Invest in Vietnam: Picking Stocks for Sustainable Gains as Liquidity Falls

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Disclaimer: the opinions expressed herein are that of Rongviet Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.

WORLD ECONOMY

US – The economy appears to look better in Q3/2016

According to the updates, the US macroeconomic indicators experienced a positive growth in July. In particular, industrial production went up 0.7% as compared to previous month and better than market expectation of a 0.2% increase. This figure is the highest in 20-month period. This improvement was also reflected through US Manufacturing PMI, in which August figure reached 52 points, downed slightly from 52.9 points in July. Further moderate upturn in business condition and new orders led to the expansion in manufacturing. It is noticeable to bear a positive outlook for US industrial production in the third quarter.

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Alongside with the improving macroeconomic indicators of the US economy, Federal Reserve Chairman (Janet Yellen) said that the US could likely hike interest rates in coming months as the US economy is close to hitting its targets. However, after the latest US employment report, many economists supposed that the upcoming interest rate hike would likely occur in the end of 2016 or early 2017. In August, the economy continued to be at full employment when the unemployment rate remained at 4.9%, but created only 155,000 new jobs, lower than expectation of 180,000 jobs. According to a Bloomberg survey, economists put a 32% probability of rate hike in September, 2016 and 59% in December, 2016.

Japan – BOJ strongly stimulated after economic stagnation

According to the updates, the Japanese economy showed no growth in the second quarter, lower than the 0.5% expansion in Q1 and worse than a 0.2% increase of market forecast. Private consumption, government consumption, and exports fell sharply which became the key factor pulling down GDP growth in Q2/2016. As well as weakened domestic demand, the yen went up 14% against the US dollar making export activities as well as the Japanese economy suffer. In July, Japanese exports fell by 14% yoy and the 10th monthly decrease due to the yen’s appreciation.

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At the same time, the stagnation of industrial production in July is less optimistic for economic growth in Q3/2016. In particular, industrial production declined 3.8% yoy, which was the 8th consecutive month with a negative growth. Japanese manufacturing PMI was also below the threshold of 50 points, which continued contraction since January 03/2016. As mentioned in the previous strategic report, we believe that the ineffective negative interest rate policy and the slowdown in the private sector led economy worsen. Investors still wait for the effectiveness of the stimulus program to help economy recover.

China- Unclear transformation

Half-year has passed, yet the Chinese economy has yet to show a clear recovery signal. Weakened domestic production demand caused the importing activities to deteriorate. In July, net imports were USD 184.7bn, 4.4% lower yoy. July trade balance therefore recorded USD 52.3bn, highest since January. Industrial production has recovered, as PMI was within the expansion range (50.6 points) in July, however that of August declined to 50 points, discontinuing the trend. The decreasing number and value of new orders show that both domestic and oversea demand are going to be flat in the upcoming months.

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Studying the short-falling movements, economists have been anticipating the influenced by China’s new economic stimulus program, targeting GDP growth of 6.5 to 7% in 2016. Nonetheless, PBoC has only revealed the signals of cutting the banks’ reserve requirement in the second half of the year but not cutting the interest rate due to the existent fear of wealth bubbles. The economy’s movements have affected CNY as well. The currency has been devaluated by around 3%. USDCNY rate is forecasted at 6.8 at the end of 2016, equivalent to a further 1.8% devaluation.

GLOBAL STOCK MARKETS: Economic factors were closely observed

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This year August is a so-called “peaceful summer” for world stock markets. US market was narrow as there was little fluctuation in trading. According to JP Morgan, August saw the fourth narrowest trading range since 1928 (other years were 1958, 1964 and 1965). Besides FED delaying its decision to lift up rate, investors were quite comfortable with improving economic data in the US such as industrial production rose 0.7% in July vs 0.3% expected, inflation slightly moved up 0.2% while core inflation increased 0.1%.

