SWOT Analysis
Strengths ■ A market-leading dairy brand name that dominates sales in this high-growth channel.
■ A diverse product range and a large export division allow Vinamilk to offset downturns
in one category with an improved performance elsewhere.
■ The firm is benefiting from soaring demand for both primary and processed dairy
products in the fast-growing local economy.
Weaknesses ■ Competition from international investors is intense, and Vinamilk will have to keep up
its expansionary activities in order to secure its market share.
■ Reliance on Vietnam, which is characterised by a vast low-income rural population,
means that Vinamilk faces a limited audience size for fresh dairy.
■ Vinamilk still faces raw material shortages, importing more than 70% of its raw
material from abroad, and this leaves it highly exposed to commodity price volatility.
Opportunities ■ In urban centres, processed dairy products represent a high-value, high-margin
channel.
■ Dairy consumption at the mass-market level is experiencing high single-digit growth
annually.
■ Experience in the emerging Vietnamese market is likely to increase Vinamilk's
chances of success when exporting to other emerging South East Asian markets.
■ Increasing product diversification will allow the company to benefit from strong
forecast growth in other food and drink sub-sectors.
■ Vinamilk's recent investments in domestic capacity expansions and in New Zealand's
Miraka will allow it to ease current supply shortages.
■ The company is well placed geographically to take advantage of the burgeoning
SWOT Analysis - Continued
■ International expansion will greatly increase opportunities for the company.
Threats ■ Vietnam's weak distribution infrastructure reduces sales opportunities for perishable,
high-value dairy products.
■ Vinamilk considers itself disadvantaged by the strength of international brand names,
and their prevalence will only increase.
■ Volatile commodity costs threaten profitability, particularly with regard to mass-
market primary products.
Company Overview Vinamilk is the market leader in Vietnam's dairy industry. It produces more than 200 dairy products for domestic sale and for export. The company recently released more of its state-owned equity in order to reduce the state's share to 50% and to qualify for listing on the stock market. Vinamilk controls an estimated 75% of the high-growth Vietnamese dairy market.
Strategy Three fundamental factors underpin our favourable view of the company: its focus on the Vietnamese market, its investment in supply chain and its sound financial position. This is further bolstered by the company's investment in its production capacities. Vinamilk has set itself some very ambitious targets, though we are optimistic that the company will be able to reach them. The company aims to raise its annual revenue to US$3bn by 2017, and to become one of the 50 biggest dairy companies in the world. We believe that Vinamilk's strategy of developing in the domestic market will be to its benefit, as local demand has significant growth potential in the long term. Indeed, we forecast the country's dairy consumption to significantly increase over our forecast period, albeit from a low starting point. Finally, increased urbanisation, Westernisation and the ongoing spread of modern, organised retail networks will prove supportive of strong dairy consumption growth, especially in the light of continued economic development.
In this context, Vinamilk has been the main player on the market to take advantage of demand. Indeed, the company invested significantly in its Vietnamese production capacities as well as in supply chain enhancement and infrastructure. It has also made investments in major foreign dairy export markets in order to increase supply to the Vietnamese market. For example, Vinamilk invested NZD121mn in the Miraka
production capabilities in New Zealand in order to process and export dairy products back to Vietnam.
This has resulted in very strong revenues and profit growth for Vinamilk. The company has significantly outperformed its peers since 2006, and its average revenues and profits have been higher than those of Megmilk, Mengniu or Namyang in recent years.
Estimates for 2012 revenues and profit growth show that this trend is likely to continue. We are also positive about Vinamilk's strategy of watching margins closely in order to increase its products' competitiveness relative to cheap imports. In fact, the company has doubled operational efficiency margins and is outperforming its peers' margins. Finally, the company's focus on maintaining a very strong financial position means it is very well positioned to grow through investments. It has low debt/EBITDA compared with its peers and generates enough earnings to cover its interest expenses. We believe that this will enable it to invest in new production capacities or target companies in the long term.
Competition with both regional and international players on the domestic market could prevent the company from taking advantage of the dairy segment's full growth
potential. Indeed, for products with high quality sensitivity, such as baby food products, international brands such as Nestlé are dominating domestic sales. Also, even though Vinamilk purchases 60% of total fresh milk production in the country, other local companies such as HanoiMilk could increase their purchasing power if they manage to have access to better funding and expand their distribution networks.
The reliance on the Vietnamese market for sales and imports of raw materials to process products in the country can be a threat to the company in the long term. First, the reliance on the Vietnamese market exposes the company to specific economic risks and trends. Second, the dependence on raw material imports exposes Vinamilk to the volatility of commodity prices on international markets. For example, local companies such as TH Milk have challenged Vinamilk by importing cows to Vietnam in order to boost local fluid milk production instead of relying on imports.
Finally, the 48% ownership of Vinamilk by the government could be a weakness for the company in the future if the government blocks competition and investment in the sector. This could discourage Vinamilk from increasing efficiency and improving products, and hurt the company in the future when competition is reintroduced. Also, the government's recent move to privatise state-owned companies could force Vinamilk to find more international investors, for which competition is fierce.
At the end of 2012 Vinamilk announced plans to invest VND4trn into two new dairy plants in the southern province of Binh Duoung. The first plant will have capacity to produce 400mn litres annually in the first phase, increasing to 800mn litres in phase two. The second plant will produce Dielac 2 formula milk for children with an annual output of 54,000 tonnes.
Looking ahead, the company is likely to focus more resources on expanding its exports. In 2012, Vinamilk's exports were valued at US$180mn, accounting for 14% of total revenues, with the company looking to increase this figure.
In September 2013, Vinamilk opened a new milk plant in Vietnam, at a cost of US $110mn. The plant will have an initial capacity of 400mn litres of milk. The company has also managed to acquire an overseas investment certificate in Cambodia. Vinamilk will build a milk factory in the country, investing US$23mn and to begin production in 2015. As part of the deal, the company will own a 51% stake in the unit, while Cambodia- based Angkor Dairy Products will hold the remaining 49% stake. Such expansion indicates Vinamilk's international ambition, and we believe further expansion abroad is on the cards.