VIETNAM DAIRY PRODUCT JSC Milk Flows at Slow Pace

NEUTRAL – Potential Upside 12.2% Dong Quang Trung, Associate trungdq@tvs.vn Target Price 12-month price target: VND 157,500 Expected 12-month dividend: VND 1,000

Trading Data and Key Metrics Ticker VNM Sector Dairy Listed since Jan-2006 Price as of 24 October 2016 141,000 52-week range (VND’000) 174/111 Market cap (VND bn) 204,591 Shares outstanding (mn) 1,451 Free Float (mn) 1,270 15-day average volume 1,214,764 2015 P/ BV (x) 7.4 2015 P / E (x) 21.9 Dividend yield (%) 3.9 Net Debt to Equity (x) 0.1

Source: TVS, Thomson Reuters Data Price Performance Chart

Performance (%) 3M 12M YTD Absolute 15.51% 68.12% 32.66%

Source: Bloomberg Company Description Vinamilk is the largest dairy company in Vietnam whose 2015 revenue was VND40trn (US$1.8bn), yielding a combined market share of 42%. The company’s key competitive advantage is its nationwide distribution network covering 212,000 retailers and 1,600 supermarkets. Besides local market, Vinamilk also exports to 43 countries, having subsidiaries in USA, Poland, Cambodia and one associate in New Zealand. The company is listed on HSX since 2006 with 100% FOL. Major shareholders are SCIC (44%) and F&N (11%). Revenue structure by location

Source: Company data, TVS Research

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Equity Research I October 25, 2016 We assign NEUTRAL rating to VNM ticker given following rationales: Revenue expected to grow slower than previously Vinamilk’s revenue has recently attained robust growth in 2015 and 1H16 (+14.6% YoY and +18.6% HoH respectively) on the back of tremendous investments in market development including (1) considerable marketing spending and (2) Pan-Vietnam distribution network. Though unique Vinamilk’s position, we believe these non-organic drivers would create pressure on growth in following years when available room for extra development has now been narrowed. Therefore, the recent growth rates appear unsustainable, and we estimate revenue growth to decelerate to 12-13% over 2017F-2018F while full-year 2016 would witness an improved growth of 14.9% (vs. 14.6% in 2015). The company is reportedly pursuing a new M&A deal targeting a US firm, which, once successful, may add a remarkable revenue into Vinamik’s book. There is yet update regarding potential target firm but the company is actually doing homework such as management talk and site visit. We nevertheless rule out this transaction from our forecast since no solid data available to estimate deal size. Margin downswing key catalysts The downward trend of international milk powder prices since 1H2014, which put Vinamilk’s gross margin to record high of 42.6% in 2Q16, has ended when prices are up 20% YTD reaching US$2,650/MT for whole milk powder (WMP) and US$2,200/MT for skim milk powder (SMP) in October 2016. If remaining unchanged till year-end, the new prices would likely lower future margins given (1) milk powder accounts for c.50% of total raw material costs of Vinamilk, (2) the company annually signs one-year forward contract to purchase milk powder in Q4 and (3) constant sales prices in local market. Considering both rising import costs and slower revenue growth, our analysis indicates 200/150 bps decline in gross/net profit margins over 2016F-2018F. On the brighter side, we believe milk powder price volatility will have less impact on Vinamilk’s margins in mid-term thanks to the company’s effort to increase domestication rate of local raw materials. Unappealing valuation Our 1Y target price (excluding 2016 remaining dividend of VND 1,000) for Vinamilk is VND 157,500 deriving from both DCF and P/E methods, upside 11.5% (implied 17.7x 2017F EV/EBITDA). Although Vinamilk currently trades at 12% discount to global average P/E, its 20.2x 2017F P/E is the all-time high. Considering these valuation results and the possibility of declining revenue growth and steeper margins, our investment view is NEUTRAL. Key risks: (1) volatility in milk powder prices, (2) key management changes and (3) Vietnam Dong devaluation. Please see our disclaimer on last pages

