Need for strategy adjustment as Vinamilk loses momentum

Vinamilk’s expansion strategy seems questionable and might result in a decrease of shareholders’ trust

Cao Minh Duc, a manager working at an international consultancy, told VIR that he had second thoughts about Vinamilk shares, one of the blue-chips in the domestic market since the year-end stocks sell-off saddled major indexes. “Though I’m fairly bullish, I’m not sure I can ride out the bumps,” said Duc. “I think there’s more volatility coming.”

Vinamilk, founded back in 1976, has struggled to reclaim its high after a drop of 2.63 per cent on its shares last week, despite the fact that the company posted a rebounded business result, a trend mirrored in the VN-Index. The group witnessed a slight increase of 6.4 per cent on-year with net revenue of VND42 trillion ($1.83 billion) and net profit after tax of VND8.38 trillion ($364.36 million).

Market share expanded at around 2.2 per cent on-year, while yogurt and liquid milk hiked by more than 2 per cent and 1 per cent respectively, according to Bao Viet Securities research.

The VN-Index fell 5.88 points or 0.61 per cent to 953.43 points as of December 4, its lowest point since July. Foreign investors were aggressively selling in this session, offloading a net VND230 billion ($10 million) worth of shares.

Daisuke Imaichi, manager and department head of Japanese Corporate Department No.2 at Mizuho Bank, believes that Vinamilk’s stock price has been slightly overvalued in the last 12 months.

“Despite upbeat revenue, the earnings per share of the company’s stock are falling,” Imaichi explained to VIR. “Generally, shareholders might be keen on undervalued companies or viable stocks rather than overvalued ones. In the end, underperforming in business investment will result in a selling spree from international investors.”

Phan Dung Khanh, investment director of Maybank Kim Eng Securities added, “The bad news revolving around Vinamilk’s ingredients has in fact been threatening to reveal itself for a while. But its shares downtrend is more associated with dwindling optimism about the lacklustre economic outlook, which pushed the VN-index to another day of losses.”

The ingredients hiccup came to light recently when a Facebook account posted images thought to be of customs data of the company’s raw materials imports, most of which is skimmed milk powder. The account questioned the quality of Vinamilk’s “fresh milk”, accusing the group of selling products that actually contain reconstituted milk which consists of about 20 per cent fresh milk, while the remainder is milk powder, butter, and additives.

The strain of the share trend has been reflected in a number of companies, with some high-profile victims of the recent malaise including Masan Group and Vinhomes.

Researchers at MB Securities say that both frontier and emerging markets are suffering from overseas capital outflow, and Vietnam is not immune from the trend despite its better performance.

Meanwhile, Pham Ngoc Ha, portfolio manager at Bao Viet Securities said, “Uncertainties relating to trade friction and global macro-economic headwinds could also be the reasons as investors would like to go back to their safe havens, such as gold or bonds.”

Other investors say they are maintaining some exposure to the stocks in the sector because of their defensive nature.

“We won’t know whether the domestic equity market will create new highs or new lows. The key question to ponder is whether Vinamilk’s global expansion accelerates its growth. This actually sends them to a riskier position, at least in a near-term outlook,” said Nguyen Thi Ngan Tuyen, head of Retail Research at Maybank Kim Eng.

On the bright side, Ha of Bao Viet Securities predicted that in the coming months there will be a relatively modest inflow into exchange-traded funds, adding to the positive trend of overseas buying.

Quiet foreign shareholders

The huge stir around the origin of Vinamilk’s products and its slumping price is not good news for its investors, in which foreign shares occupy 60 per cent. However, as of now most of them have kept silent on the matter.

Thai-based F&N Group, via its two subsidiaries F&N Dairy Investment and F&NBev Manufacturing, respectively holds 17.31 and 2.7 per cent in shares, enabling F&N to become Vinamilk’s largest shareholder.

The Thai investor has previously registered on numerous occasions to purchase more stocks aiming to raise its ownership at the local dairy giant but most of them failed. In July, F&N chairman Charoen Sirivadhanabhakdi once again registered to acquire 14.7 million stocks but his desire to expand the company’s presence in Vinamilk was again not approved.

