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Hanoi University Student Research This report is published for educational purposes only by

students competing in the CFA Institute Research

Challenge.

Important disclosures appear at the back of this report

Vinamilk

Food & Beverage Industry(1)

VNM Daily Stock Price (VND thousand)

Source: Bloomberg

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90

100

110

120

130

140

150

Ticker: ● Bloomberg-VNM VN Recommendation: ●HOLD

Price: ●VND138,000 Price Target: ●VND144,000

Earnings/Share

(VND) Mar. Jun. Sep. Dec. Year P/E Ratio

2008A 882 1,110 956 594 3,563 11.6x

2009A 1,384 1,582 2,080 1,709 6,769 11.1x

2010A 2,325 2,650 3,220 2,070 10,251 8.3x

2011E 2,851 3,100 2,866 1,760(2) 10,563(3) 13.6x(4)

Highlights

We initiate a HOLD recommendation for Vinamilk stock with the year-end target price of

VND144,000, offering a 4.40% upside from the current stock price of VND138,000 on

November 11th, 2011.

Vinamilk is the leading player in the industry. Vinamilk is the largest dairy producer in Vietnam,

accounting for 39% of total market share with the most diversified product mix. Extensive

distribution channels nationwide of 220 distributors and over 140,000 outlets, a 20-year-

experienced and dedicated management team, and investment in infrastructure and nutrition

science, together with an effective enterprise resource planning system will maintain its top

position in the dairy industry.

High organic growth can be sustained in the future. Vinamilk’s revenue has grown fast from

26% to 49% for the last three years given large increase in milk consumption in the domestic

market. With persistent growth in disposable income of about 10% per year and rising awareness of

healthy benefits from using dairy products, domestic dairy consumption is forecasted to continue

expanding rapidly at the annual rate of 20-25% through this decade. In this favourable

circumstance, Vinamilk’s sales will likely increase by 27.6% per annum in the next five years.

Moreover, ROE is expected to remain at high level of about 40-42% from 2011 to 2015.

Vinamilk’s financial leverage is low with consistently strong cash position. Vinamilk is in a

healthy financial condition with strong balance sheet and solid operating cash flows (CFO). The

Company currently does not use long-term borrowings; thus, it has opportunities to enhance

shareholders’ wealth. In our valuation, a minimal level of Long-term Debt/ Equity ratio of 0.11 is

used as the target capital, which is an average level for dairy firms.

The year-end price target is VND144,000 as at November 11th, 2011. We evaluate stock price

using two techniques: discount methods and multiples analysis. To account for historical volatility

of Vinamilk share price and risks associated with two valuation approaches, we conclude with a

price range of 20%, from VND115,000 to VND173,000.

The main risks facing Vinamilk come from sanitation and quality control, dependence on

imported supply sources and intense competition in the domestic market. Strict quality

management can protect the Company from quality scandals. Besides, steady increase in domestic

supply and expansion in its own dairy farms in order to meet 40-50% of input demand by 2015 can

reduce Vinamilk’s exposure to volatility of imported input prices and exchange rates. However, in

2010, TH Milk initiated its plan to penetrate the liquid milk segment, and it is reckoned as the main

emerging threat to the Company in the future.

Date 11.11.2011

(1) To be temporarily called “dairy industry” throughout this report

(2), (3), (4) Estimated figures

(5) Trailing Twelve Months

Market Profile

52w Price Range (VND) 81,250-144,000

Avr. Daily Volume (10 days) 48,924

Beta 0.6

Dividend Yield (2010) (%) 3.49

Shares Outstanding (million) 370.72

Market Capitalization (VND billion)

51.174

Book Value per Share (VND)

31,128

Debt to Total Capital (TTM(5))

0.07

Return on Equity (TTM) (%) 45.4

Sources: VNDirect & Vinamilk

Key Financial Data (2011Q3)

Sales (VND billion) 15,980

Gross Margin (%) 31

EBITDA (VND billion) 3,598

Net income (VND billion) 3,176

Charter Capital (VND billion) 3,708

Sales growth (%) 30

ROE (%) 25.4

ROA (%) 32.6

Source: Vinamilk

Sources: Bloomberg & HANU estimates

CFA Institute Research Challenge 11.11.2011

2

Business Description Vinamilk was established in 1976 under the name Southern Coffee-Dairy Company. It was officially

converted into a joint stock company in 2003, when its name was changed to Vietnam Dairy Products Joint

Stock Company. In 2006, Vinamilk was listed on Hochiminh City Stock Exchange (HOSE), since then, its

major shareholder has been State Capital Investment Corporation (SCIC) with approximately 47.3% (2010)

of the Company’s ownership. Other major shareholders of Vinamilk include F&N Dairy Investment with

10.0% of number of shares and Dragon Capital Fund with 7.7% of ownership.

Vinamilk has the leading position in Vietnam dairy market with diversified product portfolio, in which

milk products are core contributors

Product categories:

Liquid milk: Liquid milk is Vinamilk’s biggest and key segment, which contributes 35% of total

sales. The segment grew 54% year over year (yoy) in 2010, when Vinamilk introduced pasteurized

milk, using centrifugal technology, the most advanced milk technology in the world, to remove

bacteria.

Condensed milk: Condensed milk is Vinamilk’s well known traditional products, including

“Longevity” and “Southern Star”. Although this category is on maturing stage, the Company

achieved a sales increased 27% yoy in 2010.

Powder milk: Powder milk is sold both domestically and overseas, amounting to 20% of total

revenue. Its sales in 2010 jumped 49% yoy.

Yoghurt: Yoghurt is a strong brand, having a high competitive advantage. The product line has

grown 59% yoy in 2010.

Other categories: Ice-creams, cheeses, cereal, and healthy beverages contribute to 5% of total

sales.

Market segments: domestic area is the key market

Domestic market: Vinamilk focuses on domestic market, the revenue from this market accounts

for about 90% of total sales. In 2010, domestic sales increased by 50% yoy. Milk consumption

concentrates in big cities, such as, Hanoi and Hochiminh City.

Export markets: export markets contribute only 10% of total revenue. This market’s growth rate is

40% yoy in 2010. Vinamilk’s main export partners include Iraq, Australia, Philippines, Cambodia

and the USA. In 2011, the Company expects exports turnover to reach USD130 million, which will

set a new record.

With its success in running business, Vinamilk has gained a lot of honorable awards. In 2010, Vinamilk

became the first and sole Vietnamese enterprise to be on the list of “Asia 200 Best under a Billion” or top-

performing 200 firms with sales of under USD1 billion (Forbes Asia Magazine). The Company has been

continuously elected to be on Top five private businesses of Vietnam for two consecutive years. Other prizes

that Vinamilk has won include Top ten high-quality Vietnamese goods 2010, Top ten brands in Vietnam

2010, and Top 50 biggest tax-paying enterprises 2010 in Vietnam.

Vinamilk’s vision is to be the fastest growing sustainable business in dairy and food industry by

building a long-term competitive advantage for its product portfolio across the scale. The Company is

implementing an ambitious plan in Cambodia to significantly enhance capacity by establishing the largest

cow farm in South East Asia. With this project, the number of milk cows is expected to increase to 100,000

by the year 2015. By 2017, Vinamilk expects to reach net sales of USD3 billion and to become one of the top

50 largest dairy products companies in the world.

Industry Overview and Competitive Positioning INDUSTRY ANALYSIS A Certain Growth Prospect of Demand

A strong growth of GDP and disposable income: With a level of GDP per capita that has more than tripled

in the past 10 years, Vietnam is considered one of the fastest-growing economies in the world; the

government projected GDP growth to range from 6.5% to 7.0% in the next five years. Along with this, the

growth in disposable income at CAGR of 9.89% in the period 2007-2011E (Appendix 1) suggests future

increase in consumption of nutritious foods and drinks.

