Vinamilk-ing the Cow

What is an excellent stock in a downturn? One that combines attractive returns stemming from being part of a country’s growth story, part of the non-cyclical sector of an economy, and being run by excellent management. Vinamilk is one such stock. Vinamilk is a major component of the VN Index (Ho Chi Minh’s stock exchange), Asia’s best performer this year after surging 17%. Their share price stands at VND104,000, having returned in one year 78%. Vinamilk’s current market capitalization is around VND86,687,000,000,000 (US$2.8 billion) with a 5-year dividend growth of 45%.

Vietnamese dairy market is fast-growing, with a CAGR of 12% from 1997 to 2013. There is increasing demand for nutritional products as more Vietnamese enter the middle classes. Vietnam’s government have also taken strategic decisions to develop the country into a dairy production powerhouse. There is no other country in South-East Asia with the combination of government support, abundant water, solar energy, and fertile land.

Is Vinamilk a cash cow?

Since its founding in 1976, Vinamilk has established itself as Vietnam’s strongest company by building the largest distribution network in Vietnam in order to easily access customers and leveraging its network to introduce innovative products to the domestic market as well as for export. Vinamilk produces powdered milk, condensed milk, instant coffee, yogurt, soy milk, ice cream, cheese and Vfresh fruit juices. Major export markets include the Middle-East, Australia, Cambodia, the Philippines, USA, Canada, Russia, Turkey, Thailand and South Korea. Exports accounted for $180 million out of US$1 billion revenue in 2012. Vinamilk’s distribution network boasts around 174,000 retail sales points across rural, urban, coastal and mountainous Vietnam – a decisive factor in the success of this consumer goods producer. Additionally, Vinamilk's main competitors are Dutch Lady Vietnam - a division of Friesland Foods, Nestlé Vietnam, Abbott, Mead Johnson, Friso and Nutifood. Vinamilk have had to outcompete foreign milk, often preferred to domestic products, in order to become the number one dairy producer in the Vietnamese market. They have done so by focusing on new products rather than attempting to gain traction with products that other companies have yielded success from. One example is Vinamilk’s introduction of their yogurt and ice cream products in 1993, which saw people lining up to purchase them to help Vinamilk reclaim their investment outlay in three months. Vinamilk also introduced the first powder milk plant in Vietnam in 1987. They are building two dairy processing factories in Binh Duong province which will be operated by robots – cutting edge technology developed in conjunction with the Dutch Campina company. These innovations have enabled Vinamilk to be the leading dairy producer in Vietnam by sales volumes and revenue since 2008 – they have a 31% market share of powdered milk and a 75% share of the overall dairy goods market. Furthermore, Vinamilk, as a privatised state-enterprise, has strong links with the Vietnamese government – having contributed hefty amounts of corporate tax (US$120 million in 2012) and set up many community initiatives such as a fund providing 50,000 poor children across the country with two bottles of milk daily for free in order to combat malnourishment of children under the age of five to under 15% by 2015. Perhaps a signal of its excellent operational efficiency is Vinamilk being the only Vietnamese business to have any realistic chance of being in Forbes’  2013 list of the 50 best publicly traded companies in Asia, coming off the back of their 2010 Forbes Asia Best Enterprise Award for being among the Top 200.

The food and consumer products industry is non-cyclical and a major draw for investors, particularly in emerging markets where there is expected to be a large increase in the middle class. Vietnam’s sovereign wealth fund, State Capital Investment Corporation, own 45% of Vinamilk whilst its CEO and Chairwoman Mai Kieu Lien is heavily incentivized by owning 0.3% of the company. Meanwhile foreign investors hold around 49% of Vinamilk’s shares with major investors being F&N Dairy Investments of Singapore (9.5%), Deutsche Bank (6%), local private equity fund Dragon Capital (5%), Vinacapital (2.5%), and New Zealand dairy company Miraka (2.2%). The strength of the foreign investors is a testament to their belief in Vinamilk’s growth potential and operational efficiency.

In addition, CEO and Chairwoman, Mai Kieu Lien is also a major draw for investors and a key strength of the company. She was included in a list of Asia’s 50 powerful businesswomen. Since her inception, Vinamilk have doubled their revenues and become one of the largest businesses in Asia with revenues of US$1 billion. Mai Kieu Lien has focused on long-term planning, creativity to continue producing new products and training talented managers.

Vietnam's most successful export - in more than one way

Vinamilk’s future is very bright and expected to contribute to capital gains as well as dividend increases in its share price. Vinamilk has the most modern production lines in Vietnam, ensuring quality and hygiene. They have also signed an enterprise agreement with Microsoft to obtain technical support for technology in their plants. In 2012, the US$75 million Miraka milk powder plant in New Zealand, owned by Miraka Limited and in which Vinamilk have a 19% stake, went operational. The plant has the capacity to produce 32,000 tonnes of powdered milk a year. It is Vinamilk’s first overseas investment and part of Vinamilk’s long-term strategy to become one of the world’s 50 largest dairy producers by 2017 with annual revenues of US$3 billion. To aid in reaching their target of annual revenues of US$3 billion by 2017, they are investing in building two high-tech plants (to equal a total of eleven plants nationwide) at a cost of US$200 million. One plant will be in Binh Duong province with a capacity of 400 million litres of fresh milk annually, whilst the other plant will be built in Vietnam-Singapore Industrial Park to focus on producing high-quality powdered milk (Dielac) with annual capacity of 54,000 tonnes a year. The Binh Duong plant is expected to be the biggest in South-East Asia. It is hoped that by 2017, Vinamilk’s current liquid milk production will double, yogurt products will increase by 30% and powdered milk by 125%. Other components of Vinamilk’s strategy include buying more farmland to build new farms as well as expanding existing farms in order to supply more input materials to meet Vinamilk’s production capacity demands. The company is aiming to expand the number of cows it owns to 30,000 by 2019. In addition, Vinamilk’s strategy includes diversifying product lines to meet increasing consumer demand of all sorts of dairy products, continued expansion of its extensive distribution networks, and manufacturing Vinamilk branded products in Australia and New Zealand (where the cost to produce a litre of fresh milk is lower than in Vietnam due to excellent natural conditions for raising cows and modern production technology).

With such compelling leadership vision from Mai Kieu Lien as well as overall growth in the Vietnam dairy market and well-chosen investments for their future, I would bet on Mai Kieu Lien to continue leading Vinamilk’s dominance of their domestic dairy market and to increase their exports. Hold this stock for the long-term and great rewards could be reaped.