Market Recap – Foreign Ownership Limit Explained

August 2015

Foreign Ownership Limit Explained

• China’s slowing growth and devaluation of its yuan set off turmoil in the global markets including Vietnam’s.
• Circular 123 was issued to provide guidelines on FOL expansion. In short, companies will decide whether to raise FOL or not (if allowed). SSI became first stock to have 100% foreign room on Sep 1.

China rocks global markets with yuan devaluation. Vietnam’s largest trade partner decided to devalue its yuan by nearly 2% in August in a bid to kick start slowing growth, sending shockwaves through the global markets. Vietnam’s central bank promptly responded with a duo of policy moves that effectively devalued the dong by 3%. The local stock market tumbled, exacerbated by forced margin selling of retail accounts and nearly USD 19m of worth of net divestments from foreigners in August alone. Nonetheless, foreign net inflows stood at USD 226m ytd. The VNI is down over 9% in August but remain up 3.5% year-to-date through August.

SSI is first stock to have 100% foreign room. On Sep 1, additional foreign shares of Saigon Securities was made available for trade to mark the first day Decree 60 (law to expand FOL) went into effect. The event provides some clarity on implementation guidelines set forth in Circular 123. Specifically, if the company operates in a business that allows for unrestricted foreign ownership and it wants to raise FOL, it simply needs to submit an application to the SSC. The approval is more of a formality since the company can only submit an application following it has assessed and provided documentation that it operates in a business line that allows for unrestricted FOL (see figure 1: The Process to Raise FOL).

No changes to business charter, no general shareholder meeting required. The SSI event appear to confirm that a General Shareholders meeting is not required to raise FOL. As we have pointed, a General Shareholder Meeting is only required if the company’s business charter specifically has a FOL ratio inscribed and hence shareholder approval is required to make any changes to it. Most companies do not mention FOL in their charters given that FOL is stipulated at 49% at the government level (FOL at banks is still regulated by the central bank at 30%). However, a formal BOD decision in writing to raise FOL is required as part of the application to the SSC.

Decision to raise FOL still in hand of company. Nevertheless, investors need to remember that for companies that want to raise FOL, they must assess whether they can do so or not based on a list of conditional business lines. This list is expected to be published by the Ministry of Planning and Investment sometime in Sep/Oct of this year. Furthermore and probably the most important point is that the decision to raise FOL or not still rests with the company itself. Our discussions with management of several companies have revealed that most are hesitant to raise foreign ownership for various reasons including the most obvious of not wanting to cede control of their businesses to foreigners.

Market Activity

VNI PERFORMANCE

HNI PERFORMANCE

EMERGING MARKETS PRICE-TO-EARNINGS (Trailing 12M)

ASEAN 5 MARKET PERFORMANCE

FOREIGN ACTIVITY

VCSC COVERAGE UNIVERSE

Corporate Updates

DPM: PetroVietnam Fertilizer and Chemicals Corporation

Analyst, Tram Ngo, tram.ngo@vcsc.com.vn

Stock Performance MTD -2.5% / YTD +4.8%

Low oil equal high profits; Great dividend

We issued an update on DPM, in which we revised up TP to VND 37,500 and raised our FY15 NPAT-MI by 12%.

We revised our valuation upwards base on the expectation that gas input cost will get cheaper from lower oil price and urea average selling price will be driven up by temporary supply disruption due to shortage feedstock of DPM’s competitors including Ha Bac, Ca Mau and Ninh Binh Urea plants. We expect DPM to benefit from this situation as selling prices at the end of August are 7% to 11% higher than our average price assumption in the first half of August.

The share price saw modest gains of nearly 7% in the first three weeks of Aug but ended down nearly 3% MTD due to overall bearish market sentiment at the end month.

HT1: Ha Tien 1 Cement

Analyst, Thanh Duong, thanh.duong@vcsc.com.vn

Stock Performance MTD +1.8% / YTD +28.2%

Net forex gain in 1H15 could negate negativity from the recent devaluation

In two consecutive weeks in August, the SBV devalued the mid-point rate by 1% and widened the trading band to 3% from 1%. Currently VND/USD is traded at circa 2.7% higher than the new mid-point rate at most commercial banks, implying the Dong has depreciated 5% against the USD year-to-date.

The recent Dong devaluation will dampen HT1’s bottom line in 3Q15 due to exposure to LT debts denominated in USD and EUR. To be specific, HT1 currently has 19m of USD debt, and hence 5% depreciation of the Dong, by our estimate, brings about a forex loss of VND 20b, 60% of which would be recorded in the third quarter’s P&L. Moreover, as the EUR has appreciated 4% against the Dong since end of June, HT1’s might incur another forex loss of VND 70b in 3Q due to their outstanding EUR 70m debt.

