Company visit: VNM — Conservative view over opportunities in China market

Target price: N/A

Upside: N/A

Event catalyst:

• FY18 was a challenging year.
• FY19E targets: 7% sales growth and 5% PBT growth.
• VNM is seeking M&A opportunities.

FY18 was a tough year, with just 2.9% YoY top-line growth while net profit declined by 0.7% YoY. VNM attributed the 2018 weak sales result to 1) Changed consumer behavior – a shift away from animal milk to plant-based and other high-nutrition drinks including European organic products, and 2) A shift by some wholesale distributors towards other investment opportunities (such as real estate, stock, or gold), instead of milk trading. In addition, the adverse price environment for raw milk inputs also dented profits.

FY19E targets: 7% sales growth and 5% PBT growth. VNM plans to raise the proportion of high-value-added products in the urban market, while its rural market focus is to widen coverage Vinamilk products. VNM’s conservative profit guidance is mainly attributable to concerns over the volatility of raw milk input prices.

Export opportunity to China? VNM holds a conservative view on its potential in the China market, cautioning that the China-Vietnam trade agreement on milk could widen the door for Chinese products’ penetration into Vietnam – thus resulting in even fiercer domestic competition. Therefore, they think it is too early to say who will benefit from the agreement.

M&A plan: The authorities have allowed VNM to acquire 49% of GTN (including its 51% voting shares of Moc Chau Milk) as in line with antitrust rules. VNM also expresses readiness to engage in both vertical and horizontal M&A deals in ASEAN in upcoming years.

Dividend plan is a minimum pay-out ratio of 50% for 2019 (i.e., c. VND 3,000/share), vs approximately 70% in the last two years.

SCIC awaiting government guidelines. State Capital Investment Corporation (SCIC), which still owns a 36% stake of VNM, said that it is fully prepared to divest its stake in VNM but they must wait for specific government guidelines before divesting.

Our view: We don’t cover VNM and have no investment view on the stock. Whether VNM’s M&A deals will bear fruit remains unclear, but we fail to see a clear organic growth picture for the company given the weak growth and fierce competition of the domestic dairy market, as well as the high volatility of raw milk input prices.

Please access the link for our complete report: VNM — Company Visit

Analyst: Quang Vo, quang.vo@yuanta.com.vn