KIDO Group (KDC) (SELL - 21.2%) Initiation: Hefty Valuation For An Ice Cream/cooking Oil Franchise

KIDO Group (KDC) [SELL -21.
2%] Initiation
Industry: F&B 2016 2017F 2018F 80% KDC VNI
Report Date: August 11, 2017 Rev Growth -28.7% 218.1% 20.4% 60%
Current Price: VND44,000 EPS Growth -77.7% -60.1% -74.2% 40%
18 March 2011
Target Price: VND32,200 GPM 39.1% 21.1% 20.7% 20%
0%
NPM 52.5% 6.8% 1.6%
-20%
Upside to TP: -24.9% EV/EBITDA N/A 30.4x 23.0x
Aug-16 Nov-16 Feb-17 May-17
Dividend Yield: 3.7% P/Op CF -67.5x 12.7x 15.7x
TSR: -21.2% P/E 7.5x 18.8x 73.1x
Market Cap: $388.6 mn KDC VNI Company Overview:

Foreign Room: $105.2 mn P/E (ttm) 6.4x 16.2x Kido Group (KDC) is a holding company focused on F&B.
ADTV30D: $1.3 mn P/B (curr) 1.1x 2.3x Kido Frozen Food (KDF, 65% ownership) is Vietnam’s top
ice cream maker with 35% market share. Tuong An (HSX:
State Ownership: 0% Net D/E 0.1x N/A
TAC, 79% ownership) is the second largest branded edible
Outstanding Shares: 205.6 mn ROE 21.7% 14.6% oil player, while Vocarimex (UpCom: VOC, 51% ownership)
Fully Diluted Shares: 205.6 mn ROA 13.2% 2.5% is Vietnam’s leading edible oil material trader.
3-yr PEG N/M * includes foreign peers using adjusted market multiples.
Nghia Le Hefty valuation for an ice cream/cooking oil franchise

Analyst
nghia.le@vcsc.com.vn  We initiate on KDC with a SELL recommendation. Our target price of VND32,200
+848 3914 3588 ext. 181 implies a total stock return of -21% inclusive of a 4% dividend yield.
 Reported EPS to plummet in 2017 and 2018 in the absence of one-off income from
Phap Dang
Senior Manager asset divestments/revaluation and goodwill amortization from recent M&A.
phap.dang@vcsc.com.vn  If we exclude goodwill amortization and deduct real estate assets at BV from market
+848 3914 3588 ext. 143
cap, KDC is still trading at expensive recurring PER of 47x in 2017F and 34x in 2018F.
 We are optimistic on KDF (ice cream/frozen food subsidiary), projecting 21% NPAT
CAGR during 2016-2019 mainly thanks to ice cream and tax incentives.
 Cooking oil unit (TAC and VOC) will enjoy low-hanging fruit margin improvement post-
M&A, but we expect moderate long-term growth in the face of a dominant competitor.
KDC looks expensive without one-off income. KDC recorded VND1.4 trillion (USD65
million) in PBT from selling its remaining 20% stake in the confectionary business to
Mondelez in 2016. In H1 2017, KDC booked another VND428 billion (USD19 million, 96%
of H1 2017 PBT) profit from VOC revaluation, Mondelez’s final payment and fee reversal.
Goodwill amortization will be a burden on KDC’s bottom line. We estimate annual
goodwill amortization related to TAC and VOC at VND79 billion (USD3.5 million, 14% of
KDC’s NPAT-MI) in 2017 and VND98 billion (USD4.3 million, 41% of NPAT-MI) in 2018.
Ice cream will be the key growth engine. We expect 21% NPAT CAGR during 2016-
2019 for KDF on the back of its leading brands, the most extensive distribution network in
the industry and improved logistics thanks to a new factory in the North. KDF will be the
largest profit contributor to KDC, accounting for 40%-44% of KDC’s NPAT-MI during 2017-
2019, excluding goodwill amortization and expenses at the holdco level.
TAC gets a boost from margin expansion; moderate long-term growth prospects. For
TAC, we forecast NPAT growth of 81% YoY in 2017 and then 8.5%-10%/year for 2018 and
2019 as KDC applies a profit-driven sales strategy, tightens up operational efficiency,
integrates TAC’s distribution system and scales down overhead staff post-acquisition.
VOC’s bottom line will mostly be driven by shared profits from associates. The core
business of oil trading generates negligible margins. However, VOC owns associate stakes
in major branded edible oil players in Vietnam, including 24% in market leader Calofic.
We are conservative on KDC’s forays into processed food categories. Existing and
pipeline products include Vietnamese buns (launched late 2016), French fries (2017),
processed meat, dipping sauce and seasonings. Our skepticism is premised on a lack of
first-mover advantages, fierce competition and limited market size for some categories.
See important disclosure at the end of this document www.vcsc.com.vn | VCSC<GO> August 11, 2017 | 1
Contents
KDC’s corporate structure .............................................................................................................. 6
Vietnam’s ice cream industry overview ......................................................................................... 7
Vietnam’s ice cream market has been growing exponentially ............................................. 7
The industry is forecast to grow 7% per annum over the next five years ............................ 8
Key market characteristics ................................................................................................ 11
Competitive landscape and key competitors to KDF .................................................................. 12
Unilever/Wall’s: giving Vietnam another try ....................................................................... 14
Vinamilk: ice cream is not a business focus yet ................................................................ 15
Ice cream chains: a different animal ................................................................................. 16
Yogurt industry: Vinamilk’s dominance in spoon yogurt means others must find niche to
survive ............................................................................................................................................. 17
KDF: ice cream leader with 35% market share ............................................................................ 18
The leading ice cream maker in Vietnam .......................................................................... 18
Production: North/South factories; largest combined capacity .......................................... 18
Cold distribution: the deepest and most extensive in Vietnam .......................................... 19
Brands: most popular ice cream brands in Vietnam with clear segmentation ................... 21
Products: broadest offerings, including SKUs tailored to local tastes that demonstrate KDF’s
locality advantage ............................................................................................................. 22
KDF expects its foray into frozen foods will further fuel growth ............................................... 23
Banh Bao – Vietnamese buns........................................................................................... 23
Future product launches ................................................................................................... 24
Historical performance: growth driven by distribution expansion and new products ......... 25
Vietnam edible oil industry overview ........................................................................................... 27
Vietnam’s edible oil industry is sizable yet under-penetrated ............................................ 27
Forecasts point to continued solid growth driven by improving income ............................ 28
Vietnam is following in the footsteps of other countries in terms of shifting from palm oil to
soybean oil consumption .................................................................................................. 29
Vietnam’s edible oil industry is dependent on imported raw materials .............................. 31
Vietnam edible oil industry’s competitive landscape ................................................................. 32
Vietnam’s edible oil is a concentrated market ................................................................... 33
First-mover advantages enabled the incumbents to build scale, creating high barriers to
entry .................................................................................................................................. 34
Due to its coagulability at low temperatures, palm oil is relatively unpopular in the North,
which has cold winters ...................................................................................................... 35
Premium segment leads the market, closely followed by the mainstream segment ......... 36
TAC – both sales and profitability are poised to improve on the back of KDC’s initiatives .... 37
Industry veteran with 40 years of experience and 14% market share ............................... 37
Production: second largest capacity, good access to port ................................................ 37
KDC will help strengthen operational efficiencies ............................................................. 38
Sales strategy: shifting to a profit-centric approach .......................................................... 38
Distribution: tapping into a much larger distribution network as TAC is integrated into KDC’s
system .............................................................................................................................. 38
Branding: KDC looks to better utilize TAC’s strong brand recognition .............................. 39
TAC’s historical performance: Sales rebounded in 2016 after several years of stagnation41
VOC – a strong backbone for TAC ................................................................................................ 43
Originally an industry watchdog that has significant stakes in all major players................ 43
VOC is the leading and cheapest crude oil importer/trader in Vietnam ............................. 43
Besides continuing to supply TAC, VOC will look to expand sales to non-edible oil producing
companies......................................................................................................................... 44
Historical performance: oil trading segment is barely profitable; shared profits from
associates account for most of VOC’s bottom line ............................................................ 45
H1 2017 recap: one-off gain from consolidating VOC, without which KDC would have made a
loss .................................................................................................................................................. 47
TAC: margin expansion bolsters earnings growth............................................................. 48
VOC: Deconsolidation of TAC and margin contraction in oil trading segment weighed on
performance ...................................................................................................................... 48
KDF: single-digit top line growth in H1 2017 due to muted POS expansion and cooler
weather ............................................................................................................................. 49
KDC outlook: goodwill amortization drags on profits ................................................................ 50
KDF outlook: we forecast a revenue CAGR of 15% and NPAT CAGR of 17% during 2016-
2021 ................................................................................................................................................. 51
Ice cream will remain the key driving engine..................................................................... 51
Tax incentives at the Bac Ninh plant will further support earnings .................................... 52
Summary of VCSC’s forecasts for KDF ............................................................................ 53
TAC outlook: margin improvement boosts earnings .................................................................. 54
Summary of VCSC’s forecasts for TAC ............................................................................ 55
VOC outlook: associate companies, mostly Calofic and TAC, remain major profit contributors
......................................................................................................................................................... 56
Summary of VCSC’s forecasts for VOC ............................................................................ 56
Valuation ......................................................................................................................................... 57
KDF valuation ................................................................................................................... 58
TAC valuation ................................................................................................................... 59
VOC valuation ................................................................................................................... 60
Comparable peers .......................................................................................................................... 61
Financial Statements ..................................................................................................................... 62
Rating and Valuation Methodology .................................................... Error! Bookmark not defined.
Disclaimer ............................................................................................. Error! Bookmark not defined.
Contacts ................................................................................................ Error! Bookmark not defined.
Table of Figures
Figure 1: Ownership and management ............................................................................................. 6
Figure 2: KDC’s notable corporate actions after it divested from confectionery business in 2015 .... 6
Figure 3: Vietnam’s historical ice cream consumption (’000 tons) ..................................................... 7
Figure 4: Vietnam’s ice cream consumption/capita (gram/year) is well below its peers .................... 7
Figure 5: Ice cream consumption/capita (gram/year) and GDP/capita (USD) in select ASEAN
countries............................................................................................................................................ 8
Figure 6: Countries with a higher urbanization rate often consume more ice cream ......................... 8
Figure 7: Convenience store chains are swiftly expanding in Vietnam .............................................. 9
Figure 8: Sales in modern trade account for a small share of Vietnam’s ice cream market… ........... 9
Figure 9: …which is partly due to an underdevelopment of small modern retail formats .................. 9
Figure 10: Average wages rose faster in Rural than in Urban in most cases (*) ............................. 10
Figure 11: Popularity of different ice cream flavors in Vietnam (2016) ............................................ 11
Figure 12: Market positioning by products (impulse ice cream and close substitutes) .................... 12
Figure 13: Brands Used Most Often index and Brand Awareness index of leading ice cream brands
in Vietnam ....................................................................................................................................... 13
Figure 14: Vietnam’s ice cream market share by player.................................................................. 13
Figure 15: Wall’s competitive summary ........................................................................................... 14
Figure 16: Unilever’s position in several ASEAN countries (market size in USD mn) ..................... 14
Figure 17: Vinamilk’s competitive summary .................................................................................... 15
Figure 18: Ice cream chains’ competitive summary......................................................................... 16
Figure 19: Vietnam’s spoon yogurt market (VND bn) ...................................................................... 17
Figure 20: KDF's historical roadmap and revenue (VND bn)........................................................... 18
Figure 21: KDF's distribution model and infrastructure.................................................................... 19
Figure 22: KDF’s key products ........................................................................................................ 21
Figure 23: Unbranded traditional Vietnamese products vs KDF’s products .................................... 22
Figure 24: Mom-and-pop Banh Bao vs branded Banh Bao ............................................................. 23
Figure 25: KDF’s revenue by segment (VND bn) ............................................................................ 25
Figure 26: KDF’s historical margins ................................................................................................ 26
Figure 27: KDF’s cost structure in 2016 .......................................................................................... 26
Figure 28: Vietnam’s edible oil consumption from 2005 to 2016 ..................................................... 27
Figure 29: Per capita consumption of edible oil (kg/year) across countries in 2016 ........................ 27
Figure 30: Average wages rose faster in Rural than in Urban in most cases (*) ............................. 28
Figure 31: Palm oil has the highest level of saturated fats which are unhealthy ............................. 29
Figure 32: Chinese consumers are trading up to soybean oil as income rises ................................ 29
Figure 33: Soybean oil consumption (thousand tons) is growing rapidly in Vietnam ....................... 30
Figure 34: Illustration of Vietnam’s edible industry value chain ....................................................... 31
Figure 35: Popular products in each segment (prices are per one-liter bottle) ................................ 32
Figure 36: Value market shares of Vietnam’s branded edible oi market ......................................... 33
Figure 37: Tuong An, Neptune and Simply are the most popular brands in Vietnam ...................... 33
Figure 38: Calofic’s margins dwarf those of its competitors ............................................................ 34
Figure 39: Premium segment holds the largest market share ......................................................... 36
Figure 40: TAC's history of development ........................................................................................ 37
Figure 41: TAC’s current capacity and utilization ............................................................................ 38
Figure 42: Tuong An’s products by segment ................................................................................... 39
Figure 43: TAC’s old TVCs were traditional .................................................................................... 40
Figure 44: TAC’s new TVC tackles modern issues and better resonates with young consumers ... 40
Figure 45: Revenue breakdown by segment ................................................................................... 41
Figure 46: Sales volume breakdown by segment ............................................................................ 41
Figure 47: Revenue breakdown by channel .................................................................................... 41
Figure 48: Revenue breakdown by region ....................................................................................... 41
Figure 49: TAC’s sales struggled between 2013 and 2015 and rebounded in 2016… .................... 42
Figure 50: … but earnings did not improve owing to TAC’s focus on sales of lower-end products . 42
Figure 51: Ownership structure between KDC, VOC and other edible oil companies ..................... 43
Figure 52: Sales breakdown by customer ....................................................................................... 44
Figure 53: VOC’s parent revenue (VND bn) heavily relies on TAC ................................................. 45
Figure 54: VOC’s consolidated PBT (excluding TAC) between 2014 and 2016 .............................. 46
Figure 55: KDC’s H1 2017 P&L ....................................................................................................... 47
Figure 56: TAC’s H1 2017 P&L ....................................................................................................... 48
Figure 57: VOC’s H1 2017 P&L S ................................................................................................... 48
Figure 58: VCSC forecasts for KDC in 2017 and 2018 ................................................................... 50
Figure 59: revenue forecasts for KDF (VND bn) ............................................................................. 51
Figure 60: margin projections for KDF............................................................................................. 51
Figure 61: KDF's effective tax rate projections ................................................................................ 52
Figure 62: VCSC’s five-year forecasts for KDF (on a standalone basis) ......................................... 53
Figure 63: VCSC’s FY17 forecasts for KDF (on a standalone basis) .............................................. 53
Figure 64: revenue forecasts for TAC (VND bn) ............................................................................. 54
Figure 65: margin projections for TAC............................................................................................. 54
Figure 66: VCSC’s five-year forecast for TAC (on a standalone basis) ........................................... 55
Figure 67: VCSC’s FY17 forecasts for TAC (on a standalone basis) .............................................. 55
Figure 68: VCSC’s five-year forecast for VOC (on a standalone basis) .......................................... 56
Figure 69: VCSC’s FY17 forecasts for VOC (on a standalone basis) ............................................. 56
Figure 70: Sum-of-part valuation ..................................................................................................... 57
Figure 71: KDF’s comparable peers ................................................................................................ 61
Figure 72: TAC’s and VOC’s comparable peers ............................................................................. 61
KDC’s corporate structure
Kido Group
(HSX: KDC)
51% 79% 65%
Kido Frozen
Vocarimex Tuong An
Foood
(UpCom: VOC) (HSX: TAC)
(KDF)
Edible oil trading Edible oil Frozen foods
Source: KDC
Figure 1: Ownership and management

