Vietnam Dairy (VNM VN) : Equities

19 March 2021
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Equities
Vietnam Dairy (VNM VN) Consumer Staples
Initiate at Buy: Premiumisation, exports and new

categories to reignite growth Vietnam
 Vietnam’s top dairy company offers better margins and INITIATE AT BUY
returns than its Asian peers; we think it’s undervalued
TARGET PRICE (VND) PREVIOUS TARGET (VND)
 Its premium portfolio, combined with a refreshed export
strategy and product launches, is set to reignite growth 140,000.00 -
 SHARE PRICE (VND) UPSIDE/DOWNSIDE
Initiate with a Buy rating and a target price of VND140,000;
higher growth should drive a rerating 101,000.00 +38.6%
(as of 17 Mar 2021)
MARKET DATA
Undervalued. We believe Vietnam Dairy, known as Vinamilk, is a dominant, best-in- Market cap (VNDb) 211,085 Free float 34%
class franchise trading at an unfair discount – the stock trades at a 19x FY21e PE Market cap (USDm) 9,122 BBG VNM VM
3m ADTV (USDm) 15 RIC VNM.HM
versus peers’ 30x. The company is Vietnam’s leading dairy product manufacturer
with a 50% domestic market share, a strong brand and balance sheet, and FINANCIALS AND RATIOS (VND)
competitive advantages in costs and distribution. However, over the past five years, Year to 12/2020a 12/2021e 12/2022e 12/2023e
HSBC EPS 4770.00 5339.99 5878.20 6446.81
the stock has underperformed the country index by c150% because of slower growth. HSBC EPS (prev) na na na na
We argue that Vinamilk’s growth is set to reaccelerate, driven by a rise in per-capita Change (%) na na na na
Consensus EPS 4770.00 5302.00 5832.00 5949.00
dairy consumption, a premium product portfolio, and an expanding export market. PE (x) 21.1 18.8 17.1 15.6
Dividend yield (%) 3.4 4.0 4.7 5.1
Consumption, premiumisation and exports. After comparing Vietnam with EV/EBITDA (x) 13.8 12.2 10.8 9.4
ROE (%) 37.8 37.8 38.2 38.8
countries with similar consumption cultures (e.g. China), we think there is room for
further growth in Vietnam before the dairy market becomes fully mature. We also 52-WEEK PRICE (VND)
think that the market underappreciates the investments the company has made in its 150000.00
premium portfolio, which generates faster growth and higher prices. On the export
105000.00
front, Vinamilk has started to make inroads into China, South Korea and the
Philippines. It has also formed partnerships in the domestic market with Kido Group 60000.00
03/20 09/20 03/21
(KDC VN, VND50,800, Not Rated) in beverages/ice cream and Sojitz (2768 JP, Target price: 140000.00
High: 116300.00 Low: 69749.97 Current: 101000.00
JPY317.00, Not Rated), a Japanese trading company, in a new category – beef.
Source: Refinitiv IBES, HSBC estimates
Our forecasts. We forecast a revenue CAGR of c8% in 2020-2023e, driven by

volume growth (5%), higher average selling prices (ASP) from premiumisation (1%), Shuo Han Tan*, CFA
Analyst, Discovery Research
new products (1%) and incremental contribution from higher exports (1%). We expect The Hongkong and Shanghai Banking Corporation
EPS to grow at a CAGR of over 10% during the next three years – above the Limited, Singapore Branch
shuohan.tan@hsbc.com.sg
consensus forecast of 7% – as we think the company will enjoy the benefits of +65 6658 0624
operating leverage as well as higher interest income from its rising cash balances.
York Pun*, CFA
Head of Discovery Research, Asia Pacific
Valuation and risks. Our target price of VND140,000 is based on a 26x FY21e PE, The Hongkong and Shanghai Banking Corporation Limited
a 15% discount to its peers’ average of 30x to account for its listing in Vietnam, a yorkkypun@hsbc.com.hk
+852 2822 4396
frontier market. We believe this multiple is fair given the company’s >35% ROE and
non-cyclical growth profile. With c39% upside, we initiate with a Buy rating.
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
Furthermore, its net-cash balance sheet (c10% of its current market cap in cash & not registered/ qualified pursuant to FINRA regulations
deposits) and strong free cash flow provide a cushion for downside risks. In addition,
the stock is an ideal proxy for foreign investors to the Vietnam market, as it does not
Asiamoney Global RMB Poll 2021
have a foreign ownership limit and is thus accessible without a trading premium. Key
Voting opens 22nd Feb – 02nd April 2021
downside risks: Higher raw milk powder prices and increased competition from If you value our service and insight, please vote
domestic and foreign rivals. Click here to vote
Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai

Banking Corporation Limited, Singapore Branch
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at:
MCI (P) 028/02/2021 MCI (P) 087/10/2020 https://www.research.hsbc.com
Equities ● Consumer Staples
19 March 2021
Financials & valuation: Vietnam Dairy Products Buy
Financial statements Key forecast drivers

Year to 12/2020a 12/2021e 12/2022e 12/2023e Year to 12/2020a 12/2021e 12/2022e 12/2023e
Profit & loss summary (VNDm) Domestic revenue 50,841,840 54,909,187 59,301,922 64,046,076
Revenue 59,636,286 64,583,078 70,136,680 76,181,004 Domestic revenue growth (%) 7 8 8 8
EBITDA 15,748,247 17,359,706 19,274,956 21,337,916 Export revenue 8,794,446 9,673,891 10,834,757 12,134,928
Depreciation & amortisation -2,208,867 -2,389,574 -2,595,057 -2,818,697 Export revenue growth (%) 0 10 12 12
Operating profit/EBIT 13,539,381 14,970,132 16,679,899 18,519,219
Net interest 1,272,523 1,351,585 1,676,874 2,067,555
PBT 13,518,536 14,970,132 16,679,899 18,519,219 Valuation data
HSBC PBT 13,518,536 14,970,132 16,679,899 18,519,219 Year to 12/2020a 12/2021e 12/2022e 12/2023e
Taxation -2,282,804 -2,544,922 -3,002,382 -3,518,652 EV/sales 0.47 0.36 0.26 0.16
Net profit 11,098,937 12,425,209 13,677,517 15,000,567 EV/EBITDA 13.8 12.2 10.8 9.4
HSBC net profit 11,098,937 12,425,209 13,677,517 15,000,567 PE* 21.1 18.8 17.1 15.6
Cash flow summary (VNDm) PB 7.5 6.8 6.3 5.8
Cash flow from operations 10,180,169 15,819,054 18,001,505 20,004,978 FCF yield (%) 3.9 5.9 6.8 7.7
Capex -1,114,474 -2,000,000 -2,000,000 -2,000,000 Dividend yield (%) 3.4 4.0 4.7 5.1
Cash flow from investment -4,802,010 -2,000,000 -2,000,000 -2,000,000 * Based on HSBC EPS (diluted)
Dividends 0 0 0 0
Change in net debt 2,563,416 -4,500,147 -5,059,491 -6,004,525
FCF equity 9,065,695 13,819,054 16,001,505 18,004,978 ESG metrics
Balance sheet summary (VNDm) Environmental Indicators 12/2020a Governance Indicators 12/2020a
Intangible fixed assets 2,058,548 2,058,548 2,058,548 2,058,548 GHG emission intensity* n/a No. of board members 10
Tangible fixed assets 15,734,766 15,345,192 14,750,135 13,931,438 Energy intensity* n/a Average board tenure (years) 6.1
Current assets 29,665,726 35,400,958 41,434,019 48,498,086
CO2 reduction policy Yes Female board members (%) 30.0
Cash & others 2,111,243 6,611,390 11,670,880 17,675,405
Social Indicators 12/2020a Board members independence (%) 30.0
Total assets 48,432,481 53,778,139 59,216,143 65,461,512
Operating liabilities 7,301,440 9,540,796 12,243,296 15,488,552 Employee costs as % of revenues n/a
Gross debt 7,483,919 7,483,919 7,483,919 7,483,919 Employee turnover (%) n/a
Net debt 5,372,676 872,529 -4,186,962 -10,191,486 Diversity policy Yes
Shareholders' funds 31,297,183 34,403,485 37,138,989 40,139,102 Source: Company data, HSBC
Invested capital 38,046,357 36,652,513 34,328,525 31,324,114 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s
Ratio, growth and per share analysis Issuer information

