Macro Update – 3Q GDP Growth Surprises on the Upside

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September 2015

3Q GDP growth surprises on the upside

Macro-Update2-1

  • GDP growth ramped up to 6.81% in 3Q15, the highest 3Q growth over the past five years. Manufacturing re-affirmed the pivotal role in spurring growth as the wave of production shift from electronics MNCs helped to abate negativity from stalled global trade. Meanwhile, the economy gained more momentum from construction, retail sales and hospitality services.
  • Given that 4Q is typically the year’s busiest season, this year’s GDP growth is likely to beat most forecasts, including the government target of 6.4%. We are prompted to nudge up our own 2015 projection to 6.8% from 6.5%.
  • SBV shows fortitude to steady the forex market. On Sep 27 the central bank imposed a 0% ceiling on corporate (non-financial institutions) USD deposits, which have been kept at 0.25% for more than two years. The action was framed to cope with dollar hoarding and cool off speculation on forex rate arising from the Dong devaluation in August. And it did work – the unofficial USD/VND rate retreated below the official upper band for the first time since the last devaluation while the interbank rate also strengthened in the week after the announcement.

Low pump price keeps CPI subdued, 2015 YE CPI forecast cut to 1%

  • September CPI slid 0.21% vs. July, as drastic cuts in pump price succeeded in offsetting the impact from tuition hike.
  • All price level prints are pointing to softness: the year-on-year reading retreated to 0%, YTD CPI only inched up 0.4% while average inflation through Jan-Sep came in at 0.74%. As such, we cut our year-end forecast to 1% from earlier 3%.

Domestic activity stays elevated with 5Y high retail sales and double-digit IIP

  • Price-adjusted growth continued growing at 9.1% in 9M15 vs. 9M14. Auto sales surged 57% in 8M15 vs. 8M14.
  • IIP growth picked up to 10.1% in Sep-15 vs. Sep-14 (cf. 9.1% in Aug-15 vs. Aug-14) as crude oil production quickened in September. Meanwhile, manufacturing saw another month of commendable expansion at 10.3%.

Trade deficit widened to USD 3.8b with a slight deficit of USD 100m in Sep

  • Export growth in 9M15 vs. 9M14 accelerated to 9.6% with total turnover through Jan-Sep at USD 121b. Despite further weakness in oil prices, shipments from FIEs (contributing 70% of Vietnam’s export) soared 15.8% in 9M15 vs. 9M14. As such, this group continued to be the only growth driver as domestic enterprises posted a decline of 2.7% within the same period. Meanwhile, import turnover in 9M15 vs. 9M14 was up 15.9% to USD 125b.
  • Latest data showed Vietnam incurred a trade deficit of USD 24.3b with China as of end-Sep. The US remained the biggest client of made-in-Vietnam, accounting for 21% of Vietnam export. The EU is the runner-up with 19%

Total registered FDI surged 53.4% in 9M15 vs. 9M14 on big-ticket projects
Committed capital in September alone reached USD 3.8b, largely thanks to the USD 2.4b investment into Duyen Hai 2 Thermo Power plant from Janakuasa – a Malaysian power producer. Disbursement was also well on track at USD 9.7b through Jan-Sep, up 8.4% vs. last year’s same period.

The Macro Picture

Economic Activity

Highest 3Q GDP growth since 2011 – VCSC raised growth target to 6.8%
GDP growth in the third quarter of 2015 registered at 6.81%, showing solid sequential gains from growth of 6.12% in 1Q15 and 6.47% in 2Q15. Growth through Jan-Sep reached 6.5%.

  • The industry and construction sector (~38% GDP) continued to be the main growth driver, expanding by 10.4% in 3Q15 vs. 3Q14, beating even our bullish expectation of 9.3%. The manufacturing subsector was a key component of this growth-driving engine, ramping up 12.3% (vs. 9.8% in 3Q14 vs. 3Q13) thanks to the bulk of FDI into electronics manufacturing (from Samsung and the likes) and more recently into the textile industry in anticipation of TPP.
    Macro-Update2-2
  • The services sector (~43% GDP) gathered more momentum in 3Q as growth resumed in the hospitality services subsector (growth of 5.5% in 3Q15 vs. 0.3% in 2Q15) on the back of a pickup in the number of international tourists to Vietnam in 3Q15 vs. 3Q14. In the 3Q15, that number rose 6% vs. 3Q14, following a slump of 10% in 1H15 vs. 1H14. We attribute the spur in visitors to the visa exemption program that was put in place since July.
    Macro-Update3-3

We are raising our 2015 GDP growth forecast to 6.8%, with growth in the 4Q15 alone pencilled in at 7.5%, driven by further strength in the manufacturing and services subsectors in the year’s busiest season.
Macro-Update3-4

Consumer Price Index

Prices declined for the second consecutive month on drastic pump price cuts

Macro-Update3-5-1

October inflation outlook – Recent fuel price increases could send inflation back to an uptrend

  • As global oil price rebounded after hitting the 6½ year low in mid-Aug, the retail pump price was raised a collective of 4.7% since mid-September to date. As such, the transportation basket will assert the strongest upward pressure to the October reading.
  • However, we believe the lingering indirect impact of the pump price cuts in September will keep subdued the price of foods, construction materials and other consumer goods.

We estimate October inflation to be up 0.1% vs. September.

Macro-Update3-5-2

Domestic Activity

Real retail sales growth in September at 5-year high, on par with the pace in August
Macro-Update3-6-1

Auto sales posted impressive result year-to-date (up 57% in 8M15 vs. 8M14) despite some cool-off in August – the seasonal low of consumption

Macro-Update3-6-2

Industrial ProductionM

Industrial production gathers further pace as mining activities rebound in Sep
Macro-Update3-7

Chart of the Month

Forex rate – SBV’s constant emphasis on stabilizing the Dong

Macro-Update3-8

Macro-Update3-9

Macro Indicators

Macro-Update3-10

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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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

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