BAO VIET SECURITIES COMPANY

RESEARCH & ANALYSIS DEPT

September 2009

VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY (VINAMILK)

HIGHLIGHTS Vinamilk is the largest milk producer in Vietnam which contributes up to 35% of the domestic market share by output compared to that of 24% provided by Dutch Lady, the biggest local rival of Vinamilk. Vinamilk also reached remarkable annual growth rate of revenue at 21.2% on average in the period 2004 2008. We expect that Vinamilk will maintain revenue and income growth rate above the average of Vietnam dairy industry in coming years. Vinamilk will maintain high gross profit margin as the imported milk powder price decreased sharply from late 2008 to early 2009 and is forecasted to stay at low level in the next few years as supply outweighs demand world wide. Forecast of business performance in 2009. The production output will still be high thanks to the positive impact of selling and marketing policies in the last three years. Vinamilk in 2009 may post a revenue of VND 10,579 billion, increasing by 26.8% y-o-y; profit after tax (CIT rate 11%) of VND 2,143 billion, up 77% against in 2008. The forecast is not included the arising financial activities in 2009. Recommendation: We appreciate the stability and growth potential of Vinamilk in the future. Thanks to their current competitive ability and market leader position, Vinamilk is able to maintain revenue and income growth rate above the average of Vietnam dairy industry in coming years. We assess that the current price of VNM has closely reflected the growth expectation of Vinamilk in the future; therefore, we recommend HOLD VNM for long-term investment purpose.
Code: Stock exchange: 52-week low: 52-week high: Market price at Sep, 30 , 2009 Expected price: Market cap (bil VND): Volume of outstanding shares: Average trading volume in 10 days: Dividend ratio in 2009: OWNERSHIP RATIO State-owned ratio: Foreign-owned: Other shareholders: PRICE CHART 47.60% 21.79% 30.61%
th

STOCK INFO
VNM HOSE 32,570 99,000 90,000 88,668 31,615 351,280,620 575,307 N/A

Key financial indicators:

Financial indicators Total assets (mil VN) Owners equity (mil VN) Net revenue (mil VN) After-tax income (mil VN) ROA (%) ROE (%) EPS basic (VN) P/E (x) P/B (x) 2006A 3,609,400 2,734,740 6,619,100 731,585 20.27% 26.75% 4,601 19.6 5.4 2007A 5,425,121 4,315,942 6,648,190 963,398 17.76% 22.32% 5,496 16.4 3.7 2008A 5,966,958 4,761,913 8,208,035 1,228,204 20.58% 25.79% 7,007 12.8 3.4 2009E 7,734,761 6,199,518 10,367,385 2,143,244 27.71% 34.57% 6,101 14.8 5.3 2010F 9,404,421 7,562,407 12,057,742 2,134,051 22.69% 28.22% 6,075 14.8 4.3

P/E, P/B are calculated at the market price as of 30th September 2009

Please carefully read the Disclaimer at the end of the report

VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

OVERVIEW ABOUT THE MILK SECTOR 1. Potential growth. Remarkable potential growth. Vietnam is amongst the countries that milk sector has achieved high growth rate with the annual average growth rate of 15.2% during the period 1996-2006. This rate is just lower than China and much higher than other countries in Asia region. The milk growth rate in 1990-2006
15.2% 16.1%

6.4% 1.6% 1.7% 2.5% 3.6%

0.4%

1.3%

Philipines Bangladesh Srilanka

Thailand

Nepal

Indonesia

Vietnam Trung Quc

Source: APHACA Vietnam can achieve high growth rate of milk sector thanks to: First, Vietnam has low milk consumption output per head in comparison with other countries in the region. Therefore, the milk sector will attain high growth rate in the coming years since the average milk consumption output per head is still low in Vietnam.
Average milk consumption output per person and GDP by PPP 50 45 40 35 30 25 20 15 10 5 0
Milk consumption per head - left column (kg per head) GDP per head by PPP - right column (USD)

