VINAMILK - Financial Analy

1. HISTORY AND DEVELOPMENT OF VINAMILK:

Vinamilk was established in 1976, capitalized on October 1 st, 2003, then was initial public offering on January 9th, 2006. Now, Vinamilk has the most authorized capital among joint stock companies in securities market. Address: 184 188 Nguyen Dinh Chieu street, District 3, Ho Chi Minh city Phone number: (84.8) 39 300 358 - 39 305 197 Fax: (84.8) 39 305 206 Website: www.vinamilk.com.vn Email: vinamilk@vinamilk.com.vn 1976: Vinamilk is precursor of Milk Company, Southern Coffee, directly under Food Company. There are 6 other companies directly under Food Company: Thong Nhat Milk Factory, Truong Tho Milk Factory, Dielac Milk Factory, Bien Hoa coffee Factory, Bich Chi Flour Factory and Lubico. 1978: Vinamilk was transferred to Food Industry Ministry. The company changed name that Milk & Coffee I Factory. 1988: It was the first time that the factory introduced powdered milk and nutritious powder for children in Viet Nam. 1991: It was the first time that the factory introduced UHT milk and yogurt in Viet Nam. 1992: Milk & Coffee I Factory was official changed name that Vietnam Milk Company (Vinamilk) and is managed by Ministry of Light Industry. Vinamilk focused to manufacture milk and relevant products. 1994: Hanoi Milk Factory was constructed in Hanoi. The construction was belong to strategy improvement and adapting demand of Northern. 1996: Vinamlik was joint venture with Quy Nhon Frozen Food JSC to establish Binh Dinh Milk Factory. The factory entried to Middle market of Vietnam. 2003: The company was officially transferred to Joint Stock Company on December, 2003.

2006: Vietnam Milk Joint Stock Company was initial public offering on January 9th, 2006.

2. BUSINESS OPERATION:
Product Vinamilk is the leading company in Vietnam milk market about brand, scope and market share. The company has more than 200 products from milk, for example condensed milk, fresh milk, yogurt, powdered milk, nutritious flour, frozen food, beverage and etc. The products is occupied about 37 90% market shares in Vietnam. Milk market Vinamilk is the decisive role of domestic market and competes effectively with foreign milk companies. The market share of Vinamilk is 30 80%. The company almost exports to Middle East such as Iraq. To reduce risk, Vinamilk expands to Australia, United States, Canada, and Thailand. Domestic market: Vinamilk is the leading enterprise in Vietnam milk market about 39% market shares. The company has more than 240 distributors and 140.000 stores. Foreign market: Vinamilk exports to Australia, Cambodia, Iraq, Kuwait, The Maldives, The Philippines, Suriname, UAE, and United States. The market is divided into following regions: Region ASEAN Middle East Number of market 3 ( Cambodia, Philippines, Vietnam) 3 (Iraq, Kuwait, UAE)

Rest of region

4 ( Australia, Maldives, Suriname, United States) 10

Total

Competitors Domestic competitors: Hanoimilk, TH True Milk, etc Foreign competitors: Abbott, Mead Johnson, Nestl, Dutch Lady, etc

1. Net income margin & Gross margin percent

Net income margin = Net income x100% Revenue Gross Profit x100% Revenue 2011 Net income margin Gross margin percent 19.50% 30.46% 2012 21.91% 34.17%

Gross margin percent =

Both two ratios above increased from the previous year; it means that the company improved its ability to generate profit in 2012. The main reason is that Vinamilk managed and reduced expenses very effectively. The percent Cost of sales to Sales decreased from 69.54% in 2011 to 65.83% in 2012.

2. Return on assets (ROA)

Net income ROA = Average assets x100% 2011 ROA of Vinamilk ROA of Hanoimilk 32.01% 0.74% 2012 32.99% 0.57%

ROA of Vinamilk is much higher than industry average (24.52 in 2011). 8.51% difference reveals the strong profitability of Vinamilk. Net income Revenue ROA = Revenue x Average assets = Net income margin x Asset turnover 2011 Asset turnover 1.67 times 2012 1.54 times

In general, Vinamilk has a very high ROA ratio. This ratio increased slightly from 2011 to 2012. Because Net income margin increased by 2.41% but asset turnover decreased by 0.13. However, Vinamilk had two milk factories in progress in 2012. It led to increase in Total assets and had no effect on net income. If we ignore these two milk factories, both asset turnover and ROA will increase.

Net income margin Vinamilk Hanoimilk 21.91% 0.54%

Asset turnover 1.54 times 1.05 times

Base on collected data, we can predict that Vinamilk is leader of industry because of high net income margin and high asset turnover.