Shareholder structure
Tran Le Nguyen (Vice Chairman) 12.6%
PPK Limited Company 10.2%
Kinh Do Investment Co Ltd 8.2%
Ezaki Glico 4.9%
Board of directors Title Note

Tran Kim Thanh Chairman Founding member
Tran Le Nguyen Vice Chairman Founding member
Top executives Title Note

Tran Le Nguyen CEO As above
Kelly Wong CFO
Source: KDC, Bloomberg
Figure 2: Notable KDC corporate actions after divesting from confectionery business
in 2015
Date Corporate action Value (VND bn)
Cash and short-term investments as of Q2 2014* 2,663
Jul 2014 Acquired 24% of VOC at VND14,419 per share* -421
Jan 2015 Bought back 20 million shares at VND50,043 per share -1,001
Jun 2015 Proceeds from selling 80% of confectionary business +7,596
Aug 2015 Special cash dividend of VND20,000 per share -7,072
Dec 2015 Bought back 29.5 million shares at VND27,300 per share -805
Q2 2016 Invested in a new ice cream/frozen food factory in Bac Ninh -400
Aug 2016 Sold the remaining 20% stake in the confectionary business +1,900
Aug 2016 Injected new capital into KDF -223
Nov 2016 Issued bonds to VIB +1,000
Nov 2016 Acquired 65% of TAC -1,015
Apr 2017 Sold 20% of KDF to the public at VND52,000 per share +582
May 2017 Acquired 27% of VOC at VND33,264 per share -1,094
Sold 10% of KDF to staff at VND25,000/share
H2 2017 +216
and 5% to business partners at VND40,000/share
Net cash flows from the above transactions -737
Source: KDC, VCSC estimates
(*) KDC’s cash balance as of Q2 2014 was net of an advance payment of VND421 billion (USD19
million) for the acquisition of the 24% stake in VOC.
Vietnam’s ice cream industry overview
Vietnam’s ice cream market has been growing exponentially
Vietnam’s ice cream consumption grew 15% per annum in value between 2013 and
2016, including a 6% volume expansion per annum. About 70% of ice cream in Vietnam is
sold via retail outlets in the form of impulse single servings or take-home tubs, while the
remaining 30% is sold in food service vendors, such as restaurants and coffee shops, which
are relatively more expensive. Retail ice cream sales, the channel in which KDF operates,
amounted to around VND2.7 trillion (USD120 million) in 2016.
Figure 3: Vietnam’s historical ice cream consumption (’000 tons)
13.2
12.6
12.1
11.6
11.0
10.5
28.7
26.9
25.3
23.8
20.8 22.2
2011 2012 2013 2014 2015 2016
Retail ice cream consumption Foodservice ice cream consumption
Source: Euromonitor International
Consumption per capita remains relatively low, implying large headroom for growth.
Vietnam’s annual ice cream consumption per capita remained at a modest 0.4 kg in 2016,
much lower than neighboring countries such as Philippines, Indonesia, Thailand and
Malaysia. Vietnam’s under-penetration can be attributable to its relatively low disposable
income and limited access to ice cream. The latter is caused by Vietnam’s low urbanization
rate of only 34% currently, as well as underdeveloped modern trade and cold distribution.
Figure 4: Vietnam’s ice cream consumption/capita (gram/year) is well below its peers
1,857
973
602 675
444
Vietnam Philippines Indonesia Thailand Malaysia
Source: Euromonitor International (2016)
The industry is forecast to grow 7% per annum over the next five years
Per EMI, Vietnam’s ice cream market is forecast to rise 7% per annum from 2016 to 2021
thanks to the following:
Rising disposable income. As a discretionary product, ice cream will substantially benefit
from Vietnam’s expanding middle-income class. Vietnam is one of the fastest growing
economies in Asia, boasting GDP growth of 6.2% in 2016, outpacing Thailand (0.4%),
Malaysia (4.1%) and Indonesia (5.0%). Vietnam’s GDP growth is expected to remain above
6% in the coming years. Figure 5 shows a clear correlation between per capita consumption
of ice cream and GDP/capita.
Figure 5: Ice cream consumption/capita (gram/year) and GDP/capita (USD) in select
ASEAN countries
2,000
Ice cream consumption/capita
1,500
1,000
500
0
- 2,000 4,000 6,000 8,000 10,000 12,000
GDP/capita
Source: Euromonitor International, World Bank (2011-2016)
Rising urbanization. Ice cream consumption per capita is much higher in urban areas on
the back of higher income and wider availability, i.e. higher density of retail outlets.
Figure 6: Countries with a higher urbanization rate often consume more ice cream
100%
1,857 2000
90%
1500
80%
973
70%
602 675 1000
444 75%
60%
500
50%
40%
54% 50% 0
44%
30%
-500
20%
34%
-1000
10%
0% -1500
Urban population Per capita consumption
Source: Euromonitor International, World Bank (2016)
Development of modern retail. Often equipped with ice cream cabinets, the elevation of
modern retail outlets, particularly small formats, will provide new avenues for ice cream
players to broaden their POS network. As of 2016, modern trade still only accounted for
13% of total ice cream retail sales in Vietnam. Nonetheless, its share has been widening
by 50 bps per year since 2013, primarily on the back of a rapid expansion of convenience
store chains. The total number of convenience stores in Vietnam reached nearly 1,400 as
of YE2016, increasing three-fold vs YE2015. Apart from convenience stores, the minimart
format also looks poised to thrive mostly thanks to a foray of Mobile World (MWG) into this
space.
Figure 7: Convenience store chains are swiftly expanding in Vietnam
1,400
1,200
1,000
800
600
400
200
0
2010 2011 2012 2013 2014 9M15 2016
VinMart+ Circle K B's mart Shop&Go AEON Ministop
Source: Nielsen, VCSC
Figure 8: Sales in modern trade account for a small Figure 9: …which is partly due to an underdevelopment
share of Vietnam’s ice cream market… of small modern retail formats
CVS per 10,000 people
18.0
14.2
34%
44%
66%
57% 59%
42%
87% 2.7
1.5
13%
Vietnam Indonesia Thailand Malaysia Vietnam Philippines Thailand Malaysia
Sales in modern trade Sales in general trade Vietnam Philippines Thailand Malaysia
Source: Euromonitor International (2016) Source: Nielsen Vietnam (2015)
Strengthening consumption makes profitability of cold cabinets in rural areas
increasingly feasible. The relatively limited disposable income of rural consumers has
challenged distribution expansion by ice cream players in rural areas as sales often do not
reach a level that allows them to cover the costs of investing and operating a cold cabinet.
As such, the fact that average wages in rural areas have been growing robustly and at a
quicker pace compared to urban areas bodes well for ice cream producers. Broadening its
availability to rural consumers is one of the reasons for KDF’s outperformance vs the
industry.
Figure 10: Average wages rose faster in rural than urban areas in recent years (*)
12.0 20%
13%
10% 9% 10% 9%
15%
10.0
7% 10%
3%
8.0
1% 5%
0%
5.8 6.0
6.0
4.9 5.3 -5%
4.3 4.3
3.5 3.8 -10%
4.0
2.8 3.1 -15%
2.1 2.4 2.2 2.4

1.7 1.9 -20%
2.0
-25%
- -30%
2013 2014 2015 2016 2013 2014 2015 2016

Urban Rural
Average wages Minimum wages Average wage growth
Source: GSO (wages are expressed in VND million per month)

(*) there was a severe drought in 2016 which hurt wage growth in rural areas
Widening product variety. Leading ice cream players in Vietnam have been introducing
new ways of consuming ice cream to reach more consumers. Notable products include
Wall’s sandwich ice cream, KDF’s banana ice cream (frozen banana block, non-dairy) and
KDF’s mochi ice cream.
The cohort of five to 40-year-olds, the main ice cream consumers, will remain stable
in size during the next five years. There are 60 million people between the ages of five
and 40 in Vietnam currently, equivalent to 70% of the population. This cohort is projected
to stay at 60 million people through 2020, maintaining ice cream’s primary consumer base.
Key market characteristics
Traditional Asian and Vietnamese flavors are becoming more beloved. According to
EMI, in 2016, green tea became the fourth most popular ice cream flavor in Vietnam, only
behind chocolate, vanilla and strawberry, which are also widely favored in other ASEAN
countries. Growing Vietnamese appetite for green tea, often advertised as matcha, is
mostly driven by a new-found popularity of Japanese cuisines and increasing health
awareness, hence the love for green tea. At the same time, other Asian flavors, such as
red bean, green bean and mango, have gained a lot of traction in recent years. Per KDF,
products with those Asian flavors have been recording faster growth in Vietnam compared
to Western flavors.
Figure 11: Popularity of different ice cream flavors in Vietnam (2016)
2013 2014 2015 2016
Chocolate 1 1 1 1
Vanilla 2 2 2 2
Strawberry 3 3 3 3
Green Tea 7 5 4 4
Coconut 4 4 5 5
Source: Euromonitor International (*No. 1 being most popular)
In terms of variety, impulse ice cream are most favored, accounting for 75% of retail
market share in 2016. Hot weather in Vietnam encourages impulse consumption of ice
cream for refreshment. As such, the single-serving variant is usually preferred to avoid left-
overs. In addition, due to the Vietnamese consumer’s view of ice cream as an indulgent
and unhealthy treat (high calorie content), ice cream is not part of daily family diets. This,
coupled with a low penetration of home refrigerators in rural areas, have deterred
consumption of take-home ice cream in Vietnam.
People in the North eat more ice cream owing to the region’s harsher weather
patterns. Unlike the South, where weather is generally warm throughout the year, the North
gets cold during winter (<10 degrees Celsius) and extremely hot during summer (as high
as 40 or more degrees Celsius). This makes consuming ice cream during summer much
more satisfying in the North vs in the South.
Competitive landscape and key competitors to KDF
Figure 12: Market positioning by product (impulse ice cream and close substitutes)
Premium Celano Cone Extra Unilever Cornetto Royale

KDF
~VND18,000
(USD0.80)
Nestle Nestle Kit Kat Vinamilk Twin Cows cup
Affordable
premium KDF Cone Classic Celano Passion Unilever Cornetto Classic
~VND15,000
(USD0.65)
Nestle Nestle Milo
Mainstream
KDF Merino X Merino Super Teen Unilever Wall’s Topten
~VND10,000
(USD0.45)
Merino cup Merino Yeah
Budget Vinamilk Vinamilk Delight Vinamilk cup Unilever Paddle Pop

~VND7,000
(USD0.30)
KDF Merino Kool Banana ice cream
Substitute
products
~VND5,000
(USD0.22)
or less Vinamilk Vinamilk Nhoc Kem KDF Wel Yo frozen yogurt
(water ice cream)
Source: VCSC compilation
Figure 13: Brands Used Most Often index and Brand Awareness index of leading ice
cream brands in Vietnam
Source: Vietnam Market Intelligence (2016)
Figure 14: Vietnam’s ice cream market share by player
35% KDF
46% Unilever
Vinamilk
Others
10%
9%
Source: Euromonitor International (2016), VCSC
Unilever/Wall’s: giving Vietnam another try
Figure 15: Wall’s competitive summary
Brands
Strengths Weaknesses
- Popular and well-established brands - Limited distribution, mostly in big cities
- A narrow range of products in Vietnam
- Products not tailored to local tastes
- High logistics costs
Opportunities Threats
- Rebuilding a production base in Vietnam - KDF’s aggressive expansion plan
will strengthen its competitiveness - Vinamilk may look to push its ice cream
business in the future
Source: VCSC
After first entering Vietnam in 1997, Wall’s soon departed in 2003 as sales and
profitability undershot expectations. In 1997, Unilever invested USD22 million to set up
a Wall’s factory in Ho Chi Minh City – the largest ice cream manufacturing plant in Vietnam
at that time. However, failing to gain enough financial traction because ice cream was not
affordable for most Vietnamese consumers at the time, in 2003, Wall’s decided to exit
Vietnam and sold its factory to KDC, KDF’s parent company.
In 2008, Wall’s returned to Vietnam via imports from Thailand, which undermines its
ability to expand distribution. Right after its non-competing agreement with KDC expired,
Wall’s immediately made a comeback to Vietnam, but this time without a manufacturing
base on site. Due to the need for refrigeration, transporting ice cream from Thailand can
be costly. Because of this, Wall’s has to be selective in terms of the SKUs that it brings to
Vietnam. Therefore, currently, Wall’s only carries about 20 SKUs in Vietnam. This, coupled
with the fact that an absence of on-site production facilities dampens its ability to respond
quickly to out-of-stock issues, puts Wall’s at a substantial disadvantage vs KDF in dealing
with retail shop owners, especially in general trade.
Thus, reconstructing a manufacturing base in Vietnam will substantially strengthen
Wall’s competitiveness. Wall’s has proven that it can succeed in Southeast Asian
countries, as shown by Figure 16. Re-establishing a production presence in Vietnam will
go a long way toward helping Wall’s fix its aforementioned weaknesses.
Figure 16: Unilever’s position in several ASEAN countries (market size in USD mn)
424 417
240
155
70% 115
61%
52% 10%
33%
Indonesia Thailand Philippines Malaysia Vietnam
Unilever's market share Total market size
Source: Euromonitor International (2016)
Vinamilk: ice cream is not a business focus yet
Figure 17: Vinamilk’s competitive summary
Brands
- The largest dairy player in Vietnam - Vinamilk has not made serious
- Enormous financial capabilities investments in ice cream in terms of both
- Most familiar and trusted consumer brand products and distribution.
- Will expand faster once the ice cream - KDF is trying to cement its leading
market grows to a sufficient scale position, especially in general trade.
Source: VCSC
Ice cream’s small market size is not yet exciting enough for Vinamik. Vinamilk has not
made a serious effort in the ice cream segment, understandably so given that the total
market size of ice cream in Vietnam is less than 6% of Vinamilk’s total revenue in 2016.
Even so, Vinamilk still manages to grab nearly 10% market share in ice cream,
underscoring its brand advantages and the fact that once it gets more serious, incumbent
players will be at risk.
Vinamilk’s product variety remains limited. Currently, Vinamilk’s ice cream portfolio
consists of about 50 SKUs (compared to Wall’s ~20 and KDF’s more than 200) under four
brands: Vinamilk ice cream tub (for take-home consumption), Delight, Nhoc Kem (water-
based ice cream) and Twin Cows. Vinamilk and Nhoc Kem compete in the budget segment
with basic flavors while Twin Cows, launched in 2015, was Vinamilk’s first attempt to
penetrate the premium segment.
The distribution system is mostly designed for milk products instead of ice cream.
Even though it possesses the most extensive, quality distribution system in Vietnam,
Vinamilk’s milk products only require normal temperature or chilled transportation and
storage, unlike ice cream.
Ice cream chains: a different animal
Figure 18: Ice cream chains’ competitive summary
Brands
- Customers pay for experience apart from - Expensive, only affordable to a small
the products group of consumers
- Sophisticated flavors/displays - Presence limited to big cities, CBD areas
- Rising consumer incomes - Rising rents in big cities
- Westernized consumer lifestyles
High-end ice cream chains are more about experience than product. Unlike retail ice
cream, which is often an impulse buy, consumers usually find ice cream chains for the
experience. They provide a venue for friend and family gatherings, dating or even business
meetings. Ice cream in these chains is often priced several times higher than retail ice
cream. As such, this is a distinct segment and not a direct competitor to retail-focused
players such as KDF, Wall’s or Vinamilk.
Yogurt industry: Vinamilk’s dominance in spoon
yogurt means others must find niche to survive
Vietnam’s yogurt consumption grew 15% per annum between 2013 and 2016. Spoon
yogurt is the most popular segment, occupying about 65% of the total yogurt market and
reaching a market size of VND7.6 trillion (USD334 million) in 2016.
Figure 19: Vietnam’s spoon yogurt market (VND bn)
7,622
6,662
5,911
5,024
4,200
3,500
2011 2012 2013 2014 2015 2016
Source: Euromonitor international (2016)
Vinamilk rules the market. Vinamilk owned a commanding 80%-85% market share in
spoon yogurt in 2016. The rest is shared between FrieslandCampina, International Dairy
Products and TH Milk, etc.
KDF’s Wel Yo is a tiny brand in spoon yogurt. In 2016, we estimate Wel Yo’s spoon
yogurt revenue at only VND170 billion-VND200 billion (USD7 million-USD9 million),
implying a 2%-3% market share.
KDF: ice cream leader with 35% market share
The leading ice cream maker in Vietnam

