Korea. This is still counting for various kinds of Thai consumption goods available in Vietnam through
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FOOD & BEVERAGE illegal activities including dairy products. This is thanks to Thai products being at a very competitive price.
The goods structure imported-exported between Thailand and Vietnam appears not to have changed over the past several years. Many of the exported goods of Thailand and Vietnam are similar such as rice, textile, and clothes. For that reason in many cases Vietnam and Thailand are competitors in trade. In terms of dairy development, Thailand also has National dairy development plan targeted for five times growth by the end of the plan. We can find the most information available for Thailand successfully dairy performance through NGO organizations in Vietnam.
20ies to 40ies - The colonial period: At first, cows of various origins and breeds were brought to Vietnam and dairy production was destined only to French residents and was confined mainly to Saigon, Hanoi, and Dalat. In 30ies, those breeds were mated with Vietnamese yellow cows and spread out to Kontum, Hue, Tuy Hoa, and a few farms in the South. It was generating some 400 tons of milk. But it did not expand further during the war period. 50ies to 80ies The period between the colonial era, throughout the Vietnam war and until the renovation period: This period sees the form of large state-owned farms in North and large private farms in the South/ Central in renovation Doi Moi period from 1986 onwards. Again, the overall production and consumption of dairy products remained very low due to the war and the generally bad socio-economic situation of the country. 80ies to 90ies - The form of dairy factories and the privatization of the production: Until 80ies, dairy farming in Vietnam was concentrated in few large state-owned farms which belong to the former form of Vinamilk. There farms extended their production by contracting backyard raisers, mostly farm employees. Progressively, small-scaled and household based dairy production started around HCMC. Having proved to be economically interesting and viable, the models convinced other farmers and led to a rapid expansion of dairy sector around HCMC and in neighboring provinces. Apart from the arrival of State-owned (VINAMILK), this period sees the arrival of foreign companies (Dutch Lady Vietnam and Nestl Vietnam).
90ies to 2001 There was a big growth in consumption: between 1990 and 2001, consumption per capita has been growing by 600 grams a year, while production per
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FOOD & BEVERAGE capita has been growing by 60 grams a year, ten times less! In 2001, 90% of local market demand is mainly covered by ingredients imported from overseas for recombination/ reconstitution. The source mainly came from 1. China 2. New Zealand 3. EU 4. US. The dependence on import resource might be one of reasons causing high retail price in picture Retail price for liquid milk Vietnam is on top of the world.
2001 to present: Decision 167 and National Dairy Developing Plan (NDDP) 2002 to 2010: Seeing the constraint in the Dairy Section, Government of Vietnam and its Ministry of Agriculture and Rural Development started paying serious attention to the development of the dairy production by promulgating Decision 167 and NDDP. It is said that Dairy development policy is influencing the current shape of the dairy sector in Viet Nam.
Decision 167
Decision 167 form the shape of Dairy Vietnam
Decision 167 stipulates a number of measures and policies to be taken in order to develop milk cow farming in Vietnam in the 2001-2010 period, cover many aspects of the sector development including defining target places, breeding, feeding, milk processing facilities, R&D in production, subsidies in credits, tax, insurance, and the role/ involvement of Ministry of Investment and Ministry of Trade. This aims to achieve NDDP:
In 2010: 350 thousand tons milk and 200 thousand cows. In 2015: 700 thousand tons milk and 350 thousand cows. This also aims to get level of local production / total dairy demand of 40% in 2010. This 40% was taking into account factors of Vietnam climate humid and hot and land for dairy farming is limited.
Following Decision 167, provinces have generally promulgated detailed dairy development policies in their province including free or subsidized vaccine provision, compensation of 200000 VND per male calf born (first 3 years of provincial dairy project), subsidy (2-3 millions VND) on purchase of Laisind dairy cow breed, subsidy (5-7 millions VND) on purchase of exotic dairy cows, interest free (1-3 years) loan from the bank on purchase of dairy cow, support of costs on improvement of cowshed, support of grass production costs, support on milk collection and transportation. In addition, some provinces have: tax exemption on agricultural land and priority on land supply for fodder production. However, total level of support in fact is small as mentioned Government indirect subsidy section.
NDDP performance for the first phase for 2001 and 2005:
Results for the first phase with some highlights are as follows:
2005 production volume increased almost four times compared to 2001; The average annual milk yield per cow almost doubled to 1,730 kg per year; The best places for production are in North Central as shown in Picture Vietnam Cow Map 2007;
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However, level of self production compared to total dairy market demand is still very low at approximately 28% only.
With the excellent performance for the period after the Decision 167 as summarized in picture Vietnam Dairy Development and National Dairy Developing Plan to year 2006, we can say that The Decision 167 and NDDP directly impact to production for the period up to 2006. Vietnam Dairy Development and National Dairy Developing Plan (NDDP) to year 2006
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Number of cows - a ctua l Number of cows - NDDP 2 per. Mov. Avg. (Number of cows - a ctua l)
Tota l milk productions - t/yea r - a ctua l Tota l milk productions - t/yea r - NDDP 2 per. Mov. Avg. (Tota l milk productions - t/yea r - a ctua l)
NDDP performance for the first phase for 2006 and 2015
Growth of both targets performance was starting to slow down in 2006. As up to 2006, farmers focused more on raising cows for sale than on raising cows for milk. The production volume increased thanks to the expanding of number of cows supported by governments loan. As farmers kept raising cows for sale for such a long time, the cow price has been speculative. Farmers who borrowed money to buy cow breed at high price in 2006 were in trouble. Those breeds were giving very low yields. Low yield and high investment!! Although processors have raised the collecting price, the return in dairy farming was not enough either to maintain the business nor able to pay back the loan to Government. Those farmers could not keep the cows for milk business. As per report from Vietnam Institute of Policy and Strategy for Agriculture and Rural Development - IPSARD, dairy cattle population decreased sharply in 12 provinces out off 33 provinces. In the North, cattle numbers declined in Thai Nguyen by 45%, Phu Tho by 68%, Thai
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2010
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FOOD & BEVERAGE Binh by 37%, Ha Nam by 18.5%. In the South, Tra Vinh decreased by 78%, Vinh Long by 34%, etc. And this is the first time that GSO reported a lower number of cows from 113,200 in 2006 to 98,600 in 2007 equivalent to 13% drop. From the picture Vietnam Dairy Development and National Dairy Developing Plan to year 2006 we see that calculating moving average of both targets is moving worse than its performance in 2006 of 230 thousand tons and 100 thousand cows! As land is limited, the only factor makes production improving is cow yield (Mt. per year). If we just maintain the yield growth as in recent years, NDDP for 2010 can only achieve after 2015 i.e. more than 5 years late as shown in picture Vietnam Dairy Development and National Dairy Developing Plan (NDDP) to year 2015. Vietnam Dairy Development and National Dairy Developing Plan (NDDP) to year 2015
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Number of cows - a ctua l Tota l milk productions - t/yea r - NDDP 2 per. Mov. Avg. (Tota l milk productions - t/yea r - a ctua l)
Tota l milk productions - t/yea r - a ctua l 2 per. Mov. Avg. (Number of cows - a ctua l)
A review of farming business problems in next paragraphs might be able to show necessary adjustment. And any lessons from Thailand may hint a solution.
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2015
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South East provinces produces 189.62 thousand tons, accounts for 80.9% of Vietnams milk production in 2007 but North central coast is champion in milk production growth in last 7 years.
Collection Price
Collection price is one of the reason that eliminated famers from dairy farming until 2006
The collection price is the ex-farm price that local dairy farmers sell to dairy products processor. To understand the development of the collection price over time, in picture Collection price (VND per liter in comparison with imported source / current and forecast) we make a comparison between the collection price which called local source against its equivalent cost for recombination milk from imported milk ingredients which is called imported source. Major cost added into importation is import tariffs. In the comparison, transportation cost from farm for local source which is quite small at approx. VND200 per liter and transportation cost from port for imported source to processors are excluded.
Year 2005: for decades from 1995 up to 2005 the collection price to processor remained unchanged at VND 3.500 per liter! Year 2006: according to the global price increase, after decades until August 2006 Vinamilk/ followed by Dutch Lady, the two key milk collectors/ processors in Vietnam increased local price. However, it was still low. This is one of the reasons that eliminated small farmers from the sector as mentioned in previous paragraph. Year 2007: processor raised price three times in May, Jun and again in July. Following changes of the price in the picture Collection price (VND per liter in comparison with imported source / current and forecast), we see that Government and Processor have coordinated harmoniously: Reducing the import tariff when the global price is high; and
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FOOD & BEVERAGE Increase the import tariff back to the normal level when the global price went down. But we do not see the same thing in 2006 when lots of small farmers quit their business!
Farmer is happy with the collection price First time ever since 1995
At the price farmers are quite happy. A review on the farmers profitability is done in Vietnamese dairy farmer section. Beginning March 2008, the global price is going down to level of Jun 2007. Dutch Lady Vietnam is maintaining the collection price whilst raising requirement in quality standard. This issue has angered Vinamilk farmers as they say that at the same level quality of Dutch Lady, Vinamilk is now paying less at 1,000 VND per liter. Forecast for coming years: In the context of globalization and ongoing liberalization of trade, Vinamilk / Dutch Lady Vietnam will not buy at a higher price than the global one. What is the future global price? The whole milk price has been significantly reduced from USD4600-5000 per ton to USD 2900-3200 per ton Oceania Export Price or USD 43504600 per ton to USD 3200-3600 per ton Western Europe Export Price at present.
Future global milk price is impacted by many factors: 1/ Recent chemical melamine scandal in China and in Asia, there is a trend to refuse cow-milk and switch to soy-milk. 2/ Global economic slow-down. 3. Milk productions new cycle
Collection price (VND per liter in comparison with imported source / current and forecast)
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As per latest forecast from FAPRI established in April 2008, whole-milk-powder price next five years will moving in a range of USD 3,000-3,200 for Oceania Export Price and USD 3,200-3,500 for Europe source. If the forecast is accurate, the imported source costs as much as local source as shown in picture Collection price (VND per liter in comparison with imported source / current and forecast). And it is a good start for local dairy farming. Locally, Vinamilk and Dutch Lady Vietnam and recently Hanoi Milk are finding the better way to reduce the importation dependence by a very good marketing strategy of introducing 100% fresh-milk brand.
2,000 Mar/Jun06 Concentrate Sources: Dutch Lady Vietnam, Jaccar Scale-up is the key factor to improve efficiency for the time being Sep/Oct06 Apr/May07 Sep/Oct07 Jan/Feb08 Sep_08
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Cassava waste
Beer residue
Purchased grass
There is a suggestion for feeding costs reducing by DUTCH LADY VIETNAM but this also links to increasing the size of their business. Moreover, cooperation between farmers with is very weak now. It is key factor to improve the efficiency.
As mentioned in the Production section, 72% of the raw milk/ milk ingredients are imported from abroad. And the balancing of 28% is locally produced in Vietnam. Their processing factories are located where there is high milk consumption such as in big cities. And they mainly focus on collecting raw milk from those places. And, 70% of fresh-milk is coming from HCMC / HN outskirts. The milk collection system varies according to company.
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VNM Factory
2 1 1 3
Collection Points
Sources: Vinamilk, Jaccar
Farmers
The collection price from VINAMILK is about VND1.000 lower than DUTCH LADY VIETNAM for same content of quality. However, it is not easy for a farmer to switch to DUTCH LADY VIETNAM as the processing to become a supplier for DUTCH LADY VIETNAM takes 6 months after fully implementing all technical requirements from DUTCH LADY VIETNAM. The other reason not allowing the switching is those farmers already currently receiving subsidy from international program which cooperate with Vinamilk. In fact, what they do is after taking sample for each farmer, they add water to raw-milk to have higher volume. Consequence, farmers get lower pay for the lower quality. Milk collector is enjoying the payment for volume increase. Lots of quarrels on milk payments at Vinamilk might be explained by the facts. Raw milk procurement by buyers (Vietnam)
2005
Others 28%
Others 23%
Hanoimilk 6%
Vinamilk 46%
Hanoimilk 7%
Vinamilk 48%
Anco 7%
As showed in picture Raw milk procurement by buyers (Vietnam), Vinamilk currently has the largest access to raw milk of almost half of raw milk production. Others are from Lothamilk, Mocchau Milk, Elovi, Vixumilk, etc. individual accounts for less than 1%. This un-transparency in milk collection is a big obstacle to dairy production industry in Vietnam.
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Exporting countries to Vietnam are grouped in two categories: WTO and AFTA. Below picture Milk ingredients import tariffs - Vietnam shows a summary of current tariffs under different schemes of MNF CEPT WTO and temporary one during the Q4-07 to Q1-08 for dairy ingredients/ products depending on the kind of product imported and on its fat and sugar content.
WTO
WTO is for members with whom Vietnam applies the Most Favored Nation (MFN) tariffs. As per picture Milk ingredients import tariffs - Vietnam , Vietnam commits to lower to MFN tariffs from the bound rate at the date of accession to 20 % for raw material and to 30% for premanufactured products. However, current MFN tariffs are much lower than this commitment to 10 % for raw material and to 22% for pre-manufactured products. Most of the commitments in the summary of the picture Milk ingredients import tariffs Vietnam were delivered earlier than schedule. This is a disadvantage for local milk production.
AFTA
ASEAN Free Trade Area (AFTA) members, with whom Common Effective Preferential Tariffs (CEPT): CEPT tariffs for dry skim and whole milk powder and all other ingredients for milk products are currently subject to 5% tariff. Many of them have been reducing more than committed by now. MFN tariffs on manufactured dairy products currently 15% compare to its commitment of 25% in 2012. Similar to WTO, most of the commitments in the summary of picture Milk ingredients import tariffs Vietnam were delivered earlier than schedule. This is a disadvantage for local milk production.
Quota
There is no import quota to protect local production. There is a very good protection in Thailand with request to buy 1 liter of raw milk for every liter imported.
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Source: Jaccar
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At average performance of cow yield per year of 1700 liter/cow/year: total cash received for 5 cows at collection price of VND 6.500 per liter is VND 4.6m. Total feeding cost for those cows as cost mentioned in section III.III is VND 3.9 m. Net income is VND 0.7m is quite small to raise a farmers family in a month. At good performance of cow yield per year of double 3400 liter/cow/year. The level is just at 40% performance level of the cow in Australia, and been reported achievable in Vietnam. Total cash received is double, total cost is same as above, net income is VND 5.4m per month is more than happy for their family. For the business size, they do not invest any money on building farms and equipments.
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FOOD & BEVERAGE In medium farm they can produce at better yield 5100 liter/cow/year. Although they have to pay salary for farmers, they are currently making good profit. With the high selling price starting middle of last year, they could recoup their investment in year 2007.
Farmer is happy
We see that the results depend on management skill of farmer to have high/low yield. And, cows health depends on weather and selling price is challenging to global price the cow milk business is becoming an adventure investment. And this cow milk business is not interesting compared to other agricultural products where farms can have better return Also, being controlled by processors but they could not cooperate with each other to negotiate the price with them.
Conclusion
Minimum support from Government to dairy farming
We can see that Government lacks of long-term strategy in farming business reflected through no consistency in implementation in long-term NDDP plan and in legislation. Our question is whatever Government does have an intention to deliver the NDDP plan? Without the controls
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FOOD & BEVERAGE and subsidies, farmers will not secure long-term investment in farming business for a bigger scale in terms of more cows and more technology. Consequence, there is a very high farms return. On and off farmers cannot accumulate management skill in the cattle farming results in un-efficient cost/ low cow yield. Many non-profit organizations in Vietnam and recently MARD will / are encouraging a National School Milk Program using local supplies of raw milk implemented throughout the country. Of note, total number of pupils and students and teachers are approx 24 million which accounts for almost 30% population of Vietnam. There is a big potential consumer in National School Milk Program.
General Conclusion
Market for dairy production is obvious as the current production can only cover 28% of the total market and the market is getting bigger along the dairy consumption market growth in the coming years. Currently, dairy farmers are quite happy about their returns. However, 95% dairy farming by small-holders does limit competitive advantage and depends on many internal and external factors such as 1/ High and un-efficiency price cost due to small scale, low technology, low management skill, etc. 2/ Depending on global price 3/ Long-term strategy of government policy, etc. Meanwhile, we think scale is critical factor which can solve most of the difficulties. Scale up the small-producers to become small commercial dairy farmers is more appropriate for the time being. This is even better if there is involving dairy processor the leader of the dairy chain such as Vinamilk / Dutch Lady is doing now. We believe big support from Government will be the way to succeed as shown in Thailand case. However, asking for such improvement from Government in Vietnam will take time. Otherwise, investment in a country where the weather is appropriate for the business such as New Zealand as Vinamilk ever think-off is a very good solution for the whole dairy value chain.
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Truong Tho Milk factory (in Thu Duc district, HCMC) built in 1970 by Friesland Frico Domo (Netherlands) and Cosuvina (Vietnam-China) specializes in condensed milk, aseptic fresh milk, soya milk, yogurt, fruit juice and cheese. Die Lac Milk factory (in Dong Nai province) and Bien Hoa Coffee factory (in Dong Nai province) belonging to Nestl (Switzerland) specializes in formula for kids and adults, nutritional powder for babies. Thong Nhat Milk factory set up by Foremost (USA) in 1961 specializes in condensed milk, aseptic fresh milk, ice cream, yogurt and drinking yogurt.