3. Return on equity (ROE)

Net income ROE = Average equity x100% 2011 Vinamilk 41.27% 2012 41.61%

ROE went up slightly from 2011 to 2012 because both Net income and Owners equity increased. Besides, ROE was higher than ROA. Therefore, Vinamilk used the financial leverage effectively in 2012. Net income margin, ROA, ROE from 2009 to 2012
60.0% 50.0% 40.0% 30.0%

20.0%
10.0% 0.0% 2009 2010 Net income margin ROA 2011 ROE 2012

Among 3 years 2010, 2011 and 2012, Vinamilk Co. had the massive changes in every aspect to companys performance process with profit was rising nonstop. The efficiency moved to positive direction and product enlarged widely and money was sent to state budget was greater than previous. Passing through 2011, Vinamilk stepped into one of the strongest business of AsiaPacific Broadcasting Union (ABU). The revenue reached 1 billion dollar, by far from 10 thousand billion VN in 2009. This is an appreciably results for the top leading in delivering milk in Vietnam. To have a closer look at the situation of the company, we will analyze the credit situation of Vinamilk.

1. Liquidity analysis
Current ratio Measures a company's ability to pay short-term obligations. This ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). Generally, the benchmark current ratio is 2 so the range of 1.5 to 2 is considered to be satisfactory. On the other hand, if it falls below 1, the liquidity has a problem. A low current ratio is an indicator of liquidity shortage and is a cause for concern. The current ratio in 2011 and 2012 were 3.2 and 2.7 respectively, which meant that the current ratio decreased by 0.5 times compared to that in the previous year. In other words, in 2011 one VND of liability was assured by 3.2 dong of current asset whereas in 2012 it was only assured by 2.7 dong. Therefore, the ability to pay short-term obligation in 2012 was not good as in 2011. The reason is that the growth in current assets was lower than that of the current liabilities. To be specific, while the current assets in 2012 climbed by 17.35%, there was a 40.7% rise in current liabilities, which were mainly caused by the ascent of salary payable and accounts payable during the year. Obviously, both of 2 years Vinamilk experienced the figures which were greater than 1 so it can be said that this company had enough capacity to repay its short term debts when it comes due. However, compared to the average number of 2.11 of food industry, these ratios were very high, especially in 2011. A very high ratio indicates excess liquidity. The business may be losing opportunities to make profitable use of current assets such as investing in other projects or having a plan to use them more effectively. Therefore, the reduction in current ratio in 2012 cannot be considered as a bad sign. Quick ratio As inventories are typically the least liquid of a firms current assets; and if sales are slow down, they may not be converted to cash quickly as expected. Therefore, the quick ratio, which

measures the firms ability to pay off short -term obligations without relying on the sale of inventory, is important. The quick ratio is a fairly stringent measure of liquidity. It based on those current assets that are considered to be highly liquid. The preferred ratio is about 1. This means that quick assets should be equal to current liabilities. If the ratio equals to 1, then the business can easily meet the current liabilities out of its quick assets. According to this, the quick ratio of Vinamilk indicates that it has the ability to pay current liabilities by cash when its ratio were 2.1 and 1.8 respectively in 2 studied years. In addition, identically to the current ratio, these ratios were too high, which reveal that the company may not use current assets effectively to get more profit. Cash to current liabilities ratio It should also be noticed that only rarely does a company sell its accounts receivable because by doing so, it may lose the indispensable relationships with clients. Thus, only cash and cash equivalent stand out as the really quick asset when computing the liquidity position of the company. However, when observing the cash-to-current liabilities ratio, an alarming sign can be seen when this ratio declined rapidly from 1.07 to 0.3 in 2 studied year despite the fact the quick ratio was quite favorable. It is the direct effect of the dramatic increase in Accounts receivable in 2012, which is a consequence of the rise in sales and accounts receivables through signed contract with Thailand. Although those ratios show us the liquidity position of VNM, they only reflect the situation at a point in time of December 31, 2012 because all the items used for calculation are derived from the balance sheet. As a result, those ratios are easier to be manipulated by accountants and do not reveal anything about the ability to repay short-term debt for the whole year. It is the reason explaining why we should have a closer look at several other ratios before coming to a conclusion about liquidity position of VNM for period 2011-2012. Operating cash flow ratio 2012: 1.2 2011: 0.8 The operating cash flow ratio is a measure of a company's liquidity. If the operating cash flow is less than 1, the company has generated less cash in the period than it needs to pay off its shortterm liabilities. This may signal a need for more capital. Thus, investors and analysts typically prefer higher operating cash flow ratios. It is important to note, however, that having low operating cash flow ratios for a time is not always a bad thing. In this case, in 2011, cash flow from operating activities is approximately 2,400 billion VND, equal to one half as compared to

2012s. Because the increase in export contracts leads to the large amount increase in inventory level and accounts receivable, operating cash in 2011 is much lower than 2012. On the other hands, current liabilities go up sharply in 2012. Therefore, operating cash flow in 2012 only increases slightly. In general, the company generates enough cash to pay for its short term obligation.