Figure 1: Segment contribution in

Vinamilk’s revenue 2010

Source: Vinamilk

Figure 2: Revenue growth by

segments 2010 yoy

Source: Vinamilk

Figure 3: Vietnamese’s milk

consumption per capita (kg/year)

Sources: Dairy Vietnam & FAO

35%

25%

20%

15%

5%

liquid milk condensed milk

powder milk yoghurt

others

54%

27%

49%59%

0

5

10

15

20

25


3

A relatively low but gradually increasing dairy consumption per capita: At only 13.2 kg/year in 2009,

and 14.8 kg/year in 2010, Vietnam had a much lower level of milk consumption than other countries in the

region and in the world (Appendix 2). However, it has always been on an increasing trend with CAGR of

19.19% during 2000-2009 and is expected to reach 20kg/year by 2020 as a target in the Ministry of Trade-

issued Government Decision No. 22 (Figure 3). This fact also reflects an increased awareness of the health

benefits of dairy products among Vietnamese consumers.

Potential demand from rural consumers: Dairy consumption is now concentrated in big cities – Hanoi and

Ho Chi Minh City, where only 10% of the nation’s population accounts for 78% of dairy consumption in the

whole country. Therefore, the remaining rural population is a potentially substantial source of demand in the

near future for dairy producers. Recently, Vietnamese dairy producers have focused more on this potential

market. Vinamilk’s rural market share has increased more than 50% after one and a half year focusing on this

area. Its sales in rural area have grown by 70% in 2010 yoy. By the end of 2011, rural market will have

contributed up to 50% total revenue of Nutifood, another domestic dairy producer.

The above key drivers have resulted in the continuous growth of Vietnamese dairy product market sales. The

sales rose at CAGR of 11.8%, from USD665 million in 2005 to USD1,039 million in 2009 (Figure 4); and it

is forecasted to rise at about 20-25% from 2010 to 2015, relatively high in comparison with other countries in

the world.

Supply Chain of Milk

The high dependence on imported ingredients: Vietnam’s dairy industry has two sources of supply: local

supply from farmers (25-30% of the total production demand) and imports (the remaining 70-75%) which are

mainly from New Zealand, USA, and the Netherlands. Domestic producers are largely reliant on imported

inputs; this not only gives the foreign suppliers high bargaining power (especially for powder milk products)

but also creates a financial risk for processing companies due to the changes in exchange rates.

A steady increase in domestic milk production: In comparison with other countries in South East Asia,

Vietnam’s milk production is relatively low, about 39% of Indonesia’s total milk production and 24% of

Thailand’s in 2007. Both the number of cows and the milk productions (in tons), however, have increased;

specifically, the total cow number rose at CAGR of 13.74% from 2001 to 2009 and is planned to quadruple

by 2020; the milk production increased even faster at CAGR of 20% from nearly 65,000 tons in 2001 to

about 278,000 tons in 2009 and forecasted to reach 950,000 tons by 2020 (Figure 5). There are government

programs supporting the dairy industry in the long term with the objective of enhancing the national capacity

to meet 34% and 38% of domestic milk material demand by 2015 and 2020, respectively. This development

will help processors reduce the dependence on imported ingredients.

Price Trend

A “converse” trend against the world and a low customer’s bargaining power: According to the Ministry

of Industry and Trade, in October 2011, in spite of a relatively sharp decrease in powder milk’s imported

input price in the world, prices of milk products (powder milk and liquid milk) in Vietnam market still had an

upward trend and is now about 20-25% higher than other countries in the region. According to Vietnam

Chamber of Commerce and Industry, there have been 16 occasions of increase in milk price in the last three

years at the scale of 3-10% each time. It’s the necessity of milk and the lack of close substitutes that make

consumers hesitantly accept the high milk price. In another word, Vietnamese consumers have a low

bargaining power in determining milk price.

The chance for domestic powder milk products: Given that the CPI level jumped 23.02% in the first eight

months of 2011, in which food prices increased 34%, and that imported powder milk’s price is often two to

three times higher than domestic producers’, a proportion of consumers are switching to domestic brands,

such as, Vinamilk and Nutifood.

COMPETITIVE POSITIONING Vinamilk is the market leader in Vietnam dairy industry. The Company holds 39% of the market share

nationwide. Vinamilk’s total revenue and net profit have been increased significantly in 2006-2010, at CAGR

of 26.0% and 49.1%, respectively. In 2011, the revenue is estimated to be more than VND20,000 billion,

which is an increase of about 24% compared to the previous year.

Competitive Advantages

A market-leading company brand name: After 35 years since establishment, Vinamilk has become one of

the most well-known brands among milk consumers in Vietnam. The Company has always been selected by

consumers to be on the Top ten high-quality Vietnamese goods for many years.

Figure 4: Vietnamese dairy product

market sales (USD million)

Source: Dairy Vietnam

Figure 5: Vietnam dairy production

Sources: Dairy Vietnam & MARD

Figure 6: Vinamilk’s total revenue and

net profit

Source: Vinamilk

665 698877

980 1039

2005 2006 2007 2008 2009

0

150000

300000

450000

600000

750000

900000

1050000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

20

E

Total number of cows (heads)

Total milk productions (tons)

0

5

10

15

20

25

0

200

400

600

800

1000

2006 2007 2008 2009 2010

Total revenue (USD million)

Net profit (USD million)

Net profit margin (%)


4

A diverse product range: Vinamilk produces more than 200 products for domestic sales and for export. It

has a product mix ranging from dairy products to ice-creams, cheese, and healthy beverages. Vinamilk’s

goods serve a variety of customer groups, from children, teenagers, adults, pregnant women, to elder people.

An extensive sales and distribution network: Vinamilk’s sales and distribution network, which is one of

the largest networks in Vietnam, includes 220 distributors and over 140,000 outlets all over the country.

A reliable supply chain control: Vinamilk keeps very close relationships with suppliers to ensure high-

quality milk by locating factories near farms of milk cows. Currently, the Company is purchasing 50-60% of

domestic raw milk. Moreover, Vinamilk has developed its own sources of supply; its plan of reaching

100,000 cows by 2015 should help the Company control 40-50% of milk input by then.

Application of modern technology in milk processing and producing: The Company has signed

agreements with some leading companies in the world for R&D support. Vinamilk’s production lines are

equipped with modern technology from Germany, Italia, and Switzerland; it takes advantage of a system

called Enterprise Resource Planning (ERP) powered by Oracle to manage inventory and minimize spoilage

loss.

An experienced and dedicated management team: Most of Vinamilk’s Board members have been devoting

to the Company for more than 20 years.

Competitive Evaluation by Segment

Among Vinamilk’s portfolio, liquid milk, powder milk, condensed milk, and yoghurt are four core products.

Liquid Milk – Vinamilk – The Dominating Player (Figure 7)

In 2010, Vinamilk has the biggest market share of more than 44%. However, the firm’s competitors are

heavily investing in the segment. Dutch Lady, the second dominating producer in liquid milk segment in

Vietnam, has just invested USD40 million to build the most modern factory in South East Asia. This factory

includes a liquid milk and yoghurt plant and another powder milk plant. TH Milk, a new brand in liquid milk,

has invested heavily in dairy farms, processing factories and logistic channels with the intention to provide

customers with 100% fresh milk. We expect in the near future, TH Milk will be Vinamilk’s main rival in the

liquid milk market. Despite facing great competition from Dutch Lady, and recently, TH Milk, Vinamilk can

maintain the competitive advantages in this segment. What is more, Vinamilk 100% liquid milk meets

international standards, including ISO 9001:2008, and HCCP (Hazard Analysis and Critical Control Points).