43 32

8000 7000 6000 5000 4000 3000 2000 1000 0

31 23 18 11 12

Source: APHACA, BMI

VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

Second, Vietnam has large population scale with increasing income in recent years. Thus, spending on milk will increase in line with the increasing income of the people. BMI forecasts that the average income will increase 13.1% p.a and milk market 14.6% p.a in the next five years.
GDP/head and spending on milk/head GDP/head (USD) Exchange rate (VND/USD) GDP/head (thousand VND) Spending on milk/head (kg/head/year) Population (million people) Scale of Vietnam dairy market (thousand tons) Growth rate by volume 2005 637 15,856 10,100 10.2 83.2 849 2006 723 15,991 11,561 11.0 84.4 928 9.4% 2007 829 16,084 13,333 11.8 85.6 1,010 8.8% 2008 975 16,449 16,038 13.2 86.8 1,142 13.1% 2009 986 17,666 17,419 13.8 88.0 1,218 6.6% 2010 1,141 17,850 20,367 15.3 89.2 1,364 12.0% 2011 1,250 17,850 22,313 16.3 90.4 1,469 7.7% 2012 1,456 17,850 25,990 18.1 91.6 1,655 12.6% 2013 1,614 17,850 28,810 19.5 92.8 1,806 9.1% 2014 1,783 17,850 31,827 20.9 94.1 1,971 9.2%

Source: BMI, Euromonitor and BVSC GDP/head and spending on milk/head

1,800 1,600 1,400 1,200 1,000 800 600 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 GDP/head (USD) Spending on milk/head (kg/head/year) 22.0 20.0 18.0 16.0 14.0 12.0 10.0

Source: Euromonitor, GSO and BVSC 2. Structure of the milk sector. The milk market composes of 4 key groups including milk powder, liquid milk, condensed milk and yoghurt, in which milk powder occupies up to 38% of the total output; fresh milk 34%; condensed milk 17%. However, condensed milk may reduce considerably due to its low growth rate.

VIE ETNAM DIA ARY PRODUCTS JOIN NT STOCK COMPANY Y

Milkmarketshar rebyoutput tin2008 Diary products s Conden nsed 11%
milk 17%

Milkmar rketshareby b revenuein n2008

Condensed milk 12%

Po owder m milk 3 38%

Diary products 12%

Powd der milk 39% 3

Liquid milk 34% %

L Liquid mi ilk 36%

Source e: Euromonito or The domestic d mil lk producers s take advantage in producing liqu uid milk wh hile foreign n ones focu us on milk powder. Fre esh milk ou utput produce ed by Vietn nam achiev ves the most stable and fa astest growth h rate as this is the key product p of lo ocal produc cers with sign nificant mark ket share. Foreign milk pro oducers occup py milk powder segmen nt, which bri ing high gros ss profit. The e powder mil lk output fluctuates robus stly due to its dependen nce on the ex xport market t, which acco ounts up to 50% 5 of the to otal output produced. Thus, T local mi ilk producers s have change ed strategy to o focus more on the mil lk powder seg gment with lo ow price in th he domestic m market.
M output Milk Po owder milk (To on) Co ondensed milk (million ( can) Fr resh milk (1,000 0 litres) 20 00 42,8 34 2 27 35,5 18 2001 42,670 235 72,508 2002 41,526 255 2003 44,734 294 2 004 34,118 317 170,669 2005 5 36,000 0 364 4 2006 N/A 336 2007 39,207 404 20 008 46,5 500 N N/A

108,747 1 38,253

177,300 0 216,000

N/A 261,1 160

Source: Ministry y of Industry and a Trade, GSO G M and diar Milk ry products exported (m million USD)
191.5

80.4 4

85.9 67.2 34.3

89.6 72.9 35

76

200 00

2001

2002

2 2003

2004 4

2005

2006

20 007

2008

Milk growth g rate by b group. Milk M powder ra anks at the fir rst place with h the growth rate r of 20% % p.a, follow wed by liquid d milk 16% p.a p and yoghu urt 14% in th he period 20042008. Liquid milk and yoghur rt are the two o potential p products that could gener rate attracti ive margin profit, wherea as condensed milk may re educe conside erably due to o its low gr rowth rate and d margin prof fit in compari ison with oth her diary prod ducts.

VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

Milk growth rate by group by years and forecast
21% 17% 12% 9% 13% 8% 13% 8% 22% 23% 19% 16% 14% 15% 14% 10% 7% 6% 5% 20% 15% 15% 20% 18% 16% 15% 17% 15%

Powder milk
2004 2005

Liquid milk
2006 2007

Condensed milk
2008 2009E

Yohurt
2010E

Significant gap of profitability amongst milk products. Mid and high class milk powder take the pole place in generating profit at the ratio of 46.6%; yoghurt 35.3%, liquid milk 32.5% and condensed milk 14.78% as the market has saturated. Gross margin of milk groups
46% 32% 35% 30%