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In 1994, Hanoi Milk Factory specializes in condensed milk, aseptic fresh milk, ice cream, yogurt, drinking yogurt and Soya milk In 1996, Binh Dinh Milk Factory specializes in aseptic fresh milk, ice cream, yogurt and drinking yogurt In 2001, Can Tho Milk Factory specializes in aseptic fresh milk, ice cream, yogurt and cakes In 2004, Saigon Milk Factory specializes in aseptic fresh milk, yogurt and drinking yogurt In 2005, Nghe An Milk Factory specializes in condensed milk, aseptic fresh milk, and yogurt In 2006, Tuyen Quang Dairy Farm with 1,400 heads of cows In 2007, Lam Son Milk Company Ltd
As per company, currently Vinamilk is running at capacity for each category at 60%/75%/95% for liquid/ powder/ condensed respectively. From our estimation, the capacity for each of category in the same order is approx. at 250Mt. / 30Mt. / 200Mt. Established almost 30 years ago, with a charter capital of 1,590 trillions of VND and already 9 plants operating (and more planned), 3 branches and 1400 retailers throughout the country, the Vietnam Dairy Products Joint-Stock Company (Vinamilk) has became the leading company of milk processing in Vietnam controlling approximately 35% of the total liquid-milk output. The Company has an assortment of more than 200 products, ranging from dairy to juice and water products. Recently, Vinamilk changed its strategy for dairy development, including other services, such as developing dairy cattle herd, technical support to farmers and credit system for farm households, aiming at supporting the production. The Company decided to invest USD 2.2m to build a dairy cow breeding centre in the Mekong Delta's Can Tho province, in the vicinity of the Song Hau Farm (Sohafarm). This centre will set standards for breeders, breeding facilities and management methods for the whole Mekong Delta. The company intends to turn the centre into a model farm where farmers can come to study modern techniques or buy breeding cows. The centre will also supply fresh milk for Vinamilk factory in Can Tho. Currently, some 500 dairy cows are being raised at Sohafarm. In a related development, the company will earmark VND 8bn as soft loans for cow farmers in Lam Dong province with the hope of establishing a fresh milk supply zone in the Central Highlands province. Accordingly, a single farmer buying a dairy cow can now borrow from Vinamilk VND 22m with a payment term of three years, while farms can access VND 50m each to upgrade facilities.
Vinamilk dominates the dairy market in Vietnam with its share surpassed the following player
Vinamilk is trying to control the source of raw milk. It is having plan of investment into farms of total 10,000 in 3 years time with a total investment of USD 20m. The investment for 3 years in farming is equal to 4% of annual sales. Look at its heavy level of spending in recent years into marketing and distribution of more than 10% of sales annually, we can see that Vinamilk priority is still focusing in processing, marketing and distribution the products then in the raw milk production.
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Royal Frieslandfoods, the new name for Friesland Coberco Dairy Foods, is a multinational company that develops, produces and sells a wide range of dairy and fruit-based products. The company increased its production size in 2001 with the purchase of Nutricias division of flavored milk and coffee whiteners. The company has a strong presence on dairy markets, especially in Western Europe, Central Europe, West Africa and Southeast Asia (Dutch Lady in Vietnam and Malaysia, Friesian Flag in Indonesia and Foremost in Thailand). Frieslandfoods operates at 100 locations with a total of 18,000 staff; of whom 12,500 work outside the Netherlands. The activities are carried out by the operating companies. Each year, Friesland Foods purchases some 5.2 billion kg of milk from 11,000 dairy farms owned by members of Zuivelcoperatie Friesland Foods. Historical background of Dutch Lady Vietnam Frieslandfoods has been present in Vietnam since 1969, when a joint venture between Friesland and Cosuvina was signed in Saigon and the production and sales of infant foods Dutch Baby started. In 1975, the company was nationalized. In 1993, the Dutch Lady Vietnam Food & Beverage Co. was created and a new factory opened in HCMC. In 1996, the Vietnam Foremost Dairy Company, a joint venture between the provincial importexport company Protrade and Frieslandfoods, was set-up in Thuan An district in Binh Duong province with a fund of USD 34,5m, whereas USD 6,6m were affected to the development of a milk collection program. The company, placed under the provincial Peoples Committee, was renamed Dutch Lady Vietnam in 2002. Since September 1995, Frieslandfoods has given to HVA International - a Dutch management & consultancy firm with its headquarters in Amsterdam in the Netherlands the responsibility to develop a network of milk producers and milk collection around Ho Chi Minh City. In 1993, HVA International conducted a feasibility study for the establishment of a milk collection scheme and a dairy development program to stimulate raw milk production on small farms, in order to meet the demand of the new Dutch Lady Vietnam dairy plant. Based on this study, a long-term dairy farming Development Project has been established. Dutch Lady has been implementing its dairy project since 1995. Its core activities are:
Milk collection (with focus on quality control) Extension (with focus on technical training) Special projects (issuing cattle loans, implementing farm hygiene and acquainting farmers to use milking machine)
In 2008, Dutch Lady was built a 2nd factory Phu Ly Ha Nam with USD 40m investments for drinking yogurt and powder milk.
Nestl Vietnam
Nestl Vietnam withdrawn from liquid milk business
The Swiss based Nestl Company has undergone a similar fate to Dutch Ladys in Vietnam, although it has been present in the country since much longer (1916). The Nestl factory, set-up
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FOOD & BEVERAGE in Dong Nai province in 1974, was nationalized in 1975. In 1996 Nestl started a dairy production scheme in northern Vietnam. However, in 2007, Nestl sold its Ba Vi Dairy Factory milk plant, producing pasteurized fresh milk and yogurt, one of the two plants run by Nestl Vietnam food group, has been transferred to a domestic owned joint stock company, Anco. According to Mr. Pierre Schaufelberger, General Director of Nestl Vietnam, it sold the plant to focus on developing its key products in Vietnam.
Hanoi Milk started work on a VND 80bn milk processing factory in Me Linh District in the northern province of Vinh Phuc late 2001. The company, equipped with Swedish Tetra Pak production lines, planned to produce four million liters of milk in 2003 and 11 million in 2004. In September 2007, South Korean milk processor Maeil Dairy inked a joint-venture with HANOI MILK to build a second factory in Binh Duong where HANOI MILK will contribute a land-use-right and Maeil will contribute in cash to build the factory. The deal will give Maeil access to the high-growth Vietnamese dairy market. On the other hand, Maeil will help Hanoi Milk broaden its production lines, adopt new technology and improve their management capabilities. The company will also support Hanoi Milk to build a milk processing plant in southern region of the country. However, the plan has not progressed further since then due to the global economic recession. Recently Hanoi Milk is involving in the chemical melamine. All its products have been refused by super-markets and consumers. Hanoi Milk is trying all its best in PR and marketing activities to recover from the accident. Hopefully it will be able to sustain in at least 6 months time when consumers forget about the scandal.
Campina
Campina is the 1st player jumping into dairy premium segment
Campina International Holding B.V, a leading European dairy cooperative specialized in liquid milk, dairy drinks, yoghurts and desserts, cheese and butter products, cream products, ingredients for the foodstuff and pharmaceutical industries, entered into a 50/50 joint venture of USD4 million with Vinamilk in early 2005. The JV will be focusing on the value-added segment of the Vietnamese market - yoghurts, dairy drinks and desserts - which will be marketed under the Dutch company's brand. Vinamilk is currently focusing on the lower end of the dairy market (sweetened condensed milk, milk powder and liquid milk). With the JV with Campina, Vinamilk is expecting to build sales of its higher margin products. On the other hand, with the largest national distribution network of Vinamilk, Campina is expecting its further expansion in the Asian region after getting into Thailand in 2004. Campina will contribute not only its brands but also its marketing know-how and its R&D capacities. This is key thing for Vinamilk to get into premium cold-products segmentation. Vinamilk, for its part, will contribute its production facilities and distribution network throughout Vietnam. Included in the deal was non-profit project of developing raw-milk source of USD 1.63m, half sponsored by the Netherlands and another half contributed by both partners. Campina Dairy Training Centers inauguration in Lam Dong Province is part of the project. On 6 June, Vietnam Dairy Products Joint Stock Company (Vinamilk) and Campina inaugurated a training center and model dairy farm in Tu Tra commune, Don Duong district, Lam Dong province, which is a nonprofit project under the sponsorship of the government of the Netherlands. The move is part of Development of Raw Milk Areas project conducted by Vinamilk and Campina. The projects total funding is EUR 1.26m, half of which is from Dutch Government, and the remainder is equally shared by Vinamilk and Campina. By means of training activities, the center will enhance farmers skills, support dairy farming activities, develop model farms, set up milk
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FOOD & BEVERAGE collection points and further assist satellite farms. The project is planned to end in December 2008 and will be handed over to Vinamilk to continue training dairy farmers until 2010. Early 2Q07, the JV was dissolved. Reason explained by Vinamilk was because Vinamilk was not able to meet the requirement in cold-product distribution and also because Campina is merged worldwide to the owner of Dutch Lady Vietnam. Campina was becoming a 100% entity in Vietnam doing trading with its own distribution network. Vinamilk was becoming its submanufacturer. At the dissolving, Campina, on one hand it paid for all the loss incurred by the JV, on the other hand, it has its own distribution network penetrating to most of provinces in Vietnam which were mainly spited from Vinamilks. This is a very happy end for Campina as the cost for build such a good distribution network at few USD million is really a good deal! Vinamilk is developing the cold-products by themselves. In Nov 2007, the Campina Vietnam Ltd. Co increased its charter capital from USD 4m to USD 14m. Campina is continuing the cold-products the premium segmentation, and its 1st launch recently was Dairy-base Dessert products.
Imported brands
Imported brands dominate baby powder milk segment
Many famous international brands presence in Vietnam make the dairy market very competitive. They are Mead Johnson Nutrition Division from Bristol-Myers Squibb Co., Fonterra, Abbott Vietnam Co Ltd, Meiji Dairies Corp, etc. Most of their products are manufactured in New Zealand and distributed into Vietnam. Those top brands account for more than 70% of imported brands sales. Recently, Mead Johnson Nutritionals belonging to Bristol-Myers Squibb Co. which has operated an office in Vietnam for ten years, established a 100% foreign-owned company in Vietnam named BMS Vietnam Co Ltd with a capital of USD100,000. First foreign-owned milk company licensed for the business in Vietnam. This is to import powder-milk semi-product, and package in Vietnam. This investment will threaten local business in Vietnam including Vinamilk, Dutch Lady, and Nestl in formula milk for baby. By doing this, BMS will offer lower retail price to consumer thanks to the benefit from import tax cut as mentioned in picture Milk ingredients import tariffs - Vietnam when switching from 20-30% tax class to 10-15% tax class.
Distribution network
Being the crucial factor for market shares
Dairy products reach the consumer either through retail or foodservice, i.e. restaurants and catering. Until now, owing a large distribution networks in Vietnam is definitely gaining a good market shares for a processing company. The largest distribution network is with Vinamilk which penetrates to all of 64 provinces of Vietnam whereas; all other players are focusing in key cities only. Consequence, Vinamilk market share is high and quite un-able to defeat. Normal distribution system in Vietnam is as follows:
Indirect channel (traditional trade): Traditional channel with a certain number of distributors wholesalers and retailers divided geographically and accounting for 80% sales. Products from factory will be sent to distributors spread out nation-wide. Distributor is normally paid at 3.4% for responsibility to carry products directly to
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FOOD & BEVERAGE retailers or through wholesales in remote areas to retailers. In that case, distributor shares his margin of 1% to wholesaler to carry products to retailer. Retailers are grocery stores on streets and normally paid 10%. Trade margins are quite competitive amongst processing companies.
Direct channel (modern trade): Modern channel includes supermarkets, showrooms, schools and hotels which account for 20% of companys total output: products from factory go direct to super-markets. Normally, super-market receives all margins paid to levels in indirect channel as besides acting as a retailer, super-market is a good place for display purposes. As the percentage of sales through super-market is still small, the price power is still with processors. Foodservice accounts for a very small share in the distribution at the moment.
Currently, there is no specific law for relations between industrials and supermarkets. The Thai retail market is currently equally divided between traditional trade and modern trade. Each of the categories accounts for approximately 50% of the overall sales volume. This may be the trend for Vietnam market in near future when the lift for WTO in distribution in early 2009.
Not any processing companies in Vietnam communicate about their products margin! Based on the understanding of the production and trading, we estimate trade margins and gross margins as follows, taking into account Vinamilk and Dutch Lady Vietnam are competing in all categories price, except powder milk from Vinamilk goes for low-end and DUTCH LADY VIETNAM goes for premium segment. Distribution network
Distributor 3.4% Processor Super market 13.4%
Sources: Trade, Jaccar
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From the picture Key products trade margin, the largest gross-margin is premium powder milk. Second is yoghurt then liquid. And the last one is powder-milk low-range segment and condensed milk. However, yoghurt is very costly in terms of cold-storage & distribution, deducting those factors may bring profitability level of yoghurt to liquid-milk.
Facility supplier
Facility supplier is the main R&D provider for processing company
Whilst most of investment in milk farming business is breed and land, most investment in dairy products processing are machinery for dairy processing equipment including packaging machine. Different product categories require different production lines. Currently, Tetra Pak is the supplier for most of liquid filling process including UHT/long-life milk, drinking/ spoonable yoghurt, condensed milk. Recently, Tetra Pak is facing competition from Combibboc whose new entrance into Vietnam market at a very competitive price.
Tetra Pak was the sole facility supplier for last ten years in Vietnam
Tetra Pak the sole facility supplier for last ten years in Vietnam
Apart from depending on imported materials, most of liquid milk processors in Vietnam also depend on Tetra Pak, the supplier for machinery and packaging materials for most of Vietnam liquid milk processors. Tetra Pak has been present in Vietnam for more than 10 years. Tetra Pak is involved in dairy process including providing packaging; processing equipments; and services such as training, maintenance, parts, etc. Details of their services in Vietnam are:
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FOOD & BEVERAGE providing marketing support for products brandings of their customers - the liquid products producer such as Vinamilk, Dutch Lady, Hanoi Milk, etc., supplying packaging materials for different shape/ size, charging 22$ per thousand packs of standard-size of 180ml 2 years ago with a price increase of 7% p.a., providing technical & maintenance services including spare-parts. Tetra Pak is charging VINAMILK 0.5m USD p.a. for servicing 16 packing lines used by Vinamilk and providing financial support for packaging lines. The biggest customers of Tetra pack in liquid milk are Vinamilk Dutch Lady Vietnam Hanoi Milk. Recently, Tetra Pak is getting competition from Combibboc from Switzerland, whose new entrance into VN market is at a very competitive price. On the other hand, liquid products producers commit when using Tetra Pak machinery. Details of commitments are: using Tetra Pak packaging materials as long as using Tetra Pak packaging lines, using Tetra Pak maintenance service & spare-part to ensure good working-condition for Tetra Pak machine, using Tetra Pak financial support & return in kinds of leasing rental to Tetra Pak, having Tetra Pak marketing support, and having Tetra Pak rebate on packaging volumes used. Look at the costing structure, Tetra Pak is now adding 45% to raw-milk cost in-terms of packaging and machinery depreciation.
As mentioned in the previous section, almost 72% of raw milk is imported for milk recombination in Vietnam. Apart from its price-competition, convenience and consistent quality are the two other factors that make milk processors prefer them. However, in late 2007 and early 2008, the global milk price doubled as shown in picture Collection price (VND per liter in comparison with imported source / current and forecast). Processors under Government pressure could only pass a part of the price increase of less than 22% to consumers. All processors including Dutch Lady/ Hanoi Milk have lost/ financially suffered in the fourth quarter of 2007 and in first half of 2008. It is becoming the biggest challenge facing dairy companies.
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Global price fluctuation over year / Oceania FOB (USD per ton)
Monthly rate actual & forecast from 4Q08 onwards
5,000
4,000
3,000
2,000
1,000
Cycle 1 - 01 Cycle 3 - 01 Cycle 5 - 01 Cycle 7 - 01 Cycle 9 - 01 Cycle 11 - 01 Cycle 13 - 01 Cycle 2 - 02 Cycle 4 - 02 Cycle 6 - 02 Cycle 8 - 02 Cycle 10 - 02 Cycle 12 - 02 Cycle 1 - 03 Cycle 3 - 03 Cycle 5 - 03 Cycle 7 - 03 Cycle 9 - 03 Cycle 11 - 03 Cycle 13 - 03 Cycle 2 - 04 Cycle 4 - 04 Cycle 6 - 04 Cycle 8 - 04 Cycle 10 - 04 Cycle 12 - 04 Cycle 1 - 05 Cycle 3 - 05 Cycle 5 - 05 Cycle 7 - 05 Cycle 9 - 05 Cycle 11 - 05 Cycle 13 - 05 Cycle 2 - 06 Cycle 4 - 06 Cycle 6 - 06 Cycle 8 - 06 Cycle 10 - 06 Cycle 12 - 06 Cycle 1 - 07 Cycle 3 - 07 Cycle 5 - 07 Cycle 7 - 07 Cycle 9 - 07 Cycle 11 - 07 Cycle 13 - 07 Cycle 2 - 08 Cycle 4 - 08 Cycle 6 - 08 Cycle 8 - 08 Cycle 10 - 08 Cycle 12 - 08 2009 2011 2013 2015 2017
3,092
2,989
2,939
2,935
2,958
2,984
3,049
3,089
2,181 1,954
2,181
2,100
1,312
1,312
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
The only exception in the case is Vinamilk. High level of stock for year-end 2007 helped them overcome the problems. Currently local raw milk meets 25% of Vinamilk production demand from individual farmers and from its own 03 farms including the new investment in Nghe An. Recently, Vinamilk plans to expand farming in both Vietnam and in New Zealand. If the entire plan is executed successfully, it will only raise the level of raw-milk self-control a little to 30%. There are 2 issues here:
Whether consumers accept the recombination? Or will they switch to imported brands in long-term? Thailand has successfully reached the level of 40%. With the current circumstances, it is very difficult for Vietnam to do the same thing. Depending on the import ingredients will always be an issue to Vietnam processing industry. Can current players survive if another flux happens again in future?
