VNM Initial Report

INITIAL REPORT
September, 28th 2014
FOOD AND BEVERAGE
VIETNAM DAIRY PRODUCTS J.S.C (HSX: VNM)

Nhan Pham
Analyst
Email: nhanpld@fpts.com.vn
Tel: (84) - 86290 8686 - Ext: 7593
Current price:
Target price:
+/-:
Dividend yield:
Historical price volatility 09/2012 09/2014

140%
106,000
120,000
13.2%
3.0%
-18%
Sell
-7%
Reduce
0%
Neutral
+7%
Add
+18%
Buy
ADD
THE UNCHANGED LEADING POSITION

WITH AN OPTIMISTIC PROSPECT
120%
100%
80%
60%
40%
20%
0%
-20%
Sep-12
Feb-13
Jul-13
Dec-13
VNM
Market profile
May-14
VNIndex
Sep. 28th 2014
Current price
106,000
52-week high (VND/share)
150,000
52-week low (VND/share)
106,000
Listed shares
1,000.6
Outstanding shares
1,000.1
3M average volume
187,753
% foreign ownership
Chartered capital (VND
bn)
Market cap. (VND bn)
49%
10,006
106,068
Business Overview
Name
Address
Key
product
Key input
Key
strength
Key risk
Vietnam Dairy ProductsJSC

No. 10, Tan Trao st, Tan Phu
Ward, District 7, HCMC
Liquid milk, powdered milk,
yoghurt, condensed milk
Raw fresh milk, milk powder,
sugar, package
Leading
position,
wide
product portfolio, extensive
distribution channel
Commodity price, intensity of
rivals, food hygiene and
safety
We conducted an initial report on Vietnam Dairy Products J.S.C

(HSX: VNM), which is currently listed on Ho Chi Minh Securities
Exchange (HSX). By using FCFF methodology to derive the
companys intrinsic value, we are inclined to suggest that its stock
is being undervalued or in other words, its market price is not fully
reflecting its potential. According to our valuation model, the 1Ytarget is at 120,000 VND/share. In the perspective of medium
and long-term investor, we recommend an ADD as a 13.2%
upside is an acceptable margin of safety. There are some key
business risks to mind that are food hygiene and safety issues,
incresing intensity of rivalry and milk price controling policies.
The result derived from relative valuation method after conducting
risk adjustment between Vietnamese market and these of other
comparable firms, is at 116,000 VND/share.
We estimated VNMs revenue and EAT for FY2014 at VND 32,232
billion (+17.1% YoY) and VND 6,407 billion (-1.9% YoY)
respectively, resulting in 2014s EPS of 6,391 VND/share. In
summary, VNM business performance this year turns out to be a
picture mixed by dark and bright areas.
The dark side is described as follows
The export division was in trouble all of a sudden. The conflicts
in Iraq forced powdered milk export revenue to drop and the
volume only reached 9,600 tonnes for 1H2014.
Full-year operation of two mega plants would make up
depreciation expenses of VND 1,064 billion for 2014 (+49.7%
YoY), according to our estimate.
Government capped price for baby formula (less than 6 y-o)
since Jun, 1st 2014.
While we believe the market price has mostly reflected bad
news, however positive signals are flashing
The domestic revenue for 1H2014 still showed a solid growth
of 12.4% compared to the last half, no matter how modest the
industry growth was.
The consolidated export revenue increased thank to Driftwood.
This entity is expected to generate VND 2,824 billion in
HSX: VNM
Ownership
revenue and VND 537 billion in gross margin for 2014.
(%)
SCIC
45.08
F&N dairy investment
11.04
Others
43.88
Milk powder to see lower and lower prices since the early
2014, which would improve the firms gross margin for 2H2014
In long term perspective, we remark the optimistic prospect
of Vietnamese dairy industry and VNM in particular and also
believe that its leading position would remain unchanged,
based on these following reasons:
Purchasing power appears to recover. Total sales value for
8M2014 reached VND 1,900 trillion (US$90.5 billion),
representing an 11.4% YoY increase.
Per capita milk consumption is remaining low at 18
kg/person/year. Other macro factors will also be supporting the
industry growth in the future.
Vietnams rapid aging population would create new market
space for senior and elderly nutrition products.
Rural-oriented strategy to take advantage of its extensive
distribution channel, whereas the urban market is becoming
more and more cramped.
VNM already went at a quick and correct pace to lead the
intense market: preparing long-term supply of raw milk from its
in-house farms and Duc Long Gia Lai (HSX: DLG); gearing up
marketing activities to upgrade brand and prove product
quality.
A sound financial position which could easily satisfy the firms
CAPEX plan till 2016 and the capacity is still excessive.
Financial statistics and forecast for 2014F 2020F

Key figures
vt
2013
2014F
2015F
2016F
2017F
2018F
- Condensed milk
- Liquid milk
- Powdered milk
- Yogurt
- Others
- Export
Revenue
Gross profit
Net profit
EPS
DPS
DPS/EPS
Revenue growth
Gross margin growth
EAT growth
Gross margin
Net margin
ROE
ROA
P/E
P/B
bil
bil
bil
bil
bil
bil
bil
bil
bil
VND
VND
%
%
%
%
%
%
%
%
X
X
4,113
10,747
5,572
5,174
929
4,414
30,949
11,183
6,534
7,840
4,800
61%
16.5%
23.2%
12.3%
36.1%
21.1%
39.6%
30.7%
16.2
5.0
4,403
12,531
6,402
5,868
1,132
5,896
36,232
12,238
6,407
6,391
3,196
50%
17.1%
9.4%
-1.9%
33.8%
17.7%
33.5%
26.2%
16.6
5.1
4,714
14,611
6,986
6,656
1,380
7,491
41,839
13,708
7,178
7,104
3,552
50%
15.5%
12.0%
12.0%
32.8%
17.2%
31.9%
25.7%
14.9
4.4
5,037
16,727
7,580
7,479
1,683
7,998
46,503
15,035
7,907
7,787
3,894
50%
11.1%
9.7%
10.2%
32.3%
17.0%
30.1%
24.7%
13.6
3.8
5,382
19,149
8,224
8,403
2,051
8,453
51,663
16,571
8,788
8,638
4,319
50%
11.1%
10.2%
11.1%
32.1%
17.0%
29.0%
24.0%
12.3
3.3
5,751
6,144
6,565
21,922 25,096
28,730
8,923
9,682
10,505
9,441 10,608
11,920
2,501
3,048
3,716
8,884
9,332
9,797
57,422 63,911
71,232
18,575 20,798
23,311
10,088 12,156
14,508
9,921 11,973
14,307
4,961
5,987
7,154
50%
50%
50%
11.1%
11.3%
11.5%
12.1%
12.0%
12.1%
14.8%
20.5%
19.3%
32.3%
32.5%
32.7%
17.6%
19.0%
20.4%
28.8%
30.0%
30.8%
24.2%
25.4%
26.4%
10.7
8.9
7.4
2.8
2.4
2.1
Source: VNM; FPTS-F
www.fpts.com.vn
2019F
2020F
Bloomberg FPTS <GO> | 2
HSX: VNM
VALUATION USING FCFF METHOD

DCF Assumption
Value
Valuation systhesis
Unit
Value
WACC 2014
15.0%
Forecasted duration
Year
4.7%
Total PV of cash flow
bil
102,828
15.2%
(+) Cash & ST investments
bil
7,466.6
Risk free rate*
7.4%
(-) Short & Long-term debt
bil
281
Market risk premium
5.0%
Equity value
bil
110,013
Minority interest
bil
206.1
Investment in subsidiaries
bil
524.5
2014 Cost of debt

