Vietnam's Hottest Stock -- and You Can Slurp It

HO CHI MINH CITY (TheStreet) -- As I peeled the shiny paper off a cup of lemon yogurt in my Ho Chi Minh City hotel breakfast bar, I didn't realize I was about to drink the country's hottest stock.

The yogurt taste like any other, but its producer Vinamilk has investors salivating onshore and off, I found in mid-August during talks with fund managers in Vietnam's financial center Ho Chi Minh City.

Vinamilk sits easily on Ho Chi Minh stock exchange's list of the top 30 companies because of transparency, solid management and low-priced sales to a general population that is adding dairy to its diet as it gets wealthier. They're not giving up lemongrass and pho noodles, just adding a food group.

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Vietnamese have historically bought dairy from Nestle (NSRGF) (NSRGY) , Mead Johnson Nutrition (MJN) and Dutch Lady. Two smaller local companies also vie to sell to the population of 90 million.

But cheaper-priced, scandal-free Vinamilk has a 30% share of the domestic market for powdered milk, Vietnam's chief source of dairy consumption, estimates Luong Thi My Hang, deputy CEO with VietFund Management in Ho Chi Minh City.

The company is 45% owned by the government. It typically posts healthy margins and stands out as "one of the top in terms of transparency and corporate governance," Luong says. Local brokerages rank it as the city stock exchange's No. 2 company by current market capitalization after PetroGas Vietnam.

The management is accessible, investors say. Balance sheets are honest and the company uses internationally recognized auditors. Vinamilk expects to post $1.5 billion in 2013 revenue from Vietnam and four fledgling export markets where it sells powdered milk, baby formula and ice cream.

Vinamilk is an outlier in the young Vietnamese securities market. Giant state-run firms are barred from investing outside their core business, precluding IPOs or equity trades. They're "in shambles," as one business consultant says.

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Private firms often don't know how to retain customers, and a lot lost money after 2008 by playing the then-volatile stock market or buying risky real estate.

Foreign investors and institutions may ask about stock in Vinamilk also because it has avoided food safety scams.

"When melamine was found in China five years ago, Vinamilk was untouched by that," says Kevin Snowball, CEO of PXP Vietnam Asset Management in Ho Chi Minh City. Melamine occurred in Chinese branded milk in 2008, killing six babies and hospitalizing another 54,000.

"[Vinamilk] is run in accordance with all the best standards of corporate governance," he adds. Vinamilk is PXP's biggest holding at one-fifth of the portfolio. The stock has given shareholders 22 times their money since 2005, Snowball says.

Investment in the 38-year-old dairy will surge further if the government finalizes rules letting foreign funds own majority shares in companies on the liquidity-strapped Ho Chi Minh City stock exchange. Today the cap is 49% in most companies.

Will the golden cow tip over by then?

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Vinamilk revenues were projected to rise 17% last year, but profits were anticipated to fall 8% to $284 million, according to the official Viet Nam News. "Fierce competition" and a drop in "purchasing power" despite aggressive marketing have set back profits, company Chairwoman Mai Kieu Lien said in April, according to the news service.

Vinamilk will still see 6% earnings growth this year and a more "normal" 21% next year, Snowball forecasts.

At the time of publication, the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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