KDF started when Kido Group (previously Kinh Do Corporation) acquired Wall’s
factory in 2003… KDF inherited Wall’s facilities, over 100 staff and 4,000 POS. In the
following three years, KDF focused on building its own brands, successively launching
Merino in 2004, Celano in 2005 and Wel Yo in 2006.
Figure 20: KDF's historical roadmap and revenue (VND bn)
Company establishment New Bac Ninh plant
Ice cream capacity: 10 mn liter Ice cream capacity: 25 mn liter
Yogurt capacity: 25 mn liter
Launched Merino
Upgraded Cu Chi plant 1,397
Ice cream capacity: 18 mn liter
Launched Celano
Yogurt capacity: 13 mn liter
1,068
Launched Wel Yo
Yogurt capacity 4.5 mn liter 838
772 783
645
463
277 289
167
92 95 124
40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: KDF
… and has grown into the number one ice cream producer in Vietnam. KDF’s ice
cream segment posted a revenue CARG of 29% from 2014 to 2016 to reach a commanding
35% market share in Vietnam. The company’s leading position is supported by its
operational excellence encompassing production, distribution, branding and product
innovation, which will be discussed in more detail below.
Production: North/South factories; largest combined capacity

KDF possesses a manufacturing base in Vietnam, which has been recently
strengthened by the commencement of the new Bac Ninh plant. KDF’s main
manufacturing hub located in Cu Chi (a one-hour drive from HCMC) is the biggest ice cream
plant in Vietnam with design capacity of 18 million liters per year in addition to 16 million
liters of yogurt capacity. In late 2016, KDF opened another factory in Bac Ninh (one hour
from Hanoi), adding another 7 million liters and 9 million liters of ice cream and yogurt
capacity, respectively.
Having manufacturing plants in Vietnam equips KDF with crucial advantages over
imported products, including its closest competitor, Wall’s, because: (1) it saves KDF
logistics costs, which are quite substantial in the ice cream industry due to the need for
refrigeration and (2) it helps avoid out-of-stock issues as it allows KDF to quickly produce
and re-stock at distributors as well as POS.
Bac Ninh plant further cements KDF’s foothold in the North. The Bac Ninh plant, which
supplies the northern market, will further enhance KDF’s efficiency since (1) it will reduce
logistics costs as previously, products sold in the North were shipped from the Cu Chi plant
in the South and (2) it will help KDF better cater to surging demand during summer from a
production perspective. Previously, KDF’s Cu Chi plant would have to produce several
months in advance to prepare inventory for summer sales, leading to high cold storage
costs. The Bac Ninh plant will ease this situation.
The Bac Ninh factory will enjoy tax incentives. Per KDF, the Bac Ninh plant will be tax
exempt in the first two years of operations and receive a 50% reduction in the subsequent
four years. The percentage of income attributable to the Bac Ninh plant is calculated using
its gross fixed assets as a percentage of KDF’s gross fixed assets (i.e. income attributable
to Bac Ninh plant = gross fixed assets at Bac Ninh Factory/gross fixed assets of KDF x
Total taxable income of KDF).
Cold distribution: the deepest and most extensive in Vietnam

In-house logistics enable superior quality control. Products are shipped from factories
to KDF’s five cold warehouses spanning across Vietnam, from which they are transported
to 113 distributors. These distributors then directly deliver the products to POS in areas of
high demand (urban areas and tier-2 cities) or go through sub-distributors in more remote
areas. Most of KDF’s transportation work is carried out by a fleet of 170 refrigerated trucks
owned by either KDF or its distributors, while during the summer, KDC usually has to
outsource some transportation due to capacity constraints. By keeping transportation
largely in-house, KDF seizes better control of its delivery process, which is critical as ice
cream needs to be stored at -20 degrees Celsius throughout the process to avoid melting.
Figure 21: KDF's distribution model and infrastructure
Two
manufacturing
plants
40 trucks owned by KDF
Modern trade Distributors

(25%) (75%)
130 trucks owned by distributors
Sub-distributors
GT retail outlets GT retail outlets
Source: KDF
Dominance in general trade is crucial to KDF’s success. As mentioned above, general
trade accounts for 75% of retail ice cream sales in Vietnam. Per KDF, with 50,000 owned
cabinets, the company has by far the most extensive cold POS network in Vietnam. This is
a significant competitive advantage that is difficult to replicate due to:
(1) KDF’s leading brands and wide variety of products provide the best value
to shop owners. From the perspective of a general trade shop owner, accepting
an ice cream cabinet is a big commitment owing to its high electricity costs and
occupation of retail space. Therefore, it is usually within the shop owner’s best
interest to choose KDF’s cabinets so that sales will be sufficient to cover those
costs.
Also for this reason, it is generally easier for KDF to ensure cabinet exclusivity. On
the back of its extensive product offerings, supported by a close monitoring of its
sales force, KDF does a better job (though certainly not 100%) of making sure that
its cabinets only contain its own products. On the other hand, shop owners who
carry another player’s cabinets may struggle to generate sufficient sales only from
the products of that player. Consequently, it is quite common to find a competitor’s
cabinets filled with products from various producers.
(2) Building and managing a broad cold distribution network is costly. Per
KDF, cost per cabinet ranges from USD200 to USD300, implying a total investment
of USD10 million to USD15 million for 50,000 POS. Although this may look small,
it is rather significant relative to the industry’s market size. Moreover, due to
refrigeration needs, transportation, warehousing and maintenance costs are
relatively larger for ice cream compared to other F&B categories.
(3) A strong ERP system optimizes the sales process and inventory
management. KDF’s ERP system allows its salespeople to scan and track sales
of each cabinet using mobile devices. The system then analyzes and generates
the optimal sales mix and inventory level at that particular POS, based on which, it
will recommend new orders that salespeople can use to suggest to shop owners.
This significantly reduces the time and resources that salespeople would otherwise
spend on analyzing data and generating orders while boosting accuracy. The
salespeople, consequently, have more time to take care of more POS or cater to
other needs of the shop owners.
The prosperity of modern trade may be a double-edged sword for KDF. As we
discussed previously, modern trade may propel consumption of ice cream as it provides
additional POS for ice cream players. 3,500 POS in modern trade (supermarket and
convenience store chains) and key accounts (schools, hospitals, factory sites and tourist
attractions) currently account for 25% of KDF’s revenue. Currently, KDF sells its products
in most of the popular CVS chains in Vietnam, including B’s Mart, Shop&Go, AEON
MiniStop and Circle K.
Nevertheless, in relation to general trade, KDF’s ability to secure POS in modern trade is
weaker because (1) to maintain their bargaining power against ice cream producers,
modern retail chains do not offer exclusivity to any ice cream producers. For example, per
KDF, its products are only available in a third of Circle K stores in Vietnam and (2) unlike
general trade outlets, which usually do not have enough space for more than one cabinet,
convenience stores and minimarts can contain numerous cabinets provided by different ice
cream players, lessening KDF’s ability to boast an “exclusive” presence at each outlet.
Brands: KDF’s are the most popular in Vietnam with clear
segmentation
Recognizable brands targeted at distinct consumer groups. Per Vietnam Market
Intelligence, Merino and Celano are among the top three most recognizable and most often
consumed ice cream brands in Vietnam. Merino targets mainstream and young consumers
(five to 25 years old) while Celano targets more premium and older consumers (between
25 and 40 years old).
Figure 22: KDF’s key products
Celano Segment Merino Segment
Yeah
Cone Extra
Premium 2 SKUs Mainstream
3 SKUs
(Dairy ice cream)
X
Cup Affordable 4 SKUs
Mainstream
5 SKUs Premium (traditional Asian
flavors)
Super Teen
Cone Classic Affordable 3 SKUs
Mainstream
5 SKUs Premium (budget cone ice
cream)
Passion Affordable Cup

Mainstream
3 SKUs Premium 9 SKUs
Tub Affordable Tub

Mainstream
8 SKUs Premium 15 SKUs
Kool
5 Star Dessert Affordable 14 SKUs
Budget
3 SKUs Premium (water-based ice
cream)
Sweetie Affordable Funny Face

Budget
3 SKUs Premium (ice cream for kids)
Frozen banana
(traditional Budget
Vietnamese treat)
Wel Yo
Frozen yogurt
Kidz Gold Yogurt Family Yogurt
9 SKUs
4 SKUs 2 SKUs
Key product line
Beauty Yogurt Frozen smoothie Frozen sirup

1 SKU 3 SKUs 3 SKUs
Source: KDF
On the other hand, its dairy brand Wel Yo is much less well known in a space that is
dominated by Vinamilk. However, Wel Yo pioneered the mass production of frozen
yogurt, a type of yogurt that is widely familiar among Vietnamese, but was mostly supplied
by household, mom-and-pop producers in the past.
Apart from TV commercials, KDF is intensifying its activities on social media. As
younger Vietnamese spend more time online, especially with mobile devices, KDF is
ratcheting up its marketing activities on social media. For example, for the Merino brand,
the company created a Facebook page named “Ice Cream and Bear” (original Vietnamese
name: “Kem va Gau”), which are the names of Merino’s two mascots. Unlike Wall’s, which
on Facebook mostly posts about its products, Merino’s Facebook page aims to create an
emotional attachment between consumers and the two mascots. Ice Cream and Bear’s
Facebook posts are often comical and follow trendy events. Ice Cream and Bear’s
Facebook page has over 285,000 followers, which is ten times more than Wall’s. Social
media is an effective, but less costly, marketing channel compared to TV commercials.
Products: the broadest offerings, including SKUs tailored to

Vietnamese tastes that demonstrate KDF’s local advantage
KDF’s understanding of Vietnamese preferences is reflected in its mass production
of traditional flavors/desserts. Besides Asian flavors such as red bean, green bean and
durian, one of KDF’s strategies is to mass produce and commercialize traditional, niche
frozen desserts that were previously supplied by mom and pop outlets. Frozen Banana
treat (banana coated with coconut) and frozen yogurt exemplify this. These products carry
nostalgic value as they were widely popular treats among Vietnamese in the past.
This is a substantial advantage of KDF vs international players, whose product mix is
geared toward a more global or pan-Asian palate.
Figure 23: Unbranded traditional Vietnamese products vs KDF products
Source: VCSC, KDF
KDF expects its foray into frozen foods will further
fuel growth
Taking advantage of its established cold distribution network, KDF launched “Banh Bao”
(Vietnamese buns) in late 2016 and French fries in Q2 2017. The company plans to launch
an array of other frozen foods, such as frozen vegetables, sausages and chilli sauce, in the
future.
Having said that, for the time being, we are conservative on KDC’s potential success in
these forays due to (1) a lack of first-mover advantages and the presence of existing strong
competitors (e.g. Vissan in processed meat, Masan and Cholimex in chilli sauce, Tho Phat
in Banh Bao) and (2) limited market sizes (frozen French fries, frozen vegetables).
Banh Bao – Vietnamese buns

Banh Bao is one of the most popular snacks or meal replacements in Vietnam. Banh
Bao is a rounded bun made from wheat flour and often filled with savory fillings. The most
popular Banh Bao is filled with minced pork and quail eggs. Banh Bao is popular due to its
convenience and nutritional content.
The market is fragmented, dominated by mom-and-pop suppliers. Since making Banh
Bao is quite simple, the market has a large number of mom-and-pop players, many of whom
lack quality control and hygienic standards.
In terms of branded Banh Bao, private enterprises Tho Phat and Phu My Bakery lead
HCMC and Hanoi, respectively. Tho Phat and Phu My provide warm and ready to eat
Banh Bao in traditional food outlets and chilled Banh Bao in supermarkets. For convenience
stores, Tho Phat’s ready-to-eat Banh Bao is currently present in Circle K stores in HCMC.
There is generally no pricing difference between unbranded and branded Banh Bao.
Similar to Banh Mi (Vietnamese bread), Banh Bao is considered a cheap meal replacement.
This, coupled with the fact that it is not easy to distinguish the quality among different Banh
Bao, makes it difficult for branded players to charge higher prices.
Figure 24: Mom-and-pop Banh Bao vs branded Banh Bao
For frozen/chilled Banh Bao, KDC looks to differentiate quality via production of
preservative-free Banh Bao. Most of KDF’s Banh Bao is made for cold storage (at -18
degrees Celsius), which eliminates the need for preservatives. Only one SKU, Banh Bao
with quail eggs, is made for chilled storage (-5 degree Celsius) and hence contains
preservatives. Per KDF, this is because cold storage makes quail eggs chewy and
unappetizing. “Preservative-free” is the characteristic that is most highlighted by KDF in its
marketing.
KDF’s manufacturing process was purchased from a Japanese partner and is more
automated compared to competitors. KDF possesses Banh Bao manufacturing
machinery in both the North and the South factory, with a combined capacity of roughly
3,000 tons per year. With its technology imported from Japan, KDF’s manufacturing
process is on a higher level of automation vs peers. On top of that, KDF emphasizes that
its Banh Bao is made using Japanese technology, a good marketing move given that
Vietnamese often perceived Japanese technology as cutting edge.
KDF expects to eventually sell Banh Bao at 10,000 POS. KDF’s Banh Bao is sold either
frozen or steamed. Frozen Banh Bao is offered in packs of six or eight and is often sold in
supermarkets or hypermarkets. On the other hand, steamed Banh Bao is done on premise
using steamers provided by KDF, with frozen stocks stored in the cold fridges of shop
owners.
Banh Bao can utilize KDF’s entire existing logistics. It can be stored in the same cold
warehouses and transported on the same trucks as those of ice cream.
Future product launches

