Fixed Income Report – Bonds Fail to Find Buyers

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Fixed Income Report - Efforts to jumpstart bond issuance gain traction

September 15, 2015.

Bonds fail to find buyers.

August CPI slid as expected putting no pressure on yields. The Aug reading dropped 0.06% vs. July on cheaper pump prices. We forecast Sep CPI to inch up 0.1% as further pump price cuts will cushion the impact of tuition hikes.

Low uptake on primary bond market. After the winning yield fell 10bps to 6.4%, 5Y bonds saw no match between bids and offers at the final auction in August. There was an eventual slight uptick of 5bps but the market’s expectation of higher yields resulted in low uptake. On the secondary market, foreign selling reached a year-high in Aug which drove yields up about 15-20 bps across all tenors. Weekly average turnover soared nearly 70% vs. one month earlier.

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  • Uptake on the primary market was a dismal year-low of 16% (down from 48% one month earlier). Capital appeared to be diverted to growing loan books instead as banks registered a 4-year high credit growth of 10.23% as of end-Aug.
  • Concerns on currency stability after the third devaluation of the Dong this year also raised yields
  • expectations but the Treasury did not budge. Winning yields on the 5-year bonds were nudged up only 5 bps to 6.45%.
  • Meanwhile, yields on the secondary market rose across all tenors, as forex volatility kicked off a massive sellout from foreign investors, who net sold over VND 4.3t in August compared to just VND 1.7t net sold from Jan through July. However, they were net buyers over the last 2 weeks.
  • The Treasury will undoubtedly miss its 3Q issuance plan. Year-to-date issuance as of mid-Sep only fulfilled 39% of 2015 guidance. Given the need to fund the fiscal deficit, pressure is increasing to raise yields at forthcoming auctions.

Money market – the SBV continued to inject liquidity. The central bank net pumped VND 1.6t via OMO over the past one month (a reversal from a quiet period through mid-May to July). Moreover, total T-Bill outstanding plummeted 48% vs. one month earlier. The significant money injection came in sync with the Dong devaluation in August in a bid to calm the interbank market.

On Aug 19, the SBV devalued the Dong 1% for the third time this year. The trading band was widened to 3%, only one week after the reference rate was weakened and the trading band widened from 1% to 2%. By doing so, the SBV was forced to break an earlier commitment to not devalue the dong more than 2% this year although the market widely accepted the move as well warranted amid devaluation of the Yuan.

Since then, dong has been sitting near the weak end of the band. Thus, the SBV Governor, in a public announcement, comforted the market that there would be no further devaluation until 1Q16, citing that the wider trading band allowed ample flexibility to counter further external shocks. As of this week, the USD/VND rate has shown signs of further weakening ahead of the US Fed’s upcoming interest rate decision. Nevertheless, expectations that interest rates will be raised have fallen considerably and chances are the Fed may choose to postpone the action, which would relieve some of the current pressure on the dong.

Primary Bond Market

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Secondary Bond Market

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Money Market

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Foreign Exchange Market

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CDS and NDF Market

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Appendix

Recent Secondary Market Transactions

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Bond Auction Schedule

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VCSC Information

VCSC Rating System & Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.
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Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.
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Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3)Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.
Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3)Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.

Disclaimer

Analyst Certification of Independence
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