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Master of Business Management Intake 8

CORPORATE FINANCE AND BUSINESS PLANNING

Case study
Vietnam Dairy Products Joint Stock Company

Group 4: Hoang Minh Hang


Dang Thi Phuong Chi
Nguyen Hai Anh
Vu Trung Duc
Vu Thi Hang
Ho Le Na
Pham Anh Thu
Duong Ngoc Cuong

Hanoi, 31 March 2010


Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

TABLE OF CONTENT
1. INTRODUCTION .........................................................................................................................2
1.1 Company description.......................................................................................................... 2
1.2 Strategies ............................................................................................................................... 4
2. UNDERLYING MARKET ...............................................................................................................7
2.1 Economic environment....................................................................................................... 7
2.2 Vietnam Dairy Market Overview ....................................................................................... 7
3. PORTER AND SWOT ANALYSIS ................................................................................................11
3.1 PORTER analysis................................................................................................................... 11
3.2 SWOT analysis ...................................................................................................................... 15
4. ORGANIZATION OF VINAMILK...............................................................................................17
5. FINANCIAL MODELLING .........................................................................................................18
5.1 Sales analysis and forecast............................................................................................... 18
5.2 Cost of Good Sold.............................................................................................................. 23
5.3 Operating expenses .......................................................................................................... 25
5.4 Capex and Distribution...................................................................................................... 26
5.5 Working capital................................................................................................................... 31
5.6 Short term investment ........................................................................................................ 33
5.7 Funding position.................................................................................................................. 34
5.8 Balance sheet ..................................................................................................................... 35
5.9 Income statement.............................................................................................................. 38
5.10 Cashflow statement........................................................................................................... 39
6. FINANCIAL ANALYSIS .............................................................................................................40
6.1 Return ratios......................................................................................................................... 40
6.2 Repayment capacity ........................................................................................................ 41
6.3 Liquidity ratios...................................................................................................................... 42
6.4 Profitability ratios................................................................................................................. 42
7. RISK ASSESSMENT ....................................................................................................................43
7.1 Worse case .......................................................................................................................... 43
7.2 Best case.............................................................................................................................. 47
7.3 Risk assessment ................................................................................................................... 50
8. VALUATION..............................................................................................................................51
8.1 Approach ............................................................................................................................ 51
8.2 DCF ....................................................................................................................................... 51
8.3 Price Multiples Method ...................................................................................................... 54
9. REFERENCE...............................................................................................................................55

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

More than 200 products


FOUR MAIN GROUPS

Vinamilk is currently among the largest market capitalized companies on


Vietnam’s stock market accounting for 7% of the overall market capitalization -
Top 100 Strongest Brands by the Vietnamese Ministry of Industry and Trade - Top
Ten High-quality Vietnamese Goods

1. INTRODUCTION

1.1 Company description

Overview

Vinamilk was established in 1976 and privatized in 2003 and is now the leading
producer of dairy products in Vietnam based on sales volume and revenue.
Vinamilk markets the majority of the products under “Vinamilk” brand, which has
been designated as both a famous Vinamilk Brand and one of the Top 100
Strongest Brands by the Vietnamese Ministry of Industry and Trade in 2006.
Vinamilk has also been voted the top brand in the “Top Ten High-quality
Vietnamese Goods” for each year among 1995 to 2007.Having listed on the
HCM Stock Exchange in late 2005, Vinamilk is currently among the largest market
capitalized companies on Vietnam’s stock market accounting for 7% of the
overall market capitalization.

Vinamilk’s product mix covers more than 200 products divided into fore main
groups including dairy, juice, coffee and mineral water. Dairy is the dominant
product group generating almost 98% of total revenues. The company’s dairy
products range from core dairy products such as liquid and powdered milk, to
value-added dairy products such as condensed milk, drinking and spoon
yoghurt, ice cream, and cheese. Vinamilk offers one of the largest dairy
portfolios in Vietnam, across a wide selection of products, and packaging sizes.

Since commencing operation, Vinamilk has built the largest distribution network
in Vietnam, taking advantages of both traditional distribution and modern trade
channels. Vinamilk has 250,000 distributors and 140,000 points of sales (“POS”).
This network gives Vinamilk national coverage across all 64 provinces of Vietnam.
Those sale chain and POS outlets are extensively supported by Vinamilk including

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

the supply of branded refrigeration equipment to keep its perishable products


fresh, particularly in rural areas and smaller shops.

Recently, Vinamilk has also started investing in domestic cattle farm in order to
boost liquid milk supply. Vinamilk has been operating four farms in Vietnam, and
just opened a VND100B farm in northern Vietnam with a herd of 3,000 heads. By
doing that, Vinamilk also shows their desires to stimulate the development of an
agricultural dairy supply industry in Vietnam.

Since domestic market is considered as the company’s main market in its long-
term development plan, Vinamilk’s majority of revenues from domestic market
(up to 85-90% of total sales) and the balance exported to countries such as
Australia, Cambodia, Iraq, the Philippines and the United States. The key export
products are powered milk and condensed milk. As at 31 December 2009, the
Company has 4 subsidiaries:

Subsidiaries Principal activities Ownership

Vietnam Diary Cow One Member Limited Company Milk production 100%

Lamson Diary Products Joint Stock Company Milk production 55%

International Real Estate One Member LTd., Co Real estate trading 100%

Victory – Vietnam Property Joint Stock Company Real estate trading 100%

Victory – Vietnam Property Joint Stock Company is a wholly owned subsidiary of


International Real Estate One Member Limited Company, which is a wholly
owned subsidiary of the Company

Vision

Vinamilk will become the leading Vietnamese brand on nutrition and health
products for human life.

Mission

Vinamilk commits to bring to communities the best-quality nutrition products that


convey its respectability, love and responsibilities for the people, life and society.

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Core values

Respectability: Harmony of interests:


Self-respecting, equality and Inters of Vinamilk are also the
dedication to the growth of the interests of its employees, partners,
company are what Vinamilk really investors and society.
appreciate at Vinamilk.

Will: Efficiency:
Dare to think, to do, to take Vinamilk always focus on added-
responsibilities and to overcome values in all works and activities of
challenges to realize the committed investing and operating.
Targets

Openness: Creativity:
Constructive and straight Vinamilk always highly appreciate
communication is the base for the passion, unique discovery and
Vinamilk’s team to become more innovative solutions.
united and stronger.

1.2 Strategies

• The company’s ultimate goal is to maximize the values to shareholders


and to pursuit strategy for business Vinamilk and developing a system of
powerful brands to satisfy the demand and consumption trends of
Vietnamese consumers;

• Developing “”Vinamilk" to the most reliable and trusted brand on nutrition


products by application of scientific researches on specific demand of
Vietnamese on nutrition in order to launch the best products to
Vietnamese consumers;

• Making more investment into expanding its market of healthy beverage


products through the core brand of VFresh to meet the increasing
demands for healthy and natural beverage;

• Strengthening its distribution quality and network to expand its market


segment in the market where Vinamilk’s segment is not high, especially in
rural area and small towns;

• Making comprehensive investments into developing a strong brand, new


range of products and upgrading quality of distribution network of cold

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products (spoon z, ice-cream, UHT milk) to turn this range of products into
the key contributor to the company’s sales volumes and profits;

• Exploring the power and developing reliability of “Vinamilk” brand as the


most reliable and trusted brand to the Vietnamese and in order to
account for at least 35% of powered milk market share in the next 2 years;

• Developing comprehensively the portfolio of dairy products, targeting


various consumers and expanding value-added products in order to
increase the company’s profitability;

• Continuing improvement of the supply network management capacity;

• Keeping expansion and development of a stable, active and effective


distribution network; and

• Developing materials sources to ensure a stable fresh milk supply with high
quality and competitive prices.

Strategy in 2010 – 2012 and plan for the year of 2010

Basis of the plan:

World economy:

• Milk volume grows strongly, expected at 2% - 3% per annum on average.

• Demand on drinking milk is still growing strongly in the emerging markets

• Yoghurt is still steadily growing in all markets.

• Condensed milk in trend is declining because it is substituted by liquid milk


and ice cream which have longer shelf-life.

• There is a significant growth in powder milk, especially in the South Asia.

• According to the recent survey, 80% of the South Asia population has
habit to drink milk frequently: Thailand (23 liters/year) and China (25
liters/year).

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Vietnam economic outlook:

• The annual consumption per capita of Vietnam is approximately 14 liters

• The government continues to develop the dairy industry

• Targets for the year 2010: GDP growth rate is 6.5%, the growth rate of
industry production is 10%

• Challenges facing the dairy industry: food stuff hygiene, quality of dairy
products, the control on milk price, supply of raw fresh milk is still small
while dairy industry is developing in the unfavorable climate conditions
and land for cow farms is limited.

Strategy for 2010 – 2012

• Domestic market: liquid milk, spoon yoghurt, and powdered milk continue
to grow strongly, condensed milk increases slightly. Export: maintaining the
current markets and looking for new markets;

• Looking for prestigious partners from overseas and in the regions where it
has strong supply chain in raw milk in order to secure a stable supply;
maximizing the local supply through support to the farmers.

