vietnam dairy products joint stock company

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03 December 2014

Asia Pacific/Vietnam

Equity Research

Food Producers

Vietnam Dairy Products Joint Stock Company (VNM.HM / VNM VN)

INITIATION

High quality at a bargain price

■ Initiate coverage with OUTPERFORM and target price of D130,000 (31%

potential upside). Vinamilk enjoys a dominant position in the dairy business in

Vietnam (48% market share), driven by a strong brand image, extensive

distribution network and an excellent management team. Its continued

investment in supply chain and branding are key differentiators.

■ Dominant player in a growth market. Vietnam Dairy Products Joint Stock

Company (Vinamilk) is the dominant player in the growing dairy market in

Vietnam (5Y CAGR of 20% over 2008-13). The country's per capita income

of US$1,890 p.a. is among the lowest in Asia, and with 42% of the

population below the age of 25, there is huge growth potential. It also lags

some regional peers on per capita milk consumption (18 kg), vs Myanmar

(30 kg), Thailand (28 kg), China (23 kg) and South Korea (55 kg).

■ Margin upswing and earnings recovery key catalysts. International milk

powder prices (65-70% of raw material cost) are down 53% YTD, and with a

weak near-term price outlook, margins are likely to rise by 176 bp in 4Q. VNM

has underperformed the benchmark by 27% on lower earnings in 9M14, which

is now behind us. Rising margins, new capacity in Cambodia and a likely

recovery in exports should drive a three-year (2014-17E) EPS CAGR of 15%.

■ Attractive valuations. Our DCF-based target price is D130,000; 31%

potential upside (implied 13.6x 2015E EV/EBITDA). The 10.2x 2015E multiple

signifies 38% regional/9% historical discount. Given superior EBITDA margins

(23% vs 17% regional), low capex and attractive yield (3.8%), valuations are

compelling. Key risks: (1) continued government regulation on pricing, (2)

prolonged issues with exports and (3) intensifying competition.

Share price performance

80

100

120

140

6000080000

100000120000140000

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

VIETNAM INDEX which closed at 569.43 on 02/12/14

On 02/12/14 the spot exchange rate was D21370./US$1

Performance over 1M 3M 12M Absolute (%) -5.2 -11.2 -15.3 — Relative (%) -0.0 -0.0 -27.3 —

Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Revenue (D bn) 30,948.6 34,491.0 38,786.4 43,877.0 EBITDA (D bn) 8,336.2 7,776.7 8,960.8 9,906.6 EBIT (D bn) 7,549.8 6,836.3 8,050.9 9,029.2 Net profit (D bn) 6,534.1 5,846.9 6,850.2 7,784.0 EPS (CS adj.) (D) 6,533.3 5,846.1 6,849.3 7,782.9 Change from previous EPS (%) n.a. Consensus EPS (D) n.a. 5,787 6,878 7,665 EPS growth (%) 12.3 -10.5 17.2 13.6 P/E (x) 15.2 17.0 14.5 12.8 Dividend yield (%) 4.0 3.2 3.8 4.3 EV/EBITDA (x) 11.2 11.9 10.2 9.0 P/B (x) 5.7 4.8 4.2 3.7 ROE (%) 39.6 30.7 31.0 30.6 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (02 Dec 14, D) 99,500 Target price (D) 130,000¹ Upside/downside (%) 30.7 Mkt cap (D bn) 99,511.9 (US$4.7 bn) Enterprise value (D bn) 92,695 Number of shares (mn) 1,000.12 Free float (%) 44.0 52-week price range 125,000-99,000.0 ADTO - 6M (US$ mn) 0.85

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

03 December 2014

Vietnam Dairy Products Joint Stock Company (VNM.HM / VNM VN) 2

Focus charts Figure 1: Market dominance with balanced revenue mix… Figure 2: …due to high market shares across segments

0

9,000

18,000

27,000

36,000

45,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Liquid Milk Powdered Milk Condensed Milk Yogurt Others

Domestic revenue mix (VND bn)

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Liquid milk Powder milk Yogurt Condensed milk

Domestic market shares trend

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 3: Int'l powder prices have fallen 53% YTD… Figure 4: …and should drive margins higher in 2015

2,000

2,600

3,200

3,800

4,400

5,000

5,600

6,200

Nov-

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Mar

-11

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Jul-1

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NZ milk powder prices (USD/MT)

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

GP margins EBITDA margins

Source: Bloomberg Source: Company data, Credit Suisse estimates

Figure 5: Low per capita milk consumption offers long-

term growth opportunities

Figure 6: Valuations are attractive (38% regional discount)

despite high margins and decent EBITDA growth outlook

1217

1823

28

30

5155

57

6569

0.0

12.0

24.0

36.0

48.0

60.0

72.0

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8,000

16,000

24,000

32,000

40,000

48,000

Indo

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Phi

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Vie

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Chi

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Thai

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Mya

nmar

Mal

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Sou

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orea

Bra

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New

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land

Indi

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GDP per capita (US$) Milk consumption/capita - kg (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Chi

na M

oder

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Vin

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Chi

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EV/EBITDA (x) EBITDA growth (%) - LHS

Source: FAO, Canadian Dairy Centre, World Bank, CS estimates Source: Bloomberg, Credit Suisse estimates (2015E)

03 December 2014


High quality at a bargain price We initiate coverage on Vinamilk (VNM), the largest dairy company in Vietnam, with an

OUTPERFORM rating and a target price of D130,000. Vinamilk enjoys a dominant

position in the dairy business in Vietnam (48% market share), driven by a strong brand

image, extensive distribution network and an excellent management team The company

focuses on an aggressive growth strategy, driven by major capacity expansions worth D13

tn (US$600 mn) over 2012-16, the bulk of which already came on line in 2013.

Dominant player in a growth market

Vinamilk remains the dominant player (48% market share) of the growing dairy market in

Vietnam, which posted a five-year (2008-13) CAGR of 20%. Given that Vietnam's per

capita income of US$1,890 p.a. is among the lowest in Asia, and with 42% of the

population below the age of 25, we note that there is vast potential for demand growth. An

improving macroeconomic environment (low CPI and rising GDP growth of 5.8% in 2015E

(Asian Development Bank estimates) should also support demand growth. Despite strong

momentum in the past five years, Vietnam continues to lag in Asia, with per capita milk

consumption of 18 kg compared to South Korea (55 kg), Myanmar (30 kg), Thailand (28

kg), China (23 kg). Independent studies, such as Business Monitor, have forecast an 8%

increase in food expenditure (which we see as conservative) in the country led by

improving income levels and consumer appetite for branded products. We expect dairy

volumes to grow 5-6% annually over the medium to long term.

Margins on the rise, earnings to rebound sharply

After five years of robust growth (22% EPS CAGR over 2008-13), VNM saw pressure on

volumes and margins, particularly on account of issues with exports to Iraq and

government intervention to regulate milk powder prices in June. As a result, exports fell

38% in 9M14, while a 14% decline in milk powder prices in June drove earnings down

14% YoY to D4,338 bn. We believe the worst is behind us, with low international milk

powder prices (-53% YTD) likely to drive a margin upswing from 4Q14. Management has

indicated plans to sign long-term purchase contracts, which should boost margins in 2015

and negate the impact of the decline in sales price. Moreover, the new capacity in

Cambodia (2Q15) and gradual improvement in Iraq should boost export volumes in 2015.

We expect earnings to rebound sharply with a three-year 2014-17 CAGR of 15%.

Competition concerns are overplayed

Competitive pressures have intensified, particularly in the liquid milk segment domestically,

with aggressive growth strategy by TH Milk and extensive marketing by Friesland Campina

(FCV). However, we believe competitive concerns are overplayed as there are significant

barriers for new players, given the large amount of capex required to build critical mass,

such as the development of in-house farms in the case of TH Milk. Moreover, VNM's strong

brand positioning, extensive distribution network and superior financial muscle provides it an

advantage over new entrants, helping to increase market share in liquid milk to 51% (Dec-

13: 49%). Aggressive marketing spend by both FCV (~60-70% rise) and VNM (~50%)

outlines the strength and commitment of the top players to defend their turf.

Attractive valuations

Our DCF-based target price is D130,000, a 31% potential upside (implied 2015E EV/EBITDA

of 13.6x). The stock trades at an attractive 2015E EV/EBITDA of 10.2x (38% regional/ 9%

historical discount). Given superior EBITDA margins (23% vs 17% regional average), low

capex and attractive yield (3.8%), valuations appear compelling. VNM has also

underperformed the benchmark HOSE by 27% over 12M, making this a good entry point.

Key risks are: (1) continued government regulation on product pricing, (2) further

deterioration in operating conditions in export markets and (3) macro slowdown and intense

competition.

Vinamilk is the dominant

player in the dairy business

in Vietnam with a 48%

market share; F&N Group, a

leading regional consumer

name, is a strategic

shareholder

Vietnam has one of the

lowest per capita milk

consumption, well behind

Asian peers such as

Thailand, India and Pakistan

Margins are on a rising

trend due to lower milk

powder prices, and together

with robust demand growth

will drive 2014-17E CAGR

of 15%

Competitive pressures have

intensified but VNM has key

competition advantages in

terms of supply chain,

distribution and financial

position

DCF valuation yields a TP of

D130,000, implying 31%

potential upside and 13.6x

2015E EV/EBITDA

03 December 2014


Vietnam Dairy Products Joint Stock Company VNM.HM / VNM VN Price (02 Dec 14): D99,500, Rating: OUTPERFORM, Target Price: D130,000, Analyst: Farhan Rizvi

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside 185,000.00 85.93 Peak EV/EBITDA multiple of 20x Central Case 130,000.00 30.65 FCFF–Target EV/EBITDA of 13.6x Downside 58,000.00 (41.71) 3-year trough EV/EBITDA multiple of 5.6x

Key earnings drivers 12/13A 12/14E 12/15E 12/16E

Liquid milk rev (D bn) 10,797 13,107 14,941 16,867 Powder milk rev (D bn) 5,300 4,981 5,557 6,379 Advertising & prom (D bn) 1,828 2,770 3,363 3,826 Gross margin (%) 36.1 34.6 36.3 36.1

Income statement (D bn) 12/13A 12/14E 12/15E 12/16E

Sales revenue 30,949 34,491 38,786 43,877 Cost of goods sold 19,766 22,573 24,702 28,025 SG&A 3,888 5,272 6,247 7,066 Other operating exp./(inc.) (1,041) (1,131) (1,124) (1,120) EBITDA 8,336 7,777 8,961 9,907 Depreciation & amortisation 786.4 940.3 909.9 877.5 EBIT 7,550 6,836 8,051 9,029 Net interest expense/(inc.) (416.6) (484.0) (571.8) (693.5) Non-operating inc./(exp.) — — — — Associates/JV 43.9 52.7 63.3 79.1 Recurring PBT 8,010 7,373 8,686 9,802 Exceptionals/extraordinaries — — — — Taxes 1,476 1,519 1,824 2,000 Profit after tax 6,534 5,854 6,862 7,802 Other after tax income — — — — Minority interests (0.0) 7.4 11.7 18.3 Preferred dividends — — — — Reported net profit 6,534 5,847 6,850 7,784 Analyst adjustments — — — — Net profit (Credit Suisse) 6,534 5,847 6,850 7,784