EU stock markets also moved sideways. The quite summer began after shocking events like Brexit and negative data on Italian banking system. FTSE 100 and CAC 40 did not see much monthly change. DAX proved itself the best regional in August when it added 2.47% to July’s close thanks to 5-year-high GDP growth rate, which implies that Germany’s economy is the healthiest one among other members.

On contrary to last year August when China’s currency devaluates to cause sharp drop across Asia markets following by other major global markets collapse, this August was the month of Asian shares. SSE (Shanghai), Hang Seng (Hong Kong) were top performers with the gains of 3.59% and 4.96%. VNIndex came third with 3.43% gain.

Oil prices fluctuated strongly in August. In the beginning of August, oil price withdrew to USD40.7/barrel (-20% compared to June’s close) with rising concerns of OPEC members continued to increase the output. However, oil price rebounded to the month height of USD49.2/barrel (+21% from August 2nd) thanks to decreasing of US inventory and OPEC’s plan to open a conference in September to discuss about freezing production. However, bad news came in the final week of August as Iraq, Iran and Nigeria seemed not to be pleasure with the plan of OPEC as well as worry of slowdown demand in China. Last but not least, the strengthen of USD also contributed to the drop of oil price.

VIETNAM ECONOMY

In September Strategy Report, RongViet Research mentions some policy implications for interest rate and exchange rate based on recent macroeconomic developments as well as gives some comments on the process of SOE reform. The third quarter economic growth will be announced at the end of this month with our projection at 5.6-5.8%. This growth rate could disappoint investors, along with the external uncertainties such as (1) the Fed rate hike, (2) the yuan depreciation, (3) there is only slim chance TPP will be ratified this year and US election could make investors less optimistic during the rest of 2016.

Favorable condition for lending rate to decline

Monetary market last month experienced a rare phenomenon, interbank rate dropped to the record low level. Specifically, overnight rate in August averaged 0.83%/year, 17 basis points lower than last month. Remarkably, interest rate has been in the downtrend and at the end of August, overnight rate dropped to only 0.32%/year, lowest figure over the last few years. Not only overnight rate but also other common terms in interbank market also experienced the similar issue. Therefore, we could infer that loan demand in the system is relatively low. As mention in August Strategy report, the State Bank proactively utilized treasury bills to neutralize the residual amount in the system. Total issued treasury bills reached VND 70,000 billion at the end of August. Furthermore, treasury bill rate also decreased to 0.59%/year, lowest in history. In fact, treasury tool only has the neutralizing effect in short-term. Liquidity surplus situation over the last few months pointed out that the issue came from commercial banks.

According to statistics from Vietnam Bond Market Association, the winning rate for government bonds rose to monthly-high after winning rate fell in most maturities (except 2year term). At the end of 8/2016, the State Treasury successfully mobilized VND 239,284 billion, achieved 96% of adjusted plan for this year (VND 250,000 billion). Capital demand for the economy is no longer undercut by public sector, however, credit growth is still slower than mobilization rate, leading to the difficulties in regulating demand-supply of the Central Bank. For the developing economy as Vietnam, capital demand for production and businesses is still at high level. However, business screening over the last years, partially processing bad-debts and requirements for safety made banks to be more cautious. Despite of favorable liquidity, we have not recognized the aggressiveness of the State Bank in term of downward adjusting operating rate. Instead, we believe that the lending rate will depend on the ability to balance capital of commercial banks. At this moment, being less cautious to increase credit market share will be more suitable for healthy banks which went through the restructuring period. This trend is happening in several group of commercial banks to enhance credit growth and support economic growth in 2H2016.

