Vinamilk faces pressure on brand maintenance and fast growth

21-Dec-2017 Intellasia | Nhip Cau Dau Tu | 6:00 AM Print This Post

One of the most impressive M&A deals in 2017 is the deal of Jardine Cycle & Carriage. The investor from Singapore surprisingly spent nine trillion dong to acquire more than 48 million shares of Vietnam Dairy JSC (Vinamilk), raising the ownership rate to 5.53 percent, though VNM share price is at record high level.

When the Vietnam biggest dairy company is seeking for a new generation of leaders to replace old senior leaders, Jardine’s drastic takeover move shows great ambition of this investor. Jardine Cycle & Carriage does not hide the ambition to quickly create influence, becoming the real counterbalance of the two current big shareholders i.e. the State Capital Investment Corporation (SCIC, owning 36 percent), and Fraser & Neave (F&N, owning 18.7 percent). But is this easy? With foreign capital flow, will Vinamilk have more momentum to carry out new ambition?

Vinamilk’s attractiveness is obviously clear to domestic and foreign investors. In one recent decade, shares of the Vietnam biggest diary company have always been targeted by many famous investment funds such as Dragon Capital, VinaCapital, DWS, etc.

Over the last decade, VNM market price has increased nearly 300 percent, the capitalisation is largest in the market with more than $11.6 billion. The revenue growth over the last few years has been maintained at two digits to achieve more than 46.9 trillion dong in 2016. In the first nine months of this year, in spite of facing intense competition pressures from domestic and foreign competitors, Vinamik also recorded the growth rate of 10.37 percent compared to the same period last year while the net profit increased sharply 13.45 percent (8.548 trillion dong). This result is thanks to the shift of product structure focusing on higher added value industry and more efficient products such as organic milk produced from clean material area in Da Lat.

In this year, the profit target set by the company’s leadership is 9.735 trillion dong but some securities company assess that Vinamilk’s profit may surpass 10 trillion dong for the first time. VNM stock is being traded at 194,000 dong, up nearly 50 percent from a year ago.

Vinamilk’s market share in the entire milk industry increased slightly 1.9 percent to 57.8 percent at the end of Q3/2017, of which, the market share of the liquid milk segment is 58.1 percent, compared to 40.5 percent of powder milk segment besides continued dominance in the field of condensed milk and yogurt, though the yogurt market welcomes another heavyweight component i.e. Nutifood.

According to Kantar World Panel, the room for growth of the domestic milk industry still remains large thanks to the on-going population structure, urbanisation process and increased income. The average milk consumption per capita in Vietnam is just about 17 litters per annum, still rather low compared to Thailand market with 35 litters/annum and Singapore with 45 litters/annum.

Vinamilk’s strength also lies in the scale of distribution channel when owning as many as 240,000 retail outlets nationwide. Besides, Vinamilk also owns 360 Vinamilk stores which are expected to increase to 400 at the end of this year in the strategy on expansion of the chain store to 1,000. Perhaps, apart from Masan, few other food businesses have such strong distribution system as Vinamilk now.

Along with excellent marketing strategy, along with competitive selling price compared to other competitors, that Vinamilk is eyed by foreign investors is evident. In fact, Jardine Cycle & Carriage is no stranger to investors in the region. It is a Singapore-based group and member of a Hongkong-based multi-sectoral group Jardine Matheson. Some other members in this group is taking part in other fields in Vietnam such as real estate (Hongkong Land) and F&B franchise such as KFC Vietnam, Pizza Hut, etc.

Jardine Cycle & Carriage is also a major shareholder of Truong Hai Automobile JSC with the ownership rate of 25.1 percent. In addition, this company also owns nearly 23 percent stake of Refrigeration Electrical Engineering JSC (REE). These are also industry leaders in their field and contribute significantly to Jardine’s profits. “Vinamilk has another long-term financial investor with a wealth of experience”. Jardine contributes more stability to Vinamilk and may increase value for the business in many different ways”, said Hochiminh City Securities Company (HSC).

The sudden appearance of Jardine makes the distribution of power in Vinamilk in the near future to be very difficult to predict. In the current Board of directors, the largest shareholder SCIC is holding three “seats”, and F&N is holding two “seats”. With the ownership rate of more than 10 percent of Vinamilk stake, Jardine may win a seat following cumulative voting rule and may participate in strategic decisions of Vinamilk later on.

Of course, other competitors cannot stand still. To maintain influence against too drastic takeover move of Jardine, F&N also joined into the race when registering to purchase nearly 22 million VNM shares from now till the beginning of 2018. If the purchase is successful, the ownership rate of F&N in Vinamilk will be raised by 1.5 percent.

More than anyone else, F&N understands clearly the value that Vinamilk brings about, even the lifebuoy for the Group in the context of declining consumption in other markets. At the end of the fiscal year on September 30, 2017, F&N attained the record profit of 1.28 billion Singapore dollars (SGD) compared to just 108.1 million SGD in the previous year. The largest contributor to F&N was the extraordinary income worth 1.2 billion SGD from the reappraisal of the investment in Vinamilk under equity method.

