kinh do –initial coverage

INITIAL
N
L COVE
ERAGE
KIINH DO CORPORA
C
ATION.
HSSX Symbol: KDC
vative conssiderationss, we value KDC at th
he price
With conserv
of VND 30,58
88 per share, about 1
12% higherr than the market
m
prrice and wee give “Buy”” a recomm
mendation on
o this stocck.
An
nalyst: Tong
g Van Dzun
ng
AC
CBS Researcch Center
Jan
nuary 17, 2012
2
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
KINH DO GROUP – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
VND 30,588
VND 26,500
KINH DO – BAKERY MARKET LEADER
In 2010, Kinh Do Corp. has been acquired North Kinh Do JSC and JSC KIDO via a share
exchange. After the acquisition, the group counted 120,000 outlets with over 1,800
employees spreading nationwide.
While the 2011’s target revenue increased by 117% to VND 4,200 billion (from VND
1,933 billion), the EBT declined by 18.3% to VND 550 billion compared to last year. In
addition, ACNielsen ranked Kinh Do brand fourth in the top 10 famous brands in
Vietnam. With this, Kinh Do is considered as the market leader in the bakery industry
in Vietnam.
IMPROVING GOVERNANCE
Thanks to the acquisition mentioned above and a strategy to focus on the core
business, the corporate governance and the earnings quality have considerably
improved. In 2011, the financial revenue is expected to accounts for 22.8% of the EBT,
compared to the figure of 98.5% in 2010. The acquisition also helps the shareholders
to understand better the company’s actual financial position including contingent
liabilities and the right to use Kinh Do related brands.
Despite the recent improvements, the loan outstanding given to related parties is still
quite large. As the terms of these loans are not clear, this might negatively affect
minority shareholders’ interests.
FAIR FINANCIAL SITUATION
The ROA and ROE are not impressive as just achieving 11.34% and 15.42% in 2010.
However, Kinh Do’s financials are considered as safe, especially after the successful
M&A between North Kinh Do JSC and KIDO JSC. This deal caused Kinh Do’s equity to
increase by VND 1,195 billion from VND 795 billion, and its liabilities decreased by
over 34% compared to the previous year. As a result, debt to equity ratio decreased by
31% in 2010 instead of 71% in 2009 and the debt to total assets decreased to 23% in
2010 from 42% in 2009.
Kinh Do's merger and acquisition activities are mostly done by exchanging shares. As
a result, M&A activities will not affect significantly its operating cash flows. Besides,
the activities will increase Kinh Do’s equity and improve its financial leverage ratios.
However, we are also concerned about the possibility of diluted EPS in the future due
to its continuous equity issuance.
BUY RECOMMENDATION
Kinh Do Corp has good business performance, stable revenue and earnings growths
from its core business. However, despite the recent changes, the risks of investing in
KDC are moderately high under both long-term and short-term investment strategies.
After careful considerations towards the cash flows and profitability, we value KDC at
the price of VND 30,588 per share, about 12% higher than the market price. With this,
we give a “BUY” recommendation.
CONTENTS
KEY STATISTICS ....................................................................................................................... 3
COMPANY OVERVIEW .............................................................................................................. 4
PRODUCT PORTFOLIO ............................................................................................................. 5
INVESTMENT ACTIVITIES ........................................................................................................ 6
CORPORATE GOVERNANCE ..................................................................................................... 7
FINANCIAL ANALYSIS .............................................................................................................. 8
Bloomberg: ACBS <GO>
Tong Van Dzung, Financial Analyst
+84 8 5 404 3054 (692) | dungtv@acbs.com.vn
ACBS Research Center
+84 8 5 404 3257 | research@acbs.com.vn
Contact Center
+84 8 39 107 107 | contact.center@acbs.com.vn
Website: research.acbs.com.vn
Bloomberg: ACBS <GO>
2
KINH
H DO – INITIAL
N
COVERAGE
BUY
Tarrget price:
Currrent price:
Upda
ated as of Ja
anuary 17, 2012
2
30,588
26,500
KEY STATISSTICS
'0
000 units
11//10
VND '000
Price - Volume
450
400
350
300
250
200
150
100
50
0
13
55
45
35
25
15
5
01/11
03/11
05/1
11
07/11
0
09/11
Performancce
Cu
urrent price (VN
ND)
M
Market
cap (VND Bil)
52
2 week high (VN
ND)
52
2 week low (VND
D)
Av
verage volume in
i 100 days (shaare)
Sh
hare outstandingg (share)
1 month return
3 month return
6 month return
12
2 month return
Sh
hareholder stru
ucture
Major shareholdeers (%)
M
Sttate ownership (%)
(
11
4.2
9
3.2
7
2.2
5
1.2
P/E
E
P/B
3
08
8/10
11/11
1
5.2
P/E - P/B
P Chart
65
0.2
10/10
26,500
3,570
55,500
29,700
121,057
118,026,000
-8.01
-13.41
-8.98
-34.61
Official name
Abb
breviation
Sym
mbol
Chartered Capital
Heaadquarter
Tel.