2014 Cost of equity
2014 Beta
0.68
2014-2020 CAGR
12.6%
Terminal growth rate
5.5%
Total equity value
bil
110,332
Marginal tax rate
20%
Outstanding shares
mil
1,000.1
12M target price
* 10-y Government bond yield
VND/cp
120,090
RELATIVE VALUATION
Code
Mar.
Cap.
(mil
USD)
Rev.
(mil
USD)
ROE
(%)
Gross
margin
(%)
P/E
P/B
EV/
EBITDA
VNM VN
5,043
1,568
39.6
36.1
17.5
5.8
12.2
THAI BEVERAGE PCL
THBEV SP
14,471
5,018
21.8
28.1
21.1
4.8
16.5
INNER MONGOLIA YILI INDUS-A
600887 CH
12,880
8,314
27.2
28.3
21.1
4.7
N/A
SAPUTO INC
SAP CN
11,476
9,053
21.0
11.1
22.3
4.6
13.9
CHINA MENGNIU DAIRY CO
2319 HK
8,742
7,908
11.7
27.0
27.1
2.6
17.2
MEIJI HOLDINGS CO LTD
2269 JP
5,984
11,356
6.0
34.3
31.5
1.9
8.7
ALLIANCE GLOBAL GROUP INC
AGI PM
5,957
2,545
18.0
42.7
15.9
2.3
12.8
NESZ MK
4,792
1,507
71.7
35.5
28.8
25.1
21.9
FRASER AND NEAVE LTD
FNN SP
3,512
2,640
67.4
33.1
8.7
2.7
7.8
FRASER & NEAVE HOLDINGS BHD
FNH MK
1,910
1,157
16.3
29.5
22.2
3.8
16.1
DF US
1,282
9,231
151.8
20.6
9.4
1.9
11.4
SUPER SP
1,140
431
23.1
37.6
19.5
3.2
15.3
BH FP
1,046
6,155
4.4
N/A
18.0
0.7
6.2
20.5
13.4
21.5
Company
VIETNAM DAIRY PRODUCTS JSC
NESTLE (MALAYSIA) BERHAD
DEAN FOODS CO
SUPER GROUP LTD
BONGRAIN SA
Mean
P/E Comparables
2014 EPS
6,391
VND
P/B Comparables
2014 BPS
20,739
VND
EV/EBITDA Comparables
2014 EBITDA
9,120
bil VND
19.5
20.0
20.5
4.9
21.0
124,439
127,634
130,830
134,025
137,221
4.5
4.7
4.9
5.1
5.3
92,562
96,709
100,857
105,005
109,153
13.0
13.2
13.4
13.6
13.8
118,909
120,732
122,556
124,380
126,204
Average price
VND/cp
115,844
Source: FPTS; Bloomberg
www.fpts.com.vn
HSX: VNM
Revenue, 2009-2013
Vinamilk at a glance
The leading dairy processor in Vietnam
2013
2012
CAGR
30.7%
2011
2010
2009
0
10
20
30
Vietnam Dairy Products J.S.C (Vinamilk) was formed as a stateowned company including three condensed milk factories by August
20th, 1976. During 38 years of operation, VNM has equitizied and
listed its stock on HSX, becoming the biggest dairy manufacturer in
Vietnam which has the portfolio of more than 200 products for local
and export market. VNMs product range varies from core dairy
products such as liquid and powdered milk, to value-added dairy
products such as condensed milk, drinking and spoon yoghurt, ice
cream, and cheese.
40
Investment portfolio
trillion VND
Revenue
Name
Description
Chartered cap.
(bil VND)
%
interest
Net income, 2009-2013

Vietnam Dairy Cow
Ltd
Cow raiser
840
100
Lamson Dairy Ltd
Cow raiser
80
100
Thong Nhat Thanh

Hoa Dairy Ltd
Cow raiser
600
96.3
Asia Saigon Food

Ingredient J.S.C
Crme
manufacturer
120
15
Driftwood Dairy
Holding (US)
Dairy
processor
N/A
70
Miraka (New
Zealand)
Angkor Dairy
Products
(Campuchia)
Dairy
processor
N/A
19,3
Dairy
processor
23 mil USD
51
Cattle and
raw milk
trader
3 mil USD
100
2013
2012
CAGR
28.8%
2011
2010
2009
0
trillionVND
Net income
Vinamilk Europe
Sp.Z.O.O
Profitability, 2009-2013
Source: VNM
60%
The main role of the CEO

50%
40%
30%
20%
10%
0%
2009
ROE
2010
2011
ROA
www.fpts.com.vn
2012
2013
Gross margin
We believe that we should mention about the Chairwoman and

CEO of VNM, Ms Mai Kieu Lien (1953) who is supposed to be the
most famous businesswoman in Vietnam. She was the only
Vietnamese awarded by Forbes as one of Asias 50 power
businesswomen in 2012 and 2013 in a row and was described as
the one who played an important role in making VNM a remarkably
grown firm and one of the most profitable brands in Vietnam after
20 years being the CEO. However we wonder what would happen
at VNM after a resignation of this woman. This doubt is not only for
VNM but also a concern with many giant firms in Vietnam, which
have to face the issue of next generation after leaving of the first
post-Doi Moi managers.
HSX: VNM
Plan and result comparision, 2009-2013*
Trillion VND
Total assets and resources, 2009-2013

25
170%
20
160%
150%
15
140%
10
130%
120%
110%
0
2009
2010
2011
Current assets
2012
2013
Long term assets
100%
90%
2009
2011
% revenue completion
% EAT completion
25
Trillion VND
2010
20
15
2012
2013
% EBT completion
*Regarding their management skills, we assess them by

conducting a simple statistic which values differences between
VNMs business plan in the beginning and its performance in the
end of each financial year from 2009 to 2013.
Source: VNM
10
2009
2010
2011
Short term liabilities

Shareholders' equity
2012
2013
Long term liabilities

Source: VNM
A popular brandname from urban to rural

Top 10 manufacturers in urban, 2014
Rank
Manufacturer
Consumer
Reach Points Penetration%
2013
Top 10 manufacturers in rural, 2014

Frequency
Rank
Consumer
Reach Points
2013
407,009,306
Manufacturer
Penetration%
Frequency
Vinamilk
74,588,671
97.5
32.1
Unilever
99.8
25.2
Unilever
57,443,108
99.6
24.2
Masan
297,556,856
97.8
18.8
Masan
33,263,962
95.6
14.6
Vinamilk
212,873,299
81.7
16.1
11.5
Vinan Acecook
142,707,986
80.9
10.9
12.4
Asia Foods
113,258,816
72.9
9.6
Calofic
95,686,739
79.9
7.4
7.5
4
5
Vina Acecook
Friesland Campina
24,584,054
22,725,385
89.7
76.9
Nestle
22,725,385
84.7
10.1
Pepsico
20,072,390
75.2
11.2
Ajinomoto
95,280,533
78.5
P&G
19,647,224
91.6
P&G
94,751,331
86.1
6.8
Ajinomoto
13,354,107
84.9
6.6
Liwayway
76,933,265
41.7
11.4
10
Calofic
12,899,866
79.6
6.8
10
Friesland Campina
76,620,923
55.7
8.5
Source: Kantar Worldpanel

According to Brand Footprint of Kantar Worldpanel released on
May 22nd, 2014 listing the most chosen FMCG brands in Vietnam,
Vinamilk was No.1 in urban. The local biggest dairy firm delivered
its products to 98% of urban households totalling 75 million times. In
rural areas, Vinamilk held the third position as its products was
chosen by 82% of rural household 200 million times.
www.fpts.com.vn
HSX: VNM
We believe that after nearly 40 years of operation VNM has been

dominating the local market by focusing on marketing, promotion as
well as renewing its products, guaranting its quality to cope with
Vietnamese specific nutrition needs and fit their disposal income.
The market leader in most of its categories* with

the extensive portfolio
* Refer to appendices 4,5,6
Average cost and selling price, 2014E
Thousand VND
Gross margin by category, 2014E
48.2%
43.1%
36.3%
35.9%
28.0%
19.8%
250
200
150
100
50
-
Condensed Liquid milk Powdered

milk
milk
Yogurt
Others
Export
Condensed Liquid milk

milk
Powdered
milk
Average selling price (VND/kg)
Yogurt
Others
Export
Average cost (VND/kg)
* The powdered milks ASP and gross margin was calculated

excluding the effect of Government price capping.
Revenue breakdown, 2009 6M2014
13%
14%
14%
10%
14%
17%
17%
15%
25%
17%
17%
18%
18%
29%
33%
35%
35%
36%
22%
18%
17%
15%
13%
13%
2009
2010
2011
2012
2013
6M2014
11%
11%
15%
15%
18%
31%
Condensed milk
Liquid milk
Powdered milk
Yogurt
Others
Export
Source: VNM, FPTS-E
www.fpts.com.vn
HSX: VNM
Condensed milk market share, 2013
(1) Condensed milk the saturated market

VNM has been dominating the market with two well-known brands
named Sua Ong Tho and Ngoi Sao Phuong Nam respectively,
making up to 75% of the local market share. It is followed by
Friesland Campina Vietnam (FCV) with around 20% market share.
This category used to be the core product of VNM long ago,
however the market is becoming saturated and it currently
accounted for only 13% of total revenue in 1H2014.
Others
5%
FCV
20%
Condensed milk is a condensed source of calories and sugar but

lacks protein, vitamin, mineral then it is not really nutritious. It is
now mainly used as an ingredient in making cake, confectionary,
coffee or tea, etc. Though its gross margin is still high at 36%, we
believe the firm would not pay too much attention to this category.
The target geographic segment is rural area and Cambodia
market, may be Myanmar market in the near future.
VNM
75%
Retail price of condensed milk products
(2) Liquid milk the leading market share

Ngun: VNM, FPTS tng hp
F&N
We suggest that local consumers will tend to prefer fresh milk

