VINAMILK - Financial Analy

1. HISTORY AND DEVELOPMENT OF VINAMILK:

Vinamilk was established in 1976, capitalized on October 1st, 2003, then was initial public offering

on January 9th, 2006. Now, Vinamilk has the most authorized capital among joint stock companies

in securities market.

- Address: 184 – 188 Nguyen Dinh Chieu street, District 3, Ho Chi Minh city

- Phone number: (84.8) 39 300 358 - 39 305 197

- Fax: (84.8) 39 305 206

- Website: www.vinamilk.com.vn

- Email: vinamilk@vinamilk.com.vn

1976: Vinamilk is precursor of Milk Company, Southern Coffee, directly under Food

Company. There are 6 other companies directly under Food Company: Thong Nhat Milk

Factory, Truong Tho Milk Factory, Dielac Milk Factory, Bien Hoa coffee Factory, Bich Chi

Flour Factory and Lubico.

1978: Vinamilk was transferred to Food Industry Ministry. The company changed name

that Milk & Coffee I Factory.

1988: It was the first time that the factory introduced powdered milk and nutritious

powder for children in Viet Nam.

1991: It was the first time that the factory introduced UHT milk and yogurt in Viet Nam.

1992: Milk & Coffee I Factory was official changed name that Vietnam Milk Company

(Vinamilk) and is managed by Ministry of Light Industry. Vinamilk focused to manufacture

milk and relevant products.

1994: Hanoi Milk Factory was constructed in Hanoi. The construction was belong to

strategy improvement and adapting demand of Northern.

1996: Vinamlik was joint venture with Quy Nhon Frozen Food JSC to establish Binh Dinh

Milk Factory. The factory entried to Middle market of Vietnam.

2003: The company was officially transferred to Joint Stock Company on December, 2003.

2006: Vietnam Milk Joint Stock Company was initial public offering on January 9th, 2006.

2. BUSINESS OPERATION:

Product

Vinamilk is the leading company in Vietnam milk market about brand, scope and market share. The company has more than 200 products from milk, for example condensed milk, fresh milk, yogurt, powdered milk, nutritious flour, frozen food, beverage and etc. The products is occupied about 37 – 90% market shares in Vietnam.

Milk market

Vinamilk is the decisive role of domestic market and competes effectively with foreign milk companies. The market share of Vinamilk is 30 – 80%. The company almost exports to Middle East such as Iraq. To reduce risk, Vinamilk expands to Australia, United States, Canada, and Thailand.

Domestic market: Vinamilk is the leading enterprise in Vietnam milk market about 39%

market shares. The company has more than 240 distributors and 140.000 stores.

Foreign market: Vinamilk exports to Australia, Cambodia, Iraq, Kuwait, The Maldives, The

Philippines, Suriname, UAE, and United States. The market is divided into following

regions:

Region Number of market

ASEAN 3 ( Cambodia, Philippines, Vietnam)

Middle East 3 (Iraq, Kuwait, UAE)

Rest of region 4 ( Australia, Maldives, Suriname,

United States)

Total 10

Competitors

Domestic competitors: Hanoimilk, TH True Milk, etc

Foreign competitors: Abbott, Mead Johnson, Nestlé, Dutch Lady, etc

1. Net income margin & Gross margin percent

Net income margin = Net income

Revenue x100%

Gross margin percent = Gross Profit

Revenue x100%

2011 2012

Net income margin 19.50% 21.91%

Gross margin percent 30.46% 34.17%

Both two ratios above increased from the previous year; it means that the company improved

its ability to generate profit in 2012. The main reason is that Vinamilk managed and reduced

expenses very effectively. The percent Cost of sales to Sales decreased from 69.54% in 2011 to

65.83% in 2012.