Secttor
Subsector
49.2
-
Ex-d
dividend date
08/24/2011
10/04/2010
12/10
02//11
04/11
06/11
08/11
Comp
pany brief
Kinh Do C
Corporation
Kinh Do
KDC (HOSSE)
VND 1,195
5,178,810,000
141 Nguyeen Du St, Ben Th
hanh Ward, Dist 1, HCM.
+ 84 8 38 270 838
Comsumm
mer Good
Bakery
Record date
08/26/2011
10/06/2010
Gross amount
12%
12%
Payment Type
T
Cash
Cash
IS
S (VND Bil)
Revenue
Co
ost of goods sold
d
Grross profit
Fiinancial Income
Fiinancial Expensees
Seelling Expenses
G&
&A Expenses
Op
perating profit
Otther profit
EA
AT
Net profit
EP
PS (VND)
2008
1,456
1,086
370
119
313
133
122
(80)
20
(61)
(85)
(1,494)
2
2009
1,529
1
1
1,024
505
64
9
164
112
284
258
505
463
5
5,820
2010
0
1,934
4
1,248
8
685
4
664
242
348
142
618
21
579
9
523
4,372
2011F
4,714
2,915
1,799
118
223
864
349
481
3
385
374
3,128
2012F
5,767
3,669
2,098
199
143
1,046
437
671
9
534
518
3,715
20
013F
6
6,943
4
4,418
2
2,525
254
94
1
1,248
524
912
6
716
694
4
4,976
2014F
F
8,224
4
5,241
1
2,983
3
275
5
67
7
1,468
8
629
9
1,093
3
7
855
5
830
0
5,947
7
2015F
9,772
6,225
3,547
277
74
1,732
755
1,264
7
986
956
6,856
2016F
11,648
7,417
4,231
293
84
2,048
906
1,487
7
1,156
1,122
8,040
BS
S (VND Bil)
Cu
urrent Assets
Caash and cash equ
uivalents
Sh
hort-term investtments
Acccounts receivab
ble
In
nventories
Non-current Asssets
Lo
ong-term investm
ments
To
otal Assets
Cu
urrent Liabilitiess
Non-current liabillities
Owners’ Equity
Reetained Earnings
To
otal Funds
BV
VPS (VND)
2008
1,474
207
584
489
182
1,509
673
2,983
664
172
2,076
(147)
2,983
36,346
2
2009
2,532
2
985
518
847
162
1
1,716
995
4
4,248
1
1,633
135
2
2,413
291
4
4,248
30
0,336
2010
0
2,330
0
672
2
162
2
1,018
8
434
4
2,710
0
1,210
0
5,040
0
1,004
4
151
3,738
8
661
5,040
0
31,277
7
2011F
2,641
836
394
730
609
2,753
1,138
5,394
1,336
193
3,806
730
5,394
31,846
2012F
3,545
1,438
219
998
766
2,975
1,138
6,520
1,880
46
4,520
803
6,520
32,397
20
013F
3
3,745
1
1,497
111
1
1,061
923
3
3,470
1
1,178
7
7,215
2
2,314
46
4
4,761
1
1,045
7
7,215
34
4,125
2014F
F
3,882
2
1,291
1
127
7
1,185
5
1,095
5
4,163
3
1,221
1
8,044
4
2,754
4
46
6
5,131
1
1,414
4
8,044
4
36,774
4
2015F
4,405
1,339
145
1,404
1,301
4,574
1,265
8,979
3,248
46
5,551
1,834
8,979
39,787
2016F
5,083
1,442
164
1,668
1,550
5,083
1,311
10,167
3,832
46
6,128
2,412
10,167
43,925
2008
2
2009
2010
0
2011F
2012F
20
013F
2014F
F
2015F
2016F
2.22
1.93
1.55
1.44
2.32
2
1.84
4
1.98
1.47
1.89
1.41
1.62
1.15
1.41
1
0.95
5
1.36
0.89
1.33
0.85
25.40
(5.50)
(5.86)
(1.68)
(2.70)
33.05
3
1
18.58
3
30.27
1
10.88
1
16.43
35.45
5
31.94
4
27.03
3
11.34
4
15.42
2
38.16
10.20
7.93
7.39
10.22
36
12
9
9
13
36
13
10
10
15
36
6
13
3
10
0
11
1
17
7
36
13
10
12
18
36
13
10
12
20
28
40
1.44
(0.18)
42
73
1.76
13
23
3
31
1.34
4
16
6
28
40
1.41
4
30
42
1.43
8
33
49
1.50
20
35
5
54
4
1.56
6
84
4
37
59
1.60
121
38
63
1.64
172
3
(14)
(21)
14
80
0
(13
3)
(5)
24
(10)
5
9
(15)
16
6
(12))
9
14
10
9
Fiinancial Ratios
Liiquidity ratios
Cu
urrent ratio (Tim
mes)
Qu
uick ratio (Timees)
Prrofitability ratiios
Grross profit marggin (%)
Op
perating profit margin
m
(%)
Net profit margin (%)
OA (%)
RO
RO
OE (%)
So
olvency ratios
To
otal debt ratio (%
