VIETNAM DAIRY PRODUCT JSC

VIETNAM DAIRY PRODUCT JSC Started The Year On A Solid Footing Equity Update I May 18, 2017 We upgrade Vinamilk (VNM) to BUY from NEUTRAL with a revised 12M DCF-based target price of VND 167,000 (previously VND 148,400), and tweak our 2017 earnings forecasts by 10.2% (see Figure 1). Key highlights for VNM in 2017-18F are: 1Q2017 established a solid footing. VNM reported net revenue of VND 12,049bn (+16.6% YoY) and NPAT of VND 2,935bn (+35.8% YoY), accomplishing 23.6% and 30.1% of its 2017 guidance respectively. The upbeat top-line performance was attributable to domestic volume expansion as ASP remained unchanged and overseas sales declined 14% YoY. Good news from China. VNM will export its dairy products to China earliest in 2017, following a memorandum of understanding inked between the Company and a Chinese partner on May 12 th 2017. This is the first time VNM penetrates into this US$ 30bn dairy market after years of focusing on the Middle-East market (mostly Iraq). Accordingly, we see potential upsides for VNM s export sales in upcoming years. Lower-than-expected material cost. According to VNM, the Company utilized the recent retreatment of milk powder price to complete its orders for this material until end-2017. We estimate the average input cost of milk powder in 2017F to be $3,000/MT (+36% YoY), lower 9.1% than the old estimate of $3,300/MT. 2017-18 revenue and earnings forecasts. We estimate VNM to end 2017F with VND 54,386bn in net revenue (+16.2% YoY) and VND 10,633bn in NPAT (+13.7%). Margins shrink is likely due to rising material costs, in which GPM would drop 220 bps to 45.5% (2016: 47.7%) and EBITDA margin would drop 30 bps to 24.9% (2016: 25.2%). EPS would be VND 6,601 (+13.2% YoY). See Figure 1 for 2017-2018 estimates. Figure 1: Summary of estimate revisions All figure in VNDbn unless New estimates Old estimates % change otherwise stated 2017F 2018F 2017F 2018F 2017F 2018F Net sales 54,386 61,192 53,071 58,568 2.5% 4.5% EBITDA 13,563 15,149 12,156 14,560 11.6% 4.0% Net Income 10,633 11,815 9,649 11,567 10.2% 2.1% EPS (VND) 6,601 7,335 5,990 7,181 10.2% 2.1% 12M TP (VND) 167,000 148,400 12.5% Justifiable valuation. We raise the 12M DCF-based TP to VND 167,000 from VND 148,400 based on (1) the improved prospect of export sales and (2) lower-thanestimate material costs. We assume 2017F dividend to be VND 5,700, implying a 18.3% return. VNM currently trades at 22.3x P/E forward and 15.7x EV/EBITDA forward, which are expensive but justifiable when compared to global peers. Key investment risks: (1) Volatility in milk powder prices. Future earnings would be dampened if the rally of milk powder price extends beyond 2017F, and (2) Unstable export model. VNM s export strategy through trade partners, rather than setting up its own distribution channel that allows frequent sales, is a pitfall for export growth. BUY 18.3% Potential Upside Dong Quang Trung, Associate trungdq@tvs.vn Target Price 12-month price target: VND 167,000 Expected 12-month dividend: VND 5,700 Trading Data and Key Metrics Ticker VNM Sector Dairy Listed since Jan-2006 Price as of May 18, 2017 (VND) 146,000 52-week range (VND 000) 110/156 Market cap (VND trn) 211.9 Shares outstanding (mn) 1,451 Free Float (mn) 1,160 15-day average volume 792,931 2016 P/ BV (x) 8.7 2016 P / E (x) 22.9 Dividend yield (%) 3.7 Net Debt to Equity (x) 0.1, Thomson Reuters Data 40% 30% 20% 10% 0% -10% Price Performance Chart VNM Price performance (%) 3M 12M YTD Absolute +12% +21% +15% Source: Bloomberg Company Description Vinamilk (VNM) is the largest dairy company in Vietnam whose revenue reached VND 46.8trn (US$ 2.07bn) in 2016, yielding a combined market share of 58%. The Company s key competitive advantage lies in its nationwide distribution network covering 212,000 retailers and 1,600 supermarkets. Besides the local market, VNM also exports to 43 countries and has subsidiaries in USA, Poland, Cambodia and one associate in New Zealand. The company is listed on HSX since 2006 with 100% FOL. Others, 41.4% VNM's key management, 0.5% F&N Group, 18.7% VN Index Ownership structure SCIC, 39.3% Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages.