However, the estimated forex loss of VND 82b in the 3Q is cushioned by HT1’s cumulative forex gain of VND 93b through the first 6 months of this year. Hence, the year-to-date figure through end of 3Q would be about VND 10b, which is in line with our full year forecast of foreign exchange translations to be net neutral to earnings for 2015.

MWG: Mobile World Investment Corporation

Senior Analyst, Phap Dang, phap.dang@vcsc.com.vn

Stock Performance MTD -7.7% / YTD -24.3%

ESOP revised to appease shareholders. MWG to open grocery stores.

Revenue +58% and NPAT +50% in 7M15 vs 7M14, both having achieved 55% of our respective forecast. Store expansion propels growth, as store count for Thegioididong (mobile) reached 446 as at July 2015 (+102 stores YTD) while that of DienmayXANH (consumer electronics) touched 33 (+13 stores YTD). Despite this impressive performance, MWG share price fell during the
month in parallel with the market downturn without support from foreign investors as foreign room remains full. This has pushed MWG into a grossly undervalued territory with FY15 PER of 9.3x and FY16 PER of 7.9x per our forecast.

On 27 Aug, MWG announced several BOD resolutions that are in favor of shareholders in our opinion, including 1) VND 1,500 cash dividend for FY15 to be paid in 2Q16 (yield of 2.3%), 2) ESOP program for FY16 that lowers the maximum potential dilution compared to FY15’s (3% vs 5%) while the degree of dilution is also linked to profit growth and MWG share price performance relative to the overall market, and 3) new entry into grocery retailing. See more details in our daily notes dated 27 Aug 2015.

NBB: Nam Bay Bay Corporation

Senior Analyst, Tuan Hoang, tuan.hoang@vcsc.com.vn

Stock Performance MTD -3.8% / YTD +3.7%

NBB impressive 1H results as slow land plots sales are offset by divestment income. TP reduced to reflect delayed City Gate Towers handover but market perform rating unchanged.

NBB announced Q2 earnings result with 1H 2015 NPAT reaching VND 41b, which amounts to 43% of our previous forecast for the full year. Most of NPAT in Q2 came from the divestment of NBQ (a subsidiary of NBB doing mining in Quang Ngai Province) at a price of VND 47.7bn which generated financial income of VND 43.2b. Real estate sales progress has been slow compared to 2014 as most of NBB’s current products are land plots located in secondary provinces like Quang Ngai and Bac Lieu which are smaller and have experienced slower cyclical recoveries than the major urban centers. From Q2 2015 until year-end we expect NBB‘s real estate revenues will continue to come mainly from land plot sales in existing provincial projects like Son Tinh in Quang Ngai and Bac Lieu. Based on our discussion with the company, NBB is looking to divest from another mine in Quang Ngai (QMI) to focus on its core real estate business.

Regarding City Gate Towers, revenue from this project will not be recognized until 2017 due to slower than expected construction progress; as a result, we reduce our 2016 NPAT forecast by 32%. Divesting from mines in Quang Ngai will help to maintain some earnings momentum, partially compensating for sluggish real estate performance.

We also know that CII plans to acquire more NBB shares at a price of VND 27,200/share to raise its stake in NBB to 51% by June 2016 either through put through transaction or private placement. We expect this acquisition will have no impact on the joint venture between NBB and Creed Group for the City Gate Towers project.

We reduced our target price for NBB by 3.1% to VND 22,800.

PDR: Phat Dat Corporation

Senior Analyst, Tuan Hoang, tuan.hoang@vcsc.com.vn

Stock Performance MTD -18.9% / YTD -1.9%

PDR: Completion of rights issue to help pay-off current loan from Dong A Bank

PDR reported on Aug 27th, 2015 that the issuance of 65.1m shares to existing shareholders at the price of VND 10,000/share has now been completed, as part of a rights issue announced earlier this year. This event has increased PDR’s total outstanding shares from 136.7m to 201.8m and was captured earlier in VCSC’s daily news on July 3rd 2015.
All the proceeds of VND 651b from this issuance will be used to pay off the existing debt balance with Dong A Bank which amounts to VND 687b according to PDR’s Q2/2015 financial statements. Most of the loan was used to finance the development of Ever Rich 2 project which PDR recently transferred to one of its subsidiaries. As a result of this debt settlement, PDR’s long term debt balance should fall from the current VND 2,756b to VND 2,137b (some of the proceeds will be used to pay-off short term loans from DongA bank). The remaining balance comes from long term bonds all of which mature in Dec 2017. These bonds were privately issued to 5 investors and carry an interest rate of 15%.

