12:47 (GMT +7) - Wednesday 28/06/2017

Business

Sweet deals

Released at: 08:07, 18/05/2017

Sweet deals

Photos: Viet Tuan

KIDO’s decision to sell a major share of its frozen food business belies the fact it only has expansion in mind.

by Ngoc Chi

The first days of summer have arrived in Vietnam’s north, the peak season for ice cream and soft drinks. The KIDO Group Corporation (KDC)’s new frozen food facility producing yogurt and ice cream opened last November in northern Bac Ninh province and is now running at full capacity. Another ice cream plant of the group in Ho Chi Minh City’s Tay Bac Cu Chi Industrial Park is also planning to increase capacity to 3 million liters this year. While the ice cream segment is entering its “harvest” season, KDC surprised many investors in March when it announced the sale of 35 per cent of its holding in the KIDO Frozen Food JSC (KDF), despite it being “the goose that laid the golden egg”. 

Ambitions & obstacles

At the group’s roadshow in Hanoi on March 31 introducing investment opportunities, Mr. Tran Quoc Nguyen, General Director of KDF, did not hide his ambition to hold a 50 per cent share of the ice cream market in Vietnam by 2020. There will be changes in the shareholder structure after the sale of 35 per cent of KDF, he acknowledged, but KDC will continue to hold 65 per cent. 

Insiders believe that this is a considered step by KDC because the ice cream and yogurt segment sees stable annual growth of 35 per cent. According to a report from the Ho Chi Minh Securities Corporation (HSC), KDC’s net revenue reached VND1.4 trillion ($61.6 million) in 2016, up 34.8 per cent against 2015. After-tax profit was VND143 billion ($6.3 million), up 85 per cent and accounting for 63 per cent of KDC’s profit. 

Ice cream market share, by company

Source: Euromonitor

With such results, the sale of 35 per cent of KDF is expected to bring a tidy sum to the group. HSC also estimated that KDC could record a substantial profit if the deal is completed by June this year. Its profit forecast of about VND238 billion ($10.4 million) is much higher than the company’s profit from business activities. Moreover, it is expected to increase in the years to come thanks to the new facility in Bac Ninh province, which is the largest of its kind in the north, with initial capital of VND400 billion ($18 million). 

Another reason, according to Mr. Nguyen, is that KDF needs to be popularized to have more external resources and make the shareholder structure more diverse. Popularizing and listing the shares on the stock market is a way for the group to raise capital, he explained. In the future, KDC needs a lot of money to expand its business, not only in ice cream but also in the frozen product industry, with it targeting to meet 85 per cent of demand among Vietnamese consumers.  

While valued at VND65,000 ($2.8) per share, KDF has determined that the starting price will be VND52,000 ($2.3). Mr. Nguyen said that KDF’s goal is to create as many opportunities for investors and potential partners as possible. “Based on our leading position in the frozen food market, we believe in creating value for our shareholders,” he said. 

In order to achieve the target of securing a 50 per cent share of the ice cream market in Vietnam by 2020, the company will focus on expanding distribution channels for frozen food, with a goal of 150,000 points of sale by 2020. “KDF currently has more than 70,000 points of sale in the country and we plan to increase this by 10,000 to 20,000 each year,” Mr. Nguyen said, adding that the company targets 2017 revenue of VND1.8 trillion ($79.2 million). 

KDF’s ambition of a 50 per cent share of the ice cream market will be anything but straightforward. According to Euromonitor, ice cream is a fiercely competitive industry with a host of names such as Vinamilk, Thuy Ta, and Trang Tien. KDF also faces international names such as Unilever, Fanny, and Monte Rosa. Notably, Nestle also jumped into Vietnam’s ice cream market at the end of 2015 with two brands: Milo and Kit Kat. 

With such fierce competition, the pressure on KDF is to make a difference to reduce the direct competition. According to Mr. Nguyen, KDF will focus on developing both the medium- and high-end segment. The latter, however, is now dominated by foreign brands, including those from South Korea, Thailand, and New Zealand. This poses a challenge to KDF gaining market share in the segment. 