Cash flow (D bn) 12/13A 12/14E 12/15E 12/16E

EBIT 7,550 6,836 8,051 9,029 Net interest (416.6) (484.0) (571.8) (693.5) Tax paid 1,476 1,519 1,824 2,000 Working capital (2,830) (203) (1,098) (887) Other cash & non-cash items (2,524) 1,726 358 363 Operating cash flow 3,255 9,394 8,563 9,812 Capex (1,385) (2,734) (1,919) (1,598) Free cash flow to the firm 1,870 6,659 6,644 8,214 Disposals of fixed assets — — — — Acquisitions (66.7) (28.5) (31.3) (17.2) Divestments — — — — Associate investments — — — — Other investment/(outflows) (513.2) 30.8 28.2 (79.1) Investing cash flow (1,965) (2,732) (1,923) (1,694) Equity raised — 390.9 — — Dividends paid (2,250) (4,001) (3,215) (3,767) Net borrowings 362.6 (9.3) (137.8) (137.0) Other financing cash flow 1,113 17 19 30 Financing cash flow (775) (3,602) (3,334) (3,875) Total cash flow 515 3,060 3,307 4,243 Adjustments — — — — Net change in cash 515 3,060 3,307 4,243

Balance sheet (D bn) 12/13A 12/14E 12/15E 12/16E

Cash & cash equivalents 6,913 7,170 8,588 10,812 Current receivables 2,330 2,468 2,879 3,254 Inventories 3,217 3,803 4,264 4,837 Other current assets 558.4 682.1 746.6 762.9 Current assets 13,019 14,124 16,477 19,667 Property, plant & equip. 7,849 7,668 7,625 11,491 Investments 434.1 462.5 493.8 511.1 Intangibles 705.9 675.2 647.0 726.0 Other non-current assets 867 2,842 3,894 749 Total assets 22,875 25,772 29,138 33,144 Accounts payable 1,968 2,165 2,369 2,687 Short-term debt 178.9 143.0 139.5 65.6 Current provisions 956 1,043 1,115 1,187 Other current liabilities 1,853 1,429 1,542 1,745 Current liabilities 4,956 4,779 5,166 5,684 Long-term debt 184.1 210.8 76.5 13.3 Non-current provisions 160.6 170.5 178.0 189.7 Other non-current liab. 5.9 5.9 5.9 5.9 Total liabilities 5,307 5,166 5,426 5,893 Shareholders' equity 17,545 20,575 23,670 27,190 Minority interests 22.9 30.2 42.0 60.2 Total liabilities & equity 22,875 25,772 29,138 33,144

Per share data 12/13A 12/14E 12/15E 12/16E

Shares (wtd avg.) (mn) 1,000 1,000 1,000 1,000 EPS (Credit Suisse) (D) 6,533 5,846 6,849 7,783 DPS (D) 4,000 3,215 3,767 4,281 BVPS (D) 17,543 20,573 23,667 27,187 Operating CFPS (D) 3,254 9,392 8,562 9,811

Key ratios and valuation 12/13A 12/14E 12/15E 12/16E

Growth (%) Sales revenue 16.5 11.4 12.5 13.1 EBIT 16.3 (9.4) 17.8 12.2 Net profit 12.3 (10.5) 17.2 13.6 EPS 12.3 (10.5) 17.2 13.6 Margins (%) EBITDA 26.9 22.5 23.1 22.6 EBIT 24.4 19.8 20.8 20.6 Pre-tax profit 25.9 21.4 22.4 22.3 Net profit 21.1 17.0 17.7 17.7 Valuation metrics (x) P/E 15.2 17.0 14.5 12.8 P/B 5.67 4.84 4.20 3.66 Dividend yield (%) 4.02 3.23 3.79 4.30 P/CF 30.6 10.6 11.6 10.1 EV/sales 3.00 2.69 2.35 2.02 EV/EBITDA 11.2 11.9 10.2 9.0 EV/EBIT 12.3 13.6 11.3 9.8 ROE analysis (%) ROE 39.6 30.7 31.0 30.6 ROIC 57.7 43.8 43.7 45.1 Asset turnover (x) 1.35 1.34 1.33 1.32 Interest burden (x) 1.06 1.08 1.08 1.09 Tax burden (x) 0.82 0.79 0.79 0.80 Financial leverage (x) 1.30 1.25 1.23 1.22 Credit ratios Net debt/equity (%) (37.3) (33.1) (35.3) (39.4) Net debt/EBITDA (x) (0.79) (0.88) (0.93) (1.08) Interest cover (x) (18.1) (14.1) (14.1) (13.0)

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0

1

2

3

4

5

6

7

8

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

0

3 D

ec

em

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4

Vie

tna

m D

airy

Pro

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Jo

int S

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k C

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(VN

M.H

M / V

NM

VN

) 5

Regional consumer valuations Figure 7: We use dairy companies, food processors and agricultural businesses as the appropriate benchmark for Vinamilk

Reuters Name of Company Price US$mn P/E (x) EV/EBITDA (x) ROE (%) P/B (x) FCF yield (%) ROIC (%) Margins (%)

Rating Local Target Mkt cap T+1 T+2 T+1 T+2 T+1 T+1 T+1 T+1 Gross EBITDA

China

0151.HK Want Want China Holdings Ltd. N 10.2 12.0 17,323 25.8 21.8 16.8 14.4 31.3 8.1 4.2 52.6 40.6 24.1

0322.HK Tingyi N 18.3 21.5 13,239 26.8 22.5 9.3 8.4 15.6 4.2 2.4 14.9 31.5 13.9

0288.HK WH Group O 4.4 6.9 8,274 9.2 10.0 7.4 5.9 23.9 1.6 - - - -

2319.HK China Mengniu Dairy N 30.3 35.0 7,652 24.4 20.9 14.6 12.6 11.8 2.9 (1.1) 8.7 32.4 7.1

1117.HK China Modern Dairy Holdings U 2.4 3.3 1,469 9.7 9.3 8.9 9.1 13.5 1.3 0.5 11.0 35.9 31.3

1431.HK YuanShengTai Dairy Farm O 0.8 2.8 413 5.3 4.2 1.4 1.0 10.9 0.6 (36.4) 14.3 47.0 45.4

Indonesia

UNVR.JK Unilever Indonesia U 31,275 21,500 19,453 44.9 41.0 31.2 28.6 126.0 56.5 1.9 94.7 49.3 22.2

INDF.JK Indofood Sukses Makmur O 6,675 8,100 4,778 17.6 15.1 6.1 5.2 14.5 2.6 (5.1) 14.2 28.8 17.0

ICBP.JK Indofood CBP O 11,400 11,800 5,419 24.2 20.3 14.2 11.8 19.3 4.7 1.4 22.7 26.6 14.1

AALI.JK PT Astra Agro Lestari Tbk O 23,200 28,000 2,978 14.2 13.0 10.2 9.5 22.1 3.1 3.5 19.5 31.0 22.8

BUMI.SI Bumitama Agri Limited O 1.0 1.4 1,360 13.7 11.1 9.7 7.8 18.3 2.5 2.2 13.4 42.4 39.4

LSIP.JK PT London Sumatra Indonesia O 1,910 2,300 1,062 14.1 12.2 7.5 6.6 12.8 1.8 2.4 16.0 34.5 32.0

IFAR.SI Indofood Agri Resources Ltd U 0.7 0.7 823 12.8 11.5 4.7 4.2 5.4 0.7 (4.6) 5.9 25.3 21.4

Korea

051900.KS LG Household & Healthcare O 633,000 720,000 8,871 29.2 23.1 16.5 13.9 19.9 5.8 3.0 17.4 55.0 14.2

001800.KS Orion Corp. O 996,000 1,140,000 5,340 34.9 29.0 14.7 13.9 13.2 4.6 2.2 10.1 45.4 18.8

Thailand

CPF.BK Charoen Pokphand Foods O 28.3 35.0 6,659 22.2 14.4 12.8 10.8 8.1 1.8 7.7 4.8 13.5 7.0

TUF.BK Thai Union Frozen Products O 88.5 95.0 3,214 19.1 15.8 13.2 11.3 13.3 2.6 7.0 8.9 17.8 9.2

TBEV.SI Thai Beverage N 0.7 0.7 12,926 19.5 17.5 17.2 15.9 20.4 4.0 5.2 12.3 29.5 17.7

India

HLL.BO Hindustan Unilever Ltd N 804.8 800.0 28,171 43.0 36.1 32.9 28.0 104.2 44.8 3.2 1,072.2 47.6 17.0

NEST.BO Nestlé India U 6,190 5,500 9,657 49.6 43.3 29.1 25.8 49.1 24.4 2.9 46.2 53.6 20.9

DABU.BO Dabur India N 242.5 237.0 6,892 39.2 33.1 32.0 27.5 33.2 13.0 2.4 47.6 52.1 16.7

Malaysia

SIME.KL Sime Darby N 9.6 9.0 16,982 21.4 18.1 12.5 10.8 8.2 1.8 7.3 7.4 13.5 12.3

GENT.KL Genting Berhad O 9.5 10.6 10,340 18.9 17.6 4.8 4.4 6.7 1.3 (6.5) 7.5 36.2 36.2

IOIB.KL IOI Corporation U 4.8 4.1 9,117 25.4 22.0 18.2 16.0 20.1 5.1 2.4 13.1 16.6 16.5

KLKK.KL Kuala Lumpur Kepong U 22.3 20.0 6,965 23.5 19.9 15.5 13.4 12.4 2.9 6.0 9.7 16.9 16.4

Philippines

URC.PS Universal Robina Corp. R 196.1 9,551 39.5 33.6 24.7 21.0 19.8 7.8 1.2 23.9 30.3 18.3

EMP.PS Emperador Inc. U 10.9 9.0 3,637 28.0 26.9 18.4 17.6 17.0 4.8 3.6 48.9 35.0 26.7

Pakistan

ENFL.KA Engro Foods - - - 764 78.3 41.1 19.8 15.2 4.0 7.1 (6.5) 3.5 22.0 10.5

Vietnam

VNM.HM Vina Milk O 99,500 130,000 4,676 17.0 14.5 11.9 10.2 30.9 4.8 3.8 43.8 36.3 23.2

MSN.HM Masan Group O 80,500 106,000 2,785 16.3 12.7 8.1 6.3 18.4 3.0 14.4 11.3 46.0 30.9

Market cap weighted average 29.2 25.1 18.8 16.4 19.6 14.7 2.6 20.5 34.3 17.7

* ROIC excludes Hindustan Unilever which is an outlier. Source: Reuters, Bloomberg, Company data, Credit Suisse estimates

03 December 2014


Dominant player in a growth market Vinamilk remains the dominant player (48% market share, according to Euromonitor) in

the growing dairy market in Vietnam, having grown at a five-year (2008-13) CAGR of 20%.