(pasteurized milk or UHT milk) to reconstituted milk (refer to
Appendix 4). Then not only VNM but also such other local liquid
milk manufacturers as FCV, TH Milk and IDP are considering
raising their cow cattle as a key factor to survive the intensifying
market. We tried to figure out where main competitors of VNM are
standing as follows:
Vixumilk
FCV
Vinamilk
20
30
40
50
60
70
80
'000 VND/kg
FCV is a traditional competitor of VNM in the local liquid milk

market, however the survey of Euromonitor showed us a
downward trend in its market share relatively compared to
VNM. The former had 25.2% and the latter had 38.7% market
share in 2009. Five years later, the figures were 25.7% and
48.7% respectively. FCV has access to 35,000 dairy cows in
total.
Liquid milk market share, 2013
Others
17.9%
TH Milk
7.7%
VNM
48.7%
Khung gi bn l sa nc trn th
FCV
trng
TH Milk: TH Milk specializes in making 100% of liquid milk

from its in-house dairy farms with the herd of 32,000 cows after
four years of operating and that is the point. Due to the short
depreciation period of milk cow of about 7 years then we
believe that TH Milk would face very large capital requirement
to fund its farms within the next three years and we also doubt
the possibility to increase its herd to 137,000 cows by 2017.
Unless the firm keeps sticking to the plan to ultimately raise its
dairy cows, we find it hard for TH Milk to steal its competitors
market share, since its promotional message the clean, fresh
milk is no longer unique.
25.7%
The cooperative deal between Nutifood and Hoang Anh Gia

Lai (HSX: HAG) may be a respectful rival however this story
should be told 2-3 years later as HAGs dairy cow breeding
www.fpts.com.vn
HSX: VNM
Retail price of liquid milk products

Imports
Long Thanh
Da Lat
Love'in farm
TH Milk
FCV
Vinamilk
20
30
40
50
60
'000 VND/kg
Powdered milk market share, 2013
Others
15%
VNM
25%
Mead
Johnson
14%
FCV
16%
Abbott
30%
efficiency is still an unknown variable. The number of planned

cow herd is 116,000 but we are not quite impressed by this
figure as the first milk cows has just arrived in HAGs farm this
September and Nutifoods fresh milk revenue is not expected
to come till 3Q2015.
IDP is launching two brands named Lovein Farm (mid-end)
and Ba Vi (low-end). The prevailing strategy is to make 100%
fresh milk from northern farmers cow milk (only about 10,000
cows) and the company size is quite small compared to VNM,
FCV or TH Milk.
Competition between the local players is not something new in the
liquid milk market and we realized that VNM has not been left
behind by any of its rivals, especially in term of upstream
development (expanding dairy cattle and local raw milk supply for
better material control). The firm is now collecting raw milk from
68,000 cows in total, including 8,200 in-house cows and the rest
from local farmers throughout the country. VNM is planning to
breed 28,000 cows, a more reliable number than those of its
competitors. A potential supply is coming from the deal between
the firm and DLG in which the latter would be raising 80,000 cows
for the formers raw milk needs.
We want to remind that the level of competition is becoming more
and more intense in the years to come and VNMs market share
would appear to remain stable eventually. However the firm has
been being superior to its rivals and is expected to secure the
leading position in the liquid milk market, based on: strong and
solid financial position that helps gear up marketing activities; the
plan to raise cows and the agreement with other potential
suppliers; estensive distribution channel, especially in rural area.
(3) Powdered milk competing with MNC brands

Wholesale price of powdered milk
products
Vinamilk
This market is totally depending on import as: (1) formula milk

(Abbott, Mead Johnson, Nestle); (2) imported milk powder mixed
and packed locally (VNM, FCV); (3) Unofficially imported
powdered milk. Though it is a profitable market, such local
producer as VNM is always exposed to commodity price volatility
and currency risk.
Abbot
Mead
Johnson
Nestle
FCV
0
200 400 600
800 1,000
VNM is the biggest local manufacturer in the market and

competing mostly with MNC brands, furthermore we also
recorgnized the noticeable return of Nutifood. It is harder to grap
market share from other competitors in powdered milk market than
in liquid milk market, while consumers tend to have higher brand
loyalty on products that fix their children appetite and constitution.
According to a research of Friseland Campina in Vietnam, 60-70%
moms who were asked told that they would keep purchasing the
same powdered milk brands.
'000 VND/kg
www.fpts.com.vn
HSX: VNM
The firm navigates its products in the low-end and mid-end
segments as our price statistics show that infant formula
wholesale prices of VNM are relatively lower than most of its main
competitors. However the price advantage is not really a big deal
and we suppose that in this sensitive market, consumers are
willing to pay premium for MNC brands to get quality assurance in
return, as many parents think importers provide better quality and
more nutritious products than local processors do. Then we
believe that VNM has to keep gearing up its marketing and R&D
activities in order to bring about new added values to local
customers apart from its average products with reasonable price,
and to prove that local powdered milk is not inferior to MNC
brands at all. We also expect to withness more and more VNMs
products in the high-end segment that would help increase the
powdered milks gross margin from 40-43% at this moment.
Yogurt market share, 2013

Others,
10%
VNM,
80%
Retail price of yogurt products, 2013

Love'in
farm
(4) Yogurt the advantage of distribution channel

The shorter time yogurt is delivered from factory to customer, the
better quality it is. VNM has a huge avantage in the yogurt market
due to its nine yogurt factories across the country (refer to
Appendix 8) combined with an extensive distribution channel and
largesystem of cooler and fridge (which is essential for cool
products such as yogurt and pasteurized milk). Hence there is no
wonder that the firm announced to own up to 80% of market
share.
FCV
TH Milk
Ki Do
Vinamilk
20
35
50
65
80
'000 VND/kg
The main competitor in this market is FCV, while new entrants

would need more time to establish their distribution system and
more importantly develop their brands in the market that VNMs
products are too familiar to customers.
Source: VNM; AC Nielsen; Euromonitor;

MoF; FPTS
One of the most extensive distribution systems in

the local market
The traditional channel of VNM is totalling 266 independent
distributors and 224,000 outlets in all cites and rural areas, which
generated about 90% of domestic revenue in 2013. The rest was
from the modern trade with more than 600 supermarkets and
convenience stores. The CAGR of VNMs retail outlet was 12.4%
per annum during the past six years and the firm is trying to expand
its channel to acquire more market share, especially in rural areas
and small urbans. We believe that dramatic growth is mainly
attributable to its Enterprise Resource Planning (ERP) which has
helped switch the firm from wholesaler to retailer, manage its
inventory more strickly and improve its saleteams efficiency.
In our opinon, VNM is totally capable of expanding its distribution
system although the number of its outlets already ranked the
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125,000
135,000
140,000
178,000
200,000
224,000
Number of VNMs retail outlet, 2008-2013
2008
2009
2010
2011
2012
2013
second in the local market after Unilever. A statistic shows that there
are over 500,000 retail oulets nationalwide then VNMs market
coverage just reached 45% of them.
We suggest that the strategy to target and unlock potential in rural
market is suistable now and then. Though per capita milk
consumpition is still low which shows large growth potential, the
urban market is becoming more and more cramped by many
players and new entrants and milk consumption habbit is already
high there. Expanding the rural market by its well-known low-end
and mid-end products would help increase market size and protect
the firms market share while the national purchasing power is still
weak and consumers is still tightening their expenditure.
Source: VNM
There are two factors to be considered while targeting the rural
market, which are distribution system and price respectively. Firstly,
due to its low density of population and poor infrastructure then it is
difficult to expand distribution channel. Secondally, milk
manufacturers can not price its products similarly between the rural
and the urban market while transport cost and maintainance cost is
higher for the former. These two obstacles may stop other players
but VNM, as the firm has advantage on the large number of
factories across the country combined with the extensive distribution
system and the wide product portfolio with many low-end and midend products.
Export division powdered milk and Iraq market
'000 VND
Exported ASP and average cost, 2014E

150
The export revenue of VNM accounts for 13-14% of total revenue

every year, attributable to two main sources:
(1) Powdered milk to Iraq and condensed milk to

Campuchia
120
Gross margins of export products are relatively lower than those of

domestic products by 21.5-27% because VNM does not have to
spend too much on selling and marketing activities. (Refer to next
part).
90
60
30
Condensed Powdered Others
milk
milk
Average selling price (VND/kg)
Average cost (VND/kg)
The export division is quite unstable. Beforehand, due to lack of

powdered milk capacity then VNM had had to prefer a more
profitable market, which also means the local market. After putting
the Dielac II plant into operation in late 2013, the firm expected to
stimulate powdered milk export but the conflict happening in Iraq in
1H2014 dropped the volume exported to this market. VNM also said
that the situation would not be getting better for the 2H2014.
(2) Consolidate Driftwood Dairy from 2014

Source: VNM; FPTS-E
www.fpts.com.vn
Established in 1946, Driftwood Dairy specialises in producing and

distributing products such as fresh milk, soybean and ice cream,
and fruit juice for schools. It is the largest company in California,
HSX: VNM
USA. Its 1H2014s revenue was VND 1,400 billion and gross margin
was 19% but net margin is expected at only 2% for 2014 due to its
interest burden. We expect its financial performance would get
better in the foreseeable future thank to its restructuring process and
support from the parent company.
Export revenue breakdown and gross
margin, 2014E*
Billion VND
Export revenue and gross margin, 1H2009-1H2014*
84.9%
21.6%
13.3%
11.8%8.9%
3.3%
3,000
60%
2,500
40%
2,000
20%
1,500
0%
1,000
-20%
500
-40%
0
Condensed Powdered milk
milk
revenue breakdown
Others
Export gross margin
-60%
1H2009 1H2010 1H2011 1H2012 1H2013 1H2014
Export revenue
% growth (r.h.s)
Export gross margin
*: excluding Driftwoods revenue and gross profit