After this issuance, Mr. Nguyen Van Dat, PDR’s Chairman, becomes the largest shareholder of the company with a 59.95% holding, followed by Vietnam Enterprise Investments Limited (Dragon Capital) with a holding of 5.99%. At today’s closing price of VND 15,800, PDR is trading at a PER of 26.1x of VCSC’s 2015 forecasted EPS of VND 605 (fully diluted)

PNJ: Phu Nhuan Jewellery

Analyst, Vy Nguyen, vy.nguyen@vcsc.com.vn

Stock Performance MTD -14.2% / YTD +3.2%

DongA Bank casts shadow but fundamentals remain strong

We suspend our rating for PNJ for the time being as DongA Bank, in which PNJ has VND 395b long-term investment equivalent to 7.7% stake, has been put under the SBV’s special supervision. The incident poses downside risks to near-term earnings as PNJ will have to increase provision for DongA Bank. Currently, PNJ’s total cumulative provisions for the DongA Bank investment is VND141b.

PNJ’s core business remains solid with 1H15 earnings rose 44% mainly driven by 45% gold jewellery retail sales growth despite 18% gold bar sales slide. On-ongoing success of the renewed strategic focus on customers and aggressive store expansion is helping PNJ boost retail sales (27% same-store-sales growth and 17 new stores opened during the period). Higher revenue contribution from retail also lifted blended GPM (+ 365 bps vs. 1H14).

Revised FY15 NPAT growth forecasted to be 11%, post regular planned provision of VND 140b for DongA Bank. 1H15 results have already fulfilled 46% and 67% of our full year revised revenue and NPAT forecasts. Please see our PNJ 1H15 Update.

PLC: Petrolimex Petrochemical Corporation

Analyst, Tram Ngo, tram.ngo@vcsc.com.vn

Stock Performance MTD -1.2% / YTD +25.6%

Asphalt profits surge on infrastructure and cheap oil

We issued an update on PLC, in which we revised up TP to VND 38,900 and raised our FY15 NPAT-MI by 19%.
As PLC stores materials of 3 months for lubricant and 1 month for asphalt, the effect of falling oil price has not been fully reflected in 1H15. As such, we revised our forecast on expectation that further weakening of oil will contribute more upside for both PLC’s lubricant and asphalt businesses. Share price mostly jumped in late July and extended its rallying streak to the early of August on the back of strong 1H15 results (NPAT jumped 78% vs. 1H14 mainly thanks to asphalt sales growth and margin expansion from weak oil price). We believe profit-taking (PLC is up nearly 26% YTD) and bearish market sentiment caused the share price to slip slightly in late August.

PPC: Pha Lai Thermal Power

Senior Analyst, Duong Dinh, duong.dinh@vcsc.com.vn

Stock Performance MTD -11.3% / YTD -31.0%

Fairly valued in absence of change in management course

We initiated on PPC with M-PF rating and target price of VND 20,600. Fully depreciated asset by 2016 as well as soaring contribution from the associated company – Hai Phong thermal power plant is estimated to boost PPC earnings from 2016.

However, Pha Lai 1 will have to re-negotiate its PPA with some possibility of lower price for the Electricity of Vietnam’s benefit. In addition, there is a risk that PPC will be forced to dispose its stake in Hai Phong Power Plant due to restriction of cross-holdings between “sisters/brothers” within Gencos, the power generation companies wholly-owned by EVN.

Finally, the fact that JPY/VND appreciated significantly in recent days hurt PPC’s profit. Using 28 Aug JPY/VND rate of 186.4, forex loss is estimated to be VND 244b vs. our previous estimates of VND 77b.

Total shareholder return widens to 15% from 10.5% since our initiation date due to weakness in share price given market volatility worldwide.

PVD: PetroVietnam Drilling and Well Services Corporation

Manager, Tuan Nguyen, tuan.nguyen@vcsc.com.vn

Stock Performance MTD -17.3% /YTD -33.5%

Day Rates Heading Lower

In our 1H15 update, we downgraded PVD rating to M-PF and cut TP by 16% to VND44,500 (adjusted for recent 100:15 stock dividend) due to fundamental weakness given the stall in oil recovery with Brent oil below USD 50 per barrel at the time of our publication (Brent has since recovered to around USD 50-52). We expect day rate for PVD’s own JU rig fleet to plummet from USD 135,000 to USD 120,000 – the floor price agreed between PVD and oil companies if oil falls below USD 55. Meanwhile, day rate for TAD will be lowered to USD 190,000 in return for a contract extension until the end of 1Q17 (TAD contract was set to end Jun-16). Therefore, although our FY15 NPAT-MI forecast is kept unchanged at USD 87m (-18.5% vs. FY14), we project FY16 NPAT-MI to drop about 23% before recovering about 6% in FY17 mainly due to lower financial expenses.

