Vinamilk Research

1 January 2017

Throughout the years, Vinamilk has expanded its production capacity by acquisition and construction of new plants around the country. At present, the Group operates nine dairy factories with a total capacity of 504 thousand tons per year and one coffee factory with a capacity of 1,500 tons of instant coffee and 6,000 tons of roasted ground coffee. Invest Rationale The largest player in the domestic dairy market The Group is the largest dairy producer in Vietnam, capturing around 37. 0% of the market share in the domestic dairy market.

In terms of product segments, the Group accounted for nearly 85. % of the market share in the yoghurt and condensed milk segment; and around 45. 0% of the market share in the liquid milk segment in 2008. These segments jointly contributed to around 68. 0% of its total revenue in 2008. Besides that, Vinamilk’s powdered milk-infant cereals segment accounted for about 29. 0% of its total revenue in 2008. The management has set an ambitious target to expand the market share of this segment from 15.

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0% in 2008 to at least 35. 0% over the next two years. Strong brand name Over the years, the Group has built a reputable brand name for its major products.

Its highly-popular brand, ‘Vinamilk’, is viewed by many domestic consumers as the most trusted brand for nutritional dairy products. The Group is ranked first in ‘The Top Ten High-Quality Vietnamese Goods’ from 1995 to 2009. According to AC Nielsen, Vinamilk’s contributions in the ‘favorite brand index’ and the ‘brand-used most-often index’ have increased by 14% and 12% y-o-y, respectively, in 2008. Extensive nationwide distribution network Vinamilk has established the largest distribution network compared to its sector’s peers. The Group has 250 distributors selling its products to 125,000 retail outlets covering 64 provinces in Vietnam.

This traditional distribution channel accounted for 80. 0% of the Group revenue last year. Its modern distribution network through hypermarkets and supermarkets contributed to about 12. 0% of the Group’s total revenue, while the remaining 8. 0% of its revenue comes from hotels, restaurants, and cafeterias (Horace). Besides that, Vinamilk has consistently been reaching out to assist its distributors in order to strengthen its foothold. The Group has invested in 7,000 fridges, coolers for chilled products and 300 mini-vans to support distributors last year.

In 2009, the management plans to invest more than VND 127. 0bn in vans and refrigerators to support its distributors and outlets. We believe that such an extensive distribution channel will continue to give Vinamilk a competitive edge against its foreign and domestic peers. The wide market reach also serves as the biggest barrier for its competitors to enter and/or expand their market share in this market. Continuously expanding product offerings The Group has continuously launched new product offerings to meet the increasingly diversified demand of consumers.

In 2008, the Group has developed more than 40 new products and successfully FIN 332 – Troy Spring Page 3 Company research VINAMILK introduced 12 new products to domestic and overseas markets. These include “Probi” yogurt, which help people to enhance the absorption of underlying nutrients and ‘Dielac Diecerna’ for diabetes consumers. The management plans to re-categories its product range tailored for specific consumer classes such as pregnant women, infant, children, teenagers, and elderly. This is expected to help the target consumer group to easily recognize the benefits of the products.

Catalysts for upside potential Rising demand Rapid urbanization has boosted domestic demand for dairy products. We expect improved living standards and rising health awareness to encourage the consumption of dairy products going forward. Although domestic per capita fresh milk consumption has increased from 3. 8kg in 2001 to around 9. 0kg in 2008, it remains substantially below the fresh milk consumption per capita in the regional market such as Thailand (25kg) and Singapore (33kg), thus implying favorable growth potential.

Upbeat growth prospect According to Agroinfo, Vietnam has the highest retail price of milk in the world. The persistently high consumer milk price, coupled with the robust domestic consumption, has enabled the dairy market to grow exponentially over the past five years. Vietnam’s dairy market has been accredited as the ‘rapid growing sector’ given that it has registered a respectable growth of 15. 2% per annum from 1996-2006, only lagging behind the 16. 0% annual growth rate registered by China’s dairy market.