Year to 12/2020a 12/2021e 12/2022e 12/2023e Share price (VND) 101000.00 Free float 34%
Y-o-y % change Target price (VND) 140000.00 Sector Food Products
Revenue 5.9 8.3 8.6 8.6 RIC (Equity) VNM.HM Country/Region Vietnam
EBITDA 6.8 10.2 11.0 10.7 Bloomberg (Equity) VNM VM Analyst Shuo Han Tan, CFA
Operating profit 5.8 10.6 11.4 11.0 Market cap (USDm) 9,122 Contact +65 6658 0624
PBT 5.6 10.7 11.4 11.0
HSBC EPS 4.5 11.9 10.1 9.7
Ratios (%) Price relative
Revenue/IC (x) 1.7 1.7 2.0 2.3
ROIC 32.3 33.3 38.5 45.7
ROE 37.8 37.8 38.2 38.8 132000.00 132000.00
ROA 24.7 24.9 24.7 24.6 122000.00 122000.00
EBITDA margin 26.4 26.9 27.5 28.0 112000.00 112000.00
Operating profit margin 22.7 23.2 23.8 24.3 102000.00 102000.00
Net debt/equity 16.0 2.4 -10.6 -24.0
92000.00 92000.00
Net debt/EBITDA (x) 0.3 0.1 -0.2 -0.5
82000.00 82000.00
Per share data (VND)
72000.00 72000.00
EPS Rep (diluted) 4770.00 5339.99 5878.20 6446.81
62000.00 62000.00
HSBC EPS (diluted) 4770.00 5339.99 5878.20 6446.81
2019 2020 2021
DPS 0.00 0.00 0.00 0.00 Vietnam Dairy Products Rel to HANG SENG INDEX
Book value 13450.62 14785.62 15961.26 17250.62
Source: HSBC
Note: Priced at close of 17 Mar 2021
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19 March 2021
Our thesis in 6 charts
The market has matured, but Vinamilk’s growth can re- Vietnamese milk has significant capacity to premiumize
accelerate from premiumisation, new products and exports (ASP/litre 2020)
Source: Company data, HSBC Source: Euromonitor
estimates
Alternative milk products, including plant-based milks, Input costs are rising but are still manageable, as Vinamilk
premium formula and yoghurt are under-penetrated has long-term supply contracts and can raise prices
pressure
Source: Euromonitor
Source: Global dairy trade
Vinamilk scores favourably in valuations relative to EPS Even if growth remains weak, multiples could still rise from
growth and ROIC versus its global and regional peers strong FCF & dividend yield, as with Yili, Dutch Lady Msia
Source: HSBC estimates Source: Bloomberg
3
19 March 2021
Investment summary
 Vinamilk is a best-in-class franchise with a strong brand and

competitive advantages in its supply chain and distribution
 We expect slowing growth to rebound as the market premiumizes
and the company grows overseas
 Margins and free cash flow are exceptional: dividends have grown at
a 16% CAGR over the past decade, with a 4% dividend yield today
Investment thesis
Founded in 1976, Vietnam Dairy, or Vinamilk, is Vietnam’s largest dairy product manufacturer.
Vinamilk has strengthened its
market leadership through its
Revenue reached USD2.6bn in 2020, led by liquid milk (45%), milk powder (20%), yoghurt
focus on product quality (15%) and condensed milk (15%). In recent years, Vinamilk has strengthened its market
leadership through its focus on product quality. The company has pursued vertical integration of
its supply chain and today sources a third of its liquid milk requirements from its own farms, with
the rest from third-party contracted farms. This growing self-sufficiency gives Vinamilk a
significant cost advantage and has allowed it to establish a strong presence in upscale product
segments. With close to 250,000 points of sale, its wide penetration of the country’s retail
network also gives it a distribution edge over rivals.
Despite slower market growth in the past three years, we look favourably on Vinamilk’s long-
term prospects, given the potential for product premiumisation, exports and new categories to
boost growth. We expect further traction in product launches, both in premium dairy categories
such as plant-based and organic milk, as well as in new products, which include healthy
beverages and beef. Leveraging its recently-established partnerships and distribution
agreements in China, South Korea and ASEAN, the company also aims to reignite its export
push and tap into the growth of dairy products across the rest of the Asian region.
Earnings forecasts
Vinamilk has grown its revenues from VND21.6trn in 2011 to VND59.6trn in 2020, a CAGR of
Revenue growth has been
largely driven by higher
11.9%. Revenue growth has been largely driven by higher volumes. The company’s policy
volumes towards hiking prices is to pass on higher raw material costs, rather than increase prices by a
pre-determined amount each year. Exports have made up 12-20% of revenue over the past
decade.
We forecast a revenue CAGR of c8% in 2020-2023e, driven by volume growth (5%), higher
average selling prices (ASP) from premiumisation (1%), new products (1%) and incremental
contribution from higher exports (1%). We are generally slightly above consensus on both
4
19 March 2021
revenue and earnings growth rates over the next three years, with the exception of FY23e EPS,
where we are well above consensus (10% growth vs 3%).
Valuation and risks

Our target price of VND140,000 implies a forward PE ratio of 26x FY21e, an EV/EBITDA ratio of
16x and a dividend yield of 3%. We expect the company to continue to lead the industry and
grow revenues in the high single digits through 2023e.
We think near-term pressure may come from higher raw milk powder prices. However, we
expect Vinamilk’s margins to be sustainable owing to locked-in supply contracts and price hikes.
Additionally, we see ongoing competition from both domestic rivals such as TH Milk (not listed)
and IDP (not listed) as well as from imported ultra-high-temperature milk, but we believe that
Vinamilk’s strong economic moat leaves the company well placed to withstand these
competitive pressures.
ESG
Vinamilk has a strong focus on sustainability and ESG considerations.
Social. Vinamilk pioneered the national school milk program, which was rolled out in 2016 in
order to improve the nutritional intake of Vietnamese children, targeting 70% of all preschool
and elementary children by the end of 2020. Milk sold though the national school milk program
is either sold at cost or provided free via its “Stand Tall Vietnam Milk Fund”.
Environment. Given that dairy farming is a water-intensive activity, efforts have been made to
reduce water consumption. By requiring its farms to reuse 100% of wastewater after treatment,
water consumption rates have fallen over the past five years. Through the adoption of solar and
biomass, the company has also been increasing its ratio of renewable to total energy
consumption.
Governance. Out of its 10 board of directors, three are independent and three are women.
Approximately half of board director’s compensation is tied to the company’s performance. The
company pays out >70% of its yearly profits as dividends.
Figure 1: Reducing water usage… Figure 2:…and carbon footprint