Given Vietnam's per capita income of US$1,890 p.a. is amongst the lowest in Asia, and

with 42% of the population under the age of 25, we note there is vast potential for demand

growth. An improving macroeconomic environment reflected by low CPI (3.3% in October

2014) and rising GDP growth of 5.8% in 2015E (ADB estimates) should also support

demand growth. Despite strong momentum in the past five years, Vietnam remains well

behind regional/developing market peers, with per capita milk consumption of 18 kg p.a.,

compared with Pakistan (159 kg), India (69 kg) and Thailand (28 kg). Independent studies,

such as Business Monitor, have forecast an 8% increase in food expenditure (which we

see as conservative), led by improving income levels and consumer appetite for

quality/branded products. We expect dairy volumes to grow 5-6% annually over the

medium to long term.

A rich history with excellent leadership from the CEO

Vinamilk has a rich history dating back nearly 40 years when the company was founded as

Southern Coffee-Dairy Company, with two condensed milk factories. The company has

come a long way since those humble beginnings, and now boasts of a production capacity

of 1.5 mn tonnes supported by 13 factories spread across Vietnam. It has a 19.3% stake

in Miraka (a dairy company in New Zealand since 2010), a JV in Cambodia (Angkor Dairy)

and a subsidiary in California (Driftwood). The company has a strong footprint in all key

dairy segments—liquid milk, milk powder, condensed, yoghurt and sour drinks—with

market leadership in all those segments except milk powder. It is one of the premier blue

chip names at the local bourse (listed since 2006) with a market cap of US$4.7 bn (second

largest by market cap at HOSE). The remarkable growth and success story of the

company to a large extent can be attributed to CEO Mai Kieu Lien, who has been at the

company's helm for the past 20 years, and has driven most of the expansion and

acquisition initiatives undertaken by VNM. Ms Lien's contribution to the success of

Vinamilk was acknowledged by Forbes, which named her amongst the 50 most powerful

businesswomen in Asia (the only Vietnamese) for two years running in 2012 and 2013.

The core management team of the CEO and seven executive directors in charge of Sales,

Marketing, R&D, Finance, etc., have a sound education and business background, most of

whom have grown with the company for the past two decades.

Figure 8: Vinamilk's corporate holding structure

Vinamilk

Vietnam

Dairy Cow

Ltd (100%)

Thong Nhat

Than Hoa

(96%)

Driftwood

Dairy USA

(70%)

Angkor Dairy – JV

Cambodia (51%)

Lam Son

Dairy

(100%)

Miraka Limited (New

Zealand (19%)Asia Saigon

Food (15%)

Source: Company data

Vinamilk has a rich history

dating back nearly 40

years, and has grown

tremendously over the past

two decades led by a

dynamic CEO, Ms Mai

Kieu Lien—named among

50 most prominent

businesswomen in Asia by

Forbes in 2012 and 2013

03 December 2014


Strong footprint across all major segments

The key factor behind the dominant franchise position of Vinamilk is its strong market

positioning across all key business segments—namely (1) liquid, (2) powder milk, (3)

condensed milk, (4) and yoghurt and sour drinks—with market leadership in all segments

except powder milk. According to Euromonitor and management representation, Vinamilk

has around 48% market share in the overall dairy business in the country, with liquid milk

(51%), powder milk (25%), condensed milk (75%), and yoghurt and sour drinks (88%).

Figure 9: Vinamilk has strong brand positioning across the four key segments

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Liquid Milk Powdered Milk Condensed Milk Yogurt Others

Domestic revenue mix (VND bn)

Source: Company data, Credit Suisse estimates

Figure 10: Product-wise breakup of revenue, market growth and market share assumptions

2014E 2015E 2016E 2017E 3Y CAGR Market growth Assumptions of MC market share

D bn

Liquid milk 13,107 14,941 16,867 19,226 13.5% 13% From 51% currently to 52.5% by 2017E

Powder milk 4,981 5,557 6,379 7,322 13.6% 12-15% 25-27%

Condensed milk 4,404 4,711 5,097 5,442 7.2% 5-6% 75-78%

Yoghurt and sour milk drinks 5,772 6,553 7,510 8,606 14.1% 13-14% 88-90%

Beverages and others 1,143 1,315 1,512 1,739 14.8% 14-15% 3%

International 5,084 5,709 6,512 7,303 12.7% n.a. n.a.

Total revenue of VNM 34,491 38,786 43,877 49,638 12.8%

Source: Euromonitor, company data, Credit Suisse estimates

Enjoys a dominant

franchise position across

all key dairy segments

03 December 2014


Figure 11: VNM has a wide product suite… Figure 12: …across key dairy segments

Source: Company presentation Source: Company Presentation

Liquid milk: Strong leadership position with substantial market share gains

Liquid milk is the largest revenue contributor to the company (45% domestically), and

based on Euromonitor and company data, the largest segment in the dairy business in

Vietnam, with an approximate market size of D26,000 bn (US$1.2 bn). UHT and flavoured

milk drinks dominate the liquid milk market (~90% share), with pasteurised and

reconstituted milk accounting for approximately 10% of the market. Two key reasons for

the preference for UHT milk are: (1) longer shelf life and (2) high refrigeration costs for the

transportation of pasteurised milk. Liquid milk has been a key focus area and growth driver

for Vinamilk over the past five years (revenue CAGR of 36% over 2009-13, according to

CS estimates), with the company increasing its market share to 51% from 30% in 2008.

FCV, the biggest competitor for Vinamilk in this segment, has lost significant market share,

with its market share falling to 26-28% (2013) from ~38% in 2008. Gross margins in this

segment remain healthy at 34-35%, and are significantly higher than 20-25% in other

developing countries in Asia such as India, Pakistan and Bangladesh. This segment has

historically seen volumes grow at 8-9% annually, and we expect a 5-6% volume growth

over the next five years, with VNM growing in line with the market.

Figure 13: Liquid milk is the key revenue driver for VNM… Figure 14: …with healthy margins of 34-35%

0

4,000

8,000

12,000

16,000

20,000

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

35% CAGR (2009-13)

Liquid milk revenues (VND bn)

16% CAGR(2013-17)

23.0%

26.0%

29.0%

32.0%

35.0%

38.0%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Liquid milk gross margins


Liquid milk is the single

largest contributor to

domestic revenues at

~45%

03 December 2014


Competition intensifying but VNM expected to maintain its dominant position

Competition has intensified significantly in this segment, led by aggressive marketing by

FCV to regain lost share (60-70% increase in marketing expenditure in 2014) and

emergence of TH Milk as a niche player in the urban area, focusing solely on liquid milk

from its in-house dairy farm, with a herd size of approximately 30,000-35000 cows.

Despite these challenges, VNM has managed to hold its own and marginally increase its

share to approximately 51% (49% as of December 2013). This has, however, come at the

expense of a sharp rise in advertising expenditure (40% jump in selling and distribution

expenses in 9M14), which is likely to remain on the higher side in 2015 as well. We expect

Vinamilk to maintain its dominant position in this segment due to a superior distribution

network, higher penetration into the rural segment in the backdrop of lower raw material

prices (powder milk prices down 53% YTD), and the capacity to maintain a high marketing

outlay. Moreover, high capex requirements for organic growth via in-house farming limits

the growth potential for both TH Milk and entrants such as Hoang Anh Gia Lai (HAGL)

Group, which has plans to develop in-house farming and has signed a milk and meat

supply agreement with Nutifood (biggest meat processor in Vietnam).

Figure 15: VNM's liquid milk market share has risen

despite intense competition…

Figure 16: …and is expected to hover around 51-52% over

the medium term

Vinamilk51%

FCV26%

TH Milk7%

Others16%

Liquid milk market shares (2014E)

25%

30%

35%

40%

45%

50%

55%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Source: Company data, Euromonitor, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Powder milk: Most lucrative segment, but dominated by multinational players

Powder milk is the third largest revenue contributor to VNM domestically (17%), though it

remains a less dominant player in the domestic market focused largely on the low- to mid-

end segment as the market is dominated by multinationals such as Abbott, Mead Johnson,

FCV and Nestlé. Given that approximately 90% of the powder milk market is concentrated in

the infant/baby segment, there is a high preference for well-known multinational brands as

they are viewed as higher-quality products. Market share also tends to be very sticky, with

high consumer loyalty. Prior to 2013, Mead Johnson and Fonterra used to dominate this

segment with ~80% market share; however, ever since Fonterra's wide scale recall in

August 2013 on account of traces of bacteria found during testing, Vinamilk and FCV have

gained market share. Powder milk is the most lucrative segment as far as margins are

concerned, with multinationals estimated to earn margins of around 55-60%. Since VNM is

focused predominantly in the lower end segment, its product is priced at a 40-50% discount

to the multinational brands, resulting in lower, yet attractive, domestic margins of 43-45%.

Market leader in liquid milk

with a rising market share

(51%) despite intensifying

competition

Niche player in the mid- to

low-end segment as the

high-end market is

dominated by big

multinational brands

03 December 2014


Figure 17: Powder revenues expected to recover in 2015

after taking a hit due to 14% price reduction in 2014

Figure 18: VNM is a less dominant player in powder milk

due to customer preference for multinationals (2014E)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Powder milk domestic revenues (VND bn)

30% CAGR (2009-13)

14% CAGR (2014-17)

Abbott30%

FCV18%

Mead Johnson15%

Vinamilk25%

Others12%

Powder milk market shares

Source: Company data, Credit Suisse estimates Source: Company data, Euromonitor, Credit Suisse estimates

(powder milk market share is based on value)

Figure 19: Margins expected to rise in 2015 due to sharp reduction in raw material cost

28.0%

32.0%

36.0%

40.0%

44.0%

48.0%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Powder milk gross margins


Exports are an important part of the powder milk business and powder milk exports have

historically accounted for 85-90% of total exports. 2014, though, has been a tough year as

the main export market, Iraq, witnessed volatile political conditions resulting in 60-70%

drop in volumes from 2Q14. Gross margins on exports are approximately half of those

domestically; however, with ~40% revenue CAGR over 2010-13, gross margins have been

an important contributor to earnings growth in the past.