15%

Condensed milk

Liquid milk

Yohurt

Low price powder milk

Hige price powder milk

Gross profit/sales

Source: BVSC 3. Market and competitors. The market shares. Vinamilk and Dutch Lady are now the two largest milk producers in Vietnam, occupying approximately 60% of the market share by value; Mead Johnson, Abbott, Nestle 22% with the main products are milk powder and the balance belong to small-sized milk companies such as Hanoi milk, Ba Vi, Lothamilk...Vinamilk currently controls the largest market share and it plans to increase its market share to 40% in the next few years. It is likely that Vinamilk may achieve this goal thanks to its famous brand names and large-sized operation scale. However, Vinamilk will also face fierce competition from its major rival Dutch Lady Vietnam, who made a rapid leap from 15.5% market share in 2003 to nearly 25% in 2007, especially the M&A of the first two leading milk producers of Netherlands
Royal Friesland Foods and Campina in early 2009. FrieslandCampina Vietnam targets

VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

to raise its market share by 1% per year and earn VND 6,300 billion in 2009, equivalent to the increase of 20% per year. The market share of Vietnam's milk producers
2007 35% 24% 6.50%

2003 Vinamilk BMS - Mead Johnson Hanoi Milk

35% Dutch Lady Vietnam Fonterra

15.50%

6.5%

Nestle Vietnam Saigon Beverages JSC (Tribeco)

Source: Euromonitor, BVSC Fierce competition from potential rivals. Significant development potential with attractive profit margin has encouraged foreign ones to enter the market, particularly when the milk market in western countries seems to be saturated. Furthermore, the import tariff towards milk is relatively low at 10 15% (much lower than the committed rate to WTO entrance 25%) and there is no quota on import volume. However, almost milk importers compete in the medium and high class segment with 22% of the market shares and earning US$ 13.3 million/company/year. 4. Input materials. The input materials are mainly imported from other countries, and milk powder price fluctuates sharply against fresh milk, which is collected domestically. The input materials including milk powder and fresh milk. However, milk powder has been fully imported, fresh milk can be supplied domestically. At present, the fresh milk output produced by local companies only meet 28% of the production demand of milk producers.
Fresh milk price collected in Vietnam and skim milk price for export of New Zealand
5000 4500 4000 3500 3000 2500 2000 1500 1000 0

4637 4024

8000

6000

2049 1788

2217

2455 2136

4000

2000

Skim powder milk price from New Zealand (right column - USD) Fresh milk collection price (left column - VND)

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So ource: Dairy Vietnam, BV VSC The fr resh milk pri ice collected domestically y controlled by some ma ajor compani ies. That Vinamilk V and d Dutch Lady y collect up to 65% of th he total dome estic fresh milk m output reduces the e pressure on n local supp pliers to zero o level. Prof fit gained from breedin ng milk cow w low made the t farmers change c to rai ise other catt tle. The figu ures shown n by General l Statistic Of ffice (GSO), the cow he erd decreased d by 13% from 113,20 00 in 2006 to o 98,600 in 20 007. Besides, , the milk pro oductivity of f Vietnams cow herd is s also lower th han others (1,700 kg/year/ /cow compar red to that of 6,200 kg in EU, E 8,400 kg k in US and d 3,300 kg in n New Zealan nd). Although h the Governm ment set goal l to produc ce the dome estic fresh milk m output of 350,000 tons, meetin ng 40% of the produc ction demand d by the year r 2010, this is hard to fu ulfil the set goal g as the real r domes stic fresh milk k output only y meet 28% of the demand d. Then, local l milk produc cers still ne eed to import milk powder r to serve for their production purposes s in the next 2 3 years s.
Milk collection c mar rket share in 2008
hers, 23% Oth Hanoimilk, 7 % Anco, 7% % Dutch Lady VN, 15% Vinamilk, 48 %

Sourc ce: Euromoni itor The in nput materi ial price sha arply fluctua ate, however, producers can increa ase selling g price to ke eep high pro ofit margin. Over 70% of the materia als, mainly milk m powde er, is importe ed from Euro ope, New Zea aland, US, A Australia and China. Thus s, it made milk produce ers face diffi iculties durin ng the period d 2007-2009 when the inp put material price sky rocketed the en fell unexp pectedly. How wever, if the e material pr rice increas ses, local pro oducers can ra aise selling pr rice to maintain high gros ss profit marg gin. For ins stance, the gr ross profit ma argin posted by b Vinamilk in 2007, 200 08 was 27% and a 32% re espectively and a 37.6% in QII/2009, de espite the fac ct that materia al price reduc ced consid derably and se elling price is s kept at high level.