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 2

SUMMARY FINANCIALS Earning Model (VNDbn) 2015A 2016F 2017F 2018F Balance Sheet (VNDbn) 2015A 2016F 2017F 2018F Net sales 40,080 46,046 51,867 58,155 Cash and equivalents 1,359 1,561 1,758 1,971 Cost of sales 23,818 26,388 30,700 34,941 Financial investment 8,668 9,958 11,218 12,577 Gross profit 16,262 19,658 21,167 23,214 Accounts receivable 2,202 2,520 2,859 3,290 Selling expenses 6,258 7,189 8,098 9,079 Inventory 3,810 4,678 5,213 5,751 General administration expenses 1,233 1,416 1,595 1,789 Prepaid expenses, other CA 692 795 896 1,005 Other operating income/(expenses) 96 110 124 139 Total current assets 16,732 19,513 21,943 24,594 EBITDA 9,965 12,377 12,969 14,039 Property and equipment Depreciation & Amortization 1,097 1,214 1,370 1,554 At cost 13,239 13,821 16,521 17,903 EBIT 8,868 11,163 11,599 12,485 Less accumulated depreciation (5,302) (6,475) (7,841) (9,392) Net interest income/(expenses) 486 553 624 701 Net property and equipment 7,938 7,346 8,680 8,511 Net investment income 13 15 17 19 Net intangibles 419 415 412 408 Others (recurring) 0 0 0 0 Total investments 940 1,080 1,217 1,364 Pretax Profit 9,367 11,731 12,239 13,205 Other long - term assets 1,449 3,292 1,692 2,555 Income tax 1,598 2,001 2,087 2,252 Total Assets 27,478 31,646 33,943 37,433 Tax rate (%) 17% 17% 17% 17% Minorities (4) (4) (4) (4) Account Payables 2,194 2,754 3,078 3,265 Net Income 7,773 9,734 10,155 10,956 Short-term debt 1,475 1,675 1,842 2,009 EPS (basic, reported) 6,474 6,706 6,997 7,549 Other current liabilities, CL 2,335 2,683 3,022 3,389 Weighted shares outstanding (mn) 1,201 1,451 1,451 1,451 Total Current Liabilities 6,004 7,112 7,942 8,662 Long-term debt 368 418 460 501 Common dividends declared 0 0 0 0 Other long-term liabilities 182 209 235 264 DPS (VND) 4,999 5,000 5,000 5,000 Total long-term liabilities 550 627 695 765 Dividend Payout ratio (%) 77% 75% 71% 66% Stockholders' equity 20,924 23,908 25,306 28,005 Dividend cover (X) 1.3x 1.3x 1.4x 1.5x Common Equity 12,007 14,515 14,515 14,515 Treasury shares (5) (5) (5) (5) Growth and Margin (%) Retained earnings 5,392 4,895 5,277 6,881 Sales Growth 14.6 14.9 12.6 12.1 Budget sources and other funds 3,300 4,273 5,288 6,384 EBITDA Growth 23.1 24.2 4.8 8.3 Minority interest 231 231 231 231 EBIT Growth 25.6 25.9 3.9 7.6 Total liabilities and equity 27,478 31,646 33,943 37,433 Net Income Growth 28.1 25.2 4.3 7.9 Capitalized leases 0 0 0 0 EPS Growth 6.7 3.6 4.3 7.9 Capital employed 21,474 24,535 26,001 28,771 Gross Margin 40.6 42.7 40.8 39.9 EBITDA Margin 24.9 26.9 25.0 24.1 Ratios EBIT Margin 22.1 24.2 22.4 21.5 ROE (%) 37.2 40.7 40.1 39.1 ROA (%) 28.3 30.8 29.9 29.3 Cash flow Statements (VNDbn) 2015A 2016F 2017F 2018F ROIC (%) 36.2 39.7 39.1 38.1 Pretax profit 9,367 11,731 12,239 13,205 Inventory days 58 64 61 59 Adjustments for: Receivable days 20 20 20 21 Depreciation and amortization 1,097 1,214 1,370 1,554 Payable days 33 37 36 34 Change in inventories (499) (868) (535) (538) Asset Turnover 1.5x 1.5x 1.5x 1.6x Change in trade receivables 166 (318) (338) (432) Net debt/equity 0.1x 0.1x 0.1x 0.1x Change in trade payables 484 560 324 187 Interest cover - EBIT(x) 283.5x 266.8x 252.0x 248.6x Other operating cash flow (2,956) (3,487) (3,036) (3,658) Cash flow from operations 7,659 8,833 10,023 10,318 Valuation (Multiples) Net Capital expenditure (1,068) (2,700) (1,382) (1,549) EV / EBITDA 14.8x 16.6x 15.8x 14.6x Acquisition 0 0 0 0 P/E 21.9x 21.1x 20.2x 18.7x Divestures 0 0 0 0 Dividend Yield (%) 3.96 3.54 3.54 3.54 Other investments, net (1,059) (1,430) (1,396) (1,507) P/B 7.4x 8.6x 8.1x 7.3x Cash flow from investing (2,127) (4,130) (2,777) (3,057) Equity issued 107 2,508 0 0 Net borrowings 190 249 209 209 Dividends to shareholders (6,002) (7,257) (7,257) (7,257) Cash flow from financing (5,704) (4,500) (7,048) (7,048) Net cash flow (172) 202 197 213 Opening cash 1,528 1,359 1,561 1,758 Forex change 3 0 0 0 Notes: CA = current assets; CL = current liabilities Closing cash 1,359 1,561 1,758 1,971 Source: Thomson Reuters historical data, TVS model and forecast

