Hanoi University Student Research Food & Beverage Industry

(1)

This report is published for educational purposes only by

students competing in the CFA Institute Research
Challenge. Vinamilk

Date 11.11.2011 Ticker: ● Bloomberg-VNM VN Recommendation: ●HOLD

Price: ●VND138,000 Price Target: ●VND144,000
Earnings/Share
Mar. Jun. Sep. Dec. Year P/E Ratio
(VND)
2008A 882 1,110 956 594 3,563 11.6x
2009A 1,384 1,582 2,080 1,709 6,769 11.1x
2010A 2,325 2,650 3,220 2,070 10,251 8.3x
(2) (3)
2011E 2,851 3,100 2,866 1,760 10,563 13.6x(4)

Sources: Bloomberg & HANU estimates

VNM Daily Stock Price (VND thousand)
Highlights
150
140 We initiate a HOLD recommendation for Vinamilk stock with the year-end target price of
130 VND144,000, offering a 4.40% upside from the current stock price of VND138,000 on
120 November 11th, 2011.
110
100
 Vinamilk is the leading player in the industry. Vinamilk is the largest dairy producer in Vietnam,
accounting for 39% of total market share with the most diversified product mix. Extensive
90
distribution channels nationwide of 220 distributors and over 140,000 outlets, a 20-year-
80
experienced and dedicated management team, and investment in infrastructure and nutrition
science, together with an effective enterprise resource planning system will maintain its top
position in the dairy industry.
Source: Bloomberg
 High organic growth can be sustained in the future. Vinamilk’s revenue has grown fast from
26% to 49% for the last three years given large increase in milk consumption in the domestic
market. With persistent growth in disposable income of about 10% per year and rising awareness of
Key Financial Data (2011Q3)
healthy benefits from using dairy products, domestic dairy consumption is forecasted to continue
Sales (VND billion) 15,980 expanding rapidly at the annual rate of 20-25% through this decade. In this favourable
Gross Margin (%) 31 circumstance, Vinamilk’s sales will likely increase by 27.6% per annum in the next five years.
EBITDA (VND billion) 3,598 Moreover, ROE is expected to remain at high level of about 40-42% from 2011 to 2015.
Net income (VND billion) 3,176
Charter Capital (VND billion) 3,708  Vinamilk’s financial leverage is low with consistently strong cash position. Vinamilk is in a
Sales growth (%) 30 healthy financial condition with strong balance sheet and solid operating cash flows (CFO). The
ROE (%) 25.4 Company currently does not use long-term borrowings; thus, it has opportunities to enhance
ROA (%) 32.6 shareholders’ wealth. In our valuation, a minimal level of Long-term Debt/ Equity ratio of 0.11 is
used as the target capital, which is an average level for dairy firms.
Source: Vinamilk
 The year-end price target is VND144,000 as at November 11th, 2011. We evaluate stock price
using two techniques: discount methods and multiples analysis. To account for historical volatility
of Vinamilk share price and risks associated with two valuation approaches, we conclude with a
Market Profile price range of 20%, from VND115,000 to VND173,000.
52w Price Range (VND) 81,250-144,000
 The main risks facing Vinamilk come from sanitation and quality control, dependence on
Avr. Daily Volume (10 days) 48,924 imported supply sources and intense competition in the domestic market. Strict quality
Beta 0.6 management can protect the Company from quality scandals. Besides, steady increase in domestic
Dividend Yield (2010) (%) 3.49 supply and expansion in its own dairy farms in order to meet 40-50% of input demand by 2015 can
Shares Outstanding (million) 370.72 reduce Vinamilk’s exposure to volatility of imported input prices and exchange rates. However, in
Market Capitalization 51.174 2010, TH Milk initiated its plan to penetrate the liquid milk segment, and it is reckoned as the main
(VND billion)
Book Value per Share emerging threat to the Company in the future.
(VND)
31,128
Debt to Total Capital 0.07
(TTM(5))
Return on Equity (TTM) (%) 45.4

Sources: VNDirect & Vinamilk

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

(2), (3), (4) Estimated figures
(5) Trailing Twelve Months

Important disclosures appear at the back of this report

 CFA Institute Research Challenge 11.11.2011

Business Description
Vinamilk was established in 1976 under the name Southern Coffee-Dairy Company. It was officially
converted into a joint stock company in 2003, when its name was changed to Vietnam Dairy Products Joint
Stock Company. In 2006, Vinamilk was listed on Hochiminh City Stock Exchange (HOSE), since then, its
major shareholder has been State Capital Investment Corporation (SCIC) with approximately 47.3% (2010)
of the Company’s ownership. Other major shareholders of Vinamilk include F&N Dairy Investment with
10.0% of number of shares and Dragon Capital Fund with 7.7% of ownership.
Figure 1: Segment contribution in
Vinamilk’s revenue 2010 Vinamilk has the leading position in Vietnam dairy market with diversified product portfolio, in which
milk products are core contributors
5% Product categories:
15%  Liquid milk: Liquid milk is Vinamilk’s biggest and key segment, which contributes 35% of total
35% sales. The segment grew 54% year over year (yoy) in 2010, when Vinamilk introduced pasteurized
milk, using centrifugal technology, the most advanced milk technology in the world, to remove
bacteria.
20%
 Condensed milk: Condensed milk is Vinamilk’s well known traditional products, including
“Longevity” and “Southern Star”. Although this category is on maturing stage, the Company
achieved a sales increased 27% yoy in 2010.
25%
 Powder milk: Powder milk is sold both domestically and overseas, amounting to 20% of total
liquid milk condensed milk revenue. Its sales in 2010 jumped 49% yoy.
powder milk yoghurt
others  Yoghurt: Yoghurt is a strong brand, having a high competitive advantage. The product line has
grown 59% yoy in 2010.
 Other categories: Ice-creams, cheeses, cereal, and healthy beverages contribute to 5% of total
Source: Vinamilk
sales.

Market segments: domestic area is the key market

 Domestic market: Vinamilk focuses on domestic market, the revenue from this market accounts
Figure 2: Revenue growth by for about 90% of total sales. In 2010, domestic sales increased by 50% yoy. Milk consumption
segments 2010 yoy concentrates in big cities, such as, Hanoi and Hochiminh City.
54% 49%
59%  Export markets: export markets contribute only 10% of total revenue. This market’s growth rate is
40% yoy in 2010. Vinamilk’s main export partners include Iraq, Australia, Philippines, Cambodia
27% and the USA. In 2011, the Company expects exports turnover to reach USD130 million, which will
set a new record.

With its success in running business, Vinamilk has gained a lot of honorable awards. In 2010, Vinamilk
became the first and sole Vietnamese enterprise to be on the list of “Asia 200 Best under a Billion” or top-
performing 200 firms with sales of under USD1 billion (Forbes Asia Magazine). The Company has been
continuously elected to be on Top five private businesses of Vietnam for two consecutive years. Other prizes
that Vinamilk has won include Top ten high-quality Vietnamese goods 2010, Top ten brands in Vietnam
Source: Vinamilk 2010, and Top 50 biggest tax-paying enterprises 2010 in Vietnam.

Vinamilk’s vision is to be the fastest growing sustainable business in dairy and food industry by
building a long-term competitive advantage for its product portfolio across the scale. The Company is
implementing an ambitious plan in Cambodia to significantly enhance capacity by establishing the largest
cow farm in South East Asia. With this project, the number of milk cows is expected to increase to 100,000
by the year 2015. By 2017, Vinamilk expects to reach net sales of USD3 billion and to become one of the top
50 largest dairy products companies in the world.