%)
Debt to equity (%
%)
Fiinancial Leveragge (Times)
In
nterest coverage (Times)
Acccruals ratios
Acccruals ratio BS (%)
Acccruals ratio CF (%)
Bloomberg: ACBS <GO
O>
3
KINH DO – INITIAL COVERAGE
Updated as of January 17, 2012
BUY
Target price:
Current price:
30,588
26,500
COMPANY OVERVIEW
COMPANY BRIEF
Kinh Do Corp. was formerly known as Kinh Do Co., Ltd, which was established in 1993,
carrying the core business of manufactory bakery. In 2002, Kinh Do joined Moon Cake
market and was transferred the "Kinh Do" trademark from Kinh Do Construction and
Food Processing Co., Ltd. In 2010, ACNielsen ranked the Kinh Do trademark as the
ACNielsen ranked Kinh Do
fourth out of 10 recognized brands in Viet Nam. This is a great advantage of Kinh Do to
trademark as the fourth
recognized brands in Vietnam. promote its business in the future.
Formerly known as Kinh Do
Company Limited.
Successfully complete the
merger between KIDO JSC and
NKD in 2010.
Kinh Do Group owns four
subsidiaries and three jointly
controlled ventures.
2010 is considered as a transitional year of Kinh Do Corp. during 19-year development
in term of both corporate governance and business development. In 2010, Kinh Do
Corp. successfully merged with North Kinh Do and Ki Do to increase the bakery market
share to 28% and expand its business to ice cream and yoghurt markets. The company
expects the merger to facilitate superior growth of revenue and market share to the
group in the coming years.
After the deal, Kinh Do Corp. owns 4 subsidiaries and 3 affiliates. Producing and selling
bakery and dairy products are still the core. Particularly, North Kinh Do and KIDO
contributed about 30% and 14% of the group’s revenue respectively, the remaining
56% came from the parent company.
REVENUE STRUCTURE
Major product lines are bakery Kinh Do major product lines include bakery products (cookies, crackers, cakes and
moon cakes) and dairy products (ice cream and yogurts). Bakery product line is the
products.
most important one, contributing 86% and 91.2% to the total revenue and EBT. Gross
profit margin of this line remains stable at 30-35%; the remaining come from dairy
products, which had high gross margin of 59-60% in 2010. Therefore, the dairy
products are expected to still deliver constructive changes to the group.
Achieve impressive growth
rate in 2010 and H1/2011.
In 2010, Kinh Do’s business grew remarkably, as its revenue increased by 39% from
2009. In addition, all of its products recorded the considerable growths. In the first half
of 2011, the core business of Kinh Do continued achieving impressive growth, which is
45% nominally and 22% in real term.
As a result, it appears that the group’s business has improved extremely in the recent
period. Together with other positive outlooks on bakery industry, we expect that the
revenue of Kinh Do will increase by 34% in 2011 and 18-22% in the period of 2012-2016.
COMPETITIVE EDGE
In our view, the admirable growth of Kinh Do since 2010 primarily resulted from the
group’s strengths, including advantages of distribution channel, wide recognized brand
and power of marketing.