16 800
14 700
12 600
10 500
8 400
6 300
4 200
100
2
0
0
2017 2018 2019
2017 2018 2019
Carbon footprint (kg/ton)
Water usage (cubic meter per ton)
Source: Vinamilk Sustainability Report Source: Vinamilk Sustainability Report
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19 March 2021
Dominant franchise with high

market share and returns
 Market structure of Vietnam’s dairy market supports a dominant

domestic champion across various categories
 As the first mover, Vinamilk has significant competitive advantages
in brands, production, raw material procurement and distribution
 High market share allows it to maintain cost ratios below its regional
peers, flowing through into superior margins and returns on capital
With a domestic market share of about 50%, Vinamilk is the most dominant player across Asia.
Figure 3: Market share comparison of leading dairy players across Asia (2020)
60%
50%
40%
30%
20%
10%
0%
Vinam ilk (Vie tnam ) Dutch La dy (M alaysia ) Me iji (S ing apore) Yili (Ch in a) Nestle (indo nesia)
Dairy market share (%)
Source: Data from relevant companies, Euromonitor
Figure 4: High net margins due to dominance (2020)

25%
20%
15%
10%
5%
0%
Vinamilk Unilever Nestle Indofood CBP URC CP Indonesia Yili Mayora Indah China
Indonesia Malaysia Mengniu
10-year net margin average(%)
Source: Bloomberg
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19 March 2021
Compared to China’s Mengniu (2319 HK, HKD42.55, Buy, covered by Lina Yan) and Yili
(600887 CH, RMB38.28, Buy, covered by Katharine Song), Vinamilk spends far less on selling
and marketing costs as a percentage of sales. In our view, this is the biggest contributor to its
higher margins.
Figure 5: Selling and marketing costs to sales ratios (2020)

30.0% 27.3%
25.0% 23.2% 22.5%
20.0%
15.0%
10.0%
5.0%
0.0%
China Mengniu Inner Mongolia Yili Vinamilk
Selling & marketing exp as % of sales

Source: Bloomberg
With over 250 stock keeping units (SKUs), Vinamilk commands a high market share across
multiple dairy categories. Vinamilk dominates in condensed milk (82%), yoghurt (65%) and plain
drinking milk (40%). In other dairy categories such as infant formula, flavoured milk, and milk
alternatives, Vinamilk’s share is between 10% and 30%, as it faces high levels of competition
from a range of local and foreign rivals.
Figure 6: Brand landscape

Category Vinamilk brands Competitor brands
Liquid milk Vinamilk, Moc Chau Th True Milk, Lothamilk, Dutch Lady
Powdered milk/infant formula Dielac, Yokogold, Optimum Anmum, Similac, Dutch Lady
Flavoured milk MyJoy Milo, Nutriboost
Condensed milk Longevity, Southern Star, Ong Tho Nuti, Dutch Lady
Soymilk Sua Dau Nanh, Goldsoy Fami, Rita, Yeo's
Yoghurt Vinamilk, Love, Susu, Probi Dutch Lady, Rita
Cheese Pho Mai Laughing Cow
Ice Cream Yolo, Nhoc Kem, Twin Cows Celano, Merino, Thuy Ta
Milk Tea Happy Dr Thanh, Tra Xanh Khong do, C2
Bottled water Icy La vie, Aquafina, Dasani
Bottled coffee Hi Café Boss, Georgia, Nescafe, Birdy
Fruit juice Vfresh Rita, Minute Maid
Source: Data from relevant companies
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19 March 2021
Figure 7: Condensed milk market share Figure 8: Yoghurt market share

90 80
80
70 60
60
50
40
40
30
20 20
10
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Vinamilk Friesland Campina Vinamilk Friesland Campina TH Milk IDP Yakult
Source: Euromonitor Source: Euromonitor
Figure 9: Plain drinking milk market share Figure 10: Flavoured milk market share
45.0 35
40.0 30
35.0
25
30.0
25.0 20
20.0 15
15.0
10
10.0
5.0 5
0.0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Vinamilk Nestle Friesland Campina
Vinamilk Friesland Campina TH Milk Nestle
Coca-cola IDP
Figure 11: Infant formula market share Figure 12: Milk alternatives market share
30 80
70
25
60
20
50
15 40
30
10
20
5
10
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
Vinamilk Abbott Friesland
Vinasoy Vinamilk Nutifood
Mead Johnson Nestle
Given its dominance in the domestic market, Vinamilk is the price leader in many of its
categories. In liquid milk, its products are priced at a 5-20% premium to local competitors’ TH
Milk and Long Thanh (not listed). In yoghurt, its “Yomilk”, “Susu” and “Probi” brands compete
with TH Milk and IDP. In the powdered milk/infant formula category, Vinamilk’s “Dielac”,
“YokoGold” and “Optimum” labels contend with Friesland-Campina (not listed). Mead Johnson
(not listed). Abbott (ABT US, USD118.22, Not Rated) and Fonterra (FCG NZ, NZD5.05, Not
Rated). Here, Vinamilk’s pricing strategy is to compete at a lower price point, which has allowed
it to gain incremental market share from its global rivals over the years (see figure 11).
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19 March 2021
Figure 13: Fresh milk ASP comparison Figure 14: Powdered milk ASP comparison
700000
40000
600000
39000
500000
38000
400000
37000 300000
36000 200000
35000 100000
34000 0
Vinamilk Moc Chau Lothamilk (Long Th True Milk Enfamamma Frisomum Anmum Similac Dielac Dutch Lady
Thanh) (Mead (Friesland) (Fonterra) (Abbott) (Vinamilk) (Friesland)
Price of 1-litre fresh milk (VND)
Johnson)
Price of 1-litre powdered milk (VND)
Source: Euromonitor, Company data Source: Euromonitor, Company data
In our view, Vinamilk’s dominance can be attributed not only to its brand but also to its edge in
production, raw material sourcing and distribution. It owns 13 factories in Vietnam and three
abroad, while its next largest competitors, Friesland-Campina and TH Milk, each just have two
factories locally. Vinamilk’s scale in raw material procurement also dwarfs its rivals. It still largely
depends on imported milk powder but has starting to grow its own herds/farms that produces
fresh milk. Today, it sources fresh milk from its own dairy farms and over 6,000 third-party
contracted farmers (approximately a third of supply is internal). With over 250,000 points of sale,
Vinamilk has a much wider retail distribution than rivals- crucial in Vietnam where urbanisation
rates are just 35% and over 80% of dairy sales are still sold through traditional channels.
Figure 15: Higher number of POS…. Figure 16:…and larger network of dairy
cows
300,000 140,000
250,000 120,000
100,000
200,000
80,000
150,000
60,000
100,000
40,000
50,000 20,000
0 0
Vinamilk TH Milk Vinamilk TH Milk Lothamilk
Point of sales Dairy cow network
Source: Data from relevant companies, HSBC estimates Source: Data from relevant companies, HSBC estimates
Figure 17: Factory locations in Vietnam