2. Operational efficiency
The operational efficiency of performance showed through below data: Accounts receivable turnover Account receivable turnover = Sales / Account receivable balance 2012: Account receivable turnover = 14.6 2011: Account receivable turnover = 17.4 Accounting measures used quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. In this case, we can see that this ratio of Vinamilk is fairly acceptable. However, the ratio decreased fast in 2012, mean that the firm had operated less efficiently in collecting debts. Inventory turnover Inventory turnover = COGS/ Inventory 2012: Inventory turnover = 5.1 2011: Inventory turnover = 5.3 Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period. Inventory turnover ratio is used to measure the inventory management efficiency of a business. In general, a higher value indicates better performance and lower value means inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication of overstocking which may pose risk of obsolescence and increased inventory holding costs. However, a very high turnover may result in loss of sales due to inventory shortage. Inventory turnover is different for different industries. Businesses which trade in perishable goods have very higher turnover with comparison to those dealing in durables. A comparison would be fair only if made between businesses of same industry.

From these numbers, its clear that Vinamilk has so low inventory turnover, because they have to keep a large amount of inventory to serve many exporting contract with Thailand in 2011. Inventory turnover in 2012 is almost unchanged as compared to this number in 2011. It may suggest that the company continue to manage high sales level. However, keeping too much inventory, for a producer of perishable goods, can be very risky and increase holding cost too much. Payable turnover ratio 2012: Payable turnover ratio = 5 2011: Payable turnover ratio = 6 A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. The measure shows investors how many times per period the company pays its average payable amount. It can be seen that the turnover ratio is falling from one period to another (6 times to 5 times). This is a sign that the company is taking longer to pay off its suppliers than it was before. In addition, it should be noticed that the decrease in inventory turnover and accounts receivable turnover lead to the increase in both days to sell inventory and collection period. Similarly, the payment period is lengthened as a result of the decline in payable turnover ratio. To be specific, whereas the payment period is 61 and 75 days respectively in 2011 and 2012, the collection period is only accounted for a half of this amount (28-30 days). By that way, Vinamilk can shorten its operating cycle by delay payment for suppliers on one hand and encourage customers to pay early on another hand, and thus improve the cash on hand as well as liquidity position.

3. Solvency analysis
Capital structure

Capital structure 2011

19% 1%
Short-term debts Long-term debts Owner's equity

80%

Capital structure 2012

21%
0%
Short-term debts Long-term debts Owner's equity

79%

Total debt ratio: is a financial ratio that measures the extent of a companys leverage. It can be interpreted as the proportion of a companys assets that are financed by debt. In 2011, there was 0.2 unit of debt in one unit of Vinamilks capital and this number con tinue to be stable in the following year when only 7% of increase can be observed in 2012. The slight climb in total debt ratio is caused by the more rapid increase in total debt compared to the growth in stockholders equity. However, it should be noticed that the increase in total debt was generated by the sharp escalation in short-term debts (62.39%) as opposed to the reduction in long-term liabilities. From these numbers, we can see that current liabilities accounted for too large percentage, about 95% of total liabilities.

Obviously, Vinamilk continue keeping its conservative capital structure. The total debt ratio in both years were smaller than 0.344 the average number of Food industry, which indicated that Vinamilk possessed only a small proportion of debts in its total capital. It has a low amount of debt, and therefore this leads to company be more active in implementing its investment projects, increasing profit for the shareholders, reducing significantly borrowing costs and exposed to less risk in terms of interest rate increases or credit rating because capital structure of this company is quite safe when it relied mainly on its own equity and did not depend too much on the external financing. Ability to pay interest expenses Time interest earned ratio: A metric used to measure a company's ability to meet its debt obligations. It indicates how many times a company can cover its interest charges on a pretax basis. As can be seen from the calculation, the TIE rocketed in the period 2011-2012 from 358 to 2226 times so it can be concluded that the ability to pay interest of VNM was absolutely strong when it only need 1 out of 2226 dong created by earnings before taxes to cover for this expense. The rationale for the soar in TIE was that the company experienced a sharp rise in earnings (38.85%) and a dramatic reduction in interest expense in 2012. Specifically, in 2012, interest expense declined from nearly 14 billion to only 3 billion VND, which was a direct consequence of 62.39 % decrease in long-term debts. As a result, the high ratio can also mean that the Vinamilk has an undesirably low level of leverage or pays down too much debt with earnings that could be used for other investment opportunities to get higher rate of return.

RECOMMENDATION
Vinamilk should control to reduce the producing cost to increase net income margin. Moreover, to strengthen the leader of industry position, Vinamilk should control their assets better to increase assets turnover. Vinamilk should increase the debt in its capital structure, especially the long-term debts to take advantages of leverage from the debt. The amount of inventory should be reduced in order to reduce the holding cost and avoid the risk of inventory damage.