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The perception of fresh, long-life/ UHT, and micro filtered milk was a little bit confusing in Vietnam. Most consumers think that they are all same thing. Processors have taken advantage of the situation for a long time until end of 2007. In late 2007, Vinamilk launched a brand new brand called 100% fresh milk. This is just a name as in fact it is requested a certain volume of vitamin/protein added-in the fresh-milk processing. Until now, Vinamilk is the only processor having real fresh-milk but this is a small volume of less than 1/10 of total Vinamilk liquid milk. With the lift of quotas and duties on imported raw material, fresh milk produced in Vietnam will hardly be in a position to compete with reconstituted milk anymore. Vietnam is having the same problem in dairy products as with all other kinds of foods & drinks in developing countries where there is no assurance for the quality. Different food products suffered from negative reports in the media, especially chemical melamine contamination linked to kidney problems in thousands of Chinese children from China raw milk. So consumers were always watchful and in need of some guarantees about food and beverage quality. Milk quality is considered as a major bottle-neck in the absence of any standardized milk quality testing scheme for the whole country and no independent quality control agency carrying out regular checks at farms, collecting centers and processing factories. Vietnamese are now to believe that foreign products are better than domestic ones. That is a very good sign for local products from Vinamilk / Dutch Lady Vietnam thanks to the melamine scandal.
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FOOD & BEVERAGE Competition among milk producers is getting tougher. To gain bigger market shares, milk firms continuously launch new products, organize seminars on the health of mothers and children, and establish close ties with hospitals to market their products. And they may be consolidation and even new player in the section.
Although in the past few years, local companies have invested in Research and Development, and upgrading their factories to facilitate the new developments, Dairy products in Vietnam are still very simple and typically shelf stable and store at ambient temperatures. As per Euromonitor, less than 5% share of the dairy market for child-targeted brand compared to normal bench-mark of 50%! The Vietnamese manufacture showed a greater resistance to cush overt segment, fearing that this could reduce the target consumer group for their particular brand! Most of dairy products in Vietnam are low-end products range at very low margin. This is with an exception to international brands from foreign milk companies in powder milk for baby who is having the high-tech to add special ingredients such as Canxi DHA etc safely into baby milk powder. Please refer to picture Key products trade margin for a view in big different margin of low and premium products powder milk. Foreign milk companies really take advantage of technology, research, and development tasks, and over 5,000 scientists and experts work every day to find new milk formulas for Abbott, said Bui Thi Minh Tu, Advertising and Marketing Director of Abbott Vietnam, which invested over USD 1.7bn in researching and developing products in 2003. The firms distribution network covers over 130 countries. While most of local processors including Vinamilk relies on big innovations through its facility/ material supplier and does small innovation of new pack size/ new flavor by themselves. Consequence for the future, local market might be behind in innovation and taken over by international brands where they are strong and first in R&D.
The structure of local/ foreign players may be changed sharply after the issue melamine contamination. This is giving a big potential for expansion for both Vinamilk and Dutch Lady to expand to another VND1.000 bio revenue from small local players.
In long-term:
A huge potential for big brands from foreign investors who have raw milk source controlling from their over-sea parent companies, very experienced in providing sophisticated products for urban niches to Vietnamese consumers. It is even better when tariff reduced further by 2012 at latest. On the contrary, a much tougher competition for local players, including Vinamilk if they do not have a breakthrough in R&D and in controlling raw milk source.
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The low income in rural areas: urban people have 2 times higher income than rural people, top 22% richest people have 5 times higher income than the top 22% poorest people, ethnic minority people have 60% less income than country average people. The most important is milk is very expensive in Vietnam as Cost of 1 liter of fresh-milk equals to cost of 3 kilos of rice in Vietnam. There is no habit of milk/ dairy products consumption.
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0.30 0.25
CARG 14.1%
GPD - Mio VND / capita / year Milk consumption - Mio vnd / capita / year
The potential contribution of school milk program to national development cuts across a number of sectors including health, education and agriculture. One child in Vietnam having milk everyday at school costs USD30 a year and normally it requests this child has milk all through school. Looking at its benefits described below, spending in School Milk Program is considered an investment for future not a cost. Health benefits:
School milk will supplement the quality and quantity of food available for the children. Milk being a good source of proteins, vitamins and minerals will enhance attainment of sound health and development in children. The childs body immunity would be boosted thus reducing infections in this age group and subsequently good nutrition will contribute to the effect of other interventions in reducing infant mortality. A child who is taking milk is likely to develop a better mental capacity than one who is not because of the nutrients contained in it.
Increase enrolment and retention in school: the prospect of having milk will attract more children in school and improve their participation in school activities. This gives them the opportunity to access education and compete favorably. They become good material for human development and also contribute to the countrys goal of increasing national literacy rates. The schools will have relatively healthy children with high morale for education.
Supplying milk to schools will increase demand for processed milk. This will call for increase in quantity and quality of processed milk thus enabling the manufacturers to utilize their redundant processing capacity. This could have an impact of the tax revenue of the country as well.
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Milk in schools will increase per capita milk consumption and therefore increase demand for milk and dairy products. A milk drinking culture is likely to start with these children and continue with future generations, developing a formidable local market for dairy products. This will stimulate milk production and eventually lead to a vibrant dairy industry in future, while contributing to national poverty eradication efforts. Increased income to farmers will enable them to diversify production and penetrate other available market avenues. Increased milk production and subsequent increase and diversification in processing would gradually replace milk imports, which come in the form of condensed milk, milk powder and infant milk powder. In this way the country would become self-sufficient in milk. Once farmers are assured of markets they will form dairy cooperatives, eliminate middlemen and make bigger profits from their farming efforts.
Conclusion: School milk program has significant direct or indirect contribution to the economy. It will contribute to human development and human capital accumulation and play a key role in increasing household incomes. It offers on-farm and off-farm employment and has potential for increasing tax revenue.
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Thailand
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Powder milk Yogurth Liquid milk Condense milk Cream
France
60,000 50,000 40,000 30,000 20,000 10,000 0 Yogurth Liquid milk Da iry-ba se dessert Froma ge Powder milk Cream Condense milk
Powder milk
Powder milk is top seller in Vietnam
There are more than 50 products of powder milk in Vietnam of which the imported one accounts for more than 50% of the segment.
Most of powder milk in Vietnam is for follow-on baby milk formula. The rest is for adults with pregnancy, diabetes, osteomalacia, etc. Although breastfeeding is encouraged in Vietnam, most parents prefer to give their offspring milk formula. Milk formula products made claims such as closer than ever to breast milk and helps growth and the immune system which help parents to be more confident in milk formula products. Baby milk is an important product, so parents tend to choose the most famous brands that have built their reputation over a long time.
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Baby milk advertising was allowed in Vietnam. However, during the advertisements, manufacture emphasizes the need for mothers milk, while claiming that their products contained nutrients that were similar to those found in mothers milk. Thanks to the development of the national economy and the small number of children in each family, parents were more able to buy higher quality and higher price products. Multinational have more experience in developing baby milk than domestic players. Multinational are able to invest in high technology, which helps to develop special ingredients and safer products. Consequently, parents are generally more confident in purchasing multinational baby milk. Vinamilk is an exception in the case as it is famous in milk products, so most of Vietnamese consumers feel they can trust the quality and safety of its milk formula.
Definition for UHT or Pasteurized milk The pasteurization process involves heating milk to 72-75 degrees Celsius with a holding time of 15-20 seconds before it is cooled. Along with correct cooling, pasteurization will supply milk with longer shelf life. With proper chilled distribution, pasteurized milk has a shelf life of 5-15 days. Using UHT treatment, liquid food products are exposed to brief, intense heating to temperatures in the range of 135 to 140 degrees Celsius. UHT treatment is a continuous process which takes place in a closed system that prevents the product from being contaminated by airborne microorganisms. The product passes through heating and cooling stages in quick succession. Aseptic filling is an integral part of the process that avoids re-infection. The end result is a product that can be conserved for around six months without refrigeration.
Flavored milk drinks in Vietnam are typically shelf stable and stored at ambient temperatures. Unlike Thailand, which has a strong and expanding presence of child-specific drinking milk products, Vietnam has a significantly smaller presence of child-target brands, accounting for only 5% share of retail value sales of milk in 2007. The Thai government encouraged children to drink more milk and hence, increase their in-take of calcium for stronger bones and growth. However, Vietnamese manufacturers of drinking milk products showed a greater resistance to such overt segmentation, fearing that this could reduce the target group for their particular brand. The perception of fresh, long-life/UHT, and micro filtered milk was rather confused in Vietnam. Most consumers think that micro filtered is the same as fresh or long-life/UHT. Vietnamese consumers were more interested in taste and a guarantee of good quality, as the demand for milk in Vietnam is not sophisticated. Another reason was the enduring problem of food. Different food products suffered from negative reports in the media, so consumers were always watchful and in need of some guarantees about food and beverage quality.
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Condensed milk
Condensed milk is still doing well in Vietnam
This product is used for different purposes in Vietnam: consumers could just mix with water or coffee and drink, or eat it with bread. Hence, the growth of complementary products boosted sales of condensed milk in Vietnam. Condensed milk is grouped in an other dairy products where its sister product could be chilled and shelf stable dessert but it is absent in Vietnam i.e. a great potential here.
Yoghurt
Yoghurt a mean to promote Vietnam dairy into premium segment
Fermentation of milk sugar (lactose) produces lactic acid, which acts on milk protein to give yoghurt its texture and taste. In most countries, a product may be called yoghurt only if live bacteria are present in the final product.
Vietnamese consumers have been familiar with yogurt since at least 1990. Strawberry and mix-fruit are the top flavors for yogurt in Vietnam. Most of yogurt products claim to improve the digestion system and skin care. And most of them target women and children.
The product is giving high margin but its distribution requires a cold storage which is costly compared to other ones. Currently, only Vinamilk / Campina and players who intend to expand into the premium converted dairy product for ice-cream/ cheese/ dairy-base-dessert, etc. are doing the business.
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FOOD & BEVERAGE Four-step testing for melamine at farm-gate, at factory-gate for raw milk and final products, etc... are suggested for all dairy products. However, equipments to perform the tests are quite expensive as recently mentioned by Chinese dairy company Yili. It said it has spent about USD15m on importing melamine testing equipment from the US and Japan to restore confidence after the melamine scandal. How the test could be done in Vietnam still has no answer. Lesson from the disaster is showing a big inherent risk for investment into the products and for food in general.
1.4
1.3 1.3 1.2 1.1 0.9 0.8 0.7 0.6 0.6 0.8 0.8 0.9 0.8
1.3
1.4 1.4
0.9
0.9 0.9
0.5
0.5
India Indonesia China Vietnam VNM Vietnam Avg South Korea Philipines
Russia Sweden Hungaria UK Portugal Romania Belgium Austria Germany Turkey Poland Netherland Switzerland Ireland Czech
Apart from milk being very expensive in Vietnam in comparison to other kinds of basic food such as rice, Vietnam milk consumers complain that retail milk price is increasing every day. Milk processors blame rising imported raw milk/ rising fuel and transportation costs, etc. In fact, the import raw milk price has been reduced half in March 2008 compared to its peak at 2007 end. But retail milk price never drops. The above comparison with 2 prices from Vietnam: the first one is the average for whole country which is mixed between the imported and locally produced and the second one is the price from Vinamilk as we want to look at the competitive ability of Vietnam in general and of Vinamilk representing 70% of liquid milk for Vietnam.
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Categories in which consumers claim they will change their purchase behavior
Infant Formula Powedred Full Cream Milk Gums Adult Milk Drinking Yoghurt Tonic Food Drink Drink Soya Milk Liquid Milk Sauce Condensed Milk Canned Food Bouillon - MSG Instant Noodle Instant Coffee Biscuits Cooking Oil 0 10 20 30 40 50 6 9 17 18 18 19 20 24 26 29 29 30 33 34 38 51 60
Infant Formula
Current Inflation May 07May 08 9% Category Growth 39%
Currently, the 2 prices from Vietnam are high compared to global retail price, especially in the context of a low living standard. It is a disadvantage for both consumers as they cannot afford more milk drink; and for processors, their competition disability when in 2012, full WTO tariff is implemented at lower rate. Threat is mostly coming from yellow countries which have big milk production capacity and low retail price.
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21.6 18.0
9.5
8.5
8.3
7.6
7.4
6.6
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Powder
Powder
Liquid milk
Condense
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FOOD & BEVERAGE Moreover, for the difficult period as this year and possible coming 2 years: after going through Vietnam dairy consumption in the context of high inflation in the above section, we think people wont drop their spending in dairy products for their children although global market and Vietnam are in difficulties and possible economy slowdown in coming years. Vietnamese milk price is now at the top of the world, opening the gate to the foreigners who will bring in sophistication through products innovation and quality, no further big price surprise; better control at consumer end by Vietnamese government and a better price for global raw milk; and inflation expected lower is another factor keeping price increase slower. We think consumption trends in Vietnam will follow Thailands where converted products including yogurt/ ice-cream is keeping the fastest growth and the others including UHT and powder and especially condense-milk will be slowed down.
Conclusion
The above chart shows a potential chance for dairy products in 5 years. Currently, only 10% of Vietnamese people mainly from Ho Chi Minh City and Hanoi consume milk/ dairy products The milk consumption market is really fresh How to reach the potential consumer? In short-term: Quality focus:
Recent issue with chemical melamine impacts Vietnam dairy market in both negative and positive ways. One way, it may create good conditions for processors consolidation. The other way is an alert to farmer and processor to not continue benefit from bad practices. Currently, the group of people is willing to pay well-known brands such as Abbott, BMS/ Mead Johnson/ VINAMILK/ Dutch lady at higher price. Meaning an un-known brand at lower price cannot be able to do good business in Vietnam. This trend will continue as long as food quality is still an issue in Vietnam. Provide more sophisticated products: For such a small group of consumers coming from same places, it is easy to switch to sophisticated products. Imported brands from developed countries can easily meet the demand. In longer term, as mentioned in the previous section, if the local Company could not improve in the area, they will lose their market share to the international brands.
Recently, Campina Vietnam an international brand has just entered into the new segment of dairy-base dessert In long-term:
To create a habit of drinking milk for everybody. The efficient way to provide milk to everybody is National School Milk Program. We can imagine the result of the program in the case of Thailand which is reported to involve 50% of children drinking milk now. Continuously, those children are growing up - they will be able to drink milk and will pass their habits to their children.
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COMPANY SHEETS
Rating: REDUCE Target Price: 10,800 VND
Company Data
Price, close (Dec 29, 2008): 9,700 VND Price, close (Dec 29, 2008): 0.58 USD Free Float (in %): 100.0% Market cap. (VND bn): 97 Market cap. (USD m): 5.82 Turnover per day: 38,700 Bloomberg code: HNM VN
The Company was established in 2001 in the North of Vietnam and has grown very fast. In 2007 it achieved almost 1.6% share of total Vietnamese dairy market and 2.3% share of total Vietnam liquid milk market. Year 2008 is a very bad year for Hanoi Milk: 1/ In 1Q08, Hanoi Milk heavily impacted by global milk price doubling as they could not pass the cost increase to their consumers because of barrier from the market dominant, Vinamilk, 2/ Late 3Q08, Hanoi Milk was extremely impacted by melamine scandal. All of their products seem to be boycotted in the market as no consumer wanted to buy them. All super-market, distributors, agents returned product to the company. In late Oct 2008, Hanoi Milk received a melamine-free test result. Almost 2 months after having the good result, as per Company management, its sales are recovering. However, it is still premature to reach any conclusion. Hanoi Milk operation relies heavily on short-term loan which is becoming more difficult as Hanoi Milk is having a problem with melamine and direct competition from an ex-partner for their business, IDP JSC. Consequently, Hanoi Milk could not deliver the profit target for year 2008 of VND 12bn but on the contrary, it will make a loss of VND 12bn. Hanoi Milk is still having a problem with melamine scandal. Until the company really overcomes the problem, we valuate Hanoi Milk by Asset-Based method. We set a rating REDUCE with a target price of VND 10,800
Company Contacts
Tran Dang Tuan (CEO) Nguyen Thi Thu Huyen (CFO) Dang Anh Tuan (IR) www.hanoimilk.com
Shareholder structure
Lion Capital Vietnam Maeil Korea 3.98% 3.50%
Performance
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
12/06 3/07 Price 6/07 9/07 12/07 3/08 6/08 9/08 12/08
Price/VN Index
P&L Highlights
(VND bn) Sales EBIT Op. Margin (%) Net Income Net Margin (%) Fixed Assets Debts FCF FCF yield (%) 2006 322 21 6% 12 3% 127 76 (16) -28% 2007 236 20 6% 12 4% 138 87 (60) -155% 2008e 334 5 2% (12) -3% 133 98 (16) -162% 2009e 299 1 0% (5) -2% 122 70 34 355% 2010e 329 16 5% 7 2% 110 50 16 166%
Key Ratios
(x) EV/Sales EV/EBITDA EV/EBIT PE P/Book ROE (%) ROCE (%) Div. Yield (%) Payout ratio (%) 2006 1.4 13.6 21.5 33.7 3.3 10% 11% 0% 0% 2007 1.9 14.1 23.1 32.5 2.2 7% 9% 3% 106% 2008e 0.6 9.2 36.5 (8.4) 0.6 -7% 2% 0% 0% 2009e 0.5 10.6 242.3 (18.0) 0.6 -3% 0% 0% 0% 2010e 0.4 4.5 8.5 13.2 0.6 5% 7% 13% 173%
Weaknesses
Heavily depending on imported materials; Low-end products with low margin; Young management.