Due to the mechanism of securities-based lending, the Thai investor has to continuously register for the purchase of stocks to keep the price stable. It consequently leads to “unappropriated happenings in the market” repeating all year round, Sirivadhanabhakdi explained. However, as Vinamilk’s stock price has been dropping, partially contributed to its notorious reconstituted milk scandal and the foreign net selling trend, the F&N’s wish to maintain the stock price may not live up its expectation.

Meanwhile, one of the overseas stockholders of Vinamilk, Arisaig Asia Consumer Fund, refused to comment on the company’s plummeting shares. Arisaig Asia currently holds about 28.8 million stocks in the company, equaling the takeover rate of 1.65 per cent in Vinamilk’s shareholders.

Grow and conquer

Vinamilk’s fresh data has shown positive signals, with a growth rate at 8.2 per cent on-year, and with revenues of overseas subsidiaries also increasing positively by 12.4 per cent on-year. But instead of valuing Vinamilk as a nimble upstart with a seemingly limitless potential for global expansion, financiers are increasingly pricing in slowing growth and rising expenses.

Thao Dang, analyst at Viet Dragon Securities, cautioned that the company’s globalisation strategy would also bring greater risks.

“Geographical uncertainties are important factors to consider when it comes to exports, as seen in the Middle East. Social unrest in the long run is going to impact Vinamilk to some extent,” Dang wrote in a report.

Last year, the group’s overseas operations were hit by a halt in its exports to the Middle East, which accounts for 85 per cent of its export revenue, due to geopolitical conflict in the region.

Vinamilk’s public relations director Do Thanh Tuan previously said that they had to push domestic sales to make up for the slump in overseas ones. Traditional dairy has faced intense competition in recent years as alternatives like almond milk and soy milk have gained popularity. Although Vinamilk has ramped up its efforts to promote the business by launching 17 new products as of October – ranging from nut milk and chocolate-flavoured drinks to fruit juices – success cannot be guaranteed.

The competition is getting intense, as the thirst for plant-based milk has prompted large food groups to try to cash in, with PepsiCo, Coca-Cola, and TH Group launching specific lines to consumers.

Some market watchers also questioned the company’s ambitions for robust rising sales if commodity prices soar. Truong Sy Phu, analyst at Bao Viet Securities, wrote in a November report that the weather in New Zealand, which is one of the main sources for Vinamilk’s raw materials, has not shown much improvement, thereby affecting production volume.

“Profit growth in 2020 for this biggest local dairy production will slow down due to higher input prices,” Phu highlighted. “A push by grocers and food retailers into their own private label milk brands has also added to pricing pressure on milk.”

In October, Vinamilk announced that it would begin exporting to China, tapping into the world’s second-biggest dairy market for growth. But experts’ view on Vinamilk’s future in the Chinese market is rather gloomy, partially due to fierce competition and a higher commodity price.

“Due to the diverse product portfolio, it will take more time for the company to finish issuing export product codes,” Phu of Bao Viet Securities highlighted.

“Time will tell how far Vinamilk could go, but globalisation is not always a good option,” added Khanh of Maybank Kim Eng.

Statistics from Bloomberg Intelligence revealed China’s $60 billion-a-year dairy industry is forecast to grow at mid-single-digits for the next three to five years.

“China is a very big market with a lot of potential,” said Vinamilk’s international business director Vo Trung Hieu in its annual shareholder meeting in April. “However, it is also a very challenging market as most of the world’s big players are already there while its local companies are also big and competitive.”

Vinamilk and other Vietnamese companies looking to win Chinese customers’ hearts will face tough competition from strong domestic players, such as China Modern Dairy or China Mengiu Dairy. Notwithstanding, even the Chinese dairy market faces headwinds, with sales of infant formula of some dairy companies set to record flat results this year before declining in 2020 due to a falling domestic birth rate, according to Goldman Sachs analysts.

“China also has a lot of non-tariff barriers that makes it hard for foreign companies to crack its market,” Vinamilk’s Hieu admitted.