It is expected that this segment will grow at CAGR of about 25% for the whole industry during the next five

years.

Powder Milk – The Fierce Competition from Imported Products (Figure 8)

The most intense competition takes place in this segment, which is predicted to grow at 30% in 2012-2016.

The powder milk market is currently dominated by foreign producers, which currently accounts for more than

65% of total market share. In 2010, Vinamilk held 20% of powder milk market share and its major

competitors are Abott, Mead Johnson, Dutch Lady and Nutifood. In order to gain more market share in this

segment, Vinamilk is focusing more on marketing and R&D activities. Until now, Vinamilk has successfully

applied nutritional development in many of its products, including Dielac Powder Milk (Dielac Alpha, Dielac

Mama, and Ridielac). Especially, in 2011, Vinamilk has signed an agreement with three leading European

partners, namely DSM Group and Lonza Group of Switzerland and the Denmark-based Hansen group, for a

program to study and apply nutrition science to the development of special nutritional products for

Vietnamese children. Moreover, this segment is supported by a national campaign “Vietnamese buys

Vietnamese goods”.

Condensed Milk – A Maturing Segment (Figure 9)

The consumption of condensed milk is mainly from low income rural areas. In general, Vinamilk and Dutch

Lady dominate this segment, with market share of 80% and 20%, respectively. The competition in this

segment is relatively low and this segment is starting to mature. We, however, forecast this division to grow

at CAGR of about 15% in 2012-2016 as a result of condensed milk’s sales growth in rural areas and in export

markets.

Yoghurt – The Threat from New Entrants (Figure 10)

This is a potentially high-growing segment with a few participants, including Bavi milk (IDP), Kido (Kinh

Do), Moc Chau and Yakult (from Japan). Among these, Vinamilk controls 90% market share of spoon

yoghurt and 26% market share of fermented drink yoghurt, with revenue growth of both product lines was

more than 50% per year in 2010. Currently, to compete with Vinamilk, Kido targets high-end customers and

children; and Yakult focuses on fermented drink yoghurt while starting to offer the market with spoon

Figure 7: Liquid milk market share

Sources: MIT & Vinamilk

Figure 8: Powder milk market share


Figure 9: Condensed milk market

share


Figure 10: Yoghurt market share

Spoon yoghurt Drink yoghurt


44%

56%

Vinamilk

others

20%

65%

5%

10%

Vinamilk

foreign

companiesNutifood

others

80%

20%

Vinamilk

Dutch Lady

90%

10%

Vinamilk others

26

%

74

%


5

yoghurt. Besides, attracted by the high growth of this market, about 30-40% in 2012-2016, some new

entrants, such as, Yogood, Casei and Betagen (from Thailand), have threatened the dominating positions of

existing players. Competition in this market is expected to intensify in the future; however, it is still at the

growing stage and opportunities are available for every company.

Investment Summary We initiate a HOLD recommendation for Vinamilk share with a year-end target price of VND144,000,

offering a 4.40% upside from the current stock price of VND138,000 on November 11th, 2011

Firstly, there is an increasing trend in stock price overtime. Despite a deep fall of nearly 40% in stock

price during 2008 due to the global financial crisis that negatively affected Vietnam stock market, the overall

trend of growth has been observed from 2009 to current 2011. In 2011 particularly, Vinamilk experienced a

dramatic rise of more than 40% in stock price from VND87,000 in January to VND127,000 in October;

moreover, Vinamilk stock markedly outperforms VN-index which has been declining throughout the year.

The key for Vinamilk success is increasing milk consumption in domestic market. Thanks to continuous

growth in disposable income of about 10% per annum and increasing awareness of healthy benefits from

using dairy products, dairy consumption per capita has been increasing at annual rate of about 10% during

2007-2011 period and is expected to rise at 20-25% through this decade.

Vinamilk has the ability to maintain its high organic growth. Firstly, being the leader in domestic dairy

industry, Vinamilk experienced high sales growth from 26-49% during the last three years and total sales are

forecasted to increase at an annual rate of 27.6% until 2015. Secondly, although EPS is expected to decrease

in 2011 and 2012 due to recent announcement of 50% stock dividend, it will increase by nearly 27% per

annum from the year 2013. Furthermore, Vinamilk is in a healthy financial condition with low level of

liquidity risk and steadily high amounts of CFO. In the future, we expect the Company will keep a minimal

Long-term Debt/Equity ratio of 0.11, which is an average level for dairy firms in Asia.

The price target of Vinamilk using discount methods and multiples analysis is VND144,000, a 4.40%

return from the stock price of VND138,000 on November 11th, 2011. Under discount methods, our

adjusted levered equity beta for target capital structure is 0.79; subsequently, the cost of equity capital and

WACC are 16.50% and 16.00%, respectively. The resulting prices using discount models range from

VND102,662 to VND151,923. On the other hand, in multiples analysis, six regional peers are selected, of

which four peers with similar capital structure are used to average multiples and the remaining two peers are

for contrasting purposes (Appendix 18). Accordingly, the price target using P/E, P/B, EV/EBITDA and

EV/EBIT multiples varies from VND64,527 to VND184,437. Thus, from these outputs, we conclude with a

median price of VND144,000 for Vinamilk share. Overall, we offer a HOLD recommendation.

Finally, some of the main risks that Vinamilk is confronting come from sanitation and quality control,

fluctuations in imported input prices, and intense competition in domestic market. First, ensuring

product quality through an effective ERP system and R&D in nutrition science will be critical to the strategic

management of Vinamilk. And, continuous investment in its own supply sources also helps the Company

reduce its current reliance on imported input and maintain its leading position. Last but not least, Vinamilk

will be facing strong competition in the future, especially from TH Milk.


6

Figure 11: Vinamilk’s share price and news flow in the last two years

Source: chart.vietstock.vn

Valuation Discount Methods

Dividend discount model (DDM)

DDM is our first choice as a method of valuation because Vinamilk is one of the companies that have

consistently committed to stable-payout-ratio dividend policy and no changes are expected regarding this

matter in the future.

The Company’s current market beta is 0.60 but due to long prediction period and the fact that 2011 is an

unusually volatile year for Vietnam’s economy we opt to use the adjusted beta of 0.73. After adjusting for

target capital structure with Long-term Debt/ Equity ratio of 0.11, our levered beta is 0.78. Assuming a risk-

free rate of 9.20% (10 year T-bond rate, adjusted for default risk) and market risk premium of 9.50% results

in 16.50% cost of equity capital with CAPM.

The key driver of this valuation is the high projected sales growth at CAGR of 27.6% between 2011 and

2015. Taking into consideration the recent figures of 25.5% to 48.6% in the last three years, this is a sound

number. Moreover, the Company’s ability to sustain high profit margin and dividend payout ratio will also

play a critical role. According to our estimation, Vinamilk is expected to maintain a gross margin and net

margin of approximately 32% and 19.7% respectively while distributing 45% of its earnings as dividends

each year.

Consequently, the outcome is an intrinsic value of VND102,662 with mid-year adjustment.

Owing to the nature of DDM, our price target is exposed to variation of assumptions consisting of (i) the

pressure from input cost and fierce competition which will dampen sales and reduce dividends, (ii) the

difficulty in balancing substantial capital expenditure and a high payout ratio, and (iii) the instability of the

economy which could significant undermine the correctness of our forecasts.

Discounted cash flow (DCF)

In addition, we also apply DCF method to our valuation. Like DDM, sales growth and profitability continue

to be the main catalysts and lead to improving CFO, despite increased investments in net working capital.