Largest distribution channel in At the present, Kinh Do possesses the largest distribution channel in Viet Nam. After
the acquisition, the group counted 120,000 outlets with over 1,800 employees
Viet Nam bakery industry.
spreading nationwide. With this advantage, Kinh Do will strengthen its competitive
edge and be easier to launch new products.
Successful in marketing itself
and building the trademark.
Bloomberg: ACBS <GO>
Besides, with strong financial potential and professional sales team, Kinh Do has
relatively succeeded in marketing itself and building the trademark. According to
ACNielsen, Kinh Do trademark was ranked as the fourth out of 10 most recognized
brands in Viet Nam.
4
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
PRODUCT PORTFOLIO
BAKERY PRODUCTS
Leader of bakery industry.
The bakery products are Kinh Do Corp’s most important product line, which accounts
for 89% of the total revenue. As a market leader, Kinh Do Corp is holding significant
market share for all of its bakery product lines. Specifically, the company is holding
27%, 30%, 80% and 30% shares of cookie, cracker, moon cake and bread markets
respectively.
2010
Revenue
Sales Growth
Cakes
276
11%
Bread
145
11%
Cookies
534
18%
Cracker
407
10%
Moon Cake
89
30%
Snack
68
-30%
Bun & cake
587
5%
Candy
29
-36%
Total
2,139
5%
Sources: KDC and ACBS Research (2011).
Impressive growth rate in
revenue.
Cracker is the highest growth
rate.
Moon Cake accounted for
80%of market share.
Bakery products’ gross profit
margin was relatively stable.
2011F
Sales Growth
386
40%
189
30%
668
25%
564
39%
116
30%
88
30%
705
20%
35
20%
2,756
29%
2012F
Sales
561
265
875
1,016
152
120
775
40
3,808
Growth
45%
40%
31%
80%
31%
35%
10%
15%
38%
In 2010, Kinh Do also witnessed the fast growths of bakery product lines as the
average growth rate reaching 26-33% from 2009. This is relatively an outstanding
growth amid the numerous difficulties remaining on the whole economy. Supported by
the merge activities, the growth was even more impressive in H1/2011 as the reported
revenue increased as much as 43% nominally. Particularly, the revenue of cracker,
cookie, bread and moon-cake product increased by 97%, 44%, 36% and 30%.
Remarkably, Moon Cake products have grown rapidly compared to other lines. After 8
years joining the market since 2002 with over 30,000 outlets, currently Kinh Do’s
Moon Cakes have accounted for up to 80% market share with the annual growth is as
fast as 20-30%. As such, Moon Cakes contribute about 8-10% into North Kinh Do’s
total revenue.
The bakery products’ gross profit margin was relatively stable and had trend of
widening in the period of 2008-2010 despite to strong fluctuations in raw material
price. Especially, in 2010, sugar and flour’s prices, which accounts for 65-75% of the
total production costs, increased steeply by over 50% but Kinh Do Corp. still can
maintain and widened its gross margin to 30-35%. This implies the company’s strong
capability to shift the input cost increases to consumers given the strong brand name.
Even though Kinh Do Corp. is having quite strong brand, we still expect the gross
margin of this product line to be slightly narrowed in the coming years. This is mostly
because of the low brand loyalty in the confectionary sectors.
Exporting accounts for 8% of
the bakery products’ revenue.
Beside the domestic market, the exporting activities accounts for 8% of the bakery
products’ revenue. The major exporting markets are Japan and Cambodia. For the
coming years, Kinh Do Corp. has plan to join the Middle East and Myanmar markets.
Revenue growth rate at 39%
in 2011 and 19-26% in 20122016.
Given that, we suppose that the growth rate of bakery products will be 39% in 2011
and 19-26% in the period of 2012-2016. The gross profit margin is expected at 38% in
2011 and about 36% in 2012-2016.
Bloomberg: ACBS <GO>
5
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
DAIRY PRODUCTS
Account for 14% of total
revenue.
High growth rate in revenue.
Yogurts are not the main
product line of Kinh Do.
We expect growth rate of
product line at 30% in 2011
and 20% in 2012-2016.
Even though the dairy products accounts for only 14% of the total revenue, this
product line is extremely potential with gross profit margins of 59-60% and accounts
for as much as 8.72% of EBT. Currently, Kinh Do is also producing and distributing
dairy products, including ice creams and yogurts under several well-known brands
such as Merino, Celano and Yogurt Wel Yo.