Unlike with Banh Bao, KDF will outsource production of other frozen food until
revenues reach a certain scale. To minimize risks, KDF will at first partner with OEM
producers while it focuses on marketing. In the meantime, KDF will try to learn technical
and production know-how. Once the products reach annual revenue of at least VND300
billion (USD13 million), KDF will invest in in-house production capacity.
KDF partnered with food producer Dabaco via a joint venture for processed meat
products. KDC acquired a 50% stake in Dabaco Foodstuffs Processing LTD (DBC Foods)
for VND100 billion (USD4.5 million), a firm that was previously a wholly owned subsidiary
of Dabaco Group (HNX: DBC). DBC Foods’ core operations include processing fresh pork,
beef and poultry; manufacturing packaged foods (canned meats and sausages) and ready-
to-eat foods (Vietnamese ham). Per KDC, DBC Foods' revenue reached a mere VND23
billion (USD1 million) in Q1 2017. Within this joint venture, DBC Foods will undertake the
role of an OEM while KDF will be responsible for branding, marketing and distribution.
Similarly, KDF will enter the chili sauce market via a joint venture with a Thai partner.
KDF plans to launch a chili sauce toward the end of 2017.
Historical performance: growth driven by distribution expansion and
new products
Figure 25: KDF’s revenue by segment (VND bn)
1,400
36.4% 30.8% 40%
1,200
20%
1.5% 1,020
1,000
-7.9% 0%
800
743
575 611 -20%
600
400 325 355 -40%
197 172 -60%
200
21
- -80%
2013 2014 2015 2016
Ice cream Yogurt Frozen foods Revenue growth
Source: KDF
Aggressive POS expansion in general trade bolstered ice cream sales. KDF made a
strategic decision to widen its reach to city outskirts and rural areas, opening 8,000-10,000
POS per year in 2014 and 2015 vs only 5,000-6,000 per year prior to that. As a result,
KDF’s ice cream segment outperformed the industry with a 29% revenue CARG from 2014
to 2016.
Improving product variety helped Celano deliver strong volume growth. KDF
successfully entered the higher premium segment with its Celano Cone Extra and Celano
Pistachio Cone. KDF also introduced a chocolate-coated ice cream cube called Sweetie,
which is a relatively new type of ice cream for Vietnamese consumers. Between 2014 and
2016, Celano recorded a 31% revenue CAGR driven by a 23% volume CAGR and 6% ASP
CAGR.
Meanwhile, Merino grew primarily on ASP as it shifted to smaller but higher-value
products. Starting from 2015, KDF pushed ice cream with higher dairy content, such as
the Superteen and Yeah line-ups. As a result, while Merino’s volume (liter) dropped an
average of 8% per annum from 2014 to 2016, its ASP jumped 39% per annum,
underpinning a 29% revenue CARG between 2014 and 2016.
Wel Yo’s spoon yogurt struggled against Vinamilk… In the face of Vinamilk’s
domination, Wel Yo’s revenue, which was primarily spoon-able yogurt at the time, declined
13% in 2014 vs 2013.
…but frozen yogurt has brought new life to this segment the last two years. As
discussed previously, Wel Yo’s frozen yogurt line-up, which leverages on KDF’s cold
distribution network, has been a big success. Wel Yo frozen yogurt was launched in 2015
and helped KDF’s yogurt revenue to almost double in 2015. Building on this success, KDF
launched frozen smoothies and frozen syrup under the Wel Yo brand.
Figure 26: KDF’s historical margins Figure 27: KDF’s cost structure in 2016
54% 54% 56%
52%
13%
9%
6% 7%
2013 2014 2015 2016
Gross profit margin PBT margin
Source: KDF Source: KDF
Margins improved on sales mix and easing A&P driven by a stronger utilization of
social media vs TV commercials. KDF’s operating margin expanded 6.1 percentage
points from 6.9% in 2014 to 13.0% in 2016 on the back of (1) GPM expansion, (2) easing
A&P expenses as KDF shored up online and social media marketing instead of TV
commercials and (3) economies of scale.
Vietnam edible oil industry overview
Vietnam’s edible oil industry is sizable yet under-penetrated
Edible oil consumption in Vietnam grew 6.2% per annum during 2010-2016 to reach
nearly 1.1 million tons in 2016, according to data from IndexMundi. Branded edible oil
accounted for about 50% of total market volume, per Euromonitor, and boasted a market
value of roughly VND30 trillion (USD1.3 billion) in 2015.
Figure 28: Vietnam’s edible oil consumption from 2005 to 2016
1,400
11.0 11.1 11.4 12.0
10.1
1,200
9.3 1,076
8.7
10.0
998 1,035
1,000
908
826 8.0
800
763
6.0
600
4.0
400
2.0
200
- 0.0
2011 2012 2013 2014 2015 2016
Edible oil consumption ('000 tons) Consumption per capita (kg/capita)
Source: IndexMundi, World Bank (column: thousand tons; point: kg/capita)
Relatively low consumption per capita vs peers suggests plenty of headroom for
growth for Vietnam. Vietnam’s total edible consumption per capita stood at 11.4 kg in
2016, much lower than the average consumption of Thailand, Malaysia, Indonesia and the
Philippines of 16.6 kg as well as the global average of 26.6 kg. It is also lower than World
Health Organization’s (WHO) recommended minimum consumption level of 13.5 kg per
capita. Vietnam’s underpenetrated edible oil consumption can be attributable to its low
disposable income and low urbanization rate, both of which promote the use of cheaper
but relatively unhealthy alternatives, such as home-made animal fat.
Figure 29: Per capita consumption of edible oil (kg/year) across countries in 2016
29.1
24.2
WHO's recommended minimum consumption
14.9
13.2
11.3
8.0
India Vietnam Philippines Thailand China Malaysia
Source: IndexMundi, World Bank
Forecasts point to solid growth driven by improving income
Vietnam’s edible oil consumption is forecast to grow 8.7% per annum between 2015
and 2020, per the General Statistics Office (GSO) and the Ministry of Industry and Trade
(MoIT). Specifically, consumption per capita is expected to rise from 11.4 kg in 2016 to 16.2
kg in 2020 on the back of growing income and urbanization coupled with increasing
consumer health awareness.
Rising incomes to spur consumption of edible oil, replacing less healthy
alternatives. Vietnam is one of the fastest growing economies in Asia with its GDP forecast
to grow at least 6% per year in the next few years. In terms of edible oil consumption, rural
areas are likely to be the main driver going forward thanks to a combination of faster income
growth and lower penetration. This means that for edible oil players, an extensive
distribution network that covers rural areas well is crucial to outperforming the industry.
Figure 30: Average wages rose faster in rural than urban areas in recent years (*)
12.0 20%
13%
10% 9% 10% 9%
15%
10.0
7% 10%
3%
8.0
1% 5%
0%
5.8 6.0
6.0
4.9 5.3 -5%
4.3 4.3
3.5 3.8 -10%
4.0
2.8 3.1 -15%
2.1 2.4 2.2 2.4

1.7 1.9 -20%
2.0
-25%
- -30%
2013 2014 2015 2016 2013 2014 2015 2016

Urban Rural
Average wages Minimum wages Average wage growth
Source: GSO (wages are in VND million per month)

(*) there was a severe drought in 2016 which hurt wage growth in rural areas
Rising urbanization bolsters edible oil consumption thanks partly to broader

consumer access to foodservice. Urban consumers tend to consume a much higher
level of edible oil compared to rural consumers partly owing to their wider access to
foodservices, among which are fried or stir-fried foods that are generally preferred by
Vietnamese consumers. Urban residents still constitute only 34% of Vietnam’s current
population, but the ratio is climbing steadily by about 60 bps per annum. At the same time,
consumer adoption of Western cooking styles, such as salad making or baking with edible
oil, is rising in Vietnam, further underpinning consumption.
Better health awareness will promote consumption of branded, healthier edible oil
products. According to a Nielsen survey in Q1 2016, one out of three Vietnamese listed
health as either the biggest or second-biggest concern. This carries different implications
for urban areas and rural areas. In urban areas, where branded edible oils are already
popular, consumers will trade up for higher-quality products that provide better health
benefits, such as soybean, canola or sunflower oil. Per a survey conducted by W&C
research, prevention of heart diseases and strokes is one of the top reasons Vietnamese
choose high-end edible oils. On the other hand, due to lower incomes, we expect to see
rural consumers shift from unbranded products and animal fats to branded edible oils with
reliable origins.
Vietnam is following the footsteps of other countries in terms of
shifting from palm oil to soybean oil consumption
Palm oil is typically the choice of low-income consumers. This is indicated by the fact
that developing countries, such as India and Indonesia, are among the top consumers of
palm oil. Yet, what we also see is that as incomes rise, so does consumer preference for
soybean oil.
Compared to other edible oils, palm oil is generally much cheaper to produce… Per
LCM International, the production cost of palm oil is less than half that of soybean oil on
the back of its higher crop yield and lower labor costs.
…but less healthy due to its high content of saturated fats. In general, the healthiness
of edible oil is determined based on its mix of saturated and unsaturated fats. Saturated
fats (or bad fats) contribute to the risk of heart diseases and strokes because they raise the
blood cholesterol level. Meanwhile, when eaten in moderation, unsaturated fats (good fats)
can help reduce bad cholesterols.
Figure 31: Palm oil has the highest level of unhealthy saturated fats
Fat content expressed as g/100g fat

Canola oil 7 28 65
Sunflower oil 9 29 62
Olive oil 14 11 75
Soybean oil 16 57 27
Peanut oil 17 32 51
Palm oil 49 9 42
Saturated Fat Polyunsaturated Fat Monounsaturated Fat
Source: Canolainfo
As incomes rise, consumers will shift to soybean oil. This premiumization trend can be
clearly seen in China. Chinese consumption/capita of palm oil started to flatten out in 2005
before falling gradually from 2012 onward. In contrast, Chinese consumption/capita of
soybean oil has advanced steadily in correlation with income growth.
Figure 32: Chinese consumers are trading up to soybean oil as incomes rise
14 9,000
12 8,000
7,000
Kg/capita/year
10
6,000
8 5,000
USD
6 4,000
3,000
4
2,000
2 1,000
- 0
Palm oil consumption (LHS) Soybean oil consumption (LHS)

GDP per capita (RHS)
Source: IndexMundi, World Bank
Vietnam remains in the early stage of this premiumization trend. Per IndexMundi, total
soybean oil consumption in Vietnam grew 8% per annum between 2010 and 2016, twice
as fast as the growth rate of palm oil consumption. That said, soybean oil still accounted
for only 25% of total edible oil consumption in 2016, implying sizeable headroom for further
share gains.
Figure 33: Soybean oil consumption (thousand tons) is growing rapidly in Vietnam
56
58 55
68
53
11 12
9
9 9 735 750
8 720
630
7 565 570 573
552
449 457 472
350
200 210 220 245 270
126 171 181
53 71 87 93
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Soybean oil consumption Palm oil consumption Others
Source: IndexMundi
Vietnam’s edible oil industry is dependent on imported raw materials
Figure 34: Illustration of Vietnam’s edible industry value chain
Growers Millers
UPSTREAM
-Global- Export
Crude oil
manufacturing
- Cultivate and harvest palm - Extract crude oil from

kernels, soybeans and other oilseeds
Activities
oilseeds - Usually undertaken by
growers
- Increasing production costs - Often enjoys a fixed margin
Market traits because of stagnating crop
yield and rising labor costs
Distributors Refiners
DOWNSTREAM
-Vietnam-
Edible oil
manufacturing
Import to Vietnam
- Market and distribute - Refine, bleach and deodorize

products to the end users. crude oil to fit the needs of
Activities
- Usually undertaken by customers.
refiners
- Highly competitive - Requires good access to port
- Requires substantial and logistic services as most
Market traits
investments in branding and input materials are imported.
distribution network
Vietnam heavily relies on imports of palm oil and soybean, as its weather conditions
(soil, rainfall) are not suitable for oilseed cultivation. Per Vocarimex (UpCom: VOC), 70%
of crude material oils in Vietnam are imported. Vietnam imports almost all soybean that it
consumes, mostly from South America, while the country imports palm oil primarily from
Malaysia and Indonesia, particularly from Wilmar and Sime Darby, two of the largest palm
oil producers in the world. On the other hand, Vietnam can self-supply sesame, rice bran
and peanuts for edible oil production.
Aside from Calofic and Golden Hope, the respective subsidiaries of Wilmar and Sime
Darby, VOC is the key trader and supplier of oil materials for edible oil makers in
Vietnam. Wilmar is the major shareholder of Calofic, the number one branded edible oil
player in Vietnam, while Sime Darby is the major shareholder of Golden Hope Nha Be, the
third-biggest player. Naturally, Wilmar and Sime Darby directly supply materials to these
companies. For other edible oil players in Vietnam, including TAC, VOC is their key
supplier. VOC, which enjoys its own port and ability to purchase in bulk, buys materials
from Wilmar, Sime Darby and other suppliers before reselling to downstream players.
Competitive landscape of Vietnam edible oil industry
Figure 35: Popular products in each segment (prices are per one-liter bottle)
High
premium
>VND60,000
(USD2.60)
Calofic Calofic TAC
Sunflower oil Rice bran oil Sesame Oil
Premium
~VND55,000
(USD2.40)
Calofic TAC
Canola oil Canola oil
Affordable
premium
~VND45,000
(USD.9)
Calofic Calofic TAC Golden Hope Tan Binh
Soybean oil Soybean + rice Soybean oil Soybean oil Soybean oil
+ sunflower oil
Mainstream
~VND35,000
(USD1.50)
Calofic TAC Golden Hope
Palm + soy Palm + soy + Palm + soy
canola
Economy
<VND30,000
(USD1.30)
Calofic TAC Golden Hope Tan Binh