Factories Location
Thong Nhat Ho Chi Minh
Truong Tho Ho Chi Minh
Saigon Dairy Ho Chi Minh
Can Tho Can Tho
Dielac Dong Nai
Binh Duong Binh Duong
Vietnam Beverage Binh Duong
Vietnam Powdered Milk Binh Duong
Binh Dinh Binh Dinh
Da Nang Da Nang
Lam Son Thanh Hoa
Nghe An Nghe An
Tien Son Bac Ninh
Source: Company
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19 March 2021
Figure 18: A majority of dairy products are still sold through traditional channels
120.0
100.0
80.0
60.0
40.0
20.0
0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(%) (%) (%) (%) (%)
Modern (%)
retail (%) (%) (%) (%) (%)
Traditional retail (%) (%) (%) (%)
Source: Euromonitor
10
19 March 2021
Growth drivers
 Dairy per-capita consumption rates have matured over the past two
decades, but still trail the level in neighbouring countries
 Since 2018, Vinamilk has launched multiple products in premium
categories, including flavoured soy milk, A2 milk and organic
 JVs with local and foreign partners have been gaining traction as
Vinamilk expands into new markets and categories
Per-capita consumption rates suggest further growth potential
Vietnam has been one of the fastest-growing dairy markets over the past two decades. Per-
Overall market volume
growth has slowed since
capita dairy consumption rose from under four litres in 2006 to over 16 litres in 2020
2017 (Euromonitor). However, as the penetration gap has narrowed with its neighbours, overall
market volume growth has slowed since 2017. Today, dairy per-capita consumption still trails
Asian peers, suggesting further upside potential if Vietnamese drink more milk. Consumption
habits are difficult to change, but the government has launched a number of initiatives to
encourage higher milk consumption. For instance, drinking milk is encouraged among school
children through a nationwide school milk program.
Figure 19: Growth of liquid milk over the past five years, by market
12.0% 10.3%
10.0%
8.0% 6.9%
6.0% 4.1%
4.0% 2.1%
2.0%
2.0%
0.0%
-2.0% -0.5%
China Singapore Japan Thailand Malaysia Vietnam
2015-2020 Milk sales CAGR(%)
Source: Euromonitor, company data
11
19 March 2021
Figure 20: Growth in per capita consumption

18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Vietnam per capita dairy consumption (litres)
Source: Euromonitor, FAO
Figure 21: Per-capita consumption comparison

70 60.7
60
50
40 32
24.6 27
30 23.0
20 16.4
10
0
Vietnam China Japan Malaysia Thailand US
2020 per capita dairy consumption (litres)
Source: Euromonitor, HSBC estimates
Given the cultural differences between Asian and western countries, we don’t expect
consumption levels of dairy to reach that of the US and Europe. Nonetheless, we still believe
that there is upside to Vietnamese dairy consumption, as we think it can reach levels similar to
its Asian peers. We present our base, bull and bear case scenario analysis and argue that a 5%
CAGR volume growth rate is a reasonable assumption for the next decade.
1) Base case. Vietnam to reach China’s 23 litre per-capita dairy consumption rates by
2030e, which will imply c5% volume growth rates over the next decade.
Figure 22: Base case volume projections

3000
2500 4-5% CAGR
2000
1500
1000
500
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Base case dairy consumption (m litres)
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19 March 2021
2) Bull case. Vietnam to reach Thailand’s 30 litre per-capita dairy consumption rate by
2030, which will imply c8% volume growth rates over the next decade.
Figure 23: Bull case volume projections
3500
3000 7-8% CAGR

2500
2000
1500
1000
500
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Bull case dairy consumption (m litres)
3) Bear case. Vietnam’s per-capita dairy consumption has hit its ceiling in 2020. This
implies 1% volume growth rates over the next decade, in line with population growth.
Figure 24: Bear case volume projections

2000 1% CAGR
1800
1600
1400
1200
1000
800
600
400
200
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Bear case dairy consumption (m litres)
13
19 March 2021
Premium categories set to spur growth
Premium categories, comprising plant-based milks, A2 milk, organic, yoghurt, cheese have
been growing more quickly than the overall market and is set to add incrementally to growth.
Over the past two years, Vinamilk has launched various products in these categories and is well
positioned to benefit from the overall premiumisation of the industry.
Figure 25: Product launches in 2018-2020

New product launches Category
100% Sua Tuoi Imported fresh milk
Oc Cho (Walnut), Hanh Nhon (Onion), Dau Do (Red Bean) Plant-based milk
Zori Rice milk
A2 milk Premium milk
Oc Cho Yoghurt (Walnut) Plant-based yoghurt
Organic Gold Premium infant formula
Coco Fresh Coconut water
Power/ My Joy Flavoured milk/energy drink
Vfresh smoothie Juice
Source: Company data
Figure 26: Growth of premium categories in Vietnam

15.0%
14.0%
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
Dairy Cheese Flavoured milk Yoghurt
2015-2020 Value CAGR (%, Vietnam)
Source: Euromonitor, company data
In Vietnam, the average selling price (ASP) per litre of milk is quite low versus its neighbours,
suggesting upside to prices as premium products grow. However, we expect this shift in mix to
be margin neutral, given the higher costs of producing certain premium categories such as A2
milk and organic milk.
Figure 27: Significant room for premiumisation (2020)

3.0
2.5
2.0
1.5
1.0
0.5
0.0
Vietnam China Japan Singapore
Selling price per litre (USD)
14
19 March 2021
According to Euromonitor, the size of the plant-based market (soy, almond, coconut, oat, rice,
cashew, macadamia, hemp, quinoa milk) in Vietnam today is approximately USD300m. We
believe that the market has the potential to triple to close to USD1bn in the next decade, given
the rising consumption of plant-based milks. While flavoured and condensed milk are relatively
more “mature” categories in Vietnam, we see huge upside in plant-based milk and yoghurt, as
they still constitute a small fraction of total drinking milk volumes relative to Asian peers.
Figure 28: Flavoured milk to total drinking Figure 29: Condensed milk to liquid milk
milk share (2020) share (2020)
35.0% 35.0%
30.0% 30.0%
25.0% 25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
0.0% China Japan Singapore Vietnam Thailand Malaysia
Thailand Singapore China Vietnam Malaysia Condensed milk to liquid milk sales (%)
Flavoured milk to total milk sales (%)
Source: Euromonitor, companies Source: Euromonitor, companies
Figure 30: Milk alternatives to total Figure 31: Yoghurt to total drinking milk
drinking milk share (2020) share (2020)
50.0% 140.0%
45.0%
120.0%
40.0%
35.0% 100.0%
30.0% 80.0%
25.0%
20.0% 60.0%
15.0% 40.0%
10.0%
20.0%
5.0%
0.0% 0.0%
Vietnam Japan China Malaysia Thailand Vietnam Thailand China Singapore Japan
Milk alternatives to total milk sales (%) Yoghurt to total milk sales (%)
Source: Euromonitor, companies Source: Euromonitor, companies
Figure 32: Soy milk is a global growth category worth over USD7bn today
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2006 2010 2015 2020 2025e
Global soy milk sales (USDm)
15
19 March 2021
Export strategy
Vinamilk’s exports account for c15% of its sales. Its largest export markets are in the Middle
Vinamilk’s exports account
for c15% of its sales
East, and countries in the CMLV region (Cambodia, Laos, Myanmar). These markets were
chosen for their proximity to Vietnam when Vinamilk first began exporting in 1997. However,
since 2017, the company has been diversifying its export base and is today eyeing a major
push into China, Japan, South Korea and the Philippines.
China. Vinamilk today sells primarily condensed milk in China, but aims to expand its product
portfolio to UHT milk and infant formula once it acquires the relevant licenses by the end of
2021. China imports approximately a fifth of its milk supply, and Vinamilk aims to compete in
this space, pricing its products at a slight discount to international rivals such as Nestle and
Danone (BN FP, EUR59.84, Buy).
South Korea. Originally selling mostly sweetened condensed milk into South Korea, Vinamilk in
mid-2020 launched products in a few niche premium categories, including soy milk, coconut
water and milk tea, which are distributed by local partner Vina Korea.
Philippines/ASEAN. Vinamilk set up a JV with an undisclosed local partner to import dairy