With regards to its expansion plan for the period 2011 - 2013, Vinamilk is expected to commit a significant

amount to capital expenditure as illustrated by our forecasts in the pro forma statement of cash flows

(Appendix 10). Historically, the source of long-term debt capital for the Company has been borrowings from

Table 1:

Assumptions for DDM

Equity Beta (unlevered) 0.73

Target D/E 0.11

Risk premium 9.50%

Effective tax rate 18.00%

Equity Beta (levered) 0.78

Risk-free rate 9.20%

Cost of equity capital 16.50%

Payout Ratio (2011 – 2015) 45.00%

Dividend growth rate (2016 – 2025)

Exponential decay

Dividend growth rate (After 2025) 4.50%

10 year T-bond yield 12.50%

CDS Spread 466bps

Liquidity factor in CDS Spread

30%

Sources: Bloomberg, Asian Bonds Online,

CMA, & HANU estimates

Table 2:

Assumptions for FCFF


Cost of debt capital 14.50%

Target D/E 0.11

Effective tax rate 18.00%

WACC 16.00%

FCFF growth rate (2016 – 2025)

Exponential decay

FCFF growth rate (after 2025) 4.50%


Vinamilk starts operating its first oversea project - Miraka

Powder Factory, in which the Company invested NZD90

million

Vinamilk raises the

collecting price of

fresh milk material

by VND800/kg

Vinamilk continues to be listed in top top five private

businesses of Vietnam 2011, exports is at the highest level

since establishment, over USD130 million in 2011

(estimated)

Inflation rate increases,

in November 2010,

inflation rate increases

2%

At the end of 2009, Vietnam’s

public debt is USD28 billion,

which is double year 2005’s figure,

Government’s monetary is more

tightened; State Bank of Vietnam

requires commercial banks to stop

offering securities loans

Vinamilk makes a

profit of more than

VND1,000 billion in

the first quarter

Inflation rate of

the first four

months 2011 is

at high level, up

to 10%,

Government

intends to

restrain

inflation rather

than to set

priority for

growing factors

Vinamilk

declares to pay

stock dividends

of about 180

million stocks at

the rate of 1:2


7

domestic banks at a margin above average 1-year term deposit rates. Therefore, we estimate the cost of debt

for Vinamilk to be 14.50% in the foreseeable future.

The results from DCF valuation are VND151,923 for FCFF and VND144,068 for FCFE . Due to their similar

nature, DCF inherits both the strengths and weaknesses of DDM. On the one hand, it sheds light on the true

intrinsic value of the firm’s equity. On the other hand, it’s highly sensitive to changes in assumptions (D/E

ratio, Effective Tax Rate, Cost of equity, Cost of debt, etc.).

To remedy part of the problems outline above and account for the historical share price volatility (about

20%), sensitivity analyses are conducted to determine share price at various level of constant growth rate and

cost of equity for DDM and both versions of DCF (Appendix 15, 16, and 17).

Multiples analysis

Additionally, price and enterprise value multiples are used to offer an alternative perspective on Vinamilk.

Six regional players are selected, of which the first four are used to average multiples Vinamilk and the other

two are only for comparison and contrast purposes due to substantial differences in capital structure

(Appendix 18).

The price multiples give conflicting signals. P/B appears to demonstrate the opposite at higher than average

level, whereas P/E indicates a relatively cheap price at lower than average level. Subsequently, two markedly

different estimates of Vinamilk share price are computed, VND184,437 using P/E and VND64,527 using P/B

with the median measures acting as proxies for industry benchmarks. Given the outstanding performance of

Vinamilk as demonstrated by its ROA and ROE ratios in 2010, respectively 2.9x and 2.3x industry averages,

our “Discount methods” price targets of VND102,662 to VND151,923 appear to be reasonable, lying

between the two extremes above. Moreover, in the future, we expect Vinamilk to continue to acquire fast

growth rates in sales and maintain high margins, which further enhances the stock price upside potential.

The analyses of enterprise value multiples further cement this argument. Despite having twice as high

EBITDA Margin in comparison to the industry, its EV/ EBIT are just nearly two thirds of the respective

benchmark. Conversely, EV/EBITDA Margin was higher than industry number. Using medians for industry

figures and book value as estimates of market value for Debt and Cash produces a range of VND97,255 to

VND175,647 for Vinamilk share price.

The robustness of this model, however, is somewhat hindered by the fact that Vietnam’s dairy industry has

exhibited some unique characteristics compared to others in Asia, in both milk consumption and product

prices as highlighted in our industry analysis. The differences in competitive positioning of each company

also raise questions on the reliability of comparison. For instance, the China dairy market has three major

companies, namely Bright Food Group, China Mengniu Dairy Co Ltd and Yili Group, totaling to 38.80% of

market share in 2009, which was roughly Vinamilk’s share in Vietnam market in the same year.

The verdict

Ultimately, to synthesize the results of the two modes, we use the median of the produced numbers and arrive

at a year-end target price of VND144,000. This is a 4.40% return from the share price on November 11th,

2011 (VND138,000). Taking into account all the uncertainties with regards to the two valuation models and

historical volatility of Vinamilk share price, we propose a price range of 20%, which is equivalent to an upper

bound of VND173,000 and a lower bound of VND115,000. As a result, we offer a HOLD recommendation.

Financial Analysis Vinamilk’s financial condition has remained consistently healthy.

Earnings

A strong growth of sales is driven by increasing demand volume (Figure 12)

In 2010, Vinamilk recorded very positive sales revenue of VND16,081 billion, 11% more than the

Company’s target and about 50% jump compared to 2009 figure. The selling prices increased twice with the

total percentage of 7-9%, thus, the growth rate of sales revenue mainly came from increasing demand

volume. In 2011, the Company’s planned sales revenue is VND20,560 billion; after the third quarter, it has

earned approximately VND15,980 billion. Therefore, it is really possible for the Company to achieve its 2011

target or even more than that figure. According to Vinamilk, it has planned to reach approximately

VND63,000 billion (USD3 billion) of net sales, which is equal to about VND64,300 billion of sales revenue

in 2017. This goal is also reasonably within the Vinamilk’s ability because of high sales growth rate along

with the expansion of production capacity.

Table 3:

Assumptions for FCFE


FCFE growth rate (2016 – 2025)

Exponential decay

FCFE growth rate (after 2025) 4.50%


Table 4:

Method Valuation

DDM VND102,662

FCFF VND151,923

FCFE VND144,068

Source: HANU estimates

Table 5:

Multiples Vinamilk Industry

P/E 13.60x 17.46x

P/B 4.73x 2.12x

EV/ EBITDA 10.70x 8.85x

EV/ EBIT 11.69x 16.80x

EBITDA Margin 23.07% 10.23%


Table 6:

Multiples Valuation

P/E VND184,437

P/B VND64,527

EV/ EBITDA VND97,255

EV/ EBIT VND175,647

Source: HANU estimates

Figure 12: Sales revenue (VNDbillion)

Sources: Vinamilk & HANU estimates

0

10,000

20,000

30,000

40,000

50,000

60,000


8

The overall increasing trend of EBITDA margin and EPS

EBITDA margin has increased in recent years as a result of the improving gross profit margin, which was

driven by the economies of scale and ERP application. In 2010, EBITDA margin was about 23% and this

figure was much better than those of the major peers in Asia region with the average EBITDA margin of

approximately 12.14% (Appendix 18). In our forecast, EBITDA margin will be stable at about 23% in the

next five years (Figure 13).

In addition, EPS enjoyed a remarkable growth from VND3,653 (2008) to VND10,251 (2010). In 2011, the

Company issued 5% additional stock and 50% stock dividend, which makes EPS decrease in 2011 and 2012.