VIE ETNAM DIA ARY PRODUCTS JOIN NT STOCK COMPANY Y

Re etail price in ncreases or keep k un nchanged while imp port ma aterial fluctua ates.
Retail pr rice of powde er milk for kid ds and impor rt material pr rice
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Import price (lef ft column-VND) Import tariff (lef ft column -VND) Retail price of powder milk for kids k (right column nVND/kg) 130,00 00 120,00 00 110,00 00 100,00 00 150,00 00 140,00 00 160,00 00

5. Indu ustry risk. Qualit ty risk. Qual lity risk is pe ermanent, not t only for the e milk sector but also for the food industry i in general, g especially there is rumors on n milk quali ity in Vietna am. Melam mine scandal in late 2008 has h remarkab ble impact on n the milk ma arket in gener ral. Some small-sized milk m producer rs were found d importing m milk powder from China that t contam minated with melamine; th hen, they had d to cut its pro oduction outp put by 50% and a lay off ff 40% of the e workers as s consumers boycotted its s products an nd internatio onal partner rs cancelled contracts. c Excha ange rate risk: During the period 2007-2009, 2 t the material imported pr rice fluctua ates sharply, making milk k producers such s as Dutc ch Lady and Hanoimilk face fa certain n difficulties (except for Vinamilk V as the t company has abundan nt inventories s in 2007). In particular r, Hanoimilk made a loss of VND 1 b billion in QI/2 2008 due to the increas sing cost of goods g sold, bringing b the total loss in 2008 to VND D 12 billion, , in which VND 5 billio on was from the t difference es in exchang ge rate. f potenti ial competito ors: Vinamilk k has mainta ained its first place so far. . In Risk from China, , the leading milk produce ers are the tar rgets for mul ltinational mi ilk groups wh hile in Tha ailand, the larg gest local mil lk producers Thaidairy I Industry Co., which accou unts th for 10% % of the mar rket share, ra anks at the 4 place after r three foreig gn-invested milk m produc cers. It is possible that the e same scenar rio may happe en in Vietnam m in the coming years if i the market scale is matu ure and attract tive for foreig gn invested milk m producer rs. VIETN NAM DIARY Y PRODUCT TS JOINT ST TOCK COM MPANY 1. Core busin ness Key products. p Pr resently, Vin namilk provid des over 200 types of milk and di iary produc cts in 4 key groups: g milk powder, liqu uid milk, fres sh milk and condensed c m milk. Milk powder, p cond densed milk contributed 29% 2 each, liquid milk 27 7% and yogh hurt 12% in n the total rev venue of Vin namilk in 200 08. In the firs st half of 200 09, milk pow wder

VIE ETNAM DIA ARY PRODUCTS JOIN NT STOCK COMPANY Y

contrib buted 30%, co ondensed mil lk 27% in the e revenue stru ucture. Vinam milk has focused on mil lk powder, liq quid and yogh hurt production plants in t the recent yea ars. This chan nge has sho own that for long term development, Vinamilk V will l expand milk k powder, liq quid milk an nd yoghurt pr roducts repla acing for cond densed milk.
R Revenue struc cture by prod ducts in 1H20 009
Yoghurt, 13 % O Others 1% Milk k powder 30% 3 Yoghurt 16.30% Cond densed mi ilk 17.8 80%

Profi it structure by b products in n 1H2009

Others 9.43% Milk powder with low price , 24.13% Liquid milk 32.33%

Liqu uid milk 29%

Condensed d milk 27%

Source: Vinamilk MILK K POWDER

Source:BVS SC

Accou unting for 16 6% of the market m share e, Vinamilk c currently sta ands at the 2nd positio on after Dut tch Lady Vietnam in mi ilk powder s segment, in which nutrition produc cts for kids oc ccupy 36.2% % of the marke et share ran nking in the 1st, milk powder for chi ildren 13.2%, , ranking for the t 2nd, and milk m powder f for adult rank ks at the 4th af fter foreign n milk import ters. Market share s of milk k powder seg gment
20% Dutch h Lady 16% % V Vinamilk 16% Abbott 10 0% Nestle 23% Others