2 SUMMARY FINANCIALS Earning Model (VNDbn) 2015A 2016A 2017F 2018F Balance Sheet (VNDbn) 2015A 2016A 2017F 2018F Net sales 40,080 46,794 54,386 61,192 Cash and equivalents 1,359 655 608 684 Cost of sales 23,818 24,459 29,656 33,493 Financial investment 8,668 10,454 11,842 13,324 Gross profit 16,262 22,336 24,729 27,699 Accounts receivable 2,612 2,191 2,547 2,866 Selling expenses 6,258 10,759 11,421 12,850 Inventory 3,810 4,522 5,483 6,192 General administration expenses 1,233 1,053 1,115 1,255 Prepaid expenses, other CA 282 852 736 828 Other operating income/(expenses) 96 77 90 101 Total current assets 16,732 18,674 21,215 23,893 EBITDA 9,965 11,792 13,563 15,149 Property and equipment Depreciation & Amortization 1,097 1,191 1,280 1,454 At cost 13,903 14,258 16,170 18,470 EBIT 8,868 10,601 12,283 13,695 Less accumulated depreciation -5,264-6,341-7,603-9,039 Net interest income/(expenses) 486 620 605 626 Net property and equipment 8,639 7,916 8,567 9,431 Net investment income 13 16 19 22 Net intangibles 214 405 386 368 Others (recurring) 0 0 0 0 Total investment 1,083 614 614 614 Pretax Profit 9,367 11,238 12,907 14,343 Other long - term assets 810 1,770 1,487 1,673 Income tax 1,598 1,874 2,259 2,510 Total Assets 27,478 29,379 32,270 35,980 Tax rate (%) 17% 17% 17.5% 17.5% Minorities -4 14 16 18 Account Payables 2,194 2,562 3,019 3,409 Net Income 7,773 9,350 10,633 11,815 Short-term debt 1,454 1,333 1,669 3,017 EPS (basic, reported) 4,864 5,831 6,601 7,335 Other current liabilities, CL 2,357 2,563 3,249 3,656 Weighted shares outstanding (mn) 1,201 1,451 1,451 1,451 Total Current Liabilities 6,004 6,457 7,937 10,082 Long-term debt 368 327 272 306 Common dividends declared 0 0 0 0 Other long-term liabilities 182 188 243 274 DPS (VND) 4,999 5,000 5,700 6,300 Total long-term liabilities 550 515 515 580 Dividend Payout ratio (%) 103% 86% 86% 86% Stockholders' equity 20,924 22,406 23,818 25,318 Dividend cover (X) 1.0x 1.2x 1.2x 1.2x Common Equity 12,007 14,515 14,515 14,515 Share premium 0 261 261 261 Growth and Margin (%) Treasury shares (5) (1) (1) (1) Sales Growth 14.3% 16.8% 16.2% 12.5% Retained earnings 5,392 5,592 5,952 6,284 EBITDA Growth 24.4% 18.3% 15.0% 11.7% Budget sources and other funds 3,300 1,803 2,854 4,023 EBIT Growth 27.2% 19.5% 15.9% 11.5% Minority interest 231 237 237 237 Net Income Growth 28.0% 20.3% 13.7% 11.1% Total liabilities and equity 27,478 29,379 32,270 35,980 EPS Growth 28.1% 19.9% 13.2% 11.1% Capitalized leases - - - - Gross Margin 40.6% 47.7% 45.5% 45.3% Capital employed 21,474 22,921 24,333 25,898 EBITDA Margin 24.9% 25.2% 24.9% 24.8% EBIT Margin 22.1% 22.7% 22.6% 22.4% Ratios Net Margin 19.4% 20.0% 19.6% 19.3% ROE (%) 38.5% 41.7% 44.6% 46.7% ROA (%) 29.2% 31.8% 32.9% 32.8% Cash flow Statements (VNDbn) 2015A 2016A 2017F 2018F ROIC (%) 37.5% 40.8% 43.7% 45.6% Pretax profit 9,367 11,238 12,907 14,343 Inventory days 57 67 67 67 Adjustments for: Receivable days 23 17 17 17 Depreciation and amortization 1,097 1,191 1,280 1,454 Payable days 31 37 37 37 Change in inventories -499-1,037-961 -709 Cash conversion cycle 48 47 47 47 Change in trade receivables 166-183 -355-319 Asset Turnover 1.5x 1.6x 1.7x 1.7x Change in trade payables 484 330 457 390 Net debt/equity 0.1x 0.1x 0.1x 0.1x Other operating cash flow -2,956-3,149-2,424-6,069 Interest cover - EBIT(x) 283.5x 228.0x 142.3x 106.8x Cash flow from operations 7,659 8,390 10,903 9,091 Net Capital expenditure -1,068-1,142-3,000-1,250 Valuation (Multiples) Acquisition 0 0 0 0 EV / EBITDA 14.8x 16.5x 15.6x 14.0x Divestures 0 0 0 0 P/E 21.9x 22.9x 22.1x 19.9x Other investments, net -1,059-804 0 0 Dividend Yield (%) 3.96 3.7 3.9 4.3 Cash flow from investing -2,127-1,946-3,000-1,250 P/B 7.4x 8.7x 8.9x 8.4x Equity issued 107 286 0 0 Net borrowings 190-188 281 1,382 Dividends to shareholders -6,002-7,238-8,231-9,147 Cash flow from financing -5,704-7,141-7,950-7,764 Net cash flow -172-697 -47 76 Opening cash 1,528 1,359 655 608 Forex change 3-6 0 0 Notes: CA = current assets; CL = current liabilities Closing cash 1,359 655 608 684 Source: Thomson Reuters historical data, TVS model and forecast