2. Return on assets (ROA)

ROA = Net income

Average assets x100%

2011 2012

ROA of Vinamilk 32.01% 32.99%

ROA of Hanoimilk 0.74% 0.57%

ROA of Vinamilk is much higher than industry average (24.52 in 2011). 8.51% difference reveals

the strong profitability of Vinamilk.

ROA = Net income

Revenue x Revenue

Average assets = Net income margin x Asset turnover

2011 2012

Asset turnover 1.67 times 1.54 times

In general, Vinamilk has a very high ROA ratio. This ratio increased slightly from 2011 to 2012.

Because Net income margin increased by 2.41% but asset turnover decreased by 0.13. However,

Vinamilk had two milk factories in progress in 2012. It led to increase in Total assets and had no

effect on net income. If we ignore these two milk factories, both asset turnover and ROA will

increase.

Net income margin Asset turnover

Vinamilk 21.91% 1.54 times

Hanoimilk 0.54% 1.05 times

Base on collected data, we can predict that Vinamilk is leader of industry because of high net

income margin and high asset turnover.

3. Return on equity (ROE)

ROE = Net income

Average equity x100%

2011 2012

Vinamilk 41.27% 41.61%

ROE went up slightly from 2011 to 2012 because both Net income and Owners’ equity increased.

Besides, ROE was higher than ROA. Therefore, Vinamilk used the financial leverage effectively in

2012.

Net income margin, ROA, ROE from 2009 to 2012

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2009 2010 2011 2012

Net income margin ROA ROE

Among 3 years 2010, 2011 and 2012, Vinamilk Co. had the massive changes in every aspect to

company’s performance process with profit was rising nonstop. The efficiency moved to positive

direction and product enlarged widely and money was sent to state budget was greater than

previous. Passing through 2011, Vinamilk stepped into one of the strongest business of Asia-

Pacific Broadcasting Union (ABU). The revenue reached 1 billion dollar, by far from 10 thousand

billion VNĐ in 2009. This is an appreciably results for the top leading in delivering milk in Vietnam.

To have a closer look at the situation of the company, we will analyze the credit situation of

Vinamilk.

1. Liquidity analysis

Current ratio

Measures a company's ability to pay short-term obligations. This ratio is mainly used to give an

idea of the company's ability to pay back its short-term liabilities (debt and payables) with its

short-term assets (cash, inventory, receivables…). Generally, the benchmark current ratio is 2 so

the range of 1.5 to 2 is considered to be satisfactory. On the other hand, if it falls below 1, the

liquidity has a problem. A low current ratio is an indicator of liquidity shortage and is a cause for

concern.

The current ratio in 2011 and 2012 were 3.2 and 2.7 respectively, which meant that the current

ratio decreased by 0.5 times compared to that in the previous year. In other words, in 2011 one

VND of liability was assured by 3.2 dong of current asset whereas in 2012 it was only assured by

2.7 dong. Therefore, the ability to pay short-term obligation in 2012 was not good as in 2011. The

reason is that the growth in current assets was lower than that of the current liabilities. To be

specific, while the current assets in 2012 climbed by 17.35%, there was a 40.7% rise in current

liabilities, which were mainly caused by the ascent of salary payable and accounts payable during

the year.

Obviously, both of 2 years Vinamilk experienced the figures which were greater than 1 so it can

be said that this company had enough capacity to repay its short term debts when it comes due.

However, compared to the average number of 2.11 of food industry, these ratios were very high,

especially in 2011. A very high ratio indicates excess liquidity. The business may be losing

opportunities to make profitable use of current assets such as investing in other projects or

having a plan to use them more effectively. Therefore, the reduction in current ratio in 2012

cannot be considered as a bad sign.

Quick ratio

As inventories are typically the least liquid of a firm’s current assets; and if sales are slow down,

they may not be converted to cash quickly as expected. Therefore, the quick ratio, which

measures the firm’s ability to pay off short-term obligations without relying on the sale of

inventory, is important.