Figure 3: Vietnamese’s milk

consumption per capita (kg/year) Industry Overview and Competitive Positioning
25 INDUSTRY ANALYSIS
20 A Certain Growth Prospect of Demand
15 A strong growth of GDP and disposable income: With a level of GDP per capita that has more than tripled
10 in the past 10 years, Vietnam is considered one of the fastest-growing economies in the world; the
5 government projected GDP growth to range from 6.5% to 7.0% in the next five years. Along with this, the
0 growth in disposable income at CAGR of 9.89% in the period 2007-2011E (Appendix 1) suggests future
increase in consumption of nutritious foods and drinks.

Sources: Dairy Vietnam & FAO

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 CFA Institute Research Challenge 11.11.2011

A relatively low but gradually increasing dairy consumption per capita: At only 13.2 kg/year in 2009,
and 14.8 kg/year in 2010, Vietnam had a much lower level of milk consumption than other countries in the
region and in the world (Appendix 2). However, it has always been on an increasing trend with CAGR of
19.19% during 2000-2009 and is expected to reach 20kg/year by 2020 as a target in the Ministry of Trade-
issued Government Decision No. 22 (Figure 3). This fact also reflects an increased awareness of the health
benefits of dairy products among Vietnamese consumers.

Potential demand from rural consumers: Dairy consumption is now concentrated in big cities – Hanoi and
Figure 4: Vietnamese dairy product Ho Chi Minh City, where only 10% of the nation’s population accounts for 78% of dairy consumption in the
market sales (USD million) whole country. Therefore, the remaining rural population is a potentially substantial source of demand in the
near future for dairy producers. Recently, Vietnamese dairy producers have focused more on this potential
980 1039 market. Vinamilk’s rural market share has increased more than 50% after one and a half year focusing on this
877
665 698 area. Its sales in rural area have grown by 70% in 2010 yoy. By the end of 2011, rural market will have
contributed up to 50% total revenue of Nutifood, another domestic dairy producer.

The above key drivers have resulted in the continuous growth of Vietnamese dairy product market sales. The
2005 2006 2007 2008 2009
sales rose at CAGR of 11.8%, from USD665 million in 2005 to USD1,039 million in 2009 (Figure 4); and it
is forecasted to rise at about 20-25% from 2010 to 2015, relatively high in comparison with other countries in
Source: Dairy Vietnam the world.

Supply Chain of Milk

The high dependence on imported ingredients: Vietnam’s dairy industry has two sources of supply: local
supply from farmers (25-30% of the total production demand) and imports (the remaining 70-75%) which are
mainly from New Zealand, USA, and the Netherlands. Domestic producers are largely reliant on imported
inputs; this not only gives the foreign suppliers high bargaining power (especially for powder milk products)
Figure 5: Vietnam dairy production but also creates a financial risk for processing companies due to the changes in exchange rates.
1050000
900000 A steady increase in domestic milk production: In comparison with other countries in South East Asia,
750000 Vietnam’s milk production is relatively low, about 39% of Indonesia’s total milk production and 24% of
600000
450000
Thailand’s in 2007. Both the number of cows and the milk productions (in tons), however, have increased;
300000 specifically, the total cow number rose at CAGR of 13.74% from 2001 to 2009 and is planned to quadruple
150000 by 2020; the milk production increased even faster at CAGR of 20% from nearly 65,000 tons in 2001 to
0 about 278,000 tons in 2009 and forecasted to reach 950,000 tons by 2020 (Figure 5). There are government
2001
2002
2003
2004
2005
2006
2007
2008
2009
2020E

Total number of cows (heads)
Total milk productions (tons)
Sources: Dairy Vietnam & MARD
programs supporting the dairy industry in the long term with the objective of enhancing the national capacity
to meet 34% and 38% of domestic milk material demand by 2015 and 2020, respectively. This development
will help processors reduce the dependence on imported ingredients.
Price Trend
A “converse” trend against the world and a low customer’s bargaining power: According to the Ministry
of Industry and Trade, in October 2011, in spite of a relatively sharp decrease in powder milk’s imported
input price in the world, prices of milk products (powder milk and liquid milk) in Vietnam market still had an
upward trend and is now about 20-25% higher than other countries in the region. According to Vietnam
Chamber of Commerce and Industry, there have been 16 occasions of increase in milk price in the last three
years at the scale of 3-10% each time. It’s the necessity of milk and the lack of close substitutes that make
consumers hesitantly accept the high milk price. In another word, Vietnamese consumers have a low
bargaining power in determining milk price.

The chance for domestic powder milk products: Given that the CPI level jumped 23.02% in the first eight
Figure 6: Vinamilk’s total revenue and months of 2011, in which food prices increased 34%, and that imported powder milk’s price is often two to
net profit
three times higher than domestic producers’, a proportion of consumers are switching to domestic brands,
1000 25 such as, Vinamilk and Nutifood.
800 20
600 15 COMPETITIVE POSITIONING
400 10 Vinamilk is the market leader in Vietnam dairy industry. The Company holds 39% of the market share
200 5 nationwide. Vinamilk’s total revenue and net profit have been increased significantly in 2006-2010, at CAGR
0 0
of 26.0% and 49.1%, respectively. In 2011, the revenue is estimated to be more than VND20,000 billion,
which is an increase of about 24% compared to the previous year.
2006 2007 2008 2009 2010

Competitive Advantages
Total revenue (USD million)
A market-leading company brand name: After 35 years since establishment, Vinamilk has become one of
Net profit (USD million)
the most well-known brands among milk consumers in Vietnam. The Company has always been selected by
Net profit margin (%)
consumers to be on the Top ten high-quality Vietnamese goods for many years.
Source: Vinamilk

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 CFA Institute Research Challenge 11.11.2011

A diverse product range: Vinamilk produces more than 200 products for domestic sales and for export. It
has a product mix ranging from dairy products to ice-creams, cheese, and healthy beverages. Vinamilk’s
goods serve a variety of customer groups, from children, teenagers, adults, pregnant women, to elder people.

An extensive sales and distribution network: Vinamilk’s sales and distribution network, which is one of
the largest networks in Vietnam, includes 220 distributors and over 140,000 outlets all over the country.

A reliable supply chain control: Vinamilk keeps very close relationships with suppliers to ensure high-
quality milk by locating factories near farms of milk cows. Currently, the Company is purchasing 50-60% of
domestic raw milk. Moreover, Vinamilk has developed its own sources of supply; its plan of reaching
100,000 cows by 2015 should help the Company control 40-50% of milk input by then.

Figure 7: Liquid milk market share Application of modern technology in milk processing and producing: The Company has signed
agreements with some leading companies in the world for R&D support. Vinamilk’s production lines are
44%
equipped with modern technology from Germany, Italia, and Switzerland; it takes advantage of a system
Vinamilk called Enterprise Resource Planning (ERP) powered by Oracle to manage inventory and minimize spoilage
others
loss.