Kinh Do Corp is the leader in Vietnam ice cream market after purchasing the Unilever
Group’s Wall ice cream factory. The ice cream’s revenue increased steeply by 50-60%
in 2010 and 51% in H1/2011. Currently, Kinh Do Corp accounts for 29% ice cream
box, 39% ice cream cone and 55% of ice cream bar market shares. We expect Kinh Do
Corp to maintain its current market leading positions in the coming years as there is
no big investments carrying on Vietnam ice cream industry.
The yogurt product line recorded impressive growth rate of 100% in 2010 and 51% in
H1/2011 . However, this does not significantly contribute to the overall growth as this
product line accounts for only 20% of Kido’s revenue and 3% of the group’s revenue.
For the future, it is very hard for Kinh Do to gain remarkable market share in Vietnam’s
yogurt market, as Vinamilk is the current dominate player with over 90% market
share.
Generally, we expect lower growth rates for dairy products in H2/2011 given the
current weak consumption. Specifically, the ice cream and yogurt revenues are
expected to increase by 40% for the whole year 2011, comparing to 51% in H1/2011.
For the forecasted period of 2012-2016, we expect the dairy product revenue growth
at 20%.
INVESTMENT ACTIVITIES
REAL ESTATE
Entities
Lavenue JSC
Tan An Phuoc Co,. Ltd
Thanh Thai Real Estate JSC
Sources: KDC and ACBS Research (2011).
Real estate activities are not
effective.
Chartered Capital
1,200 billion
409 billion
6 billion
KDC's stake
50%
49%
30%
Kinh Do Corp. indirectly invested in real estate via its affiliates. As of the end of
H1/2011, amount of Kinh Do’s investment in its affiliates was VND 802 billion.
Currently, projects of these affiliates have been delayed as the real estate market has
frozen since 2010. Kinh Do Corp does not disclose any details regarding these projects.
Therefore, we cannot fully estimate financial affects of these companies in Kinh Do
Corp’s performance in the coming years.
EQUITY INVESTMENT
Tend to withdraw capital and
concentrate to the core
business.
The equity investments used to accounted for as much as 10.5-8.6% of the total assets,
equivalent to VND 449 billion and VND 438 billion as of the end of 2009 and 2010. The
investment was not very effective while the company have to make VND 57 billion and
VND 142 billion provisions in 2009 and 2010 respectively.
Currently, Kinh Do Corp. has strategy to withdraw capital to focus on the core
business. As of the end of H1/2011, the equity investment was only VND 343 billion,
equivalent to 6.6% of the total assets. This will help Kinh Do Corp. to improve capital
efficiency in the coming years. Hence, the investment outstanding might gradually
reduce in the coming years.
Bloomberg: ACBS <GO>
6
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
OTHER INVESTMENTS
This item is mainly comprised
of loans to its related parties.
At the end of H1/2011, other investment was worth VND 620 billion, accounting for
51.8% of total equity. This item is mainly comprised of loans to its related parties, of
which loan to Kinh Do Co,. Ltd made up VND 527 billion. At present, information
concerning on these loans is not clearly explained in Kinh Do financial statements.
CORPORATE GOVERNANCE
CORPORATE STRUCTURE
Increase more advantage after To concentrate in core business, Kinh Do has succeeded in M&A of North Kinh Do JSC
and KIDO JSC, and started to operate as a Group at the end of 2010. As such, the
acquisition.
current Kinh Do Corporation structure is as follow:
Subsidiaries
North Kinh Do JSC
Kinh Do Binh Duong JSC
Vinabico JSC
KIDO JSC
Source: KDC 2011
Capital
% Ownership Major business
69 billion
100 Bakery
100 billion
80 Bakery
90 billion
51 Bakery
151 billion
100 Dairy products
We appreciated this M&A as follows:
(1) Increasing the size of market cap, revenue and profit, hence raising the ability of
fund mobilization by attracting more strategic investors.
(2) Raising Kinh Do’s market share and the number of retail outlets, which enhance the
group’s competitive advantages.
(3) Centralizing management of sales, distribution and marketing of the products,
which will enable consistency in planning and execution, and enhance efficiency in the
Group’s operations.
BOARD OF DIRECTORS
No independent member in
BOD.
