Invest in Vietnam: Your 2016 Outlook Part 4

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Ayurveda & Yoga Wellness Counseling Certification, Ho Chi Minh City, Vietnam

March 28, 2016

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

INVESTMENT STRATEGY AND IMPLEMENTATION IDEAS: VALUE OVER GROWTH

Overshadowed by uncertainties, 2016 is set to be a relatively harder year for stock investors. The stock market should see more volatility and a higher probability of extreme movements while the fluctuations of capital and market liquidity remain a threat to local market participants. This year, we focus our stock-pick strategies on three key themes:
(1) Countering increased market volatility and dwindling liquidity,
(2) Taking advantage of the equitization of SOEs and state holdings sales, and
(3) Capitalizing on the divergence of growth at sector and company levels

Fundamental stocks are better positioned to weather market turbulence but an oscillating market will open opportunities for bargain buys

As a rule, in flat or declining market, which are our high probability scenarios this year, value stocks tend to outperform. As capital gains become increasingly uncertain, we believe investors should prefer high-yielding stocks. In addition, strong earnings and sound fundamentals should provide a cushion against downside risk. Stocks such as KSB, BMP and CTD were barely shaken by the market last year. Given the positive outlook of their respective sectors, these stocks should continue to do well in 2016. Good fundamental stocks should have:
(1) Leading market share in the relevant sector,
(2) Sound fundamentals, characterized by strong cash position and low debt-to-equity ratio (preferably below 0.7x) and no exposure to FX risk,
(3) Consistent cash dividend payment with acceptable dividend yield,
(4) Positive industry outlook, and
(5) A position in the market top market cap quartile.

Our top picks include VNM, FPT, DPM, BMP, CTD, HPG, VSC, and REE. Of the list, HPG, REE and DPM returned the least in 2015 in terms of capital gain but are currently the highest-yielding stocks. For their low correlation with the others, these stocks can also provide good diversification benefits while enhancing income return for a market-oriented portfolio.

On the other hand, we also believe any strong market downturns will open a window for more active investors to “shop” for good stocks at a bargain. China’s currency play, oil price fluctuations and the VCP National Congress are the most likely factors to sway market sentiment this year. However, reversals are to be expected. In 2015, the VNIndex added an average 17.5% in the two times it bounced from the bottom to the next high, the first time was between May and July and the second time between August and November. Under our coverage, stocks with beta above 1.0 gained on average 10% in the three months after the first trough of 2015 and 20% in the sixty days after the date the yuan devaluation hit the hardest. In this category, our recommendations are PVT, VCB, SVC, ACB, HSG and HPG. These stocks fluctuate in line with the market and as long as their fundamentals remained intact, are good to buy on the dip.

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Outperforming companies in underperforming industries may be trading at large discounts

During expansion, the economy will grow but earnings and stock performance may diverge. The divergence has been notable among banks, real estate, O&G, non-life insurance, logistics and textile-garment companies. Since there are underperforming companies in outperforming sectors, there are outperforming companies in lagging sectors as well. Companies’ brand names and positions in their respective sectors form the first-line of defence against a contraction of the market. Then a good strategy and ample resources will allow them to grow sales and gain market shares at the expense of their competitors. Some of the companies with these traits are HSG, HPG and PVT. For the two steel producers, solid market shares and brand recognition on top of respectable financial strength and aggressive expansion strategy have been playing well to their advantage while smaller competitors have been hurt by Chinese steel. Low oil price is a slow-acting toxic to most O&G companies but is a boon for PVT as it increases the needs for oil tankers as storage space. Cheap oil and growing domestic demand have also boosted the capacity of Dung Quat Refinery, the only oil refinery in Vietnam. Since PVT the sole transporter of crude oil for Dung Quat, it is one of the biggest beneficiaries in this story. PVT also has a lot of room to grow in segments such as LPG and coal transportation and FSO/FPSO services. However, due to its link with O&G producers and foreign-exchange risk, PVT can sometimes trade at a significant discount to its intrinsic value. HSG, HPG and PVT are trading well below their 4-year-average P/E and Price-to-average-EPS ratios. Nonetheless, the cyclical nature of their respective sector should make these stocks more appealing to long-term investors, who may be more willing to hold their investments over the course of the business cycle.

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SCIC divestment & FOL extension: “New owners, new future”

With the issuance of Decision No. 60/2015/NĐ-CP in late 2015, the increase of the FOL will be something to watch this year. Although the government has been reluctant to release guidance on the enactment of the D60, FOL extension is still largely perceived to be completed in 2016. Not only will this increase the chances for Vietnamese stocks to be included in the MSCI Emerging Market Index but it might also help reverse the exodus of foreign capital as the Fed raises interest rates. More importantly, the extension of the FOL will go hand in hand with SCIC’s plan to divest from listed companies. For the State-owned financial company to dispose its holdings of blue-chips such as VNM, raising the FOL is almost inevitable. The only problem is how big the premium SCIC is asking.

Stocks in SCIC’s portfolio generally have stable core businesses, sound fundamentals and consistent cash dividends. Furthermore, SCIC’s exit from listed companies would increase their float. Combined with an increase in foreign-ownership limits, this could lead to a significant increase in foreigner participation.

Stocks gained an average 18.3% in the 3 months following an SCIC divestment and 23.6% in the 6 months after the divestment as compared to a return of 8.1% for the VNIndex in 2014 and 6.1% in 2015. Market leaders such as VNM, FPT, and BMP should attract lots of foreign interest if and when SCIC divests.

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IPO & UPCOM opportunities

Last year, the UPCOM saw nearly 80 new listings but the HNX estimated at least 380 public companies should have listed under the current regulation. In addition, 2015 was a slow year for SOE equitization with nearly 90 companies failing to make equitize by the end of the year.

Circular 180/2015/TT-BTC requires companies that go public after January 1st 2016 to list shares on the UPCOM within 30 days and for SOEs, 73 days after they equitize. The government is determined to hasten the equitization process and increase funding for its budget. For this, it is largely expected that there will be a flux of new listings in 2016.

Some of the most expected IPOs and UPCOM listings this year include Novaland, ACV, Garco 10, PVOil (may be delayed to 2017) and BSR, each a big player in its respective industry whose distinct competitive advantages justify their potential as an alternative investment opportunity to the stocks on the HSX and HNX. For example, Novaland, is a new star among Vietnamese real estate developers whose respectable pipeline of high-end and luxury condominiums and land banking strategy took the market by storm when the company acquired dozens of projects across HCMC almost overnight. Despite its hefty leverage, Novaland already have the endorsement of large institutional investors such as Dragon Capital and VinaCapital to offer their shares to the public.

ACV, on the other hand, is attractive for its monopolistic status as operators of 22 airports in Vietnam, including Tan Son Nhat, Noi Bai, Da Nang, Phu Quoc. Given projection of two digit-growth rates in the volume air cargo and international-flight passengers, ACV attracted a lot of attention when it equitized in 4Q2015. However, ACV has yet to reveal its listing plan.

We have also found other potential businesses that are already listed on UPCOM, i.e. WSB, Sowatco and ABI. Aside from the companies’ business potential, UPCOM stocks are attractive for their potential to migrate to the larger exchanges and for the improvements in liquidity and transparency that would justify higher valuations. However, investing in the UPCOM and new listing issues may be more fitting for long-term, high risk-tolerance investors.