Source: VNM; Bloomberg; FPTS-E
Marketing spend on the rise, especially for liquid

and powdered milk to upgrade brand and
increase competitive advantage
We notice the upward trend on selling expense dragging on recent
years, following the firms strategy as scarifying its profit to protect
the market share. It also suggest a surging competition in the local
milk market while purchasing power has been weak for too long.
The selling expense/sales ratio and selling expense/domestic
revenue ratio reached 11.8% and 12.7% for 1H2014. These ratios
are relatively lower than those of other FMCG producers such as
KDC (21.9%) and Masan Consumer (16.6%) over the same period.
We are also informed that selling expense at FCV, the main
competitor of VNM, has surged by 80% compared to that of last
year. Based on these figures, we believe that VNM would keep
increasing its marketing budget in the near future to catch up with
other players.
To be noticed that the scale of VNMs selling activities is far bigger
than that of either KDC or Masan Consumer though their retail
outlets may be equivalent (KDC: 176,000 outlets; Masan: 200,000
outlets). VNMs selling expense was VND 1,980 billion for 1H2014,
which is 4.73x bigger than KDC and 1.5x bigger than MSN.
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SG&A/sales raio, 2009-2014E
SG&A/category sales ratio, 2014E

Abbortion to
2014E ratio
Value*
11.8%
4,261,568
7.4%
324,574
+ Liquid milk
13.5%
1,685,808
+ Powdered milk
14.6%
932,748
+ Yogurt
13.2%
774,421
+ Others
12.9%
146,353
+ Export
1.9%
58,782
+ Driftwood
12%
338,884
1.98%
715,615
Selling expense
11.7%
10.6%
9.1%
8.4%
2.8%
2009
2.5%
2010
2.1%
2011
11.8%
8.8%
2.0%
2012
1.98% 1.975%
2013
2014E
+ Condensed milk
G&A expense
% selling expense/sales
% G&A expense/sales
* million VND
Source: VNM; FPTS-E
Increase in selling expenses. 2011-2013

100%
75%
50%
25%
0%
-25%
2011
2012
2013
Advertising cost
Promotion cost
Commission for distributors
Transportation cost
Source: VNM
In term of selling expense allocation, it would appear that the firm is

now focusing most on liquid milk and powdered milk, as the former
accounts for the largest proportion in revenue and the latter is a
category in which VNM has the lowest position compared to other
categories. Meanwhile, condensed milk market has showed a little to
no growth potential then its marketing budget is relatively low.
We suppose that VNMs brand has not been equivalent to the
company size yet. VNM is also aware of this issue and currently
focusing on upgrading its brand to affirm its position and product
quality. VNMs BOD has appointed Phan Minh Tien, the former Vice
President of Foods at Unilever Vietnam, as Executive Director of
Marketing as from May 20 this year. We expect that the firms
marketing strategy would reach a new high along with its new
manager.
Up to now, the Corporate Income Tax Law curbs the total
expenditures for advertising and promotions at below 15%, and any
expenses exceeding this level will not be deducted when
determining taxable incomes. We expect this regulation be removed
in the coming time (1-2 years), which would help VNM to take
advantage of its leading position to gear its brand building, promote
its image and goods overseas, equally compete with MNCs and
outpace local players in the local market.
Production capacity and system of plants

Our estimation shows that the current capacity for each category is
as follows: 800 million litres of liquid milk, 326 million cannes of
condensed milk (380g per can), 67,500 tonnes of powdered milk
and 1,162 billion jars of yogurt (100g per jar). There are 13 factories
across the country in total and only Tien Son plant is still in tax
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holiday which is 50% reduction till 2015 (Refer to Appendix 7). It
also means that since 2016, VNMs effective tax rate would follow
the Government CIT.
After putting Cambodia plant into operation from the late 2015, the
firms capacity would increase by 19 million litres of liquid milk, 64
million jars of yogurt and 80 million cannes of condensed milk.
VNM has a plan to upgrade the capacity of its Vietnam Liquid Milk
plant from 400 million litres to 800 million litres in 2017. However we
wonder if it is really essential since our estimate shows that the plant
would not operate anywhere near its full capacity during our
forecasted duration.
VNMs CIT rate, 2009-2016F
Prodution capacity, 2012-2015F

'000 tonnes
30%
20%
1,000
800
600
400
10%
200
0%
0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Government CIT rate
Effective tax rate
2012
2013
2014E
2015F
Condensed milk
Liquid milk
Powdered milk
Yogurt
Source: VNM; FPTS-E,F
Input costs the large effect of imported milk

powder
Raw milk material comes from two main sources:
+ Imported milk powder (~37% COGS) from New Zealand, US
which includes Whole milk powder (WMP) and Skim milk powder
(SMP).
+ Raw fresh milk from farmers and VNMs in-house farms (~10%
COGS)
According to our estimates, local milk supply only meets about 37%
of VNMs liquid milk production currently. It also means that over
63% of its liquid milk output is reconstituted milk originated from milk
powder (SMP, WMP). Other products of VNM such as powdered
milk, yogurt and condensed milk are mostly made from these
imported materials. This explains a negative correlation between
milk powder price and VNMs gross margin during the observed
period.
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SMP price and VNMs gross margin by

quarter
6000
COGS breakdown, 2014E
40
5000
47.0%
17.0%
4000
3000
35
22.0%
2000
1000
0
30
Q1 Q2 Q3 Q4 Q1 Q2
2013 2013 2013 2013 2014 2014
SMP price
Gross margin (r.h.s)
Raw milk
Other raw materials
Salaries & benefits
Other manufacturing costs
Packaging
Water & electricity
Depreciation
Source: VNM; FPTS-E
Local raw fresh milk supply, 2011-2016F

Year
2011
2012
2013
2014F
2015F
2016F
6,712
8,214
8,818
13,818
25,500
28,000
12,848
20,051
24,491
38,378
70,823
77,767
3.83
4.88
5.55
5.55
5.55
5.55
61,000
60,825
59,000
59,000
59,000
59,000
123,918
141,540
132,071
132,071
132,071
132,071
4.15
4.75
4.57
4.57
4.57
4.57
67,712
69,039
67,818
72,818
84,500
87,000
Total volume (tonnes)
136,766
161,591
156,562
170,449
202,894
209,838
VNMs liquid milk production
321,514
390,162
424,797
467,277
514,005
555,125
4.0%
5.1%
5.8%
8.2%
13.8%
14.0%
42.5%
41.4%
36.9%
36.5%
39.5%
37.8%
VNMs in-house farm

No. of cow
Volume (tonnes)
Cow yield (tonnes/cow)
Collection from farmers
No. of cow
Volume (tonnes)
Cow yield (tonnes/cow)
Total raw fresh milk supply
No. of cow
VNMs self-supply
Local supply
* Excluding supply from Duc Long Gia Lai that is expected to happen from 2016 onwards
Source: VNM; FPTS-F
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Better material control could not help improve
gross margin
Number of (planned) cows, 2010-2016F
30,000
25,000
20,000
15,000
10,000
5,000
0
2010 2011 2012 2013 2014E2015F 2016F
Raw fresh milk purchase price (000