products into the Philippines. The country today is a powdered milk market but liquid milk
consumption seems to have hit an inflection point and is rising sharply. In 2019, Nestle (NESN
SW, CHF100.88, Buy) invested USD54m in a liquid milk plant in the Philippines, while local
companies such as URC (URC PM, PHP 125.00, Not Rated), Century Pacific (CNPF PM,
PHP17.24, Buy) and RFM Corp (RFM PM, PHP 4.78, Not Rated) have plans to expand liquid
milk capacity. Vinamilk is also in discussions about a JV in Indonesia (VN Express, 29 Jan
2019).
Cambodia. Angkor Dairy was first set up in 2014 in partnership with local firm BPC Trading,
with a factory in Phnom Penh to produce liquid milk, yoghurt and condensed milk. In 2017,
Vinamilk acquired full control of Angkor Dairy. Today, the factory not only serves the local
market but is a production base for exports into the rest of the CMLV region.
Laos. Vinamilk’s dairy farm in Laos, Lao-Jagro Development, was established in 2015, and
serves as a supply of fresh milk for the company. Laos’ flat terrain is ideal for organic cow
farms, providing a good supply base to increase availability of organic milk into Vietnam.
US. In December 2014, Vinamilk purchased 70% of Driftwood Dairy, and completed the full
purchase of the company in 2017. Driftwood is a relatively small US producer of milk, yoghurt
and juice focused on the California region.
Figure 33: Size of Asian dairy markets versus Vietnam (2020, USDbn)
100.0 90.8
80.0
60.0
40.0
22.0
20.0
4.2 5.6 5.7
0.0
Thailand Vietnam South Korea Japan China
Total dairy market size (USD bn)
16
19 March 2021
Figure 34: Vinamilk prices at a discount to Figure 35: … in categories such as

peers in foreign markets… condensed and walnut milk
6.4 12.0
6.2
10.0
6.0
8.0
5.8
5.6 6.0
5.4
4.0
5.2
2.0
5.0
4.8 0.0
Vinamilk Nestle Black & White (Friesland) Vinamilk Orasi 137 Degrees Gomgom
Sweetened condensed creamer selling price (USD/kg) Walnut milk selling price (USD/kg)
Source: HKTV Mall Source: HKTV Mall
New categories
Vinamilk established a JV with Kido Group (KDC VN, VND50,800, Not Rated) in 2020, which
will sell ice cream and still beverages (non-carbonated “healthy” drinks such as bottled water,
sports drinks, RTD tea) under the brand “Vibev”, launching in the second half of 2021. Kido is
the leading ice cream player in Vietnam through its brands “Wall’s”, “Merino” and “Celano”. The
JV is targeting sales of USD80-100m in the first year from launch (VN Explorer, 24 Feb 2021)
leveraging Vinamilk’s and Kido’s distribution network. This USD80-100m target implies 3-4% of
Vinamilk’s current USD2.6bn revenue base.
Ice cream and healthy beverages are relatively smaller categories in Vietnam, with an estimated
market size of USD300m each versus >USD5bn for dairy products. But many of these
categories are also far less mature and growing quicker than dairy, allowing Vinamilk to diversify
to provide new avenues of growth for the company.
Figure 36: Beverages and juices are faster growing categories in Vietnam than dairy
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Ice cream Dairy Sports drinks Bottled water Juice
2015-2020 Value CAGR (%, Vietnam)
Source: Euromonitor, data from relevant companies
In March 2021, Vinamilk also announced a JV with Japanese trading house Sojitz Corp to
develop the beef category. Although pork is the preferred meat in Vietnam, the domestic beef
market is still a USD2.5bn business, currently dominated by companies such as Vissan (not
listed).
17
19 March 2021
Short-term negative impact from COVID-19 and floods to abate
Although Vietnam is perceived as one of the countries in Asia which has managed COVID-19
well, the country has not emerged unscathed from the pandemic. In 2020, retail sales slowed
sharply while unemployment rates rose to the highest levels seen in the past decade. In 4Q
2020, consumption spending was also hurt by severe floods in the central region, while wage
hikes were stymied by the labour ministry’s decision not to raise the minimum wage.
Nonetheless, the overall macro-economic outlook seems to have brightened since the turn of
the year, with a recovery in retail sales, PMI, and consumer confidence.
Figure 37: In 2020, retail sales were weak… Figure 38: while unemployment also rose.
14.0% 2.3%
2.3%
12.0%
2.2%
10.0%
2.2%
8.0% 2.1%
6.0% 2.1%
2.0%
4.0%
2.0%
2.0% 1.9%
0.0% 1.9%
FY16 FY17 FY18 FY19 FY20 Jan-21 FY16 FY17 FY18 FY19 FY20
Vietnam retail sales yoy growth(%) Vietnam unemployment rate (%)
Source: General Statistics Office Source: General Statistics Office
HSBC’s Economist team does not expect Vietnam to reach herd immunity until the end of 2022
(Asia COVID-19 & Vaccine Tracker: More positive news, 12 March 2021). Nonetheless, our
equity strategy team is bullish on the outlook for Vietnam, because of its strong export
competitiveness and as a beneficiary of numerous FTAs. For more details, please see Frontier
Markets Outlook: Portfolio guard (15 March 2021) and ASEAN Equity Strategy (30 November
2020) by our ASEAN strategist Devendra Joshi. Additionally, HSBC FX strategists expect USD-
VND to remain on a steady ground as the SBV continues to absorb most of the FX inflows –
persistent FDI inflows and healthy trade surplus (Currency Outlook: Slower speed, stay the
course, 12 March 2021)
“In equities, Vietnam is one of the best long-term growth stories in Asia and is our most
preferred frontier market for several reasons, ranging from the healthy state of foreign direct
investment, the rising share of global exports, the country’s impressive handling of the COVID-
19 crisis and higher levels of government investment, to policy reforms which will increase
foreign ownership limits and a consistent reduction in debt levels among listed companies.
Stocks are inexpensive, too. Many believe Vietnam’s prime attraction to foreign companies is its
proximity to China, but that is only part of the story. It is assembling a home-grown economic
growth engine that is making it an even more attractive destination in its own right.
Policy reforms and EM upgrade: In order for a market to be upgraded to EM status it must meet
various quantitative and qualitative criteria. Vietnam meets the quantitative criteria, such as the
presence of large stocks, trading volumes, and the size of the market. The reason Vietnam is
still classified as FM, however, is qualitative. Some of the key issues include the presence of
foreign ownership limits, a lack of some disclosures in English, the lack of an offshore currency
market and limitations in onshore currency markets, mandatory registration of accounts,
prefunding of trades and restrictions on off market transfers.”
–Devendra Joshi, HSBC equity strategist
18
19 March 2021
Valuation and risks
 Vinamilk’s stock has not benefitted from the global rerating in

consumer staples as interest rates have declined
 Current multiples are the lowest among its peer group: our reverse
DCF suggests markets are pricing in terminal growth rates of 1%
 We think the stock will be supported by its 4% dividend yield, which
may appeal to global income investors owing to VND resilience
Initiate with a Buy rating and TP of VND140,000. Our target price is based on a 26x FY21e
PE and our FY21e EPS estimate of VND5340. Our target PE is at a c15% discount to its peer
comps’ 30x average – China Mengniu Yili, Dutch Lady Malaysia and Ultrajaya to account for its
listing in Vietnam, a frontier market. This implies a c35% PE discount to the Chinese dairy
stocks’ average 39x multiple. We believe that this 26x multiple is fair, given the company’s high
ROE, steady growth profile and c4% dividend yield. Additionally, the stock does not have a
foreign ownership limit, making it accessible to foreign investors without a trading premium. Our
target price implies c39% upside from current levels; accordingly, we initiate coverage of the
stock with a Buy rating.
Figure 39: Valuation comps