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O&G STOCKS: A contrarian buy worth considering

Over the last two years, Oil & Gas stocks have gone through one of the worst periods of the last 12 years. A strong drop in earnings and stock prices has led to extremely negative investor sentiment for Oil & Gas companies. However, we believe 1Q2016 could be a period that oil price reach its “trough” for the industry cycle and that contrarians may find good entry points at current levels.
1. Historical prices during the three most recent oil crises, i.e. 1999, 2002 and 2009, a plunge in oil producer’s capital expenditures would begin to show positive effect on crude oil price after 2 – 3 years. In the last 18 months, nearly USD380 million of planned capital investments have been suspended. This translates into a reduction of future supply of nearly 2.9 million barrels/day. (Figure 16)
2. At current oil prices, oil-exporting countries such as Venezuela and Nigeria are being pushed to the brink of financial disaster. Moreover, the US expects to cut production by 700,000 barrels/day between 2016 and 2017, offsetting the additional supply of 500,000 barrels/day from Iran. Russia is also planning to reduce output, with a cut of 150,000 barrels/day in 2016.
3. In terms of market sentiment, despite the gloomy outlook for global oil prices, a contango still prevails in future markets. The number of long positions on oil futures has also improved, showing strong “bottom-fishing” activities. Moreover, the overall analyst consensus still leans toward an increase in crude prices for 2016 (Table 20).
4. Russia, OPEC, and the US all seem increasingly open to negotiations on output. Therefore, the possibility, though thin, of an agreement between oil-producing nations to stabilize the global crude market could happen.

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Vietnam Oil & Gas industry

At the moment, investors still have a pessimistic outlook for the oil & gas industry and reflect into prices for over a year (Table 21). With the lag between crude oil price and Vietnamese business activities, the true effects have just impacted and demonstrated into O&G companies’ results during the 2H2015 (Table 22). Based on the assumption that crude oil price will pick up gradually after the first quarter of 2016, we believe the results from Oil & Gas companies could have a less pessimistic prospects. Due to the “hard landing” at the end of 2015, we expect the growth in revenue and earnings could be demonstrated during late 2016. In addition, as the market sentiment will act at a faster pace than the actual announced business results, we believe the best time to invest could be when the prices of such stocks continue to plunge with continuously negative results. And this could happen soon in 1H2016.

Given the industry cyclical nature, we only recommend investors to go for O&G stocks with a willingness to take risk as well as the patience to see a recovery in oil price. The stocks that we are interested in and advise investors to pay attention to are GAS, PVS, and PVT as they are the companies that have stable fundamental factors and could be much more stable when the crude oil price stops significant fluctuation.

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STOCK PICKS

NOTES AND EXPLANATIONS

Below is RongViet Research’s top picks for 2016 which is based on a combination of the following factors:
(1) optimistic sector prospect in 2016,
(2) strong earnings prospect supported by perceivable catalysts,
(3) the underlying company possesses strong market position and/or competitive advantages, and
(4) the stock is trading at the significant discount to its intrinsic value with a consideration of the company’s long-term outlook.

The financial ratios and trading data presented below are computed as of 23rd February 2016.

RongViet Research’s guideline of stock ratings

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COTEC CONSTRUCTION JSC

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A raging growth engine
CTD is one of the key players in Vietnam’s construction industry. Unlike CII, REE, LCG and other constructors who have, over time, diversified away from their core businesses, CTD remains largely focused on the business line that makes up its brand name and reputation. CTD is among real estate developer’s top-choice for luxury malls, high-end condominiums and five-star resorts. The firm recently moved up the value chain to become a design-build contractor. CTD exceeded its annual net income target by 50% in FY2015. Last year, the Company teamed up with FCN and Cienco 1 to start its first BOT project. In a longer view, the government’s accommodative stance toward infrastructure development combined with the robust real estate market should fuel CTD’s growth engines.

What to expect

Strong order book and hefty backlog in high-end residential projects will carry top line growth. By year-end 2015, CTD had around VND13,500bn worth of construction backlog. Residential projects still account for the largest part of CTD’s revenue. The number of condo sales in Hanoi and HCMC doubled from a year earlier, marked by a hike in demand for high-end and luxury apartments. Not only is CTD the preferred contractor in this particular segments, it now has a huge advantage walking along property giants such as Vingroup and Novaland.

Robust FDI growth and strong investment for transport infrastructure is a powerful driver. Last year, FDI registration grew 12.5% from 2014 and the Ministry of Transportation predicted Vietnam would need USD40-50bn for the development of transport projects between 2016 and 2020. CTD began to see a surge in the number of industrial projects two years ago. The Company’s order book includes several high-value industrial projects of Unicons. In addition, a JV between CTD, FCN and Cienco 1 is working on the Phu Ly City Bypass BOT project.

The lifting of the foreign “room” is a near-term catalyst. Hopes for the FOL extension are high this year considering SCIC’s plan to liquidate its holding in listed companies and recent efforts by the government to upgrade Vietnam into an emerging market. CTD only has minimal free-floats and the lifting of the ownership limit should have some positive impact on the stock’s price.

2016 Outlook

– Revenue from the construction segment may grow 20% in 2016. Gross profit margin should remain strong at 8.0% thanks to the increase of its luxury residential projects.
– FY2016 NPAT and EPS (after Bonus & welfare funds) are forecasted at VND784.8bn (+19.8% yoy) and VND16,811 respectively.

Risks to our call

– A slowdown of the real estate market could affect CTD’s ability to sign new contracts and collect cash from ongoing projects.
– A delay in the implementation of the FOL extension may adversely affect stock price.

HAIAN TRANSPORT AND STEVEDORING JSC

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Transport business to drive growth in 2016
HAH, a small port in Hai Phong city, has seen its annual earnings growing continuously since its establishment. Solid recovery of Vietnam economy and robust growth of FDI in the manufacturing sector are strong drivers for port services providers such as HAH. Due to restrictions in port capacity expansion, the firm decided to venture into the container vessel business to generate top-line growth while strategically increasing the port’s throughput against expected fiercer industry competition among local ports. In addition, HAH’s well maintained operating cash-flows ensure an annual cash-dividend payment of about VND3,000 per share.

What to expect

A shift in FDI flows to Northern Vietnam, notably the triangle of Hai Phong – Bac Ninh – Thai Nguyen sets to keep 2016 cargo volume via Hai Phong ports at a healthy growth of 12-14%/year.
The strictly implemented truckload control policy and protection of Vietnam-flagged vessels on domestic routes have helped ward off foreign competition and support cargo volume for HAH’s vessel fleet, which currently makes up ~13% of the domestic container vessel capacity.
HAH added Hai An Time vessel in late September 2015. As the result, the firm’s vessel fleet capacity went up 58%. We expect HAH’s total transport cargo to increase 24% in 2016.
Low oil prices and stable freights should help maintain vessel gross profit margins. With fuel expense accounting for nearly 40% of vessel operating cost, a prolonged low fuel prices environment, which fell nearly 28% on average in 2015 as to 2014, should benefit vessel profitability.

2016 Outlook

– Given the port’s nearly full capacity, we forecast HAH’s port throughput in 2016 to record a slight growth of 2% based on (1) growth in cargo throughput to Hai Phong and (2) better cargo handling.
– We project HAH port operation’s gross margin to drop to the industry average of 46% in 2016 (2015: ~52%) as Vietnam-China border trade goes back to normalcy and reefer services revenue falls to half that of 2015.
– Our preliminary forecast calls for consolidated 2016 revenue and net profit of VND814 bn (+10.8% yoy) and VND159 bn (-4.7% yoy), respectively. EPS in 2016 is estimated at VND5,940.

