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Fluid movement

Released at: 10:19, 01/05/2017

Fluid movement

Photo: Viet Tuan

The recent acquisition of a major shareholding in the parent company of Moc Chau Milk is indicative of the many deals being done in the dairy sector.

by Nguyen Quynh

At Lotte Mart’s milk counter every weekend, Ms. Lan Huong, a 38-year-old housewife, often picks up five to seven bottles of Moc Chau pasteurized milk, costing VD29,000 ($1.2) each. She said she encourages her kids to drink pasteurized milk because it’s safe. When asked why she doesn’t choose foreign milk or other dairy products, she said her children are accustomed to the flavor of Moc Chau Milk and don’t want to change. “And the price is reasonable,” she added. 

Compared to Vinamilk and other dairy brands such as TH True Milk and Dutch Lady, Moc Chau Milk doesn’t take up much space at Lotte Mart’s milk counter. The brand recently made the news when GTNFoods acquired 65 per cent of the Vietnam Livestock Corporation (Vilico), which owns the Moc Chau Dairy Cattle Breeding JSC (Moc Chau Milk).  

Attractive acquisitions

With charter capital of VND2.5 trillion ($110 million), GTNFoods was a quiet player in the market before taking over two State-owned agricultural enterprises. Besides these two M&A deals, it is also planning to acquire two State-owned consumer goods enterprises with annual revenue of over VND2 trillion ($88 million). The two enterprises have strong distribution channels that would improve the company’s, according to Mr. Nguyen Tri Thien, a spokesperson for GTNFoods. 

The acquisition of the two State-owned consumer goods enterprises is part of a strategy to boost GTNFoods’ market share in the coming years. Earlier this year it announced it had finalized its purchase of 36.18 million shares in Vilico, increasing its holding to 41.02 million shares, or 65 per cent. Vilico, in turn, owns more than 50 per cent of Moc Chau Milk. 

Vilico has charter capital of VND765 billion ($33.6 million) and has been equitized, but failed to find investors as the State still holds a controlling stake of 77.6 per cent. Moreover, its revenue and profits are not high, reaching VND2.7 trillion ($118 million) and VND209 billion ($9.1 million), respectively, in 2016. So why is Vilico attractive in the eyes of GTNFoods? 
Among Vilico’s subsidiaries and associated companies, Moc Chau Milk has the highest profit figures, accounting for nearly two-thirds of Vilico’s consolidated profit. In 2015 its revenue reached nearly VND2.2 trillion ($96.8 million) and net profit over VND190 billion ($8.36 million), up 28 per cent year-on-year. In 2016, though revenue and profit both fell slightly due to tough competition, it still brought a great source of money to Vilico. It recorded nearly VND2.3 trillion ($101.2 million) in revenue last year and over VND215 billion ($9.46 million) in profit, up 10 per cent compared to 2015. The structure of dairy products within Vilico’s net revenue remains high, at approximately 70 per cent. 

One industry insider said that environmental costs are a burden for dairy producers due to the nature of dairy farming. But Moc Chau Milk’s dairy cattle are mainly raised by farming households, through the contract farming model, under which environmental costs are significantly reduced. Moreover, raw material supply is stable from this close cooperation with farmers. “Transport costs are expensive in remote areas, and this helps prevent milk supplies from household farmers being sold to other companies,” the insider said. “While other businesses are looking for ways to increase their milk supply, Moc Chau has a guaranteed source.”  

Vietnam’s dairy market is predicted to double in size by 2020, reaching $8.2 billion, as the population is expected to increase by 5 million and dairy consumption by a compounded annual growth rate of 7 per cent. This is also considered a reason why Moc Chau Milk is an important part of GTNFoods’ multi-sector development strategy. 

Whether GTNFoods can develop strongly with this strategy is an open question. Its shares previously attracted the attention of investors, including Deutsche Bank. After selling its shares in the KIDO Group Corporation, Deutsche Bank raised its ownership in GTNFoods to 7.93 million shares, equal to 5.29 per cent of the company’s charter capital, and became a major shareholder. 

GTNFoods also signed a separate share issuance agreement with Hanil Feed, a leading South Korean company in the animal feed sector. With this agreement, GTNFoods had another foreign shareholder along with Deutsche Bank AG London, UBS AG London Branch, and Tael Two Partners Ltd. These shareholders will serve the purpose of raising capital and promoting investment in Vietnam’s agriculture and food industry.

M&A on the rise

GTNFoods is one of many investors fascinated by the potential of Vietnam’s dairy industry. There’s still much room for milk consumption to grow, according to Euromonitor International, as the industry is expected to see growth of 9 per cent per year, or 27-28 liters per person per year, by 2020. The $3 billion market is already crowded with domestic and foreign players such as Vinamilk, FrieslandCampina, Ba Vi, Da Lat, Long Thanh, and Moc Chau, and is now witnessing more M&A deals. 

F&N Dairy Investments, which is under F&N Beverages Singapore and owned by Thai billionaire Charoen Sirivadhanabhakdi, registered to buy 21.77 million Vinamilk shares in February. Late last year, F&N Dairy Investments was one of two companies owned by F&N Beverages Singapore. F&N has spent a total of more than $500 million on buying nearly 80 million Vinamilk shares, or 60 per cent of the volume offered for sale during the company’s first divestment. 

Vinamilk announced in September last year that it is looking to acquire another dairy company in the US via an M&A. A representative from Vinamilk’s Public Relations Department confirmed with VET that “we are still in the negotiation stage and have not yet wrapped up the deal,” while preferring not to reveal any additional details on the terms. “Through M&A deals, the company seeks to expand its operations globally and drive up revenue,” she said. 

Ms. Mai Kieu Lien, CEO of Vinamilk, told Bloomberg in a recent interview that she expected the deal to be completed by early next year but declined to name the target company or the deal’s value. According to Ms. Lien, Vinamilk may increase its financial resources for M&A activities as it strives to achieve an annual revenue target of $3 billion in 2017. 

With the strong presence of major dairy firms such as Vinamilk, the goal of increasing Moc Chau Milk’s market share will be difficult. In the long term, its milk supply may fall if its investment is not bolstered. About 70 per cent of liquid milk produced in Vietnam is reconstituted milk, while demand for sterilized and pasteurized milk is rising due to changes in consumption habits, according to a report from Vietnam Industry Research and Consultant (VIRAC). 

Most companies are now focusing on developing their own raw material supplies to address the biggest gap in Vietnam: the lack of input materials. Most cattle in Vietnam are raised separately on small-scale farms under low-level techniques and inferior technology, resulting in low productivity and high material prices. 

GTNFoods said that a multi-sector expansion and utilization of distribution channels would be one way for it to achieve higher productivity and lower costs. Although its profit in 2016 remains low, at less than VND8 billion ($352,000), GTNFoods is still an interesting name in Vietnam’s dairy sector. 

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