An experienced and dedicated management team: Most of Vinamilk’s Board members have been devoting
to the Company for more than 20 years.
56%
Competitive Evaluation by Segment
Sources: MIT & Vinamilk Among Vinamilk’s portfolio, liquid milk, powder milk, condensed milk, and yoghurt are four core products.
Liquid Milk – Vinamilk – The Dominating Player (Figure 7)
In 2010, Vinamilk has the biggest market share of more than 44%. However, the firm’s competitors are
heavily investing in the segment. Dutch Lady, the second dominating producer in liquid milk segment in
Figure 8: Powder milk market share
Vietnam, has just invested USD40 million to build the most modern factory in South East Asia. This factory
10% includes a liquid milk and yoghurt plant and another powder milk plant. TH Milk, a new brand in liquid milk,
5% 20%
Vinamilk
has invested heavily in dairy farms, processing factories and logistic channels with the intention to provide
customers with 100% fresh milk. We expect in the near future, TH Milk will be Vinamilk’s main rival in the
foreign liquid milk market. Despite facing great competition from Dutch Lady, and recently, TH Milk, Vinamilk can
companies
Nutifood maintain the competitive advantages in this segment. What is more, Vinamilk 100% liquid milk meets
international standards, including ISO 9001:2008, and HCCP (Hazard Analysis and Critical Control Points).
others It is expected that this segment will grow at CAGR of about 25% for the whole industry during the next five
years.
65%
Sources: MIT & Vinamilk Powder Milk – The Fierce Competition from Imported Products (Figure 8)
The most intense competition takes place in this segment, which is predicted to grow at 30% in 2012-2016.
The powder milk market is currently dominated by foreign producers, which currently accounts for more than
65% of total market share. In 2010, Vinamilk held 20% of powder milk market share and its major
Figure 9: Condensed milk market
share
competitors are Abott, Mead Johnson, Dutch Lady and Nutifood. In order to gain more market share in this
segment, Vinamilk is focusing more on marketing and R&D activities. Until now, Vinamilk has successfully
20%
applied nutritional development in many of its products, including Dielac Powder Milk (Dielac Alpha, Dielac
Mama, and Ridielac). Especially, in 2011, Vinamilk has signed an agreement with three leading European
Vinamilk partners, namely DSM Group and Lonza Group of Switzerland and the Denmark-based Hansen group, for a
Dutch Lady program to study and apply nutrition science to the development of special nutritional products for
Vietnamese children. Moreover, this segment is supported by a national campaign “Vietnamese buys
Vietnamese goods”.
80%
Sources: MIT & Vinamilk Condensed Milk – A Maturing Segment (Figure 9)
The consumption of condensed milk is mainly from low income rural areas. In general, Vinamilk and Dutch
Lady dominate this segment, with market share of 80% and 20%, respectively. The competition in this
Figure 10: Yoghurt market share segment is relatively low and this segment is starting to mature. We, however, forecast this division to grow
Spoon yoghurt Drink yoghurt at CAGR of about 15% in 2012-2016 as a result of condensed milk’s sales growth in rural areas and in export
10% markets.
26
% Yoghurt – The Threat from New Entrants (Figure 10)
This is a potentially high-growing segment with a few participants, including Bavi milk (IDP), Kido (Kinh
Do), Moc Chau and Yakult (from Japan). Among these, Vinamilk controls 90% market share of spoon
yoghurt and 26% market share of fermented drink yoghurt, with revenue growth of both product lines was
74
more than 50% per year in 2010. Currently, to compete with Vinamilk, Kido targets high-end customers and
90% % children; and Yakult focuses on fermented drink yoghurt while starting to offer the market with spoon

Vinamilk others

Sources: MIT & Vinamilk

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CFA Institute Research Challenge 11.11.2011

yoghurt. Besides, attracted by the high growth of this market, about 30-40% in 2012-2016, some new
entrants, such as, Yogood, Casei and Betagen (from Thailand), have threatened the dominating positions of
existing players. Competition in this market is expected to intensify in the future; however, it is still at the
growing stage and opportunities are available for every company.

Investment Summary
We initiate a HOLD recommendation for Vinamilk share with a year-end target price of VND144,000,
offering a 4.40% upside from the current stock price of VND138,000 on November 11th, 2011

Firstly, there is an increasing trend in stock price overtime. Despite a deep fall of nearly 40% in stock
price during 2008 due to the global financial crisis that negatively affected Vietnam stock market, the overall
trend of growth has been observed from 2009 to current 2011. In 2011 particularly, Vinamilk experienced a
dramatic rise of more than 40% in stock price from VND87,000 in January to VND127,000 in October;
moreover, Vinamilk stock markedly outperforms VN-index which has been declining throughout the year.

The key for Vinamilk success is increasing milk consumption in domestic market. Thanks to continuous
growth in disposable income of about 10% per annum and increasing awareness of healthy benefits from
using dairy products, dairy consumption per capita has been increasing at annual rate of about 10% during
2007-2011 period and is expected to rise at 20-25% through this decade.

Vinamilk has the ability to maintain its high organic growth. Firstly, being the leader in domestic dairy
industry, Vinamilk experienced high sales growth from 26-49% during the last three years and total sales are
forecasted to increase at an annual rate of 27.6% until 2015. Secondly, although EPS is expected to decrease
in 2011 and 2012 due to recent announcement of 50% stock dividend, it will increase by nearly 27% per
annum from the year 2013. Furthermore, Vinamilk is in a healthy financial condition with low level of
liquidity risk and steadily high amounts of CFO. In the future, we expect the Company will keep a minimal
Long-term Debt/Equity ratio of 0.11, which is an average level for dairy firms in Asia.

The price target of Vinamilk using discount methods and multiples analysis is VND144,000, a 4.40%
return from the stock price of VND138,000 on November 11th, 2011. Under discount methods, our
adjusted levered equity beta for target capital structure is 0.79; subsequently, the cost of equity capital and
WACC are 16.50% and 16.00%, respectively. The resulting prices using discount models range from
VND102,662 to VND151,923. On the other hand, in multiples analysis, six regional peers are selected, of
which four peers with similar capital structure are used to average multiples and the remaining two peers are
for contrasting purposes (Appendix 18). Accordingly, the price target using P/E, P/B, EV/EBITDA and
EV/EBIT multiples varies from VND64,527 to VND184,437. Thus, from these outputs, we conclude with a
median price of VND144,000 for Vinamilk share. Overall, we offer a HOLD recommendation.

Finally, some of the main risks that Vinamilk is confronting come from sanitation and quality control,
fluctuations in imported input prices, and intense competition in domestic market. First, ensuring
product quality through an effective ERP system and R&D in nutrition science will be critical to the strategic
management of Vinamilk. And, continuous investment in its own supply sources also helps the Company
reduce its current reliance on imported input and maintain its leading position. Last but not least, Vinamilk
will be facing strong competition in the future, especially from TH Milk.

5
 CFA Institute Research Challenge 11.11.2011

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

Vinamilk continues to be listed in top top five private

businesses of Vietnam 2011, exports is at the highest level
since establishment, over USD130 million in 2011
(estimated)

Vinamilk starts operating its first oversea project - Miraka Vinamilk

Powder Factory, in which the Company invested NZD90 declares to pay
million stock dividends
of about 180
At the end of 2009, Vietnam’s million stocks at
public debt is USD28 billion, the rate of 1:2
which is double year 2005’s figure, Vinamilk raises the Inflation rate of
Government’s monetary is more collecting price of the first four
tightened; State Bank of Vietnam fresh milk material months 2011 is
requires commercial banks to stop by VND800/kg at high level, up
offering securities loans to 10%,
Government
intends to
Inflation rate increases, restrain
in November 2010, Vinamilk makes a inflation rather
inflation rate increases profit of more than than to set
2% VND1,000 billion in priority for
the first quarter growing factors