• Investment in fixed assets: VINAMILK focus on the following project groups

1. Projects started in previous years: Beverage factory, Phu My Hung,


office building, upgrading Tien Son factory to Mega standard

2. Office buildings in Hanoi and other branches: Mega factory in Binh


Duong: 2011 / 2012. Powdered milk factory Dielac 2: 2010/2013

3. Upgrading Saigonmilk factory, Thong Nhat factory, and upgrading


to maximize capacity of factories in Nghe An, Bình Chanh, Can Tho

4. Developing cow farms in the Central and North of Vietnam

5. Developing distribution network for cool/frozen products:


warehouses, cool trucks

6. Overseas investment to secure raw material

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2. UNDERLYING MARKET

2.1 Economic environment

At the end of the year 2008, economists and financial institutions gave different
forecasts on Vietnam’s 2009 GDP, from only 0.3% (as per The Economist) to 5.5%
(as per World Bank).

Major economic indicators in the first quarter of 2009 showed pessimistic future
picture of the economy. Facing with such shortcomings, the Government made
strong decision when launching the first stimulus package with total value of
US$8 billion to finance local enterprises. The package provided subsidy interest
rate of 4.0% for each loan. In fact, this program helped the economy to obtain
remarkable results. According to General Statistics Office of Vietnam, the
economic growth rate in 2009 reached 5.32% which is lower than that of 6.18% in
2008, but exceeds most of optimistic forecast for the year. This rate is still a rather
high level in comparison with that of global and regional economies. It should
also be noticed that GDP of the third and fourth quarter increase to 6.04% and
6.90% respectively, which are higher than those of 2008. Besides, CPI in 2009
increases by 6.88%, the lowest rate during the last 6 years.

Those above mentioned optimistic signals of the economy have positive effects
on the whole economy, in general, and on the diary product industry, in
particular.

2.2 Vietnam Dairy Market Overview

Dairy sales and consumption

Vietnam dairy industry has witnessed the strong growing trend in revenues during
2000-2008 period, namely the national sales tripled to US$1.15bn in 2008
compared with that of US$0.36bn in 2003. The high growth rate in revenue is
relative to consumption volumes.

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Dairy consumption per capital in Vietnam has grown from 9.0 kg in 2003 to
11.6kg in 2008. However, it is well below peers in the region such as Indonesia
(14.4 kg); Thailand (38.3 kg) and Philippines (14.4 kg). In terms of consumption
allocation, it is believed that dairy consumption is overwhelmingly concentrated
in wealthier urban population. Although dairy there is dramatical improvement in
storage facility and distribution network, only 10% of the population, principally
the middle class and wealthier urban in Ho Chi Minh City and Hanoi, consume
78% of the total dairy products sold in Vietnam according to Vietnam- Belgium
Dairy Project. Only 22 % of consumption is attributable to the remaining 90% of
Vietnam population.

It is projected by the Government that the urban population will increase from
27% in 2009 to 45% in 2020; hence the long term growth potential for milk
consumption is feasible.

There is a relationship between strong domestic consumption and GDP per


capital growth

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With the low national consumption base, young population, change in drinking
habit and strong economic growth outlook, it is estimated that consumption
volume will reach 14.6 kg per capital by 2013 driving the total consumption to
1.32mn tones by 2013 from 1.0mn tones in 2008.

Supply and retail prices

Vietnamese consumers currently have to pay some of highest milk prices in the
world at an average price of USD1.3 per liter, primarily due to the cost of
imported milk powder as Vietnam’s fresh milk production only meet less than 22%
local consumption demand.

Source: Vietnam- Belgium Dairy Project

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As of end 2008, Vietnam had only 108,000 heads of cattle. In an effort to


increase domestic production, the department of livestock production under the
Ministry of Agriculture and Rural Development plans to in-place to achieve a
cattle population of 200,000 heads by 2010 and 350,000 head in 2015. By 2020,
the aim is for a national self-sufficient rate of 38% which equivalent to about 1bn
tones.

Competition

The Vietnamese dairy market is largely driven by 2 main players, dominated by


VINAMILK (37%) market shares as of end 2008 and Dutch Lady (32%). VINAMILK
hold a dominant position across most sectors including cup yoghurt, UHT liquid
milk and sweet condensed milk.

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3. PORTER AND SWOT ANALYSIS

3.1 PORTER analysis

Supplier

Among five forces including: suppliers, new entrants, buyers and substitute
products, suppliers should be considered as the most competitive factor of
VINAMILK. VINAMILK has a diversified supplier domestic and oversea network.

As described in the market overview, Vietnamese dairy industry depends much


on imported milk powder over the long term and will continue this dependence
in the future. The raw materials comprise mainly of fresh milk, milk powder and
sugar.

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Major dairy exporters by Volume- Source: www.moit.gov.vn

VINAMILK’s suppliers are located in different regions including Argentina,


Australia, Belarus, US, EU, New Zealand etc, leading to the lower of supplier
concentration. Over the years, VINAMILK has built and been maintaining the
good business relationship foreign suppliers. Among them, Fonterra, who makes
up one third of the world trading volume and a world leading multinational
corporation in milk and in dairy product export, is the biggest milk powder
supplier. Being partners of such company, VINAMILK can improve the quality of
the products thanks to high quality input. Given the low reliance on supplier and
long term business relationship, VINAMILK does not have any concern on sources
of raw materials.

Name of Supplier Product(s) Supplied

Fonterra (SEA) Pte Ltd Milk powder


Hoogwegt International BV Milk powder
Perstima Binh Duong, Tins
Carton packaging and
Tetra Pak Indochina
packaging machines
Domestic farms Fresh milk

VINAMILK do not sign long-term contracts with any suppliers of milk material, milk
powder, sugar or any other materials. The supplier contracts normally last for a
year. They find the sources through tenders after VINAMILK have worked out our
needs for manufacture of the next financial year. This policy will significantly
reduce switching costs in changing suppliers.

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It seems that relying too much on foreign suppliers and imported activities may
arise some risks. Therefore, VINAMILK started finding the way to catch with
domestic suppliers. Applying encouraging policies based on Vietnamese
Government policies, VINAMILK initiated its cow-breeding program in 2006 in
order to outsource fresh milk domestically. VINAMILK provide local farms with the
finances and the technology, thus maintaining a strong and stable fresh milk
sources. The company also provides additional assistance for suppliers in remote
areas in the form of transportation fee allowances. VINAMILK is also willing to
provide finance support to suppliers if there is increase in world price of milk.
Together with proactive support from the Government and VINAMILK desire to
develop the domestic fresh milk supply, the dependence on foreign suppliers will
be gradually reduced.

Strategic combination high quality and huge supply from powder milk foreign
supplier; and improvement of domestic fresh milk sources will make VINAMILK
maintain the dominant roles in Vietnam dairy market and gain the big
advantages over the competitors.

Threats of substitutes

For milk industry in general speaking, traditional dietary habits are the 1st threat
of substitute should be mentioned. The increasing popularity of Soya milk
presents a threat to dairy products. These kinds of substitutes bring benefits from
reducing cholesterol, improving bone health and aiding in relaxation. Soy milk
consumption has increase by a 4.2% CARG over the last three years alone.
According to some recent reports and research, the global sale of soy milk
presents a threat to dairy products. VINAMILK also has to pay attention to build
up the products that focus much on healthy.

For VINAMILK in position as a domestic company, imported/foreign powdered


milk/brands are considered the important substitute. Account for 86% of that
particular segment as the Vietnamese consumer believes foreign names offer
better nutritional characteristics (particularly for infant formula) despite that
foreign product price is two or three times as much as domestic product. At the
moment, Vietnam's domestic dairy industry is effectively an oligopoly with
VINAMILK and Dutch Lady holding a major market share in all segments other
than powder milk. However, both companies will face challenges as Vietnam's
proceeds with its commitment to greater access and potential future tariffs
following accession to WTO.

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The schedule for lowered tariffs on imported dairy products as described as


follow:

Current Import WTO limits by


Product
Taxes 2012

Whey (Milk Plasma) 20-30% 10%


Cream 50% 20%
Milk Powder (Used as Material Inputs) 10% <20%
Manufactured Products 22% <30%

This is one of the factors that may affect to the stability of current dairy pricing in
Vietnam. If foreign players are efficient enough to enter and complete in the
same price range as VINAMILK , their brand name and financial clout could help
them to win market share, as they currently do with infant milk formula, despite
retails prices of two to three times more than the domestic equivalent product.
Moreover, the end consumers could be easy in changing the used dairy
product, thus switching costs is very low. Therefore, VINAMILK will spend much
more on R&D to get competitive idea by understanding customer’s behavior.

New entrants

There are some reasons for the difficulty of new entrants. First of all, economy of
scale is high. High fix asset costs, big initial investment. Other smaller player has
struggled to enter also expand due to limited financial resources and a focus on
building up their brands. The second entrant barrier is brand identity. VINAMILK
has gained a strong position in Vietnamese customers. Based on characteristic of
the foods market, it is not easy to get an acknowledgement from consumers.
VINAMILK provides customer with high quality, nutritious and delicious products
for your health. Currently VINAMILK brand is leading the market, with 4 main
product groups: Condensed milk, Dielac, V-fresh and VINAMILK Café, offering
more than 200 dairy products. VINAMILK specialize in producing internationally
recognized quality standards across all our products and aim at satisfying its
customers’ needs perfectly every time.