However, EPS is forecasted to grow at the rate of 27% from 2013 onwards (Appendix 5).

High level of ROE (Figure 14)

In 2010, ROE was at the level of 50%, which was much better than the figures of other peers in dairy industry

(Appendix 18). In the next five years, even though ROE is predicted to decrease, it still stays at high level of

about 40-42%. In the following parts, ROE will be broken down for deeper analysis.

Consistently high ROA: ROA has always been above 30% for the last two years and is expected

to remain its stable level of 30% to the year 2015. This is mainly due to high net income and high

profit margin for ROA.

Capital structure leverage: Vinamilk has mainly use common equity to finance assets. Its

consistently high CFO has allowed the Company to keep its debt at a quite low level. With this

capital structure, Vinamilk would not be seriously affected by the current difficult economic

environment and the high borrowing interest rate. However, Vinamilk can boost ROE by taking

the advantage of financial leverage. In the upcoming years, we expect Vinamilk to use more

long-term debt to finance its fixed asset investment in some large projects such as Vietnam Milk

factory, Dielac two Plant, upgrading investment and cow farms. In our forecast, Long-term Debt/

Equity ratio is at the level of about 0.11 when non-interest bearing debts are excluded.

Cash Flow

Strong cash flow supporting the capacity expansion

Cash flow from operation had an increasing trend over the period of 2007 and 2009 as operating income grew

considerably. In 2010, CFO decreased due to the increase of nearly 80% in inventory compared to the

previous year. However, this increase in inventory level was mainly for the purpose of purchasing the raw

materials as a defensive action against the volatility of the input price.

Despite the decrease in CFO in 2010, Vinamilk still produced enough operating cash flow to cover increasing

capital expenditure and dividend payment. For instance, although investment in fixed asset in 2010 increased

significantly by 119% yoy, it was just only 63% of CFO. In the future, CFO is predicted to continue to

sustain CFI.

Balance Sheet & Financing

Low liquidity risk: Liquidity position has been consistently strong from 2006 to 2010; and, the current ratio

and quick ratio will be constant at level of 2.2 and 1.2 respectively in the next five years. Besides,

CFO/Current Liabilities fluctuated from year to year and reduced significantly from 1.8 in 2009 to 0.7 in

2010 because of the 80% increase in inventory and more than 50% increase in current liabilities. Overall,

these ratios still indicate low liquidity risk (Figure 15).

Improving efficiency ratios: With the implementation of ERP system into operation in 2008, the inventory

has been more tightly controlled and results in relatively high inventory turnover ratio. Furthermore, the

receivable collection ability has been enhanced significantly. Receivable Turnover increased from 15.86 to

28.62 during 2008-2010. Therefore, Day Receivable Outstanding reduced remarkably from 23 days to 13

days. In terms of Day Payable Outstanding, it stayed at high level compared to the peer’s figures, which

indicates that Vinamilk is taking the advantage of suppliers’ credit policy as well as having good and long-

term relationship with them (Figure 16).

Corporate Governance and Corporate Social Responsibilities Vinamilk has regarded corporate governance as one of the key factors for its sustainable growth.

According to the Company’s Annual Report 2010, the Board of management emphasizes five core values:

Integrity, Respect, Fairness, Compliance, and Ethics. Board members are provided with adequate and timely

information related to the Company on on-going basis, which enables them to carry out their duties. A formal

assessment on the performance efficiency of each Board member is carried out on an ongoing basis by

Vinamilk. The salary structure was developed and implemented by Vinamilk with the assistance of TalentNet

Consulting Company, a leading global provider of HR consulting, outsourcing, and investment services. In

Figure 13: Vinamilk’s EBITDA

margin

Sources: Vinamilk & .HANU estimates

Figure 14: Vinamilk’s ROA and ROE


Figure 15: Vinamilk’s liquidity ratios


Figure 16: Vinamilk’s efficiency ratios


11% 12%

17%

24% 23% 23%

0%

10%

20%

30%

40%

50%

60%

ROA ROE

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Current ratio Quick ratio

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Inventory turnover

Account receivable turnover

Account payable turover


9

2010, advised by Ernst & Young Vietnam, the Company improved its risk management system in all

activities, goals, and important programs to bring more value to shareholders and gain the trust of customers.

Besides, Vinamilk continues to communicate effectively with investors through its annual shareholders’

meetings and investor relations function.

Vinamilk has consistently engaged in corporate social responsibilities (CSR). The Company has

cooperated with the Ministry of Education and Training to set up a scholarship foundation named “Vinamilk

– Nurturing Vietnamese Young Talents”, and co-founded Vietnam Development Milk Fund with Vietnam

Children Support Fund, among other programs (Appendix 7).

Investment Risks Operational Risks

Food safety and nutrition control

Dairy products can directly affect consumers’ health, especially children’s. The drug residue (following

treatment of cows), and the toxic substances like melamine and other toxins produced by bacteria might be

harmful to consumers. Therefore, ensuring high product quality is crucial for the strategic management of

every producer in this intensely competitive environment, and safety control is required in every stage of

production from acquiring of raw material, storing, processing and packaging to distributing and retailing.

Hanoimilk Joint Stock Company, for instance, fell victim to the “Melamine Storm” originated from China.

The Company, then, suffered a financial loss of VND40 billion and even more severe loss of consumers’

belief although the Ministry of Health did make a formal apology for its misleading melamine testing result

of Hanoimilk products afterwards. Despite the fact that Vinamilk was not affected by the melamine scandal,

the firm will have to pay a great deal of attention to prevent even the smallest mistakes in quality control,

which can significantly damage the Company’s long-built reputation.

Volatility in price of imported raw milk (Figure 17)

Milk powder, which accounts for about 60% of cost of goods sold, is a major raw material for the Company.

Currently, this input is being imported mainly from New Zealand, America and Netherlands. Thus, Vinamilk,

along with other dairy processors, has to cope with the fluctuation of the imported materials’ prices. The

Company has been trying to develop its own supply sources and to significantly increase the number of milk

cows and farms by 2015. This should reduce the level of dependence on imported ingredients; therefore,

reduce the risk exposed to changes in input prices.

Fierce competition risk

As mentioned earlier in the industry overview section, the competition in dairy industry is getting more

intense. The forecasted profitability of Vietnamese market will undoubtedly be a motive for multinational

dairy companies to enter, especially in powder milk and yoghurt segments, where customers’ demands are

growing and profit margins are larger at about 30-40%. In the market of liquid milk, although Vinamilk is

now the dominant player, it is getting riskier with the aggressive strategic moves from Dutch Lady and the

entrance and popularization of TH Milk. We anticipate in the near future, TH Milk will be Vinamilk’s main

rival in the liquid milk market.

Financial Risks

Foreign exchange risk

Because Vinamilk still relies on imported inputs, the depreciation of VND should reduce the Company’s

profit margin. Since the beginning of 2010, depreciation pressure on VND has increased. By November 2011,

VND/USD has declined 12.4% compared to January 2010’s figure, and it is expected to depreciate further

(Appendix 6). In order to manage this risk, Vinamilk has held sufficient foreign currency to hedge the foreign

exchange risk from imported materials and other international projects that require foreign currency

payments. At the end of the third quarter 2011, the Company accumulates USD17 million.

Strategic Risk

In recent years, Vinamilk has unsuccessfully expanded its operation to other nondairy markets, such as, beer

and instant coffee, which have never been their strengths. By March 2009, Vinamilk had sold 50% ownership

of its beer joint-venture back to SABMiller Asia after only two years of operation. In 2010, five years after

establishment, it had to sell Café Moment to Trung Nguyen Coffee. Currently, Vinamilk is investing in its

new Vfresh soft drinks and a lot of uncertainty about this product line’s future is waiting ahead.