Palm oil Palm + soy Palm + soy Palm + soy
Source: VCSC’s compilation
Note: we exclude olive oil from this table because (1) its prices are two to three times higher than the average price and (2) Vietnamese
people only use olive oil for unique dishes or purposes, not for everyday cooking.
Vietnam’s edible oil market is concentrated
Vietnam’s edible oil industry has been concentrated since its inception due to
protectionist State policies. When Vietnam first developed its edible oil industry, the
country viewed edible oils as one of its strategic foods. As a result, to enter the market,
foreign companies were forced to form joint ventures with VOC, a state-owned holding
company tasked with overseeing the industry. Golden Hope, which was later acquired by
Sime Darby, and Wilmar, partnered up with Vocarimex to form Golden Hope Nha Be and
Calofic, respectively. These two companies, along with Vocarimex’s own branded oil
company Tuong An, were pioneers of the industry.
Three players account for 70% of the branded space. Based on our estimates, Calofic
commands a 46% market share with three popular brands under its wing: Neptune, Simply
and Meizan. Calofic is followed by Tuong An (14.3%) and Golden Hope (6.8%) while the
rest of the market is occupied by smaller players, such as Tan Binh Vegetable Oil
(Nakydaco brand), Acecook (De Nhat brand) or Binh An Vegetable Oil (Binh An and Ogold
brands).
Figure 36: Market share value of Vietnam’s branded edible oil market
29.8%
Calofic
TAC
46.0%
Golden Hope
Tan Binh
3.1%
Others
6.8%
14.3%
Source: Euromonitor, IndexMundi, VCSC (2016)
Tuong An leads in the South while Calofic dominates the North. According to W&C
Research’s 2015 survey, 57% of HCMC respondents named Tuong An as their top-of-mind
brand, while Neptune was voted the top-of-mind brand by 46% of Hanoi respondents.
Calofic’s Simply brand is also widely popular in Hanoi. Other brands, such as Meizan and
Cai Lan of Calofic or Marvela of Golden Hope, recorded less than 10% in both cities.
Figure 37: Tuong An, Neptune and Simply are the most popular brands in Vietnam
57.0%
46.0%
35.3% 34.5%
28.0%
23.0%
19.5%
13.5% 11.0%
Tuong An Neptune Simply Tuong An Neptune Simply Tuong An Neptune Simply

Hanoi + HCMC Hanoi HCMC
Source: W&C Research (Percentages show % of respondents listing a brand as their top-of-mind
brand)
Led by Neptune and Simply, Calofic has been acquiring market share from Tuong
An in the North. During 2014-2016, Calofic recorded a revenue CARG of 10.1%,
outperforming the 7.0% of the overall branded edible oil market. Calofic’s market share
expansion has been driven by its Simply and Neptune brands, which together obtained an
additional 2.5% market share from 2014 to 2016. In contrast, Tuong An’s market share fell
from 17.0% in 2014 to 14.3% in 2016. According to KDC, this can be attributed to 1) Tuong
An’s passive sales strategy, i.e., only passively catering to client orders rather than actively
pushing sales, 2) weak coordination between production planning and input material
procurement that often led to stock shortages and additional logistics costs and 3) Calofic’s
strong presence in the premium segment, which is the fastest-growing segment in the
edible oil industry.
First-mover advantages enabled the incumbents to build scale and

create high barriers to entry
Many of the barriers to entry are tied to the inherent thin margins of the edible oil
industry, including:
- Economies of scale: the inherent low margins of the edible oil industry make economies
of scale a crucial competitive aspect. Calofic, whose margins are well above its competitors,
exemplifies this. A focus on the premium segment provides Calofic with natural margin
advantages. However, its much bigger scale in relation to competitors also enables Calofic
to achieve better efficiency in manufacturing, logistics and overhead. Even the second
leading player, Tuong An, reached a net margin of just under 2% in 2016, underscoring the
challenges for smaller players or new entrants.
Figure 38: Calofic’s margins dwarf those of its competitors
18,000
6.2% 8.0%
16,000
6.0%
14,000
12,778 4.0%
1.7%
12,000
1.0% 2.0%
10,000
0.0%
8,000
-2.0%
6,000
-4.2%
3,978 -4.0%
4,000
1,890
2,000
850 -6.0%
- -8.0%
Calofic Tuong An Golden Hope Tan Binh

2016 Revenue (VND billion) 2016 NPM
Source: Vocarimex (2016)
- Distribution: The dilemma here is that as margins are unrewarding (even for top players),
new players may be reluctant to build out an extensive distribution network, thereby limiting
their ability to build scale and reach consumers.
- Brand power: Given that the manufacturing technology of edible oil has matured, there
is little room for innovation and product differentiation in Vietnam. In fact, according to our
discussion with industry people, the differences in quality among similar products are hardly
distinguishable. Consequently, a consumer’s purchasing decision is heavily influenced by
marketing. In addition, since the additional margins of premium products outstrip their
marginal costs, edible players tend to push sales of premium products.
- Refining capabilities: the low margin nature of edible oil makes it extremely tough to
pursue an unrefined product strategy which is commoditized and competes mostly on price.
The fluctuation of input material prices, which are mainly imported, further increases the
riskiness of this strategy. On the other hand, for those who want to penetrate the refined oil
market, refine capabilities typically can be obtained by either 1) building their own factories,
which is challenging amid a lack of scale and the industry’s compressed margins or (2)
outsourcing refining capabilities, which does not help form a competitive advantage.
- Connectivity between port and factory: Most factories of established players are
located near and connected with a port via a pipe system, which transfers imported crude
oil directly from the port to the manufacturing plant. This puts players with poor port access
at a disadvantage as transporting crude oil by tankers is cost inefficient.
Due to its coagulability at low temperatures, palm oil is relatively

unpopular in the North, which has cold winters
Consumers perceive coagulation of palm oil at low temperatures as a sign of spoiled
quality… Edible oils with a high content of saturated fats tend to coagulate at low
temperatures, (e.g. palm has a natural freezing temperature of 24 Celsius), which does not
impact their quality. There is a general misperception among consumers that if a cooking
oil coagulates, it is either spoiled, of inferior quality or contains animal fat. Northern
consumers generally dislike palm oil because of this.
…which leads to their preference for soybean oil. As shown in Figure 35, apart from
pure soybean oil, producers also mix palm oil with other oil types, similar to what TAC does
with its Cooking Oil product, which mixes palm oil with soybean oil and canola oil. Per KDC,
the mix varies depending on the area. For example, to make the product more marketable
in the North, TAC’s Cooking Oil SKU in the North contains a greater level of soybean oil.
Premium segment leads market, closely followed by mainstream
The premium segment accounts for 39% of the market and is poised to broaden
further led by soybean oil. As we have discussed above, the premium segment,
spearheaded by soybean oil (affordable premium), has been the best performing segment
thanks to rising consumer health consciousness amid improving incomes. Furthermore,
cold winters in the North also prop up consumption of soybean oil at the expense of palm
oil.
Figure 39: Premium segment holds the largest market share
6%
21%
Premium
39%
Mainstream
Economy
Others
34%
Source: KDC (2016)
More exotic oils remain unaffordable for most consumers. Although the health benefits
of canola, sunflower, peanut and rice bran oils are well known to consumers, they still
account for a very small part of the market. Consumption of these products is poised to rise
along with improving consumer income, which will support the margins of producers.
However, their contribution should remain insignificant over the next few years as they are
growing off a low base.
Calofic, the dominant premium player, wins the heart of consumers by emphasizing
health benefits in its marketing. For its Simply brand, instead of just boasting that a
product “not contain cholesterol” or is “premium”, Calofic highlights the specific health
benefits of its products. Simply soybean oil, canola oil and rice bran oil are advertised as
“for a healthy heart” while Simply sunflower oil “provides energy for daily life”. In addition,
these slogans are verified by respectable health institutes in Vietnam, such as the Vietnam
Heart Association.
TAC – sales and profitability are poised to improve
on the back of KDC initiatives
Industry veteran with 40 years of experience and 14% market share
Founded in 1977, TAC has grown to be one of the leading players in Vietnam,
especially in the South. After starting off as a small oil refining factory located in HCMC,
in 1991, TAC launched its now flagship Tuong An “Cooking Oil” brand with an elephant
logo, which marked the first milestone in the company’s journey. Today, TAC is the second
largest edible oil player in Vietnam.
Figure 40: TAC's history
• Tuong An factory was established in HCMC; capacity at 28,000 tons/year

1977
• Launched its flagship Cooking Oil brand and elephant logo

1991
• Established a distribution hub in Mekong Delta area

1997
• Established a distribution hub in Central Vietnam

1999
• Established a distribution hub in the North; raised capacity to 75,000 tons/year

2000
• Acquired Nghe An vegetable oil factory; expanded capacity to 93,000 tons/year

2002
• Phu My factory commenced operation; widened capacity to 252,000 tons/year

2008
• Moved all equipment and machinery to Phu My Factory

2011
• 24/11/2016: KDC officially acquired 65% of TAC

2016
Source: TAC
Production: second largest capacity, good access to port

TAC’s main factory is located in Vung Tau Province (southern Vietnam) with access
to a deep-water port. TAC’s largest factory, Phu My, was built in 2008 in Phu My industrial
park, Vung Tau Province, along the Thi Vai river. The factory is connected with a deep-
water port via a pipe system for transportation of imported crude oil. As discussed above,
this gives TAC cost advantages in terms of logistics.
After receiving all of TAC’s production capacity in the South in 2011, the Phu My factory
became the third-largest edible oil refining factory in Vietnam, with total capacity of 252,000
tons/year, trailing only two of Calofic’s factories. The factory also manufactures shortening
(capacity of 20,000 tons/year) and margarine (capacity of 3,000 tons/year).
TAC’s other factory is located in Vinh city (central Vietnam) but has much smaller
capacity. This factory can refine up to 28,000 tons of edible oil and produce up to 15,000
tons of shortening per year.
Spare capacity is sufficient to support growth in the next few years. Per management,
the company only reached roughly 50% utilization of its refinery capacity in 2016.
Figure 41: TAC’s current capacity and utilization
As of FY2016 Capacity (tons per year) Utilization
Phu My factory
Oil refinery 252,000 50%
Shortening 20,000 50%
Margarine 3,000 70%
Vinh factory
Oil refinery 28,000 95%
Shortening 15,000 15%
Source: TAC
KDC will help strengthen operational efficiencies

Tightening coordination in production planning. Per management, there have been
instances where TAC manufactured its products in the North, but then sold them in the
South despite its southern factory’s spare capacity. This dynamic was caused by
uncoordinated production planning and created unnecessary transportation costs.
KDC will also solidify the coordination between TAC and VOC. Before KDC, although
VOC had a controlling stake in TAC and VOC is TAC’s key raw material supplier, weak
coordination between the two led to instances in which VOC ran out of stock and TAC had
to purchase raw materials from other foreign suppliers, usually at higher prices. Now under
the same roof, KDC should be able to better align VOC’s raw material purchases and TAC’s
production planning.
Sales strategy: shifting to a profit-centric approach

Abandoning volume-focused KPI to boost profitability. Prior to KDC’s takeover, TAC’s
sales KPIs were centered on volume sold, which motivated its salesmen to push lower-end
products and condensed oil in the B2B channel, which generated low margins. KDC has
applied a new system, which promotes sales of high-margin products, especially its flagship
Cooking Oil and Dau Nanh (soybean in English) brands. TAC will also ramp up A&P for
these product lines.
More flexible pricing is another way to enhance profitability. Per KDC, TAC used to
apply the same pricing for products under the same brand even though they were made
with different formulas to suit different target areas. For example, for the mainstream and
economy brands, products sold in the North are mixed with a higher content of soybean so
that they will not coagulate during the colder season. A higher content of soybean increases
the cost of the product. As such, applying the same price caused TAC to lose margins on
these products. KDC said they will be more flexible on pricing to maximize profitability.
Distribution: tapping into a much larger distribution network as TAC is

integrated into KDC’s system
The salesforce is now directly under TAC’s control instead of working under
distributors as in the past. TAC recently took control of its sales force, which previously
worked under the payroll of distributors. This allows TAC to directly and actively manage
its performance as well as collect sales data.
TAC can now utilize KDC’s extensive distribution network… With the help of KDC,
TAC can now distribute its products via a network of 200 exclusive distributors, about
400,000 general trade POS (vs a total of 1.4 million general trade POS in Vietnam) and
870 modern trade POS (vs 3,000 modern trade POS in Vietnam).
…and strong ERP system that optimizes sales process and inventory management.
As already mentioned in our discussion on KDF above, KDC’s ERP system allows it to
accurately track sales to each POS at any time as well as analyze sales patterns and
inventory levels at each POS, based on which, the system will recommend new orders that
salespeople can use to suggest to shop owners. This significantly reduces the time and
resources that salespeople spend on generating orders while propping up accuracy.
Salespeople, consequently, have more time to handle more POS or cater to other shop
owner needs.
Branding: KDC looks to better utilize TAC’s strong brand recognition

Figure 42: Tuong An’s products by segment
Affordable Mainstream Economy

High premium Premium
premium
VND95,000 VND52,000 VND47,900 VND35,500 VND28,400

(USD4.8) (USD2.3) (USD2.1) (USD1.6) (USD1.2)
Sesame oil Canola oil Soybean oil Soy + palm + Palm + soy
canola (top seller)
VND80,000 VND48,300 VND34,000 VND32,600

(USD3.5) (USD2.1) (USD1.5) (USD1.4)
Peanut oil Soy + peanut Soy + palm + Palm + soy
canola
Source: TAC, VCSC compilation (prices are per one-liter bottle)
Tuong An is the most recognizable edible oil brand in HCMC and the South, and the
third most in Hanoi and the North, as discussed on page 33.
KDC will focus sales and marketing efforts on affordable premium and mainstream
products, specifically its “Dau Nanh” and “Cooking Oil” brands. The premium
segment only constituted 10% of TAC’s revenue in 2016, much smaller than that of market
leader Calofic. At the same time, KDC believes TAC has been underinvesting in its flagship
“Cooking Oil” brand. Promoting Cooking Oil (mainstream) and Dau Nanh (affordable
premium) also aligns with TAC’s new profitability-driven KPI system.
Economy products will find growth mainly via expansion of distribution. KDC expects
the economy segment, which contributed roughly 39% to TAC’s revenue in 2016, to remain
a significant source of revenue going forward by broadening its distribution reach.
KDC modernizes TAC’s marketing campaigns. Since KDC’s acquisition in November
2016, we have witnessed an improvement in TAC’s TV commercials. Featuring a modern
look, TAC’s first new TV commercial post-KDC acquisition addresses issues faced by 20-
45 year old consumers. It highlights the pros and cons of the single life vs marriage life,
culminating in a happy moment when a husband and wife prepare a meal together. This
resonates with the largest age group in Vietnam while associating the product with familial
values.
Figure 43: TAC’s old TVCs were traditional
(Warmth with love)