On the other hand, quality control standard is also very important in this sector.
On the market of dairy, the quality control standards play a vital role in activities.
There are many mandatory standards controlled by the authority agencies and
all the participants have to follow tightly. To name as an example, the significant
effect from the crisis of melamine- infected milk in China and have caused
negative impacts on the purchasing power of the consumers. Another factor is
tight existing company’s relationship leading to a difficulty to enter a market for
a new one.

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Buyer power

According to the Ministry of Industry and Trade, average milk consumption by


Vietnamese per capita is currently about 11.6kg/ year, and expected to rise to
14.6 kg by 2010. However, only about 10% of the population, principally the
middle class and wealthier urban dwellers in Ho Chi Minh City and Hanoi that
consume 78% of the total dairy products sold in Vietnam. Only 22% of
consumption is attributable to the remaining 90% of Vietnam’s population.

An oligopoly with VINAMILK and Dutch Lady holding majority shares lead to the
lower of buyer's power. There no many choices for customer for the dairy
products. VINAMILK seems like the sole company which supplies the domestic
dairy products with high quality and competitive prices. Thus, customer power in
bargaining is very low, nearly equal zero.

One of the important characteristic of dairy industry is the inelasticity of demand.


The high growth in revenue relative to consumption implies substantial demand
inelasticity for dairy products because end consumers have historically generally
absorbed price increases in Vietnam.

By making research on the forces, we can get an overview of the VINAMILK


competitiveness. General development strategies have been implemented and
VINAMILK Board of Director has made best effort in setting up a professional
governance system and procedures to adapt and maintain its competitiveness.

3.2 SWOT analysis

Strengths Weakness

• A market leading dairy brand name, which • Competition from


dominates sales in this high-growth channel international investors is
• A diverse product range and a large export intense with the government
division actively encouraging
• A familiar trademark to domestics’ clients investment to boost output
• A great customer understanding and
satisfaction as welll as knowledge of the local • VINAMILK distribution
market with marketing strength infrastructure reduces sales
• Strong distribution presence which spreads opportunities for perishable,
nationwide, from urban to rural, coastal to high-value fresh dairy
mountainous area. products
• Modern production lines to ensure the quality
and hygiene • The low-income majority rural
• Technical support from other firms to improve population also restricts the
administration. audience size of fresh dairy

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Opportunities Threats

• In urban centers, processed • VINAMILK considers itself


dairy products represent a high- disadvantaged by the strength of
value, high-margin channel international brand names such as
• Even dairy consumption at the Dutch Lady, Nestle, and F&N and their
mass-market level is prevalence will only increase going
experiencing high single-digit forwards
growth annually • Rising commodity costs threaten
• Experience in the emerging profitability, particularly with regard to
Vietnamese market should mass-market primary products, a
increase the chance of success Q1/08 net profit decline already
when exporting to other reflects this trend
emerging South East Asian • Joining WTO, the import tax for dairy
markets product will be reduced. It will provide
• A second stock exchange listing a great opportunity for imported milk
should lift capital available for products
investment in expansion • VINAMILK is facing with unstable
export market. Annually, more than
90% of VINAMILK’s export turnover is
from Iraq where is political and
economic situation is unsteady.
• Currency risks is also a big concern
with VINAMILK; in which
approximately 50% of raw material
inputs are imported
• Ongoing and upcoming projects with
the requirement of the long-term
nature may be affected by the
success or failure.

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4. ORGANIZATION OF VINAMILK

As at 31 December 2009 the Group had 4,670 employees (31/12/2008: 4,532 employees) and
By December 2008, HTE has 7 main Unit in three office location: the headquarter office in Hanoi and two branch office in
DaNang & HoChiMinh City. The existing organization chart is below:

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5. FINANCIAL MODELLING

5.1 Sales analysis and forecast

2008 was another golden year of VINAMILK when it continued achieving


remarkable growth rate trend since 2003. In 2008, VINAMILK’s growth rate was
25.5% in comparison with that of the same period in the previous year, higher than
the average growth rate of 22.1% during the period 2003-2007. Overall domestic
market made up 85-90% of sales with the balance exported. VINAMILK’s main
exported products are milk powder and sweet condensed milk. Its principal export
markets are the Middle East, Philippines and neighboring Cambodia and Laos.

The increase of sales is mainly thanks to the significant contribution of consumption


volumes. With the current capacity of 504 thousand tons/ year and the
productivity reaches nearly 70%, VINAMILK ranks number 1 in dairy market in terms
of designed capacity.

In addition, VINAMILK focused expanding distribution network with 125,000 outlets


nationwide. More investments were made to cold and cool stores and freeze
vehicles to meet the growth of yoghurt products. In 2008, VINAMILK also purchased
over 7,000 cold &cool stores and more than 300 small vans for distribution system.
Remarkably increase in consumption volume also resulted from the reliable quality
of products. 2008 witnessed the difficulties from the scandal of melamine-infected
milk in China, however, it was the opportunity for VINAMILK to further develop its
business Thanks to valuable resources, strict input material selection, the advanced
and innovative production technology and equipment in combination with a
team of expertise, VINAMILK’s products are consistently complied with Vietnamese
and International standards. All the above-mentioned were contributed to the
increase in consumption volumes of VINAMILK in 2008.

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The biggest change in sales proportion in 2008 was powdered milk- infant cereals
with the increase from 24% in 2007 to 29% in 2008 while sales proportion of liquid
milk and yoghurt products have experienced a slightly increase from 26.5% to
27.1% and from 12% to 13% respectively. At the same time, there was a decrease
in sales proportion of condensed milk from 36% down to 29%.

In 2009, VINAMILK achieved highest growth rate over the past few years of 29.3%
thanks to 22% increase in consumption volumes. The average prices of VINAMILK’s
products were kept unchanged for almost one year from Nov 2008 to Nov 2009.
The prices have been increased by 6% only when input materials and import
expenses sharply increased in Dec 2009. Breakdown of sales and market shares
are shown as below:

Source: VinaSecurities research

VINAMILK is expected not to maintain the high growth rate as it did in 2008 (26%)
and in 2009 (29%), which is considered as threshold. We expect a sustainable
growth rate of 18% assuming that there will be an increase of 8% in average price
and 10% in VINAMILK’s capacity. Our assumption also takes into account the milk
consumption and demand of Vietnam market and national distribution networks
of VINAMILK, one of its the huge competitive advantages as well as Government
policies to encourage the manufacturers in addressing nutrition imbalance.

For the whole year 2008, VINAMILK decided to increase price once by 5% and not
until at the end of 2009, did the company increase 6% due to the higher input
materials. Hence, we forecast that price will be increase once per year at 8%
annually to cover for inflation.

With strong brand and dominant threshold in domestic market, it is reasonably


believed that there is further room for them to expand, hence we estimate that
the company will increase its capacity by an average of 10% per year during 2010-
2014 period.

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2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Revenues from UHT
Milk & Drinking
Yoghurt 2,271,133 3,040,756 3,776,619 4,690,560 5,825,676 7,235,490 8,986,478

y-o-y
27.1% 28.1% 29.7% 31.2% 32.7% 34.2% 35.5%
Revenues from
Cup Yoghurt 1,089,473 1,731,391 2,150,388 2,670,782 3,317,111 4,119,852 5,116,856

y-o-y
13.0% 16.0% 16.9% 17.8% 18.6% 19.5% 20.2%
Revenues from
Powdered milk 2,430,363 3,181,431 3,779,540 4,490,094 5,334,232 6,337,067 7,528,436
y-o-y 29.0% 29.4% 29.7% 29.9% 30.0% 29.9% 29.8%
Revenues from
Condensed Milk 2,430,363 2,607,908 2,738,303 2,875,219 3,018,979 3,169,928 3,328,425
y-o-y 29.0% 24.1% 21.5% 19.2% 17.0% 15.0% 13.2%
Revenues from F&B
& by Product 159,231 259,709 272,694 286,329 300,645 315,678 331,461
y-o-y 1.9% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3%

Total Revenue
8,380,563 10,821,195 12,717,544 15,012,984 17,796,643 21,178,015 25,291,656

y-o-y 26% 29% 18% 18% 19% 19% 19%


In terms of revenue structure, UHT Milk & Yoghurts and Powder Milk products will continue dominating VINAMILK total revenues while the
contribution of Condensed Milk will dramatically reduce from 2009-2014.

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100% 1.5% 1.9% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3%

15.0% 13.2%
90% 19.2% 17.0%
24.1% 21.5%
29.0%
36.0%
80%

29.9% 29.8%
70% 30.0%
29.9%
29.7%
60% 29.4% Revenues from F&B & by Product
29.0% Revenues from Condensed Milk
50% 24.0%
20.2% Revenues from Powdered milk
18.6% 19.5%
17.8% Revenues from Cup Yoghurt
40% 16.9%
16.0% Revenues from UHT Milk & Drinking Yoghurt
12.0% 13.0%
30%

20% 32.7% 34.2% 35.5%


27.1% 28.1% 29.7% 31.2%
26.5%
10%

0%
2007 2008 2009 2010 2011 2012 2013 2014

Revenues of Liquid milk including UTH milk and a small portion of drinking yoghurt
out of total revenues surged from 20% in 2007 to 27.1% in 2008. Since there is no
sale breakdown in audited financial statement of 2009, we estimate that it has
increased to 28.1% in 2009. It is one of the strong products of VINAMILK. The
product consists of full cream milk, low fat, skim milks and drinking yoghurt for the
balance. According to Vinasecurities research, the market share of VINAMILK
Liquid milk was about 40% in 2007 and forecasted to gain 44% in 2008. It is
expected that the proportion of Liquid milk in VINAMILK’s total revenues will
gradually increase from 29.7% to 35.5% during 2010-2014 with the 15% increase in
consumption volumes.