Source: BV VSC The milk m powder products of f Vinamilk are a mainly f for the low segment s in the t domes stic market to t compete directly d with h the milk im mporters. In the low mar rket segmen nt, Vinamilk can compete e better since low price is suitable for almost a end us sers in Viet tnam.
Comparison of C o milk powder price (9 900 gram) P Producers V Vinamilk M Meiji A Abbott B Bristol Myers Squibb D Dutch Lady N Nestle Dielac Meiji Similac-Gai in-Grow-Pedi iasure Enfalac/Enf fapro/Enfagro ow DutchLady-Friso Nestle/Lact togen/Nan x x U Unit: VND Brand nam me Low w price < 100,000 x x x x x x x x x x M Medium price e 100 0,000-200,000 0 High price > 200,000

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Source: BV VSC Vinam milk is payin ng attention to the dome estic milk po owder mark ket. Facing with w the un nexpected cha anges of the export contr racts, Vinami ilk now conc centrates on the local milk m powder r market and d posted grow wth rate of 3 32.8% in 2008 and 20% in 1H200 09. Revenue growth g rate over years and a forecast
53 3.6%

32.8% % 27.6% 25.4%

33 3.6%

% 20.0% % 22.4% 16 6.6% 22.6% 19.2% 2.1% 20.0% 20 0.0% % 18.0%

17.0% 17.0%

20 004

2005 5

2006

2007

2008

2009E

2010E E

2011E

VN powd der milk mark ket

Vinamilk powde er milk (dome estic market)

So ource: Eurom monitor, VNM M, BVSC forec cast LIQUID MILK Liquid d milk has ac chieved the fastest f growt th rate of 29. .5% p.a on average a in term of revenue during g the period 2004 2009 9. Revenue fr rom liquid milk in 2008 was w some VND V 2,263 billion, b incre easing by 30% % y-o-y; in 1H2009 was VND 1,408.24 billion n, up 24% aga ainst the same e period last year. y Liquid d milk has hig gher growth rate r thanks to: First, Vinamilk co ollect nearly 50% of the total domest tic fresh milk k output. Th hus, Vinam milk may expa and its consu umption mark ket for the traditional prod duct 100% pu ure fresh milk. m Second d, Vinamilk has better di istribution ne etwork than D Dutch Lady since Vinam milk now has h nine oper ration plants nation wide compared to o only one in i the South by Dutch Lady. Thus, Vinamilk has h more ad dvantage in t the transporta ation cost from buying g fresh milk to o delivering to t the end use ers.

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

Revenue growth rate over years and forecast

49%

28% 12.40% 16% 2005 18% 14% 2007

30%

36% 22% 20% 18%

21% 2004

13% 2006

15% 2008

16% 2009E

17%

2010E

2011E

Vinamilk

Vietnam liquid milk market

Source: Euromonitor, VNM, BVSC forecasts Vinamilk owns 35% of the liquid milk market share, ranking in the 2nd place after Dutch Lady with 37%. The liquid milk market has fierce competition with the participation of many milk producers including Vinamilk, Dutch Lady, Hanoimilk, Moc Chau milk.... and some imported sterilized milk. The largest rival of Vinamilk in this segment is still Dutch Lady (35% vs. 37%) and the balance belongs to other domestic milk producers. The liquid milk market share of Vinamilk
35% Vinamilk 37% Dutch Lady Others 28%

Source: Euromonitor, VNM, BVSC forecasts CONDENSED MILK Revenue growth rate from condensed milk is on the decreasing trend to its stability level for this segment of 5.7% p.a although it is the traditional product of Vinamilk and brought the most benefit for the company in 2007, 2008 thanks to considerable market share of 79% and its reputation for years.

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

Revenue growth rate by years and forecast
38% 26% 10% Vinamilk Condensed milk market

9% 8% 2004

7.50%

8% 6%

7% 4%

13% 5.50% 2009E

8% 5% 2010E 2011E

2005

2006

2007

2008

Source: Vinamilk, Euromonitor, BVSC Vinamilk has no plan in expanding its production in the condensed milk segment in the next three years. It will focus on developing high class milk products with attractive profit margin. However, Vinamilk can still gain more market share in this segment from Dutch Lady Vietnam as this company heads for developing high class milk products with better profit margin. YOGHURT Yogurt has posted annual revenue growth rate of 30% in 2004 2009 and this rate can be maintained at 20% p.a in the next few years. The market barriers of penetrating this segment are higher as investment in refrigerator system is costly, only some large producers including Vinamilk, Campina have invested in this system. Revenue growth rate of yohurt by years and forecast
47% 44% 37% 25.30% 24% 15% 12% 2004 13% 2005 14% 2006 10% 2007 Vinamilk 15% 2008 15% 2009E 15% 2010E 25% 22% 16%