03 December 2014


Figure 20: Export revenues fell sharply due to deterioration of security conditions in key

market, Iraq, but should recover in 2015 due to diversification to new markets

17.5%

18.3%

19.1%

19.9%

20.7%

21.5%

0

700

1,400

2,100

2,800

3,500

4,200

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Powder exports (LHS) Export margins

Powder milk exports (VND bn) and gross margins


Lower international powder prices have negated impact of govt. price capping

Lower international powder prices (-53% YTD) have largely negated the impact of recent

price capping by the government. According to a directive issued on 1 June 2014, prices of

all infant and baby formula milk (under six years of age) have been capped for one year,

resulting in 13-30% decline in powder milk prices across the industry. According to

management, Vinamilk had to reduce its product prices by approximately 14% to implement

the government directive, resulting in margin compression in 2Q14. That said, weak powder

prices have helped to partially negate this impact with an uptick in margins in 3Q14. Going

forward, management plans to sign longer forward contracts to secure supplies and take

advantage of the weak international prices, which should boost margins in 2015.

Figure 21: Lower powder prices have helped drive margin improvement in 2014

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Gross margins - Domestic Gross margins

Domestic and overall margins trend


International powder milk

prices have crashed (-53%

YTD), helping to negate

the impact of price capping

by the government

03 December 2014


Condensed milk: A mature product but an important earnings driver nonetheless

The oldest product in VNM's current mix, condensed milk, is predominantly used by coffee

and confectioneries in Vietnam, and accounts for a healthy market size of D5,500-5,800

bn (US$250-270 mn). Vinamilk dominates the domestic market with a 75% market share

(Euromonitor and company estimates) with two known brands. The main competitor is

FCV (Dutch Lady) with an 18% market share followed by a few niche players. It was

historically VNM's top-selling product; however, it has been taken over by liquid milk and

powder milk over the past decade. It still constitutes 13-14% of total revenue with decent

margins of 30-32%, though demand growth remains weak (3%) as the product has

reached maturity stage. The rural belt of the country and low-end consumers in urban

areas remain the target market. It also constitutes 8-10% of total exports, predominantly to

Cambodia, Laos and the Philippines. We expect demand growth to remain weak at 3-4%,

with the new 19 mn tonne capacity in Cambodia (likely to be operational in 2Q15)

expected to boost both margins and sales volumes next year.

Figure 22: Revenue growth and margins have been

steady, given limited demand growth

Figure 23: VNM comfortably dominates the condensed

milk market in Vietnam (2014E)

25.0%

28.0%

31.0%

34.0%

37.0%

40.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue (VND bn) Gross Margins

Condense milk revenues and margins trend

Vinamilk75%

FCV18%

Others7%

Condense milk market share


Yoghurt and sour milk drinks: Fastest growing segment over the past three years

Yoghurt and sour milk drinks is the fastest growing segment in Vinamilk's product profile

(2009-13 revenue CAGR of 37%: CS estimates). Vinamilk dominates the branded yoghurt

market, with around 88% market share. The product line includes natural, flavoured and

drinking yoghurt, with the spoonable yoghurt as the most popular variant. The segment

constitutes approximately 16-17% of domestic revenues with high margins of around 43-

44%. Vinamilk has clear advantage over peers due to its greater geographical reach (nine

yoghurt factories across the country) and the most extensive distribution channel (225,000

retailers and 250 distributors), which is critical for products such as yoghurt, due to their

limited shelf life. The rising urbanisation and income levels along with increasing customer

preferences towards healthy products such as branded yoghurts makes this a key growth

segment for the company. We estimate yoghurt demand to grow at a five-year CAGR of

6%, with Vinamilk expected to maintain its market share of 88-90%.

Market dominance in

condensed milk to

continue but demand

growth has slowed

considerably

Fastest growing segment

for VNM over the past

three years, yoghurt and

sour milk offers

tremendous growth

potential

03 December 2014


Figure 24: Yoghurt has been the fastest growing segment

over the past five years…

Figure 25: …with VNM a clear leader due to superior

distribution network countrywide (2014E)

0

1,500

3,000

4,500

6,000

7,500

9,000

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

37% CAGR (2009-13)

14% CAGR (20013-17)

Yogurt and sour milk revenues (VND bn)

VNM88%

FCV8%

Others4%

Yogurt and sour milk market shares


Beverages and other products: Huge potential but a very long-term story

The beverages and other products segment constitutes 4% of domestic sales, and

includes fruit juices, soya milk, ice-cream and cheese. This segment has historically not

been a key focus area for the company, as it has concentrated more on the higher-volume

liquid milk, powder milk and condensed milk segments. Having clearly established itself as

the market leader across the dairy chain, the company now plans to focus more on

beverages, cheese and ice-cream, and aggressively launched new products this year,

including fresh cheese, seven new flavours for ice-cream, and one new flavour for cheese.

Figure 26: VNM launched new flavours in ice-cream and a few cheese variants in 2014

Source: VNM company presentation

The company plans to focus more on juices and healthy drinks as part of its growth

strategy in beverages, which appears reasonable considering the huge barriers to entry in

carbonated beverages, and also aligns well with its broader vision and mission statement

"to become a world grade brand in food and beverage industry where people put all their

trust in nutrient and health products." We remain conservative on the growth opportunities

03 December 2014


for VNM in this segment, and expect revenues to grow at a three-year (2014-17E) CAGR

of 15%.

Figure 27: Beverages remains a very long-term story, in our view

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

36.0%

0

300

600

900

1,200

1,500

1,800

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue (LHS) Margins

Beverages and other products revnues (VND bn) and margins


Dairy farm: Plans to expand capacity with 30,000 herds over four new farms

Vinamilk also runs a small dairy farm (herd size of ~9,500 cattle), which satisfies a very

small portion of the company's raw material requirement. The company, however, plans to

expand its farming capacity and is in the process of investing in four new farms (three in

the north and one in the south), with a target herd size of 30,000. As local supply accounts

for only 30% of the total milk demand, more and more companies are looking to set up

dairy farms. However, the lack of grass in Vietnam and huge capex outlay are major

challenges for dairy farming. Though VNM has limited constraints on the financial front

given its high free cash flow generation, we expect the pace of farm expansion to be slow,

considering the company's conservative capex plan for the next two years.

Macros on improving trend

Vietnam's macroeconomic stability has continued for a third year, with the latest N-14 CPI

(3.3%) printing at a six-year low. International financial institutions such as the IMF, World

Bank and ADB expect GDP growth to touch 5.8% in 2015-16E after an average of 5.7% in

the past five years. With high double digit CPI behind us and a contained inflation outlook

(ADB estimates 6.2%/6.6% in 2014/15E), we believe domestic demand themes should

remain in the limelight in lieu of better purchasing power. On the external account, a trade

surplus of US$2 bn in 11M14 has been led by export growth (+14%; US$137 bn) outpacing

imports (+13%; US$135 bn). Recently, the central bank has taken a number of important

steps to spur economic activity, including a controlled 1.0% devaluation of the dong vs the

greenback, and a 50 bp cut in the policy rate (to 6.5%) after 200 bp of easing in 2013. The

biggest risk in our view is that Vietnam's open economy (as measured by trade-to-GDP) and

linkage with global economic conditions can hold direct implications for growth.

Macroeconomic

environment has stabilised

with low inflation and rising

GDP growth

03 December 2014


Figure 28: GDP growth set to tick higher Figure 29: CPI has eased off from the worst of pressures

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E

GDP growth (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E

Source: ADB, World Bank Source: ADB, World Bank

Low per capita consumption signifies long-term

growth potential

Vietnam's per capita income has been growing at a steady 10-12% rate, and stood at

US$1,890 in 2013 (as per World Bank). In a recent development, the government has

announced an increase in minimum wages by 15% next year, well in excess of annual CPI

(5-6%). Independent studies by Euromonitor estimate that spending on food and

consumption is a fraction of this (US$244), and one of the lowest in the region, signalling

huge potential to grow (the study indicates 8.4% CAGR over 2014-17E). From a sample of

14 countries in Asia, Business Monitor International (BMI) has also noted that Vietnam

ranks amongst the poorest on a metric of food consumption.

Figure 30: Per capita food consumption poised to grow in

high single digits

Figure 31: Vietnam has one of the lowest ranking on BMI's

metric of per capita food consumption

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

50

100

150

200

250

300

350

2011A 2012A 2013A 2014E 2015E 2016E 2017E

Per capita food consumption (US$) LHS % growth

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Indi

a

Pak

ista

n

Vie

tnam

Phi

lippi

nes

Chi

na

Tha

iland

Indo

nesi

a

Mal

aysi

a

Aus

tral

ia

Sin

gapo

re

Sou

th K

orea

Hon

g K

ong

Japa

n

Tai

wan

Source: Business Monitor International Source: Business Monitor International

Per capita food

consumption of US$244,

one of the lowest in the

region, is set to grow at

8.4% over 2014-17E

03 December 2014


Per capita milk consumption lower than most regional peers and globally as well

In line with the overall consumption trend, milk consumption per capita in Vietnam (18kg)

is also lower than most regional peers such as Myanmar (30 kg), Thailand (28 kg), China

(23 kg), South Korea (55 kg), India (69 kg) and Malaysia (51 kg). We believe improving

macro fundamentals and low per capita consumption levels signify significant growth

potential, with consumption (nominal terms) likely to grow in low double digits (10-12%)

over the medium term. Attractive demographics (42% of the population below the age of

25) further support our positive view on consumption growth. Recent government

initiatives to encourage milk consumption to boost the average height of the population,

which has fallen over the past few decades, should also support milk consumption over

the medium to long term.

Figure 32: Vietnam has a low per capita consumption

compared to most of the regional peers

Figure 33: …with tremendous growth opportunity due to

excellent demographics (2013)

1217

1823

28

30

5155

57

6569

0.0

12.0

24.0

36.0

48.0

60.0

72.0

0

8,000

16,000

24,000

32,000

40,000

48,000

Indo

nesi

a

Phi

lippi

nes

Vie

tnam

Chi

na

Tha

iland

Mya

nmar

Mal

aysi

a

Sou

th K

orea

Bra

zil

New

Zea

land

Indi

a

GDP per capita (US$) Milk consumption/capita - kg (RHS)

(0-14)24%

(15-24)18%

(25-44)31%

(45-54)14%

(55-64)7%

65 & above6%

Population demographics

Source: FAO, World Bank, Credit Suisse estimates Source: CIA World Factbook

Per capita milk

consumption of 18 kg is

also one of the lowest in

Asia, as well as globally

03 December 2014


Margins on the rise, earnings to rebound sharply After five years of robust growth (22% EPS CAGR over 2008-13), VNM witnessed

pressure on volumes and margins, particularly on account of issues with exports to Iraq

(due to the security situation) and government intervention to regulate powder milk prices

in June. As a result, export revenues fell 38% in 9M14, while 13-14% decline in powder

milk prices in June drove earnings down 14% YoY to D4,338 bn. We believe the worst is

behind us, with low international powder milk prices (~65-70% of total raw material cost)

likely to drive a sharp margin upswing from 4Q14. Management has indicated plans to

sign long-term powder milk purchase contracts at current prices, which should boost

margins in 2015 and negate the impact of the decline in powder milk selling prices

domestically. Moreover, new capacity additions in Cambodia (2Q15) and a gradual

improvement in Iraq should boost export volumes in 2H15. Thus, we expect earnings to

rebound sharply with a three-year 2014-17 CAGR of 15%.

