9 July, 2014

Kinh Do Corporation (KDC) is set to expand into the food industry by becoming a strategic partner of the Viet Nam Vegetable Oils Industry Corporation (Vocarimex)

Kinh Do Corporation’s top executives officially confirmed at the 2014 shareholders meeting earlier this week that the company would buy a 24% stake in Vocarimex.

The share price will be decided after Vocarimex makes its initial public offering (IPO) on July 25, 2014 (according to the law, listed companies are allowed to sell their shares to strategic partners at agreed prices, but they should not be lower than the IPO’s average price).

By becoming a large shareholder in Vocarimex, KDC will wrap up its preparations it has planned for a very long time: expanding into the food industry.

Six weeks ago Kinh Do issued 40 million shares at a price of VND 44,000 to strategic investors. Plans for the issuance had been announced to shareholders last year.

In the beginning Kinh Do targeted foreign partners, including financial investors and multinational food processing corporations so that they could help the company enter other regional markets.

However, according to a resolution by the board of directors announced by Kinh Do, five local enterprises became strategic investors for this share issuance -- Thap Lang Ha Limited Company, Dong Tam Joint Stock Company, Dong Tam Trade Company, An Thinh Loc Real Estate Investment Limited Company, and Truong Thinh Phat Investment Join Stock Company. All of them have less than 5% of Kinh Do’s shares, and are not major shareholders.

None of them is in the food production or processing business. They are likely to be long-term financial investors who will keep their stake for years.

Kinh Do now has cash holdings of VND4 trillion, including VND1.7 trillion raised from the share issuance, and has become a “rich” company. The money will be spent to develop its oil, instant noodles, and sauces businesses.

In a recent newsletter to clients Viet Capital Stock Company (VCSC)’s research department revealed that KDC planned to spend US$30 million to buy a 20% – 30% stake in a local vegetable oil company. And now the identity of Vocarimex has been publicly announced.  Kinh Do might invest more money – if necessary – to improve distribution and management and Vocarimex’s brands.

In the Vietnamese market, Tuong An Vegetable Oil Company and Cai Lan Vegetable Oil Company have overwhelming market shares. Cai Lan is a joint stock company in which foreign investors have a dominant stake. Tuong An company is a listed company in which Vocarimex has a 51% stake. Vocarimex wants to neither withdraw capital nor reduce its stake, which would lead to loss of management control.

Under its equitisation plan, approved by the Government in April, Vocarimex will sell 32 per cent to strategic investors (KDC will buy 24% and a securities company has registered to buy the rest), 31% to the public, and 1 per cent to staff. The reserve price is set at VND11,300 and the chartered capital is VND1.218 trillion.

It cannot predict how successful Vocarimex’s IPO will be, but with a huge amount of cash holding and pledge of an investment of $30 million to buy a vegetable oil company, KDC has the financial wherewithal to fulfill its promise.

Kinh Do also informed shareholders to tie up with Sai Gon Ve Wong Limited Company for the production of instant noodles and sauces under the KDC brand name. Kinh Do general director Tran Le Nguyen said to Sai Gon Times newspaper that his company fully understands there is fierce competition in the instant noodles and sauces markets, but is ready to spend a huge amount of money, even several hundred billion Dong, to achieve a firm foothold in the market.

According to a report from a market research company, in 2013 Vietnamese consumed around 5 billion packs of instant noodles or 55.5 packs per person on average in a year. This is a high proportion compared with neighbouring countries, and so the market cannot put on a sudden spurt like it did five years ago. Besides, Kinh Do will come up against major rivals like Masan Consumer, Vina Acecook, and other companies who dominate with various popular brands.

Kinh Do retains its domination of the confectionary market, but growth has slowed down since consumers are now only buying what they need amid a general decline in spending.  Confectionary is not part of daily food unlike rice, meat, or milk. But demand has fallen even for milk.

According to its financial report for the first quarter of 2014 KDC’s turnover was down by 1.7% in comparison with the same period of last year. The fall was considered acceptable because the first quarter is the low season for the confectionary industry. Bibica, Hai Ha, Huu Nghi considered as competitors are also failed to increase their turnover.  However, compared with its own earlier performances, KDC will this year have difficulty in expanding market share. In the first quarter of 2012 and 2013, Kinh Do’s turnover grew at a healthy 14 and 12 per cent respectedly in the year-on-year comparison.

Mr Tran Le Nguyen said that in its confectionary business Kinh Do has focused on reducing management and sales expenses. The company has instead invested in distributors’ management systems and services to improve productivity. This has helped make up for the increasing cost of human resources and packaging while input prices remain unchanged.