KDF also targets a share of 44 per cent this year. To do this, according to Mr. Nguyen, it will expand its coverage, from urban to rural areas and into each village. KDF’s ice cream products continue to be diversified and serve a wider range of customers. In the immediate future, KDF’s plan is to acquire more ice cream market share in the north. “KDF plans to conduct mergers and acquisitions (M&As) with dairy and frozen food companies that have good nationwide distribution systems, to expand its market share,” he explained. 

While expansion plans have been proposed, the company’s debt-to-equity ratio rose sharply in 2015 and 2016 as it increased its borrowings to support the construction of the two new plants in Ho Chi Minh City and Bac Ninh. “The greatest challenge is the cost of investing in refrigeration,” Mr. Nguyen said. “We have just passed the break-even point, however, and this is the foundation for further development in the future.” 

New openings

Since transferring it entire confectionery segment, worth about VND10 trillion ($440 million), to the Mondelez International Group in August last year, KDC has repeatedly made decisions on expanding or ceasing the trade of many commodities and has carried out a series of M&As with the aim of increasing ownership in companies in the essential goods sector.

It has been involved in the production of yogurt and whey since 2006. The scale of such products, according to Euromonitor, is 4 to 4.5-times higher than ice cream. Over the past five years, KDF’s dairy products have grown more than ice cream and contributed 25-26 per cent of total revenue. But the company still wishes to seek opportunities in new fields in order to develop further. KDF’s strategy is to target the billion-dollar market that includes ice cream, dairy products, frozen food (sausages, spring rolls, fried fish fillets, and frozen seafood), and frozen vegetables. 

KIDO Frozen Food (KDF)
Company type: Joint Stock Company
Established: 2003
Main business: Frozen food and drinks
Product catalogue: Cenalo high-end ice cream, Merino mid-end ice cream, WellYo yogurt
2016 net revenue: VND1.397 trillion ($61.4 million)
Charter capital: VD560 billion ($24.6 million)
Total assets: VND1.242 trillion ($54.6 million)

This year it will continue to promote the development of other packaged products such as French fries, sausages, and fish balls, and other items such as fresh fruit and vegetables to meet increasing demand. “Consumption trends are shifting to high-quality fresh products that had a market size of about $343 million in 2016,” Mr. Nguyen said. “This is the growth engine for KDF to implement its long-term growth strategy.” 

Not all KDC products have been successful, however. The group failed with its Dai Gia Dinh instant noodles, which were expected to earn it substantial profits. The failure was due to Vietnam’s instant noodle market losing steam, with both local and foreign producers experiencing heavy falls in sales.

Japan’s Acecook reported revenue falling from VND10 trillion ($440 million) in 2013 to VND9 trillion ($396 million) in 2015. Masan, one of the largest food companies in Vietnam, reported a year-on-year decline in profits of 20 per cent in the first half of 2016.

Meanwhile, cooking oil will be a spearhead of the group in the near future and it hasn’t hidden its ambition of expanding in the domestic market by acquiring leading companies in the segment. In 2015, KDC and Felda Global Ventures (FGV) and the Indo-Trans Logistics Corporation (ITL) from Malaysia signed a cooperative agreement under which they would identify strategies to capture Vietnam’s packaged oil market, leveraging on the strengths of all parties.

In January this year, the group was given permission to hold more than 51 per cent in the Vietnam Vegetable Oils Industry Corporation (Vocarimex) without the need to conduct a takeover bid. At the end of last November, KDC announced the purchase of 12.34 million shares, equivalent to 65 per cent, in the Tuong An Vegetable Oil Company (TAC). In order to ensure the success of the acquisition of the second-largest cooking oil maker in the country, KDC was prepared to raise its bid price from VND78,000 ($3.45) to VND82,000 ($3.65) per share. It was estimated that it spent over VND1 trillion ($44 million) on the deal. 

Business growth from potential prospects in the frozen food market saw investors sit back until the last minute during the group’s roadshow in March. A Malaysian fund announced it would be willing to spend $200 million on acquiring all shares in KDF, after KDC announced the sale of 35 per cent of its shares. A Japanese company also expressed an intention to buy the 35 per cent stake at a much higher price than the expected listing price of VND52,000 ($2.3) per share. 

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