The 2nd biggest element of total sales is the Powder milk segment include baby,
infant and elderly formula’s as well as a recently launched dietary/ weight
management powdered dietary supplements. However, VINAMILK is not a
dominant player in this segment, but foreign and imported brands. Despite costing
two to three times as much as domestic products, imported/ foreign powder milk
brand accounts for 86% of market shares since Vietnamese consumers believe that
those imported ones offer high quality and nutritional products. In 2007, market
share of VINAMILK’s powder milk was 13.8% only. Since it is high margin business,
VINAMILK is targeting a 35% market share in powder milk by end of 2010 by
participating in media education campaigns in cooperation with Government
National Nutrition Institute. It is believed that USD50M School Milk Program will
create milk drinking habits for the younger generation which could push the total
sales of VINAMILK increased. Accordingly, powder milk segment is estimated to
account for about 30% of VINAMILK total sales from 2009-2014.

With the proactive investment in facilities and distribution network, cup yoghurt has
been VINAMILK’s fastest growth business and will only lag behind liquid and
powder milk segments. As illustrated in the above market share chart, VINAMILK’s
cup yoghurt dominates the market with 90% of market shares. Going forward, the
market share for this segment will not change much since it is not the focus and
expertise of Dutch Lady, the main competitor of VINAMILK. Sales of yoghurt are

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concentrated in urban centers given the availability of cold storage facilities. Since
the second tier cities and rural areas develop, it is forecasted sales of yoghurt
could double in 2012 and account for more than 20% of total revenues. The
consumption volume will achieve a stable growth rate of 10% y-o-y.

Condensed milk is the most popular and traditional product along with long history
of VINAMILK since establishment. VINAMILK’s 80% market share in the sweetened-
condensed milk should continue as Dutch Lady does not intend to expand this
business while other small players have just entered the market and still have minor
market shares. Historically this segment used to be the key revenue contributor..
However, condensed milk is gradually replaced by liquid and powder milk
recently. We forecast that this segment will remain stable growth rate of 5% y-o-y
thanks to increased price and no change in volume taking into account of strong
demand from rural area but will contract over time as dietary habits and
economic growth drive consumption towards liquid milk.

The F&B segment primarily includes fresh juices, soya milk products and coffee. To
date, F&B only accounts for more than 2% of total revenues. Currently, VINAMILK
has been building a healthy drink factory which will begin commercial operation in
2011 and be fully operational the following year. Given that the juice and coffee
market are very competitive, we suspect that profits are quite low. Consequently
the growth rate of this segment is forecasted at 1 digit going forward.

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5.2 Cost of Good Sold

2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)

Raw materials 3,604,700 4,311,178 5,066,686 5,981,192 7,090,206 8,437,348 10,076,228


y-o-y 29% 20% 18% 18% 19% 19% 19%
% of COGS 64% 64% 63% 63% 63% 63% 63%

Packaging 1,198,000 1,414,605 1,683,380 2,003,222 2,383,834 2,836,763 3,375,748

y-o-y 13% 18% 19% 19% 19% 19% 19%


% of COGS 21% 21% 20% 21.1% 21% 21% 21%

Other 661,000 808,346 921,514 1,068,957 1,261,369 1,488,415 1,741,446


y-o-y -25% 22% 14% 16% 18% 18% 17%
% of COGS 12% 12% 12% 11% 11% 11% 11%

Depreciation 147,269 202,086 323,809 430,199 527,751 614,545 721,074

y-o-y 41% 37% 60% 33% 23% 16% 17%

% of COGS 3% 4% 4% 5% 5% 5% 5%

Total 5,610,969 6,736,215 7,995,390 9,483,570 11,263,160 13,377,072 15,914,496

y-o-y 16% 20% 19% 19% 19% 19% 19%

Cost of good sold of VINAMILK was composed of 4 elements: raw materials, packaging, other and depreciation.

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Raw material

The main raw material of VINAMILK is powder milk which is primarily imported from
Australia and the Netherlands. In terms of, powdered milk accounts for approx 75%
of production and locally sourced fresh liquid milk for the balance. We estimate
that powdered milk imports account for 60-64% of VINAMILK’s costs of goods sold.
As mentioned in Supplier section of Porter analysis, VINAMILK has gained a good
relationship with foreign suppliers. The biggest supplier of VINAMILK in milk powder is
Fonterra, who makes up one third of the world trading volume, is a world leading
multinational corporation in milk and in dairy product export. This advantage help
VINAMILK obtain the bargaining power in raw material purchase. Hence, VINAMILK
has been able to overcome pricing volatility and partly pass the cost to consumers
more effectively.

Two other elements driving the company’s COGS are inventory management and
raw material purchase prices. Practically, VINAMILK signs the purchase contracts
on yearly basis to cover the production volume and pricing of each contract can
be negotiable when there is a material adverse change in the market. This
practice allows VINAMILK to manage the inventory and pricing level, hence
margins in a rising price market will be preserved.

Package

Packaging costs are estimated to significantly account for 21% of year 2009's
COGS. VINAMILK has two main packaging operations, Tetra Pak lines for dairy and
Tin canning lines for powdered and condensed milk product range. VINAMILK has
signed a long-term agreement with Tetra Pak Vietnam for packing while the Tin
canning line is owned by company. VINAMILK upgraded their Tin can lines in 2008,
to accommodate a thinner type of tin can in an effort to reduce costs. Our
forecasts suggest that packaging will constitute about 19% -20% of COGS on a
forward basis.

Other

We expect that other expense will remain of 11%-12% of total COGS.

Depreciation

Refer to Depreciation calculation

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

5.3 Operating expenses

2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)

Selling expenses 1,052,308 1,245,476 1,420,804 1,618,400 1,831,275 2,075,445 2,354,653

y-o-y 8% 18% 14% 14% 13% 13% 13%

% of sales 12.8% 11.7% 11.4% 11.0% 10.5% 10.0% 9.5%

GA expenses 297,804 292,942 373,896 514,945 662,747 830,178 991,433

y-o-y 46% -2% 26% 38% 29% 25% 19%

% of sales 3.6% 2.8% 3.0% 3.5% 3.8% 4.0% 4.0%

Majority of selling expenses come from advertising and promotion campaign to enhance VINAMILK’s brand in the market. In 2006, selling
expenses over sales was around 18%. However, there is a downtrend in selling expenses over sales ratio recently by 12.8% and 11.7% in
2008 and 2009 respectively. It is expected that the ratio will continue decreasing to approx 9-10% from 2010 to 2014 given that no
significant advertising program is necessary for VINAMILK, a dominate player in the market.

G& A expense in 2009 was a little bit lower compared with that of 2008, possibly due to the enhanced operation management. We,
however, still forecast that it will continue increasing in lines with company’s expansion and the ratio of G&A to sales will gradually
increase at 3-4%.

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

5.4 Capex and Distribution

Our assumption

As per VINAMILK announcement, VINAMILK identified 2,100 VND bn for expansion CAPEX on 03 projects in the upcoming years with the
disbursement as described in below table:

Million VND

Project 2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
1. Construction in progress (WIP)
Phu My Hung office 458,000 228,000
Health Drink Factory 295,000 97,000
Mega Factory 430,000 563,500
Total 356,868 650,140 1,183,000 888,500 750,649 889,832 1,058,901
2. New purchase of Tangible FA 81,123 92,264 122,711 163,206 217,064 288,695 383,964
y-o-y 14% 33% 33% 33% 33% 33%

3. New purchase of Intangible FA 8,353 2,923 3,499 4,199 5,039 6,047 7,256
y-o-y 20% 20% 20% 20% 20%

Total Capital Expenditure 446,344 745,327 1,309,210 1,055,905 972,752 1,184,574 1,450,121

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Due to limitation on access to details of each project, an assumption is made that the expansion CAPEX will be distributed to WIP of
each type of fixed assets with same ratio as it was in 2008. Besides, other CAPEX, so-called new purchases for tangible and intangible
fixed asset will increase annually by 33% and 20%, respectively. The expansion CAPEX and other CAPEX for the years 2012 and 2013 will
be assumed as 5% of last year net revenue which is reasonable and roughly same level of CAPEX/net revenue ratio of previous years.
Fixed assets include 5 elements: Building, machinery, livestock, motor vehicles and office equipment. Per reviewing the historical
proportion of each element, we find that they are relatively constant for years. We assume that the value of WIP will be allocated based
on that proportion of year 2009:

Project 2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)

Building & Structure 19% 19% 19% 15% 18% 17% 17%

Machinery & Equipment 67% 65% 63% 65% 62% 61% 60%

Livestock 1% 1% 2% 2% 2% 2% 3%

Motor vehicles 10% 11% 12% 13% 13% 14% 15%

Office equipment 3% 4% 4% 5% 5% 5% 6%

100%
100% 100% 100% 100% 100% 100%

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Fixed assets

2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
Tangible fixed assets
Cost 2,618,638 3,135,507 3,908,358 5,026,955 6,356,781 7,393,298 8,663,743
y-o-y 33% 20% 25% 29% 26% 16% 17%
Accumulated depreciation -1,089,452 -1,299,925 -1,644,069 -2,104,033 -2,670,959 -3,335,226 -4,119,550
y-o-y 16% 19% 26% 28% 27% 25% 24%

Intangible fixed assets


Cost 79,416 82,339 85,838 90,038 95,077 101,123 108,380
y-o-y 105% 4% 4% 5% 6% 6% 7%

Accumulated amortization -28,548 -43,098 -53,503 -57,044 -61,290 -66,385 -72,499


y-o-y 58% 51% 24% 7% 7% 8% 9%
Construction in progress 356,868 650,140 1,183,000 885,154 747,822 886,481 1,054,913
y-o-y -41% 82% 82% -25% -16% 19% 19%

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Intangible fixed assets

Intangible fixed assets include Land used right and software. Land used right was stopped to amortize from 2004 and was re-evaluate in
2008. In 2007 and 2008, VNM invested a big amount of money (approx. 37 VND bn) for new software and invested 2.9 VND bn in 2009 for
upgrade and maintenance. Therefore, the assumption is made that VNM’s expense on upgrade and maintenance software will
increase at rate of 20% from 2009. Amortization period of software is identified as 3 years.