Figure 17: Raw milk price volatility in

2010 (USD/ton)

Source: USDA

2000

2500

3000

3500

4000

4500

Ja

n

Feb

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Sep

Oct

Nov

Dec

Australia skim milk

Australia fat milk

Europe skim milk

Europe fat milk


10

Appendices

Appendix 1 Vietnamese’s annual disposable income (USD million) - Source: Euromonitor International

Appendix 2

Milk consumption per capita in 2009 (kg/ year) - Source: APHCA

Appendix 3.

Retail price for liquid milk 2010 (USD per litre) – Sources: Euromonitor & Jaccar Equity Research

0

20000

40000

60000

80000

2007 2008 2009 2010 2011

13.229

9262 66

176

96

1.2

0.6

1.4

1.7

1.5

1.1

1.2

1.6

0.8

1.1

0.8

1.0 1.0

1.1

1.0

1.2

0.9

1.3

0.9

1.1

1.2

1.3

1.2

1.4

0.5

1.0

0.8

Ch

ina

Ind

ia

Ind

on

esia

Sou

th K

ore

a

Vie

tnam

Avg

Vie

tnam

VN

M

Au

stra

lia

New

Zea

lan

d

Cze

ch

Hu

ngar

ia

Pola

nd

Ru

ssia

Net

her

lan

d

Ger

man

y

Sw

end

en

UK

Tu

rkey

Sw

itze

rlan

d

Port

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Au

stri

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Bel

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and

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Can

ada

Mex

ico

Ch

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Bra

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11

Appendix 4

Vinamilk’s ratios – Sources: Vinamilk & HANU estimates

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

EBITDA Margin 17.38% 24.25% 23.09% 22.63% 22.66% 22.69% 22.71% 22.73%

EPS 3,563 6,769 10,251 10,563 9,214 11,769 14,941 18,872

ROA 22.39% 32.95% 37.62% 30.42% 29.27% 29.70% 29.86% 29.71%

ROE 27.85% 42.40% 50.03% 40.94% 39.85% 41.07% 41.84% 42.26%

Current Ratio 2.98 2.92 2.24 2.35 2.42 2.46 2.37 2.24

Quick Ratio 1.20 1.92 1.18 1.26 1.31 1.30 1.27 1.20

CFO to Current Liabilities 1.27 1.82 0.87 0.62 1.2 1.19 1.2 1.12

Account Receivables Turnover 15.86 20.34 28.62 25.29 22.5 22.44 22.38 22.32

Inventory Turnover 3.23 4.33 5.75 4.93 4.78 4.77 4.75 4.74

Accounts Payable Turnover 8.87 8.39 11.64 11.5 11.19 11.21 11.18 11.16

Long-term Debt/ Equity (6) 0.00 0.00 0.00 0.05 0.11 0.13 0.14 0.13

Appendix 5

Vinamilk’s EPS (VND) - Sources: Vinamilk & HANU estimates

Appendix 6

VND per USD from January 2010 to November 2011 - Source: XE

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

(6)Excluding non-interest bearing debt


12

Appendix 7

Vinamilk’s corporate social responsibilities – Source: Annual report 2010

Vinamilk scholarship foundation “Nurturing Vietnamese Young Talents”

From school year 2003-2004, Vinamilk cooperated with the Ministry of Education and Training to set up a scholarship foundation called

“Vinamilk – Nurturing Vietnamese Young Talents”. Thanks to this foundation, the primary school students nationwide have been

supported with more than 29,000 scholarships valued at VND14 billion. In 2011, there are expected to be 6,000 scholarships to be granted.

Vietnam Development Milk Foundation

The foundation started with one million glasses of milk for poor children. The fund’s purpose is to help children with disadvantaged family

situation, malnutrition and disability. At the moment, Vinamilk is targeting eight million glasses of milk (or VND30 billion) to daily offer

to disadvantaged children, primary students and pre-school students at 63 provinces.

Some other social activities that Vinamilk have participated

Vu A Dinh Scholarship Foundation: supporting students living in mountainous areas and minority students

Honoring Vietnamese Heroine Mothers: paying monthly allowance to the heroine mothers

Hochiminh City Poor Patient Support Association: granting VND500 million in the heart surgery program for children with defective

hearts

Million Hearts towards the Islands: supporting people and soldiers in Truong Sa Islands

Blood Donate Patient Support

Appendix 8

Balance sheet (VND million) – Sources: Vinamilk & HANU estimates

Items 2009 2010 2011E 2012E 2013E 2014E 2015E

Current Assets 5,069,158 5,919,803 8,282,289 10,732,936 13,396,039 17,187,652 21,813,956

Cash and Cash Equivalents 426,135 263,472 471,496 607,544 764,213 974,813 1,233,314

Short-term investments 2,314,254 2,092,260 2,646,922 3,493,551 4,163,930 5,462,386 7,002,985

Account Receivables 589,272 770,766 1,322,705 1,700,384 2,171,904 2,757,383 3,482,703

Inventories 1,311,765 2,351,354 3,246,756 4,173,818 5,331,227 6,768,363 8,548,757

Other Current Assets 427,733 441,950 594,408 757,636 964,763 1,224,705 1,546,195

Long-term Assets 3,412,878 4,853,230 7,434,319 9,518,598 12,077,794 15,306,181 19,296,578

Fixed Assets 3,217,846 4,376,472 5,651,844 7,301,717 9,361,533 11,919,173 15,087,702

Accumulated Depreciation (1,343,023) (1,613,183) (1,988,762) (2,480,456) (3,117,116) (3,933,778) (4,973,435)

Construction in progress 650,140 665,282 1,100,157 1,417,602 1,783,163 2,274,563 2,877,732

Long-term investments 629,968 1,242,616 1,456,201 1,812,487 2,221,120 2,771,765 3,446,711

Other long-term assets 249,124 182,018 184,442 232,789 290,909 365,806 458,184

Total Assets 8,482,036 10,773,032 15,716,617 20,251,542 25,473,842 32,493,841 41,110,542

Current liabilities 1,734,871 2,645,012 3,525,614 4,430,054 5,449,596 7,242,302 9,751,006

Accounts Payable 789,867 1,089,417 1,472,414 1,870,320 2,386,285 3,026,320 3,818,899

Accrued expenses 208,131 264,151 377,197 486,035 611,370 779,850 986,651

Short-term borrowings 13,283 567,960 839,243 981,677 1,052,769 1,649,817 2,681,758

Bonus and welfare fund 182,265 259,395 361,875 480,830 624,398 800,391 1,017,391

Other payables 541,325 464,089 474,883 611,189 774,770 985,921 1,246,304

Long-term liabilities 256,325 163,583 683,101 1,614,555 2,361,460 3,195,031 3,748,266

Long-term borrowings 12,454 - 537,672 1,558,989 2,303,671 3,134,931 3,685,762

Other long-term liabilities 243,871 163,583 145,429 55,566 57,789 60,100 62,504

Total Liabilities 1,991,196 2,808,596 4,208,715 6,044,608 7,811,056 10,437,333 13,499,272

Common stock 3,512,653 3,530,721 5,562,151 5,562,151 5,562,151 5,562,151 5,562,151

Share premium - - - - - - -

Treasury Stock (154) (669) (1,326) (1,326) (1,326) (1,326) (1,326)

Retained Earnings 892,345 1,909,022 2,820,012 5,006,683 7,808,095 11,370,960 15,876,310