Board of Directors
Tran Kinh Thanh
Tran Le Nguyen
Ma Thanh Danh
Vuong Buu Linh
Tran Quoc Nguyen
Wang Chinh Hua
Vuong Ngoc Xiem
Co Gia Tho
Sources: KDC and ACBS Research (2011)
Position
Chairman
Member
Member
Member
Member
Member
Member
Member
Shares
6,475,000
833
652,176
3,297,441
515,076
Stake (%)
5.64
0.64
2.78
0.51
Kinh Do has the BOD of eight members with family relationship. Noticeably, there is no
representative of foreign shareholders and independent member in the current
presence of the Board.
Nevertheless, with all members of the Board experienced in consumer and food
industry, we appreciate the ability of the Kinh Do’s BOM and BOD in taking good
business decision. Mr. Nguyen Khac Huy, the CEO of Kinh Do Group with over 22 years
working for multinational companies, has applied Strategic and Business Unit (SBU) in
the operation of the Group and has gained initial achievements.
Bloomberg: ACBS <GO>
7
KINH DO – INITIAL COVERAGE
Updated as of January 17, 2012
BUY
Target price:
Current price:
30,588
26,500
SHAREHOLDER STRUCTURE
Entity members relating to
Chairman of the BOD make up
32% of equity capital.
Shareholders
PPK Co,. Ltd
Kinh Do Investment Co,. Ltd
Tran Le Nguyen
Deutsche Bank AG London
Kinh Do Constructing and Food processing
Co,. Ltd
Vietnam Ventures Limited
Vuong Ngoc Xiem
VOF Investment Limited
Sources: KDC and ACBS Research (2011).
Shares
14,507,302
13,313,512
6,475,000
6,351,507
% Ownership
12.24
11.24
5.64
5.36
5,000,000
4.22
4,703,655
3,297,441
1,800,000
3.97
2.78
1.52
The total share of companies and entity members relating to The Chairman of The Board
of Director (BOD) make up to 32% of equity capital. Some shareholders hold above 5%
stake such as PPK Co,. Ltd (12.24%), Kinh Do Investment Co,. Ltd (11.24%), Mr. Tran Le
Nguyen, Vice President of the BOD (5.65%) and Deutsche Bank AG London (5.36%).
Foreign investors hold over 25% stake, far lower compared to other leading industry
companies such as Vinamilk and FPT. As such, the floating share outstanding of Kinh
Do is estimated at 47%, relatively high comparing to other listed companies.
FINANCIAL TRANSPARENCY
Some important items are
represented briefly, causing
several difficulties in collecting
information for analysis
purpose.
The consolidated financial statements of Kinh Do are audited by Ernst & Young
Vietnam Limited, a leading auditing firm in the world. The auditor‘s opinion was
qualified with respect to VND 50 billion of Goodwill account, relating to the value of
the brand name “Kinh Do”. However, the value of this account is not essential
compared to the total assets value.
Except for this matter, the consolidated financial statements gave a true and fair view
on the Group‘s financial situation. Nevertheless, some important items are presented
briefly in the financial statement, causing several difficulties in collecting information
for analysis purpose.
MINORITY SHAREHOLDER RIGHT PROTECTION
Rights of the minority are hard As mentioned above, the members of BOD included all the family members and there is
no independent member on Kinh Do’s BOD. In addition, some relative transactions did
to be protected.
not announce clearly. Therefore, we believe that the rights of the minority might not be
fully protected.
Noticeably, in August, State Securities Commission of Vietnam (SSC) decided to impose
administrative punishment on Kinh Do as the company gave loans to its chairman and
other BOD members without presenting this to the general meeting of shareholders. It
was not a big fine, though this shows the loose in Kinh Do’s internal controlling
procedure and it may be affect to minority shareholders.
FINANCIAL ANALYSIS
EXTRAORDINARY FINANCIAL ITEMS
Lending to relate parties
account for 62.8% of total
equity.
Bloomberg: ACBS <GO>
Lending to related parties
At the end of H1/2011, Kinh Do has given a loan of VND 527 billion and an investment
trust of VND 50 billion to their parents’ company, Kinh Do Co,. Ltd. Moreover, there is
another interest receivable account worth of VND 174 billion that needs to be collected
8
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
from the Kinh Do Co,. Ltd. Thus, the Kinh Do’s total account receivable related to its
parents’ company is worth up to VND 751 billion, accounting for 62.8% of the equity.
As such, this is a material item on the balance sheet and has great impact on Kinh Do’s
business. However, we cannot find any clear information related to the loans.
Therefore, we can estimate the effect to the result of business and interest of minority
shareholder.