Intangible fixed assets 2008A 2009A 2010E 2011E 2012E 2013E 2014E

Land use right

Cost 35,751 35,751 35,751 35,751 35,751 35,751 35,751

Amortization 0 0 0 0 0 0 0

Accumulated amortization -11,608 -11,608 -11,608 -11,608 -11,608 -11,608 -11,608

Re-evaluation 15,851

Software

Cost 43,665 46,588 50,087 54,287 59,326 65,372 72,629

Amortization -10,492 -14,550 -10,405 -3,541 -4,246 -5,095 -6,114

Accumulated amortization -16,940 -31,490 -41,895 -45,436 -49,682 -54,777 -60,891

New purchase 24,794 2,923 3,499 4,199 5,039 6,047 7,256

Net 26,725 15,098 8,192 8,851 9,644 10,596 11,738

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Depreciation expense
Depreciation period for each type of fixed assets is identified as follows:

Fixed assets Depreciation period


Building & Structure 40 Years
Machinery & Equipment 10 Years
Live stocks 6 Years
Motor & Vehicle 10 Years
Office equipment 8 Years
Software 3 Years
Because of the lack of information, we assume that depreciation of building, machinery and equipment, livestock and motor vehicles (in
production purpose) will be allocated to COGS. And depreciation & amortization expense from office equipment and software will be
allocated to G&A expenses.
Depreciation expense
(to be allocated to COGS) from 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Building & Structure -9,182 -25,716 -18,296 -18,412 -28,529 -32,344 -36,897
Machinery & Equipment -107,226 -141,519 -247,885 -328,751 -392,059 -448,415 -516,357
Livestock -2,921 -2,674 -10,322 -16,375 -22,503 -30,064 -39,973
Motor vehicles -13,389 -23,732 -47,306 -66,662 -84,659 -103,722 -127,847
-132,718 -193,641 -323,809 -430,199 -527,751 -614,545 -721,074
Depreciation and amortization
expense (allocated to G&A expenses) 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Office equipment -15,544 -16,832 -20,335 -29,765 -39,176 -49,721 -63,250
Software -10,492 -14,550 -10,405 -3,541 -4,246 -5,095 -6,114
-26,036 -31,382 -30,740 -33,306 -43,422 -54,816 -69,364
Total Depreciation and amortization -158,754 -225,023 -354,549 -463,504 -571,173 -669,362 -790,438

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5.5 Working capital

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

Accounts Receivable 530,149 513,346 660,549 809,200 1,046,443 1,487,149


Increase/(Decrease) from Prev. Period 24,915 -16,803 147,203 148,651 237,243 240,334 200,373
Y-o-Y 4.9% -3.2% 28.7% 22.5% 29.3% 23.0% 15.6%
% of Net sales 6.5% 4.8% 5.3% 5.5% 6.0% 6.2% 6.0%

Days Outstanding of Accounts Receivable 23.2 17.4 19.1 19.8 21.6 22.3 21.6

Inventory 1,789,646 1,321,271 1,552,816 1,833,090 2,172,975 2,585,842 3,088,118


Increase/(Decrease) from Prev. Period 108,146 -468,375 231,545 280,274 339,886 412,866 502,277
Expected Growth rate (based on CARG
of Net sales) 6% -26% 18% 18% 19% 19% 19%
% of COGS 31.9% 19.6% 19.4% 19.3% 19.3% 19.3% 19.4%

Days Outstanding of Inventory 115 71 70 70 69 70 70

Accounts Payable & Accrued Expenses 492,556 789,867 928,286 1,095,836 1,299,023 1,545,838 1,846,103
Increase/(Decrease) from Prev. Period -128,820 297,311 138,419 167,550 203,187 246,815 300,265
Expected Growth rate (based on CARG
of Net sales) 18% 18% 19% 19% 19%
Growth rate -21% 60% 18% 18% 19% 19% 19%
% of COGS 8.8% 11.7% 12.0% 11.0% 11.0% 11.0% 11.0%
Days Outstanding of Accounts Payable 32 42 43 40 40 40 40
Cash conversion cycle 106 46 46 50 51 52 52

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Working capital requirement -261,881 782,489 -240,329 -261,374 -373,942 -406,385 -402,385
VINAMILK’s main debtors are supermarkets hence account receivable is expected to be stable at 5% to 6.5% of net sales.
Inventory mostly includes finished goods (40%) and material (33%). We forecast growth of inventory and account payable
are based on growth of sales.

Debtor, stock, creditor outstanding days and cash conversion cycle are illustrated in below chart:

140.0

120.0

100.0

Account Receivable
80.0
Inventory
Account Payable
60.0
Cash Conversion Cycle

40.0

20.0

-
2007 2008 2009 2010 2011 2012 2013 2014

Since VINAMILK is a cash rich customer with well-managed cash conversion cycle, it is estimated that working capital
requirement is negative from 2010-2014.

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5.6 Short term investment

2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)

Short- term investment Million VND

Short- term investment cost 496,998 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760

Provision for short term investment -122,996 -86,507 -120,038 -120,038 -120,038 -120,038 -120,038

% of short-term investment at cost 25% 4% 5% 5% 5% 5% 5%

Short-term investments include short-term deposit, investment in shares of listed and unlisted companies. We noted that short-
term investment increased sharply in 2009 due to high term deposit at bank of VND 2,227,700 million (mostly in term of 6
months or 12 months). We forecast that deposit would be used to finance fixed asset and long-term investment. According
to Shareholder meeting's Minutes 2009, in coming years, VINAMILK will continue to focus on key business. Short term
investment will stay at moderate level.

Investment in listed and unlisted share is about VND 150,000 million. We forecast provision rate would be 5% of total short-term
investment.

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5.7 Funding position

Being a cash-rich company and short cash conversion cycle, the total borrowings of VINAMILK are quite small. Total debt to
total equity ratio in 2009 was 1.85%. As we believe in cash generation capacity of VINAMILK, it is estimated that this ratio will
increase about 2%pa from 2010 to 2014. In addition, long term borrowings will be higher during this period given that the
company has been implementing some projects.
There was a remarkable increase in contribution capital thanks to new share issuance in October 2009. 175,624,990 shares
were issued at the face value of 10,000VND per shares. As a result, the contributed capital was recorded at VND3,
512,653mn. Our assumption is that the contributed capital will be kept unchanged in the next five years.

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5.8 Balance sheet

Please refer to excel file for details


Unit: VNDmn
2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
ASSETS

Current assets 3,187,605 5,069,157 5,834,153 7,310,935 8,970,731 11,126,324 13,798,181

Cash and cash equivalents 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782 6,290,019

Short- term investment 374,002 2,314,253 2,280,722 2,280,722 2,280,722 2,280,722 2,280,722

Short- term investment 496,998 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760

Provision for short term investment -122,996 -86,507 -120,038 -120,038 -120,038 -120,038 -120,038

Accounts receivable 646,385 728,634 897,597 1,075,921 1,348,202 1,630,467 1,881,833

Accounts receivable - trade 530,149 513,346 660,549 809,200 1,046,443 1,286,776 1,487,149

Prepayments to suppliers 75,460 139,363 165,414 196,202 233,019 276,753 329,249

Other receivables 40,923 76,588 76,588 76,588 76,588 76,588 76,588

Provision for doubtful debts -147 -663 -4,954 -6,069 -7,848 -9,651 -11,154

Inventories 1,775,342 1,311,765 1,537,288 1,814,759 2,151,245 2,559,983 3,057,237

Inventories 1,789,646 1,321,271 1,552,816 1,833,090 2,172,975 2,585,842 3,088,118

Provision for inventories -14,304 -9,506 -15,528 -18,331 -21,730 -25,858 -30,881

Other current assets 53,222 288,370 288,370 288,370 288,370 288,370 288,370

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Non-current assets 2,779,354 3,412,879 4,793,341 5,793,489 7,074,188 8,479,700 10,198,168

Longterm receivable 475 8,822 8,822 8,822 8,822 8,822 8,822

Fixed assets 1,936,923 2,524,964 3,479,624 3,841,069 4,467,431 4,979,292 5,634,987