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 3

INVESTMENT THESIS Dairy Sector Updates Vietnam dairy sector is one of the fastest growing FMCG achieving 11% YoY value growth in 2015 (VND 83trn vs. VND 75trn in 20141) with yogurt being best performer amongst categories (+15% YoY), followed by drinking milk (+12% YoY), powder milk (+8% YoY) and condensed milk (+8% YoY). This growth was fueled mostly by volume increase thanks to (1) rising demand for health and wellness products, (2) growing population and (3) improving household income. Drinking and powder milk are largest segments constituting 80% of total market value. Vietnam Dairy Products JSC (Vinamilk) is still the market leader with a combined market share of 42%, far ahead of the runner-ups FrieslandCampina Vietnam (16%), Abbott Vietnam (6%) and TH Food Chain JSC (6%)2. We believe the sector will continue expanding but at slower pace of 9% CAGR till 2020 due to weaker volume growth of 8% CAGR and modest price increases of 1% CAGR (vs. 9% and 6% respectively during 2012-20153). Vinamilk’s revenue expected to grow slower than previously Recent revenue growth was driven by market development activities Vinamilk’s revenue has attained robust growth in 2015 and 1H16 (+14.6% YoY and +18.6% HoH respectively). Since these growth rates are much higher than industry benchmarks, our analysis indicates market developments activities, including (1) sizable marketing spending and (2) expansive distribution network, are prominent driving forces. Particularly, proportion of selling expenses to total revenue have reached record high during this period (16% vs. 2012-2014 average of 11%), in which marketing expenses (sum of advertising, commission and promotion expenses) materially increased by 170% in 2015 and another 25% in 1H16. Besides that, in 2015 the company also managed to place its products at 1,609 supermarkets (+959 vs. 2014 figure) and open 36 more showrooms across the country, as well as export to more than 43 nations versus 29 nations a year before.

1 EIU 2 EIU 3 EIU, TVS

Sector growth is likely to slow down from 11% to 9% per annum till 2020 due to weaker volume growth and modest price increases Considerable marketing spending and expansive distribution network, rather than organic factors, have driven recent revenue growth of Vinamilk...

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 4

Figure 1: Considerable investment in market developments between 2014-1H16

Source: Company data, TVS Research Future revenue will grow slower but still surpass 2016 target The rapid market developments as discussed above, though currently unique Vinamilk’s position, would create pressure on growth in following years when available room for extra development has now been narrowed. Therefore, we believe 1H16 growth of 18.6% appears unsustainable and estimate annual revenue growth to moderate to 12-13% over 2017F-2018F, while full-year 2016 would still witness an improved growth of 14.9% (vs. 14.6% in 2015). Based on that, our analysis results in 2016 revenue of VND 46trn, surpassing the target of VND 44.5trn by 3%.

Figure 2: Forecasted total revenue in the next 1-3 years Figure 3: Revenue YoY growth by location

Source: Company data, TVS research Source: Company data, TVS research

8.8%10.6%

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2012 2013 2014 2015 1H16Selling expenses/Revenue (LHS) No. of supermarkets (RHS)No. of showrooms (RHS)

... which appears unsustainable, thus we estimate annual revenue growth to moderate to 12-13% over 2017F-2018F

26.6 30.9 35.0 40.1 46.0 51.9 58.1

22.8%

16.5%13.0% 14.6% 14.9%

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0.010.020.030.040.050.060.070.0

2012 2013 2014 2015 2016F 2017F 2018FRevenue (LHS) YoY growth (RHS)