The quick ratio is a fairly stringent measure of liquidity. It based on those current assets that are

considered to be highly liquid. The preferred ratio is about 1. This means that quick assets should

be equal to current liabilities. If the ratio equals to 1, then the business can easily meet the

current liabilities out of its quick assets.

According to this, the quick ratio of Vinamilk indicates that it has the ability to pay current

liabilities by cash when its ratio were 2.1 and 1.8 respectively in 2 studied years. In addition,

identically to the current ratio, these ratios were too high, which reveal that the company may

not use current assets effectively to get more profit.

Cash to current liabilities ratio

It should also be noticed that only rarely does a company sell its accounts receivable because by

doing so, it may lose the indispensable relationships with clients. Thus, only cash and cash

equivalent stand out as the really quick asset when computing the liquidity position of the

company. However, when observing the cash-to-current liabilities ratio, an alarming sign can be

seen when this ratio declined rapidly from 1.07 to 0.3 in 2 studied year despite the fact the quick

ratio was quite favorable. It is the direct effect of the dramatic increase in Accounts receivable in

2012, which is a consequence of the rise in sales and accounts receivables through signed

contract with Thailand.

Although those ratios show us the liquidity position of VNM, they only reflect the situation at a

point in time of December 31, 2012 because all the items used for calculation are derived from

the balance sheet. As a result, those ratios are easier to be manipulated by accountants and do

not reveal anything about the ability to repay short-term debt for the whole year. It is the reason

explaining why we should have a closer look at several other ratios before coming to a conclusion

about liquidity position of VNM for period 2011-2012.

Operating cash flow ratio

2012: 1.2

2011: 0.8

The operating cash flow ratio is a measure of a company's liquidity. If the operating cash flow is

less than 1, the company has generated less cash in the period than it needs to pay off its short-

term liabilities. This may signal a need for more capital. Thus, investors and analysts typically

prefer higher operating cash flow ratios. It is important to note, however, that having low

operating cash flow ratios for a time is not always a bad thing. In this case, in 2011, cash flow

from operating activities is approximately 2,400 billion VND, equal to one half as compared to

2012’s. Because the increase in export contracts leads to the large amount increase in inventory

level and accounts receivable, operating cash in 2011 is much lower than 2012. On the other

hands, current liabilities go up sharply in 2012. Therefore, operating cash flow in 2012 only

increases slightly. In general, the company generates enough cash to pay for its short term

obligation.

2. Operational efficiency

The operational efficiency of performance showed through below data:

Accounts receivable turnover

Account receivable turnover = Sales / Account receivable balance

2012: Account receivable turnover = 14.6

2011: Account receivable turnover = 17.4

Accounting measures used quantify a firm's effectiveness in extending credit as well as collecting

debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its

assets. A high ratio implies either that a company operates on a cash basis or that its extension

of credit and collection of accounts receivable is efficient. A low ratio implies the company should

re-assess its credit policies in order to ensure the timely collection of imparted credit that is not

earning interest for the firm. In this case, we can see that this ratio of Vinamilk is fairly acceptable.

However, the ratio decreased fast in 2012, mean that the firm had operated less efficiently in

collecting debts.

Inventory turnover

Inventory turnover = COGS/ Inventory

2012: Inventory turnover = 5.1

2011: Inventory turnover = 5.3

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced

over a period. Inventory turnover ratio is used to measure the inventory management efficiency

of a business. In general, a higher value indicates better performance and lower value means

inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication

of overstocking which may pose risk of obsolescence and increased inventory holding costs.

However, a very high turnover may result in loss of sales due to inventory shortage. Inventory

turnover is different for different industries. Businesses which trade in perishable goods have

very higher turnover with comparison to those dealing in durables. A comparison would be fair

only if made between businesses of same industry.

From these numbers, it’s clear that Vinamilk has so low inventory turnover, because they have

to keep a large amount of inventory to serve many exporting contract with Thailand in 2011.