Tangible fixed assets 1,529,187 1,835,583 2,264,289 2,922,922 3,685,822 4,058,072 4,544,193

Cost 2,618,638 3,135,507 3,908,358 5,026,955 6,356,781 7,393,298 8,663,743

Accumulated depreciation -1,089,451 -1,299,924 -1,644,069 -2,104,033 -2,670,959 -3,335,226 -4,119,550

Intangible fixed assets 50,868 39,241 32,335 32,994 33,787 34,739 35,881

Cost 79,416 82,339 85,838 90,038 95,077 101,123 108,380

Accumulated amortisation -28,548 -43,098 -53,503 -57,044 -61,290 -66,385 -72,499

Construction in progress 356,868 650,140 1,183,000 885,154 747,822 886,481 1,054,913

Real estate investment 27,489 27,489 27,489 27,489 27,489 27,489 27,489

Long-term investments 570,657 602,479 903,719 1,355,578 1,897,809 2,656,932 3,719,705

Other long-term assets 243,810 249,125 373,688 560,531 672,638 807,165 807,165

TOTAL ASSETS 5,966,959 8,482,036 10,627,494 13,104,425 16,044,919 19,606,024 23,996,349

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

RESOURCES
Liabilities 1,154,432 1,808,931 1,988,676 2,190,888 2,435,160 2,731,720 3,093,375
Current liabilities 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588
Short-term borrowings 188,222 13,283 17,945 21,856 26,491 32,103 39,029
Accounts payable – trade 492,556 789,867 928,286 1,095,836 1,299,023 1,545,838 1,846,103
Other 291,724 749,456 749,456 749,456 749,456 749,456 749,456
Long-term borrowings and liabilities 181,930 256,325 292,988 323,740 360,190 404,323 458,787
Long-term borrowings 22,418 104,455 141,118 171,870 208,320 252,453 306,917
Long-term payable-trade 93,612 116,940 116,940 116,940 116,940 116,940 116,940
Other 65,900 34,930 34,930 34,930 34,930 34,930 34,930

EQUITY 4,761,913 6,673,105 8,638,818 10,913,537 13,609,759 16,874,304 20,902,974


Equity 4,665,715 6,455,474 7,953,160 9,686,279 11,740,544 14,227,816 17,297,279
Contributed capital 1,752,757 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653
Share premium 1,064,948 0 0 0 0 0 0
Retained profits (included
reserves) 1,848,010 2,942,821 4,440,507 6,173,626 8,227,891 10,715,163 13,784,626
Welfare and bonus fund 146,812 217,631 685,658 1,227,258 1,869,215 2,646,488 3,605,695
TOTAL RESOURCES 5,966,959 8,482,036 10,627,494 13,104,425 16,044,919 19,606,024 23,996,349

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5.9 Income statement


VND m 2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
Total revenue 8,380,563 10,821,195 12,717,544 15,012,984 17,796,643 21,178,015 25,291,656
Less sales deductions -171,581 -206,371 -254,351 -300,260 -355,933 -423,560 -505,833

Net sales 8,208,982 10,614,824 12,463,194 14,712,724 17,440,711 20,754,454 24,785,823

Cost of sales -5,610,969 -6,736,215 -7,995,390 -9,483,570 -11,263,160 -13,377,072 -15,914,496

Gross profit 2,598,013 3,878,609 4,467,804 5,229,154 6,177,551 7,377,383 8,871,327


Selling expenses -1,052,308 -1,245,476 -1,420,804 -1,618,400 -1,831,275 -2,075,445 -2,354,653
General and administration expenses -297,804 -292,763 -373,896 -514,945 -662,747 -830,178 -991,433

Financial income 190,860 439,936 495,672 563,451 644,785 758,654 918,070


Financial expenses -197,621 -184,828 -184,828 -184,828 -184,828 -184,828 -184,828

Net operating profit 1,241,140 2,595,478 2,983,948 3,474,432 4,143,487 5,045,585 6,258,483

Results of other activities 130,173 136,232 136,232 136,232 136,232 136,232 136,232
Profit before tax 1,371,313 2,731,710 3,120,180 3,610,664 4,279,719 5,181,817 6,394,715
% of net sales 16.7% 25.7% 25.0% 24.5% 24.5% 25.0% 25.8%
Tax rate 25% 25% 25% 25% 25% 25%
CIT expense -161,874 -355,290 -780,045 -902,666 -1,069,930 -1,295,454 -1,598,679
Corporate income tax – deferred 39,259 0 0 0 0 0 0
Net profit after tax 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036
% of net sales 15.2% 22.4% 18.8% 18.4% 18.4% 18.7% 19.3%

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5.10 Cashflow statement


VND m 2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)

Total profit before tax 1,371,313 2,731,710 3,120,180 3,610,664 4,279,719 5,181,817 6,394,715
Depreciation of Fixed Assets Expenses 178,430 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment loss 124,892 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Corp Income tax -161,874 -355,290 -780,045 -902,666 -1,069,930 -1,295,454 -1,598,679
Net profit from Operating activities before changes in current capital 1,669,727 2,738,970 2,738,529 3,175,420 3,786,140 4,561,655 5,593,000
Increase, Decrease Account Receivable 13,354 -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory -112,069 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account Payable -105,919 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid Expenses -17,077 10,276 -26,051 -30,788 -36,817 -43,734 -52,496

Net cashflow provided by operating activities 1,269,759 3,096,503 2,472,150 2,883,257 3,375,380 4,111,536 5,138,119

Cash flows from Investing activities

Purchase and construction of Fixed assets and other long term assets -445,062 -654,817 -1,309,210 -824,950 -1,197,534 -1,181,222 -1,446,133

Cash payments to capital contribution investment -134,152 -2,450 -425,802 -638,703 -654,337 -893,651 -1,062,773
Net Cash provided by Investing activities -531,785 -2,476,274 -1,735,012 -1,463,653 -1,851,871 -2,074,874 -2,508,906
Cash flows from Financing activities
Proceeds from issue of shares, capital constribution 0 3,646 0 0 0 0 0
Short , long term loan received 173,547 3,320 41,325 34,662 41,085 49,745 61,389
Dividends and Profit paid -680,733 -351,281 -374,422 -433,280 -513,566 -621,818 -767,366
Net Cash provided by Financing activities -517,149 -532,691 -333,096 -398,617 -472,481 -572,073 -705,977

Net Cash and Cash equivalents during the period 220,825 87,538 404,041 1,020,987 1,051,028 1,464,590 1,923,237

Cash and cash equivalents at beginning of year 117,819 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782
Effect of exchange rate changes on cash and cash equivalents 10 -57 0 0 0 0 0
Cash and Cash equivalents at end of year 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782 6,290,019

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

6. FINANCIAL ANALYSIS

6.1 Return ratios

Thanks to amazing growth rate of sales at 26% and 29% in 2008 and 2009 respectively, VINAMILK’s return ratios were quite
good. ROE and ROCE are expected to gradually improved from 2010-2014 given the high growth rate of sales and net profit
after tax. As VINAMILK was listed in Stock exchange in 2005, corporate tax is exempted for VINAMILK for the first 3 years. By
end of 2008, VINAMILK had to start paying corporate tax income, leading to ROIC were lower.

2008(A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Return on capital employed
(ROCE) 32.10% 68.75% 59.84% 61.65% 62.14% 66.18% 71.71%
EBITA 1,241,140 2,595,478 2,983,948 3,474,432 4,143,487 5,045,585 6,258,483
Capital employed 3,866,094 3,775,496 4,986,222 5,635,912 6,667,855 7,623,903 8,727,953
Return on invested capital
(ROIC) 32.10% 51.56% 44.88% 46.24% 46.61% 49.64% 53.78%
NOPLAT = EBITA after taxes 1,241,140 1,946,609 2,237,961 2,605,824 3,107,615 3,784,189 4,693,862
Invested capital = Capital
employed 3,866,094 3,775,496 4,986,222 5,635,912 6,667,855 7,623,903 8,727,953
Return on equity (ROE) 71.24% 67.65% 66.62% 77.09% 91.38% 110.64% 136.54%
Net current profit 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036
Equity 1,752,757 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653

In terms of leverage effect, as ROE > ROIC, we can say that VINAMILK has gained the positive leverage effect. In other words,
value is created to the shareholders due to NFD.