21.2%16.1%

10.4% 9.8%14.3% 10.6% 9.6%

33.9%

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39.3%

17.3% 20.5% 21.1%

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10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

2012 2013 2014 2015 2016F 2017F 2018FDomestic International

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 5

Domestic sales rebound this year to boost revenue growth… Domestic sales, currently account for 80% of total revenue, have recorded solid growth of 20% in 1H16 on the back of expansive distribution network and especially the vigorous “Vinamilk – 40 years” marketing campaign. We estimate domestic sales would post strong growth of 14.3% in 2016 (vs. 9.8% in 2015) before normalizing to 9-10% during 2017F-2018F, being attributable to 9-13% volume growth while sales prices would remain constant. These growth rates indicate Vinamilk would outstrip market norms by 1-4%, which is reasonable considering the company’s dominant position. In terms of volume, besides the above market development activities, the recent launch of dairy e-commerce website is expected to attract more customer flows given its first-mover advantage and ability to integrate with existing showrooms for quick delivery. However, it is still a bit early to make conclusion about the effectiveness of this new sales channel. Domestic sales would also get supported by several organic drivers including (1) increasing milk consumption per capita, (2) growing population, and (3) improving household income. In number, one Vietnamese person is now averagely consuming 20 liters of milk a year and the consumption would reach 25 liters in 2018 (+6.7% CAGR) thanks to rising awareness for nutrition products. Furthermore, estimations from BMI shows Vietnam’s total population in 2020 would reach 98.2 million (vs. 93.4 million in 2015) including 22.5 million young people 0-14 years old (vs. 21.6 million in 2015). Researches on household income, on the other hand, indicate substantial numbers of households will migrate to higher income over the next 5 years.

Figure 4: Expanding population till 2020 Figure 5: Household income is shifting to wealthier zones

Source: GSO, BMI, WB Source: GSO, BMI, WB

We estimate domestic sales would post strong growth of 14.3% in 2016 (vs. 9.8% in 2015) before normalizing to 9-10% during 2017F-2018F on the back of volume growth boosted by both marketing and demographic factors,...

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100.0120.0

2015 2016F 2017F 2018F 2019F 2020FTotal population (mn) Young people 0-14 yrs (mn)

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 6

Increase in sales prices would be very limited due to (1) consumer’s high price-sensitivity, (2) ongoing regulatory oversight over milk prices, especially to powder milk products for children under six-year old4, and (3) new competition from foreign dairy companies who would soon enjoy 0% import taxes as part of international free trade agreements, especially European, Australian and New Zealand companies. Following that, we forecast sales prices would remain constant during 2016F-2018F. Figure 6: Schedule of Tariff commitments by Vietnam to eliminate import taxes for dairy products from EU, Australia and New Zealand Trade agreement name 2016 2017 2018 2019 2020 AANZFTA (ASIAN-Australia-New Zealand FTA) 5-7% 5% 0% 0% 0% EVFTA (European-Vietnam FTA) 15% 15% EVFTA is set to take effect from 2018 onwards, requiring Vietnam to fully eliminate import taxes for milk from EU in 7 years

Source: MOF, GSO Given the current competition landscape in Vietnam where dairy companies are fighting hard for market share, we believe Vinamilk would not reduce marketing spending during the forecast period. We justify these marketing activities will help Vinamilk gain 2-4% of market share in liquid milk, powder milk and yogurt segments, while its share in condensed milk will sustain at current levels (80%).

Figure 7: Combined market share by top players Figure 8: VNM’s market share across major segments

Source: EIU Source: EIU, TVS research

4 In June 2014, MOF imposed Circular No. 395/TB-BTC to regulate price caps on powder milk products for children under six-year old, which subsequently led to a sharp reduction of c.20% in sales prices across dairy categories. MOF is planning to remove price caps by end-2016 but further controls are likely.