2011E

Yohurt market

Source: Vinamilk, Euromonitor, BVSC In 2008, Vinamilk covered 55% of the yoghurt market share, in which spoonable yoghurt is 97% and drinking one is 26%. Spoonable yoghurt accounts for 59% of the

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

yoghurt market. Dutch Lady has stopped producing spoonable yoghurt and focused on its advantage product drinking yoghurt. It is relatively difficult for Vinamilk to increase its market share in yoghurt segment since drinking yoghurt made by Dutch Lady is consumed better and the balance 3% of the market share already belonged to small-sized milk producers. Therefore, revenue growth of yohurt will result from total market expansion rather than market share occupation. 2. Production capability. The designed capacity of Vinamilk is approximately 504 million tons per year, in which milk powder/ liquid milk/ condensed milk capacity is 75%, 60% and 95% respectively, equivalent to 30, 250, 200 million tons in order. At the time being, Vinamilk has nine milk production plants nation wide compared to one in Binh Duong and one newly operated plant in the North of Dutch Lady Vietnam. The North plant of Dutch Lady only produces milk powder and drinking yoghurt with total investment capital of US$ 40 million. 3. Distribution network. Vinamilk has wide distribution network from the north to central to the south, while its rivals only concentrate on the big cities. Vinamilk also has agents in almost communes in the rural areas while in the cities, its products present in many groceries. Therefore, Vinamilk can take advantage to maintain and increase its market share even when foreign milk companies further penetrate Vietnams market. The number of distributors and retail point of sales by Vinamilk and its rivals: Company Vinamilk Dutch Lady Nutifood Distributors 300 150 121 Retail PoS 141,000 100,000 60,000 Salesman 1,787

Vinamilk currently has indirect distribution network. The indirect distribution network brings up to 80% of the sale revenue, providing commission for distributors, wholesales, retailers at the ratio of 2.4%, 1% and 10% accordingly. The direct selling network only contributes 20% of the revenue. 4. Input materials. Vinamilk is the largest milk collector, however it still has to depend on the imported milk powder output. At the present, the collected fresh milk output only meet 25% of Vinamilks production demand. In 2008, Vinamilk collected some 120,000 tons of fresh milk, accounting for nearly 50% of the total fresh milk output compared to that of 15% by Dutch Lady at the average price cheaper than VND 1,000 1,500/litter against Dutch Lady. Even though there is disparity in the buying price between Vinamilk and Dutch Lady, it is not easy for breeders to change the collectors because it takes 6 months to be Dutch Ladys supplier if meeting all its technical

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

requirements. Furthermore, Vinamilk has 86 points of sale nearby milk production plants nation wide while Dutch Lady only has 44, mainly in the south. Vinamilk is more advantageous over Dutch Lady not only in the buying price but also the fresh milk output collected. Vinamilk plans to invest in cow farm in the south with total investment capital of VND 340 billion in three years with 10,000 cows in order to lessen its dependence on the milk output imported. Upon the completion, the cow farm will provide 24,000 tons of fresh milk per year for Vinamilk, which means that Vinamilk can meet 30% of the input materials demand by itself. Vinamilk has more advantageous in comparison with other milk producers in the context that imported milk powder price increased since its collecting price of fresh milk is much lower. In 2007, the fresh milk price collected domestically was equalled to 50% of the imported price, which helped Vinamilk save VND 514 billion (equivalent to 54% of profit after tax in 2007) by self providing 25% of input materials. Vinamilk uses up to 75% of the milk powder output imported, mainly from New Zealand. The international milk powder price is now maintained at the average price for the period 1996 - 2006, decreasing by 40% against the peak price in 2008. Vinamilk enjoys the lower price and it doesnt reduce retail price. However, imported milk powder price has increased 23% against the bottom price in February 2009 and tend to increase if the economy recovers. Vinamilk reported that it signed one-year import contract so it is not affected by the fluctuation of milk powder price; yet it is still traditional risk for those companies that have to import input materials. 5. Investment activities. In 2008, Vinamilk put into operation Tien Son milk production plant in the northern province of Bac Ninh. This plant specializes in producing sterilized milk, drinking yoghurt, spoonable yoghurt and fruit juice to serve for the North market. In addition, Vinamilk also plans to build a fruit juice production plant. Vinamilk now concentrates on diary product segment: yoghurt, liquid milk, ice cream, dessert while continuing producing condensed milk. Vinamilk in QI/2009 sold its equity in the joint venture with SAB Miller to emphasize on its key products. Currently the revenue from drinking products (coffee, beer) contributed only 2% of the total revenue while Vinamilk has invested VND 500 billion (some US$ 30 million) in beer joint venture company and coffee production plant. BUSINESS PERFORMANCE OF VINAMILK Revenue sky rocketed in recent years thanks to the increasing retail revenue. In 1H2009, Vinamilk had sold 945.6 million units, increasing by 27.5% against the same period last year while selling price only increased 1.2%, making the revenue increase