Steep fall in powder milk prices to boost margins

International powder milk prices have crashed to four-year lows of US$2,400/tonne due to

a combination of excess supply, higher inventories and weaker demand from China.

Average realised prices are down 30-35% YoY with a bleak outlook for prices near term,

due to weak demand from China and supply additions from New Zealand and Europe.

This bodes well for VNM, as imported milk powder constitutes approximately 65-70% of

the raw material cost for the company. We have already seen domestic margins stay flat in

3Q14 despite the impact of the 14% decline in sales price for milk powder on account of a

government decree issued in June. Given the lag in impact due to around 3-6 months of

forward purchasing pattern, we expect a 100-120 bp rise in margins in 4Q. Going forward,

VNM's plans to source forward contracts for one year should keep margins upbeat across

the product range, in our view, particularly for powder milk and liquid milk. We estimate

domestic margins to average 36.3% in 2015 as against 34.6% in 2014E.

Figure 34: International powder milk prices have crashed

due to weak demand from China and excess supply

Figure 35: Margins should rise sharply in 2015 amid sharp

decline in imported powder cost

2,000

2,600

3,200

3,800

4,400

5,000

5,600

6,200

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Jul-1

2

Nov

-12

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

Jul-1

4

Nov

-14

NZ milk powder prices (USD/MT)

32.8%

30.5%

34.2%

36.1%

34.6%

36.3%

36.1%

36.0%

28.0%

30.0%

32.0%

34.0%

36.0%

38.0%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Gross margins trend

Source: Bloomberg Source: Company data, Credit Suisse estimates

Steep fall in powder milk

prices to help margins rise

to 36% in 2015E

03 December 2014


Export revenues have bottomed, likely to recover in

2015

One of the key challenges for the company in 2014 was a sharp decline in export

revenues on account of the volatile political situation in Iraq. International revenues

(excluding Driftwood) fell 38% in 9M14 as the company suspended the majority of its sales

contracts and tightened credit to Iraq (the key export market). Powder milk exports to Iraq

constituted an estimated 55-60% of total exports in 2013 (US$110-125 mn), reflecting the

importance of this region. While we do not expect much recovery in volumes in 4Q, recent

success in the ongoing military operation by the Iraq government bodes well for stability in

central and northern Iraq next year. In addition, the new plant in Cambodia (another

important export market) will come into operation in 2Q15, adding 19 mn litres of liquid

milk and 80 mn cans of condensed milk, thereby boosting export sales from 2H15. We,

therefore, expect exports to recover starting next year and reach D3,803 bn by 2016

(2014E: D2,634 bn). The company has already started focusing on new export markets in

Africa, Cuba and South America, which should support export recovery next year and

drive growth momentum into 2016.

Modest growth in revenues from Driftwood

Driftwood (VNM's subsidiary in the US) posted steady numbers in 9M (revenues of D1,977

bn). Given the lack of information on the prior-year revenues and earnings as the company

only started consolidating numbers in 2014, it is difficult to ascertain the growth trend.

Going forward, we have estimated 4% annual revenue growth in USD terms. Net margins

should improve in the future as the company has successfully replaced some of the more

expensive debt in the current year.

Figure 36: Exports suffered from the deteriorating

security condition but should recover in 2015

Figure 37: Driftwood likely to provide steady growth in

revenues with minimal earnings contribution

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

0

900

1,800

2,700

3,600

4,500

2009 2010 2011 2012 2013 2014E 2015E 2016E

Export Revenues (LHS) Margins

Export revenues (VND bn) and margins

-

20

40

60

80

100

120

140

0

500

1,000

1,500

2,000

2,500

3,000

2014E 2015E 2016E 2017E 2018E

Revenues (LHS) Net profit

Driftwood revenues and net profit (VND bn)


Earnings to rebound sharply in 2015, 3Y CAGR of 15%

After a tough 2014 (9M earnings down 14% to D4,338 bn), we expect a sharp rebound in

earnings (+16% YoY) next year. Our optimism is driven by rising margins due to lower raw

material cost, stable-to-expanding market share across key segments (liquid milk, powder

milk, condensed milk and yoghurt) and recovery in export volumes. We expect overall

dairy market volumes to grow at an annual rate of 5-6% over the next three years with

VNM growing slightly ahead of the market due to likely gains in market share for powder

milk amid more aggressive penetration into semi urban and rural areas in the backdrop of

lower input prices. This should drive a domestic revenue CAGR of 13% over 2015-17E.

Export revenues are

expected to recover next

year with emergence of

new markets

Earnings to rebound

sharply in 2015 (three-year

CAGR of 15%)

03 December 2014


Moreover, higher export volumes to Cambodia due to additional capacities, recovery in

sales volumes to Iraq and rising sales to newer markets such as Africa and South America

are likely to boost export revenues over the medium term. This should propel a three-year

earnings CAGR of 15% over 2014-17E with gross margins rising to 36.3% in 2015E

(2014E: 34.6%) and stabilising to 36.1% and 36% thereafter.

Figure 38: Earnings to rebound sharply in 2015 Figure 39: EBITDA and margins to trend higher as well

0

2,000

4,000

6,000

8,000

10,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

15% EPS CAGR

22% EPS CAGR

Earnings (VND bn)

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014E 2015E 2016E 2017E

EBITDA (LHS) EBITDA margins

EBITDA (VND bn) & margins trend


03 December 2014


Competition concerns are overplayed Competitive pressures have intensified, particularly in the liquid milk segment domestically,

with aggressive growth strategy by TH Milk and extensive marketing by FCV. However, we

believe competitive concerns are overplayed, as there are significant barriers to entry for

new players, given the large amount of capex required to build critical mass, including the

development of in-house farms to support milk production in the case of TH Milk.

Moreover, VNM's strong brand positioning, extensive distribution network and superior

financial muscle provide it a clear advantage over new entrants, helping it to maintain its

51% market share in liquid milk. Aggressive marketing spend by both FCV (60-70%

increase) and VNM (+40%) outlines the strength of the top players, which is likely to make

it difficult for new entrants to make any significant inroads. The top players continue to

dominate in terms of brand power, reflected by recent brand surveys. According to the

Brand Footprint Study 2014, released by the Kantar World Panel (a global leader in

consumer knowledge and insights), Vinamilk was the top brand in urban Vietnam ahead of

the likes of Unilever, Nestlé, FCV and Masan. Moreover, it was the third top brand in rural

Vietnam. In terms of food companies, it was the No. 1 brand in urban Vietnam, with two of

its other condensed milk brands—Ngoi Sao Phuong Nam (No. 5) and Ong Tho (No. 8)—

also in the top 10. In terms of the rural belt, Vinamilk was classified as No. 8, with its Ong

Tho brand rated as No. 10.

Figure 40: Vinamilk is the No. 1 brand in urban Vietnam…

Manufacturers Rank 2013 Rank 2012 Consumer research

points Penetration (%) Frequency

Vinamilk 1 1 74,588,671 97.5 32.1

Unilever 2 2 57,443,108 99.6 24.2

Masan 3 3 33,263,962 95.6 14.6

Vina Acecook 4 4 24,584,054 89.7 11.5

Friesland Campina 5 5 22,725,385 76.9 12.4

Nestlé 6 8 20,387,689 84.7 10.1

PepsiCo 7 7 20,072,390 75.2 11.2

P&G 8 6 19,647,224 91.6 9.0

Ajinomoto 9 9 13,354,107 84.9 6.6

Calofic 10 11 12,899,866 79.6 6.8

Source: Kantar World Panel (Brand Footprint Study 2014)

Figure 41: …and No 3 in rural Vietnam

Manufacturers Rank 2013 Rank 2012 Consumer research

points Penetration (%) Frequency

Unilever 1 1 407,009,306 99.8 25.2

Masan 2 2 297,556,856 97.8 18.8

Vinamilk 3 3 212,873,299 81.7 16.1

Vina Acecook 4 4 142,707,986 80.9 10.9

Asia Foods 5 6 113,258,816 72.9 9.6

Calofic 6 9 95,686,739 79.9 7.4

Ajinomoto 7 7 95,280,533 78.5 7.5

P&G 8 5 94,751,331 86.1 6.8

Liwayway 9 8 76,933,265 41.7 11.4

Friesland Campina 10 10 76,620,923 55.7 8.5


Competition has intensified

with aggressive initiatives

by FCV and TH Milk,

particularly in the liquid

milk segment…

…but VNM remains the

dominant brand with No. 1

ranking in urban and No. 3

in the rural belt

03 December 2014


Figure 42: Amongst the top food brands in both urban and rural Vietnam

Top 4 urban cities Rural

Manufacturers Rank 2013 Consumer Research

points

Rank 2013 Manufacturers Consumer Research

points

Vinamilk 1 26,799,253 1 Nam Ngu (Masan) 164,489,399

Nam Ngu (Masan) 2 15,624,358 2 Gau Do 106,914,873

Hao Hao 3 14,848,383 3 Hao Hao 89,770,041

Tuong An 4 11,531,901 4 Oishi 77,739,205

Ngoi Sao (Vinamilk) 5 10,707,308 5 Ajinomoto 70,943,740

Ajinomoto 6 10,541,437 6 A One 62,326,011

Oishi 7 9,852,926 7 Kokomi (Masan) 61,957,026

Ong Tho (Vinamilk) 8 9,165,368 8 Vinamilk 53,862,025

Gau Do 9 8,862,462 9 Tam Thai Tu (Masan) 50,185,127

Tam Thai Tu (Masan) 10 8,320,757 10 Ong Tho (Vinamilk) 36,574,778


Market dominance to continue due to economies of

scale and significant entry barriers

Despite the rising competition, particularly in liquid milk (not a new phenomenon), we

expect Vinamilk to maintain its dominant market position due to advantages of economies

of scale, an extensive distribution channel and significant barriers to entry for new entrants

due to high capex requirements. Despite rising competition from TH Milk, which

specialises in liquid milk derived from in-house farms with a herd size of 30,000-35000

cows and more aggressive marketing strategy by main competitor Dutch Lady (which has

raised advertising expenditure by 60-70%), Vinamilk has been able to raise its liquid milk

market share to 51% (December 2013: 49%). We expect the company's market share to

remain stable going forward, though competition will stay intense at least in the near term,

given the entry of new players albeit in niche markets and reported acquisition of Dalat

Milk (a small local player) by TH Milk. We rule out any major competitive challenges from

the decision by Hoang Anh Gia Lai (HAGL) group to develop in-house farming (target herd

size of 116,000 cattle) and its milk supply deal with Nutifood, as the project requires

substantial capex and our recent meeting with the company also suggests that it will focus

more on meat supply (the strategic focus area of Nutifood).