Source: chart.vietstock.vn

Table 1: Valuation
Assumptions for DDM Discount Methods
Equity Beta (unlevered) 0.73 Dividend discount model (DDM)
Target D/E 0.11 DDM is our first choice as a method of valuation because Vinamilk is one of the companies that have
Risk premium 9.50% consistently committed to stable-payout-ratio dividend policy and no changes are expected regarding this
Effective tax rate 18.00% matter in the future.
Equity Beta (levered) 0.78
Risk-free rate 9.20% The Company’s current market beta is 0.60 but due to long prediction period and the fact that 2011 is an
Cost of equity capital 16.50% unusually volatile year for Vietnam’s economy we opt to use the adjusted beta of 0.73. After adjusting for
Payout Ratio target capital structure with Long-term Debt/ Equity ratio of 0.11, our levered beta is 0.78. Assuming a risk-
(2011 – 2015)
45.00%
free rate of 9.20% (10 year T-bond rate, adjusted for default risk) and market risk premium of 9.50% results
Dividend growth rate Exponential
(2016 – 2025) decay in 16.50% cost of equity capital with CAPM.
Dividend growth rate 4.50%
(After 2025)
The key driver of this valuation is the high projected sales growth at CAGR of 27.6% between 2011 and
10 year T-bond yield 12.50%
2015. Taking into consideration the recent figures of 25.5% to 48.6% in the last three years, this is a sound
CDS Spread 466bps
number. Moreover, the Company’s ability to sustain high profit margin and dividend payout ratio will also
Liquidity factor in
30% play a critical role. According to our estimation, Vinamilk is expected to maintain a gross margin and net
CDS Spread
margin of approximately 32% and 19.7% respectively while distributing 45% of its earnings as dividends
Sources: Bloomberg, Asian Bonds Online, each year.
CMA, & HANU estimates
Consequently, the outcome is an intrinsic value of VND102,662 with mid-year adjustment.

Table 2: Owing to the nature of DDM, our price target is exposed to variation of assumptions consisting of (i) the
Assumptions for FCFF pressure from input cost and fierce competition which will dampen sales and reduce dividends, (ii) the
Cost of equity capital 16.50% difficulty in balancing substantial capital expenditure and a high payout ratio, and (iii) the instability of the
Cost of debt capital 14.50% economy which could significant undermine the correctness of our forecasts.
Target D/E 0.11
Effective tax rate 18.00% Discounted cash flow (DCF)
WACC 16.00% In addition, we also apply DCF method to our valuation. Like DDM, sales growth and profitability continue
FCFF growth rate Exponential
decay
to be the main catalysts and lead to improving CFO, despite increased investments in net working capital.
(2016 – 2025)
FCFF growth rate With regards to its expansion plan for the period 2011 - 2013, Vinamilk is expected to commit a significant
(after 2025) 4.50% amount to capital expenditure as illustrated by our forecasts in the pro forma statement of cash flows
(Appendix 10). Historically, the source of long-term debt capital for the Company has been borrowings from
Sources: Bloomberg & HANU estimates

6
 CFA Institute Research Challenge 11.11.2011

Table 3: domestic banks at a margin above average 1-year term deposit rates. Therefore, we estimate the cost of debt
Assumptions for FCFE for Vinamilk to be 14.50% in the foreseeable future.
Cost of equity capital 16.50%
FCFE growth rate Exponential The results from DCF valuation are VND151,923 for FCFF and VND144,068 for FCFE . Due to their similar
(2016 – 2025) decay
FCFE growth rate nature, DCF inherits both the strengths and weaknesses of DDM. On the one hand, it sheds light on the true
4.50%
(after 2025) intrinsic value of the firm’s equity. On the other hand, it’s highly sensitive to changes in assumptions (D/E
ratio, Effective Tax Rate, Cost of equity, Cost of debt, etc.).
Sources: Bloomberg & HANU estimates
To remedy part of the problems outline above and account for the historical share price volatility (about
Table 4: 20%), sensitivity analyses are conducted to determine share price at various level of constant growth rate and
Method Valuation cost of equity for DDM and both versions of DCF (Appendix 15, 16, and 17).
DDM VND102,662
FCFF VND151,923 Multiples analysis
FCFE VND144,068 Additionally, price and enterprise value multiples are used to offer an alternative perspective on Vinamilk.
Six regional players are selected, of which the first four are used to average multiples Vinamilk and the other
Source: HANU estimates two are only for comparison and contrast purposes due to substantial differences in capital structure
(Appendix 18).

Table 5: The price multiples give conflicting signals. P/B appears to demonstrate the opposite at higher than average
Multiples Vinamilk Industry level, whereas P/E indicates a relatively cheap price at lower than average level. Subsequently, two markedly
P/E 13.60x 17.46x different estimates of Vinamilk share price are computed, VND184,437 using P/E and VND64,527 using P/B
P/B 4.73x 2.12x with the median measures acting as proxies for industry benchmarks. Given the outstanding performance of
EV/ EBITDA 10.70x 8.85x Vinamilk as demonstrated by its ROA and ROE ratios in 2010, respectively 2.9x and 2.3x industry averages,
EV/ EBIT 11.69x 16.80x our “Discount methods” price targets of VND102,662 to VND151,923 appear to be reasonable, lying
EBITDA Margin 23.07% 10.23% between the two extremes above. Moreover, in the future, we expect Vinamilk to continue to acquire fast
growth rates in sales and maintain high margins, which further enhances the stock price upside potential.
Sources: Bloomberg & HANU estimates
The analyses of enterprise value multiples further cement this argument. Despite having twice as high
EBITDA Margin in comparison to the industry, its EV/ EBIT are just nearly two thirds of the respective
Table 6:
benchmark. Conversely, EV/EBITDA Margin was higher than industry number. Using medians for industry
Multiples Valuation
figures and book value as estimates of market value for Debt and Cash produces a range of VND97,255 to
VND175,647 for Vinamilk share price.
P/E VND184,437
P/B VND64,527 The robustness of this model, however, is somewhat hindered by the fact that Vietnam’s dairy industry has
EV/ EBITDA VND97,255 exhibited some unique characteristics compared to others in Asia, in both milk consumption and product
EV/ EBIT VND175,647 prices as highlighted in our industry analysis. The differences in competitive positioning of each company
also raise questions on the reliability of comparison. For instance, the China dairy market has three major
Source: HANU estimates companies, namely Bright Food Group, China Mengniu Dairy Co Ltd and Yili Group, totaling to 38.80% of
market share in 2009, which was roughly Vinamilk’s share in Vietnam market in the same year.

The verdict
Ultimately, to synthesize the results of the two modes, we use the median of the produced numbers and arrive
at a year-end target price of VND144,000. This is a 4.40% return from the share price on November 11th,
2011 (VND138,000). Taking into account all the uncertainties with regards to the two valuation models and
historical volatility of Vinamilk share price, we propose a price range of 20%, which is equivalent to an upper
bound of VND173,000 and a lower bound of VND115,000. As a result, we offer a HOLD recommendation.

Figure 12: Sales revenue (VNDbillion)

Financial Analysis
Vinamilk’s financial condition has remained consistently healthy.
60,000
50,000 Earnings
A strong growth of sales is driven by increasing demand volume (Figure 12)
40,000
In 2010, Vinamilk recorded very positive sales revenue of VND16,081 billion, 11% more than the
30,000 Company’s target and about 50% jump compared to 2009 figure. The selling prices increased twice with the
20,000 total percentage of 7-9%, thus, the growth rate of sales revenue mainly came from increasing demand
10,000
volume. In 2011, the Company’s planned sales revenue is VND20,560 billion; after the third quarter, it has
earned approximately VND15,980 billion. Therefore, it is really possible for the Company to achieve its 2011
0
target or even more than that figure. According to Vinamilk, it has planned to reach approximately
VND63,000 billion (USD3 billion) of net sales, which is equal to about VND64,300 billion of sales revenue
in 2017. This goal is also reasonably within the Vinamilk’s ability because of high sales growth rate along
Sources: Vinamilk & HANU estimates with the expansion of production capacity.