(No Trans-fat)
(No coloring)
(No preservatives)
(Rich with natural vitamin E)
Source: TAC
Figure 44: TAC’s new TVC tackles modern issues and better resonates with young consumers
(Single life)
(Having a family)
Source: TAC
TAC’s historical performance: Sales rebounded in 2016 after several
years of stagnation
TAC’s sales mix:
- Mainsteam and economy segments are mainstays
- General trade is the largest distribution channel, followed by B2B.
- The South is TAC’s largest market
Figure 45: Revenue by segment Figure 46: Sales volume by segment
8% 10% 9% 7%
11%
17%
26%
32%
39%
51%
Premium Mainstream Economy Others Condensed oil Premium Mainstream Economy Others Condensed oil
Figure 47: Revenue by channel Figure 48: Revenue by region
18% 18% 18%
6%
16%
76%
47%
General trade Modern trade B2B North Central South B2B
Source: TAC (2016)
Revenue slid during 2013-2015 due to Calofic’s strength... After posting a solid 9%
revenue CARG between 2010 and 2013, TAC’s top line shrank in 2014 and 2015. This
could be attributed to the strength of Calofic, which recorded 10% revenue CARG during
this period amid TAC’s relatively inferior presence in the fast-growing premium segment
and reduced spending on advertising and promotion. Between 2013 and 2015, TAC’s
revenue in the North and the South declined by 8% and 11% per annum, repectively, while
revenue in central Vietnam stayed flat.
… but recovered nicely in 2016, partly aided by KDC’s involvement toward year-end.
TAC delivered solid 10.7% revenue growth in 2016 vs 2015 mostly thanks to a strong
rebound in northern sales (+14% vs 2015) and a substantial increase in B2B sales (+29%
vs 2015). Revenue in the Central and the South also bounced back, climbing 7% and 5%,
respectively, vs 2015 thanks to robust sales of economy products. TAC’s recovery was
further fueled by KDC’s involvement in the few last months of 2016 as KDC supported TAC
to broaden its distribution.
Figure 49: TAC’s sales struggled between 2013 and Figure 50: … but earnings did not improve owing to
2015 and rebounded in 2016… TAC’s focus on sales of lower-end products
6,000
6.4% 10.7%
10.0%
416 429
-3.9%
5,000
0.0%
374
-12.9% 353
-10.0%
4,000
666 621 729 -20.0%
593 637 563

3,000
598 638 -30.0%
751 795
2,000 636 724 -40.0%
-50.0%
70 66 67 63 82 70 80 67
2,281 2,071 1,887
1,797
1,000
-60.0%
0 -70.0%
2013 2014 2015 2016 2013 2014 2015 2016

South North Central B2B Revenue growth Gross profit Operating profit Net profit
Source: TAC (numbers are in VND billion) Source: TAC (numbers are in VND billion)
VOC – a strong backbone for TAC
Initially an industry watchdog, it now has significant stakes in all major
players
VOC was established in 1975 as a state-owned watchdog tasked with overseeing
Vietnam’s edible oil industry. This resulted in it having substantial holdings in every major
player, including Calofic (24%), TAC (27%), Golden Hope Nha Be (49%) and Tan Binh
Vegetable Oil - Nakydaco (18%).
Figure 51: Ownership structure between KDC, VOC and other edible oil companies
51%
27% 24% 49% 17.8%

65%
76% 51%
Source: VOC
VOC is the leading and cheapest crude oil importer/trader in Vietnam

Extensive scale leads to better purchase prices. In 2016, VOC imported and re-sold
250,000 tons of edible oil, which accounted for roughly 25% of Vietnam’s total consumption.
Thanks to such scale, VOC is currently the cheapest edible oil importer in Vietnam, per
KDC management.
VOC operates a deep-water port that specializes in importing edible oil. VOC’s Nha
Be Port is located in District 7, HCMC, on a seven-hectare site. This port has two berths
capable of accommodating vessels of up to 10,000 DWT and 20,000 DWT. In addition, it
has a bulk liquid storage system that can contain up to 20,000 tons. In 2016, the port’s
utilization rate reached 50%, implying sufficient spare capacity to accommodate future
growth.
Besides continuing to supply TAC, VOC will look to expand sales to
non-edible oil producing companies
Supplying input oil materials to TAC remains VOC’s key mission after KDC’s
acquisition. Sales to TAC contributed 58% to VOC’s revenue in 2016, while Tan Binh,
Golden Hope and Calofic collectively accounted for 19% of its 2016 revenue.
Figure 52: Sales by customer
23.3%
Tuong An
Tan Binh
0.2%
Golden Hope
2.8%
58.5% Calofic
15.2% Others
Source: VOC
International standards attained in hopes of reaching non-edible oil producing

customers. As VOC’s major customers are its subsidiaries and associate companies, VOC
did not need to meet international standards in the past. However, to bolster its goal of
serving large F&B companies, such as Vinamilk and Suntory Pepsico, VOC successfully
acquired ISO 9001 and HACCP (Hazard Analysis and Critical Control Point) standards in
2016. Besides F&B, VOC will target companies in the cosmetics, pharma and animal feed
sectors.
Historical performance: oil trading segment is barely profitable;
shared profits from associates account for most of VOC’s bottom line
Note that our following discussion excludes TAC’s contribution to VOC’s consolidated
revenue and profit because VOC has stopped consolidating TAC since Q3 2016. In
addition, as TAC now belongs to KDC, we believe that discussing VOC in this context will
better illustrate its business role and contribution to KDC going forward.
VOC’s parent revenue is highly dependent on TAC. As TAC struggled between 2013
and 2015, so did VOC, especially in 2015. In 2016, TAC’s turnaround, coupled with KDC’s
initiatives to broaden VOC’s customer base, fueled a 16% rebound in revenue for VOC.
Figure 53: VOC’s parent revenue (VND bn) heavily relies on TAC
4,358
4,193 4,156
3,692 3,593
Revenue
Sales to TAC
75% 70%
72% 59%
62%
2012 2013 2014 2015 2016
Source: VOC
The oil trading segment has been subpar, even making a loss in 2014 and 2015... We
estimate that the PBT margin of VOC’s oil trading business ranged from -1% to 0% between
2014 and 2015. Besides the inherent thin margins of the business, this subdued result
could be attributable to operational inefficiencies, which are common in SOEs, coupled with
VOC’s high interest expenses and FX losses.
…but its profitability has improved since privatization with new management. Despite
not having a controlling stake in VOC until May 2017, KDC started becoming involved in
VOC’s operations ever since the latter’s IPO in July 2014. In fact, KDC’s chairman was
elected as VOC’s chairman in November 2014. Profitability has improved since then, as
the oil trading segment’s PBT margin swelled to 1.5% in 2016 driven mostly by cost saving
initiatives from KDC and lower interest expenses on smaller short-term debt.
Excluding TAC, most of VOC’s bottom line has derived from shared profits from
associates, which in turn emanate from VOC’s stakes in leading edible oil players. Taking
out TAC, shared profits from associate companies accounted for roughly 100% and 75%
of VOC’s PBT in 2015 and 2016, respectively.
Figure 54: VOC’s consolidated PBT (excluding TAC) between 2014 and 2016
304
Profits on asset revaluation

11 and divestments
0
Shared profit from associates
218
202 243 Oil trading PBT
60
0
-43
2014 2015 2016
Source: VOC, VCSC
Asset revaluation and divestments generated VND304 billion (USD13 million) in

financial gains in 2014. Just before its IPO in 2014, in accordance with Circular 127, VOC
revalued its investments in all associate companies, which resulted in VND230 billion
(USD10 million) in financial gains. Furthermore, VOC reduced its stake in Calofic by 8 ppts
to 24%, recognizing a gain of VND75 billion (USD3 million) in the process. These were
partly offset by a financial loss of VND1 billion (USD0.4 million) from selling down its stake
in Tan Binh Vegetable Oil from 27.1% to 17.8%.
H1 2017 recap: one-off gain from consolidating VOC,
without which, KDC would have made a loss
A year-over-year comparison between 2016 and 2017 for KDC would not be
meaningful since KDC only started to consolidate TAC in December 2016 and VOC in the
beginning of June 2017. Moreover, KDC sold down its stake in KDF from 100% to 80% in
April 2017 and then to 65% in H2 2017. Thus, we believe it is more relevant to focus on the
year-over-year performance of KDC’s subsidiaries to track their fundamental progress.
Figure 55: KDC’s H1 2017 P&L

H1 2017
VCSC as % of
VND bn H1 2017 VCSC comments
2017F VCSC
forecast
Revenue 2,897 7,121 40.7%
Sales concentrate in the second half due to seasonality (i.e.
KDF 778 1,751 44.4%
summer)
TAC + VOC 2,077 5,328 39.0% VOC was only consolidated for one month in H1 2017
Parent 42 42 Revenue was no longer in place in Q2 2017
Gross profit 654 1,503 43.5%
KDF 410 929 44.1%
TAC + VOC 236 566 41.7%
Parent 7 7 100.0%
Selling expenses -510 -1,019 50.0%
G&A expenses -170 -369 46.1%
Operating loss in H1 2017 was due to:
* Amortization of goodwill related to TAC’s acquisition amounting
to VND26 billion (USD1.1 million).
* Roughly VND30 billion (USD1.3 million) in one-off restructuring
Operating profit -26 114
costs at a subsidiary
* Overhead expenses at KDC’s parent company
We expect the ice cream segment to drive operating profit in H2
2017.
More shared profits from associates under VOC will be
Non-operating profits 44 125 35.3%
recognized in H2 2017.
* A VND240 billion (USD11 million) gain stemming from a
revaluation of KDC’s 24% stake in VOC which was in place
before KDC raised its ownership in VOC to 51% in June 2017.
Non-recurring profits 428 428 100.0% * VND188 billion (USD8 million) of income emanating from
Mondelez’s final payment to KDC and a reversal of fees
previously provisioned for KDC’s divestment from the
confectionery business.
PBT 446 667 66.8%
NPAT 400 610 65.5%
NPAT-MI 370 481 76.9%
Source: KDC, VCSC estimates
TAC: margin expansion bolsters earnings growth
Figure 56: TAC’s H1 2017 P&L
VND bn H1 2016 H1 2017 Growth VCSC comments
* An early Tet holiday in 2017 pushed some pre-Tet sales from
January 2017 to December 2016, affecting H1 2017 revenue
* TAC increased prices of a few loss-making products in the
Revenue 1,884 1,973 4.7%
economy segment to support margins, but sales growth was
muted
* Yet, sales growth still mostly came from the economy segment
GPM expanded thanks to:
Gross profit 171 215 25.5% * Price hikes in some products as mentioned above
* Pushing sales of higher-margin products
* Shoring up marketing for mainstream and premium brands
Selling expenses -103 -137 33.4% * Taking control of the salesforce as explained on page 38,
leading to higher labor costs
G&A expenses -24 -17 -28.5% Scaling down overhead staff
Operating profit 44 60 36.8%
Financial income 10 9 -13.5%
Financial expenses -8 -7 -11.7%
Other non-operating income/
1 1 42.9%
expenses
PBT 47 63 34.2%
NPAT-MI 38 51 33.8%
Gross profit margin 9.1% 10.9% 1.8 ppt

Operating profit margin 2.3% 3.1% 0.7 ppt
NPAT-MI margin 2.0% 2.6% 0.6 ppt
Source: VOC, KDC
VOC: Deconsolidation of TAC and margin contraction in oil trading

segment weighed on performance
Figure 57: VOC’s H1 2017 P&L S
VND bn H1 2016 H1 2017 Growth VCSC comments
* VOC has deconsolidated TAC since Q3 2016
Revenue 2,555 1,991 -22.1% * Consolidation of a loss-making oil bottling company
* Oil trading revenue climbed 8% YoY
* Gross profit from oil trading dropped 42% due to a 3 ppt
Gross profit 275 65 -76.3%
contraction in GPM
Selling expenses -126 -34 -73.3%
G&A expenses -56 -41 -27.2%
Operating profit 92 -10 NM
VND27 billion (USD1.2 million) profit from selling Nortalic in H1
Financial income 26 40 53.5%
2017, an edible oil company in the North
Reversal of provision for an investment helped reduce H1 2016
Financial expenses -2 -17 672.6%
expenses
Other non-operating
108 119 10.2% Mostly shared profits from associates
expenses
PBT 224 132 -41.3%
NPAT-MI 199 139 -30.2%
Gross profit margin 10.8% 3.3% -7.5 ppt

Operating profit margin 3.6% -0.5% -4.1 ppt
NPAT-MI margin 7.8% 7.0% -0.8 ppt
Source: VOC, KDC
KDF: single-digit top line growth in H1 2017 due to muted POS
expansion and cooler weather
At the time of this report, KDF is undergoing a blackout period as it prepares for listing on
the UpCom stock exchange. As such, we do not currently have access to full financial
statements. Based on our discussion with management and past earnings releases, we
infer the following regarding KDF’s H1 2017 performance:
KDF’s revenue rose only 5% in H1 2017 vs H1 2016 due to:
- Cooler weather in H1 2017: the hot season in 2016 arrived in April-May, leading to high
demand for ice cream during Q2 2016. Meanwhile, heavy rain in Q2 2017, especially in
northern cities, discouraged ice cream consumption. Therefore, sales during Q3 2017,
KDF’s peak season, will be crucial to KDF’s 2017 performance.
- Slow POS expansion: per management, KDF was focused on ramping up the operation
of its new factory in Bac Ninh during H1 2017.
- Sluggish sales of Vietnamese buns: KDF is still at the stage of studying consumer
preferences instead of aggressively pushing sales and distribution.
KDC outlook: goodwill amortization drags on profits
Figure 58: VCSC forecasts for KDC in 2017 and 2018
VND bn 2016 2017 2018
Revenue 2,239 7,121 8,574
KDF 1,751 2,038
TAC 4,243 4,556
VOC* 1,084 1,979
Parent 42 0
Gross profit 874 1,503 1,775
KDF 929 1,085
TAC 475 524
VOC* 91 167
Parent 7 0
Selling expenses -718 -1,019 -1,185
G&A expenses -255 -369 -445
Of which, amortization of goodwill
and revalued assets from past -79 -98
acquisitions
Operating profit -99 114 145
Non-operating profit** 218 125 273
Non-recurring profit**** 1,389 428 0
PBT 1,507 667 418
NPAT 1,184 610 360
NPAT-MI 1,175 481 139
Recurring PBT 118 239 418

Recurring NPAT-MI, in which: 64 91 139
KDF 138 141
TAC 95 105
VOC* 74 121
Parent expenses*** -137 -130
Goodwill amortization -79 -98
Source: KDC, VCSC
(*) Excluding sales to TAC and shared profits from TAC. VOC will be consolidated into KDC for the
final seven months of 2017.
(**) Non-operating profits primarily include shared profits from associates and net interest income.
(***) Parent expenses are overhead expenses and one-off restructuring costs in 2017, partly offset
by net interest income at holdco level.
(****) Non-recurring profits in 2016 include a VND1.4 trillion (USD65 million) gain from selling the
remaining 20% stake in the confectionary business to Mondelez. This followed a VND6.5 trillion
(USD286 million) gain recognized in 2015 derived from the sale of the first 80% stake.
Non-recurring profits in 2017 include: (1) a VND240 billion (USD11 million) gain stemming from the
revaluation of KDC’s 24% stake in VOC, which was in place before KDC raised its ownership in VOC
to 51% in June 2017, (2) VND188 billion (USD8 million) of income emanating from Mondelez’s final
payment to KDC and (3) a reversal of fees previously provisioned for KDC’s divestment from the
confectionery business.
KDF outlook: we forecast a revenue CAGR of 15%
and NPAT CAGR of 17% during 2016-2021
Figure 59: Revenue forecasts for KDF (VND bn) Figure 60: Margin projections for KDF
3,500
25.3% 30%
16.4%
13.6%
10.3%
20%
3,000
56.0%
10%
53.1% 53.2% 52.8% 52.5%
2,500
0%
2,000
1,749
1,603
1,428
-10%
1,500
1,218 -20%
1,000
-30%
13.0% 11.7% 12.3% 12.5% 12.3%