Figure 43: VNM likely to maintain dominant market share across its product range

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Liquid milk Powder milk Yogurt Condensed milk

Domestic market shares trend

Source: Company data, Euromonitor, Credit Suisse estimates (Powder milk share is based on volumes)

Economies of scale, an

extensive distribution

channel and high capex to

ensure continued market

dominance

Steady growth in market

share expected across

segments

03 December 2014


Rising advertising outlay to support brand position

Distribution and marketing expenditure rose sharply over 9M14 (+40%), largely in

response to more aggressive marketing by FCV and more intense competition from TH

Milk in urban cities. This has pushed the promotion and advertising expense-to-sales ratio

to ~7.7% (5.9% in 2013). Management has clearly outlined plans to keep advertising

expenditure on the higher side to counter competitive intensity, and we expect advertising

expense to grow at a three-year CAGR of 18% over 2014-17. This strategy will ensure the

Vinamilk brand continues to remain at the forefront, helping to fend off major competitors.

Given its superior financial muscle, wider distribution network and better supply chain,

VNM should be able to maintain its leading market share in the liquid milk and yoghurt

segments. Vietnamese corporate law also caps the tax deductibility of advertising

expenditure to 15% of total deductible expenses, which will make it even harder for

smaller players to sustain high advertising outlay, given added burden on cash flows due

to higher tax outlay.

Figure 44: Advertising and promotion expense expected to remain high in the face of

rising competition

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

800

1,600

2,400

3,200

4,000

4,800

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Advertising & promotion exp (LHS) % of revenue

Trend of adversting exp (VND bn) as % of revenue


Extensive distribution channel offers competitive

advantage

Vinamilk enjoys one of the most extensive distribution networks in Vietnam, with a network

of 266 distributors and 225,000 retailers country wide. This generates bulk of the domestic

revenue (>90%), with the remainder through modern trade of 600 supermarkets. The firm

has extensively grown its distribution network to 225,000 retailers (12% CAGR over the

past five years), and plans to continue to grow further to increase market share,

particularly as it tries to penetrate more in semi urban and rural areas of the country. The

extensive distribution network offers the company a competitive advantage over peers to

grow beyond urban areas, which have become more competitive and offer limited growth

opportunity over the longer term. Another factor that works positively for the company with

regards to tapping the semi urban and rural areas is the large number of factories spread

across the country, which significantly reduces transportation costs. The factories at

Thanh Hao and Danang have strengthened Vinamilk's position in central Vietnam, as

none of the competitors have any major presence there.

Advertising expenditure

will continue to remain

elevated to counter

competition

Most extensive distribution

network a key competitive

advantage

03 December 2014


Figure 45: VNM has the most extensive distribution

network among local dairy processors…

Figure 46: …with 90% of revenues generated by general

trade route of distributors and retailers (2014)

-

50,000

100,000

150,000

200,000

250,000

2008 2009 2010 2011 2012 2013

VNM's retail network accross Vietnam

5 year (2008-13) CAGR of 12%

General trade (Distributors &

retailers)90%

Modern trade10%

Revenue contribution by distribution channel

Source: Company data, Credit Suisse estimates Source: Company data

Major capex out of the way, muted outlay over the

next two years

Vinamilk embarked on a major expansion plan in 2011, with a targeted outlay of D12,996

bn to substantially increase the production capacity from 0.7 mn tonnes in 2011 to around

1.5 mn tonnes in 2013. The two major expansions undertaken during this period included:

(1) 400 mn litres liquid milk plant in the Binh Duong province at a cost of US$110 mn and

(2) 54k tonnes Dielac 2 powder milk factory in Binh Duong at the cost of US$100 mn.

Approximately D9.8 tn (75%) of the capex has already been spent with another D3,200 bn

targeted to be incurred in 2015-16. VNM had earlier announced plans to further enhance

its liquid milk production capacity to 1.2 mn litres (800 mn currently) by 2017; however, we

rule out any major investment in the next 1-2 years considering the low utilisation levels

(58% estimated) post the 0.4 mn tonnes addition last year and 5-6% annual demand

growth outlook. The low capex requirement is expected to keep FCFE at elevated levels

over the next two years, and we estimate FCFE of D4.8 tn and D6.3 tn, respectively, in

2015 and 2016, as against D3.0 tn in 2014E.

Figure 47: Strategic capex plan (~75% of the strategic capex has been completed)

Strategic capex outlay

All figures D bn Plan (2012-16) Until 2013 2014E 2015-16E

Vinamilk 8,580 6,391 948 1,241

Vietnam Dairy Cow Co 1,281 431 412 438

Lam Son Milk 790 223 480 87

Driftwood 151 150

Miraka 33 33

Cambodia JV (Angkor) 222 0 222

Thong Nhat Than Hoa 1,600 0 393 1,207

Cow farm (Lam Dong) 341 0 120 221

Total 12,996 7,228 2,575 3,194

Source: Company presentation

Capex outlay to remain

muted over the next two

years

03 December 2014


Figure 48: Dielac 2 powder milk plant was set up at a cost

of US$100 mn

Figure 49: Tetra Pak filling machines at new liquid milk

factory is its most advanced plant build to date

Source: Company presentation Source: Tetra Pak

According to Managing Director of Tetra Pak Vietnam, Mr Bert Jan Post, "The new Milk

Factory set up in Binh Duong is by far the most advanced plant in automation and

integration that Tetra Pak has ever built."

03 December 2014


Attractive valuations Vinamilk trades at an attractive 2015E EV/EBITDA of 10.2x (38% regional/ 9% historical

discount). Given superior EBITDA margins (23% vs 17% regional average), low capex and

an attractive dividend yield of 3.8%, valuations appear compelling, in our view.

Initiate with OUTPERFORM

We initiative coverage on Vinamilk (VNM), the largest dairy company in Vietnam, with an

OUTPERFORM rating and a target price of D130,000. Vinamilk enjoys a dominant

position in the Vietnam dairy business (48% market share), driven by a strong brand

image, extensive distribution network and an excellent management team. The company

focuses on an aggressive growth strategy, driven by major capacity expansions worth D13

tn (US$600 mn) over 2012-16E, the bulk of which already came online in 2013.

DCF-based target price of D130,000, 2015E implied EV/EBITDA of 13.6x

Our DCF-based target price is D130,000—a 31% potential upside with an implied 2015E

EV/EBITDA of 13.6x. Vinamilk currently trades at 2015E EV/EBITDA of 10.2x (38% regional

discount and 9% historical average). Given its superior EBITDA margins (23% vs 17%

regional average), low capex requirements and attractive dividend yield of 3.8%, valuations

are compelling, in our view. The stock has underperformed the benchmark HOSE by 27%

over the past 12 months, which makes it a good entry point, in our opinion. We believe

concerns on profitability and margins amid rising competition are overplayed, and expect

earnings to rebound sharply rising by 16% in 2015E (11% decline in 2014E).

Figure 50: Vinamilk's DCF-based target price calculation

D bn Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24

Net income 5,854 6,862 7,802 8,905 10,105 11,376 12,725 14,296 15,934 17,781 19,849

Depreciation 940 910 877 1,093 1,031 1,030 1,281 1,298 1,441 1,518 1,692

Interest (1-tax) 80 74 76 79 83 89 96 103 111 119 128

Change in working capital (979) (538) (361) (499) (398) (541) (610) (678) (761) (854) (959)

Capex (2,749) (1,938) (1,708) (1,768) (1,768) (2,143) (2,873) (3,635) (3,220) (3,638) (3,908)

FCFF 3,147 5,370 6,687 7,810 9,052 9,812 10,619 11,384 13,505 14,925 16,802

PV of FCFF 3,108 4,752 5,300 5,547 5,760 5,594 5,423 5,209 5,536 5,482 5,528

Enterprise value 123,281

Net cash and equivalents 6,787

Equity value 130,068

Number of shares (D mn) 1,000

Equity value per share (D) 130,000

Source: Credit Suisse estimates

Figure 51: Sensitivity of WACC and terminal growth to target price

D/share

WACC (%)

9.6 10.6 11.6 12.6 13.6

(Term

inal

gro

wth

) u

sed

in V

NM

3.0% 148,000 125,000 108,000 95,000 85,000

4.0% 168,000 139,000 118,000 102,000 90,000

5.0% 196,000 157,000 130,000 111,000 97,000

6.0% 239,000 183,000 147,000 122,000 105,000

7.0% 317,000 223,000 171,000 138,000 115,000


DCF based target price of

D130,000 implies 2015E

EV/EBITDA of 13.6x

03 December 2014


One of the lowest EV/EBITDA multiple despite high EBITDA margins

Vinamilk trades at a 2015E EV/EBITDA of 10.2x, one of the lowest in the region, despite

high EBITDA margins of 23%. While earnings are expected to decline 9% in 2014, primarily

on account of weakness in exports, outlook for 2015 remains positive, given rising margins

and stable-to-growing market share (5-6% volume growth). Moreover, exports are expected

to rebound on account of recovery in volumes to Iraq, and higher volumes to Cambodia and

newer markets in Africa and South America. Thus, we expect earnings to rise by 16% in

2015 and grow at three-year CAGR of 15% over 2014-17.

Figure 52: Valuations remain attractive with 9% historical

discount on EV/EBITDA (x)

Figure 53: …and 23% discount to historical average price

to book (x)

0.0

3.0

6.0

9.0

12.0

15.0

18.0

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

3 year Mean EV/EBITDA= 11.1x

EV/EBITDA (x)

Target EV/EBITDA = 13.6x

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

Mean P/B = 6.8x

Target P/B = 6.1x

P/B (x)

Source: Bloomberg, company data, Credit Suisse estimates Source: Bloomberg, company data, Credit Suisse estimates

Figure 54: Attractive valuations (38% regional discount) despite high margins and decent

EBITDA growth outlook (2015E)

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Chi

na M

oder

n

Vin

amill

k

Chi

na M

engn

iu

Eng

ro F

oods

Dut

ch L

ady

Bhd

Nes

tle B

hd

Nes

tle In

dia

EV/EBITDA (x) EBITDA growth (%) - LHS

Source: Bloomberg, Credit Suisse estimates

03 December 2014


Vinamilk implied EV/EBITDA is at 15% discount to Masan

Credit Suisse has also initiated coverage on Masan Group with a target EV/EBITDA

multiple of 16.0x versus implied 13.6x multiple for Vinamilk. The reasons for a higher

target multiple for Masan are its superior margins and higher EPS CAGR for the consumer

business.