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The necessary to devaluate local currency from trade balance

Not as noisy as liquidity story, central rate slightly adjusts over the last days. Compared with the downward decline from the last 2 months, central rate remains stable. However, we believe that it is the time for the Central Bank to devaluate VND. Perhaps, we should start with the story of trade balance this year. Overall, Vietnam net exported over USD 2 billion in 8 months. This figure relatively equivalent to the trade surplus of USD 2.8 billion over the same period of the last 2 years. However, on the inside, it is the complete different story. The difference comes from the trade balance between domestic and foreign investors. 8M2014, FDI sector had the trade surplus of USD 6.7 billion, domestic sector had the trade deficit of USD 3.9 billion. Those figures after 2 years were USD 14.1 billion and USD 12.1 billion respectively. This fact was resulted from the decline in prices, leading to the significant drop in exporting value of several goods. It also delves into deteriorating competitiveness of domestic sector over a short period of time.

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SOEs privatization and divestment: the latest efforts

The equitization of state-owned enterprises (SOEs) in 2016 is not as hasty as in 2015. As of 20/08/2016, 48 SOEs went through equitization, this figure is equivalent to only 21.6% of actual result in 2015. However, the process of privatization is considered to be suitable with the goal of period 2016-2020 (250-280 companies which are forced to be equitized, half of 20112015 period). IPOs remained stable with higher success rate (increased from 45% to 75%). Thus, investors’ interest is improving, especially the IPOs of big corporations (Vinapharm, VEAM, Viglacera, Vietnam Livestock Corp…). Total bought value grew by 60% compared to 2015’s result thanks to these companies.

Under above developments, investors’ expectation on SOEs reform has not been fulfilled. The drawbacks include (1) big-ticket “equitization” sales have been delayed years by years; (2) the lack of SOEs’ transparency after IPOs; (3) the State retains majority ownership after IPOs. By this time, one of big name is Mobiphone, however, the risk of revaluation could delay its IPO. The lack of transparency and majority ownership by the State after IPOs should be a big disappointment of the SOEs reform. The most prominent event happened is the removal of Vinamilk foreign ownership cap, it is the first step for SCIC to divest from the best companies on Vietnam stock exchange. However, at current pace, we believe that the divestment of SCIC could be delayed so far. Recently, the Prime Minister has stressed the sales of State stakes in beer giants Sabeco and Habeco. The listings of these two companies must be done prior to their State stake sales, this latest information could be an attractive story for investors, as well as the newest effort of new Government to push the SOEs reform.

The Government may fully divest Habeco in 2016 (~VND 9,000 bn, equivalent to 81.79% stake). Meanwhile, the sale of the state’s stake in Sabeco has two phases: (1) reduce the state ownership from 89.59% to 36% once through public auction (~VND24,500 bn in 2016), (2) sell the remaining state’s stake in 2017 (~VND16,000 bn), after being listed. Thus, it is unnecessary to sell stake in Vinamilk, the Government could receive at least VND25,000 bn this year, a significant contribution to the budget could reduce fiscal pressure. However, it is still an open question to make it happen.

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AUGUST STOCK MARKET: Investing in bad-luck month

Similar to US market where September is considered to be the worst month to invest, Vietnam market also has its own bad-luck month. That is July in the lunar calendar, which is this August 2016, when Vietnamese believe most of their serious work will end up not good. And whether it is coincidence or not, a lot of market shocks indeed happened in this month, causing significant losses for many people. First, it was TTF who announced Q2 loss of VND 1,128 billion due to nearly VND 1,000 billion shortage of inventory. Similarly, the 2015 financial statement of ATA showed 365 billion value of inventory evaporated, and received Disclaimer of Opinion from auditor. Also not to mention large loss of JVC, HAG and HNG in the first half of 2016. The price of these stocks, after the bad news was released, all went down significantly. These shocks also raised concerns about the transparency of listed companies as well as the ability to protect investors of the competent institutions and the current regulations.