Risks to our call

– The construction of Bach Dang bridge could affect ship handling schedule.
– Border-trade tensions with China could hamper cargo flows in the short-term.
– Fiercer competition between ports in 2016.
– A large number of HAH’s shares will be unlocked in March 2016.

VINCONSHIP JSC

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Ready for a strong and sustainable growth period
VSC is one of the most experienced port operators in Vietnam, the others being State-owned SaiGon Newport, Sai Gon Port and Hai Phong Port. Longstanding experience and proven services quality have enabled the firm to achieve sustained growth rates over the years with revenues and NPAT expanding at CAGRs of 11% and 9.4% during 2010-2015. Solid recovery of Vietnam’s economy and strong FDI inflows will prop up volumes of international trade. To meet rising demand, VSC has invested and commenced Phase I of VIP-Greenport (design capacity of 500,000Teus/year) last November. We believe that the new port, with its strategic location and state-of–the-art equipment, would be a springboard for the firm’s long-term business prospects.

What to expect

Strategic location supports growth. Better connected public infrastructures (Hanoi – Hai Phong Highway, national road 5, Dinh Vu–Cat Hai IP road, and channel dredging projects) and cheap labour costs have attracted a lot of FDI to the industrial parks in Northern Vietnam since 2014. The volume of goods passing through seaports in Hai Phong is expected to rise ~ 12-14% in 2016.
The construction of Bach Dang Bridge would negatively affect the operations of upstream ports (including Hai An, SNP 128, Transvina, Nam Hai…). Therefore, four ports in the Dinh Vu area (Tan Vu, Nam Hai Dinh Vu, Dinh Vu and VIP-Greenport) would look favourable for higher cargo volumes thanks to their shorter distance to the open sea, deeper channels and unrestricted vessel clearance.
VIP-Greenport officially operated in November 2015 (designed capacity of Phase 1 is 250,000TEU/year and the Phase 2 will likely be operational in Q3/2016) will increase VSC’s capacity to ~860,000 TEUs/year. Profit from VIP-Greenport will be taxed at 0% in the first four years of operation.

2016 Outlook

Assuming VIP-Greenport’s first year utilization rate of 60%, or 300,000 TEUS, the new port is forecast to generate PBT of VND64 billion in 2016.
– With the assumption that revenue from reefer containers will drop 33% from 2015, consolidated 2016 revenue and NPAT are projected at VND1,204 billion (+30% yoy) and VND306 (+9.5% yoy) respectively.
– Hence, 2016 EPS should be ~VND6,653, equivalent to a forward P/E of 10.2x. This is reasonable for a leading enterprise like VSC with ample room for growth.

Risks to our call

– Fluctuation in China’s cross-border imports, especially frozen food could affect cargo throughput and the reefer revenue of the ports in Hai Phong.

PETROVIETNAM TRANSPORTATION CORPORATION

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Cyclical industry set to benefit from growing fuel consumption
As a PetroVietnam subsidiary possessing the largest domestic tanker fleet in the country PVT is in a dominant position in the oil transportation sector. PVT is the only crude tanker provider in Vietnam. The firm’s fleet comprises of tankers and LPG sea carriers and will soon include bulk-cargo vessels, which enables it to capture most of energy transport demand. Steady growth in oil consumption supported by increasing manufacturing activities and the addition of new refineries and power plants will be its major growth drivers in the mid- to long-term.

What to expect

Tanker freight in 2016 should continue to be supported by low oil prices. Lower prices of oil has boosted consumption of petroleum and crude storage demand while supply pressure from new vessel orders will not come until late 2017.
Increased LPG output at Dinh Co refinery and higher gas import will increase demand for PVT’s LPG vessels. The Nam Con Son II (Phase 1) gas sea pipeline went online at the end of 2015 and promises to see LPG output from GPP Dinh Co grow 25% in 2016. We expect the LPG fleet’s cargo volume to surge by transporting the whole amount of LPG import from PVGas Trading in 2016, which is forecasted to carry on the healthy growth seen in 2015 (~18%).
The whole year operation of FSO Dai Hung Queen (7 months in 2015), PVT’s most profitable business should contribute greatly to the bottom-line.
Higher utilization at Vung Ang thermal power plant and the trial run of Thai Binh 2 plant expected for late 2016 should boost transport volume of bulk vessel operation significantly.
The full operation of GPP Ca Mau and expected commencement of Nghi Son refinery in 2017 could push PVT to shorten the timeline for a secondary share issuance in order to finance the purchase of one VLCC at the estimated cost of USD80-100 mil.

2016 Outlook

– We project PVT’s tanker business and FSO segment revenue to grow 10% and 38% in 2016
– Net revenue and PBT in 2016 are estimated to achieve VND5,900 billion (+4% yoy) and VND646 billion (+18% yoy) respectively; 2016 EPS is projected at VND1,508.

Risks to our call

– Three quarters of PVT’s total debt is denominated in USD. The firm is susceptible to unrealized FX losses should the USD strengthen against the VND.
– Prolonged state of low oil prices could force oil producers to shut down unprofitable wells and reduce demand for FSO services.
– Freight for vessels deployed overseas is sensitive to international tanker supply-demand balance.

BINH DUONG MINERAL AND CONSTRUCTION JSC

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Rock-solid foothold in construction stone
With a 10% market share in Southern Vietnam, KSB benefits from the strong recovery of the property market and construction activities. KSB has maintained stable earnings with a gross margin of around 36%. Thanks to its large cash balance on-hand and low investment requirements, the Company does not have to use debt. A stable dividend yield of VND3.000 per share is also a plus for this stock.

What to expect

The demand for construction stone in the South should continue to increase in 2016. According to the master plan on the development of Vietnam’s building material industry through 2020, Southeastern provinces, KSB’s primary market, rank second on gravel demand with 2020’s consumption forecast of about 45 million m3, an increase of 45% compared to that of 2015.
KSB has successfully renewed its extraction license of its main quarry, Tan Dong Hiep, for the 2016-2017 period. The sale volume of Tan Dong Hiep is twice as large as that of the other two quarries i.e. Phu Giao and Tan My. An extended period for extraction here could support KSB’s output until consumption in the remaining quarries reach a sizable scale. In the intermediate term, sales of Phu Giao and Tan My will be supported by an improvement gravel quality as extraction goes deeper and higher demand in Binh Phuoc and the Mekong Delta.
Industrial land sales in Dat Cuoc industrial park is improving. The book value of Dat Cuoc IP accounts for ~ 20% of KSB’s total assets but the project accounts for less than 5% of the company’s revenue. Occupancy in Dat Cuoc IP is still relatively low, i.e. below 50%. However, in 2H2015, the area of leased land increased 8.2 times compared to the whole-year of 2014 thanks to a surge in FDI inflows in Binh Duong. With the recent development of transport infrastructures surrounding Dat Cuoc, we are optimistic about the IP’s sales outlook in 2016.
The possibility divestment of SCIC may improve the stock’s liquidity and allow more flexibility to the company’s senior management in their business strategy.