Inventory turnover in 2012 is almost unchanged as compared to this number in 2011. It may

suggest that the company continue to manage high sales level. However, keeping too much

inventory, for a producer of perishable goods, can be very risky and increase holding cost too

much.

Payable turnover ratio

2012: Payable turnover ratio = 5

2011: Payable turnover ratio = 6

A short-term liquidity measure used to quantify the rate at which a company pays off its

suppliers. The measure shows investors how many times per period the company pays its

average payable amount. It can be seen that the turnover ratio is falling from one period to

another (6 times to 5 times). This is a sign that the company is taking longer to pay off its suppliers

than it was before.

In addition, it should be noticed that the decrease in inventory turnover and accounts receivable

turnover lead to the increase in both days to sell inventory and collection period. Similarly, the

payment period is lengthened as a result of the decline in payable turnover ratio. To be specific,

whereas the payment period is 61 and 75 days respectively in 2011 and 2012, the collection

period is only accounted for a half of this amount (28-30 days). By that way, Vinamilk can shorten

its operating cycle by delay payment for suppliers on one hand and encourage customers to pay

early on another hand, and thus improve the cash on hand as well as liquidity position.

3. Solvency analysis

Capital structure

Total debt ratio: is a financial ratio that measures the extent of a company’s leverage. It can be

interpreted as the proportion of a company’s assets that are financed by debt. In 2011, there was

0.2 unit of debt in one unit of Vinamilk’s capital and this number continue to be stable in the

following year when only 7% of increase can be observed in 2012. The slight climb in total debt

ratio is caused by the more rapid increase in total debt compared to the growth in stockholders’

equity. However, it should be noticed that the increase in total debt was generated by the sharp

escalation in short-term debts (62.39%) as opposed to the reduction in long-term liabilities. From

these numbers, we can see that current liabilities accounted for too large percentage, about 95%

of total liabilities.

19%

1%

80%

Capital structure 2011

Short-term debts

Long-term debts

Owner's equity

21%

0%

79%

Capital structure 2012

Short-term debts

Long-term debts

Owner's equity

Obviously, Vinamilk continue keeping its conservative capital structure. The total debt ratio in

both years were smaller than 0.344 – the average number of Food industry, which indicated that

Vinamilk possessed only a small proportion of debts in its total capital. It has a low amount of

debt, and therefore this leads to company be more active in implementing its investment

projects, increasing profit for the shareholders, reducing significantly borrowing costs and

exposed to less risk in terms of interest rate increases or credit rating because capital structure

of this company is quite safe when it relied mainly on its own equity and did not depend too

much on the external financing.

Ability to pay interest expenses

Time interest earned ratio: A metric used to measure a company's ability to meet its debt

obligations. It indicates how many times a company can cover its interest charges on a pretax

basis.

As can be seen from the calculation, the TIE rocketed in the period 2011-2012 from 358 to 2226

times so it can be concluded that the ability to pay interest of VNM was absolutely strong when

it only need 1 out of 2226 dong created by earnings before taxes to cover for this expense. The

rationale for the soar in TIE was that the company experienced a sharp rise in earnings (38.85%)

and a dramatic reduction in interest expense in 2012. Specifically, in 2012, interest expense

declined from nearly 14 billion to only 3 billion VND, which was a direct consequence of 62.39 %

decrease in long-term debts. As a result, the high ratio can also mean that the Vinamilk has an

undesirably low level of leverage or pays down too much debt with earnings that could be used

for other investment opportunities to get higher rate of return.

RECOMMENDATION

Vinamilk should control to reduce the producing cost to increase net income margin.

Moreover, to strengthen the leader of industry position, Vinamilk should control their

assets better to increase assets turnover.

Vinamilk should increase the debt in its capital structure, especially the long-term debts

to take advantages of leverage from the debt.

The amount of inventory should be reduced in order to reduce the holding cost and avoid

the risk of inventory damage.