VinaMilk: Insights from the JP Morgan Roadshow

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Coverage on one of Asia’s biggest stock offerings in 2016.

Roadshow for government’s 9% stake sale: Company Visit Note

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On Nov. 23, State Capital Investment Corporation (SCIC) held a roadshow at HOSE for a 9% stake sale in VNM worth US$804mn (based on the current price), one of the largest stake offerings in Asia this year. Auction highlights are below.

Bidding prices must be higher than the “starting price” or the “market price”, whichever is higher. The starting price will be set by SCIC but has yet to be announced today (12 days until the auction date). The latter will be VNM’s closing share price in the previous day of the auction (T-1). The complication of having two starting prices instead of one is because the Decree 151/2013 of the government does not allow SCIC to sell the government stakes at below their market values.

Dec 2, 2016 auction date. Prospective investors are required to make a 10% deposit from Nov 23 to Dec 01, based on the starting price (has yet to be announced, making a tight bidding timeline for investors). Payment dates are from 02-08 of Dec. Payment can be made in either VND or USD.

Timeline for further stake sale will depend on the government. SCIC still holds around 36% stake in VNM after the 9% sell-down. SCIC said the timeline for further divestment will be decided on by the government.

Valuation. VNM currently trades at 20.4x 17E P/E and 18.6x 18E P/E, and 7.7x 17E P/BV and 7.4x 17E P/BV, already above its +2 standard deviations, and also higher than the 17E P/E regional peer average of 18.6x, based on Bloomberg consensus estimates. Its shares have gained 30% YTD, mainly triggered by the lifting of foreign ownership limit and strong earnings growth. The stock currently trades 7.8% below the Bloomberg consensus price target of VND150,000.

NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P.MORGAN DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK. NO PART OF THIS RESEARCH MAY BE REPRODUCED OR DISTRIBUTED INTO VIETNAM BY ANY MEANS WHATSOEVER.

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Key takeaways from the meeting

Today, State Capital Investment Corporation (SCIC) held a roadshow at HOSE for a 9% stake sale in VNM, the country’s biggest dairy company. Prior to this, it conducted non-deal roadshows in Singapore, Hong Kong and London over 24 Oct – 01 Nov.16 for the US$804mn worth stake sale (based on current market price), one of the biggest stake offerings in Asia this year.

Our key takeaways from the meeting are below:

Part 1: Auction highlights

Bidding prices must be higher than the “starting price” or the “market price”, whichever is higher. The starting price will be set by SCIC but has yet to be announced today (12 days until the auction date). The latter will be VNM’s closing share price in the previous day of the auction (T-1). The complication of having two starting prices instead of one is because the Decree 151/2013 of the government does not allow SCIC to sell government stakes at below market value.

Dec 2, 2016 will be auction date. Prospective investors are required to make a 10% deposit from Nov 23 to Dec 01, based on the starting price (has yet to be announced, making a tight bidding timeline for investors). Payment dates are from 02-08 of Dec. Payment can be made in either VND or USD.

Timeline for further stake sell-down will depend on the government’s decision. The SCIC still holds around a 36% stake in VNM after the 9% selldown. Timeline for further divestment will have to wait for the government’s decision, said SCIC at the roadshow.

Part 2: Company’s Q&A

VNM’s CEO expressed confidence about the company outlook, at least over a five-year span. Despite worries about whether VNM can maintain as high a growth rate as in the past, the CEO said the dairy consumption level in Vietnam remained low, creating more opportunity for the industry to grow until reaching saturation point in the next 10 years. With 1.2mn newborns per year, the sector has plenty of room to grow and that could facilitate an average growth of 7% for the sector in the next five years.

Key principle is to gain market share: VNM has three scenarios of long-term growth for the industry, with the worst case at 5%, base case at 7%, and best case at 10%. The CEO emphasized that VNM’s principal target for the next five years is to gain more market share and grow more than 7% in sales per year. The company now has a 51.8% share of the country’s fresh milk market and a dominant 79.4% and 84.1% of the condensed milk and yogurt markets respectively.

Key material inputs secured until April-May next year in anticipation of dairy price rebound. Global milk prices have bottomed out and risen sharply by 25- 35% this year, with prices coming close to farmers’ breakeven range. The CEO projected milk prices would continue to rise, but believed it was unlikely that in the next five years prices would surge back to the historical high of U$6,000/MT which was primarily caused by China’s demand shortage in 2013. The CEO also said that dairy prices moving in the range of US$2,500-3,500/MT are at a reasonable level for farmers to stay with their farms and dairy companies to generate profit. From VNM’s perspective, the CEO added that VNM can obtain better milk input prices than the general market due to higher bargaining power, thus suffering less from the average price surge of 25-35%, with no further figure to illustrate how much VNM would be affected.