Goodwill
Kinh Do’s goodwill emanates from the successful merger with its offshoots North Kinh
Do (NKD) and Ki Do JSC, worth VND 361 billion and VND 36 billion respectively. As
such, total Kinh Do’ goodwill reached VND 396 billion, making up 33% of equity as of
the end of 2010. Goodwill is amortized using straight-line method over 10 years.
SOLVENCY & LIQUIDITY
Low leverage ratios
Kinh Do’s financial structure is
valuated at a suitable and safe
level.
Solvency ratios
Total debt ratio (%)
Debt to equity (%)
Financial Leverage (Times)
Interest coverage (Times)
Sources: KDC and ACBS Research (2011).
2008
28
40
1.44
(0.18)
2009
42
73
1.76
13.68
2010
23
31
1.34
16.87
2011F
28
39
1.40
4.25
Kinh Do’ leverage ratio was improved significantly after successful merged two
subsidiaries into Kinh Do Corporation at the end 2010. This deal caused Kinh Do’s
equity to increase by VND 1,195 billion from VND 795 billion, and its liabilities
decreased by over 34% compared to the previous year. As a result, debt/equity ratio
decreased to 31% in 2010 instead of 71% in 2009 and debt/total assets decreased to
23% in 2010 from 42% in 2009.
Therefore, Kinh Do’s financial structure is considered as stable and relatively safe.
Fair liquidity
We appreciate the solvency of
Kinh Do for debts to maturity.
Liquidity ratios
Current ratio (Times)
Quick ratio (Times)
Sources: KDC and ACBS Research (2011)
2008
2.22
1.93
2009
1.55
1.44
2010
2.32
1.84
2011F
2.02
1.50
Given abundant cash, Kinh Do’ solvency ratios are quite high and settle at suitable
levels. With this, it is very unlikely for Kinh Do to have any problem with meeting its
short-term financial obligation.
Affects of future M&A activities
KDC stock face with dilution
risk.
Bloomberg: ACBS <GO>
Kinh Do mainly does M&A activities by issuing share exchanging. As a result, M&A
activities will not affect significantly to its operating cash flows. Besides, this aquisition
activities will increase Kinh Do’s equity and improve its leverage ratios. However, we
also concern about the ability of EPS dilution in the future because of the acceleration
of issuing its equity.
9
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
30,588
26,500
PROFITABILITY & EARNINGS QUALITY
Low profitability ratios
Profitability ratios
Gross profit margin (%)
Operating profit margin (%)
Net profit margin (%)
ROA (%)
ROE (%)
Sources: KDC and ACBS Research (2011).
Gross margin achieve at high
levels.
Its net profit margin in the
period of 2009-2010 was
equivalent to 31% on
average.
ROA, ROE still low.
2008
25.40
(5.50)
(5.86)
(1.68)
(2.70)
2009
33.05
18.58
30.27
10.88
16.43
2010
35.45
31.94
27.03
11.34
15.42
2011F
37.97
11.05
8.55
7.89
10.88
Kinh Do’s gross profit margins in the period of 2009-2010 were around 33-35%,
higher than 2005-2008 periods (25-29%). This shows that Kinh Do has managed its
production cost efficiently.
Its net profit margin in the period of 2009-2010 was equivalent to 31% on average,
increasing steeply from the average level of 11% in the period of 2005-2008. The
optimistic result in 2009–2010 is caused by significant contributions of financial and
other income. If we eliminate those abnormal incomes, 2009’s net profit margin was
16%, equivalent to the previous year, while 2010’s net profit margin was only 8%, far
lower than the previous years.
In addition, Kinh Do’s ROA and ROE was 11% and 16% in 2010 respectively, equaling
the average levels of firms in the industry. Therefore, Kinh Do does not impress to
investors because its efficient profitability is not commensurate with the economics’
scale and advantages. We believe the major reason is Kinh Do did not use assets
effectively.
Improving earning quality
Earning quality of Kinh Do
will improve considerably.
Kinh Do had achieving good business results in 2009-2010, but we do not apreciated
the earnings quality since the net profit is contributed by large of profit from
investment activities and other activities.
However, with the first six months of 2011 earning results, we expect that the earning
quality of Kinh Do will be improved considerably since Kinh Do planned to invest
heavily to develop its core business.
VALUATION
Assumptions
We forecast Kinh Do revenue We expect the company’s revenue growth rate based on both the industry’s growth
base on its products lines.
and the careful adjustments on each particular product lines:
For bakery, within a significant improvement in the first six months 2011, we also
expect the bakery product lines to grow at around 39% in 2011.