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 CFA Institute Research Challenge 11.11.2011

Figure 13: Vinamilk’s EBITDA The overall increasing trend of EBITDA margin and EPS
margin EBITDA margin has increased in recent years as a result of the improving gross profit margin, which was
24% 23% driven by the economies of scale and ERP application. In 2010, EBITDA margin was about 23% and this
23%
figure was much better than those of the major peers in Asia region with the average EBITDA margin of
17% approximately 12.14% (Appendix 18). In our forecast, EBITDA margin will be stable at about 23% in the
11% 12% next five years (Figure 13).

In addition, EPS enjoyed a remarkable growth from VND3,653 (2008) to VND10,251 (2010). In 2011, the
Company issued 5% additional stock and 50% stock dividend, which makes EPS decrease in 2011 and 2012.
However, EPS is forecasted to grow at the rate of 27% from 2013 onwards (Appendix 5).

High level of ROE (Figure 14)

Sources: Vinamilk & .HANU estimates In 2010, ROE was at the level of 50%, which was much better than the figures of other peers in dairy industry
(Appendix 18). In the next five years, even though ROE is predicted to decrease, it still stays at high level of
about 40-42%. In the following parts, ROE will be broken down for deeper analysis.
Figure 14: Vinamilk’s ROA and ROE  Consistently high ROA: ROA has always been above 30% for the last two years and is expected
60% to remain its stable level of 30% to the year 2015. This is mainly due to high net income and high
50% profit margin for ROA.
40%  Capital structure leverage: Vinamilk has mainly use common equity to finance assets. Its
consistently high CFO has allowed the Company to keep its debt at a quite low level. With this
30%
capital structure, Vinamilk would not be seriously affected by the current difficult economic
20% environment and the high borrowing interest rate. However, Vinamilk can boost ROE by taking
10% the advantage of financial leverage. In the upcoming years, we expect Vinamilk to use more
0% long-term debt to finance its fixed asset investment in some large projects such as Vietnam Milk
factory, Dielac two Plant, upgrading investment and cow farms. In our forecast, Long-term Debt/
Equity ratio is at the level of about 0.11 when non-interest bearing debts are excluded.
ROA ROE
Cash Flow
Sources: Vinamilk & HANU estimates
Strong cash flow supporting the capacity expansion
Cash flow from operation had an increasing trend over the period of 2007 and 2009 as operating income grew
Figure 15: Vinamilk’s liquidity ratios considerably. In 2010, CFO decreased due to the increase of nearly 80% in inventory compared to the
3.50 previous year. However, this increase in inventory level was mainly for the purpose of purchasing the raw
3.00 materials as a defensive action against the volatility of the input price.
2.50
2.00 Despite the decrease in CFO in 2010, Vinamilk still produced enough operating cash flow to cover increasing
1.50 capital expenditure and dividend payment. For instance, although investment in fixed asset in 2010 increased
1.00 significantly by 119% yoy, it was just only 63% of CFO. In the future, CFO is predicted to continue to
0.50 sustain CFI.
0.00

Balance Sheet & Financing

Low liquidity risk: Liquidity position has been consistently strong from 2006 to 2010; and, the current ratio
Current ratio Quick ratio and quick ratio will be constant at level of 2.2 and 1.2 respectively in the next five years. Besides,
CFO/Current Liabilities fluctuated from year to year and reduced significantly from 1.8 in 2009 to 0.7 in
Sources: Vinamilk & HANU estimates
2010 because of the 80% increase in inventory and more than 50% increase in current liabilities. Overall,
these ratios still indicate low liquidity risk (Figure 15).
Figure 16: Vinamilk’s efficiency ratios
Improving efficiency ratios: With the implementation of ERP system into operation in 2008, the inventory
35.00 has been more tightly controlled and results in relatively high inventory turnover ratio. Furthermore, the
receivable collection ability has been enhanced significantly. Receivable Turnover increased from 15.86 to
30.00
28.62 during 2008-2010. Therefore, Day Receivable Outstanding reduced remarkably from 23 days to 13
25.00 days. In terms of Day Payable Outstanding, it stayed at high level compared to the peer’s figures, which
20.00 indicates that Vinamilk is taking the advantage of suppliers’ credit policy as well as having good and long-
15.00
term relationship with them (Figure 16).
10.00
5.00 Corporate Governance and Corporate Social Responsibilities
0.00 Vinamilk has regarded corporate governance as one of the key factors for its sustainable growth.
According to the Company’s Annual Report 2010, the Board of management emphasizes five core values:
Integrity, Respect, Fairness, Compliance, and Ethics. Board members are provided with adequate and timely
information related to the Company on on-going basis, which enables them to carry out their duties. A formal
Inventory turnover assessment on the performance efficiency of each Board member is carried out on an ongoing basis by
Account receivable turnover Vinamilk. The salary structure was developed and implemented by Vinamilk with the assistance of TalentNet
Account payable turover
Consulting Company, a leading global provider of HR consulting, outsourcing, and investment services. In
Sources: Vinamilk & HANU estimates

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 CFA Institute Research Challenge 11.11.2011

2010, advised by Ernst & Young Vietnam, the Company improved its risk management system in all
activities, goals, and important programs to bring more value to shareholders and gain the trust of customers.
Besides, Vinamilk continues to communicate effectively with investors through its annual shareholders’
meetings and investor relations function.

Vinamilk has consistently engaged in corporate social responsibilities (CSR). The Company has
cooperated with the Ministry of Education and Training to set up a scholarship foundation named “Vinamilk
– Nurturing Vietnamese Young Talents”, and co-founded Vietnam Development Milk Fund with Vietnam
Children Support Fund, among other programs (Appendix 7).

Investment Risks
Operational Risks
Food safety and nutrition control
Dairy products can directly affect consumers’ health, especially children’s. The drug residue (following
treatment of cows), and the toxic substances like melamine and other toxins produced by bacteria might be
harmful to consumers. Therefore, ensuring high product quality is crucial for the strategic management of
every producer in this intensely competitive environment, and safety control is required in every stage of
production from acquiring of raw material, storing, processing and packaging to distributing and retailing.
Hanoimilk Joint Stock Company, for instance, fell victim to the “Melamine Storm” originated from China.
The Company, then, suffered a financial loss of VND40 billion and even more severe loss of consumers’
belief although the Ministry of Health did make a formal apology for its misleading melamine testing result
of Hanoimilk products afterwards. Despite the fact that Vinamilk was not affected by the melamine scandal,
the firm will have to pay a great deal of attention to prevent even the smallest mistakes in quality control,
Figure 17: Raw milk price volatility in
which can significantly damage the Company’s long-built reputation.
2010 (USD/ton)

4500 Volatility in price of imported raw milk (Figure 17)

Milk powder, which accounts for about 60% of cost of goods sold, is a major raw material for the Company.
4000
Currently, this input is being imported mainly from New Zealand, America and Netherlands. Thus, Vinamilk,
3500 along with other dairy processors, has to cope with the fluctuation of the imported materials’ prices. The
Company has been trying to develop its own supply sources and to significantly increase the number of milk
3000 cows and farms by 2015. This should reduce the level of dependence on imported ingredients; therefore,
2500
reduce the risk exposed to changes in input prices.