Next Events
01/04/09 Shareholder meeting
Opportunities
Analyst
LE VAN CAO Luan 81-85 Ham Nghi District 1 Ho Chi Minh City Tel: +84 8 39 14 90 60 lle@jaccar.net
Opportunity in a fresh dairy farming market; Opportunity in a fresh dairy consumption market; International companies could be interested in the
simple structure company.
Threats
Melamine involved and struggling; Funding for working capital period after 1Q09; Very high gearing.
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VALUATION
To valuate Hanoi Milk we looked at different methods: DCF, Peers comparison, Sector-based transactions and Net Asset Value. We could not choose the DCF method. Indeed the Free Cash Flows of the company are mostly negative. The Peer Comparison is not relevant when talking about Hanoi Milk because we could not find a company comparable to Hanoi Milk. The multiples of sector-based transactions is also not relevant as we could not find a transaction comparable to Hanoi Milk. This leaves only the value of Hanoi Milk with its high-tech factory.
DCF
The company is relying heavily on short-term loans for its operations. With an echo of melamine problem and also current economic situation in Vietnam, the Company has to 1/ Delay all capital expenditure, 2/ Plan no dividend payments for the next 2 coming years. Consequently, the DCF being negative, Jaccar decide that the valuation of Hanoi Milk using DCF is irrelevant.
Sector-base transactions
Jaccar also considers another method to value Hanoi Milk by sector-based transactions. We use a median over three years period from 2005 to 2007 as follows: Last transactions (in EUR m)
P/Ebi P/ EV/E EV/
Target
Drayton Pte Ltd New Zealand Dairies LaDorna Newlat Spa Unimilk Limited Liability Company OAO Ostankino Dairy Nutritek
Bidder
Country
Date
PT Indofood Makmur Singapore Nutritek New Zealand Groupe Lactalis Romania TMT Finance Italy Capital International Private Equity Fund II Russia De Milkland Ukraine Russia Russagroprom Holding Russia S.I. Food Products Shanghai Bright Dairy & Food Holdings China Unimilk Limited Edelveis M Liability Company Russia Marfin Investment Vivartia SA Group Greece Compania Agricola y Forestal Parmalat Espana SA Lacteos Siglo XXI sl Spain United Milk Company Vivartia SA Bulgaria Arla Foods UK plc Arla Foods amba UK Ochakovo Dairy Wimm-Bill-Dann Foods Russia Al Safwa Dairies Almarai Company Saudi Arabia Delta Dairy SA Vivartia SA Greece Median Average
Source: mergerarket.com
Price EV P/S tda Ebit PE EV/S bitda Ebit PE 23/09/2008 169 169 7/6/2008 29 64 21/04/2008 70 70 1.8 - 17.5 - 1.8 - 17.5 21/04/2008 35 35 2 - 0.2 -
96 27 170 89 73
96 36 170 89 -
0.9 0.6 -
3.0 19.4 27.3 32.9 1.0 1.5 25.7 0.5 8.5 13.4 36.7 0.7 0.5 4.1 7.2 68.4 0.8 9.1 17.5 34.8
8.0 68.7
1.1
This valuation method is giving a share value for Hanoi Milk of VND 23,000 with a discount of 80%. The multiples of sector-based transactions is also not relevant as we could not find a transaction comparable to a small size of Hanoi Milk.
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Peer comparison
For the valuation of Hanoi Milk with peer comparison, we considered the followings companies: We choose followings companies:
Nestle SA (Switzerland): is a multinational packaged food company that manufactures and markets a wide range of food products. The company product lines include milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods; Danone (France): processes food. The group produces yoghurts, cheeses, dairy desserts, cookies, snacks, and bottled water. It manufactures and markets its products worldwide; Meiji Dairies (Japan): produces a variety of dairy products. They include regular, condensed and powdered milk. The company also produces butter, ice cream, yogurt and dairy based drinks; Yakult Honsha Co (Japan): produces and sells fermented milk products and soft drinks. The company also manufactures pharmaceutical and cosmetic products.
Peer Group
Company Name Market EV/Sales EV/Sales EV/Sales EV/Ebitda EV/Ebitda EV/Ebitda EV/Ebit EV/Ebit EV/Ebit cap (USD m) Nestle SA 135,342 Danone 28,655 Meiji Dairies 1,639 Yakult Honsha Co 3,275 Median Source: Bloomberg 2008e 1.62 2.12 2009e 1.57 1.94 2010e 1.44 1.77 2008e 10.43 12.93 8.60 10.43 2009e 9.51 11.10 8.01 9.51 2010e 8.97 10.31 7.28 8.97 2008e 11.47 14.33 2009e 10.99 12.75 2010e 9.92 11.38 PE PE PE 2008e 2009e 2010e 14.30 15.81 17.14 23.39 16.48 13.06 14.33 15.83 21.40 15.08 11.94 12.83 14.75 18.51 13.79
1.87
1.76
1.61
12.90
11.87
10.65
Hanoi Milk is a very small size business with fits more to groups of companies coming from Japan. However, we do not have enough information available from Bloomberg for these companies.
Net-asset value
Valuation: VND10,800
Hanoi Milk is still experiencing problems with melamine scandal 1/ low revenue 2/ low marketing support due to its output problem. Until the company really overcomes the problem, we valuate Hanoi Milk by only the value of Hanoi Milk with its high-tech factory without taking into account any stock valuation due to its short life-time nature. The Asset-Based method gives Hanoi Milk a share value of VND 10,800 with a discount of 15% (country risk).
Conclusion
Hanoi Milk is recovering but we see lots of risk. Therefore, we choose the net-asset value as only the valuation for the Company. Valuation Summary VND
Net-asset-value
Source Jaccar
USD
0.64
12,700
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The Company was established in 2001 in the North of Vietnam and has grown very fast. In 2007 it achieved almost 1.6% share of total Vietnamese dairy market and 2.5% share of total Vietnam liquid milk market. Hanoi Milk with its 1.6% market share is too small compared with key players in dairy market such as Vinamilk 35%, Dutch Lady Vietnam 25%, and Nestle 6%. Vietnam Dairy Products Hanoi Milk % Shares - Retail Value
2007
2006
2006
2005
2005
2004
2004
Source: Euromonitor
Source: Euromonitor
Hanoi Milk has 23 dairy variants. All of the variants are liquid milk or yoghurt and traded under a unique brand IZZI. Just before the melamine scandal, Hanoi Milk launched a new brand for a 100% fresh-milk product. The brand was named after Hanoi Milk. IZZI was performing very well until the melamine scandal: IZZI was ranked 5th after 1/ VINAMILK from Vinamilk, 2/ MILO from Nestle, 3/ ANLENCE from Fonterra, 4/ FRISTI from Dutch Lady Vietnam. After being heavily impacted by melamine scandal as mentioned in below Hanoi Milk Sees Big Revenue Loss due to Melamine section, as per Company, IZZI progressively recovered from grass to 80% of normal performance but the just launched brand, Hanoi Milk is totally dead as at present. The Company is focusing on PR in order to persuade its consumers that the Company is innocent in the scandal. Similar to Vinamilk, IZZI is for mid-income class. Therefore, Hanoi Milk is facing direct competition from Vinamilk.
In spite of being a small company in the dairy sector, Hanoi Milk has a big expectation of Becoming a leading company in Vietnam in milk and nutrition In which the detailed plan of 2008 is as follows:
Further expanding in the North by joining retailing system with HaproMart Group;
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Expanding into the South with a contribution to total sales from existing 10% to 40-50% in coming years by building a dairy factory in Binh Duong & co-operating with other companies to use their large distribution network such as Kinhdo Corporation; Stabilization of fresh-milk purchase in the North: on 19 Aug 2008, with the witness of Tuyen Quang Provincial Communist Party and Peoples Committee, Australian and Israel Ambassadors and other governmental authorities, the License was handed by the President of Tuyen Quang Province to VnFutureMilk with the capital 100% contributed by Australia of VND 317bn (USD 19m), the farms of dairy cows and the estimated area of 2,500 ha from 2013 to 2017. The capacity is estimated at 50 tons of fresh milk/day. On the same day, Hanoi Milk and VnFutureMilk also inked a MOU regarding Hanoi Milk purchasing the whole production of fresh milk from VnFutureMilk.
Expanding into baby food & powder milk: baby food, specifically cereal processed in Malaysian factory and powder milk produced in this newly-built plant.
On one hand, Hanoi Milk is a young company with a significant growth but on the other hand, it has not had enough experience of managements of raw-materials storm-price, of melamine scandal handling, etc. which leads to the extreme difficulties in this stage.
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Sales impacts:
180 tons of milk for trading imported from China contaminated with melamine was totally annihilated; Several products were recalled including sweetener yoghurt product after test found melamine in 11 input materials and products; On average, Hanoi Milk provided an amount of milk valued at VND 1.5bn daily but the sales are now reduced to hundred millions dong per day. Hanoi Milks products seem to be boycotted in the market as no consumer wants to buy them. All super-market, distributors, agents returned products to the company
The government has come forward to arrange that other competitors take contracts purchasing fresh milk signed by Hanoi Milk. Thus, Hanoi Milk is exposed to the threat of losing these contracts when its production is back to normal. The melamine contamination does not only affect their revenue but also strikes their project signed with foreign partners such as "For Futures sake ". This is a project with VnMilkFuture, an Australian investment of VND 317bn (USD 19m) to establish a rawmilk area for Hanoi Milk in Tuyen Quang. This project has just started operating.
The crucial matter relating to Hanoi Milk product quality: 1/ Raw-milk is collected through middle-men equipped with plastic containers, 2/ Good raw-milk is all collected by the two big players, leaving the rest to Hanoi Milk as long as the middle-man keeps good relationship with the Company and/ or other un-disclosed reasons. This means there is no quality assurance for Hanoi Milk raw-milk sourcing at the moment. Just before the melamine scandal, Hanoi Milk contracted with VnMilkFuture, an Australianowned farm to becoming the sole buyer for the farms raw-milk. This means Hanoi Milk is now really concerned about its products quality so that they could win back consumers trust.
Operation impacts:
Hanoi Milk has had to reduce production by 50% and dismiss 40% employees; Hanoi-Milk 100% fresh-milk brand named after Hanoi Milk is dead; Hanoi Milk also discussing with Kinhdo Corporation for distribution in the South. However, the melamine scandal marked the end of the cooperation.
In late Oct 2008, Hanoi Milk received a melamine-free test result. Almost 2 months after having the good testing result, the sales are recovering, according to the management. However, it is still premature to reach any conclusion.
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Mr. Tran Dang Tuan who is the current Chairman and General Director of Hanoi Milk JSC; Mr. Tran Tuan Khai, the ex-Chairman and ex-General Director of Hanoi Milk JSC, is the Chairman and General Director of IDP JSC.
The capital structure of Hanoi Milk founders is as follows: Existing founders capital structure Name Position in HNM
Tran Dang Tuan Phan Duc Binh Dinh Van Thinh Nguyen Thi Sam
Source: Company
Shares Ownership
200,000 200,000 200,000 200,000 1.99% 1.99% 1.99% 1.99%
Since the date of establishment, Hanoi Milk has expanded IZZI UHT to yoghurt and developed another brand called Hanoi Milk 100% Fresh-Milk. Meanwhile, after leaving Hanoi Milk, Mr. Tran Tuan Khai set up IPD JSC in 2004 and officially started operating in 2006. IPD JSC succeeded in establishing a brand of ZDOZI which is easily confused with IZZI. After ZDOZI, IPD JSC launched a brand called PURINA, a 100% fresh-milk product. And recently, IPD JSC launched a brand called DISNEY, a franchised brand from Disney USA, which is loved by Vietnamese children. Product portfolio of IPD JSC is exactly the same as Hanoi Milks but it is more diversified. IDP has about the same revenue as Hanoi Milk with a similar distributor network. When the melamine scandal occurred, IDP JSC took-over Hanoi Milk fresh-milk purchasing contracts from farmers. This means in a much shorter time, IDP catches Hanoi Milk in all terms of branding, distribution, raw-milk area and finally, revenue. However, in such a difficult stage of Vietnam economic, we think there wont be a case that IDP is able to buy Hanoi Milk.
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Sales: similar to the whole dairy industry in Vietnam, thanks to consumer behavior in the last 3 quarters regardless of the very high CPI, they did not lower their spending for their children. However, Hanoi Milk products were involved with chemical melamine in late September 2008, and are just getting better starting in late Dec 2008. Gross margin: due to difficulties mentioned above: 1/ High global milk price but cannot pass the cost increase to consumers, 2/ USD dollar flux, 3/ Stock returned due to being contaminated with chemical melamine, gross margin dropped significantly by 33% of revenue in 2007 to 26% in 2008; Selling expense: although revenue badly dropped since late September 2008 because of melamine scandal, Hanoi Milk has to tight its selling expense;
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CAPEX: the whole CAPEX plan for the South factory in 2008 except for its land-useright has been delayed. Most of the Company activities in 2008 were funded by equity increase in early 2008 for the business expansion purposes.
In summary, Hanoi Milk will not deliver its 2008 net profit target of VND 12bn but a loss of the same figure of VND 12bn.
to the future
Volume - wait and see 2010
It took Hanoi Milk five years to build its current market share. Therefore, the serious problem with melamine scandal in terms of consumer perception for Hanoi brand cannot be solved over night; Year 2009 will be a very tough time for Hanoi Milk which will be totally dependent on the management boards sufficient action to overcome the scandal in 2008 so that Hanoi Milk can get back to normal operation by late 2009. Then Hanoi Milk will be able to grow at the same pace as the dairy market. Otherwise, we are afraid that Hanoi Milk would be acquired by an existing / new competitor.
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Balance Sheet
Working capital difficulties
We do not expect any improvement in working capital but worse for forecasted period from 2008 to 2009 due to low sales because of the melamine scandal. If the Company can overcome the scandal, a normal level of working capital is back afterwards.
Cash-flow Statement
Dividends no payment before 2010
Dividends have a very significant cash impact. With a difficulty in profitability/ and cash-flow in 2008/2010, we think Hanoi Milk will not be able to pay dividend for the period before 2010.
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Company Profile
In spite of being a small company in the dairy sector, Hanoi Milk has big expectations of Becoming a leading company in Vietnam in milk and nutrition. In the short-term, the Company wants to 1/ expand in distribution by corporation with other businesses who have big networks, 2/ expand in capacity by corporation with well-known brands, 3/ expand to other baby products. www.hanoimilk.com
Risks
Young management; High gearing with high working capital cost; Concern about product quality, especially with current milk collection system and with melamine problem.
Internal
External
Pricing power of Vinamilk, the market dominant; Heavily depending on imported milk leads to heavily depending on USD; Direct competition from IDP.
Key Figures
Geographical breakdown (sales)
0.0% 13.0%
What's Up
Division breakdown (sales)
Company
15 Dec 2008: Hanoi Milk negotiated with banks on loans rescheduling; 15 Dec 2008: Hanoi Milk declared the loss from Melamine involvement of more than VND 20 bil for 4Q08; 05 Nov 2008: Hanoi Milk declared the melamine free upon tests by inspection team of Ministry of Health released on October 29, 2008; 11 Nov 2008: Hanoi Milk brought melamine testing machine; 21 Oct 2008: Hanoi Milk recall two products upon tests by inspection team of Ministry of Health released on October 9, 2008
E Q U I T Y
Sector
87.0% 100.0%
Oct 08: Vietnam Dairy Conference to streamline ongoing activities of the public and private sector and to attract new investments and efforts to support smallholders dairy development in Vietnam; Late Sep 08: Chemical melamine found in small dairy processing companies including Hanoi Milk/ Anco Milk. Although there was not any illness case found in Vietnam, but those two companies were boycotted by consumers.