New capacity to work on in the next five years: VNM’s current capacity remains sufficient to meet market demand, with powder milk running at 75% capacity and yogurt running at 80% capacity, but more capacity will be added in the next five years. With a total investment of VND13trn (US$600mn) spent in the past five years, the company aims to spend a similar level in the next five years.

Trans-Pacific Partnership has minimal impact: VNM mainly sources raw milk materials from Australia and New Zealand which already sent import tariffs to zero. While the delay in TPP ratification may mean slower relaxation of import tariffs from the US and EU, the impact will not kick in until 2018, as per management, and by then the dairy farms could catch up and yield similar productivity with the global average, making VNM less reliant on dairy imports from other countries.

3Q16 results

VNM continued to see solid results but growth appeared to soften. 3Q sales stayed strong (+15.7%y/y), aided by strong domestic demand (+21% y/y), but growth momentum is starting to moderate (-2%q/q and down from 18.6% y/y in 2Q). Overseas sales were the main drag (-6.6%y/y). Revenue softened but growth remained at a good pace. Quarterly sales growth has accelerated from lows at less than 10% in 3Q14 to a healthy level of ~18% in the past three quarters before moderating in 3Q. Strength was all in volumes as the company kept prices unchanged during the period. 9M16 sales were better than the company’s target, meeting 78.5% of management’s full-year guidance. 9M16 net earnings were up 28% y/y, and at 91.2% of full-year guidance, well ahead of target.

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Overseas sales falling (15.5% of revenue): Overseas sales in 3Q16 (-6.6% y/y) was weaker than domestic sales (+21% y/y), extending the downward trend to the prior quarter’s weakness. Despite the decline, management did not see this as a sign of deterioration in its export markets and remained positive on long-term growth in its key export markets. In the US (Driftwood) and Cambodia (Angkor), sales continued to do well with the combined sales growing at 20.4% y/y in 9M16. VNM started to operate the first and only dairy plant in Cambodia in May this year, with a total investment of US$23mn. VNM owns 51% of the plant and the remainder belongs to its Cambodian distribution partner. The plant has capacity of 19mn liters of liquid milk, 64mn units of yoghurt and 80mn cans of condensed milk in the first phase. In 9M16, overseas sales grew 7.4% y/y vs. domestic sales (+20% y/y).

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Gross margin deteriorated, down 150bp to 41.7% in 3Q, after reaching a record high since listed in 2Q16, but it was still 40bp better than the same period last year because milk input prices bounced off six-year lows. The company continued to improve the product mix by shifting to higher-margin categories, but it was not enough to offset the effect of higher milk input prices. It does not have any plan to increase prices in the near term to protect its market share.

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Selling expense as a percentage was kept unchanged; we see more initiatives to promote sales. VNM said it would coordinate with FPT Shop, a retailer of mobile phones and ICT products, to sell VNM’s products in FPT’s retail chain of 355 shops across the country. VNM currently distributes its products via two main channels: 1) traditional channel (90% of revenue) with 243 exclusive distributors that bring its products to 212,000 retail outlets, and 2) modern channel (10% of revenue) with 1,609 supermarkets and 575 convenience stores. Under the agreement with FPT, VNM will provide cold chain for FPT Shop and FPT Shop will distribute VNM’s products at FPT’s shops together with its own products. Apart from that, VNM has relaunched its online shopping website (www.giacmosuaviet.com.vn/) to catch up with new buying habits, as it believes consumers are spending more time online and have less time for in-store shopping, especially once they have children.

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Valuation and band charts

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VNM currently trades at 20.4x 17E P/E and 18.6x 18E P/E, and 7.7x 17E P/BV and 7.4x 17E P/BV, already above its +2 standard deviations, and also higher than the 17E P/E regional peer average of 18.6x, based on Bloomberg consensus estimates. The stock is currently trading with an upside potential of 7.8% based on the Bloomberg consensus PT of VND150,000.

Management remained positive on the company’s growth outlook as demand continues to rise and it can still gain market shares. Despite concerns about margin compression going forward, management believes it still has the ability to cut down ad spending as a cushion for the margin fall.

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Vietnam Dairy Products JSC: Summary historical financial

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