2000 Fierce competition risk

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

May
Jan

Sep
Oct

Dec
Mar
Apr

Jun
Jul
Aug

Nov

intense. The forecasted profitability of Vietnamese market will undoubtedly be a motive for multinational
Australia skim milk dairy companies to enter, especially in powder milk and yoghurt segments, where customers’ demands are
Australia fat milk
growing and profit margins are larger at about 30-40%. In the market of liquid milk, although Vinamilk is
Europe skim milk
now the dominant player, it is getting riskier with the aggressive strategic moves from Dutch Lady and the
entrance and popularization of TH Milk. We anticipate in the near future, TH Milk will be Vinamilk’s main
Europe fat milk
rival in the liquid milk market.
Source: USDA

Financial Risks
Foreign exchange risk
Because Vinamilk still relies on imported inputs, the depreciation of VND should reduce the Company’s
profit margin. Since the beginning of 2010, depreciation pressure on VND has increased. By November 2011,
VND/USD has declined 12.4% compared to January 2010’s figure, and it is expected to depreciate further
(Appendix 6). In order to manage this risk, Vinamilk has held sufficient foreign currency to hedge the foreign
exchange risk from imported materials and other international projects that require foreign currency
payments. At the end of the third quarter 2011, the Company accumulates USD17 million.

Strategic Risk
In recent years, Vinamilk has unsuccessfully expanded its operation to other nondairy markets, such as, beer
and instant coffee, which have never been their strengths. By March 2009, Vinamilk had sold 50% ownership
of its beer joint-venture back to SABMiller Asia after only two years of operation. In 2010, five years after
establishment, it had to sell Café Moment to Trung Nguyen Coffee. Currently, Vinamilk is investing in its
new Vfresh soft drinks and a lot of uncertainty about this product line’s future is waiting ahead.

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 CFA Institute Research Challenge 11.11.2011

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

80000

60000

40000

20000

0
2007 2008 2009 2010 2011

Appendix 2
Milk consumption per capita in 2009 (kg/ year) - Source: APHCA

176

92 96
62 66
29
13.2

Appendix 3.
Retail price for liquid milk 2010 (USD per litre) – Sources: Euromonitor & Jaccar Equity Research

1.7
1.6
1.5
1.4 1.4
1.3 1.3
1.2 1.2 1.2 1.2 1.2
1.1 1.1 1.1 1.1
1.0 1.0 1.0 1.0
0.9 0.9
0.8 0.8 0.8

0.6
0.5
Chile
Canada
UK
Turkey

Brazil
China

USA
Russia

Mexico
Hungaria

Portugal
Germany
Australia

Czech

Austria
Belgium
India
Indonesia

Netherland
Poland
Vietnam VNM

Swenden

Switzerland

Ireland
Vietnam Avg

New Zealand
South Korea

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 CFA Institute Research Challenge 11.11.2011

Appendix 4
Vinamilk’s ratios – Sources: Vinamilk & HANU estimates

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

EBITDA Margin 17.38% 24.25% 23.09% 22.63% 22.66% 22.69% 22.71% 22.73%
EPS 3,563 6,769 10,251 10,563 9,214 11,769 14,941 18,872
ROA 22.39% 32.95% 37.62% 30.42% 29.27% 29.70% 29.86% 29.71%
ROE 27.85% 42.40% 50.03% 40.94% 39.85% 41.07% 41.84% 42.26%
Current Ratio 2.98 2.92 2.24 2.35 2.42 2.46 2.37 2.24
Quick Ratio 1.20 1.92 1.18 1.26 1.31 1.30 1.27 1.20
CFO to Current Liabilities 1.27 1.82 0.87 0.62 1.2 1.19 1.2 1.12
Account Receivables Turnover 15.86 20.34 28.62 25.29 22.5 22.44 22.38 22.32
Inventory Turnover 3.23 4.33 5.75 4.93 4.78 4.77 4.75 4.74
Accounts Payable Turnover 8.87 8.39 11.64 11.5 11.19 11.21 11.18 11.16
(6)
Long-term Debt/ Equity 0.00 0.00 0.00 0.05 0.11 0.13 0.14 0.13

Appendix 5
Vinamilk’s EPS (VND) - Sources: Vinamilk & HANU estimates

21,000
18,000
15,000
12,000
9,000
6,000
3,000
0

Appendix 6
VND per USD from January 2010 to November 2011 - Source: XE

(6)
Excluding non-interest bearing debt
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 CFA Institute Research Challenge 11.11.2011

Appendix 7
Vinamilk’s corporate social responsibilities – Source: Annual report 2010

Vinamilk scholarship foundation “Nurturing Vietnamese Young Talents”

From school year 2003-2004, Vinamilk cooperated with the Ministry of Education and Training to set up a scholarship foundation called
“Vinamilk – Nurturing Vietnamese Young Talents”. Thanks to this foundation, the primary school students nationwide have been
supported with more than 29,000 scholarships valued at VND14 billion. In 2011, there are expected to be 6,000 scholarships to be granted.

Vietnam Development Milk Foundation

The foundation started with one million glasses of milk for poor children. The fund’s purpose is to help children with disadvantaged family
situation, malnutrition and disability. At the moment, Vinamilk is targeting eight million glasses of milk (or VND30 billion) to daily offer
to disadvantaged children, primary students and pre-school students at 63 provinces.

Some other social activities that Vinamilk have participated

Vu A Dinh Scholarship Foundation: supporting students living in mountainous areas and minority students
Honoring Vietnamese Heroine Mothers: paying monthly allowance to the heroine mothers
Hochiminh City Poor Patient Support Association: granting VND500 million in the heart surgery program for children with defective
hearts
Million Hearts towards the Islands: supporting people and soldiers in Truong Sa Islands
Blood Donate Patient Support

Appendix 8
Balance sheet (VND million) – Sources: Vinamilk & HANU estimates

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

Current Assets 5,069,158 5,919,803 8,282,289 10,732,936 13,396,039 17,187,652 21,813,956
Cash and Cash Equivalents 426,135 263,472 471,496 607,544 764,213 974,813 1,233,314
Short-term investments 2,314,254 2,092,260 2,646,922 3,493,551 4,163,930 5,462,386 7,002,985
Account Receivables 589,272 770,766 1,322,705 1,700,384 2,171,904 2,757,383 3,482,703
Inventories 1,311,765 2,351,354 3,246,756 4,173,818 5,331,227 6,768,363 8,548,757
Other Current Assets 427,733 441,950 594,408 757,636 964,763 1,224,705 1,546,195
Long-term Assets 3,412,878 4,853,230 7,434,319 9,518,598 12,077,794 15,306,181 19,296,578
Fixed Assets 3,217,846 4,376,472 5,651,844 7,301,717 9,361,533 11,919,173 15,087,702
Accumulated Depreciation (1,343,023) (1,613,183) (1,988,762) (2,480,456) (3,117,116) (3,933,778) (4,973,435)
Construction in progress 650,140 665,282 1,100,157 1,417,602 1,783,163 2,274,563 2,877,732
Long-term investments 629,968 1,242,616 1,456,201 1,812,487 2,221,120 2,771,765 3,446,711
Other long-term assets 249,124 182,018 184,442 232,789 290,909 365,806 458,184
Total Assets 8,482,036 10,773,032 15,716,617 20,251,542 25,473,842 32,493,841 41,110,542

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

Accounts Payable 789,867 1,089,417 1,472,414 1,870,320 2,386,285 3,026,320 3,818,899
Accrued expenses 208,131 264,151 377,197 486,035 611,370 779,850 986,651
Short-term borrowings 13,283 567,960 839,243 981,677 1,052,769 1,649,817 2,681,758
Bonus and welfare fund 182,265 259,395 361,875 480,830 624,398 800,391 1,017,391
Other payables 541,325 464,089 474,883 611,189 774,770 985,921 1,246,304
Long-term liabilities 256,325 163,583 683,101 1,614,555 2,361,460 3,195,031 3,748,266
Long-term borrowings 12,454 - 537,672 1,558,989 2,303,671 3,134,931 3,685,762
Other long-term liabilities 243,871 163,583 145,429 55,566 57,789 60,100 62,504
Total Liabilities 1,991,196 2,808,596 4,208,715 6,044,608 7,811,056 10,437,333 13,499,272