3 1Q2017 Business Performance Review & 2017 Outlook 1Q17 Revenue and Earnings Review: Marketing was still key to sales growth VNM reported net revenue of VND 12,049bn (+16.6% YoY), accomplishing 23.6% of its 2017 guidance; Selling expenses grew 38.3% YoY (1Q16: +44.7% YoY), implying marketing was still key to sales growth NPAT was VND 2,935bn (+35.8% YoY), accomplishing 30.1% of its 2017 guidance; Margins surged as GPM and NPM reached the all-time high of 48.3% and 24.4% respectively last quarter VNM reported net revenue of VND 12,049bn (+16.6% YoY), accomplishing 23.6% of its 2017 guidance. The upbeat top-line performance was attributable to domestic volume expansion as ASP remained unchanged and overseas sales declined 14% YoY. Selling expenses grew 38.3% YoY (1Q16: +44.7% YoY), implying marketing was still key to sales growth. By end-1q17, there is no major change in VNM s market share, in which the Company now holds 55% market share in liquid milk, 85% in yogurt, 41% in powder milk and 80% in condensed milk. NPAT was VND 2,935bn (+35.8% YoY), accomplishing 30.1% of its 2017 guidance. GPM reached the all-time high of 48.3% (1Q16: 42%) although milk powder price a significant input material that accounts for ~20% of COGS has increased ~50% YoY on average. Regarding this matter, VNM comments that this price hike only impacts margins in 2H17 as price in 1H17 was hedged last year. Our analysis indicates the increasing portion of high-margin products (powder milk and yogurt with GPM of ~55%) in total revenue has also spurred margin upswing. Most of GPM expansion was translated into NPM when this ratio surpassed the prior peak of 22.6% in 2Q16 to establish the new record high of 24.4% last quarter. 2017-18 Outlook: Good news from China VNM will export its dairy products to China earliest in 2017, making it the first time VNM penetrates into this US$ 30bn dairy market VNM utilized the recent retreatment of milk powder price to complete its orders for this material till end-2017 at ~$3,000/MT (+36% YoY) VNM will export its dairy products to China earliest in 2017, following a memorandum of understanding inked between the Company and a Chinese partner on May 12 th 2017. This is the first time VNM penetrates into this US$ 30bn dairy market after years of focusing on the Middle-East market (mostly Iraq). Accordingly, we see potential upsides for VNM s export sales in upcoming years, considering (1) milk consumption in China is expected to expand at above 5% CAGR over 2017-20F after the removal of one-child policy in late 2015 (BMI) and (2) the widening gap between local milk production and consumption indicates higher import demand (the supply deficit of powder milk in China would increase to 630,000 tonnes by 2021F from the current 510,000 tonnes, BMI). Besides China, VNM is also eyeing Bangladesh, Indonesia, Myanmar and Malaysia as new export market. Another upside for VNM in 2017F is the recent retreatment of milk powder price in Oceania VNM s main import region due to extra supply under favorable weather conditions for dairy farming. Particularly, average milk powder price was down 15% to $3,101/MT in Mar-17 from the recent peak of $3,656/MT in Dec-16 (Global Dairy Trade). According to VNM, the Company utilized this price correction to complete its orders for milk powder till end-2017. Though there is no official disclosure, we estimate the average input cost of this material in 2017 is $3,000/MT (+36% YoY).