...while sales prices would remain constant due to (1) consumer’s high price-sensitivity, (2) ongoing regulatory and (3) possibly new competition from foreign players Vinamilk will gain more market share thanks to persistent investments in market developments

44.3% 43.3% 43.7% 43.2% 45.2% 46.2% 47.2%

24.3% 25.6% 26.6% 26.8% 27.8% 28.8% 29.8%

72.3% 69.6% 69.0% 67.5% 68.5% 68.5% 68.5%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%

2012 2013 2014 2015 2016F 2017F 2018FLiquid milk Powder milk Yogurt

42.7% 42.0% 42.0% 41.9% 42.3%

17.7% 16.8% 16.1% 16.1% 16.3%7.3% 6.9% 6.7% 6.5% 6.0%

2.8% 4.5% 5.0% 5.5% 5.9%0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

2012 2013 2014 2015 Sep-16VNM FCV Abbott VN TH Food Chain JSC

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 7

…but a steep fall in international sales growth would lower domestic attempt International business is steadily enlarging its contribution into total revenue as Vinamilk was actively exploring new emerging markets (e.g. Africa and Myanmar) as well as higher-end markets (e.g. Japan and Canada), which have less political risk than some original export markets (e.g. Middle East). However, international sales growth has recently slowed down from 39% in 2015 to 15% in 1H16, which we believe reflecting already-large revenue base. In this respect, our analysis indicates full-year 2016 growth would decelerate to 17%, stimulated by 12% volume increase (vs. 21% in 2015), and 5% price rise (vs. 15% in 2015). We nevertheless forecast growth would recover at 20-21% CAGR over 2017F-2018F considering the management’s endeavor to uplift international sales’ contribution to 50% in 2020. Figure 9: Sales contribution by location

Source: Company data, TVS research Additional revenue through M&A deal likely closed next year Vinamilk in September 2016 announced its plan to buy a second US company, just a few months after acquiring 100% stake of US Driftwood Dairy. Given the company’s revenue growth can achieve 10-15% CAGR domestically in the forecast period, M&A seems to be the only strategic option to realize the revenue target of $3bn next year from the current US$ 2bn (2016F). Still, we are in the view that Vinamilk would adjust this target due to limited time-frame. It’s worth noticing a possible drawback

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2012 2013 2014 2015 2016F 2017F 2018F 2020TargetDomestic International

In contrast to domestic sales, international business would see steeper annual growth of 17-21% in the next 1-3 years (vs. 39% in 2015), which reflects already-large revenue base A new US subsidiary may add a significant amount of revenue into Vinamik’s book, but also dampen consolidated margins

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 8

of acquiring companies in mature markets is that their low margins (less than 2% p.a.5) would dampen Vinamilk’s consolidated margins. There is yet update regarding potential target firm but the company is actually carrying groundwork such as management talk and site visit. Given the complexity of overseas M&A, we anticipate the deal to be finalized earliest 1H17. However, we will not include this transaction in our valuation model since no solid data available to estimate deal size. Margins to dip 150-200 bps due to rising material costs and slower revenue growth Milk powder price’s rally has posed threat of margins downswing International milk powder prices have recently soared to US$ 2,783/MT for whole milk powder (WMP) and US$ 2,213/MT for skim milk powder (SMP) in October 2016, up c.23% YTD. This rally is the result of reduction to milk production from previously low prices caused by sluggish demand6, as well as from the El Nino. If remaining unchanged till year-end, the new prices would lower future margins given (1) milk powder accounts for 50% of key raw material costs of Vinamilk and (2) the company annually signs one-year forward contract to purchase milk powder in Q4. Figure 10: The rally of powder milk price in 2016

Source: Global Dairy Trade 5 In 2014, US Driftwood Dairy reported VND2.6trn ($121.7mn) in revenue and VND25.6bn ($1.7mn) in net profit, yielding a net margin of 1.4%. Source: Company data, TVS 6 The plunge of milk prices starting 1H14 primarily reflected the retreats of China and Russia, the top two importers, from purchases. Particularly, China run down buying after huge stockpiles that sent dairy prices to record highs early 2014, while Russia in August 2014 banned imports from Western countries as response to sanctions imposed on Russia over its role in stoking Ukraine tensions.

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OB pric

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Whole Milk Powder Skim Milk Powder

Given the complexity of overseas M&A, we anticipate the deal to be finalized earliest 1H17 International milk powder prices soared 20% YTD and may sustain at the current level till next year

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 9

Indeed, Vinamilk’s margins expanded constantly during the downturn of world’s milk powder prices initiated since 1H14, and gross margin has recently peaked at 42.6% in 2Q16 (see Figure 11). Consequently, a reverse trend in the high-price period is foreseeable. Besides milk powder, other key raw materials such as fresh milk and sugar are self-produced or purchased locally hence Vinamilk can well control input prices given the company’s strong purchasing power in domestic market. As production setbacks in major dairy exporters are expected to continue till 2017F7, we assume milk powder prices in 4Q16 to average at US$ 2,800/MT for WMP and US$ 2,250/MT for SMP, up 15% versus end-2015 prices of US$ 2,400/MT and US$ 1,950/MT respectively. Since milk powder makes up 25% of total production costs, this price upsurge would entail an equivalent 300 bps increment in COGS next year. Figure 11: Reduced YoY changes in milk production volume across major exporters embarked since 2015 may extend till 2017F