Name Ticker Market cap PE (x) ROE (%) Dividend yield 5-year revenue
(USDbn) (%) growth (%)
Inner Mongolia Yili 600887 CH 37.0 33.7 26.3 2.1 10.8
China Mengniu 2319 HK 23.3 44.0 9.9 0.4 8.0
Dutch Lady Milk Bhd DLM MK 0.55 28.0 49.7 2.4 2.3
Ultrajaya Tbk ULTJ IJ 1.25 14.8 24.2 0.9 5.7
Average 16.6 30.1 27.5 1.5 6.7
Source: Bloomberg consensus for Dutch Lady Milk (DLM MK, MYR35.98, Not Rated) and Ultrajaya (ULTJ IJ, IDR1,525, Not Rated), HSBC estimates for Mengniu (2319 HK,
HKD42.55, Buy), HSBC Qianhai Securities estimates for Yili (600887 CH, RMB38.28, Buy)
19
19 March 2021
Figure 40: Vinamilk’s return on capital scores highly (2020)
35%
30%
25%
20%
15%
10%
5%
0%
HM Sampoerna Vinamilk Yili Saigon Beer CP Indonesia San Miguel Phil Indofood CBP Cpall Mengniu
ROIC(%)
Source: Bloomberg
We cross-check our TP using a reverse DCF methodology. At its current stock price, we believe
that the market is pricing in 1.0% terminal growth rates. At our TP of VND140,000, the implied
terminal growth rate is just 2.0%.
Figure 41: Our TP implies 2.7% terminal growth rate
FY21e FCF (VNDm) 13,819,054
Capital structure
Debt to total capitalisation 3%
Equity to total capitalisation 97%
Cost of Equity
Risk-free rate 2.5%
Equity risk premium 5.5%
Levered beta 0.9
Cost of equity 10.1%
Cost of Debt
Cost of debt 5.0%
Tax rate 17%
After tax cost of debt 4.2%
WACC 5.2%
Target price (VND) 140,000
Implied terminal growth rate 2.0%
Source: HSBC estimates
20
19 March 2021
Figure 42: Sensitivity analysis
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
1% 2% 3% 4%
Sensitivity of terminal growth rate assumption on fair value per share (VND)
Vinamilk’s PE multiple is at the average of its 5-year PE and the discount to peers at its largest,
signifying the market’s bearishness on its growth prospects.
Figure 43: PE chart
190,000
165,000
140,000 28x
24x
115,000
20x
90,000
16x
65,000
12x
40,000
Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19 Oct-19 Mar-20 Aug-20 Jan-21
Share price (VND)
Source: Bloomberg, HSBC estimates
Figure 44: Valuation discount to Chinese peers

60%
40%
20%
0%
-20%
-40%
-60%
Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20
Vinamilk PE discount to Yili, Mengniu
Source: Bloomberg, HSBC estimates
21
19 March 2021
Comparing valuation multiples relative to EPS growth, Vinamilk’s stock scores favourably
versus its global/regional dairy peers as well as large-cap ASEAN consumer names.
Figure 45: Valuation versus growth relative to global dairy stocks

45
FY20e PE
40 Mengniu
35
Inner Mongolia Yili
30
25 Nestle SA
Vinamilk
20
Danone SA
15 3-year forward EPS
growth CAGR
10
0% 5% 10% 15% 20% 25%
Figure 46: Valuation versus growth relative to ASEAN consumer stocks
45 FY20e PE
40
Homepro CPALL
35 Unilever Indo
30
25
Vinamilk
20
Indofood CBP
15
10
3-year forward
5
EPS growth CAGR
0
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
We think that Vinamilk’s stock can be supported by its dividend growth and free cash flow
alone. To illustrate this, we point to two examples: Yili (600887 CH) and Dutch Lady Malaysia
(DLM MK), where revenue growth has slowed but free cash flow and dividends continued to
rise, and the stocks have enjoyed an upward multiple re-rating.
22
19 March 2021
Figure 47: Dutch Lady Milk Bhd’s multiples Figure 48: ...as dividends have grown quite
have risen even as revenues slowed… steadily
40 200
35 180
160
30
140
25 120
20 100
15 80
60
10
40
5 20
0 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Dutch Lady Malaysia PE ratio (x) Dutch Lady Malaysia Dividends paid (MYRm)
Dutch Lady Malaysia 5- year trailing yoy revenue growth (%)
Source: Bloomberg Source: Bloomberg
Figure 49: Yili’s multiples have risen… Figure 50: …as dividends have grown
35 4500
4000
30
3500
25 3000
20 2500
15 2000
1500
10
1000
5 500
0 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019
Yili 5- year trailing yoy revenue growth (%) Yili PE ratio (x) Yili Dividends paid (CNY m)
Source: Bloomberg Source: Bloomberg
Figure 51: We expect dividends from Vinamilk to rise, continuing their upward trajectory
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
-
FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY20 FY21eFY22eFY23e
Vinamilk dividends paid (VNDm)
Source: Company data, HSBC estimates
23
19 March 2021
Downside risks
 Margin pressure from higher raw milk powder prices – however, Vinamilk can pass on these
higher costs as long as these input increases are under 20%. We estimate that every 5%
increase in input prices will have a negative 1-1.5% impact on earnings.
Figure 52: Vinamilk’s margins were pressured in 2014 after a 50-60% y-o-y increase in
input prices, while today’s cost increases are more moderate (10-20% y-o-y)
3500 30
3000 25
2500
20
2000
15
1500
10
1000
500 5
0 0
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20
Skim milk powder price (USD MT) Vinamilk's T12m OPM (%)
Source: Bloomberg. HSBC
Figure 53: Sensitivity impact of higher raw material prices on EPS
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
-3.0%
-3.5%
-4.0%
-4.5%
5% 10% 15% 20% 25%
Impact of % increase in Input prices on FY21e EPS
 Rising competition from local rivals, such as TH Milk and IDP, since 2014. However, in July
2020, Vinacapital and Daiwa Pi Partners sold their stake in IDP to Blue Point. As such,
overall promotional activity seemed to have rationalised over the past few months and
market share has stabilised.
 Greater competition from foreign entrants, especially as import duties are set to be lowered
gradually after the completion of the EU-Vietnam free trade agreement (EVFTA). However,
tariffs on imported dairy products in Vietnam are already quite low, ranging from 5% for
skim and whole milk, 10% for cheese and 15% for infant formula, and we believe Vinamilk
can compete effectively even absent the presence of tariffs. The EVFTA will also simplify
the extremely complicated tariffs for imports into the EU, providing an opportunity for
Vinamilk.
24
19 March 2021
Financial analysis
 We are above consensus on both revenue and earnings growth

rates over the next three years
 In our view, the street has not taken into account the positive impact
on growth from premiumisation as well as from the new JVs
 Earnings growth may also be supported by operating leverage as
well as from rising interest income from its cash pile
Revenue. Vinamilk has grown its revenues from VND21.6trn in 2011 to VND59.6trn in 2020, a
CAGR of 11.9%. Revenue growth has been largely driven by higher volumes. The company’s
policy towards hiking prices is to pass on higher raw material costs, rather than increase ASPs
by a pre-determined amount each year. Exports have made up 12-20% of its revenues over the
past decade. We are forecasting a revenue CAGR of c8% over the next three years, driven by
5% volume growth, a 1% ASP effect from premiumisation, 1% from new products and 1%
incremental contribution from higher exports.
Figure 54: Revenue contribution by category
UHT liquid milk