Figure 55: Masan Group enjoys higher margins and EPS CAGR than VNM

2014-17E CAGRs Three-year average

Sales EPS GP margin EBITDA margin

Masan Consumer 17.8% 23.5% 43.2% 24.8%

Vina Milk 12.8% 14.8% 35.7% 22.7%


https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1041383461&serialid=B6j2GTzhIFfj04%2fLbJBfqD5arV6SI%2fQXUHOaiqYtfQA%3d

03 December 2014


Investment risks Macros (GDP, inflation and interest rates)

Vietnam's economic growth is slowly recovering ,with GDP forecast to grow by 6% in

2014/15E (as per ADB), which is still shy of 8%+ levels seen prior to 2007. Slower-than-

expected growth will filter down into food consumption levels, and with the consumer

business forming 74% of revenues, this can be put at risk in terms of volume growth.

Decline in consumer confidence levels can also scale down purchasing power. Inflation

has moderated significantly, and is forecasted to remain sub 6%. However, a spike without

a corresponding increase in disposable incomes can clip purchasing power and compel

consumers to look for cheaper alternatives. To mitigate this, significant pricing power

enjoyed owing to high market shares can account for better pass-through abilities.

Rising competition and margin pressure

Vinamilk enjoys market dominance in the dairy business (48% overall market share).

While the company is fairly well positioned with strong management, an extensive

distribution network and strong financial position, competition has intensified substantially.

Rising competition could put pressure on volume growth and margins as new entrants

may be ready to operate at minimal margins to gain market share.

Volatility in powder prices

International milk powder prices are down 53% YTD and have remained volatile over the

past three years. While the near-term outlook for powder milk pricing remains weak,

significant volatility cannot be ruled out, particularly if demand from China picks up, and

some of the non-profitable capacities in New Zealand and Europe close down. This could

put pressure on cost and margins, as imported powder milk constitutes 65-70% of total

raw material cost. According to our estimates, every 5% increase in powder milk prices

impacts VNM's overall margins by 40-45 bp.

Government regulation on product prices

The Vietnamese government is actively involved in the regulation of powder milk prices,

particularly those relating to infant formula reflected by the price decree announced in June,

whereby manufacturers were forced to reduce prices by 13-30% across the product range.

Vinamilk was also impacted by the move, taking a 13-14% hit on product pricing as a result.

While this decree is currently valid for one year, the government may decide to continue the

current price freeze beyond the original period. Moreover, active government involvement in

price control poses risk to other dairy products, such as liquid milk, as well.

Succession of the CEO and Chairwoman

One of the key reasons behind the success story of Vinamilk has been the role of its CEO

and Chairwoman, Ms Mai Kieu Lien, who has been at the helm for two decades and has

driven most of its expansion and acquisition initiatives. She is widely regarded as one of the

top executives in Vietnam and has been voted amongst the top 50 businesswomen in Asia

by Forbes (2012 and 2013). While Ms Lien is expected to continue in her current role in the

foreseeable future, there remains a succession risk over the long term.

Political risks

While the domestic market enjoys political stability, some of the export markets of Vietnam

particularly in the Middle East—such as Iraq—have witnessed significant deterioration in

their political and security situation, resulting in a sharp decline in business. Exports were

down 38% in 9M14, with sales to Iraq down 70% over the past two quarters. Further

deterioration of political conditions in Iraq or changes in political and security environment

in other markets in Africa and East Asia (Cambodia, Laos) would have a negative impact

on revenues and earnings of VNM.

03 December 2014


Financial summary Figure 56: Vinamilk—profit and loss

D bn, unless stated otherwise 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Net revenue 15,753 21,627 26,562 30,949 34,491 38,786 43,877 49,638 55,679

% growth 37.3% 22.8% 16.5% 11.4% 12.5% 13.1% 13.1% 12.2%

Cost of sales 10,579 15,039 17,485 19,766 22,573 24,702 28,025 31,790 35,608

Gross profit 5,174 6,588 4,210 4,999 8,500 12,397 14,316 15,212 15,945

Distribution and marketing 1,438 1,812 2,346 3,276 4,503 5,360 6,070 6,843 7,720

General and admin expenses 388 459 525 611 769 887 995 1,117 1,246

EBITDA 4,246 4,969 7,029 8,336 7,777 8,961 9,907 11,250 12,430

% growth 17.0% 41.5% 18.6% -6.7% 15.2% 10.6% 13.6% 10.5%

Depreciation and amortisation 290 415 535 786 940 910 877 1,093 1,031

EBIT 3,956 4,554 6,493 7,550 6,836 8,051 9,029 10,157 11,399

Net financial (income)/expenses (295) (434) (424) (417) (484) (572) (693) (879) (1,118)

Net other (income)/expenses (609) (237) (287) (255) (191) (214) (243) (269) (294)

Share of profit/(loss) associates 0 9 -13 -44 -53 -63 -79 -95 -114

Profit before tax 4,251 4,979 6,930 8,010 7,373 8,686 9,802 11,131 12,631

Reported profit after tax 3,615 4,218 5,819 6,534 5,854 6,862 7,802 8,905 10,105

% growth 16.7% 38.0% 12.3% -10.4% 17.2% 13.7% 14.1% 13.5%

Attributable to:

Minority interest (1) - - (0) 7 12 18 25 37

Equity holders 3,616 4,218 5,819 6,534 5,847 6,850 7,784 8,880 10,068

CS recurring EPS (D) 3,616 4,218 5,819 6,533 5,846 6,849 7,783 8,879 10,066

% growth 17.2% 16.6% 38.0% 12.3% -10.5% 17.2% 13.6% 14.1% 13.4%

Margins

Gross 32.8% 30.5% 34.2% 36.1% 34.6% 36.3% 36.1% 36.0% 36.0%

EBITDA 27.0% 23.0% 26.5% 26.9% 22.5% 23.1% 22.6% 22.7% 22.3%

Net profit 23.0% 19.5% 21.9% 21.1% 17.0% 17.7% 17.8% 17.9% 18.1%


03 December 2014


Figure 57: Vinamilk—balance sheet

D bn 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Cash and equivalents 263 3,157 1,252 2,746 1,003 2,121 3,045 3,363 4,342

Short-term investments 2,092 736 3,909 4,167 6,167 6,467 7,767 10,267 12,767

Accounts receivables 587 1,141 1,266 1,895 1,984 2,338 2,645 2,992 3,356

Inventories 2,351 3,272 3,473 3,217 3,803 4,264 4,837 5,487 6,244

Other current assets 626 1,161 1,210 994 1,165 1,288 1,373 1,553 1,738

Current assets 5,920 9,468 11,111 13,019 14,124 16,477 19,667 23,662 28,448

Deferred taxation and costs 161 106 149 286 286 286 286 286 286

Fixed assets 3,255 4,789 7,789 8,387 10,181 11,190 11,911 12,585 13,320

LT investments 315 306 315 434 463 494 511 529 548

Other LT assets 1,122 914 335 749 718 690 769 738 711

Long-term assets 4,853 6,115 8,587 9,856 11,648 12,661 13,477 14,139 14,865

TOTAL ASSETS 10,773 15,583 19,698 22,875 25,772 29,138 33,144 37,801 43,313

Trade and other payables 1,089 1,831 2,248 1,968 2,165 2,369 2,687 3,048 3,610

Borrowings 568 0 0 179 143 139 66 1 1

Others 988 1,116 1,897 2,809 2,471 2,657 2,932 3,235 3,569

Current liabilities 2,645 2,947 4,145 4,956 4,779 5,166 5,684 6,284 7,179

LT borrowings and liabilities 164 159 60 351 387 260 209 220 232

Share capital 3,531 5,561 8,340 8,340 10,007 10,007 10,007 10,007 10,007

Share premium and reserves 2,525 2,739 1,955 3,056 1,779 1,779 1,779 1,779 1,779

Retained earnings 1,909 4,177 5,199 6,150 8,789 11,883 15,404 19,425 23,993

Total shareholder equity 7,964 12,477 15,493 17,545 20,575 23,670 27,190 31,211 35,780

Minority interests 0 0 0 23 30 42 60 85 122

Total equity and liabilities 10,773 15,583 19,698 22,875 25,772 29,138 33,144 37,801 43,313


Figure 58: Vinamilk—cash flow statement

D bn 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Profit after tax 3,615 4,218 5,819 6,534 5,854 6,862 7,802 8,905 10,105

Non-cash expenses 290 415 535 786 940 910 877 1,093 1,031

Changes in working capital (862) (1,132) 679 368 (979) (538) (361) (499) (398)

Income tax and others (118) 6 46 123 0 0 0 0 0

Others (2,150) 173 (3,386) (3,321) 775 (560) (526) (615) (667)

Operating cash flow 775 3,679 3,694 4,490 6,591 6,674 7,793 8,884 10,071

Fixed assets (1,060) (1,948) (3,535) (1,385) (2,734) (1,919) (1,598) (1,768) (1,766)

LT investments (396) (74) (6) (397) (15) (19) (110) (0) (3)

Other LT assets 0 0 0 0 0 0 0 0 0

Investing cash flow (275) 345 534 (183) 17 16 14 13 11

Borrowings (1,730) (1,676) (3,008) (1,965) (2,732) (1,923) (1,694) (1,755) (1,757)

Share capital and surplus (12) 0 0 363 (9) (138) (137) (67) (1)

Dividends 18 3,306 2,776 (1) 391 0 0 0 0

Other financing cash flow (1,054) (1,484) (1,500) (2,250) (4,001) (3,215) (3,767) (4,282) (4,884)

Financing cash flow 1,066 (1,634) (789) 1,113 17 19 30 38 51

Net cash flow 18 188 487 (775) (3,602) (3,334) (3,875) (4,311) (4,834)


03 December 2014


Figure 59: Vinamilk—key ratios

2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Recurring EPS (D) 3,616 4,218 5,819 6,533 5,846 6,849 7,783 8,879 10,066

% growth 17.2% 16.6% 38.0% 12.3% -10.5% 17.2% 13.6% 14.1% 13.4%

EBITDA (D bn) 4,246 4,969 7,029 8,336 7,777 8,961 9,907 11,250 12,430

% growth 56.7% 17.0% 41.5% 18.6% -6.7% 15.2% 10.6% 13.6% 10.5%

P/E (x) on recurring EPS 27.4 23.5 17.0 15.2 16.9 14.5 12.7 11.1 9.8

BVPS 7,963 12,476 15,491 17,566 20,603 23,709 27,247 31,292 35,897

P/B (x) 12.4 7.9 6.4 5.6 4.8 4.2 3.6 3.2 2.8

CFO/sh 775 15,611 13,755 16,756 18,297 20,929 24,531 28,523 32,709

P/CFO (x) 127.7 26.9 26.8 22.1 15.0 14.8 12.7 11.1 9.8

Sales/sh 15,751 21,625 26,558 30,945 34,486 38,781 43,871 49,631 55,672

P/S (x) 6.3 4.6 3.7 3.2 2.9 2.6 2.3 2.0 1.8

Average ROE (%) 50.0% 41.3% 41.6% 39.5% 30.6% 30.9% 30.5% 30.3% 30.0%

Average ROA (%) 37.6% 32.0% 33.0% 30.7% 24.1% 25.0% 25.1% 25.1% 24.9%

ROIC (%) 54.5% 44.9% 52.8% 56.0% 39.5% 41.6% 43.7% 46.2% 48.8%

Net debt-to-equity Net cash Net cash Net cash Net cash Net cash Net cash Net cash Net cash Net cash