Reserve funds 2,050,631 2,525,363 3,127,065 3,639,426 4,293,866 5,124,723 6,174,135

Minority interests 35,365 - - - - - -

Shareholder’s Equity 6,490,840 7,964,437 11,507,669 14,206,701 17,662,554 22,056,276 27,611,038

Total Liabilities &

Shareholders’ Equity 8,482,036 10,773,032 15,716,617 20,251,542 25,473,842 32,493,841 41,110,542


13

Appendix 9

Income statement (VND million) – Sources: Vinamilk & HANU estimates

Items 2009 2010 2011E 2012E 2013E 2014E 2015E

Sales 10,820,142 16,081,466 20,636,365 26,528,770 33,885,256 43,019,684 54,335,859

Less deductions (206,371) (328,600) (433,364) (557,104) (711,590) (903,413) (1,141,053)

Net sales 10,613,771 15,752,866 20,203,001 25,971,666 33,173,665 42,116,270 53,194,806

COGS (6,735,062) (10,579,208) (13,826,364) (17,774,276) (22,703,121) (28,823,188) (36,405,026)

Gross profit 3,878,709 5,173,658 6,376,637 8,197,390 10,470,544 13,293,082 16,789,780

Selling Expenses (1,245,476) (1,438,186) (1,754,091) (2,254,945) (2,880,247) (3,656,673) (4,618,548)

General and Admin Expenses (292,942) (388,147) (454,000) (583,633) (745,476) (946,433) (1,195,389)

Operating Profit 2,340,291 3,347,325 4,168,546 5,358,812 6,844,822 8,689,976 10,975,844

Interest and Dividend Income 134,759 275,493 456,150 576,840 717,511 898,057 1,148,725

Interest Expense (6,253) (6,172) (53,053) (170,217) (300,387) (421,324) (537,816)

Net other financial income 126,544 31,930 (93,551) (8,692) 91,155 168,562 204,129

Gain on disposal of assets 1,251 334,208 27,839 36,642 47,458 60,689 76,868

Net other income 134,708 274,578 405,524 520,463 664,133 842,724 1,064,185

Share of associate’s result - (235) (72,227) (92,851) (118,598) (150,569) (190,176)

Earnings before tax 2,731,300 4,257,128 4,839,227 6,220,997 7,946,092 10,088,116 12,741,759

Business income tax (361,536) (645,059) (871,061) (1,119,779) (1,430,297) (1,815,861) (2,293,517)

Deferred tax 6,246 9,344 17,421 22,396 28,606 36,317 45,870

Minority interest (375) 693 - - - - -

Net profit after tax 2,375,693 3,616,186 3,985,588 5,123,613 6,544,402 8,308,572 10,494,113

Shares outstanding 351 353 377 556 556 556 556

EPS 6,769 10,251 10,563 9,214 11,769 14,941 18,872

Appendix 10

Statement of cash flow (VND million) – Sources: Vinamilk & HANU estimates

Items 2009 2010 2011E 2012E 2013E 2014E 2015E

Net Income 2,375,693 3,616,186 3,985,588 5,123,613 6,544,402 8,308,572 10,494,113

Depreciation and Amortization 234,078 290,131 402,692 526,940 681,722 874,324 1,112,867

Provisions/ (Reversals of provision) 62,020 (3,795) 51,765 64,700 65,303 99,785 120,875

Losses/ (Gains) from non-operating

activities (160,382) (376,241) (23,751) (29,680) (37,256) (46,860) (58,971)

Cash flow before changes in

working capital 2,511,409 3,526,281 4,416,294 5,685,573 7,254,171 9,235,821 11,668,884

Decrease/ (increase) in Inventories 453,952 (1,110,497) (897,775) (928,920) (1,159,728) (1,440,016) (1,783,962)

Decrease/ (increase) in Receivables (133,718) (322,146) (640,271) (497,428) (626,782) (778,076) (963,819)

Decrease/ (increase) in Prepayments 10,276 (14,275) (18,230) (44,134) (55,100) (68,417) (84,758)

Increase/ (decrease) in Payables 454,584 455,517 732,473 788,815 985,298 1,243,524 1,539,766

Net other operating cash flows (130,917) (243,466) (1,414,212) 297,196 85,939 533,813 565,687

Cash flow from operation 3,165,586 2,291,414 2,178,279 5,301,102 6,483,798 8,726,649 10,941,798

Capital Expenditure (648,070) (742,272) (1,761,957) (2,029,895) (2,502,604) (3,145,702) (3,893,767)

Net investments in other entities 131,817 (188,315) (210,030) (362,794) (417,784) (561,600) (689,336)

Net other investing cash flows (2,029,104) (335,104) (1,044,316) (1,630,491) (1,277,534) (2,498,197) (2,960,615)

Cash flow from investing activities (2,545,357) (1,265,691) (3,016,303) (4,023,180) (4,197,922) (6,205,499) (7,543,719)

Proceeds from issuance of shares 3,646 18,068 2,031,430 - - - -

Share repurchases (154) (515) (657) - - - -

Net borrowings (184,902) 559,263 809,102 1,163,751 815,774 1,428,308 1,582,773

Dividends paid (351,281) (1,765,200) (1,793,514) (2,305,626) (2,944,981) (3,738,857) (4,722,351)

Cash flow from financing activities (532,691) (1,188,384) 1,046,213 (1,141,874) (2,129,207) (2,310,550) (3,139,578)

Net change in Cash 87,538 (162,662) 208,026 136,048 156,669 210,600 258,501

Beginning Cash balance 338,654 426,135 263,472 471,499 607,546 764,215 974,815

Other adjustments (57) (1) - - - - -

Ending Cash balance 426,135 263,472 471,499 607,546 764,215 974,815 1,233,316


14

Appendix 11 DDM – Source: HANU estimates

Year Dividend (VND) Time Discount Factor PV (VND)

2012E 4,146 1 0.86 3,559

2013E 5,296 2 0.74 3,902

2014E 6,724 3 0.63 4,252

2015E 8,492 4 0.54 4,610

Stage 1 16,323

2016E 10,785 5 0.47 5,025

2017E 13,217 6 0.40 5,286

2018E 15,706 7 0.34 5,392

2019E 18,177 8 0.29 5,357

2020E 20,565 9 0.25 5,202

2021E 22,822 10 0.22 4,956

2022E 24,915 11 0.19 4,644

2023E 26,822 12 0.16 4,291

2024E 28,538 13 0.14 3,919

2025E 30,063 14 0.12 3,544

Stage 2 47,617

After 2025 ke = 16.50% g = 4.50%

Stage 3 261,795 14 0.12 30,086

Share price 94,801

Adjusted share price VND102,622

Appendix 12

FCFF model – Source: HANU estimates

Year FCFF (VND) Time Discount Factor PV (VND)

2012E 6,017 1 0.86 5,187

2013E 7,450 2 0.74 5,536

2014E 10,451 3 0.64 6,696

2015E 13,159 4 0.55 7,268

Stage 1 24,687

2016E 16,924 5 0.48 8,058

2017E 20,896 6 0.41 8,577

2018E 24,913 7 0.35 8,815

2019E 28,830 8 0.31 8,794

2020E 32,533 9 0.26 8,555

2021E 36,100 10 0.23 8,183

2022E 39,341 11 0.20 7,688

2023E 42,232 12 0.17 7,115

2024E 44,774 13 0.15 6,502

2025E 46,979 14 0.13 5,882

Stage 2 78,167

After 2025 WACC = 16.00% g = 4.50%

Stage 3 426,889 14 0.13 53,446

Firm value 156,300

Adjusted firm value 168,804

Debt Value 16,881

Share price VND151,923


15

Appendix 13

FCFE model – Source: HANU estimates

Year FCFF (VND) Time Discount Factor PV (VND)