Source: BMI Note: EU-3 includes UK, Germany and France Limited sales price increase to compensate cost rise There is limited room to increase sales price in local market due to several constraints discussed earlier. Indeed, average price of Vinamilk’s products sold in Vietnam dropped by 5% in 2015 according to our estimations. Instead of a full pass-through, we justify prices would stagnate over 2016F-2018F and would pick up modestly by 1% afterwards to catch up CPI growth. Meanwhile, we estimate prices of export products to increase by 5% annually till 2018F, lower than the average 26%

7 The EU has implemented a new support program that compensates European farmers for any supply reduction between till March 2017, entailing possible volume downturn next year. In New Zealand, continued herd destocking could lead to another decline in production in end-2016 and 2017.

-1,000-500

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2013 2014 2015 2016F 2017F 2018F 2019F 2020F

'000 ton

nes

EU-3 Australia New Zealand USA

As margins hit record highs during the depression of milk powder prices in 1H14-2015... ...the recent upsurge of milk powder prices would reversely increase COGS by 300 bp Sales prices in local market would remain constant while those in overseas may increase by 5% CAGR over 2016F-2018F

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 10

CAGR in 2012-2015 to support internationalization strategy as well as reflect tougher competition. Our analysis indicates both gross and net margins to drop by 200 bps and 150 bps respectively in 2017F under the combined effect of rising COGS and descending revenue growth. 2H16 margins, which is protected by milk powder prices hedged last year, would remain consistent to 1H16’s level. Figure 12: Margins would shrink by 150-200 bps in 2017F

Source: Company data, TVS research Long-term outlook regarding import costs In long-term, we believe fluctuation in milk powder prices would have less impact on Vinamilk’s margins thanks to the company’s effort to increase domestication rates of local input. Vinamilk is now operating 7 dairy farms and constructing 3 others to raise 15,000 cows. Besides growing its own cattle, the company also partners with local farmers to establish a network of contracted dairy farms, resulting in a combined herd of 110,000 units. This local source of supply has allowed Vinamilk to increase the proportion of raw milk in dairy production and gradually shift away from imported milk powder. In fact, share of milk powder in total raw materials dropped to 47% in 2015 from 53% in 2011, while that of raw milk substantially increased to 25% from 16% in the same period.

37.8% 34.6% 33.9% 36.4% 39.0% 40.5% 42.6% 42.8% 40.8% 39.9%

22.9% 19.5% 17.6% 17.1% 19.5% 18.6% 21.9% 20.4% 19.6% 18.8%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16F 2017F 2018FGross profit margin Net profit margin

In bottom line, both gross and net margins would drop by 200 bp and 150 bp respectively in 2017F under the combined effect of rising COGS and descending revenue growth In long-term, price fluctuation of imported milk powder will have less impact on Vinamilk as the company is rising domestication rates of local raw materials

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 11

Figure 13: Local raw materials are gradually replacing imports

Source: Company data, TVS research

53% 51% 52% 51% 47%

16% 16% 16% 20% 25%16% 17% 13% 11% 13%8% 7% 6% 8% 5%8% 10% 13% 10% 10%

0%10%20%30%40%50%60%70%80%90%

100%

2011 2012 2013 2014 2015Milk powder Raw milk Sugar Butter oil Others

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 12

KEY RISK FACTORS Volatility in milk powder prices Global Dairy Trade reports continuously reducing production output in major export countries including Netherlands, New Zealand and Australia, alarming a potential shortfall in milk powder supply. In case demand of China, the largest milk importer, picks up in upcoming months to hedge milk powder prices there is chance price upswing would endure in 2017. Key management change One of the key reasons behind the success story of Vinamilk has been the role of its CEO, Ms. Mai Kieu Lien (aka Mdm. Lien), who has been at the helm for two decades and driven most of its expansion and acquisition activities. Her current term is set to end in 2016 and there is still no confirmation regarding her continuance or retirement. Given her notable influence on the company’s strategies and performances, we hold a conservative view towards the company’s corporate governance in 2017 due to this potential key management change. Vietnam Dong devaluation BMI forecasts the Vietnam Dong to weaken to VND22,600/USD by end-2016, and VND23,200/USD by end-2017, implying 1.3% and 4% increases versus the current level of VND22,300/USD. The purpose of this devaluation is to support export but on the downside it would amplify import costs, which is now constituting 25% of total COGS of Vinamilk. Consequently, this practice would create extra pressure on future margins.