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

23%, equivalent to VND 4,838 billion. Revenue from exporting Revenue from exporting activities fluctuates sharply as Vinamilk almost depends activities accounts for 10 on one customer Iraq. In 2007, revenue from exporting activities fell significantly (20% of the total revenue. 52%) then bounced back 89% in 2008 while the annual revenue growth rate from exporting activities is 19%. We forecast that Vinamilk can maintain the revenue growth rate from exporting activities at 10% - 15% p.a. Vinamilk can maintain high profit margin in the coming years. Despite being affected by the changes of milk price, Vinamilk still maintains high profit margin thanks to the increasing retail price as well as its large-sized operation scale. (Vinamilk has significant inventories volume while the market faces with the changes of material price). The gross profit margin of Vinamilk increased remarkably from 24.3% in 2006 to 35.3% in 1H2009 thanks to the decreasing price of imported milk powder since late 2008 to early 2009 despite that the milk powder price rose 9% since March 2009, which made the cost of goods sold at Vinamilk increase 1% in QII/2009. Net profit in 1H2009 increased unexpectedly 52.2% in 1H2009 against the same period last year thanks the sound business performances. Vinamilk earns VND 164 billion from selling equity in the joint venture SAB Miller and VND 61.9 billion from income interest and differences in exchange rate. FORECAST FOR 2H2009 The output will be kept at high level thanks to the positive marketing and selling policies in the last three years and promotion programmes. It is anticipated that Vinamilk may increase its output by 3% in 2H2009 compared to 1H2009. Vinamilk plans not to increase the retail selling price in 2009. At the current price, we estimate gross profit margin of Vinamilk will be maintained at high level in 2H2009. Gross profit margin by quarter
35.46% 30.63% 26.78% 32.65% 28.04% 32.43% 37.57% 37.57% 35.00%

Q4/07

QI/08

Q II/08

Q III/08

Q IV/08

Q1/2009

Q2/2009

Q3/2009E Q4/2009E

Source: Vinamilk Cost of goods sold: Although the imported milk powder price is on the increasing trend in the year end, Vinamilk will not be affected since its signed the one-year contract to import material in late 2008. Furthermore, inventories turnover cycle last for 3 6 months then we forecast that Vinamilk will enjoy the most profitable from

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low milk powder price in 2H2009 and Vinamilk can maintain high gross profit margin in QIII and IV. CIT: there is currently no official information about the CIT of Vinamilk, so we just estimate the CIT rate at 11% for the 2H2009. Some indicators for 2009 Unit: 1,000 billion Net sales COGS Gross profit Profit after tax (CIT 11%) VALUATION RESULT Some assumptions: The consumption growth rate base on the average growth rate in the period 2002 2008 for every milk group and Vietnams milk market scale. Vinamilk remains the current market share of 4 key milk groups. The imported price of milk powder increases in 2010 and is stable in the following years due to the supply demand curve of milk powder world wide. The domestic fresh milk output will meet 30% of Vinamilks production demand from the year 2011 according to its plan to build milk cow farm in the next three years. 1H2009 4,744 3,068 1,676 1,050 2H2009 5,624 3,475 2,148 1,093 Growth rate 19% 13% 28% 4% 2009 10,367 6,543 3,824 2,143

Valuation result: Valuation method FCFE (g = 7.5%, COE = 15.1% ) FCFF (g = 7.5%, WACC = 14.8%) PE Average price Price 87,842 90,854 87,081 88,668 Ratio 35% 35% 30%