Among the dairy products, we foresee that powdered milk and fresh milk segments could experience the highest growth rate going forward, given their increased popularity among the domestic consumers and the low market penetration rate. Ambitious target to fulfill the domestic supply gap of milk inputs Domestic dairy producers continue to rely heavily on imported milk inputs. At the end of 2008, Vietnam had 107,983 dairy cattle producing about 262,160 tons of fresh milk input, supplying less than 22% of the milk inputs for domestic production.

To reduce the country’s dependency on the imported dairy milk inputs, the authority has set an ambitious target to increase the number of dairy cattle that could fulfill around 40. 0% of the domestic demand for fresh milk inputs by 2010. We believe that Vinamilk, being the largest fresh milk purchaser in Vietnam, could benefit enormously from this government measure. Risks and Safeguards Price volatility of imported milk input As mentioned before, the Group is highly dependent on imported milk inputs. We understand that milk inputs account for more than 75. 0% of the Group’s raw materials cost and 60. % of its cost of goods sold (COGS).

Our sensitive analysis shows that every 10. 0%-increase in milk input price will translate into a 22. 4%-decline in the EPS, assuming that the ASP of its major product remains constant. Nonetheless, we believe that the active cost control policies engaged by the management will minimize the Group’s exposure to the external volatility of the global milk input prices. Furthermore, the ability of the Group to pass on its increased cost to end-users will mitigate the risk of margin erosion, in our opinion. Rising cost components The Government has approved the hike of the electricity rate by 9. % as of 1 March 2009, which is expected to increase the Group’s total cost by 1. 0%.

Furthermore, we expect the Group to incur higher FIN 332 – Troy Spring Page 4 Company research VINAMILK marketing expenses going forward to strengthen its market position. Again, the ability of the Group to pass on its increased cost to end-users will mitigate the risk of margin erosion, in our opinion. Competition of high-end product segment to intensify Domestic dairy manufacturers have faced intensified competition from foreign players such as Dutch Lady, Abbott, Meat Johnson and Nestle.

We observe that Vietnamese consumers, particularly the young and affluent people, may prefer the popular foreign brands to domestic brands. Despite the intensified competition, we believe that the Group is able to maintain its dominant position in the market given its popular brand name, extensive distribution network and aggressive marketing campaign. Furthermore, we observe that the challenging economic environment has led to a down trading consumption pattern that favor’s the competitive priced products distributed by Vinamilk.

Regulatory risk Given that majority of the Vinamilk’s products serve as essential goods for its consumer, we do not discount the possibility that the Government may restrict the Group’s ability to raise its retail price should the inflation become a concern to the economy. Peer Comparison Market Information Product overview VNM has a wide range of products including various kinds of milk such as: fresh milk, yoghurt, powdered milk, ice cream and beverage (juice, tea…). Previously there were some kinds of coffee products but they are stopped producing now. Market overview Vietnam’s boasts incomparable demographics.

It has a large population of 84 million people and more than half of them under the age of 25. Furthermore the country is urbanising rapidly and an urban wealthier population is strongly corelated with a higher per capita dairy consumption. Given that existing per capita consumption is currently very low we believe that annual double digit growth is FIN 332 – Troy Spring Page 5 Company research VINAMILK virtually built-in to the market. Currently the market is relatively immature but it is certainly large enough. Dairy products consumption CAGR in Vietnam was 16. 3% between 2004 and 2006, well above the regional average of 13 – 4%.

Going forward, we expect growth to be sustained at above average regional growth rates of around 14. 5%. The main drivers would be higher per-capita consumption, in line with strong GDP growth. Vietnam’s GDP grew by 8. 17% in 2006, the second highest in ten years. The Economist Intelligence Unit forecasts that Vietnamese GDP growth will moderate to 7. 5% by 2010. Vietnamese currently consume around 9 kg of dairy products per capita annually, which is well below the global and region averages for per-capita consumption. However this is increasing due to five key drivers.

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