Financial statements analysis of vinamilk (2012 2014)

Ho Chi Minh City - Viet NamJune9th, 2015 ADVISOR'S COMMENT Title: FINANCIAL STATEMENTS ANALYSIS OF VINAMILK 2012-2014 Author: LUONG KIEU Class: KTll 02 Advisor: PHAN THl HONG Hh.NH MSc C

MINISTRY OF EDUCATION AND TRAINING HCM CITY UNIVERSITY OF FOREIGN LANGUAGES AND INFORMA TION TECHNOLOGY

i DEPARTMENT OF INTERNATIONAL BUSINESS ADMINISTRATION

GRADUATION PAPER

/

FINANCIAL STATEMENTS ANALYSIS

OF VINAMILK (2012 - 2014)

Student's name: LUONG KIEU

Student's code: IlDH490698

Advisor: PHAN THI HONG HANH, MSc.

JUNE, 2015

Ho Chi Minh City - Viet Nam

June9th, 2015

ADVISOR'S COMMENT

Title: FINANCIAL STATEMENTS ANALYSIS OF VINAMILK (2012-2014)

Author: LUONG KIEU

Class: KTll 02

Advisor: PHAN THl HONG Hh.NH (MSc)

Chapter 1 wrote about the literature review on financial analysis.In chapter 2, analysis of data,financial circumstance of Vinamilk as well as discussions and personal ideas werepresented Some solutions were suggested with the aim of pushing upVinamilk Corporation'sfinancial effectiveness in Chapter 3

.: Contents:

•: Practicality:

The writer went into deep details on the structure of balance sheet and income statement.Moreover, cash flow statements were also taken into account with the comparisons amongcash flow from operations, cash flow from financing and cash flow from investment activities.Besides, financial ratios and Dupont analysis were mentioned, being accompanied bydiscussions with clear explanation and strong arguments, which are very helpful for investorswho are interested in the company These make the paper have practical sense and be used as

a reference for concerned parties However, although some remedies for boosting Vinamilk'sperformance in finance field were recommended, they were too general to be put into action.They should be made in more details with specific plans to implement, estimated costs to be

First and foremost, I am deliriously happy and feel lucky to have family andfriends who always give encouragement and motivation, and inspire me tosuccessfully accomplish this essay

Moreover, I would like to express my sincere gratitude to my advisor, Ms HanhHong Thi Phan, who enthusiastically and endlessly supports me to complete thisresearch She has not only provided useful instructions in specific knowledge, but also

in the proper presenting method in order to perfect my thesis

In addition as a final-year student in Department of International BusinessAdministration of Ho Chi Minh City University of Foreign Languages andInformation Technology, I would like to say thanks to the faculty for giving me anopportunity to do this paper

Furthermore, all the lecturers are very enthusiastic and devoted to teachingstudents I am grateful for all the knowledge that lecturers imparted to me which is thefoundation for me to do this research better

Finally, there would be some shortage in this essay due to limitation of time andknowledge; I will genuinely appreciate to receive all valuable comments fromlecturers and readers

These days, the economy of Vietnam has recovered and Vietnam has participated

in many world economic organizations, there are a lot of industries and businessesappear in many different fields However, the investment and business's operation stillinclude many potential risks Therefore, businesses and investors need a useful tool tohelp them make the correct decisions, completely prevent from risks and bringbenefits in the future through financial statements analysis Basing on periodicanalysis of the financial situation in the past and present will assist analysts providethe precise estimate of the possibility of the economic problems in the future Besidesthat, tools and techniques of financial statement analysis are used to point outstrengths and weaknesses of the enterprise, problems that company are confrontingwith Therefore, they can make a judgment and offer solutions and improvecompetitiveness of enterprise The research in this paper is carried out by employinginformation in VINAMILK's website, websites of securities companies, and Proquestdatabase The author used comparable approach and financial ratios analysis toindicate financial health and financial performance of VINAMILK in the period of2012-2014 Moreover, this thesis also suggested some measures for the financialimprovements in the future

II

2.3.1 Steps in the financial statements analysis framework 7

iii

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS 15

IV Financial Statements Analyis ofVINAMILK (2012-2014) 215

1 Financial tatements analysis Error! Bookmark not defined.

1.1.1 Analyzing asset structure of VNM (2012-2014) 251.1.2 The proportion of current assets in total assets ofVNM (2012-2014) 271.1.3 The proportion of long-term assets in total assets of VNM (2012-2014) 291.2 Analyzing VNM's structure of capital resources (2012 - 2014) 30

1.4.1 Changes in cash flows from operating activities 3881.4.2 Changes of cash flows from investing activities 391.4.3 Changes of cash flows from financing activities 400

2.3.5 Total Asset Turnover 47

VI

LIST OF FIGURES

Figure 2.3: Vietnam consumer price index (CPl) (2012-2014) 16

Figure 2.11: The changes in total assets (2012-2014) 26Figure 2.12: The proportion of current assets in total assets ofVNM (2012-2014) 27Figure 2.13: The proportion oflong-term assets in total assets ofVNM (2012-2014)

29

Figure 2.14: The changes in capital structure (2012-2014) 31Figure 2.15: VNM's operating overview (2012-2014) 34Figure 2.16: Changes in cost elements during 2012-2014 35Figure 2.17: VNM' Selling expenses during 2013-2014 36Figure 2.18: VNM's total revenue and profit before tax (2013-2014) 37

Figure 2.22: Total debts to total assets ratio (2012-2014) 44Figure 2.23: The times interest earned ratio (2012-2014) 44Figure 2.24: Account receivable turnover (2012-2014) 45Figure 2.25: Average collection period (2012-2014) 46

VII

Figure 2.28: Total asset turnover (2012-20 14) 47Figure 2.29: Gross profit margin ratio (2012-2014) 48

Figure 2.31: Return on assets (ROA) (2012-20 14) 49

Figure 2.34: Price to earnings ratio (2012-2014) 51

VIII

The main research objective is to collect the current and past financial data ofbusiness, and then calculating essential financial ratios In the different perspectiveand scope, these indicators can help the readers to use the information and properlyassess the financial strength, profitability and prospects of the business Finally,people can make accurate decisions based on aspects that they are interested in.

In reality, it is difficult for business to attain ideal outcome Although how wellbusinesses operate, it also contains potential financial risks Therefore, with thepurpose of analyzing financial statements, analyst can identitY strengths andweaknesses of companies If these aspects are positive, the companies should maintainand improve In contrast, the companies should have remedies for handling and deviseplans for business improvement in the future

Financial statements of Vietnam Dairy Products Joint Stock Company(VINAMILK) were selected to analyze The author is interested in this companybecause VNM has achieved a significant growth rate in recent years and is the leadingcompany in dairy industry Moreover, VNM has high market capitalization, whichmakes this company the second most valuable business in Stock Exchange Throughfinancial statements analysis of VNM, this thesis will give overall of financial

INTRODUCTIONperformance and financial circumstance of this company Then, some feasiblesolutions are discussed to contribute to the profit maximization

2 Scope of the research

Analyzing company's financial analysis requires analyst to obtain in-depthknowledge in macroeconomics, industry, and company Moreover, this topic isintegration of many subjects related to finance However, due to limited time and lack

of knowledge, the author just concentrates on examining financial statements analysisofVINAMILK in the period from 2012 to 2014

3 Research methods

This paper was conducted by using knowledge in financial textbooks and journals.The data were collected through secondary research and Pro quest database Firstly,the data was gathered from dairy industry reports of Securities companies, annualreports and financial statements which are available in official website ofVINAMILK, and General Statistics Office of Vietnam Subsequently, all collecteddata was digitalized handled by employing Microsoft Excel 2010 to draw the figuresand tables Following this stage, statistical numbers were analyzed and synthesized indepth by utilizing comparable approach, horizontal and vertical approach, as well asfinancial ratios analysis to produce the results Finally, writer depended on yieldedresults and findings to discuss some proposed suggestions

4 Contents

This study is divided into three parts The first chapter mentions the introductionfollowed by the literature review Financial statements analysis of Vietnam DairyProducts Joint Stock Company (VINAMILK) from 2012 to 2014 will be focused onchapter 2 Chapter 3 discusses the findings and produces the yielded results Finally,the author will draw the conclusion of this paper

CHAPTER 1: LITERATURE REVIEW

CHAPTER 1: LITERATURE REVIEW

1 Financial Statements

1.1 Definition of Financial Statements

Drake & Fabozzi (2012) claimed that financial statements are summaries of theoperating, financing, and investment activities of a business Information provided infinancial statements is useful to both investors and creditors in making credit,investment, and other business decisions In addition, using these reports can assistinvestors and creditors in predicting, comparing, and evaluating the amount, timing,and uncertainty of future cash flows Another explanation was suggested by Mautzand Angell (2006) "Financial statements are prepared to help investors and creditorsunderstand the financial history of a company and use that knowledge to predict theamount, timing and uncertainty of both future cash flows and price appreciation" (p.27)

1.2 Types of Financial Statements

According to Bhattacharyya (20 I 0), there are four fundamental statements whichare Balance Sheet, Income Statement, Cash Flow Statement, and Statement ofShareholders' equity These reports are generally prepared at the end of the financialyear and give the picture of financial health as well as business activities of acorporate

1.2.1 Balance sheet

Ross, Westerfield, and Jordan (2008) stated Balance Sheet is a snapshot of acompany's financial situation This statement summarizes three elements includingwhat a finn owns (its assets), what a firm owes (its liabilities), and the differencebetween of these two (owners' equity) at the given point in time

These three elements in the balance sheet must be balanced and showed in twosides with the left-hand side is total assets, while total liabilities and owners' equityare on the other side

Assets are defined as anything which has value and classified into two categories:current assets and non-current assets which are also described as fixed assets

~ Current assets are the most liquid assets and can be easily turned into cash.There are different types of current assets such as: cash, bills, and currency areassets that are equivalent to cash (e.g., bank account), marketable securities,

CHAPTER 1: LITERATURE REVIEWaccounts receivable, and inventories, which are investments in raw materials,work-in-process, and finished goods for sale.

~ Non-current assets (fixed assets) are considered to be less liquid than currentassets and comprise plants, buildings, or equipment which includedaccumulated depreciation

On the other side, liabilities refer to something that a company owes to creditorsand presents in two kinds: current liabilities (known as short-term liabilities) and long-term liabilities

~ Current liabilities (short-tenn liabilities) have a maturity within one year andconsist of accounts payable, wages and salaries payable, current portion oflong-term indebtedness, short-term bank loans

~ Long-term liabilities are obligations that are due beyond one year They usuallyinclude note payables, bonds payable, pension fund liability

The owners' equity of a company is the ownership interest Equity includes theinitial and ongoing capital that the owners have contributed to the business, retainedearnings, and reserves

1.2.2 Income statement

Income statement is one of the most important financial statements of the companyand this statement is also called "Profit and Lost Statement" "Income statement is asummary of company's operating performance over the period (e.g., a fiscal quarter or

a fiscal year)" explained by Drake & Fabozzi (2012) In other words, it reflects thecompany's expenses and revenues during that time period

1.2.3 Statement of Cash flows

The statement of cash flows is the summaries of a firm's cash inflows and outflowsthrough various activities According to Weetman (2006), there are three statements ofcash flows:

• Cash flows from operating activities: actions related to cash inflows such ascash collected from customers, interest on loans and other debt securities, ordividends received from stock investments While, payments for employeewages, interest expense, taxes are classified as cash outflows

CHAPTER 1: LITERA TVRE REVIEW

• Cash flows from investing activities: Some activities generated cash inflow ininvesting section are selling stock and bond of other issuers, collectingprincipal loan from borrowers, receiving cash from sale of plant or equipment.Whereas, cash outflow in this section includes buying stock and bondinvestments, making loans to borrowers, purchasing more plants andequipment

• Cash flows from financing activities: actions like receiving investments fromcreditors and investors are classified in cash inflow in financing section, andcash outflow in this section comprise providing investors with return of theirinvestment, repaying principal amounts borrowed from creditors

1.2.4 Statement of Shareholders' equity

Nobles, Mattison, and Matsumura (2014) claimed that the statement ofshareholders' equity is the financial statement that summarizes the changes in theowner's capital account for a specific period The statement of shareholders' equityincludes some components:

• Additional paid-in capital (contributed capital) is the amount that investorsreceived from exchanging stock

• Common stock is the main source of paid-in capital

• Retained earnings are the profits generated from operations and do notdistribute to stockholders and retained for the purpose of further businessinvestments

• Treasury stock

1.3 Users of Financial Statements

Valuable information in financial statements supports not only the owners of thecompany but also stakeholders Users of financial statements analysis are divided intotwo types: internal users and external users According to Bhattacharyya (2010) andWeetman (2006), depending on the need, a variety of people utilize these statementsfor different purposes

•: Internal users: Internal users are those who relate directly and haveresponsibilities to the company

CHAPTER 1: LITERATURE REVIEW

• Owners: owners like proprietors, partners and shareholders interested ininformation on the entity's financial performance and financial position thathelps them to assess both return on capital investment and safety of theircapital; thus, owners can make business decisions

• Management: Financial Statements Analysis helps the management in gaininginsight into a company's growth potentiality, opportunities and risks so thatthey can takes some corrective actions to minimize weaknesses as well asmaintain an advantageous position

• Employees: employees and their representatives are keen on information aboutthe stability and profitability of their employers They are also interested ininformation that helps them to assess the ability of the entity to provideremuneration, retirement benefits and employment opportunities

•: External users:

• Lenders: they always care about their safety and risks related to theirinvestment; moreover, they need information that allows them to determinewhether they can get back their loans, and the profits or not when due Hence,analyzing financial statements aids them in making lending decisions

• Customers: customers are interested in Financial Statement Analysis to assesscapability of the concern to supply goods at a fairly reasonable price on a long-term basis

• Suppliers: Suppliers need to analyze Financial Statements to assess creditworthiness, solvency and credit repayment practices

• Governments: Governments are interested in the allocation of resources and,therefore, in the activities of entities They also require information in order toregulate the activities of entities, assess taxation and provide a basis fornational income and economic statistics

• Public: General public including potential investors and research scholars showtheir interest in Financial Statements Analysis of the concern to know differentbusiness and social activities

CHAPTER 1: LITERATURE REVIEW'

2 Financial Statement Analysis

2.1 Definition of Financial Statements Analysis

Drake & Fabozzi (2012) defined Financial statement analysis is that "Financialstatements analysis, which can be known as financial analysis, is the selection,evaluation, and interpretation of financial data, along with other pertinent information,

to assist in assessing the risk and return associated with an investment" Financialstatements analysis may be used to evaluate the operating efficiency, the effectiveness

of credit policies, and the creditworthiness of a company, among other things

2.2 Objectives of Financial Statements Analysis

Bhattacharyya (2010) argued that analyzing financial statements has severalobjectives Firstly, financial analysis can help managers solve short-tenn and long-term problems of the enterprise Secondly, financial analysis is to evaluate operationaland managerial efficiency of the enterprise Thirdly, analysts can predict the trend onthe basis of the past performance Finally, the managements can assess growthpotentiality as well as risks that may be confronted with through analyzing financialstatements

2.3 Financial Statements Analysis techniques

2.3.1 Steps in the financial statements analysis framework

There are 6 phases in analyzing financial statements: (CF A Institute curriculum,2014)

+ Firstly, analysts need to state the purpose and context of the analysis Analystscompile specific questions needed to be answered, the format needed topresented, along with what resources and how much time is available toconduct the analysis

+ The next step is collecting data by acquiring company's financial statements.Besides, other information on the economy and industry is necessary to beobtained

+ After gathering data, analysts will use appropriate analytical tools to processdata and make needed adjustments Other ratios should be calculated and thenprepare exhibits such as graphs and common size statements

CHAPTER 1: LITERATURE REVIEW+ Following this is analyzing and interpreting the processed data In this step,analysts should produce the output to meet the target goal stated in the step oneand use of this interpreted output to support conclusions or recommendations.+ Developing and communicating conclusions and recommendations is the nextphase once analyzing data is completed Reports which are complied with thestandards would be disclosed to intended audience

+ Finally, since the information changes rapidly overtime, the analysts mustupdate the analysis and repeat the previous steps periodically, changeconclusions and recommendations when needed as well

2.3.2 Financial Statements analysis methods

Mautz and Angell (2006) indicates the most three common methodologies toanalyze financial statements are Horizontal analysis, Vertical analysis, and Ratiosanalysis

2.3.2.1 Horizontal analysisHorizontal analysis uses the amounts in accounts in a specified year - usually theearliest one in the period as the base, and absolute amounts in subsequent years areconverted into a percentage value base Horizontal analysis is an important tool inanalyzing the historical performance and growth based on sufficiently accurateinformation This tool is also called trend analysis, or year-to-year analysis Thismethod of analysis helps enterprises in identifying the direction and developing thebusiness (Robinson, Henry, Pirie, Broihahn, and Cope, 2015)

2.3.2.2 Vertical analysisMautz and Angell (2006) claimed that "Vertical analysis highlights therelationships that exist among financial statement items within the same year andidentifies changes in those relationships over time" Francis (2010) suggested that thistechnique is to convert dollar values into percentages in a firm's financial statements.The usefulness of this approach is when comparing one company against other ones orindustry averages According to CFA institution (2014), there are three generic types:

• Common-size balance sheet expresses individual assets as a percentage of totalassets, and items of the liability plus shareholder's equity accounts are stated inrelation to the total ofliabilities and shareholders' equity

CHAPTER 1: LITERATURE REVIEW

• Common-size income statement shows the percentage of each item on theincome statements to the total sales revenue

• Common-size analysis of the Statement of cash flows expresses each item ofcash flows as a percentage to the net cash flows

2.3.2.3 Financial ratios analysis

Financial ratios analysis is the expression between different pieces of financialstatement information This tool can eliminate the sizes when comparing differentcompallles

In this essay, it is almost focused on 5 categories of financial ratios used toappraise the performance of a firm:

2.3.2.3.1 Liquidity ratios

Liquidity ratios measure the ability of a company to meet short-term financialobligations In other words, these ratios indicate how many short-term assets can beconverted into cash The two most commonly used in liquidity ratios are current ratioand quick ratio

o Current ratio is the ability to satisfY current liabilities by converting currentassets into cash The higher this ratio, the higher possibility the company canmeet its short-term commitment

current assets - Inventory

urrent la I ItleS

2.3.2.3.2 Debt Utilization ratios

Solvency ratios are intended to address how well a company can meet its tenn debt requirements as well as assess how much financial risk the company hastaken on (Brealey, Myers and Allen, 2008)

long-CHAPTER 1: LITERATURE REVIEWThere are two types of financial leverage ratios: component percentages and coverageratios.

~ Component Percentage Financial Leverage Ratios

The component-percentage financial leverage ratios reflect how a company relies

on debt financing:

o The debt-to-assets ratio: a measure of the proportion of assets that arefinanced with interest-bearing obligations (both short-term and long-term debt).The higher this ratio, the higher the impossibility that a company meets itsmaturing obligations

Total debt

Total shareholders' eqUity

~ Coverage ratios: Coverage ratios reflect a company's ability to satisfy fixed

obligations

o Times-interest-earned ratio: the ability to satisfy interest obligations Thisratio emphasizes the ability of the firm to generate enough income to coverinterest expense

Earnings before interset and taxes

Times - interest - earned ratio =

-Interest expenses

2.3.2.3.3 Assets Utilization ratios

Activity ratios are measures of how well assets are used to generate sales.Additionally, these ratios show the effectiveness of company in its operation andinvestment activities

CHAPTER 1: LITERATURE REVIEW

o Inventory turnover: This ratio indicates how quickly inventory is created andsold during the period The higher the ratio, the better performance ofcontrolling rate

Sales

Fixed asset turnover = F d

lxe assets

2.3.2.3.4 Profitability ratios

Profitability ratios (also referred to as profit margin ratios) compare components

of income with revenues This ratio shows the ability of the company in managingexpenses and revenue

CHAPTER 1: LITERATURE REVIEW

o The gross profit margin reveals the proportion of money left over fromrevenues after deducting the cost of goods sold

Sales revenues - Cost of goods sold

Sa es

o The net profit margin is the ratio of net income (net profit) to revenues, and

indicates how much of each dollar of revenues is left over after all expenses:

Net income

Sa es

o The return on assets (ROA) indicates the company's net profit generated from

investment intotal assets The higher the ratio, the higher the return made on itsassets

Net income

Tota assets

o The return on equity (ROE) is the ratio of net income to shareholders' equity

and represents the profit generated per dollar of shareholders' equity Thehigher the return on equity, the more efficiently the company employs itsequity

Price per share

Earnmgs per s are

o Earnings per share (EPS) ratio is the measurement of company's profit.

Net income - Dividend on Preffered stock Earnings per share (EPS) = -

Average outstanding share

CHAPTER 1: LITERATURE REVIEW

o Dividend yield: indicates the relationship between what the investor to receive

from the shares and the amount which is invested in the share

nce 0 s are

Limitations of financial ratios analysis:

• Investment in diversified industries needs specific industry ratio to collate andcompare precisely in order to reflect exactly the operation of company.Therefore, it may lead to difficulties in finding various industry indexes

• Heterogeneous computation methods attribute to the distortion of comparisonsamong companies, and the company itself

• The data collected in calculating ratios stems from figures of the company'soperation in the past which may not interpret the current and future informationmost users concern

• The changes of inflation may also alter recorded value For example, assetsturnover in circumstance of inflation increases due to sales price increases,ceteris paribus; it does not mean sales volume increase or the company operatesefficiently

• Different accounting methods and practices among countries hamperinternational comparisons

3 Dupont system analysis

Dupont analysis is used to examine company's financial statement and financialperformance It, therefore, provides analyst a deeper insight into the strengths orweaknesses of the organization

"Dupont system of financial analysis uses a financial model that is based on thereturn on equity (ROE) of a firm" (McGowan, Gadner, and Moeller, 2014) Thismodel breaks down into three components:

Profitability: Net Profit Margin

Operating Efficiency: Total Asset Turnover

Leverage: The Equity Multiplier

CHAPTER 1: LITERATURE REVIEW

Revenues Total assets Shareholders' eqUIty

=Net Profit Margin x Total asset turnover x Equity multiplierThanks to Dupont analysis, corporate can achieve target ROE ratios through 3ways:

+ Use efficiently current assets+ Determine the needed net income+ Increase financial leverage

In brief, financial statements analysis is one of the most vital important sections ofany company Balance Sheet, Income Statement and Cash flows Statement are thethree reports that the owners and stakeholders are always interested in There are somemethods to analyze financial statements and calculating ratios are considered to be themost precise tool to appraise the financial position of a firm Moreover, they also give

a look of the financial performance and help a firm to have the right businessdecisions

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

I Macroeconomic analysis

When analyzing corporation, it is vitally important to consider outside factorswhich have both directly and indirectly impacts on company's operation andperformance These factors could be taken into account such as GDP, inflation rate,CPI index, interest rate, balance of trade, and exchange rate

The Gross Domestic Product (GDP) in Vietnam expanded 5.98% in 2014 and thisfigure is higher than the increase of 5.25% and 5.42% in 2012 and 2013 respectively,showing the positive signs for the economic growth

VIETNAM GOP GROWTH RATE

Figure 2.1: Vietnam GDP growth rate (2012 - 2 014)

Besides that, there was a significant decline in inflation rate from 6.81 % in 2012

?)?

to 1.86% in 2014 Controlling low inflation rate assisted VNM in reducing input costs

so that decreasing price of goods and boosting the purchasing power in the market

Jan/1S JuU14

Figure 2.2: Vietnam inflation rate (2012 - 2014)

Source: General Statistics Office o/Vietnam.

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

In the period between 2012 and 2014, the economy was still in many difficulties.Consumer Price Index (CPI) witnessed a consistent climb with the increase by 4.09%,reaching 158 point at the end of 2014 Along with that is purchasing power ofconsumer goods sector which was still low within this period Although there was agradual recover in both CPI index and purchasing power in the last months in 2014,VINAMILK had also been suffered effects from this negative situation

VIETtlAM CONSUMER PRICE INDEX (CPI'

135

Jln/12 JuV12 Jan/13 JuV13 J4n/14 JuV14 Jan/15

135

Figure 2.3: Vietnam consumer price index (CPI)

Source: General Statistics Office of Vietnam.

Interest rate is also a critical factor that business should focus on because itdirectly impacts on profit of every company The interest rate in Vietnam experienced

a dramatic drop from about 15% in 2012 to virtually 6% in 2014 Reducing interestrate supported companies in investments as well as relieved their burden in payingshort-term debts

VlETtlAM INTEREST RATE

JuV12 Jan/13

~t}Chrr.a.rk lntere$t Rilte

16 14 12 10

Figure 2.4: Vietnam interest rate (2012 - 2014)

Source: General Statistics Office of Vietnam.

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSISThe State Bank of Vietnam (SBV) kept exchange rate stable throughout 2012before increasing exchange rate at 1% in the mid-20 13 This had contributed to thepositive macro-economic stability, maintaining the purchasing power in Vietnam In

2014, exchange rate was continually remained steady and had not adjusted exchangerate more than 2% by SBV Stabilization in exchange rate assisted operationmanagement of corporations

VIETNAMESE DONG

20200

Jan/12 JuU12 Jan/13 JuU13 Jan/14 JuU14 Jan/15

20200

Figure 2.5: Vietnam exchange rate (2012 - 2014)

Source: General Statistics Office a/Vietnam.

Besides impacts of economic factors, government's policies affected dairyindustry and VINAMILK in specific A case in point is that according to decision N0.11079/QD-BTC of the Ministry of Finance has issued a decision imposing priceceilings on milk products for children under six years old from 6/2014 to 6/2015.This

./

has affected the sales and profitability of the business Setting of different ceilingprices for domestic milk and imported milk certainly influenced on consumer'sbehaviors

In addition, participating in WTO places local businesses in challenging situationsthat makes it hard to compete with foreign competitors However, it also helpsdomestic companies to expand their businesses in large scale and attracts more foreigninvestments

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

II Industry analysis

1 Advantages of dairy industry

In the recent years, customers are raising their awareness of benefits using dairy

products Moreover, the rapid urbanization and rising income are driving forces which )

prove the food and beverage industry in Vietnam has a huge potential growth

The majority of Vietnamese people have still not had a habit of drinking milk

According to Analysis report of macroeconomics of Maybank Kim Eng, there is a

self-evident fact that dairy consumption of Vietnamese is still low, with a current per

capita annual consumption of 16kg, while consuming dairy products is about 40kg in

Thailand and 26kg in China It is anticipated that dairy consumption of Vietnamese

will continue rising at 10-15% in the next coming years

Thanks to influences of Western countries, Vietnamese widely perceive health

benefits like physical and mental development from dairy goods, so it is become

common in using these products With a young and densely-populated country of 92

million people, milk consumption is not only aimed at children but also new segment

-dynamic generation This proves that food and beverage industry will have many

opportunities to develop in the future

The Vietnamese's GDP per capita trend has gradually increased, obtaining

USD1,960 in 2013 It means that Vietnamese people earn more income and their lives

are enhanced People will have more demands on consuming dairy, products because

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

2 Growing competition

As mentioned above, dairy industry in Vietnam is still immature andeconomically attractive The appearance of many local and overseas competitorsencourages tough competition in this market

-Casmilk JSC

-VNM

-Agro Nutrition InternationalJSC

Figure 2.7: Market share in fresh milk

Source: Analysis report of macroeconomics of Maybank Kim Eng

-It cannot be mentioned TH Group which has grown very fast since 2010, and afterthree years it became the third-largest supplier of fresh milk in the country, with amarket share of 22.1% in 2013 TH Group heavily invested in dairy farming modeland advanced processing technologies to ensure a high level of ,quality that meetsinternational standards

Whereas VNM has taken the leading position as regards condensed milk segment

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSISHowever, this product has been getting close to its saturation level with the low rate of3% in 2013.

International players

Appearance of reputable foreign dairy companies like Dutch Lady, Fonterra operative Group, and Mead Johnson Nutrition is likely to put competitive pressure onlocal businesses Dutch Lady has developed sustainable dairy program and cooperateswith over 4,000 milk cow farming households in Vietnam, from which it buys anamount of 240 tons of raw milk on a daily basis Fonterra Co-operative Group is aNew Zealand multinational dairy cooperative that exports approximately 30% of theworld's dairy products Mead Johnson Nutrition is a major manufacturer of infantformula, based in Indiana, US

Co-Because Vietnamese users are preferred using foreign brands; thus, internationalplayers such as Abbott, Friesland Campina Vietnam and Mead Johnson hold the bigmarket shares while domestic players like VINAMILK just has 25% market share.Competition in dairy industry are becoming fiercer in the foreseeable future andputting a threat on inland firms Therefore, local dairy companies should plan long-term strategies in fighting out against large foreign dairy ones

3 Challenges to Vietnamese dairy industry

Raw milk production from the domestic herd satisfied only around 30% percent oftotal dairy consumption in Vietnam Apparently, insufficiency of dairy productssupply enforces Vietnamese dairy companies rely too much on imported milk fromexported market as New Zealand, Australia, the US and the Netherlands In addition,Vietnam not only imports milk but also cow breeds and grass seeds The capacity ofdomestic milk was 265,400 tons in 2014, increasing 19.2% compared with 2013whereas the total number of cow reached 200,400 cows The average production yield

of Vietnam's herds is about 3,000 liters per cow per year, versus more than 8,500liters in developed countries The low quantity and productivity of milk cows producenot enough milk for satisfying such a large inland demand

The harvesting of milk in Vietnam is difficult because:

./ The small size of the average cow herd and have mainly raised by small andunskillful households;

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS./ The dairy farm system and technologies are limited and undeveloped;

./ Vietnamese cattle breeders lack financial capacity to provide quality breed;

./ Vietnamese farmers are not trained with livestock techniques and do not alwayshave the basic knowledge and understanding of farming

III OVERVIEW OF VINAMILK

1 VINAMILK's Profile

Figure 2.8: Logo ofVINAMILK

• Company's name: VIETNAM DIARY PRODUCTS JOINT STOCKCOMPANY

• Abbreviation name: VINAMILK

• Headquarter: 10 Tan Trao, Tan Phu Ward, District 7, Ho Chi Minh City,Vietnam

• Business Registration Certificate Number: 0300588569 dated 25 November

2014, the business registration certification was issued by Ho Chi Minh CityPlanning and Investment Department

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

2 Historical background and development

• 1976: VINAMILK was established on August 20, 1976 under the name ofSouthern Coffee-Dairy Company by taking over three old dairy factories,namely Thong Nhat Diary Factory, Truong Tho Diary Factory, and DielacPowdered Milk Factory

• 1978: The company was operated by the Ministry of Food Industry and thenwas renamed as United Enterprises of Milk Coffee Cookies and Candies I

• 1991: the products of UHT milk and yoghurt were first introduced in Vietnammarket

• 1992: The name of United Enterprises of Milk Coffee Cookies and Candies Iwas changed into Vietnam Diary Products Company under the management ofMinistry of Light Industry VINAMILK started to produce its dairy products

• 1994: VINAMILK officially inaugurated the first dairy factory in Hanoi

• 2000-2003: The number of factories was invested and opened such as Can ThoDiary Factory, Binh Dinh and Sai Gon Dairy Factories, Tien Son and Nghe AnDairy Factories

• 2006: VINAMILK was listed on Ho Chi Minh Stock Exchange (HOSE) onJanuary 19, 2006 Additionally, VINAMILK also invested in Health careservice and opened An Khang Clinic

• 2007-2009: VINAMILK started to develop its material areas in Vietnam bybuilding Tuyen Quang Dairy Farm and Nghe An Dairy Farm Besides,VINAMILK expanded their potential markets in the world like NorthAmerican, the Middle East, Asia, America, Australia, Canada, France, Russia,Germany, Poland, Czech, China, Laos, and Cambodia

• 2009: VINAMILK built the third and the fourth dairy farms in Thanh Hoa andBinh Dinh

• 2010: VINAMILK has, made its investment in a company in New Zealandmanufacturing whole milk powder with a capacity of 32,000 tons/year Inaddition, VINAMILK also invested in the US and opened more factories inseveral countries Its export revenue accounts for 15% of total revenue and is

mcreasmg

CHAPTER 2: VINAMILK'S FINANCIAL STA TEMENTS ANALYSIS

• 2011: Built a fifth dairy farm in Lam Dong, increasing the herd to 5,900 heads

• 2012: Inaugurated Da Nang Dairy Factory, Lam Son Dairy Factory, VietnamBeverages Factory with modem production lines originated from the US,Denmark, Germany, Italia, and the Netherlands

• 2013: The most modem factory in the world which is fully automated andlocated in a 20 hectare area in My Phuoc 2 Industrial Zone

3 Principal business activities of VINAMILK

- Process, manufacture and distribute milkcake, soya milk, fresh milk, refreshmentdrinks, bottled milk, powdered milk,nutritious powder and other products from

1 Foods and beverages milk

- Manufacture, sell and distribute beverages,grocery and processmg foods, roasted-ground-filtered and instant coffee

- Manufacture biscuits

2 Real estate - Trade in houses, brokerage and leasing of

Investment real estate

- Provide supporting agricultural operationssuch as: supply of seeds of cultivated crops,

Agricultural guidance on cultivation techniques,

3 cultivation harvest, soil working, irrigation

Production

- Raise cattle: supply of breeding animals andbreeding techniques, run agriculturaloperations

- Trade m food technology, spare parts,

4 Industrial Production

equipment, materials and chemicals

5 Health care - Provide health care clinic services

- Provide warehousing, transportation and

6 Logistic services

loading service

- Manufacture and sell plastic package and

- Manufacture and sell plastic productsTable 2.1: Principal business activities ofVINAMILK

(Source: Vietnam Diary Products Joint Stock Company,

http://www.vinamilk.com.vn 2014)

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

4 Value chain ofVINAMILK

The primary activities of VINAMILK have stable processes VNM's inboundlogistics with the material purchasing mainly in domestic can cut the cost of importedmaterial from other countries Besides that, the closed-loop production ofVNM is also

an advantage of the company Up to now, VNM has had 05 dairy farms in TuyenQuang, Thanh Hoa, Nghe An, Binh Dinh and Lam Dong province In VNM's plan for2014-2015, 4 big dairy farms have been under construction in Thanh Hoa, Ha Tinhand Tay Ninh province The construction of many farms assisted VNM to ensure itssupply chain, eliminate competition with other finns as well as take full advantage ofeconomy of scale to minimize cost The distribution network of VNM has spreadtrans-Vietnam and over 30 countries all around the world that helped VNM gain itsmarket share domestically and abroad Distribution system of VNM is presentedbelow

EXPORT

Modern trade channel

General trade channel

Figure 2.9: Distribution channel ofVINAMILK

As for marketing and sales of VNM, the company has had many goodpromotion campaigns, itinerant sales, and customer services to maximize revenue andprofit Along with primary activities, support activities of VNM including goodinfrastructure, skillful labor force, modern technology, effective procurement, are alsofactors that contribute to higher margin and higher profit which lead to the

•

development of the company

The value chain ofVNM is illustrated as following:

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

W.ES.

GOOD

PRO,'1OllON

Outbound Logistics WORl.l).W1DE DISTRIBUTION SYSTEM

CLOSED.LooP PRODUCTION Operations

ABUNDANT, SKILlFUL LABOR FORCE

III

~'>

OJ cot:

Figure 2.10: Value chain ofVINAMILK

IV FINANCIAL STATEMENTS ANALYSIS OF VINAMILK (2012 - 2014)

1 Financial statements analysis

1.1 Balance sheet analysis

1.1.1 Analyzing asset structure ofVNM (2012-2014)

Unit: million VND

ASSETS 2012 % ofTotal 2013 % ofTota] IncreasenDecrease 2014 % ofTota] IncreasenDecrease

CURRENT ASSETS 11,110,610 56.41% 13,018,930 56.91% 1,908,320 17.18% 15,522,309 60.23% 2,503,379 19.23%

Short-term investments 3,909,275 19.85% 4,167,317 18.22% 258,042 6.60% 7,467,962 28.98% 3,300,645 79.20%Accounts Receivable 2,246,362 11.40% 2,728,421 11.93% 482,059 21.46% 2,771,736 10.76% 43,315 1.59%Inventories 3,472,845 17.63% 3117,483 14.07% -255,362 7.35% 3,620,107 14.05% 402,624 12.51%Other CIIlTentassets 230,005 1.17% 160,062 0.70% -69,943 30.41% 134,627 0.52% -25,435 15.89%

LOXG- TIR.'I ASSETS 8,587,258 43.59% 9,856,483 43.09% 1,269,225 14.78% 10,247,828 39.77% 391,345 3.97%Long-term receivables 0.00% 736 0.00% 736 7,395 0.03% 6,659 904.76%fixed assets 8,042,300 40.83% 8,918,416 38.99% 876,116 10.89% 8,890,084 34.50% 28,332 0.32%Investment Properties 96,714 0.49% 149,445 0.65% 52,731 54.52% 147)25 0.57% -1,720 -1.15%Long-term Investments 284,428 1.44% 318,308 1.39% 33,880 11.91% 700,375 2.72% 382,067 120.03%Goodwill 150,152 0.76% 174,463 0.76% 24,311 16.19% 160,706 0.62% -13,757 -7.89%Other Long-term assets 13,662 0.07% 295,112 1.29% 281,450 2060.09% 341,541 1.33% 46,429 15.73%TOTAL ASSETS 19,697,868 100.00% 22,875,414 100.00% 3,177,546 16.13% 25,770,138 100.00% 2,894,724 12.65%

Table 2.2: Changes in total assets ofVNM (2012-2014)

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

It is noticeable that total assets steeply rose from 19,697,868 million VND in 2012 to22,875,414 million VND in 2013, equivalent to a 16.13% increase There was agrowth in total assets of VNM thanks to a considerable going up to 13 trillion VND,

or a 17.18% rise compared with 2012 Similarly, long-term assets also underwent anupward trend, with a climb by 14.78%, up to 22.8 trillion VND Until 2014, totalassets ofVNM continued to climb by 12.65% up to 25.7 trillion VND The increase intotal assets that company possesses was because of the gradual growth of currentassets by 2,503,379 million VND, parallel to a 19.23% increase Whereas, long-termassets jumped slightly by 391,344 million VND, equivalent to a 12.65% rise

Figure 2.11: The changes in total assets (2012-2014)

Figure 3.1 represents that VNM concerned more about current assets and invested

in this item from 56.41 % to 56.91 % On the other hand, non-current assets werereduced from 43.59% to 43.09% between 2012 and 2013 In 2014, it describes thatVNM had a growing tendency towards current assets and reduced fixed assets To bemore specific, the proportion of current assets tended to be expanded from 56.91 % to60.23%; on the contrary, that of non-current assets had a reverse direction, decreasingfrom 43.09% to 39.77% throughout a year It is clear that VNM distributed its capital

of assets unequally with the higher current-asset allocation

To broaden this issue, the author will find the roots of marked variations amongelements of asset structure during 2012 to 2014

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS

2014

5.93%

0.52%

28.98%60.23%

76.37%14.05%2013

1201l 12013 12014

1.1.2 The proportion of current assets in total assets of VNM (2012-2014)

Figure 2.12: The proportion of current assets in total assets of VNM (2012-2014)

%of Currentassets

Current assetsCash and cashequivalentShort-terminvestmentAccountreceivablesInventories5,000,000

951 billion VND and 32 billion VND in 2013 respectively contributed to rising ofcash VNM uplifted speedily their deposits in banks by almost 64%, growing from

850 billion VND in the beginning of 2013 to 1,393 billion VND at 31 December

2013 Cash equivalents also soared from 400 billion VND in 2012 to 1,351 billionVND in 2013 The amount of cash and cash equivalent fell remarkably from 2,745billion VND to 1,527 billion VND in 2014 Particularly, cash in banks sank nearly by30%, down to 991 billion VND; deposits with the maturity under 3 months alsodipped which was 40% as much as 2013

At the end of2013, short-term investments jumped by 6.6%, getting to 4,167,317million VND In more details, holding too much cash in hand but VNM still had noneed to use this money, or they did not have any plans to invest in the short-term; as

./ , \r:(.~" C{f~?

the consequence, they madeq'i'p,tlie-deCisioii"to put idle cash in banks That is the

/ ,~/ Y".' U Ii f:J' "j

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSISreason why deposits with a maturity under one year increased significantly, going up

to 3,600 billion VND However, VNM no longer invested in corporate bonds whilethis account in 2012 was 300 billion VND However, this highest liquid asset wasdeposited in banks to make profits Deposits with the maturity less than a year roughlydoubled from 3,600 billion VND in 2013 to 6,903 billion VND This is a reasonexplaining short-term investments surged by 3,300,645 million VND, equivalent to a79.20% increase compared to those in 2013; meanwhile, other investments wereremained unchanged

Besides, item of account receivables peaked out by 21.46%, reaching 2,728,421million VND in 2013 This is a negative sign which illustrates that VNM's paymentpolicy was not strict enough and their cash was being occupied by others Meanwhile,account receivables dropped marginally from 11.93% to 10.76%, equivalent to a1.59% decrease in comparison with 2013 This is a positive sign which shows thatVNM's payment policy works a little bit more efficient and cash of VNM are lessoccupied by others

The percentage of inventories witnessed a moderately drop from by 7.35% from17.63% in 2012 to 14.07% in 2013 Overall, the growth rate of accounts receivableand inventory were a little bit lower than that of sales This means that VNM soldtheir products Inventories took a large percentage of current assets, taking up virtually14% in 2014 There was a consistently increase in inventories of 3,217 billion VND to3,620 billion VND It means that more products of VNM in the past year are sold inthe market There was an accelerating rise in sales ofVNM in the period of2012-2014and the expansion of outlets, up to about 215,000 ones nationwide It means thatVNM was expanding their business and it is necessary to ensure having enoughinventories to supply the market demands Account receivables and inventories itemsincreased over this period was reasonable

CHAPTER 2: VINAMILK'S FINANCIAL STATEMENTS ANALYSIS1.1.3 The proportion oflong-term assets in total assets ofVNM (2012-2014)Figure 2.13: The proportion of long-term assets in total assets of VNM (2012-2014)

11013 Fixed assets 40.83% 38.99% 34.50%1,000,000

in fixed assets which will contribute to enhance both the quantity and quality of theirproduct lines In 2012, VNM invested 8,042,300 million VND in fixed assets, and thisinvestment went up to 8,918,416 million VND in 2013 However, the proportion offixed assets reduced from 40.83% to 38.99% within this period By contrast, in 2014,the investment density in long-term assets of VNM dropped slightly from 43.09%(2013) to 39.77% which fell by 3.97% compared to the previous year The majorreason was that VNM invested less in fixed assets which plunged significantly from38.99% to 34.5% although they still made up the highest proportion in this long-termasset accounts It seems that VNM tended to discourage their investment in technicalfacilities and large-scale production

Long-term investments of VNM grew by 11.91%, with 284,428 million VND in

2012 and 318,308 million VND in 2013 The reason for the increase was in 2013;VNM delivered 70 billion VND to acquire Miraka Limited Company in New Zealandand 6 billion VND to invest in Asia Saigon Food Ingredients Joint Stock Company.Meanwhile, VNM did not invest in long-term corporate bonds In 2014, long-terminvestments of VNM rocketed over twice than that in 2013, going up to 700 billion VND Besides short-term deposits, VNM carried on depositing over 45 billion VND

CHAPTER 2: VINAMILK'S FINANCIAL ST ATEMENTS ANALYSISwith a maturity beyond one year which did not arise in 2013 Moreover, VNM

continued to put their trust in banks and withdrew 300 billion VND to make long-term

investment in bonds of Joint Stock Commercial Bank for Development of Ho Chi

Minh City (HD Bank)

In brief, after analyzing movements towards total asset in the period of

2012-2014, it reflects the accelerating trend in current assets and the opposite of long-term

assets It is clear that VNM gradually increased in fixed assets, but the proportion of

this item was reverse, showing a slowdown investment in plants, equipment In terms

of current assets, VNM earned abundant cash from operating business and deposited

to banks so that they could ensure the financial ability to meet maturing debts as well

as expand production when needed Nevertheless, saving too much cash in banks is

not actually effective because the interest rates in previous years were low with about

6% per year Hence, VNM needs sound strategies to take advantage idle cash

1.2 Analyzing VNM's structure of capital resources (2012 - 2014)

Unit: million VND

IncreasenDecrease IncreaseiDecrease

Amount % Amount %

CURRE~" LUBU.rrIES 4,144,990 21.04% 4,956,397 21.67% 811,407 19.58% 5,453,262 21.16% 496,865 10.02% Short.tenn borrowings 0.00% 178,943 0.00% 178,943 1,279,525 4.97% 1,100,581 615.04% AccolDlts payable - trade 2,247,659 11.41% 1,968,257 11.41% -279,402 -12.43% 1,898,529 7.37% .69,72i .3.54% Advances from customers 21,589 0.11% 20,929 0.11% 659 3.06% 17,826 0.07% 3,103 14.83% Taxes payable to State TreasU!j' 333,952 1.70% 456,725 1.70% 122,773 36.76% 502,643 1.95% 45,917 10.05% Pavab1es to employees 106,150 0.54% 137,540 0.54% 31,389 29.57% 163,476 0.63% 25,936 18.86% Acaued expenses 365,103 1.85% 490,760 1.85% 125,657 34.42% 637,114 2.47% 146,353 29.82% Other payab1es 664,137 3.37% 1,341,762 3.37% 671,625 102.03% 598,428 2.32% 743,334 55.40% Bonus and welfare ftmd 406,397 2.06% 361,477 2.06% -44,920 -11.05% 355,719 1.38% -5,758 -1.59% LO~G- TERM Ll-\Bll.ITIES 59,781 0.30% 350,663 0.30% 190,881 486.57% 516,638 1.00% 165,975 47.33% Other long-tenn liabilities 0.00% 5,036 0.00% 5,036 8,192 0.03% 3,156 62.67% Lcng-tenn borrowings 0.00% 184,142 0.00% 184,142 346,383 1.34% 162,240 88.11% Deferred tax liabilities 0.00% 91,065 0.00% 91,065 84,711 0.33% 6,354 6.98% Pro\ision for severance aDowanc( 59,635 0.30% 69,583 0.30% 9,947 16.68% 71,333 0.30% 7,750 11.14% Unearned revenue 145 0.00% 835 0.00% 689 473.18% 17 0.00% -817 97.91% TOTAL Ll-\BlLITIES 4,204,771 21.35% 5,307,060 11.35% 1,101,288 16.11% 5,969,901 13.17% 662,840 12.49% TOTAL RESOURCES 19,697,868 100.00% 22,875,414 100.00% 3,177,545 16.13% 25,770,138 100.00% 2,894,724 12.65%

Table 2.3: Changes in total liabilities ofVNM (2012-2014)Table 3.7 shows that the VNM's total resource in 2012 was 19,697,868 million

VND and rose to 22,875,414 million VND in 2013, same to a 16.13% increase As

regards the table 3.8, the VNM's total capital resources continued to witness a