23%
Fresh liquid milk
22%
Powdered milk
20%
Cheese/ice cream/
beverages
5%
Condensed milk Yoghurt

15% 15%
25
19 March 2021
Figure 55: Goldsoy (soy milk) and Susu (yoghurt) are Vinamilk’s fastest-growing brands
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Dielac (powdered milk) Ong tho (condensed milk) Vinamilk (liquid milk) Susu (yoghurt) Goldsoy (soy milk)
10-year historical sales CAGR by brand
Source: Euromonitor
Figure 56: Revenue breakdown
80000000
70000000
60000000
50000000
40000000
30000000
20000000
10000000
0
FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY20 FY21e FY22e FY23e
Domestic revenue (VND m) Export revenue (VND m)
Figure 57: Export contribution
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Export share of total revenue
26
19 March 2021
Gross margins. In 2014, Vinamilk enacted large ASP hikes to pass on higher whole and skim
milk powder prices. However, as milk powder prices fell in 2015 and 2016, the company did not
cut the prices of its products. As such, there was a large jump in gross margins in these years.
With its long-term pricing agreements with suppliers, Vinamilk locks in its raw material costs for
the upcoming 2-3 quarters, hence an increase in spot milk powder prices has a 2-3 quarter lag
on its cost of goods sold (COGS). Despite the recent increase in raw milk powder prices, we
think margins will be broadly steady over the next few years. Price hikes can offset any cost
pressures. At well above 40%, export gross margins are broadly similar to domestic margins.
Figure 58: Gross margins

60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Gross margins
Opex. A large proportion of selling and marketing costs goes towards trade spending and
channel promotions, with the remainder spent on advertising. The S&M/sales ratio rose from
FY14-FY16 as the company reinvested its higher gross profits (see above) into more trade
spending to boost brand recall and combat increased competition from IDP and TH Milk.
At c23%, Vinamilk’s operating margins are already among the highest within the Vietnamese
and ASEAN consumer sector, but we believe that these margin levels are sustainable. The
company will continue to reap cost savings from its scale, especially on administrative and
central office expenses. Nonetheless, we expect Vinamilk to reinvest any savings into trade
spending and advertising. Since 2014 Vinamilk has reduced its dependence on intermediate
suppliers in the modern channel and is distributing directly to supermarkets, so we think the shift
in distribution from traditional to modern trade will be margin neutral.
Figure 59: Operating cost ratios
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Selling & marketing expenses to sales Admin costs to sales
27
19 March 2021
Figure 60: Operating margins

26.0%
25.0%
24.0%
23.0%
22.0%
21.0%
20.0%
19.0%
OPM (%)
Net margins/tax rates. The company’s tax rates have been slightly below the national tax rate
of 20%, thanks to the tax benefits for factory investments and other miscellaneous deductions.
However, financial income has also gradually increased, owing to the excess cash on the
balance sheet which the company invests in term deposits. Tax rates are expected to increase
gradually from today’s 17% towards the country’s official 20% tax rate over the next few years.
Nonetheless, interest earnings from its rising cash pile can offset this tax drag, leading to stable
to slightly increasing net margins.
Figure 61: Tax rate

25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Tax rate (%)
Cash flow. The company has shown a good ability to convert earnings into cash flow, with
operating cash flow to net income ratios averaging c89% over the last decade. It has managed
working capital well, with broadly stable cash conversion cycles. Its yearly capex averages
between VND1-3trn, which goes mainly towards factory expansion and new dairy farms. Its
dividend pay-out ratio has gradually increased from c40% before 2012 to 70-75% today.
We expect capital investments to be on the uptrend, as Vinamilk continues to ramp up the

number of dairy farms and cows that it directly owns. However, its yearly cash flows of above
VND10trn will be sufficient to cover its cVND2trn yearly capex requirements. As such, we think
the company can increase its dividend pay-out ratio to 80% even without taking on additional
debt on its balance sheet.
28
19 March 2021
Figure 62: Construction in progress

Year ending Dec, VNDm FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Investments in dairy farms 15,893 35,366 230,478 468,766 236,872 233,475 404,442 199,731 177,142 516,344
Vietnam milk factory 252,973 1,819,204 49,928 28,076 0 179,888 0 0 158,002 172,902
Can Tho branch 44,990 45,087 52,102 52,102 0 0 0 0 0 0
Da Nang milk factory 237,931 21,448 0 0 0 0 0 0 0 0
Saigon milk factory 80,404 591 0 21058.337 90,072 6,881 0 0 0 0
Tien Son milk factory 81,556 0 92,638 8,778 0 0 7,647 118,287 0 0
Nghe An milk factory 35,495 0 0 0 0 0 0 0 0 0
Lam Son Factory 0 0 81,642 123,418 202,058 30,025 0 0 0 0
Dielac milk factory 33,679 0 0 0 0 0 0 0 0 0
Dielac 2 powder factory 383,595 1,509,809 0 0 0 0 0 0 0 0
Angkor Dairy (Cambodia) 0 0 0 35,181 0 0 0 0 0 0
Driftwood Dairy (US) 0 0 877 8,299 0 0 0 0 0 0
Headquarters 0 0 6,475 30,753 0 0 0 0 0 0
Others 359,066 104,575
Balance sheet. Excess cash is held in term deposits, which are classified under held-to-
maturity investments. Other assets comprise mainly goodwill from its historical acquisitions,
construction in progress, and prepaid expenses. The company has minimal debt on its balance
sheet, with all of its expansion funded from internally generated cash. Short-term debt is
primarily used to fund working capital. Other liabilities comprise accrued expenses and its
welfare fund.
Figure 63: Forecasts

FY20 FY21e FY22e FY23e CAGR (FY20-23e)
Key income statement items
(VNDm)
Revenue 59,636,286 64,583,078 70,136,680 76,181,004 8.5%
Cost of sales (31,967,663) (34,464,086) (37,424,719) (40,646,625) 8.3%
Gross Profit 27,668,623 30,118,992 32,711,960 35,534,380 8.7%
Selling exp (13,447,493) (14,562,953) (15,815,245) (17,178,191) 8.5%
G&A exp (1,958,155) (1,937,492) (1,893,690) (1,904,525) -0.9%
EBIT 13,539,381 14,970,132 16,679,899 18,519,219 11.0%
Finance income 1,581,093 1,685,750 2,039,774 2,461,729 15.9%
Finance costs (308,569) (334,165) (362,900) (394,175) 8.5%
PBT 13,518,536 14,970,132 16,679,899 18,519,219 11.1%
Tax (2,282,804) (2,544,922) (3,002,382) (3,518,652) 15.5%
Net profit 11,098,937 12,425,209 13,677,517 15,000,567 10.6%
HSBC EPS (VND) 4,770 5,340 5,878 6,447 10.6%
Key ratios and items

Gross Margin 46.4% 46.6% 46.6% 46.6% 0.2ppt
Operating Margin 22.7% 23.2% 23.8% 24.3% 1.6ppt
Net Margin 18.6% 19.2% 19.5% 19.7% 1.1ppt
Domestic revenue growth 7% 8% 8% 8% 1.1ppt