2012E 7,975 1 0.86 6,846

2013E 8,626 2 0.74 6,356

2014E 12,605 3 0.63 7,972

2015E 15,521 4 0.54 8,426

Stage 1 29,559

2016E 18,052 5 0.47 8,412

2017E 20,472 6 0.40 8,189

2018E 22,696 7 0.34 7,792

2019E 24,656 8 0.29 7,266

2020E 26,313 9 0.25 6,656

2021E 28,971 10 0.22 6,291

2022E 31,416 11 0.19 5,855

2023E 33,630 12 0.16 5,380

2024E 35,610 13 0.14 4,890

2025E 37,361 14 0.12 4,404

Stage 2 65,136

After 2025 ke = 16.50% g = 4.50%

Stage 3 325,355 14 0.12 38,353

Share price 133,088

Adjusted share price VND144,068

Appendix 14

Sales forecast (VND million) – Sources: Vinamilk & HANU estimates

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

Total Sales 10,820,142 16,081,466 20,636,365 26,528,770 33,885,256 43,019,684 54,335,859

Condensed milk 2,705,035 3,443,042 3,993,929 4,601,791 5,268,011 5,993,486 6,778,614

Sales contribution 25.00% 21.41% 19% 17% 16% 14% 12%

Growth 11% 27% 16% 15% 14% 14% 13%

Liquid milk 3,743,769 5,771,638 7,791,712 10,259,293 13,199,152 16,621,513 20,521,119


Growth 65% 54% 35% 32% 29% 26% 23%

Powder milk 2,164,028 3,229,158 4,133,323 5,349,991 7,005,534 9,284,529 12,459,771


Growth -11% 49% 28% 29% 31% 33% 34%

Yoghurt 1,861,064 2,962,206 4,147,088 5,725,022 7,797,107 10,481,520 13,914,137


Growth 85% 59% 40% 38% 36% 34% 33%

Others 346,245 548,378 570,313 592,674 615,451 638,636 662,217

Sales contribution 3.20% 3.41% 2.80% 2.20% 1.80% 1.50% 1.20%

Growth 38% 58% 4% 4% 4% 4% 4%


16

Appendix 15

DDM sensitivity analysis (VND) – Source: HANU estimates

DDM Sensitivity Analysis (Cost of Equity↓, Terminal dividend growth→)

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%

13.50% 123,317 124,997 126,806 128,760 130,877 133,177 135,687 138,436 141,460

14.50% 113,713 115,206 116,813 118,550 120,430 122,475 124,705 127,148 129,835

15.50% 105,078 106,406 107,836 109,380 111,053 112,872 114,856 117,028 119,418

16.50% 97,301 98,484 99,757 101,132 102,622 104,241 106,007 107,942 110,070

17.50% 90,285 91,339 92,474 93,700 95,027 96,471 98,045 99,770 101,666

18.50% 83,945 84,886 85,898 86,992 88,176 89,464 90,869 92,407 94,100

19.50% 78,207 79,047 79,951 80,927 81,985 83,135 84,390 85,764 87,275

Appendix 16

FCFF sensitivity analysis (VND) – Source: HANU estimates

FCFF Sensitivity Analysis (WACC↓, Terminal FCFF growth→)

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%

13.50% 206,090 206,090 206,090 206,090 206,090 206,090 206,090 206,090 206,090

14.50% 180,961 180,961 180,961 180,961 180,961 180,961 180,961 180,961 180,961

15.50% 160,662 160,662 160,662 160,662 160,662 160,662 160,662 160,662 160,662

16.00% 151,923 151,923 151,923 151,923 151,923 151,923 151,923 151,923 151,923

16.50% 143,967 143,967 143,967 143,967 143,967 143,967 143,967 143,967 143,967

17.50% 130,029 130,029 130,029 130,029 130,029 130,029 130,029 130,029 130,029

18.50% 118,245 118,245 118,245 118,245 118,245 118,245 118,245 118,245 118,245

Appendix 17

FCFE sensitivity analysis (VND) – Source: HANU estimates

FCFE Sensitivity Analysis (Cost of Equity↓, Terminal FCFE growth→)

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%

13.50% 184,942 188,270 191,931 195,978 200,474 205,499 211,153 217,560 224,882

14.50% 166,253 168,750 171,475 174,458 177,740 181,368 185,398 189,903 194,970

15.50% 150,651 152,553 154,615 156,855 159,300 161,977 164,921 168,176 171,793

16.50% 137,456 138,925 140,508 142,217 144,068 146,080 148,276 150,680 153,325

17.50% 126,174 127,322 128,552 129,873 131,295 132,832 134,496 136,305 138,279

18.50% 116,436 117,341 118,308 119,340 120,447 121,635 122,915 124,298 125,795

19.50% 107,958 108,679 109,445 110,261 111,131 112,061 113,058 114,128 115,281


17

Appendix 18

Peer evaluation – Sources: Bloomberg & HANU estimates

COMPANIES’ NAMES Price (USD)

Market Cap ( USD million)

P/E 2011E

P/E 2012E

P/B 2011E

EV/EBITDA EV/EBIT ROA

2010 ROE

2010 EBITDA

Margin

Long

-term

D/E 2010

Yashili International Holdings Ltd 0.17 593.32 9.99 8.94 0.94 2.20 2.55 14.99% 20.06% 22.42% -

China Mengniu Dairy Co Ltd 3.34 5,896.05 22.52 17.92 3.29 13.34 19.77 7.88% 13.50% 6.97% 0.02

Fraser & Neave Holdings Bhd 5.59 2,014.46 20.93 19.54 3.55 11.62 13.82 24.27% 45.01% 13.49% 0.08

Maeil Dairy Industry Co Ltd 9.85 131.87 13.99 9.25 0.50 6.07 21.95 4.24% 8.37% 5.67% 0.09

Bright Dairy & Food Co Ltd 1.46 1,524.36 39.31 32.32 3.86 22.81 45.12 3.85% 8.76% 4.98% 0.24

Nestle Malaysia Bhd 15.94 3,738.43 25.23 23.79 18.11 19.57 22.83 22.42% 66.31% 14.63% 0.53

Average 4.74 2158.93 16.86 13.92 2.07 8.31 14.52 12.84% 21.73% 12.14% 0.05

Median 4.47 1,303.89 17.46 13.59 2.12 8.85 16.80 11.43% 16.78% 10.23% 0.05

Maximum 3.34 5896.05 22.52 17.92 3.29 13.34 19.77 14.99% 20.06% 22.42% 0.02

Minimum 0.17 593.32 9.99 8.94 0.94 2.20 2.55 7.88% 13.50% 6.97% -

Vietnam Dairy Products JSC 6.85 2,541.12 13.60 10.75 4.73 10.70 11.69 37.56% 50.16% 23.07% -

Appendix 19

Vinamilk’s product categories – Source: Vinamilk

VINAMILK

liquid milk

powder milk

condensedmilk

yoghurt

Vfresh

ice-creams

cheese

cereal


18

Disclosures:

Ownership and material conflicts of interest:

The HANU(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this Company.

The HANU(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content

or publication of this report. [The conflict of interest is…]

Receipt of compensation:

Compensation of the HANU(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The HANU(s), or a member of their household, does [not] serves as an officer, director or advisory Board member of the subject Company.

Market making:

The HANU(s) does [not] act as a market maker in the subject Company’s securities.

Ratings guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater

over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over

the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the HANU(s) to be reliable, but

the HANU(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be

used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society

Name], CFA Institute or the CFA Institute Research Challenge with regard to this Company’s stock.

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