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On the other hand, there are still some sectors outperformed the market such as Food & Beverage, Basic Resources or Health Care. There are different explanations for the outperformance of these sectors. For steel stocks (which belong to Basic Resources sector), they are benefiting from the preliminary AD duty on imported coated steel (non-alloyed flat steel, galvanized, galvalumed, hot-dipped) from China (including Hong Kong) and Korea. The appreciation may also be either a market reflection for the possibility of lifting FOL (DMC), share repurchase program (MSN) or simply the changing view for the company outlook (KDC, FPT). Overall, each stock that outperformed the market has its own story, yet these stories are not easy to be discovered by everyone.

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As the month has already past, it is easy to look back to see which stocks have gained and which opportunities have been missed. In fact, the market movement in August, especially when VN-Index went sideways for 10 consecutive sessions (from August 12 to August 25), proved that making money in this month was not easy. A majority of stocks could not breakout in the context of highly concentrated capital and foreign investors being net sellers for the whole month. At the end of the month, VN-Index gained 3.4%, but only VN30 rose 4.1%, while VNMID down by 0.3%, and VNSML fell significantly by 4%. These movements implied that the increase of VN-Index was mostly thanks to some large caps stocks, which meant most investors, who do not own these large caps, may not benefit from such increase.

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Losing patience in this sideways market, a significant part of the cash flow had turned to speculative stocks, especially TTF, DRH, HAG, and HNG, for promising quick profits. Some did succeed in bottom fishing; for example, TTF surged from 8,100 to 13,400 (+65%). Still, anyone who bought these stocks just a bit too soon or too late, their lost was inevitable. All in all, return from “catching a falling knife” can be very high, yet the players also bear enormous risks.

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Looking back a series of events in last month, it is true that investment opportunities still available, but the fact that market only moved in a narrow channel for quite a long time has caused many difficulties for investors. But eventually, at the end of the month, VN-Index did gradually rise and approached the year high. This movement somewhat reminded of Niu Lang and Zhi Nu tale, the story behind this bad-luck month, in which the two lovebirds waited for a whole year to meet each other. Yet, the fun was short as they are allowed to meet only once a year. Contrary to that folk tale, the participants in the market always want the fun to last long and a forever bull market. After all, an optimist would say that compared to the beginning of the month when the VN-Index approaching 620, the 674.6 point VN-Index achieved at the end of the month should be seen as a good sign. But taking a closer look, we can see that many market leaders seem not to have the catalyst to increase further. VNM was merely considered as indexing tool, VIC being affected by TTF, and each banking stock have its own problem. If foreign investors continue to net sell in next months, the possibility that the market decline is probably greater.

Foreign trading activities: Foreigners turned into profit takers at bluechips

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In HSX, foreign investors’ net sold VND1,837 billion while net bought in HNX VND249.56 billion worth of shares. Real estate sector and food & beverage sector were strongly sold, VND705 billion and VND 672 billion respectively. These 2 industries’ net sold data were partial by VIC (-VND569 billion) and VNM (-VND321 billion).

In case of VIC, we believe this move was different from foreigners’ net sold in first 4 months of the year with reasons of taking profit on convertible bonds. With information related to TTF, foreigners may concern in fundamentals which directly related to the business activities of the Group.

In case of VNM, net sold probably came from the step of taking profit as (1) stocks’ valuation is no longer attractive, and (2) forecast information that VNM will be added into catalogue of Db x-trackers FTSE Vietnam ETF fund (according to RongViet Research’s statistics conducted in October 2015, tickets which were added to the ETFs’ basket tend to discount later).

In addition, rating both 2 stock exchanges, the majority of stocks which were strongly sold were blue chips – which have grown much recently, encouraged VNIndex rise by 3.4% in August, while in the opposite direction, the stocks were strongly bought mainly from small and medium cap. Along with the move of the market in August with multiple “bluechipbiased” sessions, temporarily conclusion is that not only internal capital flow but also external’ s one tend to shift to stocks which have not increased much and neutral to the market volatility as stocks of small and medium cap.