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INCOME STATEMENT Net sales Deductions Revenue from sale of goods COGS Gross profit Revenue from financial activities Financial expenses Selling expenses General & administration expenses Operating profit Other income Other expenses Other profit Profit from joint venture companies Profit before tax Current CIT Deferred CIT Profit after tax Minority interest Profit after tax of holding company BALANCE SHEET Current assets Cash and cash equivalent Short term financial investments Receivables Inventories Other current assets Non current assets LT receivables Fixed assets Property investments LT financial investments Other assets TOTAL ASSETS Liabilities ST liabilities LT borrowings Owners equity Owners equity Other funds Minority interest TOTAL RESOURCES 2006A 6,662,920 43,821 6,619,100 5,012,630 1,606,470 74,254 40,002 899,396 112,888 628,438 109,014 2,982 106,032 734,470 2,884 731,585 731,585 2006A 1,996,390 156,895 306,730 511,623 965,826 55,318 1,613,010 1,071,980 422,772 117,401 3,609,400 874,665 785,525 89,140 2,669,912 1,590,000 64,826 3,609,400 2007A 6,675,030 26,838 6,648,190 4,835,770 1,812,420 257,865 25,862 974,805 204,192 865,427 120,492 30,538 89,954 955,381 (8,017) 963,398 50 963,348 2007A 3,172,434 117,819 654,485 654,720 1,669,871 75,539 2,252,687 1,646,966 401,018 203,941 5,425,121 1,073,230 933,357 139,873 4,224,320 1,752,760 91,622 9,005 5,425,121 2008A 8,379,616 171,581 8,208,035 5,609,084 2,598,952 264,840 202,566 1,062,732 292,486 1,306,006 138,155 8,035 130,120 (73,950) 1,362,177 144,753 (10,780) 1,228,204 (1,367) 1,229,570 2008A 3,187,605 338,654 374,002 646,385 1,775,342 53,222 2,779,353 1,936,922 570,657 243,810 5,966,958 1,154,432 972,502 181,930 4,665,715 1,752,757 96,198 5,966,958 2009E 10,578,964 211,579 10,367,385 6,543,093 3,824,292 242,804 385,537 1,185,136 330,853 2,165,570 109,378 9,269 100,109 113,358 2,385,221 265,297 (23,320) 2,143,244 19,926 2,123,318 2009E 3,843,826 497,107 587,582 864,434 1,815,974 78,729 3,890,935 2,922,950 116,415 669,441 270,010 7,734,761 1,464,704 1,261,691 203,013 5,985,193 3,512,806 214,324 7,734,761 2010F 12,303,818 246,076 12,057,742 7,872,011 4,185,731 334,608 154,926 1,405,933 396,614 2,562,866 206,691 33,595 173,096 2,735,962 601,912 2,134,051 19,840 2,114,210 2010F 4,557,767 474,732 826,434 1,009,443 2,184,803 62,354 4,846,654 3,725,325 114,075 778,590 314,034 9,404,421 1,771,475 1,523,524 247,950 7,349,002 3,512,806 213,405 9,404,421

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VIETNAM DIARY PRODUCTS JOINT STOCK COMPANY

DISCLAIMER The report is not done by requirement of any institution or individual. Investors should use information, analysis, comment in the report as a reference source before making own investment decision. The report is for the purpose of providing information and does not intend to advice readers to buy, sell any securities. Investors should refer to other sources of consultancy before making investment decision. The information contained in this report is verified carefully, BVSC takes no responsibility with regard to the accuracy or completeness of any information contained here. Viewpoint and analysis in the report can be changed without notification. The report is a property of BVSC and under copyright protection. Infringement of copy, change and reprint of the report without permission of BVSC is illegal. BVSC owns the copyright on the report.

BAO VIET SECURITIES COMPANY

Head office Add: Tel: Fax: # 8 Le Thai To, Hoan Kiem, Hanoi 84-4 3928 8080 84-4 3928 9888

Ho Chi Minh city branch Add: Tel: Fax: # 6 Le Thanh Ton, Dist. 1, HCMC. 84-8 3914 6888 84-8 3914 7999

INDUSTRY RESEARCH HEAD OF DIVISION Nguyn Lng Tn tannguyen@bvsc.com.vn V Th Thanh Quyn quyenvtt@bvsc.com.vn

ANALYSTS Nguyn Hi Dng Lu Vn Lng Nguyn Minh Ngc Nguyn Lng Qu Nguyn Phi Hng Lu Phng Mai V Th Mai Ch Th Mai Trang Phm Vit Hng duongnh@bvsc.com.vn luonglv@bvsc.com.vn ngocnm@bvsc.com.vn quinl@bvsc.com.vn hungnp@bvsc.com.vn mailp@bvsc.com.vn maivt@bvsc.com.vn trangctm@bvsc.com.vn hungpv@bvsc.com.vn Nguyn Quang Minh Nguyn Tun Anh Hong H Ph minhnq@bvsc.com.vn anhnt@bvsc.com.vn phuhh@bvsc.com.vn

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