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6.2 Repayment capacity


2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
Fixed Charges Cover 3.21 3.80 3.44 3.62 3.87 4.12 4.35
Net Current Cash Flow 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036
Net financial charge (excl. goodwill) 388,481 624,764 680,500 748,279 829,613 943,482 1,102,898
Senior Interest Cover 3.65 4.53 4.91 5.26 5.68 6.06 6.39
EBITDA 1,419,570 2,829,556 3,338,498 3,937,936 4,714,659 5,714,946 7,048,921
Financial result 388,481 624,764 680,500 748,279 829,613 943,482 1,102,898
Outstanding to Value Cover 0.15 0.04 0.05 0.05 0.05 0.05 0.05
Net financial debt (NFD) 210,640 117,738 159,063 193,726 234,811 284,556 345,946
EBITDA 1,419,570 2,829,556 3,338,498 3,937,936 4,714,659 5,714,946 7,048,921
[EBITDA - Capex] / Interests 2.51 3.48 2.98 4.16 4.24 4.81 5.08
[EBITDA - Capex] 974,508 2,174,739 2,029,288 3,112,987 3,517,125 4,533,724 5,602,788
EBITDA 1,419,570 2,829,556 3,338,498 3,937,936 4,714,659 5,714,946 7,048,921
Capex 445,062 654,817 1,309,210 824,950 1,197,534 1,181,222 1,446,133
Net financial charge (excl. goodwill) 388,481 624,764 680,500 748,279 829,613 943,482 1,102,898
NFD / [EBITDA - Capex] 0.22 0.05 0.08 0.06 0.07 0.06 0.06
Net financial debt 210,640 117,738 159,063 193,726 234,811 284,556 345,946
[EBITDA - Capex] 974,508 2,174,739 2,029,288 3,112,987 3,517,125 4,533,724 5,602,788

We do not realize any concern on interest and principal repayment capacity of VINAMILK. Net current cashflow is 3.5-4.5
times to net interest expense. Thanks to sales increase, EBITDA is forecasted to improve during 2010-2014 with average growth
rate around 20-21%. Accordingly, fixed charge cover and senior interest cover are more than required at 2.0x and 3.0x
respectively, which reflect the feasible capacity to pay the interest expense of VINAMILK. In terms of repayment term,
outstanding to value cover ratio is quite low, which reflect good financial position of VINAMILK. More conservatively, we
evaluate the interest and principal repayment capacity of VINAMILK by taking capex amount out of EBITDA. Even if so, those
ratios are still at good level.

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

6.3 Liquidity ratios


Historic and forecasted liquidity ratios of VINAMILK are above the required levels (higher than 1.0x for current ratio and 0.7x
for acid ratio. Those figures illustrates that it is easy for VINAMILK to liquidate the current asset to cover to current liabilities.

2008(A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Current Ratio 3.28 3.26 3.44 3.92 4.32 4.78 5.24
Current asset 3,187,605 5,069,157 5,834,153 7,310,935 8,970,731 11,126,324 13,798,181
Current Liability 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588
Acid Ratio 1.45 2.42 2.53 2.94 3.29 3.68 4.08
Current asset excluding
inventories 1,412,263 3,757,392 4,296,865 5,496,176 6,819,486 8,566,341 10,740,944
Current Liability 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588

6.4 Profitability ratios


2008(A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Gross profit margin 31.65% 36.54% 35.85% 35.54% 35.42% 35.55% 35.79%
Gross profit margin 2,598,013 3,878,609 4,467,804 5,229,154 6,177,551 7,377,383 8,871,327
Sales 8,208,982 10,614,824 12,463,194 14,712,724 17,440,711 20,754,454 24,785,823
EBITDA margin 17.29% 26.66% 26.79% 26.77% 27.03% 27.54% 28.44%
EBITDA 1,419,570 2,829,556 3,338,498 3,937,936 4,714,659 5,714,946 7,048,921
Sales 8,208,982 10,614,824 12,463,194 14,712,724 17,440,711 20,754,454 24,785,823
Operating profit margin 15.12% 24.45% 23.94% 23.62% 23.76% 24.31% 25.25%
Operating profit margin 1,241,140 2,595,478 2,983,948 3,474,432 4,143,487 5,045,585 6,258,483
Sales 8,208,982 10,614,824 12,463,194 14,712,724 17,440,711 20,754,454 24,785,823
Net profit margin 15.21% 22.39% 18.78% 18.41% 18.40% 18.73% 19.35%
Net profit margin 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036

Sales 8,208,982 10,614,824 12,463,194 14,712,724 17,440,711 20,754,454 24,785,823

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Profitability ratios are on increasing trend based on the assumption of sales growth rate at 18% y-o- and effective
management. Looking into those ratios, we can foresee the sound business performance and high profit returned of
VINAMILK in the next 5 years.

7. RISK ASSESSMENT

7.1 Worse case

For the worse case, we assume that the consumption volumes of VINAMILK’s products will reduce due to the competition in
city area while VINAMILK can not expand business to rural areas. In addition, there are more and more foreigner brand
products imported to the market given that the tax imposed on dairy product is reduced as WTO entry commitment. Taking
into those elements, we forecast that the total revenues of VINAMILK will increase by 8% per year during 2010-2012 in stead of
18% in the base case. However, the revenues rate will be enhanced from 2013 at 10% given that advertising and promotion
campaign will be carried out to gain the high growth rate.

COGS is assumed to increased by 10% y-o-y taking into account of inflation rate and price fluctuation of raw materials.
Accordingly, the income statement and cashflow are shown as below:

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Income statement
2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total revenue 10,821,195 11,686,891 12,621,842 13,631,589 14,994,748 16,494,223
Less sales deductions -206,371 -254,351 -300,260 -355,933 -423,560 -505,833

Net sales 10,614,824 11,432,540 12,321,582 13,275,656 14,571,188 15,988,390

Cost of sales -6,736,215 -7,409,837 -8,150,820 -8,965,902 -9,862,492 -10,848,742

Gross profit 3,878,609 4,022,703 4,170,762 4,309,754 4,708,695 5,139,648


Selling expenses -1,245,476 -1,420,804 -1,618,400 -1,831,275 -2,075,445 -2,354,653
General and administration
expenses -292,763 -373,896 -514,945 -662,747 -830,178 -991,433

Financial income 439,936 495,672 563,451 644,785 758,654 918,070


Financial expenses -184,828 -184,828 -184,828 -184,828 -184,828 -184,828

Net operating profit 2,595,478 2,538,847 2,416,040 2,275,690 2,376,898 2,526,804

Results of other activities 136,232 136,232 136,232 136,232 136,232 136,232

Profit before tax 2,731,710 2,675,079 2,552,272 2,411,922 2,513,130 2,663,036


% of net sales 25.7% 23.4% 20.7% 18.2% 17.2% 16.7%
Tax rate 25% 25% 25% 25% 25% 25%

CIT expense -355,290 -668,770 -638,068 -602,980 -628,282 -665,759


Corporate income tax – deferred 0 0 0 0 0 0
Net profit after tax 2,376,420 2,006,309 1,914,204 1,808,941 1,884,847 1,997,277
% of net sales 22.4% 17.5% 15.5% 13.6% 12.9% 12.5%

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Cashflow statement

VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)

Total profit before tax 2,731,710 2,675,079 2,552,272 2,411,922 2,513,130 2,663,036
Depreciation of Fixed Assets
Expenses 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment
loss 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Corporate Income tax -355,290 -668,770 -638,068 -602,980 -628,282 -665,759
Net profit from Operating activities
before changes in current capital 2,738,970 2,404,704 2,381,626 2,385,292 2,560,140 2,794,240
Increase, Decrease Account
Receivable -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account
Payable 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid
Expenses 10,276 -26,051 -30,788 -36,817 -43,734 -52,496
Net cashflow provided by operating
activities 3,096,503 2,138,325 2,089,463 1,974,533 2,110,021 2,339,360

Cash flows from Investing activities


Purchase and construction of
Fixed assets and other long term
assets -654,817 -1,309,210 -824,950 -1,197,534 -1,181,222 -1,446,133
Cash payments to capital
contribution investment -2,450 -425,802 -638,703 -654,337 -893,651 -1,062,773
Net Cash provided by Investing
activities -2,476,274 -1,735,012 -1,463,653 -1,851,871 -2,074,874 -2,508,906

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Cash flows from Financing activities


Proceeds from issue of shares,
capital constribution 3,646 0 0 0 0 0
Short , long term loan received 3,320 41,325 34,662 41,085 49,745 61,389
Dividends and Profit paid -351,281 -321,009 -306,273 -289,431 -301,576 -319,564
Net Cash provided by Financing
activities -532,691 -279,684 -271,610 -248,345 -251,830 -258,175

Net Cash and Cash equivalents


during the period 87,538 123,628 354,200 -125,684 -216,682 -427,721

Cash and cash equivalents at


beginning of year 338,654 426,135 549,763 903,963 778,280 561,597
Effect of exchange rate changes
on cash and cash equivalents -57 0 0 0 0 0
Cash and Cash equivalents at end
of year 426,135 549,763 903,963 778,280 561,597 133,876

As the result, the company still achieves positive net profit and cash and cash equivalents at the end of the year. However,
the cash is no longer much surplus as illustrated in the base case.

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7.2 Best case

For the best case, we assume that VINAMILK can maintain the growth rate of revenues as that in 2008 and 2009 at 25%
thanks to increase in production capacity and dominant role in Vietnam dairy market.

In order to boost the sales, COGS are also estimated to increase 25% pa due to raw materials stock, inflation impacted.