Yoghurt
Local sales
Export sales
UHT milk
T I P S
Efficiency profile
VND bn
25,000
Profitability profile
In %
10
Peers Comparison
In %
16 14 12 10 8 6 4 2 0
VND bn
150,000 140,000
Company
Danone Nestle SA Median
Market Cap
28,655 135,342
EV/Sales 2008e
2.1 1.6 1.9
EV/Sales 2009e
1.9 1.6 1.8
EV/EBIT 2008e
14.3 11.5 12.9
20,000
8 130,000
15,000
120,000 110,000
10,000
100,000 90,000
5,000
2 80,000
EBIT
Op. margin
Assets
ROCE
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2006
322 10 332 237 95 62 34 11 1 21 0 10 (10) 12 0 0% 0 12 12 -
2007
236 -27% 98 335 243 91 -4% 59 33 -3% 13 0 20 -7% 1 8 (7) 13 14% 1 9% 0 12 4% 12 4% -27% -
2008e
334 41% 0 334 235 99 9% 79 20 -39% 13 2 5 -75% 3 19 (17) (12) n/m 0 0% 0 (12) n/m (12) n/m high high 41% -
2009e
299 -10% 0% -10% 100% 0% 0 299 203 96 -3% 82 14 -29% 13 0 1 -88% 0 6 (6) (5) n/m 0 0% 0 (5) n/m (5) n/m -10% -10% -10% -
2010e
329 10% 0% 10% 100% 0% 0 329 213 116 20% 86 29 108% 14 0 16 2,452% 0 6 (6) 10 n/m 2 25% 0 7 n/m 7 n/m 10% 10% 10% -
2011e
362 10% 0% 10% 100% 0% 0 362 236 126 9% 90 35 20% 14 0 22 37% 0 6 (6) 16 60% 4 25% 0 12 60% 12 60% 10% 10% 10% -
2006
12 11 0 5 28 (2) 30 47 46 0 0 0 0 0 0 (16) 61 45 (45) 0 1
2007
12 13 0 10 34 7 27 33 33 46 3 43 13 1 0 (60) 58 (2) 10 0 9
2008e
(12) 13 0 (0) 1 40 (39) 8 8 (1) 31 (31) 0 0 0 (16) 0 (16) 11 0 (5)
2009e
(5) 14 0 0 8 (28) 36 2 2 0 0 0 0 0 0 34 0 34 (28) 0 7
2010e
7 14 0 (2) 21 (10) 31 2 2 0 0 0 13 0 0 16 0 16 (20) 0 (4)
2011e
12 14 0 (4) 25 7 18 8 8 0 0 0 13 0 0 (3) 0 (3) 0 0 (3)
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2006
159 33 127 0 0 0 0 0 1 0 0 0 0 127 47 8 6 0 11 7 0 0 79 117 0 2 0 0 0 2 21 55 76 8 4 0 206 0 61 127 188 -
2007
166 45 132 4% 0 0 0 0 6 n/m 11 0 0 0 7 n/m 138 9% 40 19 18 0 5 15 36 0 134 70% 174 49% 0 0 0 0 0 0 8 78 87 13% 6 6 0 273 0 71 17% 132 209 -
2008e
166 58 127 -3% 0 0 0 0 6 -10% 19 0 0 0 6 -9% 133 -4% 93 28 2 0 3 11 6 0 141 5% 162 -7% 0 0 0 0 0 0 0 98 98 13% 8 6 0 275 0 111 56% 127 244 -
2009e
185 71 116 -9% 0 0 0 0 6 0% 2 0 0 0 6 0% 122 -9% 66 25 2 0 3 17 6 0 119 -16% 157 -3% 0 0 0 0 0 0 0 70 70 -28% 7 6 0 241 0 82 -26% 116 204 -
2010e
187 85 104 -10% 0 0 0 0 6 0% 2 0 0 0 6 0% 110 -10% 55 27 2 0 3 13 6 0 106 -11% 152 -3% 0 0 0 0 0 0 0 50 50 -29% 8 6 0 216 0 73 -12% 104 183 -
2011e
189 99 99 -5% 0 0 (0) 0 6 0% 8 0 0 0 6 0% 105 -5% 60 30 2 0 3 10 6 0 111 5% 151 -1% 0 0 0 0 0 0 0 50 50 0% 9 6 0 216 0 80 10% 99 185 -
Valuation (x)
EV/Sales EV/EBITDA EV/EBIT PE PEG P/Book Dividend yield (%)
2006
1.4 13.6 21.5 33.7 3.3 0%
2007
1.9 14.1 23.1 32.5 -4% 2.2 3%
2008e
0.6 9.2 36.5 (8.4) n/m 0.6 0%
2009e
0.5 10.6 242.3 (18.0) n/m 0.6 0%
2010e
0.4 4.5 8.5 13.2 n/m 0.6 13%
2011e
0.4 3.9 6.3 8.2 -38% 0.6 13%
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2006
7 2 2 53.7 58.1 53.7 55.5 0 17 4 4 (2)
2007
10 1 1 33.3 65.3 25.7 38.8 1 17 3 3 (6)
2008e
10 (1) (1) 9.7 32.8 9.1 9.7 0 16 0 (4) (2)
2009e
10 (1) (1) 9.7 9.7 0 16 1 4 3
2010e
10 1 1 9.7 9.7 1 15 2 3 2
2011e
10 1 1 9.7 9.7 1 15 3 2 (0)
2006
29% 10% 6% 3%
2007
27% 10% 6% 4%
2008e
30% 6% 2% -3%
2009e
32% 5% 0% -2%
2010e
35% 9% 5% 2%
2011e
35% 10% 6% 3%
2006
10% 11% 60% 57% 0% 3.4 51.1 15.3 8.2 51.7 400 830.7 53.4 -
2007
7% 9% 20% 64% 106% 4.0 43.1 40.5 6.3 57.8 400 836.6 49.7 -
2008e
-7% 2% 50% 59% 0% 1.0 100.0 32.2 9.0 121.0 400 834.6 12.6 -
2009e
-3% 0% 30% 65% 0% 2.4 80.0 32.4 9.0 101.0 400 747.8 1.5 -
2010e
5% 7% 21% 70% 173% 4.9 60.0 32.2 9.0 81.0 400 822.5 39.5 -
2011e
8% 10% 23% 70% 108% 5.9 60.0 32.0 9.0 81.0 400 904.8 54.2 -
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2006
19.34 0.60 19.94 14.22 5.72 3.70 2.02 0.68 0.06 1.28 0.01 0.60 (0.59) 0.69 0.00 0% 0.00 0.69 0.69 -
2007
14.18 -27% 5.90 20.08 14.60 5.48 -4% 3.51 1.96 -3% 0.76 0.01 1.19 -7% 0.09 0.50 (0.41) 0.78 14% 0.07 9% 0.00 0.72 4% 0.72 4% -27% -
2008e
20.03 41% 0.00 20.03 14.07 5.96 9% 4.76 1.20 -39% 0.75 0.14 0.30 -75% 0.15 1.15 (1.00) (0.69) n/m 0.00 0% 0.00 (0.69) n/m (0.69) n/m high high 41% -
2009e
17.95 -10% 0% -10% 100% 0% 0.00 17.95 12.17 5.77 -3% 4.92 0.85 -29% 0.81 0.00 0.04 -88% 0.00 0.36 (0.36) (0.32) n/m 0.00 0% 0.00 (0.32) n/m (0.32) n/m -10% -10% -10% -
2010e
19.74 10% 0% 10% 100% 0% 0.00 19.74 12.81 6.93 20% 5.17 1.76 108% 0.81 0.00 0.95 2,452% 0.00 0.36 (0.36) 0.59 n/m 0.15 25% 0.00 0.44 n/m 0.44 n/m 10% 10% 10% -
2011e
21.71 10% 0% 10% 100% 0% 0.00 21.71 14.16 7.55 9% 5.43 2.12 20% 0.82 0.00 1.30 37% 0.00 0.36 (0.36) 0.94 60% 0.24 25% 0.00 0.71 60% 0.71 60% 10% 10% 10% -
2006
0.69 0.68 0.00 0.32 1.69 (0.13) 1.82 2.81 2.77 0.00 0.00 0.00 0.00 0.00 0.00 (0.94) 3.67 2.72 (2.68) 0.02 0.06
2007
0.72 0.76 0.00 0.59 2.07 0.43 1.64 2.01 1.96 2.75 0.19 2.56 0.76 0.03 0.00 (3.61) 3.50 (0.11) 0.62 0.00 0.51
2008e
(0.69) 0.75 0.00 (0.01) 0.06 2.39 (2.34) 0.49 0.49 (0.04) 1.85 (1.88) 0.00 0.01 0.00 (0.95) 0.00 (0.95) 0.67 0.00 (0.28)
2009e
(0.32) 0.81 0.00 0.00 0.49 (1.70) 2.19 0.12 0.12 0.00 0.00 0.00 0.00 0.00 0.00 2.07 0.00 2.07 (1.67) 0.00 0.39
2010e
0.44 0.82 0.00 (0.15) 1.26 (0.59) 1.85 0.12 0.12 0.00 0.00 0.00 0.76 0.00 0.00 0.97 0.00 0.97 (1.20) 0.00 (0.23)
2011e
0.71 0.82 0.00 (0.24) 1.53 0.44 1.08 0.50 0.50 0.00 0.00 0.00 0.76 0.00 0.00 (0.18) 0.00 (0.18) 0.00 0.00 (0.18)
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2006
9.56 1.97 7.63 0.02 0.00 0.01 0.00 0.00 0.03 0.00 0.00 0.00 0.00 7.64 2.83 0.49 0.36 0.00 0.66 0.40 0.00 0.00 4.73 7.00 0.00 0.10 0.00 0.00 0.00 0.10 1.28 3.31 4.58 0.46 0.23 0.00 12.37 0.00 3.64 7.63 11.28 -
2007
9.96 2.72 7.90 4% 0.02 0.01 0.01 0.00 0.38 n/m 0.67 0.00 0.01 0.00 0.39 n/m 8.31 9% 2.40 1.17 1.09 0.00 0.30 0.91 2.18 0.00 8.05 70% 10.44 49% 0.00 0.00 0.00 0.00 0.00 0.00 0.49 4.71 5.20 13% 0.35 0.36 0.00 16.35 0.00 4.25 17% 7.90 12.56 -
2008e
9.96 3.47 7.64 -3% 0.02 0.01 0.01 0.00 0.34 -10% 1.16 0.00 0.01 0.00 0.35 -9% 8.01 -4% 5.56 1.67 0.12 0.00 0.15 0.63 0.34 0.00 8.47 5% 9.75 -7% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.87 5.87 13% 0.50 0.36 0.00 16.48 0.00 6.64 56% 7.64 14.65 -
2009e
11.11 4.28 6.96 -9% 0.02 0.01 0.01 0.00 0.34 0% 0.12 0.00 0.01 0.00 0.35 0% 7.32 -9% 3.99 1.50 0.12 0.00 0.15 1.03 0.34 0.00 7.11 -16% 9.43 -3% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.20 4.20 -28% 0.45 0.36 0.00 14.43 0.00 4.95 -26% 6.96 12.26 -
2010e
11.23 5.09 6.26 -10% 0.02 0.02 0.00 0.00 0.34 0% 0.12 0.00 0.01 0.00 0.35 0% 6.62 -10% 3.29 1.65 0.12 0.00 0.15 0.80 0.34 0.00 6.34 -11% 9.10 -3% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 3.00 -29% 0.49 0.36 0.00 12.96 0.00 4.35 -12% 6.26 10.97 -
2011e
11.35 5.91 5.94 -5% 0.02 0.02 (0.00) 0.00 0.34 0% 0.50 0.00 0.01 0.00 0.35 0% 6.30 -5% 3.62 1.81 0.12 0.00 0.15 0.62 0.34 0.00 6.65 5% 9.05 -1% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 3.00 0% 0.54 0.36 0.00 12.95 0.00 4.80 10% 5.94 11.09 -
Valuation (x)
EV/Sales EV/EBITDA EV/EBIT PE PEG P/Book Dividend yield (%)
2006
1.4 13.6 21.5 33.7 3.3 0%
2007
1.9 14.1 23.1 32.5 -4% 2.2 3%
2008e
0.6 9.2 36.5 (8.4) n/m 0.6 0%
2009e
0.5 10.6 242.3 (18.0) n/m 0.6 0%
2010e
0.4 4.5 8.5 13.2 n/m 0.6 13%
2011e
0.4 3.9 6.3 8.2 -38% 0.6 13%
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2006
7.00 0.10 0.10 3.2 3.5 3.2 3.3 0.00 1.00 0.24 0.26 (0.13)
2007
10.00 0.07 0.07 2.0 3.9 1.5 2.3 0.08 1.04 0.21 0.16 (0.36)
2008e
10.00 (0.07) (0.07) 0.6 2.0 0.5 0.6 0.00 0.97 0.01 (0.23) (0.09)
2009e
10.00 (0.03) (0.03) 0.6 0.6 0.00 0.94 0.05 0.22 0.21
2010e
10.00 0.04 0.04 0.6 0.6 0.08 0.91 0.13 0.19 0.10
2011e
10.00 0.07 0.07 0.6 0.6 0.08 0.90 0.15 0.11 (0.02)
2006
29% 10% 6% 3%
2007
27% 10% 6% 4%
2008e
30% 6% 2% -3%
2009e
32% 5% 0% -2%
2010e
35% 9% 5% 2%
2011e
35% 10% 6% 3%
Operating Margin UHT milk Yoghurt Net Margin UHT milk Yoghurt Geographical breakdown / Margins EBITDA Margin Local sales Export sales -
Operating Margin Local sales Export sales Net Margin Local sales Export sales -
2006
10% 11% 60% 57% 0% 3.4 51.1 15.3 8.2 51.7 400 0.0 0.0 -
2007
7% 9% 20% 64% 106% 4.0 43.1 40.5 6.3 57.8 400 0.1 0.0 -
2008e
-7% 2% 50% 59% 0% 1.0 100.0 32.2 9.0 121.0 400 0.1 0.0 -
2009e
-3% 0% 30% 65% 0% 2.4 80.0 32.4 9.0 101.0 400 0.0 0.0 -
2010e
5% 7% 21% 70% 173% 4.9 60.0 32.2 9.0 81.0 400 0.0 0.0 -
2011e
8% 10% 23% 70% 108% 5.9 60.0 32.0 9.0 81.0 400 0.1 0.0 -
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BREAST-MILK OR VINA-MILK?
Vinamilk is the dominant of Vietnam Dairy Market with a total turnover of USD 400m in 2007 which accounts for 35% market share. Ms. Mai Kieu Lien, the current leader who has been with Vinamilk for 30 years is strong and well respected. Its main activity is to process a large portfolio of dairy products and to distribute them through its own distribution network. After spending a lot of money for Coffee and Beer businesses which did not return as well as planned, the Company will have to strongly focus into the dairy business by expanding into premium dairy segments. Furthermore, the Company is continuing to strengthen its local distribution network and looking for new markets abroad; and the most important thing it is becoming an expert in its marketing activities. With the good result from Marketing & Selling Restructuring Activities in year 2008 and after review all SWOT of Vinamilk; we believe Vinamilk has a very good revival in 2008. We believe that Vinamilk 40% market share target, although very aggressive, is achievable as we confident that Vinamilk is able to outperform itself in the next 3 years. We would like to highlight the vital role that the current management plays in restructuring the Company over last 2-3 years. Continuous efforts from Mr. James Bond and willing and openness of Vinamilk Board of Management head by Mrs. Hillary Clinton will lead the Company to expand its market share of 40% in the next 3 coming years. However, periods starting 2012 is expected to be difficult, even if the dairy market is less sensitive toward the economic crisis. Vietnam WTO commitments will induce a greater liberalization of the market. Local companies including Vinamilk will face harder competition and less profitability. Based on the average of the different methods, we get a target price of VND 70,000. Whereas, the fundamentals as well as the strategy of the group are strong, we decide to adopt a Reduce recommendation, as all positive features are already priced in.
Company Contacts
Ms. Mai Kieu Lien (CEO) Ms. Ngo Thi Thu Trang (CFO) Mr. Tran Chi Son (IR) www.vinamilk.com.vn
Shareholder structure
SCIC F&N Dairy Investments Pte Ltd 47.70% 11.00%
Performance
250,000 200,000 150,000 100,000 50,000 0
12/06 3/07 Price 6/07 9/07 12/07 3/08 6/08 9/08 12/08
Price/VN Index
P&L Highlights
(VND bn) Sales EBIT Op. Margin (%) Net Income Net Margin (%) Fixed Assets Debts FCF FCF yield (%) 2006 2007 6,245 6,648 681 911 11% 14% 660 963 11% 14% 1,603 2,252 60 42 (432) (1,241) -574% -734% 2008e 7,806 1,416 18% 1,188 15% 2,658 45 382 460% 2009e 8,620 1,477 17% 1,082 13% 3,064 45 (30) -36% 2010e 9,497 1,692 18% 1,282 14% 3,407 45 169 204%
Key Ratios
(x) EV/Sales EV/EBITDA EV/EBIT PE P/Book ROE (%) ROCE (%) Div. Yield (%) Payout ratio (%) 2006 1.9 17.1 17.4 18.1 4.5 25% 29% 2% 44% 2007 4.4 38.7 32.5 30.7 7.0 23% 25% 2% 56% 2008e 1.8 9.2 10.0 12.2 3.0 24% 28% 3% 43% 2009e 1.6 8.5 9.6 13.4 2.7 20% 22% 3% 47% 2010e 1.5 7.2 8.2 11.3 2.3 21% 23% 4% 44%
Weaknesses
Heavily depending on imported materials Low-end products with low margin No expertise in dairy farming Processing Factories Efficiency
Next Events
28/03/09 Shareholder meeting
Opportunities
Analyst
LE VAN CAO Luan 81-85 Ham Nghi District 1 Ho Chi Minh City Tel: +84 8 39 14 90 60 lle@jaccar.net
Big opportunity in dairy farming Big opportunity in dairy consumption Opportunity in expanding into new business from
extensive sales and distribution network
Threats
Quality assurance Reliance on key person Merge of Campina & Dutch Lady WTO
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VALUATION
To valuate Vinamilk we looked at different methods: DCF: thanks to the strong visibility of the business model, we decide to value the free cash flows generation over 10 years; Peers comparison: we decide to apply the Danone and Nestle valuation multiples as they are the closest international competitors. The Japanese players are just mentioned for information; Sector-based transactions: the multiples valuation applied are an average over 3 years for avoiding the peak of transactions in 2007, even if the dairy sector was less concerned that other ones. Only the relevant transactions were selected. Sum of the Part: we didnt choose it as the other businesses are too small in terms of revenue and profit contribution, i.e. less than 10%.