1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A 1Q17A 2Q17F 3Q17F 4Q17F 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A 1Q17A 2Q17F 3Q17F 4Q17F VND bn VND bn 4 Following the above discussions, we tweaked our earnings estimates for VNM in 2017-18F by 2-10% (see Figure 2). Key changes in our assumptions are (see our note Headwinds from Rising Material Costs for further details of our assumptions): Rise the domestic volume growth from 10-11% to 12-14% YoY (2016: 18%) Rise the overseas volume growth from 6-9% to 10-11% YoY (2016: 9.8%) Reduce the average input cost of milk powder in 2017F from $3,300/MT to $3,000/MT (2016: $2,200/MT); we estimate the cost in 2018F to be $3,300/MT Reduce the SG&A expenses/revenue ratio from 23.3% to 23.1% (2016: 25.2%) We estimate VNM to end 2017F with VND 54,386bn in net revenue (+16.2% YoY) and VND 10,633bn in NPAT (+13.7%); Our pattern analysis indicates sales would peak in Q2 and plateau in Q3&4, while earnings would see major moderation after Q2 We estimate VNM to end 2017F with VND 54,386bn in net revenue (+16.2% YoY) and VND 10,633bn in NPAT (+13.7%). Margins compression is likely due to rising material costs, in which GPM would drop 220 bps to 45.5% (2016: 47.7%) and EBITDA margin would drop 30 bps to 24.9% (2016: 25.2%). EPS would be VND 6,601 (+13.2% YoY). Our pattern analysis indicates sales would peak in Q2 and plateau in Q3&4, while earnings would see major moderation after Q2 due to higher material costs. Following that, we estimate 2Q17 net revenue and NPAT to be VND 14,315bn (+15% YoY) and VND 3,084bn (+9.5% YoY) respectively. Figure 2: Summary of estimate revisions All figure in VNDbn New estimates Old estimates % change unless otherwise stated 2017F 2018F 2017F 2018F 2017F 2018F Net sales 54,386 61,192 53,071 58,568 2.5% 4.5% EBITDA 13,563 15,149 12,156 14,560 11.6% 4.0% Net Income 10,633 11,815 9,649 11,567 10.2% 2.1% EPS (VND) 6,601 7,335 5,990 7,181 10.2% 2.1% Figure 3: Sales to peak in Q2 and plateau in Q3&4 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Figure 4: while earnings to see moderation after Q2 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Domestic Overseas

26.6 5.8 30.9 6.5 35.0 6.1 40.1 7.8 9.4 46.8 10.6 11.8 VND trn 54.4 61.2 5 Figure 5: Revenue and earnings projection for 2017-18F Figure 6: Margins to drop due to rising material costs 70.0 60.0 50.0 40.0 30.0 20.0 60.0% 50.0% 40.0% 30.0% 20.0% 35.9% 38.0% 38.0% 49.5% 48.2% 50.5% 42.5% 47.3% 44.8%44.0% 40.1% 20.8% 21.8% 22.0% 10.0 10.0% 0.0 2012A 2013A 2014A 2015A 2016A 2017F 2018F 0.0% 2012A 2013A 2014A 2015A 2016A 2017F 2018F Revenue (LHS) NPAT (LHS) Domestic Overseas Key investment risks: (1) Volatility in milk powder prices. Future earnings would be further dampened if the current rally of milk powder prices extends beyond 2017F, and (2) Unstable export model. VNM s current strategy of doing business overseas through trade partners, rather than setting up its own distribution channel that allows frequent sales, is a pitfall for export growth.