In term of ice cream and yogurt product line, we believe that it is hard for them to
maintain the high growths as much as the previous year. Furthermore, based on the
latest industry report of General Statistics Office, we estimate the growth of these
product lines at around 30% in 2011.
During the period of 2012-2016, we appraise the company’s growth rate may
Be able to catch up with the
general industry growth rate successfully catch up with the general industry growth rate. Particularly, the growth of
of 19-23%.
bakery products will reach 19%-23% while the growth of ice cream and yogurt lines
will be 20%.
The overall gross margin of bakery, ice cream and yogurt categories in the next period
of 2012-2016 is expected to be stable at 33% and 58% respectively.
Bloomberg: ACBS <GO>
10
KINH DO – INITIAL COVERAGE
BUY
Target price:
Current price:
Updated as of January 17, 2012
Issuing 20 million additional
shares in 2012.
30,588
26,500
We also assume that Kinh Do will issue 20 million additional shares to strategic
shareholders in 2012 at the price equivalent to the book value per share (VND 32,000).
The required rate of return is estimated at 17.5% for both models.
Valuation Result
Given these assumptions and other careful adjustments in our valuation models, the
valuation result is as follows:
Valuation method
FCFE (r = 17.5%, g = 7%)
DDM (r = 17.5%, g = 7%)
Average
Source: ACBS Research (2011).
Result
Weight
27,574
33,602
30,588
50%
50%
100%
Risk Assessment
Even though we expect KDC not to complete this year’s earning target, we are quite
confident about our earnings forecast for 2011. For longer term perspective, risks
relating to operating results fluctuation are relatively high due to the exposures link to
real-estate and equity investments as well as loans given to the related parties are
quite high.
Risks of price volatility are quite low as its 6M adjusted beta is 0.71. However, KDC’s
price movements involves with remarkable speculations and swing trading activities,
which might cause extreme price volatilities.
The liquidity risk of investing in KDC’s share is relative low for normal investors as this
is one of the most liquid stock in the listed markets.
With these, the risks of investing in KDC share are moderately high for both long-term
and short-term investment strategies.
RECOMMENDATION
Kinh Do Corp has good business performance, stable revenue and earnings
growths from its core business. However, despite the recent changes, the risks of
investing in KDC are moderately high for both long-term and short-term
investment strategies.
After careful considerations towards the cash flows and profitability, we value KDC
at the price of VND 30,588 per share, about 12% higher than the market price.
With this, we give a “BUY” recommendation.
Bloomberg: ACBS <GO>
11
KINH DO – INITIAL COVERAGE
Updated as of January 17, 2012
BUY
Target price:
Current price:
30,588
26,500
ANALYST CERTIFICATION
The analysts named in the first page of this report, who are primarily responsible for the preparation of this report,
certify that the opinion(s) on the subject company and any other views or forecast expressed herein accurately
reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to
the specific recommendation(s) or view(s) contained in this report.
REPORT DISTRIBUTION
This report is restricted to and intended only for the clients of ACBS in Vietnam. If the client receives and/or uses
this report outside Vietnam, it is the client’s sole responsibility to ensure that it is legally permitted in client’s
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DISCLOSURE & DISCLAIMER
As at the issue date of this report, the analyst(s) and ACBS have no interest in Kinh Do Joint Stock Company.
This report is provided for information purposes only. It is aimed to aid the client in the investment progress. It is
not intended as an offer or solicitation for the purchase of the share of the subject company. The opinions and
recommendations herein (if any) do not take into account individual client circumstances, objectives, or needs and
are not intended as recommendations of particular share, investment tactic or strategy to a particular client.
The information in this report is obtained from sources believed by ACBS to be reliable. However ACBS makes no
warranty or representation as to their accuracy or completeness as well as this report is free from human’s or device
function’s error(s). The information is subject to change without prior notice.
The Client shall be liable for any risk or loss (if any) as the client makes the investment based on this report. ACBS
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Some parts of the report reflect the assumptions, views and analytical methods of the analysts who prepared them,
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presented in this report.
Although at the present, ACBS and the analysts do not have any interest in the subject company as disclosed above,
in the future, ACBS and the analysts may have positions in and may from time to time purchase or sell its shares.
© Copyright. ACB Securities Company Limited 2012, ALL RIGHTS RESERVED. No part of this report may be
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12