DCF
Valuation: VND 26,280
EBITDA and EBIT margins: we expect a product mix improvement over years. Thanks to re-focusing out off condensed milk, margins will be improved for next 3 years. However, 2009 no longer brings the benefit of lower raw-milk buying price; therefore, we can only see the real margins improvement from 2010 onwards. Corporate Tax rate: starting 2009, there is no longer BIT tax exemption thanks to HOSE listing, i.e. Vinamilk will pay full BIT tax rate of 25%. Working capital: we do not include any improvement in working capital as we have no result of SAP ERP CRM implementation until end of 2010 and even for the period after 2010 as the success of the implementation is not guaranteed by then. Dividends have a very significant cash impact. In 2008, Vinamilk paid 29% of par value as dividend to shareholders. As per Vinamilk mission, the Company will not pay their shareholders less than previous periods. Therefore, we forecast dividends will increase approximately by 3% of par value for every three years.
Vietnamese 5 years bond: we took into account the average of the transactions on the latest issue done y the government; Beta: we used the data given by Bloomberg; Risk premium: is calculated from a free default government bonds (i.e. the US government bonds on the historical valuation), the Moody s rating for long term bonds (definition of the ADI default spread) and the adjusted country risk premium (equity emerging markets are in average 1.5x more volatile than bond markets); Long term interest rate: based on 2008 expectations for the group.
We would like to underline that our FCF generation for the three coming years is not similar to this one at the end of the company sheet. The financial investments are the main difference. We didnt take into account in our following valuation as they are not regular businesses.
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2008 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e
7,805 1,546 19.8% 0 269.3 1,277 205.2 637.2 508.3 0 -74 0 1,416 18.1% 14.5% 1,211 1,307 2,842 4,149 458 0 4,606 175,275,700 26.280 6% 8,619 10.4% 1,667 19.3% 7.8% 0 196.7 1,470 374.1 647.5 1.6% 508.3 0 -60 83% -49 1,477 17.1% 25.3% 1,103 9,496 10.2% 1,947 20.5% 16.8% 0 212 1,735 430 647.5 0.0% 559.1 0 98 69% 67 1,692 17.8% 25.4% 1,262 10,455 10.1% 2,273 21.7% 16.7% 0 231.8 2,041 568.3 600 -7.3% 559.1 0 314 57% 178 1,953 18.7% 29.1% 1,385 11,511 10.1% 2,525 21.9% 11.1% 0 255.2 2,270 631.4 647.5 7.9% 559.1 0 432 47% 203 2,150 18.7% 29.4% 1,519 12,674 10.1% 2,801 22.1% 10.9% 0 281 2,520 700.5 647.5 0.0% 615 0 557 39% 217 2,367 18.7% 29.6% 1,667 13,954 10.1% 2,888 20.7% 3.1% 0 309.4 2,579 722.1 699.3 8.0% 615 0 542 32% 175 2,606 18.7% 27.7% 1,884 15,363 10.1% 3,180 20.7% 10.1% 0 340.6 2,839 795.1 755.2 8.0% 615 0 674 27% 180 2,869 18.7% 27.7% 2,074 16,915 10.1% 3,501 20.7% 10.1% 0 375 3,126 875.4 815.7 8.0% 676.5 0 758 22% 168 3,159 18.7% 27.7% 2,284 18,623 10.1% 3,855 20.7% 10.1% 0 412.9 3,442 963.8 880.9 8.0% 676.5 0 921 18% 169 3,478 18.7% 27.7% 2,514 20,504 10.1% 4,244 20.7% 10.1% 0 454.6 3,789 1,061 951.4 8.0% 676.5 0 1,100 15% 167 3,830 18.7% 27.7% 2,769
WACC assumptions
Cost of capital 5-years bond Beta Risk premium Cost of debt Long-term interest rate Taxes Structure Market cap. Debts WACC
Source Jaccar
Through this method, we have a target price of VND 26,280 per share.
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PEER COMPARISON
Valuation: VND 80,000
Nestle SA (Switzerland): is a multinational packaged food company that manufactures and markets a wide range of food products. The company product lines include milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods; Danone (France): processes food. The group produces yoghurts, cheeses, dairy desserts, cookies, snacks, and bottled water. It manufactures and markets its products worldwide; Meiji Dairies (Japan): produces a variety of dairy products. They include regular, condensed and powdered milk. The company also produces butter, ice cream, yogurt and dairy based drinks; Yakult Honsha Co (Japan): produces and sells fermented milk products and soft drinks. The company also manufactures pharmaceutical and cosmetic products.
Peer Group
Company Name Market EV/Sales EV/Sales EV/Sales EV/Ebitda EV/Ebitda EV/Ebitda EV/Ebit EV/Ebit EV/Ebit cap Nestle SA Danone Meiji Dairies Yakult Honsha Co Median Source: Bloomberg (USD m) 135,342 28,655 1,639 3,275 2008e 1.62 2.12 2009e 1.57 1.94 2010e 1.44 1.77 2008e 10.43 12.93 8.60 10.43 2009e 9.51 11.10 8.01 9.51 2010e 8.97 10.31 7.28 8.97 2008e 11.47 14.33 2009e 10.99 12.75 PE PE PE 2010e 2008e 2009e 2010e 9.92 11.38 14.30 15.81 17.14 23.39 16.48 13.06 14.33 15.83 21.40 15.08 11.94 12.83 14.75 18.51 13.79
1.87
1.76
1.61
12.90
11.87
10.65
As the information for Japanese companies is not available from Bloomberg, and we see that Vinamilk reaches international level in terms of ROE, ROCE, and net margin, we just compared Vinamilk to the international companies Danone and Nestle. Taking into account the high level of return and profitability as well as the existing dominant position of the company in the Vietnamese Dairy Market, we find a share value for Vinamilk of VND 80,000 with a discount of 20% (difference of size).
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SECTOR-BASED TRANSACTION
Valuation: VND 101,000
Jaccar also considers another method to value Vinamilk, i.e. by sector-based transaction. We use a median over three years period from 2005 to 2007. Our target price reaches VND 101,000 per share.
Target
Drayton Pte Ltd New Zealand Dairies LaDorna Newlat Spa Unimilk Limited Liability Company OAO Ostankino Dairy Nutritek
Bidder
Country
Date
PT Indofood Makmur Singapore Nutritek New Zealand Groupe Lactalis Romania TMT Finance Italy Capital International Private Equity Fund II Russia De Milkland Ukraine Russia Russagroprom Holding Russia S.I. Food Products Shanghai Bright Dairy & Food Holdings China Unimilk Limited Edelveis M Liability Company Russia Marfin Investment Vivartia SA Group Greece Compania Agricola y Forestal Parmalat Espana SA Lacteos Siglo XXI sl Spain United Milk Company Vivartia SA Bulgaria Arla Foods UK plc Arla Foods amba UK Ochakovo Dairy Wimm-Bill-Dann Foods Russia Al Safwa Dairies Almarai Company Saudi Arabia Delta Dairy SA Vivartia SA Greece Median Average
Source: mergerarket.com
Price EV P/S tda Ebit PE EV/S bitda Ebit PE 23/09/2008 169 169 7/6/2008 29 64 21/04/2008 70 70 1.8 - 17.5 - 1.8 - 17.5 21/04/2008 35 35 2 - 0.2 -
96 27 170 89 73
96 36 170 89 -
0.9 0.6 -
3.0 19.4 27.3 32.9 1.0 1.5 25.7 0.5 8.5 13.4 36.7 0.7 0.5 4.1 7.2 68.4 0.8 9.1 17.5 34.8
8.0 68.7
1.1
CONCLUSION
Valuation summary (in VND)
DCF Peer comparison Sector based transactions Average
Source: Jaccar
Our target price is VND 70,000 without country discount and our recommendation is REDUCE
Based on the average of the different methods, we get a target price of VND 70,000. Whereas, the fundamentals as well as the strategy of the group are strong, we decide to adopt a Reduce recommendation, as the current price is higher than our target price. Otherwise, we would like to note that the main shareholder, the SCIC, who owns 50% of Vinamilk, is not willing to disengage from the company in the short term. However, Vinamilk received an approval for listing or 8.7 million shares on Singapore Stock Exchange. This project is currently postponed due to the unpredictable fluctuations on the global market. After listing on SGX, SCIC stake would reduce at 42%.
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Vinamilk is the dominant of dairy market with a total market share of 35%
This is thanks to the Vinamilk brand which has been in use since the company establishment in 1976 and is currently a widely recognized dairy brand in Vietnam. In 2007, Vinamilk successfully conducted extensive marketing campaigns to reposition its spoon-able / drinking yoghurt and long-life / UHT milk. In just two months, all packaging of Vinamilk spoon-able yoghurt and drinking yoghurt was totally overhauled, and all posters and billboard advertising across Vietnam were changed. With the campaign, Vinamilk has gained an edge over its key rival, Dutch Lady Vietnam. Its direct competitor is Dutch Lady with 24% of market share. We will review Vinamilks performance in each category to see if Vinamilk is able to keep the position in the coming years. Moreover, Vinamilk targets for an additional 5% market share in next 3 years by: 1/ Expansion of market share in existing and new markets, 2/ Development of a comprehensive portfolio of dairy products to target a broader consumer base and expand into higher margin value-added dairy products, 3/ Development of new product lines to satisfy different consumer preferences, 4/ Brand cultivation, 5/ Continuously enhancing supply chain management, 6/ Development of raw material sources to ensure a reliable and consistent fresh milk supply base. Lets have a look at Vinamilk and its direct competitors performance over the last 5 years. In Vietnam market:
Dutch Lady Vietnam a subsidiary of Royal Friesland Foods dramatically increase its market share from 15% to almost 25% mainly from non-brands share thanks to strong marketing activities. Vinamilk simply lived off its legacy, barely bothered to advertise, and left distribution in the hands of agents who mainly just telephone wholesales. But in late 2006, a professional marketing group was recruited. The team has launched a Vinamilk firstever active branding effort. We can see that Vinamilk took on-time actions to sustain its dominant position.
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Amazing Vinamilk
In Thailand market, international brands are leading the market, leaving a Thai Dairy Industry Co. Ltd at rank 4. Thailand Dairy Products Local Thai ranks at 4th place
Source: Euromonitor
Here, we both admire Vinamilk for sustaining its dominant position and worry whether Viet Dairy would become another Thai Dairy in future when international brands are getting strong faster than local ones as they did in Thailand or when Vietnam fully commits to WTO for dairy section in 2012. Then, will target to gain another 5% be delivered?
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Ms. Mai Kieu Lien - Chairwoman & General Director of Vinamilk ______________________________________________________________________________ Education Bachelor of Science - Moscow University of Meat and Milk Processing - Russia Certificate of Economic Management - University of Economy - Russia Certificate of Government Management - National Political Institute - Vietnam ______________________________________________________________________________ Experiences Aug 1976 - Aug 1980 Engineer of the condensed milk production at Truong Tho Dairy Factory Sep 1980 Feb 1982 Technology engineer in the Technical department of the United Enterprises of Milk Coffee Cookies and Candies I Feb 1982 Jun 1983 Vice technical director in charge of production at Thong Nhat Dairy Factory ______________________________________________________________________________ Achievements Jul 1984 Deputy General Director of the United Enterprises of Milk Coffee Cookies and Candies I Dec 1992 Nov 2003 General Director of Vietnam Dairy Products Company General Director of Vinamilk
______________________________________________________________________________
A very impressive profile
FOOD & BEVERAGE In charge of the formulation, management and execution of marketing strategies for PepsiCos six leading brands in Vietnam, namely Pepsi, 7-Up, Mirinda, Aquafina, Twister and Sting 2002 2003 Achieved Asia Pacific Region Marketer of the Year award Awarded the Top Performance Marketer in the Asia Pacific Region by PepsiCo Feb 2004 Global Pepsi innovation director and led Pepsis global product and packaging innovation agenda of PepsiCos headquarters in New York April 2005 Marketing director in charge of formulating Pepsis marketing strategy in Thailand for non-carbonated beverages Aug 2005 - Sep 2006 Marketing Director of PepsiCos Asia Pacific Business Unit, managed PepsiCos Mountain Dew, 7-Up and Mirinda brands of beverages for the Asia Pacific region
A question is how long will he stay with Vinamilk
Oct 2006
Vinamilk Ace
Vinamilk produces a broad range of dairy products with different types and flavors of powdered milk, infant cereals, UHT liquid milk, UHT drinking yoghurts, spoon yoghurt, sweet condensed milk and cheese. Currently Vinamilk is leading in most dairy categories as follows:
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Source: Euromonitor
Condensed milk is the top seller; followed by powder milk selling for local and export markets; then liquid milk, and finally yoghurt. Local / Export Sales by Segment Actual and Forecast
Vinamilk dominates the sector with its famous Longevity Ong Tho brand. The brand was built in 70ies by Friesland Frico Domo (the owner of Dutch Lady Vietnam). After 1975, the brand has been developed by Vinamilk. Many older consumers have remained loyal to this brand, which they consumed as young people, and so do their children. In Vietnam, this product is used for different purposes such as mix it with juice or coffee and drink, or eat it with bread. Hence, grow of complementary products have boosted sales of condensed milk in Vietnam. Consequence, this segment will not grow as fast as other dairy segments. In addition, gross margin of the segment is very thin with only 17.3% compared to yoghurt with 76.6%, liquid milk with 48.1% and powder milk with 21.6%. It is just enough to cover overall marketing and distribution expenses.
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DLV 21%
VNM 79%
For the next 3 years, Vinamilk will not invest more but keep the current facility and capacity for the segment. However, with a higher growth rate than total segment, we see that Vinamilk can have a higher share of 5% than it has at the moment due to Dutch Lady Vietnam switches to premium dairy products faster than Vinamilk. Vinamilk condense milk performance over years and forecast
29.6%
21.4% 10.0% 8.0% 8.0% 7.0% 9.0% 2004 7.5% 2005 8.0% 2006 10.0% 7.0% 2007 2008 5.5% 2009 5.0% 2010 4.5% 2011 6.0% 4.0%
As the product is really a low-end product meaning a low margin as mentioned in above picture Key products trade-margin, we do not expect any price increase in coming years.
From picture Local / Export Sales by Segment Actual and Forecast, we see that liquid milk is 3rd biggest sales in Vinamilk. In the segment, Vinamilk and Dutch Lady Vietnam are competing directly with each other. Vinamilk launched a 100% fresh milk brand using local cows milk, followed by Dutch Lady, then Vinamilk. If the consumer accepts the taste of this real cows milk well, local dairy production can meet 100% consumer demand for the products.
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Other 28%
VNM 35%
DLV 37%
Vinamilk is continuously performing better than total market segment thanks to its production strategy mentioned above and also thanks to its monopoly in the local raw-milk source. However, starting 2007, with a cut in import tariff as per WTO commitment, Vinamilk is facing competition from imported brands. We expect consumer awareness for real cows milk to increase in coming years so that Vinamilk, with the largest access to local raw-milk production could be back on track.
20.7% 16.0%
18.2%
18.7%
19.2%
12.4%
12.7% 2006
13.7%
14.7%
15.7%
2004
2005
2007
2008
2009
2010
2011
Compared with Dutch Lady, we see that Vinamilk has competitive advantages in the segment:
Accessing to larger source of raw milk from local farmers for the product: as mentioned in the picture Raw milk procurement by buyers (Vietnam), Vinamilk currently has access to almost 50% of raw-milk in Vietnam. Processors are in the stage of developing consumer habit of drinking real fresh milk. With a larger access to raw-milk, it gives Vinamilk a bigger chance to expand into the brand when consumers are ready to accept the product;
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Further to following paragraph regarding good processing capacity allocation, apart from accessing to larger source of raw milk from local farmers, we believe Vinamilk has a better processing capacity allocation than Dutch Lady Vietnam by building nine factories throughout Vietnam to have best benefit in transportation cost at both ends of raw-milk collection and consumer end approach; Its direct competitor, Dutch Lady Vietnam, has 2 factories: one in the South and one in the North. The new factory recently built in the North does not produce liquid milk. This limits Dutch Lady in carrying its products out of the South to the Central and the North of Vietnam.
Meanwhile, we believe the chemical melamine scandal might become both a risk that consumers step away from dairy products and also an opportunity for Vinamilk (even Dutch Lady) to win more shares from smaller players like Ancon & Hanoi Milk and from all other small brands packaging in Vietnam who were hit by the scandal. What happens to liquid milk in the scandal will be exactly the same to the other dairy products mentioned in the report. If consumer accepts the 100% fresh milk well from Vinamilk, potential market share is gaining for Vinamilk by another 5% for the segment in 3-5 years time.
From the above picture Local / Export Sales by Segment Actual and Forecast, we see that powder milk is the second biggest product at Vinamilk. However, a half of sales are for export mostly to Iraq. This appears risky being the sole key customer and also bearing a very political impact. That is why we focus on local sales only. According to the following picture Powder milk market share 2007, we would like to underline that most of key players are international brands such as Dutch Lady, Nestle, Abbott, Mead Johnson, etc. The only exception is the successful and local brand of Vinamilk. Powder milk market share 2007
Others 23%
VNM 16%
DLV 20%
Vinamilk is targeting lower income consumers as the retail selling price of Vinamilk is only approximately half of international brands. However, its performance is not stable over the years. As from 2007, Vinamilk is quite far behind the total segment performance.