VND/litre), 2009-2013
14
12
10
Raising a large size of dairy cow farm is not easy as their living
environment should have to be very well prepared to prevent
diseases. This is the reason why cow herd of VNM has showed a
very modest growth in the last three years (2011: 6,712; 2012:
8,214; 2013: 8,818) even when this firm has an extremely strong
financial basement and large land bank (Thong Nhat: 2,500 ha, Ty
Ninh: 800 ha). According to VNMs plan for 2012-2016, the firm
would set up four new farms and increase its cow herd to 25,500
cows by 2015 and 28,000 cows by 2016.
We also estimate that in order to completely control material for
liquid milk production, the firm would need up to 190,000-200,000
cows. A potential raw milk supply would come from DLG after this
firm announced the project in collaboration with Vinamilk to raise
80,000 dairy cows of the Holstein Friesian breed. Duc Long Gia Lai
will import the first herd of dairy cows in 2H2015.
Investment cost is up to 4,000-5000 USD per one dairy cow, which
is estimated to depreciate within 6-7 years, thus financial burden is
really heavy. As can be seen that, a dairy farm needs at least 4-5
years to get over its break-even point. Initial raw milk production cost
would be high at 20,000 VND per litre compared to selling price of
12,000-13,000 VND per litre at the moment.
Hence we notice that, VNMs intention to increase its self-supply of
raw milk is only for the sake of better material control and consumer
preference of fresh milk over reconstituted milk. In the other hand, it
would not help improve the firms gross margin and here is the
reason:
4
2009
2010
2011
2012
2013
Source: VNM; FPTS
VNMs fresh milk purchase price was 12,741 VND/litre in 2013, while
liquid milk production cost from milk powder was around 11,000
VND/litre according to our estimate. It also means that the difference
is bigger than a difference between fresh milk and reconstituted milk
retail price of about 3-11%.
On July 18, Representatives from GlobalGAP Control Union granted
a GlobalGAP certification to Nghe An dairy farm under Vietnam
Dairy Cow One-Member Co, Ltd (Vinacow), a subsidiary company of
VNM. This is the first dairy farm in South East Asia to receive the
GlobaGAP certification and one of only three dairy farms which have
met GlobalGAP (Good Agricultural Practice) standards in Asia. In
term of marketing aspect, it will help Vinamilk ensure quality to meet
customers increasing demands and sharpen competitive edge in
the market to meet strict requirements in the EU and US markets.
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CAPEX plan, 2012-2016
Vinamilk
Total
investment
8,580,000
Actual till
2013
6,391,000
Budget
2014
948,000
Budget
2012
620,500
Budget
2013
620,500
Vinacow
1,281,000
431,000
412,000
219,000
219,000
Lam Son Milk
790,000
223,000
480,000
43,500
43,500
International Real Estate
151,000
151,000
Driftwood
151,000
33,000
33,000
435,294
435,294
1,600,000
393,000
603,500
603,500
341,000
120,000
110,500
110,500
13,362,294
7,229,000
2,788,294
1,597,000
1,597,000
Source: VNM
CAPEX plan (million VND)
Miraka
Angkor Dairy Products
Thong Nhat Thanh Hoa
Lam Dong dairy farm
Total
Prospective analysis
2014 brighter outlook for 2H2014
(1) In 1H2014, VNM was hit by several negative
effects
The export division was in trouble all of a sudden due to
conflict in Middle East. The powdered milk export volume to Iraq
dropped sharply and we expect total volume to reach only 19,200
tonnes for 2014. Export revenue of the parent company is
expected at VND 3,071 billion for 2014 (-30.4% YoY).
Increasing in depreciation expense. Full-year operation of two
mega plants would make up depreciation expenses of VND 1,064
billion for 2014 (+49.7% YoY), according to our estimate.
Plant
Dielac II
Vietnam Milk
Start date
24/04/2013
11/09/2013
Investment
2,000 bil
2,400 bil
Capacity
54.000 tonnes
400 mil litres
Government capped price for baby formula (under 6 y-o) since

Jun, 1st 2014. According to our statistics, VNMs baby product
prices dropped by 14-20% after this decision. Consequently, its
gross margin would decrease to 39-40%, causing VNM to lose
approximately VND 130 billion in revenue for 2014.
(2) While we believe the market price has mostly

reflected bad news, however positive signals are
flashing
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The domestic revenue for 1H2014 still showed a solid growth
of 12.4% compared to the last half, no matter how modest the
industry growth was.
Kantar Worldpanels research lasting from Dec 2012 till now
suggests that milk consumption growths in both urban and rural
area was on the downward trend, in which the former showed a
more dramatic drop.
Dairy consumption growth in urban (4 main

cities)
Dairy consumption growth in rural
20%
30%
15%
20%
10%
10%
5%
0%
0%
02-12-12
Value
Volume
15-06-14
02-12-12
Value
Volume
15-06-14
Source: Kantar Worldpanel

However VNMs domestic revenue for 1H2014 still showed a solid
growth of 12.4% compared to the last half. After deducting 6%
increase in ASP in Feb. 2014, its sales volume still rosed by
approximately 6.4%. This is the reason why we expect VNMs
market share to at least remain stable. For 2014, domestic revenue
and gross profit is expected at VND 30,337 billion (+14.3% YoY)
and VND 11,069 billion (+8.3% YoY) respectively.
trillion VND
Growth on domestic revenue

20
30%
25%
15
20%
10
15%
10%
5
5%
0
0%
1H2009 1H2010 1H2011 1H2012 1H2013 1H2014
Domestic revenue
% growth (r.h.s)
Source: VNM
Consolidated export revenue is surging due to Driftwood
We expect Driftwoods revenue and gross profit at VND 2,824
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billion and VND 537 billion respectively. Accordingly, total export
revenue from export market and Driftwood would reach VND 5,896
billion (+33.6% YoY) and gross profit is expected at VND1,168
billion (+21.5% YoY).
Global SMP and WMP price (USD/tonne)
6000
5000
Milk powder to see lower and lower prices which would

improve the firms gross margin for 2H2014
There is a lagged correlation between global milk powder price and
VNMs production cost. According to our estimate, SMP and WMP
account for about 37-40% of COGS. As SMP and WMP price have
dropped by 46.2% and 45.7% since the early 2013, we believe
VNMs gross margin would improve in 2H2014.
4000
3000
2000
Purchasing power appears to recover
1000
0
2 Jan
2013
4 Jun
2013
5 Nov
2013
SMP
1 Apr
2014
2 Sep
2014
WMP
Source: Globaldairytrade
We expect the national purchasing power and milk consumption in

particular to recover from 3Q2014 onwards based on:
Figures from the GSO showed that in the first eight months of
2014, total sales value reached VND 1,900 trillion (US$90.5
billion), representing an 11.4% YoY increase. After deducting
price factor, total sales value witnessed a 6.4% rise compared
to 5.3% of the same period last year.
ANZ-Roy Morgan Vietnam Consumer Confidence Index
increased by 1.4 points to reach 135.5 in August 2014. ANZ
Bank economists announced this in a report dated August 27th ,
adding that the rise of the index was primarily driven by
increasing consumer confidence about economic conditions in
Vietnam over the next year. The index was clearly above
2014s to-date average of 131.6 and is at the highest level
recorded since March.
Long term prospect

(1) Low per capita milk consumption implies large
growth potential
Annual per capita consumption of dairy products in Vietnam is
18kg per person, far behind consumption in most of 16 observed
countries in 2013. There are two issues to be noticed:
Milk consumption is lower in Asia than in Europe and South
America, which can partially attributed to the high prevalence of
lactose intolerance among Asians. But lactose intolerance does
not tell the whole story.
Milk consumption is lower in Vietnam than in most of Asian
countries, due to difference in level of per capita income. As
can be expected, rising income would gear up milk
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consumption. Furthermore, there are so many factors that could
support milk consumption growth in Vietnam, such as: high
growth in population and urbanization, rising awareness on
health and more and more women in the labor force. (Refer to
appendix 2).
Per capita milk consumption by country, 2013
90000 148
117112
75000
60000
160
120
98
83
109
45000
55 46
30000
80
51
44
32 30
23
15000
14 8 18
Vietnam
Indonesia
Thailand
Phillipines
Singapore
Malaysia
China
India
Japan
US
Korea
Canada
Australia
England
Sweden
0
Finland
40
Per capita GDP (USD/year)

Per capita milk consumption (kg/year) (r.h.s)
Source: Bloomberg; FPTS
* ppp GDP
(2) Prospect of the local market

We believe that VNMs selling volume growth would slow down in
the forecasted period compared to the period 2009-2013, as
VNMs growth phase seems to get over and competition in the
local market appears to keep intensifying. However, we also expect
the firm, along with its strategy to upgrade the brand, would launch
more and more high-end products to enjoy a better gross margin.
Forecasted domestic volume and revenue
Item
Volume (tonne)
2014F
2015F
2016F
2017F
2018F
2019F
2020F
752,678
817,011
875,116
938,059
1,006,276
1,080,248
1,160,502
- Condensed
101,730
102,747
103,569
104,398
105,233
106,075
106,924
- Liquid
467,277
514,005
555,125
599,535
647,498
699,298
755,242
28,300
31,413
34,083
36,980
40,123
43,534
47,234
- Yogurt
122,883
131,485
139,374
147,736
156,601
165,997
175,956
- Others
32,488
37,361
42,965
49,410
56,821
65,344
75,146
Revenue (bil.)
30,336,785
34,347,836
38,505,167
43,209,323
48,537,535
54,578,655
61,435,011
- Condensed
4,403,378
4,714,256
5,037,089
5,382,028
5,750,590
6,144,390
6,565,158
12,531,002
14,611,148
16,726,843
19,148,889
21,921,649
25,095,903
28,729,790
- Powdered
6,401,603
6,986,090
7,579,907
8,224,200
8,923,257
9,681,733
10,504,681
- Yogurt
5,868,351
6,655,883
7,478,551
8,402,900
9,441,498
10,608,467
11,919,674
- Others
1,132,451
1,380,458
1,682,778
2,051,306
2,500,543
3,048,161
3,715,709
- Powdered
- Liquid
Source: VNM; FPTS-F
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Forecasted growth on domestic volume

Category
CAGR 2009-2013
CAGR 2013-2020F
6.2%
0.86%
Liquid milk
24.4%
8.57%
Powdered milk
21.1%
9.21%
Yogurt
23.5%
6.28%
Others
22.9%
15%
Condensed milk
Source: VNM; FPTS-F
(3) Prospect of the export division