Income Statement
VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total revenue 10,821,195 13,526,494 16,908,117 21,135,146 26,418,933 33,023,666
Less sales deductions -206,371 -254,351 -300,260 -355,933 -423,560 -505,833

Net sales 10,614,824 13,272,143 16,607,858 20,779,214 25,995,373 32,517,833

Cost of sales -6,736,215 -8,420,269 -10,525,336 -13,156,670 -16,445,837 -20,557,297

Gross profit 3,878,609 4,851,874 6,082,522 7,622,544 9,549,535 11,960,537


Selling expenses -1,245,476 -1,420,804 -1,618,400 -1,831,275 -2,075,445 -2,354,653
General and administration
expenses -292,763 -373,896 -514,945 -662,747 -830,178 -991,433

Financial income 439,936 495,672 563,451 644,785 758,654 918,070


Financial expenses -184,828 -184,828 -184,828 -184,828 -184,828 -184,828

Net operating profit 2,595,478 3,368,018 4,327,799 5,588,479 7,217,738 9,347,692

Results of other activities 136,232 136,232 136,232 136,232 136,232 136,232

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Profit before tax 2,731,710 3,504,250 4,464,031 5,724,711 7,353,970 9,483,924


% of net sales 25.7% 26.4% 26.9% 27.6% 28.3% 29.2%
Tax rate 25% 25% 25% 25% 25% 25%

CIT expense -355,290 -876,063 -1,116,008 -1,431,178 -1,838,492 -2,370,981


Corporate income tax – deferred 0 0 0 0 0 0

Net profit after tax 2,376,420 2,628,188 3,348,023 4,293,534 5,515,477 7,112,943
% of net sales 22.4% 19.8% 20.2% 20.7% 21.2% 21.9%

Cashflow statement

VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)

Total profit before tax 2,731,710 3,504,250 4,464,031 5,724,711 7,353,970 9,483,924
Depreciation of Fixed Assets Expenses 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment loss 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Interest Expenses -355,290 -876,063 -1,116,008 -1,431,178 -1,838,492 -2,370,981
Net profit from Operating activities
before changes in current capital 2,738,970 3,026,582 3,815,445 4,869,884 6,190,770 7,909,907
Increase, Decrease Account
Receivable -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account Payable 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid Expenses 10,276 -26,051 -30,788 -36,817 -43,734 -52,496
Net cashflow provided by operating
activities 3,096,503 2,760,203 3,523,283 4,459,125 5,740,651 7,455,026

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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company

Cash flows from Investing activities


Purchase and construction of Fixed
assets and other long term assets -654,817 -1,309,210 -824,950 -1,197,534 -1,181,222 -1,446,133
Cash payments to capital contribution
investment -2,450 -425,802 -638,703 -654,337 -893,651 -1,062,773
Net Cash provided by Investing activities -2,476,274 -1,735,012 -1,463,653 -1,851,871 -2,074,874 -2,508,906

Cash flows from Financing activities


Proceeds from issue of shares, capital
constribution 3,646 0 0 0 0 0
Short , long term loan received 3,320 41,325 34,662 41,085 49,745 61,389
Dividends and Profit paid -351,281 -420,510 -535,684 -686,965 -882,476 -1,138,071
Net Cash provided by Financing
activities -532,691 -379,185 -501,021 -645,880 -832,731 -1,076,682

Net Cash and Cash equivalents during


the period 87,538 646,006 1,558,609 1,961,374 2,833,047 3,869,439

Cash and cash equivalents at beginning


of year 338,654 426,135 1,072,141 2,630,749 4,592,123 7,425,170
Effect of exchange rate changes on
cash and cash equivalents -57 0 0 0 0 0
Cash and Cash equivalents at end of
year 426,135 1,072,141 2,630,749 4,592,123 7,425,170 11,294,609

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7.3 Risk assessment


Risk assessment is approached by comparing some financial ratio of
VINAMILK in 3 cases: base case, worse case and best case as mentioned in
the previous section.

Sales compared EBITDA compared

35,000 12,000

30,000 10,000
25,000
8,000
20,000 Base case Base case
Worse case 6,000 Worse case
15,000
Best case Best case
4,000
10,000

5,000 2,000

0 0
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E) 2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)

Net Profit compared ROE compared

8,000 250.00%
7,000
200.00%
6,000
5,000 Base case 150.00% Base case
4,000 Worse case Worse case
3,000 Best case 100.00% Best case

2,000
50.00%
1,000
0 0.00%
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E) 2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)

ROCE compared ROIC compared

120.00% 90.00%
80.00%
100.00%
70.00%
80.00% 60.00%
Base case Base case
50.00%
60.00% Worse case Worse case
40.00%
Best case Best case
40.00% 30.00%
20.00%
20.00% 10.00%

0.00% 0.00%
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)

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8. VALUATION

8.1 Approach

Our valuation applied for VINAMILK was based on a joint assessment of


Discounted Cash Flow and target P/E and P/B ratio’s as well as. We derived
a target price of VND97,787 per share, which is based on the numeric
average of our three estimates at year 2009. This is a quite good investment
for an expected profit of 15.7%

Component Weighted Price


DCF target price 40% 89,290 35,716
P/E (adjusted EPS) 17.0x 30% 115,010 34,503
P/B 5.0x 30% 91,893 27,568
Target price 97,787
Current price @ 30 Mar 2010 84,500
Expected return 15.7%

8.2 DCF

DCF on VINAMILK is run using a derived a 13.1% WACC for the company,
assuming the company finances itself solely using equity in the future. Our
assumptions are detailed below.

Beta calculation

To determine a Beta for VINAMILK we ran weekly price observations vs. the
HCM Index VINAMILK’s from the beginning of 2007 to date. We prefer
weekly price observations given the high daily price correlation between
index stocks and the HCM Index. Our resulting Beta was 0.9, which we
consider reasonable for a defensive consumer goods stock.

Beta

VN_Index Returns VINAMILK

1.00 0.90

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WACC calculation

Cost of Equity
CAPM
Beta 0.90
Risk-free rate RFR 11.50%
Market risk premium MRP 3.00%
Cost of equity Ke =RFR + (beta * MRP) 14.2%
current interest rate for company's new
Cost of debt Kd loan 12.0%
Target capital structure
Weight of equity Wd = current total equity / total resource 79%
Weight of debt We = current total liability / total resource 21%
100%
VINAMILK has no prefered stock.
Tax Rate t 25%
Weighted average cost of capital WACC =we*Ke + Wd*Kd*(1-t) 13.1%

Risk free rate is extracted from 5 year government bond rate. (http://www.bond.hnx.com)

Our resulting DCF valuations came in at a range of VND90,000 to VND104,888 per share on a forward basis, which is broadly
in-line with the target price ranges. Please refer the detail calculation in excel file attached

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Free Cash Flow 2009 2010 2011 2012 2013 2014 Terminal

Operating profit 2,340,370 2,673,104 3,095,809 3,683,529 4,471,759 5,525,241

NOPAT 1,755,278 2,004,828 2,321,857 2,762,647 3,353,819 4,143,931

Depreciation 234,078 354,550 463,504 571,173 669,362 790,438

Capex 745,327 1,309,210 1,055,905 972,752 1,184,574 1,450,121


Working capital
requirement 782,489 -240,329 -261,374 -373,942 -406,385 -402,385
Free Cash Flow (Firm) 2,026,518 809,839 1,468,082 1,987,126 2,432,222 3,081,863 46,002,505

NPV @ WACC = 13.7% 716,030 1,147,665 1,373,481 1,486,390 1,665,234 24,856,704


Sum of Future PV 31,245,505 30,529,475 29,381,810

Net Financial Debt 117,738 159,063 193,726 234,811 284,556 345,946


Equity Value 31,363,243
Equity / Share (mn VND) 89,290

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8.3 Price Multiples Method

Our forecasts suggest that VINAMILK will see a rolling average EPS CAGR of 20% from year 2010 to 2014. We selected a target
P/E of 17.0x which reflects the average of our estimated CAGR in VINAMILK’s reported earnings for coming years.

P/E 2009 2010 2011 2012 2013 2014

Earning after tax 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036

EPS (VND) 6,765 6,662 7,709 9,138 11,064 13,654


Target P/E (company) 17.0x
Price (VND) 115,010

For our target P/B multiple we looked at VINAMILK’s trading history, as the company has been listed since early 2005.
VINAMILK has traded at market miums on a P/B basis since listing. We have observed that VINAMILK has traded at an
average P/B of 5.0x. As such, we are comfortable with a target P/B of 5.0x for VINAMILK. P/B multiples suggest a fair value
range of VND88,000 to 100,000 per share for VINAMILK.

P/B 2009 2010 2011 2012 2013 2014

Book Value (Million VND) 6,455,474 7,953,160 9,686,279 11,740,544 14,227,816 17,297,279

Number of share 351,249,980 351,265,300 351,265,300 351,265,300 351,265,300 351,265,300

Book value per share 18,379 22,641 27,575 33,424 40,504 49,243
P/B 5.0x
Price (thousand VND) 91,893

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9. REFERENCE

1. Website of VINAMILK at http://www.Vinamilk.com.vn/

2. VINAMILK’s annual report 2007 and 2008

3. Website of Ho Chi Minh Security Stock Exchange at


http://www.hsx.com

4. Website of Hanoi Security Stock Exchange at http://www.hnx.com

5. Website of Ministry of Agricultural and Rural Development at


http://www.agroviet.gov.vn

6. Website of Ministry of Industry and Trade at http://www.moit.gov.vn

7. Website of General Statistics Office of Vietnam at


http://www.gso.gov.vn

8. Report of Vietnam-Belgium Dairy Product issued by International


Agricultural Products Consultant Company 2007

9. Vietnam Food and Drink Report Q3-2009 issued by Business Monitor


International dated May 2009

10. Report of Vietnam Dairy Products (VINAMILK) issued by VinaSecurities


dated 14 Oct 2009

11. Prof. Jottrand, 2009, Lecture Notes of Corporate Finance and Business
Planning, University of Lebre De Bruxelles

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