2016 Outlook

– Because KSB has extended the extraction license of Tan Dong Hiep quarry, we are optimistic about the company’s consumption prospects in 2016. Gravel sale volume may increase 5% and average sales 3% from 2015.
– 2016’s net revenue is forecasted at VND788 billion (+7% yoy) and NPAT at VND136 billion (+8% yoy). Accordingly, 2016’s EPS is estimated around VND4,804.

Risks to our call

– The investment in Dat Cuoc Industrial Park is large in relativity to KSB’s total assets. KSB plans to expand the IP by 136.5ha with a capex plan of about VND539 bn. If land sales do not meet the company’s expectations, the opportunity cost may be considerable.

BINH MINH PLASTIC JSC

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Growth momentum from Long An factory
The rebound of real estate market and construction activities has been a stimulant factor to building material producers. BMP is one of the two largest manufacturers of construction pipes in Vietnam. Thanks to lower input costs the company generated a pre-tax-profit margin of 22.7% in 2015. With a strong balance sheet and few debts, the Company offers stable annual dividends of 20%-30% of par value.

What to expect

Demand for plastic pipes remains positive. Supported by the launch of new residential and clean water projects, long-term demand for plastic pipes in Vietnam is quite substantial.
Benefit from the low raw material prices. BMP saved a lot in input costs in 2015 thanks to a drop in the prices of oil-based plastics, i.e. PVC and HDPE. Low oil prices should help maintain the company’s profitability at a high level in 2016.
Stable operations of Long An factory will help reduce the shortage in pipes and parts. Coming into operation at the end of 1Q2016, Phase I of BMP’s Long An factory can produce 5,000 tons of pipe parts per year. The factory also includes a warehouse that will help to free up storage space in other production sites, i.e. District 6 and Binh Duong.
Currency fluctuations have minimal impact on BMP’s financial activities. About 90% of the input materials are purchased from domestic suppliers (TPC Vina and LG Vina) against whom BMP has very strong bargaining power.
The possibility that SCIC will divest from BMP could improve the liquidity and price of BMP’s shares.

2016 Outlook

– As consumption outlook remains upbeat and capacity bottlenecks are resolved, we expect sales volumes to grow 13% in 2016.
– We believe 2016’s net revenue and NPAT to reach VND3,191 billion and VND547 billion, up ~14% and 9% respectively.
– 2016 EPS is estimated at VND12,036/share (+9% yoy).

Risks to our call

– If oil prices increase unexpectedly, BMP may experience a drop in gross profit margin.
– Strong competition in the plastic pipe market along with lower costs of raw materials might force BMP to lower its sales price or increase discounts for its sales agents.

PETROLIMEX CHEMICAL JSC

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All eyes on asphalt business
The boom of infrastructure investments (especially in road and airports) and the low oil prices have created some tailwinds for PLC, one of the leading manufacturers of asphalt and lubricants in Vietnam. PLC has about 11% of market share in asphalt while controlling about 30% of the market for lubricants. PLC has a well-known brand name and strong market coverage with 2 lubricant factories, 7 asphalt plants and 80 trucks. Although asphalt is a fast-growing industry, PLC faces many risks in this segment, including bad debts, price fluctuations and increasing competition.

What to expect

Asphalt demand should remain strong in 2016 thanks to government’s focus on infrastructure investment. According to the Ministry of Transport, Vietnam will have constructed 1,750km of highways by 2020. This should support asphalt consumption in years to come.
Steady and high profit margins in the lubricant segment. Thanks to low oil prices and the pricing power of big players in Vietnam lubricant market, the lubricant segment has the highest margin among three main segments (~26%).
Asphalt gross margin has been on a decline due to the increasing competition. Fluctuations of asphalt sale prices should be more in line with those of oil price in 2016.
High dividend yield should maintain due to the preference for cash distribution of PLC’s largest shareholder, i.e. Vietnam National Petroleum Group (Petrolimex).

2016 Outlook

– Sales volume could increase 11% in in 2016, mainly driven by the asphalt segment. The lubricant and chemical segments are expected to remain stable due to difficulties in expanding market share.
– Gross profit margin is estimated around 18% in 2016.
– High financial expenses due to FX losses and higher interest expenses on short-term debts.
– Our preliminary forecast calls for a small increase in 2016 revenue and net profit. 2016 EPS is estimated at VND4,117, translating into a forward PER 8.1x.

Risks to our call

– Petrolimex is withdrawing the support by imposing a high cash dividend payout ratio and forcing PLC to make faster payment for its purchases from Petrolimex Singapore, one of the company’s suppliers.
– An increase in oil prices could reduce gross profit margin.
– Provisions on asphalt inventory and bad debts may increase.
– Competition in lubricant and asphalt segments hinders the ability to improve profitability.

LONG HAU JSC (HSX-LHG)

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At the right time – at the right place
Following its investment portfolio restructuring between 2013 and 2014, LHG saw its financial status and business performance greatly improve in 2015. As small industrial real estate developer, the biggest competitive advantage of LHG is its large, low-cost land bank. Located near HCMC and within access to major trade hubs the Long Hau Industrial Park has the potential to become a preferred destination for FDI investors.

What to expect

HCMC and Long An will remain leading municipalities in the South to attract FDI. New FDI pledges in HCMC and Long An grew 8% yoy and 57% yoy respectively in 2015. Long An topped the Mekong Delta region for new FDI. Last year, LHG saw significant new demand and leasing interest from both local and foreign companies. On the back of the TPPs and other FTAs HCMC and Long An will continue to see strong FDI inflows in 2016.
The boom of transport projects in Southern Saigon will increase the value of LHG’s land bank. The construction of the Ben Luc – Long Thanh Expressway started in early 2015 while 90% of the cargo volume of Nha Rong – Khanh Hoi Port will be moved to Hiep Phuoc by 2017. Phase 3 of the Soai Rap Channel Dredging Project is also under consideration.
LHG will prioritise the development of Long Hau IP 3 between 2016 and 2017. LHG could start the compensation for the third project as early as 1Q2016. Since the majority of the area is agricultural land, the project can be operational as early as 2017.
Earnings will stay strong thanks to lower financial provisions and positive sales growth. LHG made substantial provisions for its affiliate companies in 2014. The Company plans to liquidate its entire financial investment portfolio, which includes shares in Sai Gon-Hiep Phuoc Port and Long Hau-Hoa Binh IP (Thu Thua, Long An) to raise cash for Long Hau 3.

2016 Outlook

– Land sales should continue to improve in 2016.
– Lease rates in VND could increase in line with the VND/USD exchange rate but the construction of Ben Luc – Long Thanh Expressway will have a more significant effect on lease rates.
– FY2016 revenue is projected at VND315.8 bn, a drop of 7.8% from 2015 as LHG will have no more residential land sales and this year the Company will take on a more aggressive stance against late rent payers.
– EPS in 2016 is estimated at VND2,670, P/E forward is 7.5x, still relatively attractive compared to the majority of real estate peers.

Risks to our call

– Forced land recovery may result in significant deductions of sales though it should have minor impact on bottom-line earnings.
– The retroactive land use tax payment under the New Land Law could have a disastrous effect on the Company’s cash flows and equity value.

BINH CHANH CONSTRUCTION INVESTMENT JSC

RongViet-Research_Vietnam-Equity-strategy-2016-64
Heading to a new era
BCI benefits from its large, low-cost land bank accumulated since its establishment. Following the withdrawal of the state-related HFIC and the later participation of KDH, BCI saw some major improvements in its business performance. In late 2015, BCI finally reached an agreement on cash collection and revenue recognition with the Management Authority of South Saigon regarding the handover of a part of Phong Phu 4 RA. BCI has an aggressive investment plan for 2016, in which Le Minh Xuan IP Phase 2 (110ha), Phong Phu 4 (85ha) and Corona City (18ha) have the most potential to generate revenue and profit.

What to expect

The knots are untied for Phong Phu 4 RA. In late 2015, BCI was able to recover 14ha of clean land in Phong Phu 4 RA from the Management Authority of South Saigon. In addition, the Company finally locked in a price for another 10ha in the project that it had handed over to the Management Authority years ago but had not been able to collect the full transfer price.
The construction of Binh Tien Street will help BCI’s long-term plan. BCI is currently working with Licogi 16 (HSX – LCG) to develop Binh Tien Street, a BT project that would cut through BCI’s two residential areas, i.e. Phong Phu 5 RA and Corona City. First, the construction value may be exchangeable for the LURs of BCI’s real estate projects. Second, the projects’ expected sales price can be greatly improved by the compensation process and the enhanced infrastructure value.
Smaller projects will provide a significant earnings boost. Last year, BCI changed the lease payment method for the section of Le Minh Xuan IP for small industries and handicraft from annual to lump-sum payment. As existing tenants renew their contracts, BCI will be able to book revenue for the entire lease term (40 years). Furthermore, the Company plans to liquidate some smaller, empty plots of land in its pipeline, i.e. 158 An Duong Vuong (1,900 m2) and 510 Kinh Duong Vuong (8,800m2) to raise cash for Le Minh Xuan IP Phase 2.

2016 Outlook

– FY2016 sales are projected at VND517 bn, up 11.8% yoy thanks to the contributions of Phong Phu 4, Le Minh Xuan IP Phase 2 and Corona City.
– The recognition of revenue from the section for small industries and handicrafts in Le Minh Xuan on top of the liquidation of smaller projects could add around VND265 bn to profit before tax.
– FY2016 EPS is projected at VND3,999, assuming no new share issuance.

Risks to our call

– A drop in market liquidity could slow sales at BCI’s residential projects.
– The Binh Tien Street BT project could experience a delay due to prolonged legal works.
– With BCI’s plan to raise its share capital to VND1,200 bn via private placements to strategic investors, there is a risk of dilution for existing shareholders.

NBB INVESTMENT CORPORATION

RongViet-Research_Vietnam-Equity-strategy-2016-65
Untapped potential
NBB possesses a strong pipeline of large land areas in Western districts of HCMC, i.e. District 8, Binh Chanh District. In 2015, NBB success marketed its City Gate Towers, a middle-market condominium project it is developing with the financial support of Creed Group (Japan). With the good publicity of City Gate Towers, NBB is looking for some potential locations including those in CII’s pipeline, for its next condo projects. While CII’s willingness to acquire NBB for its real estate segment has supported NBB’s stock NBB has been looking to CII as a partner who can provide the Company with access to a potential land bank and the needed financials to develop the projects.

What to expect

The success of City Gate Towers will allow NBB to drill deeper into the middle-end housing market. City Gate Towers reached it sales target of 1,092 units in just 12 months after its opening. NBB plans to buy CII’s 20% stake in Diamond Riverside, a larger project facing City Gate Towers to establish a firm foothold in the market for affordable condos given the growing demand in Western districts of Saigon.
Speculation on a partnership with CII will continue to support NBB’s stock. In 3Q2015, CII obtained shareholders’ approval to raise its holding in NBB to 51% by 2016 via a tender offer or a private placement. However, NBB later revealed that instead of an equity issuance it could issue bonds to CII. The Company is also targeting a plot of land belonging to CII located in the vibrant Thu Thiem Urban Area to make its step into the high-end segment. Considering NBB’s shortage of cash and hefty capex plan, CII now has more leverage to negotiate a friendly acquisition.
Stronger sales in Son Tinh Residential Area and the construction of NBB Garden III are expected in 2016. Slow sales in Son Tinh Residential Area have been largely due to the stagnation in land compensation and LUR issuance during the country’s political transition. NBB sold over 440 plots here but issued LURs for only 120 units. With the political factor now out of the equation, the pace of sales and sales recognition should greatly improve this year. On the other hand, the Company will push compensation and legal works for NBB Garden III to start construction and sales in late 2016.

2016 Outlook

– FY2016 sales are projected at VND164.5 bn (+70% yoy), which will come mainly from Son Tinh Residential Area. City Gate Towers, despite its strong sales, will not generate revenue until units are handed over to buyers (mid-2017). – NPAT should experience a sharp drop of 58% to VND18.1 bn or VND311 per share as NBB booked substantial gains from asset liquidation in FY2015.

Risks to our call

– A rise in interest rate may adversely impact NBB’s cash flows given its high leverage; – Fluctuations in market liquidity could affect NBB’s sales target and investment plan.

ELCOM CORPORATION

RongViet-Research_Vietnam-Equity-strategy-2016-66
A chosen tech stock
ELC, a tech-led-project firm, is currently Vietnam’s leading provider of technology equipment and services to telecommunication, transportation and national security sectors. Therefore, with rising technology need in many industries, especially for transportation, ELC possesses a large backlog for the next few years. Therefore, it is high likely that its business has turned into a new growth phase. ELC’s key earnings driver in 2016 should come from Mobiphone’s rising demand for technology infrastructure. Stable cash dividend, even in downturn phase, is a plus for ELC compared to other peers.

What to expect

Booming business performance in 2016 thanks to huge backlog value and contract signed with Mobiphone
Favourable industry outlook since (1) key mobile operators are upgrading their infrastructure to 4G network, with estimated capex of VND 10.000 billion per operator and (2) Mobiphone is investing huge capex for new infrastructure after its spinoff from VNPT, (3) transportation must be expanded and modernized in order to attract FDI investments.
High cash dividend payment in 2016 as on the back of good business results in 2015.

2016 Outlook

– We expect revenue to rise over 35% in 2016 with 65% from telecommunications, 15% from transportation, and 12% from national security. Also, nearly 45% of 2016’s revenue of the first two segments expected to come from 2015’s backlog.
– Gross profit margin in 2016 could increase 100bps to 32.4%.
– Profit before tax should reach VND169.1 billion, equivalent to a 17.5% profit margin.
– We expect EPS to double this year to VND3,200 (accounting for the impact of benefit and compensation reserve in term of Circular 200).

Risks to our call

– FX losses from equipment imports.
– Lack of transparency on national security business, which accounts for about 12% of total revenue.

FPT CORPORATION

RongViet-Research_Vietnam-Equity-strategy-2016-68
A safe choice for superior dividend yield
FPT, currently operates as a multinational company in four main businesses: technology, telecommunication, trading & retailing and education. In which, technology and retailing would be blooming in following years. Technology is benefit from worldwide experience as well as comparative cost in software outsourcing. Meanwhile, retailing would maintain high growth trend thanks to store chain expansion. Despite some businesses turning to contraction phases, its overall outlook still maintains bright.

What to expect

– Outsourcing business keeps attractive growth thanks to competitive labour costs compared to other global peers and to FPT’s worldwide experience.
– Lowering holding in its retailing business is another catalyst for investors.
FOL lifting would support the stock price.