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

Share premium - - - - - - -
Treasury Stock (154) (669) (1,326) (1,326) (1,326) (1,326) (1,326)
Retained Earnings 892,345 1,909,022 2,820,012 5,006,683 7,808,095 11,370,960 15,876,310
Reserve funds 2,050,631 2,525,363 3,127,065 3,639,426 4,293,866 5,124,723 6,174,135
Minority interests 35,365 - - - - - -
Shareholder’s Equity 6,490,840 7,964,437 11,507,669 14,206,701 17,662,554 22,056,276 27,611,038

Total Liabilities &

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

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 CFA Institute Research Challenge 11.11.2011

Appendix 9
Income statement (VND million) – Sources: Vinamilk & HANU estimates

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

Sales 10,820,142 16,081,466 20,636,365 26,528,770 33,885,256 43,019,684 54,335,859
Less deductions (206,371) (328,600) (433,364) (557,104) (711,590) (903,413) (1,141,053)
Net sales 10,613,771 15,752,866 20,203,001 25,971,666 33,173,665 42,116,270 53,194,806
COGS (6,735,062) (10,579,208) (13,826,364) (17,774,276) (22,703,121) (28,823,188) (36,405,026)
Gross profit 3,878,709 5,173,658 6,376,637 8,197,390 10,470,544 13,293,082 16,789,780
Selling Expenses (1,245,476) (1,438,186) (1,754,091) (2,254,945) (2,880,247) (3,656,673) (4,618,548)
General and Admin Expenses (292,942) (388,147) (454,000) (583,633) (745,476) (946,433) (1,195,389)
Operating Profit 2,340,291 3,347,325 4,168,546 5,358,812 6,844,822 8,689,976 10,975,844
Interest and Dividend Income 134,759 275,493 456,150 576,840 717,511 898,057 1,148,725
Interest Expense (6,253) (6,172) (53,053) (170,217) (300,387) (421,324) (537,816)
Net other financial income 126,544 31,930 (93,551) (8,692) 91,155 168,562 204,129
Gain on disposal of assets 1,251 334,208 27,839 36,642 47,458 60,689 76,868
Net other income 134,708 274,578 405,524 520,463 664,133 842,724 1,064,185
Share of associate’s result - (235) (72,227) (92,851) (118,598) (150,569) (190,176)
Earnings before tax 2,731,300 4,257,128 4,839,227 6,220,997 7,946,092 10,088,116 12,741,759
Business income tax (361,536) (645,059) (871,061) (1,119,779) (1,430,297) (1,815,861) (2,293,517)
Deferred tax 6,246 9,344 17,421 22,396 28,606 36,317 45,870
Minority interest (375) 693 - - - - -
Net profit after tax 2,375,693 3,616,186 3,985,588 5,123,613 6,544,402 8,308,572 10,494,113
Shares outstanding 351 353 377 556 556 556 556
EPS 6,769 10,251 10,563 9,214 11,769 14,941 18,872

Appendix 10
Statement of cash flow (VND million) – Sources: Vinamilk & HANU estimates
Items 2009 2010 2011E 2012E 2013E 2014E 2015E
Net Income 2,375,693 3,616,186 3,985,588 5,123,613 6,544,402 8,308,572 10,494,113
Depreciation and Amortization 234,078 290,131 402,692 526,940 681,722 874,324 1,112,867
Provisions/ (Reversals of provision) 62,020 (3,795) 51,765 64,700 65,303 99,785 120,875
Losses/ (Gains) from non-operating
(160,382) (376,241) (23,751) (29,680) (37,256) (46,860) (58,971)
activities
Cash flow before changes in
2,511,409 3,526,281 4,416,294 5,685,573 7,254,171 9,235,821 11,668,884
working capital
Decrease/ (increase) in Inventories 453,952 (1,110,497) (897,775) (928,920) (1,159,728) (1,440,016) (1,783,962)
Decrease/ (increase) in Receivables (133,718) (322,146) (640,271) (497,428) (626,782) (778,076) (963,819)
Decrease/ (increase) in Prepayments 10,276 (14,275) (18,230) (44,134) (55,100) (68,417) (84,758)
Increase/ (decrease) in Payables 454,584 455,517 732,473 788,815 985,298 1,243,524 1,539,766
Net other operating cash flows (130,917) (243,466) (1,414,212) 297,196 85,939 533,813 565,687
Cash flow from operation 3,165,586 2,291,414 2,178,279 5,301,102 6,483,798 8,726,649 10,941,798

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

Net investments in other entities 131,817 (188,315) (210,030) (362,794) (417,784) (561,600) (689,336)
Net other investing cash flows (2,029,104) (335,104) (1,044,316) (1,630,491) (1,277,534) (2,498,197) (2,960,615)
Cash flow from investing activities (2,545,357) (1,265,691) (3,016,303) (4,023,180) (4,197,922) (6,205,499) (7,543,719)

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

Share repurchases (154) (515) (657) - - - -
Net borrowings (184,902) 559,263 809,102 1,163,751 815,774 1,428,308 1,582,773
Dividends paid (351,281) (1,765,200) (1,793,514) (2,305,626) (2,944,981) (3,738,857) (4,722,351)
Cash flow from financing activities (532,691) (1,188,384) 1,046,213 (1,141,874) (2,129,207) (2,310,550) (3,139,578)

Net change in Cash 87,538 (162,662) 208,026 136,048 156,669 210,600 258,501
Beginning Cash balance 338,654 426,135 263,472 471,499 607,546 764,215 974,815
Other adjustments (57) (1) - - - - -
Ending Cash balance 426,135 263,472 471,499 607,546 764,215 974,815 1,233,316

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 CFA Institute Research Challenge 11.11.2011

Appendix 11
DDM – Source: HANU estimates

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

2012E 4,146 1 0.86 3,559
2013E 5,296 2 0.74 3,902
2014E 6,724 3 0.63 4,252
2015E 8,492 4 0.54 4,610
Stage 1 16,323
2016E 10,785 5 0.47 5,025
2017E 13,217 6 0.40 5,286
2018E 15,706 7 0.34 5,392
2019E 18,177 8 0.29 5,357
2020E 20,565 9 0.25 5,202
2021E 22,822 10 0.22 4,956
2022E 24,915 11 0.19 4,644
2023E 26,822 12 0.16 4,291
2024E 28,538 13 0.14 3,919
2025E 30,063 14 0.12 3,544
Stage 2 47,617
After 2025 ke = 16.50% g = 4.50%
Stage 3 261,795 14 0.12 30,086
Share price 94,801

Adjusted share price VND102,622

Appendix 12
FCFF model – Source: HANU estimates

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

2012E 6,017 1 0.86 5,187
2013E 7,450 2 0.74 5,536
2014E 10,451 3 0.64 6,696
2015E 13,159 4 0.55 7,268
Stage 1 24,687
2016E 16,924 5 0.48 8,058
2017E 20,896 6 0.41 8,577
2018E 24,913 7 0.35 8,815
2019E 28,830 8 0.31 8,794
2020E 32,533 9 0.26 8,555
2021E 36,100 10 0.23 8,183
2022E 39,341 11 0.20 7,688
2023E 42,232 12 0.17 7,115
2024E 44,774 13 0.15 6,502
2025E 46,979 14 0.13 5,882
Stage 2 78,167
After 2025 WACC = 16.00% g = 4.50%
Stage 3 426,889 14 0.13 53,446
Firm value 156,300
Adjusted firm value 168,804
Debt Value 16,881
Share price VND151,923

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 CFA Institute Research Challenge 11.11.2011