Revenue from export markets
The powdered milk export is expected to recover after suffered
by the conflict in Middle East. However we also keep a
conservative estimate for 2014 as the situation in Iraq seems
not to get better.
From 2015 onwards, the plant in Cambodia would be put into
operation and start to generate revenue. There is too little
available data on the Cambodian market for us to evaluate its
potential; however we suggest that it could be referred to the
Vietnamese market 10-15 years ago. VNM said that the firm is
currently the leader in the market which has a population of
15.2 million and nominal GDP of US$15.25 billion in 2013. We
are also informed that Cambodia's infrastructure is extremely
weak, causing the firm to face difficulties in developing its
distribution channel.
We have a little to no information about other target markets of
VNM. However, as VNM has been given the green light to
export its products to the US market (FDA), we believe that the
firm could even penetrate into markets which require high
quality products and high food safety and hygiene standards.
Myanmar market could be a possible destination, while Chinese
market still keeps its door shut as there has been no trade
agreement yet between China and Vietnam on milk products.
The contribution of Driftwood to consolidated top and bottom
lines
Firstly VNM is said to restructure the California-based firm and
seek opportunities in U.S market, where it was granted permission
by FDA in July, 2013 to export its dairy products. VNM expects
Driftwood to keep growing at 5% per annum. In our point of view,
VNM would likely to take one more step further by importing
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Driftwoods products back to Vietnamese market, like what it did to
Mirakas Twin Cows product.
Forecasted export volume and revenue, 2014F-2020F
Items
2014F
2015F
2016F
2017F
2018F
2019F
2020F
Export volume (tonnes)

- Condensed
33,366
53,137
60,945
67,147
72,790
78,433
84,075
14,128
20,283
20,283
21,280
24,320
27,360
30,400
3,925
9,814
13,739
15,702
17,664
19,627
19,238
27,648
27,648
27,648
27,648
27,648
27,648
1,280
3,200
4,480
5,120
5,760
6,400
144.27
209.10
222.00
231.81
239.78
247.76
255.73
17.06
24.49
24.49
25.69
29.37
33.04
36.71
5.73
14.33
20.07
22.93
25.80
28.67
122.46
176.00
176.00
176.00
176.00
176.00
176.00
- Yogurt
2.87
7.18
10.05
11.49
12.92
14.36
- Others
4.75
Driftwood revenue
132.64
139.27
146.24
153.55
161.23
169.29
177.75
Total export revenue (mil. USD)
276.91
348.37
368.24
385.36
401.01
417.04
433.48
- Liquid
- Powdered
- Yogurt
Export revenue
- Condensed
- Liquid
- Powdered
Source: VNM; FPTS-F
(4) Other potentials

We believe that there would be other opportunities that VNM could
take advantage of, as follows:
The proportion of population over 60 y-o
10,000
10%
8,000
8%
6,000
6%
4,000
4%
8,392
2,000
10,403
12%
7,664
12,000
> 60 y-o
2014F
2019F
% of population (r.h.s)
Source: GSO
www.fpts.com.vn
The country's short period of what analysts called a "golden

population structure" - when the workforce outnumbered
dependents - has now brought about considerable challenges in
meeting the need of that population as it grows older and less
people are of working age. There are now 8.4 million Vietnamese
people that are 60 y-o or older, representing 9.3% of total
population. An estimate of GSO shows that, this group would
reach 10.4 million (~11% of total population) by 2019.
2%
0%
2009
Vietnams rapid aging population would create new market

space for senior and elderly nutrition products.
Hence we believe that nutritious food for elderly offers huge

business opportunities in Vietnam the years to come. VNM has
recently launched a series of products for elderly people, including
Diecerna, Sure Prevent and Canxi Pro but its brand recognition in
this niche market is still low. Having realized the great potentials of
the market, VNM is expected to outpace in medium and long term
horizon.
HSX: VNM
Healthy juice drinks
VNM said that it would keep developing healthy beverages which
are non-carbonated and made from juices. In our opinion, it is a
suitable strategy that sticks to VNMs vision to become the leading
nutrition group locally and regionally.
Other forecasted results

Based on the firms CAPEX plan till 2016 and its plan to raise
cow herd, we expect VNM to face a dramatic increase in its
depreciation expense the coming years. A dairy cow which has
a large investment cost of about US$4000 is depreciated within
only 6 years.
Cost structure, 2014F
83%
We assume in long term perspective, the volatility in SMP and
WMP price would make lesser and lesser impact on VNMs
gross margin because the firm, as a consumer staples supplier,
could easily pass on higher input costs to its consumers.
2%
15%
The SG&A ratio is expected to remain at 14-15% in short term
but drop to 11-12% in long term when the local dairy market
turns saturated.
COGS
Selling expense
G&A expense
Interest expense
Source: FPTS-F
We assume that financial expense is immaterial and financial

income would be mainly attributable to interest received, as the
firms cash is excessive compared to its CAPEX. Accordingly,
we expect the firm to keep away from interest-bearing debt.
ROE Dupont, 2013-2020F
billion VND
Depreciation expense and gross margin, 2014F2020F

2,000
1,600
34%
1.60
33%
1.20
50%
40%
30%
1,200
32%
0.80
20%
800
400
0
2014E
2016F
Depreciation expense
2018F
31%
0.40
30%
0.00
2020F
Gross margin (r.h.s)
10%
0%
2013
2015F
2017F
2019F
Assets turnover
Financial leverage
Net margin (r.h.s)
ROE dupont (r.h.s)

Source: VNM; FPTS-F
www.fpts.com.vn
HSX: VNM
billion VND
Forecasted revenue and net income, 2013-2020F

80,000
25%
70,000
20%
60,000
15%
50,000
40,000
10%
30,000
71,232
63,911
57,422
51,663
46,503
41,839
36,232
10,000
5%
30,949
20,000
0%
-5%
2013
Revenue
2014E
2015F
Net income
2016F
2017F
% revenue growth (r.h.s)
2018F
2019F
2020F
% net income growth (r.h.s)

Source: VNM; FPTS-F
Investment risk
Food safety risk: Dairy products are very sensitive to food
hygiene and safety issues. The scandal of Fonterra, one of the
biggest infant formula exporters from New Zealand to Vietnam in
August, 2013 is a typical example of the risk that dairy processors
are exposed to.
Competitive risk: The Vietnam dairy industry is a composition of
many local manufacturers and multinational brands; it is however
overshadowed by brand recognition and dominated by a few key
players. The competition is expected to keep increasing the
coming years.
Exposure to commodity price volatility and currency risk: The
Vietnam largest milk processor still depends on imported
ingredients as milk powder (SMP, WMP) accounts for up to 3740% of VNMs production cost. As a large client, VNM however
could not only purchase goods directly from its suppliers without
taking part in price auctions but also receive discounts.
Political risk: Though VNM could export its products to many
markets; its export division heavily depends on Iraq and
Cambodia. Then VNMs export revenue is greatly exposed to
systematics risks of these two markets..
Policy risk: Dairy product, especially infant and baby formula is
under Government control on price, label and marketing activities.
www.fpts.com.vn
HSX: VNM
Appendix 1: Historical and forecasted financial figures

Income statement
Revenue
- Cost of goods sold
2012
2013
2014F
2015F
26,561,574 30,948,602 36,232,449 41,839,073
2012
2013
2014F
2015F
Assets
+ Cash & equivalent
1,252,120 2.745.645 3.296.236 5.758.462
9,076,744 11,182,808 12,237,602 13,708,233
+ Short-term investments
3,909,276 4.167.318 4.170.318 4.170.318
2,345,789 3,276,432 4,261,568 4,833,235

525,197
611,256
715,615
784,510
+ Accounts receivable
+ Inventories
2,246,363 2.728.421 2.766.316 3.194.377

3,472,845 3.217.483 4.325.565 5.071.162
Operating profit
- Financial gains/(losses)
6,205,758 7,295,120 7,260,419 8,090,487

428,199
416,661
390,240
429,944
+ Other current assets

Total current assets
230,006
160.063
142.173
142.173
11,110,610 13.018.930 14.700.608 18.336.493
- Net non-op gains

EBIT
267,164
389,877
458,316
502,845
6,933,800 8,010,360 8,055,445 8,978,747
Gross profit
- Sales & marketing
- General & admin
- Interest expense
EBT
- Income tax expense
Profit after tax
- Minority interests
17,484,830 19,765,794 23,994,847 28,130,840
Balance sheet
4,131
104
46,164
6,222
6,929,669 8,010,256 8,009,281 8,972,526

1,110,213 1,476,150 1,601,856 1,794,505
5,819,456 6,534,106 6,407,425 7,178,020
0
26
16,000
73,284
Net Income to common
5,819,456 6,534,080 6,391,425 7,104,737
EPS (VND/share)
EBITDA
6,982
7,840
6,391
7,104
7,421,235 8,721,457 9,120,084 10,333,600
Depreciation
Revenue growth
487,435
22.8%
711,097 1,064,639 1,354,853

16.5%
17.1%
15.5%
+ Gross fixed assets

- Accum. depreciation
+ Net fixed assets
+ Long-term investments
+ Other long-term assets
Total long-term assets
Total Assets
6,512,875 11.147.267 11.198.183 13.986.477

-2,289,432 -3.298.209 -4.342.457 -5.676.919
4,223,443 7.849.058 6.855.726 8.309.558
284,429
318.308
524.502
583.352
150,152
295.113
362.797
362.797
8,587,257 9.856.483 11.300.081 11.583.632
19,697,867 22.875.413 26.000.688 29.920.125
Liabilities & Equity