September will be watched closely as there are lots of important events that will directly impact global financial markets. First of all, it is the ECB’s meeting on economic stimulus solutions on Sept 08th. Next, two weeks later, investors are following 2-day FOMC’s meeting on Sept 21st – 22nd for possibility of rate hiking. Thirdly, OPEC members will gather in Algeria on Sept 26th – 28th to discuss on product output freezing plan. Last but not least, on Sept 16th, the two largest ETFs in Vietnam will complete their trades before new stock baskets come into force. Most of these events occur in mid-September. Hence, foreign capital possibly won’t see much change until those days.

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SEPTEMBER STOCK MARKET OUTLOOK

VNIndex ended the month of August with an optimistic gain of 3.2% m-o-m and HNIndex 1.0% mo-m. That, however, did not reflect the gains of the market majority as larger tickers the like of VNM and VCB took turn to support the market index. Enthusiasm ran low among local investors while foreigners sold a net VND1,587bn in both exchanges; liquidity faltered as volume dropped 19% m-o-m and trading value 14% m-o-m. As investors cranked down trading and looked at each other for hints of a rally starting, VNIndex marched lifelessly towards 680.

Overall, the market has been receiving more adverse than supporting news. According to the State Bank, bad debts accounted for 2.58% of commercial banks’ total outstanding loans at the end of June, up from 2.55% from the beginning of the year. In absolute number, bad debts have expanded VND11,254bn or 9.5% since the end of 2015. Concerns over increasing NPLs sank VCB, CTG and BID just before the month of September started. Being one with the strongest asset quality among listed banks, VCB is already trading at a higher P/B multiple than its local and regional peers; the stock does not have room for foreign investors. Until NPL fears are completely priced in, we expect bank stocks to continue going sideways and thus have no impact on the overall index.

On the other hand, one of the biggest ETFs investing in Vietnamese stocks, i.e. FTSE ETF, just announced it would sell a number of blue-chips, e.g. HPG, KBC, HAG, etc. while increasing its holdings of only VNM and HSG in its third-quarter review. Since VNM announced it would lift the FOL to 100%, the company’s share prices have gained substantially and are currently at their alltime high. VNM’s being included in the ETF’s buy list was therefore not much of a surprise and should not have a huge impact on the market overall directions. Not only VNM and VCB but other large-caps such as VIC and MSN would also have little power to sway the index. The disappointment over Q2 earnings before extraordinary items along with the concerns of potential financial loss in Q3 due to the acquisition of TTF would remain a constraint to VIC.

While there are pressures to find the destinations for cheap funds, concerns are growing as stocks are trading at their historically high. A breakout in terms of market sentiment is therefore unlikely. VNIndex is trading at 16 times its trailing P/E, the highest in the past 5 years and it is increasingly difficult to find stocks with cheap valuation these days. Even so, we see no likely catalysts for a big washout. Instead, the market may continue to trade slowly as in the first half of September. ETF’s finishing their trading could help raise the spirit in the last two weeks of the month. Overall, it is unlikely the market will find a new trend soon and contracting liquidity means investors would be better off with stock picking rather than chasing funds flows.

VNIndex is expected to move between 650 and 678 and HNIndex between 82 and 84 in September.

At the moment, we recommend that investors focus on stocks with (1) positive industry outlook, (2) P/E and P/B lower than its peers and (3) positive growth of core earnings in 1H2016. Also, falling interest rates would justify higher valuations for companies with a strong history of cash dividend payments and/or high dividend yield (over 6%). We maintain a positive outlook for stocks in Construction & Building materials (steel, cement, plastic…), Retailing, Rubber tires, Industrial real estate. Besides, updates on SCIC’s sale of stakes in FPT, NTP, BMP, BMI among others could support the prices of these stocks over a short period.