Export revenue growth 0% 10% 12% 12% 11.6ppt
Domestic GPM 46% 47% 47% 47% 0.3ppt
Export GPM 47% 47% 47% 47% 0ppt
Selling exp as % of sales 23% 23% 23% 23% 0ppt
G&A exp as % of sales 3% 3% 3% 3% -0.8ppt
Effective tax rate 17% 17% 18% 19% 2.1ppt
Dividend pay-out 71% 75% 80% 80% 8.6ppt
Capex/sales 2% 3% 3% 3% 0.8ppt
Gearing (Net debt / equity) 17% 3% -11% -25% -42.6ppt
29
19 March 2021
We are above consensus estimates for both revenue and net profits. We believe that street
estimates have not taken into account the positive impact on sales from premiumisation as well
as from its new JVs and partnerships, both domestically and overseas. In addition, we think that
the street has not fully accounted for the positive earnings boost from higher interest income,
which will help to negate higher tax rates.
Figure 64: Revenue growth estimates versus consensus
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
FY21e FY22e FY23e
HSBCe revenue yoy growth Consensus revenue yoy growth
Source: HSBC estimates, Bloomberg
Figure 65: EPS growth estimates versus consensus
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
FY21e FY22e FY23e
HSBCe EPS growth Consensus EPS growth
Source: HSBC estimates, Bloomberg
Additionally, we believe that buy-side consensus is even more negative than sell-side
consensus, as current multiplies imply no growth (see previous chapter for details).
30
19 March 2021
Financial analysis charts
Figure 66: Revenue & profit trends Figure 67: Margin trends
Source: Company data Source: Company data
Figure 68: Cost structure Figure 69: Balance sheet
Figure 70: Cash conversion Figure 71: Cash flows
31
19 March 2021
Company background
 The transition from state-ownership to privatisation has been well-

managed and the company is run very professionally today
 CEO Mai Kieu Lien is highly regarded among investors for her
success in managing the transition and in growing the company
 JCNC and F&N been adding to their existing stakes, supporting the
state fund SCIC’s ongoing divestment
Vietnam Dairy, or Vinamilk, was established in 1976 after the government nationalised three
foreign-owned dairy factories. In 2003, it was equitised as a state-owned enterprise and listed
on the stock exchange in 2006. Foreign acquisitions followed, first Driftwood Dairy in the US in
2013, Angkor Dairy in Cambodia in 2014 and Lao-Jagro Development in Laos in 2018. In 2019,
Vinamilk acquired 75% of GTN Foods, the owner of the “Moc Chau” milk brand.
The current CEO, Mai Kieu Lien, joined the company in 1976 as an engineer in the Truong Tho
factory, and was promoted to vice-director in 1984 and director in 1992. She became the
chairwoman and CEO of the company after Vinamilk’s equitisation in 2003. She has
implemented an international management style (employees must report any problem to a
superior within 24 hours) and administered various efficiency initiatives (the implementation of
SAP enterprise risk management solutions, direct selling to supermarkets).
After the removal of its foreign ownership cap in May 2016, foreign ownership has been steadily
increasing. Two large Singaporean investors, Jardine Cycle & Carriage (JCNC SP, SGD 22.11,
Buy) and F&N (FNN SP, SGD 1.41, Not Rated) have built significant positions in Vinamilk.
Figure 72: JCNC and F&N hold significant stakes in Vinamilk

50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2013 2014 2014 2015 2015 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021
Q4 Q2 Q4 Q2 Q4 Q2 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
F&N JCNC SCIC
Source: Bloomberg
32
19 March 2021
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
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issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Shuo Han Tan, CFA and York Pun, CFA
Important disclosures
Equities: Stock ratings and basis for financial analysis
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33
19 March 2021
Rating distribution for long-term investment opportunities

As of 19 March 2021, the distribution of all independent ratings published by HSBC is as follows:
Buy 57% ( 29% of these provided with Investment Banking Services )
Hold 34% ( 27% of these provided with Investment Banking Services )
Sell 9% ( 22% of these provided with Investment Banking Services )
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HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price date Disclosure

VIETNAM DAIRY PRODUCTS VNM.HM 102500.00 18 Mar 2021 7
Source: HSBC
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2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
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company.
4 As of 28 February 2021, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 January 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
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securities in respect of this company
12 As of 15 Mar 2021, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 15 Mar 2021, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
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34
19 March 2021
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35
19 March 2021
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[1167152]
36
Asia Small & MidCaps Research Team
Discovery
Head of Discovery Research, Asia Pacific
York Pun, CFA +852 2822 4396
yorkkypun@hsbc.com.hk
Analyst
Christina Chen +852 2822 2912
christina.z.chen@hsbc.com.hk
Analyst
Shuo Han Tan +65 6658 0624
shuohan.tan@hsbc.com.sg
Analyst
Terrence Liang +852 2996 6531
terrence.z.liang@hsbc.com.hk

Vietnam Dairy (VNM VN) : Equities

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Initiate at Buy: Premiumisation, exports and new

Our forecasts. We forecast a revenue CAGR of c8% in 2020-2023e, driven by

Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai

Financials & valuation: Vietnam Dairy Products Buy

Financial statements Key forecast drivers

Ratio, growth and per share analysis Issuer information

Our thesis in 6 charts

Source: Company data, HSBC Source: Euromonitor

Source: HSBC estimates Source: Bloomberg

 Vinamilk is a best-in-class franchise with a strong brand and

Valuation and risks

Vinamilk has a strong focus on sustainability and ESG considerations.

Figure 1: Reducing water usage… Figure 2:…and carbon footprint

Source: Vinamilk Sustainability Report Source: Vinamilk Sustainability Report

Dominant franchise with high

 Market structure of Vietnam’s dairy market supports a dominant

Dairy market share (%)

Source: Data from relevant companies, Euromonitor

Figure 4: High net margins due to dominance (2020)

Figure 5: Selling and marketing costs to sales ratios (2020)

Selling & marketing exp as % of sales

Figure 6: Brand landscape

Figure 7: Condensed milk market share Figure 8: Yoghurt market share

Source: Euromonitor Source: Euromonitor

Source: Euromonitor, Company data Source: Euromonitor, Company data

Figure 17: Factory locations in Vietnam

Per-capita consumption rates suggest further growth potential

Figure 20: Growth in per capita consumption

Figure 21: Per-capita consumption comparison

Figure 22: Base case volume projections

2500 4-5% CAGR

Source: Euromonitor, HSBC estimates

Figure 23: Bull case volume projections

3000 7-8% CAGR

Figure 24: Bear case volume projections

Premium categories set to spur growth

Figure 25: Product launches in 2018-2020

Figure 26: Growth of premium categories in Vietnam

Figure 27: Significant room for premiumisation (2020)

Source: Euromonitor, HSBC estimates

Source: Euromonitor, companies Source: Euromonitor, companies

Source: Euromonitor, companies Source: Euromonitor, companies

Philippines/ASEAN. Vinamilk set up a JV with an undisclosed local partner to import dairy

Figure 34: Vinamilk prices at a discount to Figure 35: … in categories such as

Source: HKTV Mall Source: HKTV Mall

Short-term negative impact from COVID-19 and floods to abate

Vietnam retail sales yoy growth(%) Vietnam unemployment rate (%)

Source: General Statistics Office Source: General Statistics Office

–Devendra Joshi, HSBC equity strategist

Valuation and risks

 Vinamilk’s stock has not benefitted from the global rerating in

Figure 39: Valuation comps

Figure 40: Vinamilk’s return on capital scores highly (2020)

Figure 41: Our TP implies 2.7% terminal growth rate

FY21e FCF (VNDm) 13,819,054

Source: HSBC estimates

Figure 42: Sensitivity analysis

Figure 43: PE chart

Share price (VND)

Source: Bloomberg, HSBC estimates

Figure 44: Valuation discount to Chinese peers