+ Accounts payable
+ Short-term borrowings
+ Bonus, welfare
Current liabilities
3,738,593 4.415.976 4.386.973 4.802.911

0
178.944
0
0
406,398
361.478
383.938
372.708
4,144,991 4.956.398 4.770.911 5.175.619
Operating profit growth
43.8%
17.6%
-0.5%
11.4%
EBIT growth
EPS growth
38.4%
-8.4%
15.5%
12.3%
0.6%
-18.5%
11.5%
11.2%
2012
2013
2014F
2015F
Total LT liabilities
Gross margin
34.2%
36.1%
33.8%
32.8%
Total Liabilities
Profit after tax margin

ROE DuPont
21.9%
41.6%
21.1%
39.6%
17.7%
33.5%
17.2%
31.9%
+ Total preferred equity

+ Addtl paid in capital
0
0
0
0
1,276,994 1.276.994 1.276.994 1.276.994
ROA DuPont
+ Share capital
8,335,054 8.334.489 10.001.026 10.001.026
Profitability ratios
+ Long-term debt
+ Other LT liabilities
0
146
184.143
96.102
281.472
90.035
170.549
90.035
146
280.245
371.507
260.584
4,145,137 5.236.643 5.142.419 5.436.203
33.0%
30.7%
26.2%
25.7%
* EBIT Margin
* Tax burden
26.1%
84.0%
25.9%
81.6%
22.2%
80.0%
21.5%
80.0%
* Interest burden
* Asset turnover
99.9%
1.51
100.0%
1.45
99.4%
1.48
99.9%
1.50
1.26
48.4%
1.29
42.5%
1.28
34.7%
1.24
35.6%
Efficiency ratios
2012
2013
2014F
2015F
Days inventory on hand

Days AR outstanding
30.3
70.4
29.3
61.8
27.9
65.8
27.9
65.8
Days AP outstanding
Cash conversion cycle
42.6
58.2
38.9
52.2
38.1
55.6
38.1
55.6
5.2
5.9
6.4
6.0
Liquidity/Solvency
2012
2013
2014F
2015F
Current ratio
Quick ratio
2.68
1.84
2.63
1.98
3.08
2.17
3.54
2.56
+ Disposal fixed assets

+ Capex
16,830
20.991
0
0
-3,133,999 -1.491.459 -2.252.542 -1.597.000
+ Change in investments
-1,856,493
Leverage ratio
ROIC
Inventory turnover
Cash ratio
+ Retained earnings
+ Minority interest
Total equity
Liabilities & equity
Cash flow
Beginning cash
Net Income
+ Depreciation
+ Other non-cash adjust.
+ Changes in non-cash
Cash from Operations
5,881,049 7.934.006 9.462.863 13.015.231

0
22.864
38.864
112.148
15,493,097 17.568.353 20.779.747 24.405.399
19,697,867 22.875.413 26.000.688 29.920.125
2012
2013
2014F
2015F
3,156,515 1.252.120 2.746.314 3.296.236

6,929,668 8.010.257 8.009.281 8.972.526
535,452
-378,221
786.433 1.064.639 1.354.853

-394.817
46.164
6.222
-1,792,332 -2.150.129 -2.801.581 -2.642.962

5,294,567 6.251.744 6.318.504 7.690.638
0.30
0.55
0.69
1.11
Debt-to-assets
Debt-to-capital
0.0%
0.0%
1.6%
2.0%
1.1%
1.3%
0.6%
0.7%
+ Other investments
Cash from Investing
0
0 -256.432
-41.404
-4,973,662 -1.589.790 -2.508.974 -1.638.404
Debt-to-equity
Short-term debt to equity
0.0%
0.0%
2.1%
0.9%
1.4%
0.0%
0.7%
0.0%
+ Dividends paid
+ Change in capital
-2,222,994 -3.167.235 -3.195.713 -3.552.368

-1,982
-525
16.178
73.284
0.0%
0.8%
1,678.48 77,022.69
1.1%
174.50
0.6%
1,443.14
Long-term debt to equity

Interest coverage ratio
+ Change in ST debt
+ Change in LT debt
-119.322
0
0
0
0
-178.944
97.329
0
-110.923
1.541
Valuation ratios
2012
2013
2014F
2015F
+ Other financing act.
Price-to-earnings (P/E)
15.2
13.5
16.6
14.9
Cash from Financing
-2,224,976 -3.167.760 -3.259.608 -3.590.007
5.7
9.9
5.0
12.9
5.1
12.1
4.4
0.0
Net changes in cash

Ending cash
-1,904,071 1.494.194
549.922 2.462.227
1,252,120 2.745.646 3.296.236 5.758.462
18,588
21,052
20,739
24,291
Price-to-book value (P/B)

EV / EBITDA
Book value per share
Units in VND million
Source: VNM; FPTS
www.fpts.com.vn
HSX: VNM
Appendix 2: Key macro drivers of dairy industry growth

Growth of urban in Vietnam
Vietnam total population and urban population ratio

120.0
70%
100.0
60%
1,000
50%
80.0
870
40%
60.0
30%
40.0
770
649
656
2000
2003
20%
20.0
10%
.0
0%
2000
2010
2020F
Population (million)
2030F 2040F 2050F

Urban population ratio (r.h.s)
2013
2015F
2025F
Source: World Urbanization Prospectives: The 2009 Revision Population Database; MoC
Real GDP growth and inflation
25%
20%
15%
10%
5%
0%
2005
2007
2009
Real GDP growth
2011
2013
2015F
CPI growth
2017F
Source: ADB, EY Rapid-Growth Markets Forecast July 2014

Per capita GDP* of Vietnam
3500
12%
3000
10%
2500
8%
2000
6%
1500
4%
2,900
2,682
2,461
2,267
2,094
1,908
1,749
1,517
1,273
1,160
500
700
1000
2%
0%
2005
2009
2010
2011
2012
2013 2014F 2015F 2016F 2017F 2018F
Per capita GDP (USD)

* Nominal GDP
www.fpts.com.vn
% growth
Source: GSO; EY Rapid-Growth Markets Forecast July 2014
HSX: VNM
Appendix 3: Vietnam dairy industry at a glance
1,600
800
1,400
700
1,200
800
600
Yield: 4.28 tonnes/cow
1,000
'000
'000 toones
National raw fresh milk production and number of cows, 2011-2013 and development plan to 2025
500
400
600
300
400
200
200
100
0
2001
2002
2003
2004
2005
2006
2007
Total fresh milk volume
2008
2009
2010
2011
2012
2013 2015F 2020F 2025F
Total number of dairy cow (r.h.s)
Source: MOIT; GSO

The Governments milk-sector development plan for the 2010-2025 period
Item
Unit
2015
2020
2025
Pasteurized/UHT milk
Thousand tones
760-780
Yogurt
Thousand tonnes
115-125
150-170
200-220
Million cannes
390-400
410-420
410-430
Thousand tonnes
75-85
110-120
160-170
Liquid milk equivalent
Million tones
1,8-1,9
2,6-2,7
3,3-3,5
Production value, 94s price
Trillion VND
11
15
19-20
Growth in production value
% per annum
7,5-8
6.5-7
5,5-6
Local raw fresh milk production
Million tones
650-670
Condensed milk
Powdered milk
Local supply/demand
Export
%
Million USD
1100-1150 1500-1550
990-1010 1400-1430
35
38-38,5
40-41
90-100
120-130
150-200
Total production volume
Thousand tones/year
779
1,145
1,533
Total production capacity
Thousand tones/year
974
1431
1916
Total incremental production capacity
Thousand tones/year
196
457
484
Source: MOIT
www.fpts.com.vn
HSX: VNM
Appendix 4: VNMs product portfolio

Liquid milk
Yogurt
Powdered milk
Condensed milk
Pasteurized milk: The pasteurisation process heats milk to 70 75 C for 15 seconds, inactivating or killing all
of the disease-producing microorganisms in milk while preserving most of the nutritional value of milk. This type
has a short shelf-life of about 10-15 days.
UHT milk: The UHT process ensures total microbial and enzyme inactivation, because the milk is heated up to
150 C for 5 seconds. Some nutritional loss can occur in UHT milk. This type has a long shelf-life of about 3-6
months depending on quality of raw milk input.
Reconstituted milkis the liquid milk obtained by adding water to skim milk powder or whole milk powder. This
type contains least nutritional value of milk among three types of liquid milk.
The pasteurized milk market size is relatively small and this type of product is only distributed to supermarkets and
convenience stores in big cities asits strick requirements on preserved temperature, transport condition and its
short shelf-life is quite different from Vietnamese milk consumption habbit. In fact, in a hot country such as
Vietnam, UHT is preferred due to high costs of refrigerated transportation and "inefficient cool cabinets". Thus we
believe that the growth potential of pasteurized milk is not clear at the moment.
www.fpts.com.vn
HSX: VNM
Appendix 5: Brands of other competitors

Category
Brand
Brands of other competitors
Ong Tho; Ngoi Sao Phuong

Nam
Dutch Lady, Hoan Hao, Truong Sinh (Friesland

Campina); Daily (Vixumilk)
Pasteurized milk
Vinamilk
Ba V, Love'inFarm (IDP); Dalat Milk (Dalat Milk);