Without extraordinary profits from the sharp increase in VNM share price, F&N will witness a decrease in net profit by about 8.3 percent from 2016 due to the sharp increase in financial costs (partly due to the loan to acquire Vinamilk), declined sales and increased marketing cost.

Besides F&N, decisions of the largest shareholder SCIC in the near future also greatly affect the situation of this deal. Although Vinamilk is on the list of SCIC’s full divestment from now till 2020, the stock transfer at small ratio from the end of 2016 till now shows that SCIC is still considering carefully.

The complete abandonment of the “golden egg” that brings about as much as $90 million dividend is a difficult “math” for any financial investor. That is not to mention, after divesting from Vinamilk, the search for investment opportunities having equal profitability is also a big challenge for SCIC.

After the transfer of VNM shares to Jardine investor, the ownership rate of SCIC still ensures veto right (at least 35 percent). However, the game is getting more balanced because the total ownership of two foreign shareholders i.e. Jardine and F&N has now reached more than 28 percent. That means if two foreign shareholders unite to increase ownership rate or negotiate with other shareholders having ownership rate of at least eight percent, they will have the same veto right as SCIC.

Earlier, Vinamilk’s management board agreed to loosen foreign room to the maximum level (100 percent), thereby making foreign investors to look at Vietnam market at desiring eyes.

The recent move of Vinamilk i.e. to spend trillions of dong to acquire Khanh Hoa Sugar Company and rename it into Vietnam Sugar JSC (Vietsugar) marks a new milestone in the use of M&A tool to complete production chain and support growth.

This can be considered a wise move. Although the company’s performance is very good when the Return on Equity (ROE) has always been maintained at approximately 40 percent in recent years, with the market share that has accounted for more than half along with slower revenue growth (HSC forecasts Vinamilk’s net revenue in this year is just 10.1 percent), the search for other growth momentum is necessary. “Other M&A targets can be animal feed industry or other F&B businesses. Of course, these deals may happen in the long term”, said Saigon Securities Company (SSI).

As of the end of Q3/2017, the total short-term and long-term loans of Vinamilk were 517 billion dong, very modest compared to the asset scale. Healthy financial structure brings about significant advantage to the company in implementing M&A deals at large scale.

In 2016-2017 period, Vinamilk plans to achieve an annual growth rate of 11.2 percent with revenue to reach 81 trillion dong, while maintaining net profit margin at 20 percent, or a bit lower than the previous stage. To meet growth demand in the coming years, Vinamilk with invest in expanding Mega plant with the target of doubling the current capacity from 400 million litters/annum to 800 million litters per annum in the context that the plant is now running at its almost full capacity.

Vinamilk also plans to increase the material cow herd to 44,000 by 2021, actively meeting about 20 percent of the company’s raw milk supply from about nine percent now.

Earlier, the liquid milk market mainly belonged to Vinamilk and FrieslandCampina with smaller rivals such as Long Thanh, Da Lat, Moc Chau, Ba Vi, etc. In recent years, there appear more competitors such as TH True Milk, Nutifood, etc. along with dozens of liquid milk brands imported from abroad. This competition pressure forces Vinamilk to increase investment further to keep market dominance advantage. Vinamilk has very good cash flow generated from stable business with high profit growth. This is the platform for the flexible implementation of business strategies, putting pressure on all components. The real market capacity shows that just foreign rivals can threaten Vinamilk’s position.

Along with that is the expansion of export to potential markets. Vinamilk has overseas plants such as in the U.S (owning 100 percent of Driftwood plant in California), Cambodia (owning 100 percent of Angkormilk in PhnomPenh), NewZealand (owning 22.8 percent) and a subsidiary company in Poland. The company’s products have been exported to 43 countries in the world such as the U.S, Japan, Australia, Thailand, Myanmar, Bangladesh and countries in the Middle East.

Currently, the contribution of Angkormilk’s revenue and profit into Vinamilk is still modest but this is the plant that has strong growth prospect and can be the model for Vinamilk’s future expansion to regional markets such as Myanmar. Recently, Vinamilk signed a memorandum of understanding on supply of milk products to China market and expects to start importing the first shipments from 2018 after terminating the period of examining product criteria.

“The initial export value may not contribute much to the general business result but this will be a big step forward of the company when it is able to bring products to a potential market with the world’s largest population”, Viet Dragon Securities Company said. The target to become one of the 50 world leading dairy companies with the turnover of $3 billion is still the next challenge that Vinamilk needs to conquer.

Having foreign investors holding a large volume of stakes will bring about the hope of technology, capital and market, helping Vinamilk realise its ambition. Of course, the entire aforementioned ambitious plan can be affected if the company’s shareholder structure is volatile and heterogeneous.

Sharing about the prospect that Vinamilk may fall into the hands of other investors, especially foreign investors, Mai Kieu Lien, CEO of Vinamilk, said the most important issue is to maintain and protect brand. “Keeping Vinamilk brand is the thing that anyone is worried about. Foreign investors just purchase Vinamilk to develop but not to remove a long-standing and well-performing brand”, said Lien.


Category: Business

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