2016 Outlook

– We expect revenue to rise 7.5% in 2016. Its trading segment, which accounts for 31% of total revenue, is a drag on the company’s overall business. This segment could decrease 17.4% yoy due to changes in Nokia’s selling policy as well as Apple’s.
– However, revenue of remaining key segments (Technology, Telecommunication, and Retailing) could rise 19.2%, 26.3% and 33.1%, respectively. In Technology segment, outsourcing’s revenue is estimated to increase 50% in 2016.
– PBT margins of technology, telecommunication, trading, retailing should be 11.9%, 15.9%, 3.0% and 2.9%, respectively. The margin of telecommunication sees a drop of 390bps due to large capital expenditures and expenses for the fiber optic infrastructure; 2016 capex guidance is about VND1,800 billion. Besides, PBT of FPT Telecom would be also affected by a provision equal to 1.5% of revenue as contribution for the Public telecom fund. Retailing PBT margin is also estimated at 2.9% versus 2.3% of 2015 thanks to economies of scale.
– 2016’s total revenue and PBT could be VND43,020 billion and 3,176 billion, respectively. Net income would be about VND2,128 billion, or VND4,800 per share.

Risks to our call

– JPY’s depreciation could make outsourcing sales to grow less than expected
– System integration business could probably keep current contraction forward due to lower government expenditure and banking sector’s recover slowly
– IT&Mobile trading could turn into long term slowdown due to sudden changes in IT& mobile market as what happened in Nokia and Apple’s policy.

POST AND TELECOMMUNICATION INSURANCE JSC

RongViet-Research_Vietnam-Equity-strategy-2016-69
Impressive Growth
PTI benefits from higher premium growth compared to other players in the non-life insurance sector. In 2015, PTI became the 4th largest insurer in terms of premium (7.3% market share). Besides, investment portfolio restructuring, which aims to lower proportion of equities but increase the fixed income assets, and participation of PTI’s strategic partner Dong Bu Insurance (Korea) support the company’s target of stable growth. Last but not least, stable cash dividend policy is a plus for value investors.

What to expect

PTI is the second largest insurer in motor insurance, which is the biggest contribution to insurance business in Vietnam. This segment is supported by (1) 10% increase in number of vehicles from 2016 – 2020 and (2) the change of premium fee per car from 1.3% to 1.5% over total property value.
More support from new strategic partner Dong Bu Insurance (Korea):
(1) Opportunities to approach Korean customer to exploit property and damage insurance operation as Korea is the largest FDI investor of Vietnam.
(2) Opportunities to enter insurance market in Myanmar faster as Dong Bu Insurance has appeared in Myanmar for 2 years
(3) Ability to restructure investment portfolio to reduce proportion of equities and increase that of fixed income assets thanks to more capital from private issuance for Dong Bu Insurance
Interest rate is forecasted to increase in 2016. Investment activities of the company could be more profitable as most of the invested capital is allocated to fixed income assets.
Cash dividend policy is stable at 10% to 13% annually. The company intends to pay 12% cash dividend for FY2016.

2016 Outlook

– Gross premium is estimated at VND2,954 billion (+20% yoy) thanks to strong growth of vehicle insurance (+64%).
– Loss ratio and combined ratio is projected at 43.11% and 99.70%.
– Net income from investment activities is projected at VND210 billion (+7.9% yoy)
– The PAT accordingly could record VND204 billion (+25.9% yoy). Hence,the EPS is calculated at VND2,539/share.

Risks to our call

– Fierce competition from other ASEAN regional insurance companies when Vietnam is a member of AEC Community.
– Slowdown of vehicle market after years of strong growth might affect the insurance business of PTI.
– Stock market volatility might negatively impact investment activities of PTI.

DRY CELL AND STORAGE BATTERY JSC

RongViet-Research_Vietnam-Equity-strategy-2016-70
A bright prospect ahead
For the past two years, PAC recorded impressive growth rates, on the back of increased demand for OEM and battery replacements. Furthermore, PAC’s two new product launches have been relatively successful. Finally, the as PAC switched suppliers, it was able to increase its gross margin of its dry cell business.

What to expect

High demand for automobile batteries. Storage batteries’ average life cycle is about 3 to 4 years. Considering the recovery we have seen in the automotive market since mid-2013, automobile replacement should start accelerating.
Further benefit from low materials prices. Raw materials prices, especially lead and zinc prices are expected to remain low (i.e below 2,000 USD/ton) in 2016. For every percentage drop in lead prices, gross margin should increase about 0.8%.
Recovery of dry cell segment. After switching suppliers, the contribution of this segment to total gross profit has improved.
Relocation of dry cell factory delayed till 2017. The probability that its dry cell plant, will be relocated in 2016 is fairly small. Thus, 2016 performance will not be affected by expenses arising from the move. Management expects to receive at least VND 30 bn in compensation for the dry cell factory, however the move could impact on production.

2016 Outlook

– Forecasted commodity prices (i.e. lead and zinc prices) are slightly up but still remain relatively low. Average lead prices are estimated at USD 1,789 per ton (+5% y-o-y).
– Total storage battery revenue in 2016 should increase by over 15% yoy, in which, the domestic automobile replacement segment can record a 7% growth.
– Gross profit margin should remain at about 17% in 2016.
– PAC should be able to make VND 2,409 bn (+13% yoy) in revenue, and record VND 109 bn (+21.1% yoy) of NPAT in 2016.
– The stock is trading 9.3x our 2016 EPS estimate of VND3,500.

Risks to our call

– Prices of input materials may rebound sooner than expected;
– Fierce competition in storage battery market could negatively impact margins;
– Factory relocation happens in 2016.

DANANG RUBBER JSC

RongViet-Research_Vietnam-Equity-strategy-2016-71
Expecting on replacement segment
We believe the company’s radial tires will be a main driver for growth as consumer preference shifts towards radial ply products.

What to expect

Maintaining bias ply tires growth in replacement segment. The truck sales growth we saw in 2014-2015 will gradually entail replacement demand. Bias tire consumption could grow by 5% per year over the next 2 years.
Optimistic performance of its radial segment. To prepare for future demand of radial tires DRC will begin construction on Phase 2 of its radial factory (Phase 2) in 2016, increasing capacity from 300,000 units/year to 600,000 units/year.

2016 Outlook

– We believe revenue will increase by 17.7% in 2016, driven mainly by its radial segment grow (up 43%).
– Gross profit margin is estimated to maintain 24%. Although Radial segment can surpass breakeven point, raw materials are able to recover after 2015 slump; thus, gross margin cannot improve significantly.
– Interest expense should drop to 9.1% as the company has been decreasing its debt.
– Our forecast calls for 2016 net profit of VND504 bn (+ 21% yoy) while EPS can reach VND4,728/share (+10.4% yoy) as expect the company will issue a 10% stock dividend.

Risks to our call

– Tough competitive pressure from Chinese tires. Chinese products are finding their way into Vietnam and are being sold 10-15% cheaper than domestic tires.
– Fluctuations of exchange and interest rates could impact COGS and debt servicing costs.

SAIGON GENERAL SERVICE CORPORATION

RongViet-Research_Vietnam-Equity-strategy-2016-72
Profit driver switched from automobile distribution to services segment
Over the last three years, the boom in the automobile market resulted in SVC’s impressive earnings result (CAGR 20%). SVC’s prospects are bright as the company aims to grow its maintenance and repair services segment, which benefits from high gross margin and a strong potential for grow.