Appendix 13
FCFE model – Source: HANU estimates

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

2012E 7,975 1 0.86 6,846
2013E 8,626 2 0.74 6,356
2014E 12,605 3 0.63 7,972
2015E 15,521 4 0.54 8,426
Stage 1 29,559
2016E 18,052 5 0.47 8,412
2017E 20,472 6 0.40 8,189
2018E 22,696 7 0.34 7,792
2019E 24,656 8 0.29 7,266
2020E 26,313 9 0.25 6,656
2021E 28,971 10 0.22 6,291
2022E 31,416 11 0.19 5,855
2023E 33,630 12 0.16 5,380
2024E 35,610 13 0.14 4,890
2025E 37,361 14 0.12 4,404
Stage 2 65,136
After 2025 ke = 16.50% g = 4.50%
Stage 3 325,355 14 0.12 38,353
Share price 133,088
Adjusted share price VND144,068

Appendix 14
Sales forecast (VND million) – Sources: Vinamilk & HANU estimates

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

Total Sales 10,820,142 16,081,466 20,636,365 26,528,770 33,885,256 43,019,684 54,335,859
Condensed milk 2,705,035 3,443,042 3,993,929 4,601,791 5,268,011 5,993,486 6,778,614
Sales contribution 25.00% 21.41% 19% 17% 16% 14% 12%
Growth 11% 27% 16% 15% 14% 14% 13%
Liquid milk 3,743,769 5,771,638 7,791,712 10,259,293 13,199,152 16,621,513 20,521,119
Sales contribution 34.60% 35.89% 38% 39% 39% 39% 38%
Growth 65% 54% 35% 32% 29% 26% 23%
Powder milk 2,164,028 3,229,158 4,133,323 5,349,991 7,005,534 9,284,529 12,459,771
Sales contribution 20.00% 20.08% 20% 20% 21% 22% 23%
Growth -11% 49% 28% 29% 31% 33% 34%
Yoghurt 1,861,064 2,962,206 4,147,088 5,725,022 7,797,107 10,481,520 13,914,137
Sales contribution 17.20% 18.42% 20% 22% 23% 24% 26%
Growth 85% 59% 40% 38% 36% 34% 33%
Others 346,245 548,378 570,313 592,674 615,451 638,636 662,217
Sales contribution 3.20% 3.41% 2.80% 2.20% 1.80% 1.50% 1.20%
Growth 38% 58% 4% 4% 4% 4% 4%

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 CFA Institute Research Challenge 11.11.2011

Appendix 15
DDM sensitivity analysis (VND) – Source: HANU estimates

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

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
13.50% 123,317 124,997 126,806 128,760 130,877 133,177 135,687 138,436 141,460
14.50% 113,713 115,206 116,813 118,550 120,430 122,475 124,705 127,148 129,835
15.50% 105,078 106,406 107,836 109,380 111,053 112,872 114,856 117,028 119,418
16.50% 97,301 98,484 99,757 101,132 102,622 104,241 106,007 107,942 110,070
17.50% 90,285 91,339 92,474 93,700 95,027 96,471 98,045 99,770 101,666
18.50% 83,945 84,886 85,898 86,992 88,176 89,464 90,869 92,407 94,100
19.50% 78,207 79,047 79,951 80,927 81,985 83,135 84,390 85,764 87,275

Appendix 16
FCFF sensitivity analysis (VND) – Source: HANU estimates

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

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
13.50% 206,090 206,090 206,090 206,090 206,090 206,090 206,090 206,090 206,090
14.50% 180,961 180,961 180,961 180,961 180,961 180,961 180,961 180,961 180,961
15.50% 160,662 160,662 160,662 160,662 160,662 160,662 160,662 160,662 160,662
16.00% 151,923 151,923 151,923 151,923 151,923 151,923 151,923 151,923 151,923
16.50% 143,967 143,967 143,967 143,967 143,967 143,967 143,967 143,967 143,967
17.50% 130,029 130,029 130,029 130,029 130,029 130,029 130,029 130,029 130,029
18.50% 118,245 118,245 118,245 118,245 118,245 118,245 118,245 118,245 118,245

Appendix 17
FCFE sensitivity analysis (VND) – Source: HANU estimates

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

2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
13.50% 184,942 188,270 191,931 195,978 200,474 205,499 211,153 217,560 224,882
14.50% 166,253 168,750 171,475 174,458 177,740 181,368 185,398 189,903 194,970
15.50% 150,651 152,553 154,615 156,855 159,300 161,977 164,921 168,176 171,793
16.50% 137,456 138,925 140,508 142,217 144,068 146,080 148,276 150,680 153,325
17.50% 126,174 127,322 128,552 129,873 131,295 132,832 134,496 136,305 138,279
18.50% 116,436 117,341 118,308 119,340 120,447 121,635 122,915 124,298 125,795
19.50% 107,958 108,679 109,445 110,261 111,131 112,061 113,058 114,128 115,281

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 CFA Institute Research Challenge 11.11.2011

Appendix 18
Peer evaluation – Sources: Bloomberg & HANU estimates

Long
Price Market Cap P/E P/E P/B ROA ROE EBITDA -term
COMPANIES’ NAMES EV/EBITDA EV/EBIT
(USD) ( USD million) 2011E 2012E 2011E 2010 2010 Margin D/E
2010
Yashili International Holdings Ltd 0.17 593.32 9.99 8.94 0.94 2.20 2.55 14.99% 20.06% 22.42% -
China Mengniu Dairy Co Ltd 3.34 5,896.05 22.52 17.92 3.29 13.34 19.77 7.88% 13.50% 6.97% 0.02
Fraser & Neave Holdings Bhd 5.59 2,014.46 20.93 19.54 3.55 11.62 13.82 24.27% 45.01% 13.49% 0.08
Maeil Dairy Industry Co Ltd 9.85 131.87 13.99 9.25 0.50 6.07 21.95 4.24% 8.37% 5.67% 0.09
Bright Dairy & Food Co Ltd 1.46 1,524.36 39.31 32.32 3.86 22.81 45.12 3.85% 8.76% 4.98% 0.24
Nestle Malaysia Bhd 15.94 3,738.43 25.23 23.79 18.11 19.57 22.83 22.42% 66.31% 14.63% 0.53
Average 4.74 2158.93 16.86 13.92 2.07 8.31 14.52 12.84% 21.73% 12.14% 0.05
Median 4.47 1,303.89 17.46 13.59 2.12 8.85 16.80 11.43% 16.78% 10.23% 0.05
Maximum 3.34 5896.05 22.52 17.92 3.29 13.34 19.77 14.99% 20.06% 22.42% 0.02
Minimum 0.17 593.32 9.99 8.94 0.94 2.20 2.55 7.88% 13.50% 6.97% -
Vietnam Dairy Products JSC 6.85 2,541.12 13.60 10.75 4.73 10.70 11.69 37.56% 50.16% 23.07% -

Appendix 19
Vinamilk’s product categories – Source: Vinamilk

liquid
milk

powder
cereal
milk

condensed
cheese VINAMILK
milk

ice-
yoghurt
creams

Vfresh

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 CFA Institute Research Challenge 11.11.2011

Disclosures:
Ownership and material conflicts of interest:
The HANU(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this Company.
The HANU(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content
or publication of this report. [The conflict of interest is…]
Receipt of compensation:
Compensation of the HANU(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The HANU(s), or a member of their household, does [not] serves as an officer, director or advisory Board member of the subject Company.
Market making:
The HANU(s) does [not] act as a market maker in the subject Company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater
over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.
A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over
the next twelve months.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the HANU(s) to be reliable, but
the HANU(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be
used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society
Name], CFA Institute or the CFA Institute Research Challenge with regard to this Company’s stock.

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