6 VALUATION and RECOMMENDATION We assign BUY rating to VNM with a revised 12M DCF-based TP of VND 167,000 (previously VND 148,400) a 14.4% upside. We expect 2017F dividend to be VND 5,700, implying a 18.3% return. VNM currently trades at 22.3x P/E forward and 15.7x EV/EBITDA forward, which are 3.3% and 13.5% premium to regional peer averages respectively. The valuations are rich but justifiable, in our opinion, considering VNM s superior EBITDA margin of 24.9% is nearly double the regional average of 13.8%. Figure 7: DCF-based target price calculation for VNM VNDbn 2017F 2018F 2019F 2020F 2021F EBIT 12,283 13,695 17,594 18,298 23,049 EBIT (1-tax) 10,133 11,298 14,515 15,096 19,016 D&A expenses 1,280 1,280 1,454 1,603 1,708 Change in working capital -58-323 -156-452 -156 Capex -3,000-1,250-1,250-1,250-1,250 FCFF 8,355 11,005 14,563 14,997 19,319 PV of FCFF 7,813 9,237 10,973 10,143 11,729 Beta 0.72 WACC 11.4% Terminal growth rate 5.0% PV of Terminal value 192,370 Enterprise value 242,264 Less: Net debt 1,004 Equity value 241,260 Number of shares (mn) 1,451 Equity value per share (VND) 167,000 Figure 8: Sensitivity analysis of DCF-based target price (VND)* 2017F average milk powder price (US$) 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 2017 domestic ASP growth 0.5% 186,000 181,000 176,000 171,000 165,000 160,000 154,000 149,000 143,000 1.0% 187,000 182,000 176,000 171,000 166,000 160,000 155,000 149,000 144,000 1.5% 187,000 182,000 177,000 172,000 166,000 161,000 155,000 150,000 144,000 2.0% 188,000 183,000 177,000 172,000 167,000 161,000 156,000 150,000 145,000 2.5% 188,000 183,000 178,000 173,000 167,000 162,000 156,000 151,000 145,000 3.0% 189,000 183,000 178,000 173,000 168,000 162,000 157,000 151,000 145,000 3.5% 189,000 184,000 179,000 173,000 168,000 163,000 157,000 152,000 146,000 Note: The two most impact variables in our model are milk powder price and domestic ASP growth Figure 9: Regional jewelry retail comparable valuations* Identifier Company Name P/E forward EV/EBITDA forward EBITDA margin Country of HQ VNM.HM Vietnam Dairy Products JSC 22.3x 15.7x 24.9% Vietnam Global mean 21.6x 13.9x 13.8% 600887.SS Inner Mongolia Yili Industrial Group Co Ltd 17.4x 11.8x 8.8% China DAIR.SI Dairy Farm International Holdings Ltd 21.9x 16.1x 6.0% Hong Kong 0151.HK Want Want China Holdings Ltd 17.6x 10.8x 28.5% China NESM.KL Nestle Malaysia Bhd 27.9x 19.3x 18.4% Malaysia GL9.I Glanbia PLC 19.1x 15.8x 12.5% Ireland LALAB.MX Grupo LALA SAB de CV 22.1x 10.9x 12.1% Mexico EMMN.S Emmi AG 24.8x 12.4x 10.0% Switzerland for VNM, Thomson Reuters for other companies

7 ANALYST CERTIFICATION I, Dong Quang Trung, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies or its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RATING and VIEWS Buy (B), Neutral (N), Sell (S) Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions 12-month rating Definition Buy Total Stock s Return Potential > 15% Neutral Total Stock s Return Potential between (-15%) and 15% Sell Total Stock s Return Potential < (-15%) Short-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to fall within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target. RATING HISTORY and TARGET PRICE Issued Date Research Recommendation Market Price (VND) 01-year target price (VND) May 18 th, 2017 Update BUY 146,000 167,000 February 10 th, 2017 Update NEUTRAL 133,800 148,400 November 16 th, 2016 Update NEUTRAL 139,000 158,000 October 24 th, 2016 Update NEUTRAL 141,000 159,000 DISCLAIMER Copyright 2017 Thien Viet Securities JSC (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of TVS. The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. HO CHI MINH 63A Vo Van Tan St, District 3 Floor 9, Bitexco Nam Long Building Tel: +84 (8) 299 2099 Fax: +84 (8) 299 2088 RESEARCH DEPARTMENT Duy Nguyen (Mr.), Manager Equity Capital Market duynh@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn THIEN VIET SECURITIES JOINT-STOCK COMPANY HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) 220 3228 Fax: +84 (4) 220 3227 Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn