Investment management

Mid-term essay
Nguyn c Khi
BBUS 4.2- 31131022117
Lecturer: Prof. Phng c Nam

VINAMILKS FIRM ANALYSIS

Industry analysis

Figure: industry groups and basic Financials (Source: cophieu68)

Porters Five forces
Porters Five forces is the tool that settle on business strategy which is used to analyze
industry structure. It consists of bargaining power of suppliers, bargaining power of buyers,
rivalry between existing competitors, pressure from substitute products, and threat of entry. It is
able to get an insight into structural characteristics to decide competitive relationship in industry
by analyzing individual or comprehensive five strengths. This section analyzes Vinamilk in the
food and beverage industry.
Bargaining power of suppliers

Supplier powers demand creates supplier-buyer relationship between the industry and
the company that provide product. If the supplier operates in a monopolistic competition, he has
a powerful position and can influence the profit and the process of companys production level.
As Vinamilk is operating in a highly competitive market and a large amount of substitute
products, its supplier power is low and its decision on price may negatively affect its profit. This
consequence is needed to regard the subtlety of the specified situation of the industry and given
company when using these result to value the markets profit potential and competitive structure.
Moreover, buyers in the milk sector are not price sensitive for bottled milk because the price of
different products is nearly the same.
Bargaining power of buyers
In the food industry, there are many buyers; it means buyers are not concentrated. It leads
to less bargaining power of buyer because importance of each customer is low. Moreover there is
a wide distribution of purchasing. Major suppliers have a number of franchisees and buyers are
able to purchase food everywhere. However, buyer switching cost is low because each product is
relatively cheap and there are a large quantity of bottled milk in convenient store and
supermarket. Then, buyers are able to switch to another product easily from Vinamilks product.
Rivalry between existing competitors
The intensiveness of competition while competitors in an industry refer to which
company in the industry have power than another and limitation profit potential. If competitive
rivalry is strong, competitors will try their best to seize market share and profit. In this industry,
all companies are exposed to the potential risk of reduced profit margin.

In the bottled milk industry, there are a lot of competitor and the scale of competitor
varies, for instance the rising TH True Milk, Dutch Lady, Kun, etc. These companies are top
sterilized milk companies in Vietnam. There are a number of competitors and the product quality
is not so different from one another.
Pressure from substitute products
Every company in the sterilized milk industry is exposed to the menace of substitutions
and they are now forced to reduce their price to be able to compete and kick out other
competitors; therefore it is need to spend more on fixed assets to improve the facilities and
technology.
Recently, most of the convenience store and supermarket are selling some kind of private
brand product. Therefore, threat of substitution is also generally high and big companies such as
Vinamilk need to constantly try to reduce cost while improve quality for the customers
satisfaction.
Threat of Entry
It is the penetration of new entrants that threatens market share of Vinamilks products.
Food industry is very attractive as it is creating more and more profit. Hence more companies are
investing into Food companies with a view to claiming more profit.
Buyer switching cost is low in milk industry, therefore when the new entrants came to the
play; consumers may purchase the product of them. Moreover, as mentioned, there are many
distribution channels and it is easy to access there. Therefore threat of new entry is also high.

When threat of new entry is high, it puts an industry to a more competitive environment because
competitors will always try to take others market share.
Company valuation
Vinamilk will be analyzed using the Free Cash Flow for Equity (FCFE). This is a method used to
measure how much cash can be paid to the equity shareholders after paying all expenses,
reinvestments and debt. ("Free Cash Flow To Equity - FCFE", 2005)

Net income = 7,274,815

Depreciation = 1,074,862
2014 Net working capital = 3,620,107 + 2,771,737 + 3,818,017 5,453,261 = 4,786,600
2015 Net working capital = 4,132,825 + 2,967,959 + 4,271,225 6,027,671 = 5,344,338
Increase in net working capital = 557,738
Net capital expenditure = -2,619,001
FCFE = Net income + depreciation/ amortization - Increase in net working capital Net
capital expenditure
FCFE = 10,410,940

At the first stage from 2014 to 2015, assume that the company will have average growth and set
g at 8%

In the second stage, assume that the company will continue to operate from 2015 to infinity, set
the growth rate g at about 5%; r = 10%
Using two-stage dividend discount model, the intrinsic value of equity is:

FCFE

[ (

) ( )]

1+ g 1+ g ' 1+ g
1+ g
+

rg rg ' rg
1+r

= 224,876,304 (million VND)

References

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