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19.2% 8.4%
17.2% 7.4%
15.2% 6.4%
13.2% 5.4%
11.2% 4.4%
16.6%
15.7%
2004
2008
A latest survey from AC Neilson shows that this is the only segment where quality is the most important factor for buying decision. This is thanks to a trust in long-standing brand names which are able to develop special ingredients and safer products. Parents believe those factors are reflected in a higher selling price. Consequently, in 1H08, the category grew by 39% whereas the super premium segment grew by 95%. As explained before, Vinamilks target is low price range in the segmentation which is marketed as an affordable and quality product. None of international brands are competing with Vinamilk in the low segment; we think Vinamilk can continue performing well in the segment. However, as the premium segment is growing much faster in the key cities where distribution network is not an issue for anybody, Vinamilk might lose approximately 5% of its current share in year 2011, if Vinamilk does not successfully expand into the premium segment.
Source: Trade
In 2007, Vinamilk accounts for 55% market share of total yoghurt market, followed by Dutch Lady Vietnam. Vinamilk accounts for 97% market share of spoon-able yoghurt and 26% market share of drinking yoghurt. Dutch Lady is currently focusing on equaling the performance of Vinamilk in the drinking-yoghurt segment.
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Others 25%
VNM 55%
Vinamilk has been constantly kept the first position in the segment since 2002 with its strong growth, surpassing the total segment. But Vinamilk showed a slowdown in year 2007: 1/ Vinamilk already reached 95% market share of spoon-able in 2006, this segment accounts for 59% retail value share of total yoghurt.
drinking yoghurt in Dutch Ladys hands
2/ Dutch Lady Vietnam stopped spoon-able yoghurt and left the segment development in Campinas hands, the ex-partner of Vinamilk and the future of Dutch lady Vietnam after a global merge. Dutch Lady Vietnam is performing its drinking yoghurt better than Vinamilk. Vinamilk yoghurt performance over years and forecast
40.0% 30.5% 25.3% 14.3% 15.0% 15.0% 15.0% 15.0% 16.0%
11.8%
13.4%
10.6% 2008
11.1%
11.6%
12.6%
2009
2010
2011
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Source: Trade Vinamilk will be able to improve its gross margin by 1% p.a. at least for coming 3 years
As a result, Vinamilk has been reviewing the product portfolio since early 2007:
Focusing more on converted products such as yoghurt and also a plan for launch and re-launch of ice-cream and other cold products such as dairy-based desserts. Expanding powder-milk into premium segment by adding value enhancing ingredients such as DHA, Canxi, etc. For the next 3 years, Vinamilk will not invest more but keep the current facility and capacity for condensed milk.
We estimate that by portfolio restructuring, Vinamilk will be able to improve its gross margin by 1% p.a. at least for coming 3 years.
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However, we think after the next 3 coming years period, starting year 2012, net margin of Vinamilk will be impacted as more competitions from imported brands as a result of WTO commitments for ready-to-use dairy products fully implemented.
On top of that, the level of marketing and selling expenses have been successfully reduced from 15% of revenue in 2006/2007 to just 12% in 2008. Although it is a bit early to conclude the level of spending for 2008, it seems a very good result for the marketing and selling expense review of Mr. James Bond in above section to the action man Mr. James Bond
Vietnam is having the same problem in dairy products as with all other kinds of foods & drinks in developing countries where there is no assurance for the quality. Milk quality is considered as a major drawback in the absence of any standardized milk quality testing scheme for the whole country and no independent quality control agency carrying out regular checks at farms, collecting centers and processing factories. Vinamilk claims that their products reach international quality standards with yearly quality check from an independent company. However, without such an agency in Vietnam, the quality assurance still remains a concern to Vinamilk.
Vinamilk has sought to fashion itself as a diversified F&B group by JV with SAB Miller for beer business and by developing coffee business by itself. Current revenues from drinks businesses for coffee and beer only account for approximately 2% of Vinamilk dairy products whereas; Vinamilk has invested VND 500bn (USD 30m) for the business. Of note, with the money Vinamilk could build another 2 well-equipped dairy processing factories. Profit return is now expected in longer time of 7 to 10 years than its original plan of 5 to 7 years.
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Planning for cold-products expansion including ice-cream & other new products.
Ice-Cream Current Vinamilk ice-cream portfolio is much smaller than it was 10 years ago with of a few take-home variants. As the market is ready to be exploited, Vinamilk decided to get back to the business by installing a network of refrigerated coolers. However, Vinamilk still has no plan on upgrading processing facilities. Competing in the segment is Kido from Kinh Do Corporation and Walls Thai from Unilever Thai. Kido business was acquired from Walls Vietnam 5 years ago with very high-tech facilities compared to what Vinamilk has now. Currently, Kido has built a network of refrigerated coolers of 8,000 cabinets i.e. 3 times development from what Walls did. Walls Thai has recently come into Vietnam through exportation with a total of 1,000 cabinets for now. They also have a very aggressive expanding network of refrigerated coolers of 6,000 cabinets. Similar to other type of Thai products, Walls Thai ice cream is very good quality for value. Walls Thai also benefits from Unilever R&D Centre in Asia region. Therefore, this is a great challenge to Vinamilk ice-cream. Vinamilk is installing a network of refrigerated coolers, and aims to the same size as its competitors. But the strength is Vinamilk units are always located at premium locations which are always barriers for all competitors including Kido, Walls Thai and any new entrance to the market. Dairy-based dessert is likely to be Vinamilks new product Vinamilk used to plan for a co-operation with JV Campina for the segment. However, due to the existing distribution network which did not meet the requirements for premium cold products, the JV was dissolved in 2007. And now, Vinamilk will develop and expand into cold products on its own. Contrary to ice-cream, we think Vinamilk is likely to enter dairy-based dessert segment which is similar to spoon-able yoghurt that Vinamilk is doing very well. This is a potential segment that Vinamilk could do very well.
Vinamilk has an extensive sales and distribution network. Even more, Vinamilk is continuously enhancing it.
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Development of direct channel has depended on the development of the network for the last ten years. During the period, the Government protected local players with an exception to international ones like Big C, Metro Cash and Carry. As location has become important, as the more easily consumers can find the stores, the more successful the retailers can become. Domestic retailers have tried to expand or at least submit their documents to reserve attractive locations with the aim of covering the country before multinational companies can penetrate the market in early 2009. Retail environment in Asia 2007
18% 48% 33% 34% 51%
54%
55%
60%
Vietnam
Asia
Phillipines
Thailand
Mordern Trade
Source: TNS
Traditional trade
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Taiwan
Korea
China
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FOOD & BEVERAGE As Vietnamese consumers got used to the supermarket system in Vietnam and above mentioned push from local players, we think the direct sales will increase at a faster rate than in the last 10 years, especially when we compare our neighbors performance at the moment. The company has already set up a distribution system in some foreign markets like the Middle East, Cambodia and Maldives over the last few years.
Vinamilk is one of the few food and beverage companies that have a readily available network of refrigerated coolers. The availability of coolers poses a high barrier of entry for competitors who may wish to enter the food and beverage market as the establishment of a refrigerated cooler network requires not much in terms of capital expenditure but most important, good locations for those refrigerated coolers. Such extensive sales and distribution networks are obviously blocking premium retail shops and will become a fence to protect Vinamilk from new entrants into the market.
Vinamilk is implementing an SAP - ERP CRM (Customer Relation Management). This is aimed at having immediate information to control the whole flow of stock/ price from distribution to retailers, especially in promotion times. Currently, Vinamilk has been installing the system for one-third of its target distributors of 300. The Group is expecting to complete the implementation in 3 years. With the system, it helps Vinamilk to:
Improve efficiency and effectiveness in selling and marketing activities: total budget for selling and marketing expense at Vinamilk is VND 1,000 bn (USD 60 m). This amount is very significant as it is equivalent to the full year net profit of Vinamilk. Any improvement in this area will directly contribute to Vinamilk profitability; Minimize working capital employed for the whole supply chain from purchasing to production to sales from current inventorys days of 90 to 180 days to 30 to 90 days i.e. saving in capital cost of VND 100bn (USD 6m) to VND 200bn (USD 12m) p.a.
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However, the implementation involves changes for working processes and peoples mind-set at the third party, the distributors. So this is not an easy task, but we have to wait until Vinamilk has fully implemented the system to ensure its success.
Development of raw material sources to ensure reliable and consistent fresh milk supply base by investing in farms. Vinamilk is planning to invest in 10,000 cows. We think the plan is moving very slowly. Although Vinamilk has acquired a few farms recently, there is not enough land for more farms and 10,000 cows insufficient to increase fresh milk portion in Vinamilk products. Moreover, plan of 10,000 cows costing approximately VND 340bn (USD 20m) is quite modest compared with level of investment into Marketing and Sales of more than 10% of revenue on yearly base. Vinamilk has other ideas of acquisition for a dairy cooperative or farms in aboard. However, we could not confirm the progress of these plans. We think that Vinamilk effort to development raw milk source in order to reduce importation dependence is very unclear. Therefore, this is still an issue for Vinamilk.
Source: Company
The Collecting Points belong to 3rd parties where they own chilling facilities and transportation trucks to Vinamilk factories. There are 2 contracts in Vinamilk system: Farmers contract with processing companies of Vinamilk to sell their raw milk. Milk collectors contract with processing in milk collection service. All milk from all sizes of farms has to send to collecting point and Milk chilling centers. Payments are made directly to farmers based on the results of the quality test at processing company.
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FOOD & BEVERAGE This process on the one hand is giving benefit to the processors by reducing the investments for collecting points and also thanks to the 3rd party running the points they help processors to compete in raw-milk collection. On the other hand, this process also shows up weakness from 3rd party collection points: 1/ No training on quality control of milk, 2/ Collector has opportunity to abuse the system.
Vinamilk decides collection price for dairy farming
The collection price from Vinamilk is about VND 1000 lower than Dutch Lady Vietnam for same quality. However, it is not easy for a farmer to switch to Dutch Lady Vietnam as the processing to become a supplier for Dutch Lady Vietnam takes 6 months after fully implementing all technical requirements from Dutch Lady Vietnam. The other reason not allowing the switching is those farmers are currently receiving subsidies from international programs which cooperate with Vinamilk. Raw milk procurement by buyers Vietnam
In fact, what they do is after taking sample for each farmer, they add water to raw-milk to get a higher volume. As a consequence, farmers get lower pay for the lower quality. The milk collector enjoys the payment for volume increase. Lots of quarrels on milk payments at Vinamilk might be explained by these facts. As shown in above picture Raw milk procurement by buyers Vietnam, Vinamilk currently has the largest access to raw milk almost half of raw milk production. Others are from Lothamilk, Mocchau Milk, Elovi, Vixumilk, etc. individual accounts for less than 1%. This lack of transparency in milk collection is a big obstacle to the dairy production industry in Vietnam.
Raw-milk quality is improving
Recently Vinamilk has raised a higher requirement of milk quality. We think it is good as it is building up farmers capacity although it is now very much against their farmers. Also, processors set up pricing and quality control system for competition, but it needs to follow a standardized ranking system nation-wide given by Government. Vinamilk is buying 50% of all local fresh-milk production in Vietnam. As the largest buyer, Vinamilk has the power to decide the collection milk price from local farmers. And Vinamilk has been able to keep it always cheaper than imported. As currently local fresh-milk meets 2530% of Vinamilk production volume, the saving from local source has been quite significant for last 10 years. This is thanks to 1/ Its production strategy of building nine processing factories along the rawmilk area in the country, Vinamilk has perfect condition approaching to the raw-milk area economically, 2/ Vinamilk ability in approaching NGO to support for local farmers, make them stay with Vinamilk to get the support. We think this is the 2nd supporter to Vinamilks leading position.
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Heavily depending on imported materials but limited expertise in local dairy farming
Vinamilk does not really want to develop local dairy farming
Currently local fresh-milk only meets 25-30% of Vinamilks production volume. This makes Vinamilk heavily dependent on imported materials. Vinamilk has had plans to invest into dairy farming in recent years. However, 1/ The investment is small compared with other investments into Marketing & Distribution, 2/ Vinamilk is employing farm professionals in set-up farms only, leaving the execution parts to Vinamilk itself. This means Vinamilk does not want to run the farms professionally as Vinamilk is doing for Marketing and Distribution. This is a big question in efficiency in Vinamilk farming and also in long-term plan for dairy farming. Vinamilk also intends to expand abroad for either owning a raw-milk production or dairy cattle there. However, neither plan has been executed until now. Again, this remains the big question to Vinamilk management board for raw-milk plan.
The red bubbles are Vinamilk factories and the blue bubbles represent other competitors.
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FOOD & BEVERAGE The picture Vinamilk and competitors processing factories and raw-milk areas in Mt. is showing developments of processing factories in accordance with developments of raw-milk areas in Mt. over years. This production strategy helps Vinamilk access to larger raw milk source and better approach to consumer end. Consequently, it helps Vinamilk to solve the big head-ache for liquid and cold products business in Vietnam in transportation cost throughout Vietnam.
Low efficiency on processing facilities - The other side of Good processing capacity allocation
Contrary to Vinamilk penetrating into all provinces of Vietnam for all products ranging from powder milk, condensed milk, yoghurt, liquid milk, etc., Dutch Lady is focusing on big cities and powder and liquid milk only. Dutch Lady Vietnam capacity for the two factories is half of Vinamilk, one in the South and one in the North. We would like to underline that the one in the North does powder milk only. Which production strategy is better?
Facilities efficiency concern
Total investments from Vinamilk for its 9 factories are almost double to Dutch Lady Vietnam for its 2 factories. Total revenue generated from 9 factories of Vinamilk is just double revenue generated from 1st factory of Dutch Lady as the 2nd is only just built. Therefore, Vinamilk facilities efficiency in the short-term is another matter of concern.
With the good result from Marketing & Selling Restructuring Activities in year 2008 and after review all SWOT of Vinamilk, we believe Vinamilk has a very good revival in 2008! We believe that Vinamilk - 40% market share target, although very aggressive, is achievable as we confident that Vinamilk is able to outperform itself in the next 3 years. We would like to highlight the vital role that the current management plays in restructuring the Company over last 2-3 years. Continuous efforts from Mr. James Bond and willing and openness of Vinamilk Board of Management head by Mrs. Hillary Clinton will lead the Company to expand its market share of 40%.
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FINANCIAL STATEMENTS
Year 2008 performance
A very good performance for nine months 2008 compared with the same period in 2007.
Sales: thanks to consumer behavior in last 3 quarters regardless of very high CPI, they did not drop their spending for their children and also thanks to export, Vinamilk achieves its sales target for both local and export market. Gross margin: thanks to 1/ well raw-milk planning activities in 2007 so that Vinamilk has high stock-up at lower buying price for 2008, 2/ power to raw-milk suppliers, 3/ pricing power, etc. Vinamilk did not face any problem in recent raw-milk price storm in late 2007 and early 2008. Starting 3Q08, the imported raw-milk price reduced but Vinamilk did not lower its retail selling price. As a result, gross margin significantly improved from 29% in 2007 to 34% in 2008. Marketing & distribution expense: Vinamilk has very good cost control thanks to marketing restructuring activities. As a result, level of those expenses reduced significantly from 15% of 2007 revenue to 12% in 2008. The result for 11 months just published, of which sales and profit after tax achieved 94.8% and 105.3% respectively of its targets.
Income Statement
Conservative forecast
Even though we believe that 40% market share target is achievable, we only adopt a conservative forecast basis. As a result, our forecast does not include any significant increase either in marketing / distribution expenses or capital expenditures.
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1,600
800
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Balance Sheet
Good impact from CRM ERP - wait and see 2010
We do not include any improvement in working capital generated by the new SAP ERP CRM system as the implementation is expected to complete of the end of 2010.
Vinamilk is executing a capacity expansion program for period from 2008 to 2010 of total VND 1,800bn (USD 105m). This will bring Vinamilk to a total capacity of 800,000 Mt. i.e. 40% increase in 2010. With its current business performance, we do not foresee any problem to make Vinamilk delay or postpone the plan; The Company is also building a Vinamilk building in Phu My Hung, District 7, Ho Chi Minh City with a total investment capital of VND 212bn (USD 12m). As end of 2007, total capital spending was 48,7% of the total investment on land-use right; As mentioned in the above Peer Comparison, Vinamilk is going to have the same level of capital expenditure for every three years period for the following years.
Long-term investment
Long-term investment is mainly investment into business partners stock and real-estate including a corporation with Fico to build the Horizon Apartment for sales. The total investment capital of the corporation is of VND 285bn (USD 16m) at Tran Quang Khai Street, District 3, Ho Chi Minh City, of which Vinamilk contributes 24.5%. With the current Vietnam economic situation, we cannot project any result for the nature of business but simply a kind of long-term investment.
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Company Profile
Vinamilk, a dominant player in Vietnam dairy market, is targeting to increase its market share by 5% in next 5 years by expanding into cold dairy products with detailed strategies: 1/ Expansion of market share in existing and new markets; 2/ Develop a comprehensive portfolio of dairy products to target a broader consumer base and expand into higher margin value-added dairy products; 3/ Development of new product lines to satisfy different consumer preferences; 4/ Brand cultivation; 5/ Continuously enhancing supply chain management; 6/ Development of raw material sources to ensure a reliable and consistent fresh milk supply base. www.vinamilk.com.vn
Risks
Milk quality is considered as a major drawback in the absence of any standardized milk quality testing scheme for the whole country Reliance on Key Management Personnel
Internal
External
Heavily depending on imported milk leads to heavily depending on USD Iraq is only major export country of Vinamilk
Key Figures
Geographical breakdown (sales) Division breakdown (sales)
4.1% 9.9%
What's Up
Company
Dec 2008: Vinamilk received an approval on SGX listing for 8.7M share but recently announced it will postpone the listing due to the unpredictable fluctuations on the global market; Dec 2008: Vinamilk pays dividend - tranche 2/2008 of 19% par value; Nov 2008: Vinamilk delivered 99% of its profit target for the year 2008.