What to expect

Sale volume in 2016 is expected to maintain its uptrend. SVC plans to open at least 4 showrooms in 2016.
Sufficient cash flow to enhance distribution network. The company will use its cash from the sale of its real estate projects to invest in its distribution network.
High expectation for automobile services segment. Utilizing its large customer database the company should be able to excel in this highly profitable (~25% gross margin) segment. Thus, we expect maintenance and repair services to contribute at least 25% to the company’s gross margin.
Revenue from office leasing to slightly improve. Its Ly Tu Trong office building should be completed in Q1/2016.
Little expectation from real estate segment. There is a small probability that SVC could record some impressive profits from the sale of its real estate projects as the remaining ones are mostly quite large.

2016 Outlook

– We expect revenue to grow by 5% in 2016 to VND10,431 bn, and NPBT to reach VND234.8 bn (+17% yoy).
– Gross profit margin is estimated remain at 6.9% in 2016 since SVC will boost sale in high margin segment such as car services and office renting segments
– The stock is trading at 7.8x our 2016 EPS estimates of VND4,131.

Risks to our call

– Demand for automobiles could fall due to changes in tax policies.
– Loss from transferring real estate projects (i.e. Mercure Son Tra).

DONG HAI BEN TRE JSC

RongViet-Research_Vietnam-Equity-strategy-2016-73
Stable growth in 2016 while waiting for Giao Long (Phase 2)
We started paying attention to DHC after noticing the early, yet encouraging, outcomes of the restructuring process it started in 2013. Thanks to intrinsic improvement in business activities, in 2014-2015, the firm recorded revenue growth of 18.7%/year and 69.1%/year in PAT. Particularly, Giao Long (Phase 2) with capacity of 600 tons/year should be a key driver for long-term prospects.

What to expect

High demand for kraft and packaging cardboard box segment. The number of export orders is expected to increase sharply, especially in the textile and consumer goods thanks to FTAs. This should generate a rise demand for packaging box as well kraft paper.
A capacity increase of its box production line. A new printing line was put into operation in Q4/2015 and we believe this should help increase the company’s cardboard box capacity by ~20%. The company should be able to produce 2.5 million units per month in 2016 and 3 million units per month in 2017.
Continuing to get preferential treatment in corporate income tax. The General Department of Taxation approved a tax exemption for kraft manufacturers and 50% CIT reduction for cardboard box manufacturers for 2015. In the following years, both plants are getting a reduction of 50% (2016 CIT is 10%).
Giao Long factory (Phase 2) adds driver to the long-term plan. According to the plan, the VND600 billion, 600 ton/day kraft paper factory will have a total capacity four times current levels. However, it will take approximately two years to build, coming into operation in late 2017. RongViet Research believes this will be the key for DHC’s long-term growth as (1) domestic demand continues to exceed supply through 2018.

2016 Outlook

– We assume revenue in 2016 will increase by 10.5% yoy, in which, its box segment should grow ~20% while kraft segment should remain steady due to capacity constraints. – We estimate gross profit margin at ~18% in 2016, slightly lower than 2015 due to our concerns related to (1) an increase of electricity price, and (2) an increase in foreign exchange rates. – We expect DHC can record extraordinary gains from transferring its old factory in Ben Tre. – In 2016, we expect net profit to reach VND 89 billion, up 15% yoy, but EPS is forecasted at VND3,567, lower than 2015 due to the issuance of 6 million additional shares (should be completed in Q2/2016).

Risks to our call

– FDI invests significantly into the kraft industry. – CNY/VND exchange rate fluctuation will make Chinese supply more unpredictable.

REE CORP

RongViet-Research_Vietnam-Equity-strategy-2016-74
A temporary hiccup
REE has all the features of a strong company, i.e. high business efficiency, healthy financials, strong market position and high corporate governance. As the largest Vietnamese M&E contractor and air-con producer, the Company stands to benefit from the recovery of the real estate market. While REE’s portfolio of prime-location office buildings continues to bring steady flows of income, 35,000 m2 of GFA of E-Town Central (Dist.4, HCMC) will be a valuable addition to REE’s cash-generating engines. On the investment side, REE possesses a long list of affiliate companies in the electricity sector, whose long-term growth potential is largely supported by the liberalization of Vietnam’s energy market.

What to expect

The real estate market recovery supports the M&E and Reetech segment. REE signed roughly VND2,200 bn worth of new M&E contracts in the nine months to September 2015. The Company is working on several large projects such as the T2 Terminal of Tan Son Nhat Airport, block CT2 of the Trang An Complex, Union Square, and the Doji Building, to name a few. As of the end of 3Q2015, REE had a total M&E backlog of over VND3,700 bn.
Earnings of thermal power plants will offset the drop of profits in hydropower. Due to the 2015-2016 El Nino, REE’s affiliate companies in hydropower such as Thac Mo and Thac Ba, may continue to experience water shortages in 2016. However, a larger output volume and higher electricity price on the competitive market will work in favour of thermal power plants like Pha Lai and Hai Phong.
The FOL extension could be a short-term catalyst. For its large market capitalization and substantial liquidity REE is one of the few stocks that can meet the trading requirements of foreign institutions. If the foreign ownership limit is lifted, we should see increased interest on the stock.

2016 Outlook

– Revenue from the M&E and Reetech segments are expected to grow at 4% and 9% in 2016. Office leasing revenue should grow in line with the increase of the VND/USD exchange rate due to high occupancy rate in all of REE’s office buildings. – Income from affiliate companies (including dividends) may remain largely unchanged at around VND310 bn in 2016 given the modest growth projection for companies in the energy sector. – We forecast 2016 NPAT and EPS at VND990bn (+16% yoy) and VND3,674 (+16% yoy) respectively.

Risks to our call

– REE’s power companies may incur substantial foreign exchange losses due to the weakening of the VND against major currencies, i.e. USD, JPY, EUR. – A delay in the implementation of the FOL extension may adversely affect stock price.

PVPOWER NT2 JSC

RongViet-Research_Vietnam-Equity-strategy-2016-75
Expect a stabilization following a high growth year
NT2 is located in the most important economic zone of Southern of Vietnam, in which load demand is consistently high. In its fifth year of operation, it was running over capacity and its net profit margin has gradually increased over this period. Strong cash flows from operations have enabled the company to increase its dividend payments.

What to expect

– The company’s new and modern equipment is able to run at high capacity enabling it to improve operating efficiencies. The generated output is 13% higher than specs.
– NT2’s profitability has increased since natural gas prices were floated in September 2015. NT2’s gross profit margin was up to 24.4% in 2015 from 23.4% in 2014 and is expected to reach 25.9% in 2016.
– Cash flow assures for increasing dividend payout ratio. As interest expense decreases by VND30 bn annually and as the company collects VND150 bn annually from EVN over the next four years (2015 – 2019), net cash flow of NT2 the company should have strong enough cash flows for higher dividend payments.

2016 Outlook

– Given a long dry season and a minor maintenance in 2016, NT2 should be able to produce about the same amount of electricity as it did last year. However, revenue may fall by 10% in 2016 due to lower input price as its selling price is marked to the input price.
– Our preliminary forecast calls for 2016 revenue and net profit of VND6,058 bn (-10%, yoy) and VND1,058 bn (-7%, yoy), respectively.
– EPS from core business in 2016 is estimated at VND3,788. Adding extraordinary FX gain/loss, basic EPS in 2016 should reach VND3,957.