373 392 412302 433372
500
160 218 -40%
- -50%
10.2% 10.1% 11.1% 10.7% 10.7%
2017 2018 2019 2020 2016 2017 2018 2019 2020
Ice cream Yogurt GPM OPM NPM

Frozen food Revenue growth
Source: VCSC Source: VCSC
Ice cream will remain key growth engine

We forecast ice cream revenue will post a 14.7% revenue CAGR during 2016-2021,
which implies market share acquisition on the back of KDF’s continuing investments in
POS, especially in rural areas, a strengthened position in the North thanks to the Bac Ninh
factory and a strong portfolio of brands and products. Growth will be higher in 2017 and
2018 as KDF reaps the benefits from its aggressive POS expansion over the last two years.
The emergence of counterfeit frozen yogurt products will likely dampen Wel Yo
revenue; we forecast a 2016-2021 CAGR of 5% for KDF’s yogurt segment. Per KDF,
the company’s success with frozen yogurt has attracted many counterfeit products, which
is made possible by the product’s simple packaging and the difficulty of clearly
distinguishing quality. The slowdown in KDF’s yogurt sales was already visible in 2016 as
this segment’s revenue only edged up 5% in 2016 after surging 119% in 2015. On the other
hand, we do not expect other frozen Wel Yo yogurts, such as frozen syrup or frozen
smoothies, to accomplish the same success as that of frozen yogurt, because (1) they do
not provide similar nostalgic value and (2) Vinamilk’s NhocKem brand has already launched
several similar products, thus, KDF will not enjoy first-mover advantages as it did with
frozen yogurt.
We are more conservative than management regarding contribution from Banh Bao
and other frozen foods. We project KDF to reach VND446 billion (USD20 million) in total
revenue from frozen foods (Banh Bao, frozen potatoes, etc.) in 2021, vs management’s
guidance of VND1.37 trillion (USD60 million). Our conservative stance is premised on the
fact that the markets for these products will likely be limited relative to ice cream and yogurt,
and that the future product pipeline remains uncertain. Nonetheless, as explained above,
aside from direct revenue contribution, frozen foods complement ice cream and frozen
yogurt sales, which will facilitate KDF’s POS expansion.
Operating profit margin will likely contract in 2017 due to depreciation from the new
factory and a larger contribution from frozen foods but should improve afterward.
OPM is forecast to decline 1.3 percentage points to 11.7% in 2017 owing to depreciation
from the Bac Ninh factory and minimal operating profit contribution from the frozen food
segment, partially offset by savings in transportation costs. In subsequent years, we expect
OPM to climb steadily to 12.4% in 2020, aided by economies of scale and improved
utilization of POS.
Tax incentives at the Bac Ninh plant will further support earnings
The Bac Ninh plant will be tax exempt for the first two years of operations and receive a
50% reduction in the four subsequent years. Per management, income attributable to the
Bac Ninh plant is calculated based on its net fixed assets as a percentage of KDF’s net
fixed assets. Accordingly, we project KDF’s effective tax rates as follows:
Figure 61: KDF's effective tax rate projections
VND bn 2017 2018 2019 2020 2021
Bac Ninh’s net fixed assets 400 400 600 600 600
KDF’s net fixed assets 871 886 1,101 1,116 1,131
Bac Ninh’s tax rate 0% 0% 10% 10% 10%
Normal tax rate 20% 20% 20% 20% 20%
Effective tax rate 10.8% 11.0% 14.6% 14.6% 14.7%
Source: KDF, VCSC
Summary of VCSC forecasts for KDF
Figure 62: VCSC’s five-year forecast for KDF (on a standalone basis)
VND bn 2017 2018 2019 2020 2021
Revenue 1,751 2,038 2,316 2,554 2,785
Ice cream 1,218 1,428 1,603 1,749 1,884
Yogurt 373 392 412 433 455
Frozen food 160 218 302 372 446
Gross profit 929 1,085 1,224 1,340 1,460
Operating profit 205 250 288 315 349
PBT 191 245 294 322 369
NPAT-MI 171 218 250 274 314
NPAT-MI growth 19.7% 27.4% 15.0% 9.5% 14.7%
Source: VCSC
Figure 63: VCSC’s FY17 forecast for KDF (on a standalone basis)
VND bn 2016 2017 Growth VCSC comments
Revenue 1,397 1,751 25%
Ice cream 1,020 1,218 19% 17% volume growth and 2% ASP growth
Yogurt 355 373 5% 3% volume growth and 2% ASP growth
Frozen food 21 160 654% Full-year contribution from Banh Bao and launching French fries
Gross profit 783 929 19%
Ice cream 598 688 15% GPM contraction due to depreciation from the Bac Ninh factory
Yogurt 179 184 3% GPM contraction due to depreciation from the Bac Ninh factory
Frozen food 6 57 810% GPM improves on economies of scale
Selling expenses -527 -635 20%
G&A expenses -74 -89 21%
Operating profit 182 205 13%
Financial income 14 10 -29% Smaller interest income from lending to the parent company
Financial expenses -20 -23 16% Higher interest expenses on a larger debt balance
Other non-operating expenses
PBT 176 191 9%
NPAT 143 171 20% Tax incentives at the Bac Ninh plant
Gross profit margin 56.0% 53.1% Margin compression due to depreciation from the Bac Ninh factory
and a broader contribution from frozen foods, partially offset by
Operating profit margin 13.0% 11.7% transportation cost savings.
PBT margin 12.6% 10.9%
NPAT margin 10.2% 9.7%
Effective tax rate 19.0% 10.8%
Source: KDF, VCSC
TAC outlook: margin improvement boosts earnings
Figure 64: revenue forecasts for TAC (VND bn) Figure 65: margin projections for TAC
7,000
7.4% 7.4% 7.5% 8.0%
6.7% 11.2% 11.5% 11.5% 11.5%

7.0%
6,000
4,840 6.0%
9.4%
5,000
4,502
4,189
3,900 5.0%
4,000
4.0%
3,000
3.0%
3.6% 3.6% 3.6% 3.6%

2,000
2.0%
2.0%
1,000
343 368 393 421 3.0%

3.0%
1.0%
2.8% 2.9%
- 0.0%
1.7%
2017 2018 2019 2020 2016 2017 2018 2019 2020
Cooking oil Condensed oil Revenue growth GPM OPM NPM
Source: VCSC Source: VCSC
We expect sales to grow in line with the industry at 7% per annum over the next few
years. We pencil in a 7.2% revenue CARG from 2016 to 2020 on the back of TAC’s
widening distribution, better control of its salesforce, a more active sales strategy and
improved marketing.
A new profit-centric sales strategy will fuel GPM expansion in 2017. As discussed
above, TAC’s GPM is poised to improve on the back of KDC’s profit-driven sales KPIs and
price increases in some loss-making products. Margin expansion was visible in H1 2017,
when GPM edged up 1.8 ppt vs H1 2016 to 10.8%. GPM should go up further in H2 2017
when sales of soybean oil, which has higher margins, will firm up as the North and the
Central enter cold weather.
We hold a conservative view on TAC’s ability to take market share in the premium
segment from Calofic. We project that the contribution from premium products to TAC’s
total revenue will hover around 10% in the next few years, which explains our assumption
that GPM will remain stable at 11.5% from 2018 onward.
Marketing expenses will likely ramp up… we pencil in a 1.0 ppt increase in selling
expenses as a % of sales in 2017 vs 2016 as TAC ratchets up marketing for its mainstream
and premium products.
…but will be partly offset by savings in G&A expenses. G&A expenses were inflated in
2016 by a non-recurring provision for severance allowance worth VND12 billion (USD0.5
million). In addition, overhead staff at TAC will be scaled down as the company is integrated
into KDC. As such, we pencil in a 0.8 ppt decrease in G&A expenses as a % of sales in
2017 vs 2016.
Summary of VCSC forecasts for TAC
Figure 66: VCSC’s five-year forecast for TAC (on a standalone basis)
VND bn 2017 2018 2019 2020 2021
Revenue 4,243 4,556 4,895 5,261 5,657
Cooking oil 3,900 4,189 4,502 4,840 5,207
Condensed oil 343 368 393 421 450
Gross profit 475 524 563 605 651
PBT 151 166 181 196 212
NPAT 121 133 144 157 169
NPAT growth 80.6% 10.1% 8.5% 8.5% 8.0%
Source: VCSC
Figure 67: VCSC’s FY17 forecasts for TAC (on a standalone basis)
Revenue 3,978 4,243 6.7%
Cooking oil 3,656 3,900 6.7% Mostly volume growth
Condensed oil 321 343 7.0% Mostly volume growth
Gross profit 374 475 27.0%
Selling expenses -224 -282 25.7% Ramp up of marketing expenses to support sales
* There was VND12 billion (USD0.5 million) worth of provision
G&A expenses -70 -42 -39.4% for severance allowance in 2016
* Fewer overhead staff in 2017
Operating profit 80 151 89.1%
There was a VND2 billion (USD0.1 million) gain from
Financial income 19 16 -15.3%
divestments in 2016
Financial expenses -17 -16 -3.2%
Other non-operating expenses 2 1
PBT 84 151 80.2%
NPAT 67 121 80.6%
Profit-centric sales strategy and ASP hikes propel GPM

Gross profit margin 9.4% 11.2% 1.8 ppt
expansion
Operating profit margin 2.0% 3.6% 1.5 ppt
PBT margin 2.1% 3.6% 1.5 ppt
Net margin 1.7% 2.8% 1.2 ppt
Effective tax rate 20.1% 20.0% -0.1 ppt
Source: TAC, VCSC
VOC outlook: associate companies, mostly Calofic
and TAC, remain major profit contributors
Revenue will be mainly driven by sales to TAC, as VOC’s main role in KDC is to supply
raw materials to TAC.
Shared profits from associates to account for over 90% of PBT in the forecast period.
VOC’s largest contributing associate remains Calofic, followed by TAC and LG Vina
Cosmetics Limited.
Summary of VCSC forecasts for VOC

Figure 68: VCSC’s five-year forecast for VOC (on a standalone basis)
VND bn 2017 2018 2019 2020 2021
Revenue 4,447 4,759 5,092 5,448 5,830
Sales to TAC 2,588 2,779 2,986 3,209 3,451
Others 1,859 1,979 2,106 2,239 2,379
Gross profit 156 167 178 191 204
PBT 285 272 293 317 342
NPAT-MI 280 273 294 317 341
NPAT-MI growth -10.7% -2.5% 7.6% 7.7% 7.7%
Source: VCSC
Figure 69: VCSC’s FY17 forecast for VOC (on a standalone basis)
* VOC deconsolidated TAC in Q3 2016
Revenue 5,567 4,447 -20.1%
* Oil trading revenue rises 7% in 2017F thanks to sales to TAC
Gross profit 492 156 -68.4%
Selling expenses -241 -70 -71.0%
G&A expenses -118 -85 -27.7%
* VOC deconsolidated TAC in Q3 2016
Operating profit 134 1 -99.6%
* Profits from oil trading business remain negligible
* There was a VND69 billion (USD3.0 million) gain from selling down
a stake in TAC in 2016
Financial income 99 49 -50.8% * There was a VND27 billion (USD1.2 million) gain from divesting
from Nortalic JSC in H1 2017
* Lower interest income resulting from the deconsolidation of TAC
Financial expenses -92 -29 -68.2% Lower interest expenses resulting from the deconsolidation of TAC
Other non-operating
220 265 Higher shared profits from TAC and Calofic
income/(expenses)
PBT 361 285 -21.2%
NPAT-MI 314 280 -10.7%
Gross profit margin 8.8% 3.5% -5.3 ppt

Operating profit margin 2.4% 0.0% -2.4 ppt
PBT margin 6.5% 6.4% -0.1 ppt
Net margin 5.6% 6.3% 0.7 ppt
Effective tax rate 13.1% 1.6% -11.5 ppt
Source: VOC, VCSC
Real Estate Investments
KDC owns 50% of the Lavenue Crown project, which is located on a 4,921 sqm site in
District 1 (CBD) of HCMC. Lavenue’s location is very prime and the project is designed to
be a complex of luxury apartments, a five-star hotel and a shopping center. However, since
it began in 2010, the project has not seen any progress.
KDC also owns 80% of Tan An Phuoc, which possesses a 5.15 ha site in Thu Duc District,
HCMC. Previously, it hosted KDC’s confectionary factory. Now KDC is seeking buyers for
the land.
Valuation
We adopt a sum-of-part valuation for KDC using a combination of DCF, PER and BV as
follows:
- For KDF and TAC, we use a combination DCF and FY17F PER. We apply a 70%
weighting to DCF as we believe it better reflects our medium and long-term views on
each company’s growth prospects.
- For VOC, we employ a FY17 PER valuation method as we project shared profits from
associates will account for more than 90% of VOC’s NPAT. As these associate
companies are mostly branded edible oil companies, we believe benchmarking VOC’s
valuation to a group of downstream edible companies is appropriate. On the other hand,
we exclude TAC from our valuation of VOC as part of our blended valuation for KDC to
avoid double counting the 27% stake in TAC currently held by VOC.
- We value KDC’s real estate assets, Lavenue and Tan An Phuoc, at book value given a
lack of visibility regarding these entities.
- We also take into account the value deduction related to recurring operating expenses at
KDC’s parent company by employing the DCF method.
Due to the value of real estate assets, which are not generating earnings, and amortization
of goodwill, our blended valuation for KDC will look high relative to its earnings.
Figure 70: Sum-of-part valuation
Equity 2016A 2017F 2018F
VND bn Valuation Method Ownership
value PER PER PER
KDF 3,365 DCF + PER 65% 2,187 23.6x 19.7x 15.5x
TAC 1,792 DCF + PER 79% 1,412 28.2x 15.6x 14.2x
VOC* 3,158 PER 51% 1,610 10.5x 14.2x 14.8x
KDC parent DCF -1,465
Lavenue BV 1,076
Tan An Phuoc BV 363
**net cash 1,446
KDC 6,628
Number of shares (mn) 206
Target price 32,200
KDC’s PER at target price 2016A 2017F 2018F
PER based on reported earnings 5.6x 14.1x 55.0x
PER based on recurring earnings 103.2x 42.2x 30.3x
PER based on recurring earnings, excluding amortization 103.2x 85.2x 55.0x
EV/EBITDA N/A 23.2x 17.5x
(*) Excluding the value attributed to VOC’s 27% stake in TAC
(**) Including an estimated VND216 billion (USD9.5 million) in net proceeds from selling 10% of KDF to employees at VND25,000 per
share and 5% to business partners at VND40,000 per share during Q3 2017.
KDF valuation
We derive our valuation for KDF using a combination of DCF and FY17F PER. We apply a
70% weighting to DCF as we believe it better reflects our medium and long-term views on
the company’s growth prospects.
We apply a target PER of 18.0x on KDF’s FY17 EPS for this report, which implies a discount
of about 10% to its peer median (see page 61) due to KDF’s much smaller scale.
Fair value
Method Weight (%) Contribution
(VND bn)
DCF (five years) 3,489 70% 2,443
FY17F NPAT @ 18.0x PER 3,074 30% 922
Equity value 3,365
Discounted Cash Flows