15.4%
Sector
32.5% 27.2%
Oct 08: Vietnam Dairy Conference to streamline ongoing activities of the public and private sector and to attract new investments and efforts to support smallholders dairy development in Vietnam; Late Sep 08: Chemical melamine found in small dairy processing companies including Hanoi Milk/ Anco Milk. Although there was not any illness case found in Vietnam, but those two companies were boycotted by consumers.
E Q U I T Y
84.6% 26.4%
Domestic sales
Export sales
Yoghurt
Powder
Liquid milk
Condense
Others
T I P S
Efficiency profile
VND bn
2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 2006 2007 2008e 2009e 2010e 2011e
Profitability profile
In %
24 22 20 18 16 14 12 10
Peers Comparison
In %
36 34 32 30 28 26 24 22
VND bn
5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 2006 2007 2008e 2009e 2010e 2011e
Company
Danone Nestle SA Median
Market Cap
28,655 135,342
EV/Sales 2008e
2.1 1.6 1.9
EV/Sales 2009e
1.9 1.6 1.8
EV/EBIT 2008e
14.3 11.5 12.9
EBIT
Op. margin
Assets
ROCE
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2005
5,639 5,639 4,302 1,337 735 602 78 (48) 572 41 10 30 603 (3) -0% 0 0 605 605 -
2006
6,245 11% 6,245 4,577 1,669 25% 972 696 16% 101 (86) 681 19% 34 44 (9) 671 11% 3 0% 0 (9) 660 9% 660 9% 31% 6% 33% 17% -8% -
2007
6,648 6% 6,648 4,705 1,943 16% 1,179 764 10% 131 (278) 911 34% 86 12 75 986 47% (8) -1% 0 (31) 963 46% 963 46% 10% -28% 18% 19% -41% -
2008e
7,806 17% 7,806 5,080 2,725 40% 1,179 1,547 102% 181 (50) 1,416 55% 230 180 50 1,466 49% 205 14% 8 (64) 1,188 23% 1,188 23% 11% 34% 19% 12% 60% -
2009e
8,620 10% 0% 10% 100% 0% 8,620 5,650 2,969 9% 1,302 1,668 8% 241 (50) 1,477 4% 24 4 19 1,497 2% 374 25% 8 (32) 1,082 -9% 1,082 -9% 11% 6% 19% 11% 5% -
2010e
9,497 10% 0% 10% 100% 0% 9,497 6,115 3,382 14% 1,434 1,948 17% 305 (50) 1,692 15% 32 4 28 1,720 15% 430 25% 8 0 1,282 18% 1,282 18% 12% 5% 20% 11% 5% -
2011e
10,456 10% 0% 10% 100% 0% 10,456 6,604 3,852 14% 1,579 2,273 17% 370 (50) 1,953 15% 58 4 54 2,007 17% 502 25% 8 32 1,529 19% 1,529 19% 13% 5% 20% 11% 5% -
2005
605 78 (41) 639 65 574 242 242 557 354 203 248 57 (2) (60) 65 5 (19) (14)
2006
660 101 (3) 770 321 448 610 610 1,034 988 46 291 66 0 (432) 0 (432) 38 (395)
2007
963 131 (78) 1,039 726 314 744 744 573 193 380 538 105 (2) (1,241) 1,219 (21) (18) (39)
2008e
1,188 181 (322) 1,324 269 1,055 637 637 (51) 377 (428) 508 45 0 382 0 382 3 385
2009e
1,082 241 (459) 1,278 197 1,081 648 648 0 0 0 508 45 0 (30) 0 (30) 0 (30)
2010e
1,282 305 (483) 1,543 212 1,331 648 648 0 0 0 559 45 0 169 0 169 0 169
2011e
1,529 370 (522) 1,855 232 1,623 600 600 0 0 0 559 45 0 508 0 508 0 508
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2005
1,285 726 748 21 12 9 614 189 120 734 1,491 1,082 383 0 0 419 500 23 2,406 2,155 0 92 92 10 12 23 261 1,367 3,898 255 748 1,746 -
2006
1,573 827 1,063 42% 22 12 9 414 -33% 316 117 531 -28% 1,603 7% 966 394 0 0 173 157 308 1,997 -17% 2,684 25% 0 55 55 42 18 60 166% 437 365 3,601 731 187% 1,063 2,334 -
2007
1,964 941 1,626 53% 39 18 21 401 -3% 604 204 605 14% 2,252 40% 1,670 505 0 0 225 118 655 3,173 59% 4,224 57% 36 92 92 32 10 42 -30% 621 410 5,425 1,369 87% 1,626 3,621 -
2008e
2,567 1,116 2,051 26% 76 24 52 350 -13% 600 204 554 -8% 2,658 18% 1,951 585 0 0 67 503 278 3,385 7% 4,904 16% 36 92 92 35 10 45 6% 650 315 6,042 1,639 20% 2,051 4,296 -
2009e
3,167 1,351 2,464 20% 76 29 47 350 0% 648 204 554 0% 3,064 15% 2,155 646 0 0 67 473 278 3,620 7% 5,478 12% 36 92 92 35 10 45 0% 718 315 6,684 1,835 12% 2,464 4,900 -
2010e
3,815 1,651 2,812 14% 76 35 41 350 0% 648 204 554 0% 3,407 11% 2,374 712 0 0 67 642 278 4,074 13% 6,201 13% 36 92 92 35 10 45 0% 791 315 7,480 2,047 12% 2,812 5,454 -
2011e
4,462 2,015 3,047 8% 76 41 35 350 0% 600 204 554 0% 3,636 7% 2,614 784 0 0 67 1,150 278 4,894 20% 7,171 16% 36 92 92 35 10 45 0% 871 315 8,530 2,279 11% 3,047 5,915 -
Valuation (x)
EV/Sales EV/EBITDA EV/EBIT PE PEG P/Book Dividend yield (%)
2005
-
2006
1.9 17.1 17.4 18.1 4.5 2%
2007
4.4 38.7 32.5 30.7 70% 7.0 2%
2008e
1.8 9.2 10.0 12.2 -60% 3.0 3%
2009e
1.6 8.5 9.6 13.4 10% 2.7 3%
2010e
1.5 7.2 8.2 11.3 -16% 2.3 4%
2011e
1.3 5.9 6.9 9.5 -16% 2.0 4%
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2005
159 4 4 2 14 4 4 (0)
2006
159 4 4 112.6 125.2 46.3 75.2 2 17 5 3 (3)
2007
175 5 5 159.1 201.1 112.6 169.0 3 24 6 2 (7)
2008e
175 7 7 83.0 159.1 66.3 83.0 3 28 8 6 2
2009e
175 6 6 83.0 83.0 3 31 7 6 (0)
2010e
175 7 7 83.0 83.0 3 35 9 8 1
2011e
175 9 9 83.0 83.0 3 41 11 9 3
2005
24% 11% 10% 11%
2006
27% 11% 11% 11%
2007
29% 11% 14% 14%
2008e
35% 20% 18% 15%
2009e
34% 19% 17% 13%
2010e
36% 21% 18% 14%
2011e
37% 22% 19% 15%
Operating Margin Yoghurt Powder Liquid milk Net Margin Yoghurt Powder Liquid milk
Geographical breakdown / Margins EBITDA Margin Domestic sales Export sales -
Operating Margin Domestic sales Export sales Net Margin Domestic sales Export sales -
2005
28% 33% -23% 55% 41% 60.0 69.0 24.4 16.7 76.8 3,800 1,483.9 150.6 -
2006
25% 29% -15% 75% 44% 16.0 55.7 22.7 25.2 53.2 4,000 1,561.4 170.2 -
2007
23% 25% -17% 78% 56% 65.5 90.4 27.4 33.6 84.1 4,200 1,582.9 217.0 -
2008e
24% 28% -15% 81% 43% 8.6 90.0 27.0 30.0 87.0 4,410 1,770.0 321.1 -
2009e
20% 22% -13% 82% 47% 371.7 90.0 27.0 30.0 87.0 4,631 1,861.5 319.0 -
2010e
21% 23% -14% 83% 44% 434.1 90.0 27.0 30.0 87.0 4,862 1,953.2 348.1 -
2011e
21% 24% -19% 84% 37% 506.6 90.0 27.0 30.0 87.0 5,105 2,048.1 382.6 -
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2005
338.33 338.33 258.14 80.19 44.07 36.12 4.65 (2.86) 34.33 2.43 0.60 1.83 36.16 (0.17) -0% 0.00 0.00 36.33 36.33 -
2006
374.73 11% 374.73 274.61 100.11 25% 58.34 41.78 16% 6.07 (5.14) 40.85 19% 2.06 2.62 (0.56) 40.29 11% 0.17 0% 0.00 (0.53) 39.58 9% 39.58 9% 31% 6% 33% 17% -8% -
2007
398.89 6% 398.89 282.30 116.59 16% 70.74 45.85 10% 7.85 (16.67) 54.68 34% 5.18 0.70 4.48 59.16 47% (0.48) -1% 0.00 (1.83) 57.80 46% 57.80 46% 10% -28% 18% 19% -41% -
2008e
468.34 17% 468.34 304.83 163.52 40% 70.72 92.80 102% 10.84 (3.00) 84.96 55% 13.80 10.80 3.00 87.96 49% 12.31 14% 0.48 (3.87) 71.30 23% 71.30 23% 11% 34% 19% 12% 60% -
2009e
517.18 10% 0% 10% 100% 0% 517.18 339.01 178.17 9% 78.09 100.07 8% 14.44 (3.00) 88.64 4% 1.43 0.27 1.16 89.79 2% 22.45 25% 0.48 (1.93) 64.93 -9% 64.93 -9% 11% 6% 19% 11% 5% -
2010e
569.80 10% 0% 10% 100% 0% 569.80 366.90 202.90 14% 86.04 116.86 17% 18.32 (3.00) 101.54 15% 1.94 0.27 1.67 103.21 15% 25.80 25% 0.48 0.00 76.93 18% 76.93 18% 12% 5% 20% 11% 5% -
2011e
627.35 10% 0% 10% 100% 0% 627.35 396.23 231.12 14% 94.73 136.39 17% 22.21 (3.00) 117.19 15% 3.48 0.27 3.21 120.40 17% 30.10 25% 0.48 1.93 91.75 19% 91.75 19% 13% 5% 20% 11% 5% -
2005
36.33 4.65 (2.49) 38.32 3.89 34.43 14.53 14.53 33.43 21.24 12.19 14.86 3.41 (0.11) (3.63) 3.90 0.27 (1.11) (0.84)
2006
39.58 6.07 (0.19) 46.17 19.28 26.89 36.57 36.57 62.06 59.28 2.78 17.46 3.99 0.00 (25.93) 0.00 (25.93) 2.25 (23.68)
2007
57.80 7.85 (4.65) 62.35 43.54 18.81 44.64 44.64 34.38 11.60 22.78 32.29 6.32 (0.14) (74.44) 73.17 (1.27) (1.07) (2.34)
2008e
71.30 10.84 (19.34) 79.45 16.16 63.29 38.23 38.23 (3.06) 22.63 (25.69) 30.50 2.68 0.00 22.93 0.00 22.93 0.15 23.08
2009e
64.93 14.44 (27.54) 76.69 11.80 64.88 38.85 38.85 0.00 0.00 0.00 30.50 2.68 0.00 (1.78) 0.00 (1.78) 0.00 (1.78)
2010e
76.93 18.32 (28.97) 92.57 12.72 79.85 38.85 38.85 0.00 0.00 0.00 33.55 2.68 0.00 10.13 0.00 10.13 0.00 10.13
2011e
91.75 22.21 (31.33) 111.28 13.91 97.37 36.00 36.00 0.00 0.00 0.00 33.55 2.68 0.00 30.51 0.00 30.51 0.00 30.51
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2005
77.12 43.59 44.89 1.26 0.70 0.56 36.84 11.36 7.21 44.04 89.49 64.89 22.96 0.00 0.00 25.16 30.02 1.37 144.39 129.28 0.00 5.54 5.54 0.62 0.74 1.36 15.65 82.05 233.88 15.30 44.89 104.79 -
2006
94.40 49.60 63.77 42% 1.29 0.74 0.55 24.83 -33% 18.97 7.04 31.88 -28% 96.20 7% 57.95 23.63 0.00 0.00 10.38 9.41 18.46 119.84 -17% 161.02 25% 0.00 3.28 3.28 2.54 1.07 3.61 166% 26.21 21.90 216.03 43.85 187% 63.77 140.05 -
2007
117.83 56.47 97.57 53% 2.33 1.08 1.24 24.06 -3% 36.22 12.24 36.30 14% 135.12 40% 100.19 30.31 0.00 0.00 13.50 7.07 39.31 190.39 59% 253.46 57% 2.16 5.50 5.50 1.94 0.60 2.54 -30% 37.28 24.57 325.51 82.15 87% 97.57 217.27 -
2008e
154.05 66.97 123.08 26% 4.56 1.42 3.14 21.00 -13% 36.00 12.24 33.24 -8% 159.45 18% 117.09 35.13 0.00 0.00 4.03 30.15 16.69 203.08 7% 294.26 16% 2.16 5.50 5.50 2.09 0.60 2.69 6% 39.03 18.90 362.53 98.31 20% 123.08 257.76 -
2009e
190.05 81.06 147.83 20% 4.56 1.77 2.79 21.00 0% 38.85 12.24 33.24 0% 183.86 15% 129.29 38.79 0.00 0.00 4.03 28.37 16.69 217.17 7% 328.69 12% 2.16 5.50 5.50 2.09 0.60 2.69 0% 43.10 18.90 401.04 110.12 12% 147.83 293.98 -
2010e
228.90 99.04 168.70 14% 4.56 2.11 2.45 21.00 0% 38.85 12.24 33.24 0% 204.39 11% 142.45 42.74 0.00 0.00 4.03 38.50 16.69 244.41 13% 372.07 13% 2.16 5.50 5.50 2.09 0.60 2.69 0% 47.48 18.90 448.80 122.83 12% 168.70 327.23 -
2011e
267.75 120.91 182.84 8% 4.56 2.45 2.11 21.00 0% 36.00 12.24 33.24 0% 218.18 7% 156.84 47.05 0.00 0.00 4.03 69.01 16.69 293.62 20% 430.28 16% 2.16 5.50 5.50 2.09 0.60 2.69 0% 52.28 18.90 511.80 136.74 11% 182.84 354.92 -
Valuation (x)
EV/Sales EV/EBITDA EV/EBIT PE PEG P/Book Dividend yield (%)
2005
-
2006
1.9 17.1 17.4 18.1 4.5 2%
2007
4.4 38.7 32.5 30.7 70% 7.0 2%
2008e
1.8 9.2 10.0 12.2 -60% 3.0 3%
2009e
1.6 8.5 9.6 13.4 10% 2.7 3%
2010e
1.5 7.2 8.2 11.3 -16% 2.3 4%
2011e
1.3 5.9 6.9 9.5 -16% 2.0 4%
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2005
159.00 0.23 0.23 0.09 0.81 0.24 0.22 (0.02)
2006
159.00 0.25 0.25 6.8 7.5 2.8 4.5 0.11 1.01 0.29 0.17 (0.16)
2007
175.28 0.33 0.33 9.5 12.1 6.8 10.1 0.18 1.45 0.36 0.11 (0.42)
2008e
175.28 0.41 0.41 5.0 9.5 4.0 5.0 0.17 1.68 0.45 0.36 0.13
2009e
175.28 0.37 0.37 5.0 5.0 0.17 1.88 0.44 0.37 (0.01)
2010e
175.28 0.44 0.44 5.0 5.0 0.19 2.12 0.53 0.46 0.06
2011e
175.28 0.52 0.52 5.0 5.0 0.19 2.45 0.63 0.56 0.17
2005
24% 11% 10% 11%
2006
27% 11% 11% 11%
2007
29% 11% 14% 14%
2008e
35% 20% 18% 15%
2009e
34% 19% 17% 13%
2010e
36% 21% 18% 14%
2011e
37% 22% 19% 15%
Operating Margin Yoghurt Powder Liquid milk Net Margin Yoghurt Powder Liquid milk
Geographical breakdown / Margins EBITDA Margin Domestic sales Export sales -
Operating Margin Domestic sales Export sales Net Margin Domestic sales Export sales -
2005
28% 33% -23% 55% 41% 60.0 69.0 24.4 16.7 76.8 3,800 0.1 0.0 -
2006
25% 29% -15% 75% 44% 16.0 55.7 22.7 25.2 53.2 4,000 0.1 0.0 -
2007
23% 25% -17% 78% 56% 65.5 90.4 27.4 33.6 84.1 4,200 0.1 0.0 -
2008e
24% 28% -15% 81% 43% 8.6 90.0 27.0 30.0 87.0 4,410 0.1 0.0 -
2009e
20% 22% -13% 82% 47% 371.7 90.0 27.0 30.0 87.0 4,631 0.1 0.0 -
2010e
21% 23% -14% 83% 44% 434.1 90.0 27.0 30.0 87.0 4,862 0.1 0.0 -
2011e
21% 24% -19% 84% 37% 506.6 90.0 27.0 30.0 87.0 5,105 0.1 0.0 -
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Rating REDUCE
Rating REDUCE
Distribution of Ratings
Analyst Certification
I, GORGIARD Servane, LE VAN CAO Luan, certify that all of the views expressed in this research report accurately reflect my personal views about the subject sector(s) and subject company (ies). The compensation of the analyst who prepared this report is determined exclusively by research management and senior management.
Important Disclosures
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