The bearish view on oil price and persistent foreign net-selling (total divestment of USD 5.3m in August) has seen the stock lose over 17% MTD. Although the stock price has recovered a bit after touching its 52-week low of VND 30,800, we expect the upside is still limited given weak oil price and market momentum against PVD and other O&G stocks.

GAS: PetroVietnam Gas Corporation

Manager, Tuan Nguyen, tuan.nguyen@vcsc.com.vn

Stock Performance MTD -21.0% / YTD -29.7%

Weak oil weighs on earnings

In the 1H15 update report, we downgraded GAS from M-PF to U-PF and revised its TP down 35% to VND 44,300. We revised our average oil price forecast from USD 60 to USD 55 per barrel in FY15 and to USD 50 for 2016 and 2017, which negatively affect our oil-linked selling price assumptions for LPG and ATOP gas volume sold to power plants. We note application of market pricing for the latter is still delayed but we expect implementation in the second half of 2015 and will be applied retrospectively from April 2014.

GAS is also expected to raise its charter capital from VND 18.95tr to VND 28.95t. Thirty percent of the new capital of VND 10 trillion is expected to come from new issuance, i.e. ESOP and private placement.

The bearish view on oil has weighed heavily on GAS. The stock touched a two-year low in the month before recovering strongly on a recent rally in oil prices.

TLG: Thien Long Group

Analyst, Vy Nguyen, vy.nguyen@vcsc.com.vn

Stock Performance MTD -0.7% / YTD +34.9%

Lower-than-expected GM expansion offset by low SG&A spend, earnings intact

1H15 NPAT jumped 29% supported by 14% increase in sales coupled with GPM expansion on lower input costs and lower SG&A expenses. GPM expansion of 91 bps was more subtle than we had expected but still drove a 17% increase in gross profit in 1H15 vs. 1H14. SG&A expenses as percentage of sales fell to 24.5% in 1H15 from 24.7% in 1H14 thereby compensating for lower-than- expected GPM expansion.

We revised down our full year forecast for both GPM and SG&A as a percentage of sales. The net effect of these changes is neutral to earnings. TLG’s 1H15 results have fulfilled 46% and 50% of our full year revenue and NPAT forecasts respectively. Please see our TLG 1H15 Update

VCB: JSC Bank for Foreign Trade of Vietnam

Analyst, Thuy Le, thuy.le@vcsc.com.vn

Stock Performance MTD -13.03% / YTD +39.02%

Look to accumulate VCB on banking fall-out

1H15 audited report indicates some blemishes but so much is working in favour for VCB that clients should continue to accumulate on weakness. Pluses includes laser focus on lifting NIMs, favoured candidate to break institutional equity capital raising drought and benefiting from fall-out in the clean-up of retail/SME focused banks.

In 1H2015, VCB focused on lifting NIMs thanks to a repositioning of the credit portfolio towards low risk bonds and continued push into retail lending. In addition, with deposit growth near the top of its peer group yet demand deposits as percentage of overall deposits remains near historical high (25%) helps keep cost of funds at the forefront. Growth in loan book and bond holdings was 10.2% in 1H15, the second fastest rate of listed-peer growth (excluding BIDV).

We see VCB as the most favorable candidate to successfully raise equity capital from institutional and foreign investors, but the timing is likely to slip to 1Q16.

The recent currency devaluation has no significant impacts on VCB as the USD and EUR net exposure are small (1% of total loan book). We leave our target price unchanged at VND 46,100. VCB is trading on a forward P/B of 2.5x based on forward BVPS of 17,000.

Research Reports Issued this Month

Should you request a copy or should you have questions regarding these reports please contact our Head of Research, Tu Vu at tu.vu@vcsc.com.vn or + (84 8) 3914 3588 ext: 105.

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.

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.
Small Cap Research: VCSC Research covers companies with a market capitalisation of up to US$50mn, inclusively. Clients should note that coverage may not be consistent and that VCSC may drop coverage of small caps at any time without notice.
Target price: In most cases, the target price will equal the analyst’s assessment of the current fair value of the stock. The target price is the level the stock should currently trade at if the market were to accept the analyst’s view of the stock, provided the necessary catalysts were in place to effect this change in perception within the performance horizon. However, if the analyst doesn’t think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.
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