Lothamilk (Long Thnh)
UHT milk
Vinamilk; Twin Cows

(Miraka)
Dutch Lady (Friesland Campina), TH True Milk (TH Milk),

Love'inFarm (IDP)
Reconstituted milk
ADM+; Flex; Fino Star
Dutch Lady (Friesland Campina); Milo (Nestle); Izzi

(Hanoi Milk)
Infant formula and

baby food
Dielac Alpha; Dielac Pedia;

Dielac Optimum
Similac Gain, Abbott Grow (Abbott); Friso, Gold

(Friesland Campina); Enfamil, Enfagrow (Mead
Johnson); Nan, Lactogen (Nestle)
Mom
Dielac Mama; Dielac

Optimum Mama
Similac Mom (Abbott); EnfaMama (Mead Johnson);

Anmum (Fonterra)
Senior and elderly
Sure Prevent; Canxi Pro
Ensure (Abbott); Anlene (Fonterra)
Spoon yogurt
Vinamilk; Probi; Star
Dutch Lady (Friesland Campina); TH True Yogurt (TH

Milk); Ba V, Love in Farm (IDP)
Drinking yogurt
Vinamilk; Susu
TH True Yogurt (TH Milk); Ba V (IDP)
Soy milk
Gold Soy
Vinasoy, Fami (Quang Ngai Sugar); Soya (Tan Hiep

Phat)
Juice
Vfresh
Juice (Tan Hiep Phat); TriO (Tribeco); Wonderfarm

(Wonderfarm)
Condensed milk
Liquid milk
Powdered milk
Yogurt
Ngun: FPTS
Appendix 6: VNMs main competitors

Name
Abbott
Mead Johnson
Geographic
MNC
MNC
Category
Comment
Powdered milk
USleading pharmaceuticals and health care

products company
Well-known in Vietnam with its powdered milk
brands
Leader in Vietnamese powdered milk market
Powdered milk
Major manufacturer of infant formula globally

Owner of such famous brands as Enfamil,
EnfaGrow
Friesland
CampinaVietnam
MNC
All
Established in 1995 as a JV of Vietnam and Royal

Friesland Campina (Nederland)
Ranked 2nd in Vietnamese milk market, compete
with VNM in every product category
Nestle
MNC
Powdered milk,
liquid milk
Manufacture and distribute many FMCGs in

Vietnam
Well-know in Vietnam with its brands: Milo, Nan,
www.fpts.com.vn
HSX: VNM
Lactogen
TH Milk
Local
UHT milk, yogurt
Strong financial support from Bac A bank, large

investment in milk plant, cow farm and selling
activity
100% self-supplied raw milk. No of cow: 32,000
cows, 2017 target: 137,000 cows
Target capacity: 500,000 tonnes per annum
IDP
Local
Pasteurized milk,
UHT milk, yogurt
Well-known in the North

On the move to expand its market to the South to
eliminate seasonality in the North
Powdered milk,
liquid milk
Focus on powdered milk niche market

A potential rival after the cooperative deal with
HAG
Target capacity: 500 million litres of liquid milk per
annum
Nutifood
Local
Source: FPTS
Appendix 7: List of plant

Plant
Location
Product type
Tax holiday
Truong Tho
Thu Duc, HCMC
Thong Nhat
Thu Duc, HCMC
Liquid milk, condensed mik, yogurt,

soy milk, juice, chesse, flan
Liquid milk, condensed milk, yogurt,
soy milk, flan
Dielac I
Bien Hoa
Powdered milk, tea, coffee
Tax free: 2003-2008

50% reduction: 2009-2013
Binh Dinh
Binh Dinh
Liquid milk, yogurt, soft drink, ice

cream
None
Nghe An
Cua Lo, Nghe An
Liquid milk, yogurt, juice
Sai Gon
District 2, HCMC
Liquid milk, yogurt, soy milk
Can Tho
Binh Thuy, Can Tho
Liquid milk, yogurt, ice cream
Tien Son
Tien Du, Bac Ninh
Vietnam Beverage
None
None
Ben Cat, Binh Duong
Liquid milk, yogurt, soft drink,

condensed milk
Beverage
None
Tax free: 2003-2005
50% reduction: 2006-2012
Tax free: 2003-2008
50% reduction: 2009-2013
Tax free: 2008-2010
50% reduction: 2011-2015
N/A
Vietnam Milk
My Phuoc, Binh Duong
Liquid milk
None
Dielac II
VSIP 1, Binh Duong
Powdered milk
None
Da Nang
Da Nang
Yogurt, liquid milk
N/A
Lam Son
Angkor Dairy
Product
Thanh Hoa
Yogurt, liquid milk
N/A
Cambodia
Liquid milk, yogurt, condensed milk
N/A
Source: VNM; FPTS
www.fpts.com.vn
HSX: VNM
Appendix 8: VNMs sphere of action
Source: VNM
www.fpts.com.vn
HSX: VNM
RECOMMEND AND EXPLANATION
This recommendation based on the difference between targeted value and market value of each stocks in order to provide
appropriate information for investors in 12-month investment period from recommend day.
The expected at 18% is estimated based on 12-month government bond rate in addition to market risk premium in
Vietnam.
Recommendation
Explanation
12 months period
Buy
If targeted price is higher than market price 18%
Add
If targeted price is higher than market price about 7%-18%
Monitor
If targeted price compared to market price is within -7%-7%
Reduce
If targeted price is lower than market price from -7% to -18%
Sell
If targeted price is lower than market price -18%
Disclaimer of Liability
All of information and analysis on this repost made by FPTS based on information sources that the company provides to
us reliable resources, available and legal. Except for information about FPTS, we are not guarantee about the
correctness or completeness of this information.
Investors who are using this report need to note that all of comments on this report only the subjective opinions of FPTS.
The investors have to take their own responsibility about their decision when using this report.
FPTS may base on all information in this report or others to make decision for us, but not have any claim on legal of
given information.
At making this analysis report time, FPTS and analyst do not hold any VNM stock.
All related information to others stocks or this stock can be seen on http://ezsearch.fpts.com.vn or provide
when having acquirement.
2010 FPT Securities
FPT Securities
Headquarter
2nd Floor - 71 Nguyen Chi Thanh,
Dong Da, Hanoi, VN
Tel: (84.4) 37737070 / 2717171
Fax: (84.4) 37739058
www.fpts.com.vn
FPT Securities
HCMC Branch
3nd Floor , Ben Thanh Times
Square Building, 136 138 Le Thi
Hong Gam Str, Dist 1, HCMC, Viet
Nam
Tel: (84.8) 6290 8686
Fax: (84.8) 6291 0607
FPT Securities
Da Nang Branch
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VNM Initial Report

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VNM Initial Report

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INITIAL REPORT

September, 28th 2014

FOOD AND BEVERAGE

VIETNAM DAIRY PRODUCTS J.S.C (HSX: VNM)

Historical price volatility 09/2012 09/2014

THE UNCHANGED LEADING POSITION

Sep. 28th 2014

52-week high (VND/share)

52-week low (VND/share)

Vietnam Dairy ProductsJSC

We conducted an initial report on Vietnam Dairy Products J.S.C

revenue and VND 537 billion in gross margin for 2014.

F&N dairy investment

Financial statistics and forecast for 2014F 2020F

Bloomberg FPTS <GO> | 2

VALUATION USING FCFF METHOD

Total PV of cash flow

(+) Cash & ST investments

Risk free rate*

(-) Short & Long-term debt

Market risk premium

2014 Cost of debt

Terminal growth rate

Total equity value

Marginal tax rate

12M target price

* 10-y Government bond yield

THAI BEVERAGE PCL

INNER MONGOLIA YILI INDUS-A

CHINA MENGNIU DAIRY CO

MEIJI HOLDINGS CO LTD

ALLIANCE GLOBAL GROUP INC

FRASER AND NEAVE LTD

FRASER & NEAVE HOLDINGS BHD

NESTLE (MALAYSIA) BERHAD

Source: FPTS; Bloomberg

Bloomberg FPTS <GO> | 3

Net income, 2009-2013

Lamson Dairy Ltd

Thong Nhat Thanh

Asia Saigon Food

The main role of the CEO

We believe that we should mention about the Chairwoman and

Bloomberg FPTS <GO> | 4

Total assets and resources, 2009-2013

Long term assets

*Regarding their management skills, we assess them by

Short term liabilities

Long term liabilities

A popular brandname from urban to rural

Top 10 manufacturers in rural, 2014

Source: Kantar Worldpanel

Bloomberg FPTS <GO> | 5

We believe that after nearly 40 years of operation VNM has been

The market leader in most of its categories* with

Gross margin by category, 2014E

Condensed Liquid milk Powdered

Condensed Liquid milk

Average selling price (VND/kg)

Average cost (VND/kg)

* The powdered milks ASP and gross margin was calculated

Source: VNM, FPTS-E

Bloomberg FPTS <GO> | 6

(1) Condensed milk the saturated market