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 13

VALUATION and RECOMMENDATION Our target price for the next 12 months is 157,500 – a 11.5% upside, averaged by P/E-based price of VND158,000 and DCF-based price of VND157,000. We assume Vinamilk to pay VND5,000 cash dividend in 2016 (interim dividend was VND4,000), resulting in a 12.2% return. Considering this valuation results and the possibility of declining revenue growth and steeper margins, our investment view is NEUTRAL. P/E method Vinamilk currently trades at 20.2x 2017F P/E based on 2017F EPS of VND 6,997 and stock price of VND 141,000 as of 24 October 2016. Although this P/E is 12% lower than global packaged foods average of 22.6x, it is still among the all-time highs. Assuming Vinamilk’s P/E will eventually reverse to global mean, we forecast 1Y target price is VND 158,000. Figure 14: Vinamilk currently trades at 12% discount to global packaged foods average P/E

Source: Bloomberg, TVS research DCF method Our DCF-based 1Y target price is VND 157,000 with an implied 2017F EV/EBITDA of 17.7x. Vinamilk currently trades at 2017F EV/EBITDA of 15.8x, 35% higher than global average, which is justifiable in our view given the company’s 2017F superior EBITDA margin of 25% produces 107% premium to international norm.

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 14

Figure 15: Reasonable EV/EBITDA against international counterparts

Source: Bloomberg, TVS Research Figure 16: Vinamilk’s DCF-based target price calculation

VND bn 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 EBIT 11,163 11,599 12,485 14,243 16,372 18,649 20,855 22,966 25,042 27,238 EBIT (1-tax) 9,259 9,620 10,356 11,671 13,252 14,909 16,672 18,360 20,020 21,776 D&A expenses 1,214 1,370 1,554 1,686 1,835 2,004 2,195 2,410 2,646 2,905 Change in working capital (381) (311) (525) (516) (626) (768) (655) (657) (625) (675) Capex (2,700) (1,382) (1,549) (1,755) (1,998) (2,255) (2,507) (2,751) (2,992) (3,244) FCFF 7,393 9,298 9,836 11,086 12,464 13,890 15,706 17,362 19,049 20,762 PV of FCFF 7,267 8,327 8,026 8,242 8,442 8,571 8,829 8,893 8,889 8,827 WACC 9.8% Terminal growth rate 4.0% Enterprise value 229,887 Less: Total debt 2,092 Equity value 227,795 Number of shares (mn) 1,451 Target price (VND) 157,000 Source: TVS Research

Figure 17: Key assumptions for DCF model Actual Forecast 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Domestic vol. growth 12% 3% 6% 12% 13% 10% 9% 9% 8% 8% 7% 7% 6% 6% Domestic price growth 13% 11% 3% -5% 0% 0% 0% 1% 1% 1% 1% 1% 1% 1% Overseas vol. growth 59% -8% -26% 21% 12% 15% 15% 17% 20% 17% 12% 8% 6% 6% Overseas price growth -16% 29% 74% 15% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% DE ratio 0.0% 2.1% 8.3% 8.8% 10% 11% 12% 13% 14% 15% 15% 16% 16% 17% Effective interest rate na 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Effective CIT rate 16% 18% 20% 17% 17% 17% 17% 18% 19% 20% 20% 20% 20% 20% DPS (VND) 2,666 3,798 3,998 4,999 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000

Source: Company data, TVS Research

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 15

ANALYST CERTIFICATION I, Dong Quang Trung, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies or its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RATING and VIEWS Buy (B), Neutral (N), Sell (S) – Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock’s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions

12-month rating Definition Buy Total Stock’s Return Potential > 15% Neutral Total Stock’s Return Potential between (-15%) and 15% Sell Total Stock’s Return Potential < (-15%) Shor-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to rise within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target.

DISCLAIMER Copyright©2016 Thien Viet Securities Company (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of TVS. The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor’s decisions.

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VIETNAM DAIRY PRODUCTS JSC (VNM) – EQUITY UPDATE 16

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