SEPTEMBER INVESTMENT STRATEGY

Biased by large stocks, VNIndex and HNIndex have become less representative of the prevailing sentiment in the market. VNIndex being at its five-year high on top of the faltering liquidity should put a great many stocks at a disadvantage. As the likelihood of a correction runs higher, investors should consider realizing profits in those stocks that have gained substantially. Though the view of September’s stock market is not very positive, we believe there are still opportunities.

In the near term, investors can take a look at tickers in SCIC’s divestment list or those will be sold by ETFs this month. While FPT, being at a low valuation, is supported by strong projected earnings and updates in SCIC’s withdrawal HPG could be brought to attractive prices during ETF’s review. For long-term investors, we continue to recommend stocks in industries with strong growth prospect. Also, since interest rates are falling, dividend-paying stocks are also worth noticing.

HSG and NKG make the second best choices after HPG in the industrial metal sector. In late August, the Ministry of Finance announced it would impose an anti-dumping tax on galvanized steel imported from Korea and China. Less competition with cheap import steel could help improve selling prices and gross margins of HSG and NKG while supporting their sales volume in the upcoming months. Recently, NKG has invested strongly to better position itself in the value chain. The firm will start the second phase of its new cold-rolling line (400,000 tons/year) in December and another expansion phase (200,000 tons/year) in mid2017.

With a constantly-expanding backlog, HBC has surpassed CTD in term of stock price performance since early-2016. In 1H2016, HBC recorded 74% and 213% year-over-year growth rates in revenue and NPAT respectively and was able to maintain a remarkable gross margin of 9.8%. A private share placement to foreign investors in late 2016 may enable HBC to reduce its dependence on borrowings and cut back on interest expense, thereby improving its operating efficiency. HBC’s backlog at the end of 2Q2016 was around VND19,000bn, a not too far from that of CTD (VND 22,000bn).

Recent developments in the bankruptcy case of a Korean shipper called Hanjin have got certain impacts on seaport stocks, especially VSC. We estimate VSC makes from VND3.5 to VND4.2bn of revenue from servicing Hanjin goods to each month. Even in the worst case scenario, the amount of provision made related to Hanjin’s receivables, which are settled monthly) should have a negligible impact on the VSC’s bottom line. On the other hand, VSC just put to Phase 2 of Vip-Greenport, its second port in Hai Phong, into operation in early September for an incremental capacity of 250,000TEUS/year. This should bring significant improvements to VSC’s Q3 and Q4 business performance. Despite its restricted port capacity, HAH has been quite active in expanding its container vessel fleet in a long-term plan to upgrade its position in the logistics value chain. Fueled by strong FDI flows, Vietnam seaport operators still have plenty of room to grow over the upcoming years. Considering their outstanding profitability (i.e. high ROE and ROA) and strong cash dividends, fluctuations in the share prices of VSC and HAH could present a buy opportunity to long-term investors.

Q3 is the peak season for tourism companies. With the dominant market share of transportation in the Phu Quoc – Kien Giang area, SKG is considered a good candidate in this sector. SKG’s speed boat fleet is running at is ~80% on their current routes. However, growth potential for SKG is still substantial and could be realized as the company (1) increases investment in new boats on existing routes, (2) opens new ferry routes for Ha Tien – Phu Quoc and (3) opens new route from Soc Trang to Con Dao.

Our selection in each sector are:

  • Transportation: PVT, VTO, TCL, NCT
  • Seaports: HAH, VSC
  • Construction: CTD, FCN, SRF, HUT, HBC
  • Electricity: NT2, PPC,
  • Real estate: BCI, KDH, LHG, TDH
  • Retailers: SVC, PTB, MWG, PNJ
  • Building materials: BMP, HPG, HSG, NKG
  • O&G: PGS, PVS, PLC
  • Banks: CTG, ACB
  • Others: VNM, FPT, SKG, DRC, DPM, IMP, VFG, NCS, VNM

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HIGHLIGHT STOCKS

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MACRO WATCH

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INDUSTRY INDEX

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DISCLAIMERS

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