Discounted Cash Flows FY17 FY18 FY19 FY20 FY21
EBIT 215 263 306 330 373
add Depreciation -23 -29 -45 -48 -55
less Tax 66 66 72 83 84
less Capex -15 -15 -215 -15 -15
less Working cap increase 1 -6 -10 -13 -15
Free Cash Flow 243 279 108 336 372
Present Value of FCF 232 240 84 235 233
Total PV of FCF 232 472 557 791 1,024
Cost of Capital Current FCFF (Five Years)
Beta 0.9 PV of Free Cash Flows 1,024
Market Risk Premium % 7.5% PV of Terminal Val (3.0% g) 2,596
Risk Free Rate % 5.0% PV of FCF and TV 3,620

Cost of Equity % 11.8% Cash & ST investments 252
Cost of Debt % 6.1% Short & Long-term debt -383
Debt % / Capital % 28.7% Minority Interest 0
Equity % 71.3% Equity Value 3,489

Corporate Tax Rate % 10.8%
WACC % 9.9%
TAC valuation
We derive our valuation for TAC using a combination of DCF and forward PER. We apply
a 70% weighting to DCF as we believe it better reflects our medium and long-term views
on the company’s growth prospects.
We apply a target PER of 13.8x on TAC’s FY17 NPAT in this report, which implies a 5%
discount to its peer median (see page 61) due to TAC’s much smaller scale.
Method Fair value Weight (%) Contribution
DCF (five years) 1,881 70% 1,317
FY17F NAT @ 13.7x PER 1,585 30% 475
Equity value 1,792
Discounted Cash Flows

Discounted Cash Flows FY17 FY18 FY19 FY20 FY21
EBIT 167 181 195 210 226
add Depreciation -33 -36 -39 -42 -45
less Tax 37 39 38 21 18
less Capex -15 -15 -15 -15 -15
less Working cap increase 1 -6 -10 -13 -15
Free Cash Flow 157 162 169 160 169
Present Value of FCF 144 136 129 112 108
Total PV of FCF 144 279 409 521 629
Cost of Capital Current FCFF (Five Years)
Beta 1.0 PV of Free Cash Flows 629
Market Risk Premium % 7.5% PV of Terminal Val (0.0% g) 1,095
Risk Free Rate % 5.0% PV of FCF and TV 1,723

Cost of Equity % 12.5% Cash & ST investments 472
Cost of Debt % 4.6% Short & Long-term debt -314
Debt % / Capital % 38.8% Minority Interest 0
Equity % 61.2% Equity Value 1,881

Corporate Tax Rate % 20.0%
WACC % 9.1%
VOC valuation
We derive our valuation for VOC based on a PER method as over 90% of VOC’s earnings
come from shared profits from associates, which in turn are mostly branded edible oil
companies. We exclude the 27% stake in TAC that VOC currently holds in its valuation to
avoid double counting this stake in our valuation of KDC.
We apply a target PER of 13.8x on VOC’s FY17 adjusted EPS, which implies a 5% discount
vs its peer median (see page 61) due to VOC’s much smaller scale.
PER valuation VND bn

FY17F NPAT-MI 261
Shared profit from TAC 33
2017 NPAT-MI without TAC
229
shared profit
Target PER 13.8
Equity value (VND bn) 3,158
Comparable peers
Figure 71: KDF’s comparable peers
TTM Net TTM FY17
(USD mn) Company Country Mkt cap Y-o-Y % Y-o-Y % Net D/E P/B Adj. P/E ROE
Sales NPAT Adj PER
INNER MONGOLIA YILI China 18,742 9,014 0% 869 20% -0.5 5.1 19.9 19.5 25.2%
MEIJI HOLDINGS CO LTD Japan 12,288 11,493 2% 562 -3% 0.2 2.9 21.6 20.1 14.2%
VINAMILK Vietnam 9,649 2,191 11% 454 14% -0.4 8.9 24.0 23.0 38.9%
CHINA MENGNIU DAIRY China 7,619 8,099 10% (113) N/A -0.1 2.5 N/A 22.6 -3.5%
MORINAGA & CO LTD Japan 3,128 1,845 10% 103 37% -0.1 3.7 30.0 24.3 13.6%
LOTTE CONFECTIONERY South Korea 2,553 1,976 1% 62 0% -0.4 1.2 37.5 28.7 2.9%
BINGGRAE CO LTD South Korea 594 714 2% 26 29% -0.5 1.2 18.6 16.0 5.9%
NAMYANG DAIRY CO South Korea 469 1,061 -1% 29 6% -0.3 0.6 17.5 16.6 3.1%
Average - 35,407 14,097 4% 1,266 14% -0.2 3.4 23.4 20.7 12.9%
Median - 7,619 2,191 2% 103 11% -0.3 2.9 20.8 20.1 13.6%
KDF Vietnam 128 61* 31%* 6* 85%* 0.5* 6.1* **15.0 17.1 29.7%
Note: Adjusted P/E ratio = Company P/E divided by the relevant market average x P/E of the VN-Index.
(*) Based on 2016 figures as financial statements for H1 2017 are not available
(**) KDF issued new shares to KDC in August 2016 (66% dilution). 2016 PER using the current share count will be 20.4x
Figure 72: Comparable peers of TAC and VOC

TTM Net TTM FY17
(USD mn) Company Country Mkt cap Y-o-Y % Y-o-Y % Net D/E P/B Adj. P/E ROE
Sales NPAT Adj PER
ARCHER DANIELS-
United States 23,973 62,950 -3% 1,388 -12% 0.3 1.4 13.8 12.3 7.9%
MIDLAND
WILMAR INTERNATIONAL Singapore 15,657 42,969 12% 1,094 6% 0.8 1.0 17.4 15.3 7.4%
BUNGE LTD United States 11,006 45,144 9% 557 -27% 0.5 1.6 17.3 13.9 8.2%
NISSHIN OILLIO GROUP Japan 1,037 3,006 -1% 70 43% 0.3 0.9 14.6 15.5 6.3%
THAI VEGETABLE OIL Thailand 753 779 4% 73 36% -0.1 2.8 9.9 14.5 30.3%
J-OIL MILLS INC Japan 593 1,667 -4% 30 10% 0.4 0.8 20.1 N/A 4.0%
MEWAH INTERNATIONAL Singapore 332 3,059 14% 22 205% 0.4 0.7 18.6 N/A 4.4%
JVL AGRO INDUSTRIES India 61 575 -15% 5 -34% 0.2 0.6 8.1 N/A 5.5%
Average - 6,677 20,019 2% 405 28% 0.6 1.2 14.9 14.3 9.3%
Median - 895 3,033 2% 72 8% 0.6 0.9 15.8 14.5 6.8%
VOC Vietnam 123 220 N/A* 11 N/A* 0.5 1.5 12.8 10.7 13.2%
TAC Vietnam 70 179 9% 4 12% 0.3 3.5 21.1 13.9 16.5%
Note: Adjusted P/E ratio = Company P/E divided by the relevant market average x P/E of the VN-Index.
(*) Quarterly financial statements for 2015 are not available
Financial Statements
INCOME STATEMENT (VND bn) 2016A 2017F 2018F BALANCE SHEET (VND bn) 2016A 2017F 2018F
Revenue 2,239 7,121 8,574 Cash & cash equivalents 1,683 2,587 2,505
COGS -1,365 -5,618 -6,799 Short term investment 654 803 803
Gross Profit 874 1,503 1,775 Accounts receivables 402 811 824
Sales & Marketing exp. -718 -1,019 -1,185 Inventories 668 1,130 1,263
General & Admin exp. -255 -369 -445 Other current assets 1,648 484 484
Operating Profit (EBIT) -99 114 145 Total Current assets 5,056 5,816 5,879
Financial income 1,548 606 146 Fix assets, gross 2,940 4,725 4,785
Financial expenses -96 -158 -120 - Depreciation -656 -1,202 -1,461
In which, interest expense -39 -136 -119 Fix assets, net 2,285 3,523 3,324
Share profit/loss from associates 130 134 243 LT investment 1635 1984 2061
Net other income/(loss) 24 -28 3 LT assets other 395 412 412
Profit before Tax 1,507 667 418 Total LT assets 4,315 5,918 5,798
Income Tax -323 -57 -59 Total Assets 9,370 11,734 11,677
NPAT before MI 1,184 610 360
Minority Interest -9 -129 -221 Accounts payable 348 710 787
NPAT less MI, reported 1,175 481 139 Short-term debt 844 1,023 988
NPAT less MI, adjusted (1) 64 91 139 Other ST liabilities 413 635 661
EBITDA -20 305 404 Total current liabilities 1,605 2,368 2,436
EPS basic reported, VND 5,714 2,278 587 Long term debt 998 934 711
EPS basic adjusted (1), VND 312 378 587 Other LT liabilities 256 245 245
EPS fully diluted (1), VND 312 378 587 Total Liabilities 2,859 3,547 3,392
(1) Adjusted for extraordinary items
RATIOS 2016A 2017F 2018F Preferred Equity 0 0 0
Growth Paid in capital/Issued capital 2,567 2,567 2,567
Revenue growth -28.7% 218.1% 20.4% Add’l share capital/share premium 3,192 3,192 3,192
Operating profit growth % N/A N/A 27.7% Retained earnings 1,904 1,938 1,815
PBT growth % -77.4% -55.7% -37.3% Other equity -1,733 -1,264 -1,264
EPS growth %, -77.7% -60.1% -74.2% Minority interest 581 1,755 1,975
Total equity 6,511 8,187 8,285
Profitability Liabilities & equity 9,370 11,734 11,677
Gross Profit Margin % 39.1% 21.1% 20.7%
Operating Profit Margin % -4.4% 1.6% 1.7% CASH FLOW (VND bn) 2016A 2017F 2018F
EBITDA Margin % -0.9% 4.3% 4.7% Beginning Cash Balance 1,151 1,683 2,587
NPAT less MI Margin % 52.5% 6.8% 1.6% Net Income 1,175 481 139
ROE(2) % 21.0% 7.8% 2.2% Dep. & amortization 79 192 259
ROA % 14.7% 5.8% 3.1% Change in Working Capital -140 101 -42
Other adjustments -1,244 -79 208
Efficiency Cash from Operations -131 694 563
Days Inventory On Hand 102 58 64
Days Accts. Receivable 51 31 35 Capital Expenditures, net -549 -50 -60
Days Accts. Payable 47 32 39 Investments, net 419 1,146 0
Cash Conversion Days 106 58 60 Cash from Investments -131 1,096 -60
Liquidity Dividends Paid -494 -447 -327

Current Ratio x 3.1 2.5 2.4 ∆ in Share Capital -1 0 0
Quick Ratio x 2.5 1.8 1.7 ∆ in LT debt 377 -233 -35
Cash Ratio x 1.5 1.4 1.4 ∆ in ST debt 961 -206 -223
Debt / Assets % 19.7% 16.7% 14.6% Other financing cash flows -50 0 0
Debt / Capital % 22.0% 19.3% 17.0% Cash from Financing 794 -886 -585
Net Debt / Equity % -7.6% -17.5% -19.4%
Interest Coverage 54.2 11.3 8.8 Net Change in Cash 532 904 -82
(2) calculated using NPAT-MI and Equity excluding minority interest Ending Cash Balance 1,683 2,587 2,505
VCSC Rating and Valuation Methodology
Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock
defined as (target price – current price)/current price + dividend yield, and is not related to market performance.
RATING DEFINITION
Total stock return including dividends over next 12 months expected to
BUY
exceed 20%
Total stock return including dividends over next 12 months expected to be
OUTPERFORM (O-PF)
positive 10%-20%
MARKET PERFORM (M-PF)
between negative 10% and positive 10%
UNDERPERFORM (U-PF)
negative 10%-20%
SELL
below negative 20%
NOT RATED The company is or may be covered by the Research Department but no
rating or target price is assigned either voluntarily or to comply with
applicable regulation and/or firm policies in certain circumstances, including
when VCSC is acting in an advisory capacity in a merger or strategic
transaction involving the company.
RATING SUSPENDED A rating that happens when fundamental information is insufficient to
determine an investment rating or target. The previous investment rating and
target price, if any, are no longer in effect for this stock.
Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-
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Analyst Certification of Independence
I, Nghia Le, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities
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KIDO Group (KDC) (SELL - 21.2%) Initiation: Hefty Valuation For An Ice Cream/cooking Oil Franchise

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KIDO Group (KDC) (SELL - 21.2%) Initiation: Hefty Valuation For An Ice Cream/cooking Oil Franchise

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KIDO Group (KDC) [SELL -21.

Market Cap: $388.6 mn KDC VNI Company Overview:

Nghia Le Hefty valuation for an ice cream/cooking oil franchise

51% 79% 65%

Figure 1: Ownership and management

Board of directors Title Note

Top executives Title Note

2011 2012 2013 2014 2015 2016

Retail ice cream consumption Foodservice ice cream consumption

Source: Euromonitor International

Vietnam Philippines Indonesia Thailand Malaysia

Source: Euromonitor International (2016)

Source: Euromonitor International, World Bank (2011-2016)

602 675 1000

Vietnam Philippines Indonesia Thailand Malaysia

Urban population Per capita consumption

Source: Euromonitor International, World Bank (2016)

VinMart+ Circle K B's mart Shop&Go AEON Ministop

Source: Nielsen, VCSC

Source: Euromonitor International (2016) Source: Nielsen Vietnam (2015)

4.9 5.3 -5%

2.8 3.1 -15%

2.1 2.4 2.2 2.4

2013 2014 2015 2016 2013 2014 2015 2016

Average wages Minimum wages Average wage growth

Source: GSO (wages are expressed in VND million per month)

Premium Celano Cone Extra Unilever Cornetto Royale

Nestle Nestle Kit Kat Vinamilk Twin Cows cup

Nestle Nestle Milo

Merino cup Merino Yeah

Budget Vinamilk Vinamilk Delight Vinamilk cup Unilever Paddle Pop

KDF Merino Kool Banana ice cream

Source: Vietnam Market Intelligence (2016)

Figure 14: Vietnam’s ice cream market share by player

Source: Euromonitor International (2016), VCSC

Unilever's market share Total market size

Source: Euromonitor International (2016)

2011 2012 2013 2014 2015 2016

Source: Euromonitor international (2016)

The leading ice cream maker in Vietnam

Production: North/South factories; largest combined capacity

Cold distribution: the deepest and most extensive in Vietnam

Modern trade Distributors

130 trucks owned by distributors

GT retail outlets GT retail outlets

Passion Affordable Cup

Tub Affordable Tub

Sweetie Affordable Funny Face

Beauty Yogurt Frozen smoothie Frozen sirup

Products: the broadest offerings, including SKUs tailored to

Figure 23: Unbranded traditional Vietnamese products vs KDF products

Source: VCSC, KDF

Banh Bao – Vietnamese buns

Source: VCSC compilation

Future product launches

400 325 355 -40%

197 172 -60%

2013 2014 2015 2016

Ice cream Yogurt Frozen foods Revenue growth

2013 2014 2015 2016

Gross profit margin PBT margin

Source: KDF Source: KDF

2011 2012 2013 2014 2015 2016