Financial leverage (x) 135.3% 156.0% 196.0% 200.0% 183.0% 169.0% 157.0% 148.0% 120.0%

FCF yield (%) -0.29% 1.75% 0.16% 3.14% 3.90% 4.80% 6.26% 7.19% 8.39%


03 December 2014


Appendix Company overview

Vinamilk is Vietnam's largest dairy company with an overall market share of 48%. The

company operates in all key dairy segments including liquid milk, milk powder, condensed

milk, yoghurts & sour drinks, ice-cream, cheese, etc. The company was established in

1976 as the state-owned Southern Coffee-Dairy Company, to nationalise and take over

the operations of three previously private dairy factories in South Vietnam: Thong Nhat

(belonging to a Chinese company), Truong Thọ (formerly owned by Friesland Foods, best

known for its production of condensed milk that was widely distributed across the south),

and Dielac (Nestlé). It was then renamed United Enterprises of Milk Coffee Cookies and

Candies I in 1978 and finally Vietnam Dairy Company was established in 1993. In 2003,

the company legally changed its name to Vietnam Dairy Products Joint Stock Company

(Vinamilk) and was subsequently listed at the Ho Chi Minh Stock Exchange (HOSE) in

2006. It is currently the second-largest company listed on the HOSE with a market

capitalisation of US$4.6 bn. Vinamilk currently operates 13 factories and a dairy farm

domestically through three major subsidiaries and also owns an international subsidiary

Driftwood Dairy (70% stake) in the US, a 51% JV stake in Cambodia (Angkor Dairy),

strategic investment in Miraka Limited New Zealand (19%) and Asia Saigon Foods (15%).

Figure 60: Vinamilk's corporate holding structure

Vinamilk

Vietnam

Dairy Cow

Ltd (100%)

Thong Nhat

Than Hoa

(96%)

Driftwood

Dairy USA

(70%)

Angkor Dairy – JV

Cambodia (51%)

Lam Son

Dairy

(100%)

Miraka Limited (New

Zealand (19%)

Asia Saigon

Food (15%)

Source: Company data

Management profiles

Ms. Mai Kieu Lien: Chairwoman & CEO

Ms Mai Kieu Lien is the Chairwoman and CEO of Vinamilk. She joined the company as an

engineer in charge of condensed milk production and rose through the ranks to become

CEO in 1992. She was elected as the Chairwoman for Board of Management (BoM) in

2003. Ms Mai has been key to the success story of VNM over the past two decades

having driven most of the expansion and acquisition initiatives. Her contribution to the

success of Vinamilk was acknowledged by Forbes, which named her amongst the 50 most

powerful businesswomen in Asia (the only Vietnamese) for two years running in 2012 and

2013. She holds a BSC from Moscow University of Meat & Milk Processing Technology,

Russia and a Certificate of Leningrad economic management from University of Economy,

Russia. Ms Lien has been Chairwoman of the Vietnam dairy association since 2010 and is

also a board member of Miraka Limited New Zealand.

03 December 2014


Mr Mai Hoai Anh: Executive Director Sales

Mr Mai Haoi Anh joined Vinamilk in 1996 and was appointed Executive Director Sales in

May 2012. Mr Anh has worked extensively in the export and import departments at VNM.

He holds an economics degree from Ho Chi Minh University and an MBA from Bolton

University (UK).

Ms. Nguyen Thi Nhu Hang: Executive Director Dairy Development

Ms Hang first joined Vinamilk in 1981 working in the consumption department till 2001.

She subsequently moved as Director of Logistics and then Deputy General Director (in

charge of technical project department). Ms Hang has also been involved in managing and

developing the dairy farms business as well as customer services. She currently serves as

a Director on the board of Vietnam Dairy Cow One Member Co Ltd and Thong Nhat Thanh

Hoa Dairy Cow Ltd.

Ms. Nguyen Thi Thanh Hoa: Executive Director Production and R&D

Ms Hoa joined the company as a process engineer in 1983 and rose through the ranks to

become Executive Director in charge of supply chain, planning, imports and exports and

customer services in 2009. Ms Hoa was rotated to the position of Executive Director

Production and R&D in Sept 2013. She holds a bachelor’s degree in meat processing

technology from Moscow National General University.

Mr Nguyen Quoc Khanh : Executive Director Supply Chain

Mr Khanh joined the company in 1988 in the checking department and became manager

of production of Thong Nhat Factory (1996) and then Director of Can Tho Dairy Factory in

2004. He was appointed Executive Director Production and R&D in 2009 and was later

rotated to Executive Director Supply Chain in 2013. Mr Khanh graduated from Ho Chi

Minh Polytechnic University in 1987 majoring in chemical technique and foods. He also

holds a Bachelor of Business Administration from Ho Chi Minh city University of

Economics and a Bachelor of English from Ho Chi Minh University.

03 December 2014


Country-wide coverage provides competitive

advantage

Figure 61: Vinamilk has a total of 13 factories well spread out across Vietnam; these

provide a key competitive advantage


Extensive distribution network

Figure 62: Distribution network is superior to peers; it is among the top three consumer

companies in Vietnam


03 December 2014


Focused marketing, sales and R&D

Figure 63: Experienced marketing, sales and R&D teams, with key members having a

long history of working together


Figure 64: One of the most modern production facilities


03 December 2014


Continued investment in R&D with new product

launches

Figure 65: New product launches for liquid milk in 2014 Figure 66: New launches for powder milk & yoghurt in

2014

Source: Company presentation Source: Company presentation

03 December 2014


Companies Mentioned (Price as of 02-Dec-2014)

Abbott Laboratories (ABT.N, $45.22) Bumitama Agri Limited (BUMI.SI, S$1.02) Charoen Pokphand Foods Public (CPF.BK, Bt28.25) China Mengniu Dairy (2319.HK, HK$30.3) China Modern Dairy Holdings Ltd (1117.HK, HK$2.36) Dabur India (DABU.BO, Rs242.5) Dutch Lady Milk (DBMS.KL, RM45.34) Emperador Inc. (EMP.PS, P10.86) Engro Foods (ENFL.KA, PRs105.71) Fonterra (FSF.NZ, NZ$6.02) Genting Berhad (GENT.KL, RM9.45) Hindustan Unilever Ltd (HLL.BO, Rs804.8) IOI Corporation (IOIB.KL, RM4.83) Indofood Agri Resources Ltd (IFAR.SI, S$0.74) Indofood CBP (ICBP.JK, Rp11,400) Indofood Sukses Makmur (INDF.JK, Rp6,675) Kuala Lumpur Kepong (KLKK.KL, RM22.32) LG Household & Healthcare (051900.KS, W633,000) Masan Group (MSN.HM, D80500.0) Mead Johnson Nutrition Co. (MJN.N, $102.87) Nestlé India (NEST.BO, Rs6189.75) Nestlé MY (NESM.KL, RM68.6) Orion Corp. (001800.KS, W996,000) PT Astra Agro Lestari Tbk (AALI.JK, Rp23,200) PT London Sumatra Indonesia (LSIP.JK, Rp1,910) Sime Darby (SIME.KL, RM9.58) Thai Beverage (TBEV.SI, S$0.68) Thai Union Frozen Products PCL (TUF.BK, Bt88.5) Tingyi (0322.HK, HK$18.32) Unilever Indonesia (UNVR.JK, Rp31,275) Universal Robina Corp. (URC.PS, P196.1) Vietnam Dairy Products Joint Stock Company (VNM.HM, D99500.0, OUTPERFORM, TP D130000.0) WH Group Limited (0288.HK, HK$4.38) Want Want China Holdings Ltd. (0151.HK, HK$10.18) YuanShengTai Dairy Farm (1431.HK, HK$0.82)

Disclosure Appendix

Important Global Disclosures

I, Farhan Rizvi, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Can adian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchm ark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

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03 December 2014


Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 46% (54% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 14% (44% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refe r to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Price Target: (12 months) for Vietnam Dairy Products Joint Stock Company (VNM.HM)

Method: We have valued Vinamilk on the FCFF methodology with cost of equity of 12.0%, Kd of 6% and WACC of 11.6%. Our FCF-based based target price arrives at D130,000, implying a 2015E EV/EBITDA of 13.6x.

Risk: Key risks to our target price of D130,000 for Vinamilk include: (1) continued government regulation on product pricing, (2) further deterioration in operating conditions in export markets and (3) macro slowdown and more intense competition in the domestic market.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (VNM.HM, URC.PS, LSIP.JK, KLKK.KL, TBEV.SI, UNVR.JK, 1431.HK, IOIB.KL, 001800.KS, HLL.BO, TUF.BK, INDF.JK, ICBP.JK, 051900.KS, EMP.PS, AALI.JK, IFAR.SI, NEST.BO, 0322.HK, MSN.HM) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (URC.PS, LSIP.JK, UNVR.JK, 1431.HK, HLL.BO, INDF.JK, ICBP.JK, IFAR.SI, NEST.BO, MSN.HM) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (001800.KS) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (NEST.BO) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (URC.PS, LSIP.JK, UNVR.JK, 1431.HK, HLL.BO, INDF.JK, ICBP.JK, IFAR.SI, NEST.BO, MSN.HM) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (VNM.HM, URC.PS, LSIP.JK, KLKK.KL, TBEV.SI, UNVR.JK, 1431.HK, IOIB.KL, HLL.BO, BUMI.SI, TUF.BK, DABU.BO, INDF.JK, 0288.HK, ICBP.JK, 051900.KS, 0151.HK, EMP.PS, AALI.JK, IFAR.SI, NEST.BO, 0322.HK, MSN.HM) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (001800.KS) within the past 12 months

Credit Suisse may have interest in (SIME.KL, GENT.KL, KLKK.KL, IOIB.KL)

03 December 2014


As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (MSN.HM).

Credit Suisse has a material conflict of interest with the subject company (051900.KS) . Credit Suisse is acting as exclusive financial advisor to LG Household & Health Care Ltd. for the acquisition of Everlife Co., Ltd. from CLSA Sunrise Capital, L.P.

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Important Regional Disclosures

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For Thai listed companies mentioned in this report, the independent 2014 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Thai Beverage () , Thai Union Frozen Products PCL (Good) , Charoen Pokphand Foods Public (Very Good)

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse AG, Singapore Branch ........................................................................................................................................... Farhan Rizvi, CFA

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03 December 2014


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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