Risks to our call

– NT2 is temporary enjoying low input prices. If natural gas prices recover, this advantage may disappear.
– Due to its high level of foreign denominated debt, NT2 is subject to FX risk. However, based on forecast on diversified movements of USD/VND and EUR/VND, it is not likely to be a serious threat to our 2016 estimates.

PHALAI THERMAL JSC

RongViet-Research_Vietnam-Equity-strategy-2016-76
Optimism about core business
As effects of El Nino will extend into 2016, thermal power plants should outperform hydropower this year.

What to expect

Manufacturing sector expansion will boost power demand. With the establishment of many industrial parks and the expansion of high power-intensive industrial sectors in Northern Vietnam, demand for electricity should experience high growth in the upcoming years.
Higher gross profit margin from PL2. PL2’s main equipment was fully depreciated by mid-2015 while its contracted price is fixed through 2032.

2016 Outlook

– FY2016 gross profit margin is expected to increase slightly to 12.8%, thanks to PL2’s enhanced profitability.
– Our forecast calls for 2016 revenue and net profit of VND7,263 bn (-5.2% yoy) and VND678 bn (+44% yoy), respectively.
– EPS from core business in 2016 is estimated at VND2,935. With the inclusion of foreign exchange and other extraordinary gains/losses, basic EPS in 2016 is projected at VND1.805.

Risks to our call

– Competition from new power plants with higher operating efficiency.
– With a large amount of foreign current debt, JPY/VND volatility is among key risks to PPC’s business result. In 2015, the JPY strengthened, though only slightly, against the VND. A depreciation of the Dong against the Yen would impact negatively on PPC’s bottom-line.
– Owned 52.3% by the State, PPC management lacks independence and dynamism in its business decisions, which downplays the firm’s potential as an investment.

JSC BANK FOR FOREIGN TRADE OF VIETNAM

RongViet-Research_Vietnam-Equity-strategy-2016-77
Steady leading positon
Thanks to its brand reputation, VCB is able to access funds from corporations, state conglomerates and other sources at relatively lower cost compared to other banks. In addition, the bank’s asset allocation is relatively well balanced with approximately 56% of total asset in customer loans, 19% in inter-bank loans and 16% in investment securities (70% of which is in government bonds). The bank has been able to better diversify its profit structure comp
ared to other players with interest income representing only 73% of total income as compared to the industry average of 80%.
Lending to State Owned Enterprises has been declining since 2013 and accounted for only 23.3% of total lending at the end 2015. Meanwhile, loans to small/medium enterprises and individuals improved significantly to 21% and 20% respectively. The average annual credit growth rates of these segments between 2011 and 2015 are 16% and 30% respectively.

What to expect

Credits and deposits accelerate thanks to economic recovery. Thanks to VCB’s strong reputation and market position, its credit and deposit growth rates are generally higher than industry averages.
– The loan-deposit ratio (LDR) reached 78% at the end of 2015, lower than the celling level for commercial banks of 80% and well below the celling for state owned banks 90% under Circular 36. With these figures, VCB is under less pressure to grow deposits while it is fully capable of boosting lending to improve capital efficiency and NIM.
– We expect VCB’s credit to grow 18% in 2016, while deposits should increase 17%.

2016 Outlook

– NIM should be maintained at around the current level of 2.72%.
– We expect that VCB’s CIR at 39.7% of total income. Total profit before tax and provision is estimated at VND14,229 bn, up by 10% yoy.
– Given its major role in Vietnam banking industry, VCB generally trades at a premium to its peers. Based on our 2016 EPS estimates of VND2,037 the stock is trading at a forward P/E ratio of 20x and a P/B ratio of 2.4x.

Risks to our call

– VCB recently supported the restructuring of Construction Bank. This participation could force VCB to share part of its resources at certain periods, which may result in a decrease of interests for minority shareholder.
– Prudent policies make growth and business efficiency indicators from VCB relatively lower compared to other banks.
– The bank’s plan to increase its charter capital could reduce its profitability.

ASIA COMMERCIAL JSB

RongViet-Research_Vietnam-Equity-strategy-2016-78
Looking at a new journey
After nearly four years of restructuring, ACB’s operations have stabilised and are finally showing signs of growth. Though it may take a few more years to work out some old issues, in 2015, ACB’s credits and deposits recorded double-digit growth for the first time since 2012 last year.

What to expect

ACB has resolved most of its past issues and we believe that it is entering a phase in its development. From 2012 to 2015, ACB aggressively used most of its revenue to solve outstanding issues related to Huyen Nhu, loans to a State Corporation and some large inter-bank loans.
The bank is focused on building its retail banking operations. ACB has recently rebranded itself and made some sizeable investments in a new core banking system at the end of 2014. Last year, deposits and loans recorded double-digit growth rates for the first time since 2012. In particular, credits in the retail banking segment grew at a rate of 20%.
With low LDR and high CAR, ACB faces less pressure to grow deposits or increase its charter capital. The operation efficiency of ACB is expected to improve in 2016.

2016 Outlook

– In 2016, we believe ACB could maintain the credit and deposit growth rates as the same levels as 2015. Interest rates might increase slightly, and NIM could reach 3.38% in 2016.
– With the total value of special bonds from VAMC reaching the highest level in 2015, the provision expenses made by ACB were expected to peak in 2015 and remain at this level until 2017. We believe that ACB might have to use approximately 45% of 2015’s total operating income and 32% of 2016 to for provisions.
– Profits before tax (after provisions) in 2016 are projected at VND1,833 billion, up 39% from a year earlier.
– ACB trades at the industry average P/B ratio of 1.3x,. However, given the bank’s optimistic prospect in the upcoming years, we believe ACB deserves a premium compared to its peers.

Risks to our call

– The success rate of NPLs recovery depends greatly on the health of the economy and the businesses of related companies. If the recovery falls short of expectations, ACB may have to continue making provisions.
– Competitive pressure in the retail banking is rising. After a prolonged period of restructuring, ACB may struggle to regain a significant position in this market.

PHU TAI JSC

RongViet-Research_Vietnam-Equity-strategy-2016-79
A year of opportunity
PTB has achieved impressive earnings results (CAGR ~25%) for the past three years. In order to meet market demand, PTB has continuously increased capital expenditures. PTB’s CAPEX have doubled in this period. Further investment is required for the upcoming year thanks to the positive outlook of all sectors. Particularly, construction stone segment would be the main profit driver of PTB thanks to the infrastructure recovery.

What to expect

Strong construction stone demand. According to the Decision No 1469/QD-TT, the master plan on development of Vietnam construction material industry through 2020, demand for both gravel and ashlar paving stone is going to increase by 8.9%% an9.3% respectively by 2016. Moreover, the recovery of infrastructure could boost construction stone demand.
Bright prospect of automobile segment. Demand for automobile market, especially passenger car is forecast to remain positive (up 10%). Its new showroom enables a reasonable increase in the sale volume of automobile in 2016.
Moderate rise in revenue of household furniture. New customers from Russia and US are expected to continue to pay a positive contribution to households’ segment.
Production capacity of Dong Nai construction stone and Thang Loi plant should increase slightly. Phase 2 for constructing Dong Nai plant will begin from Q12016 so the Dong Nai plant could reach 100% capacity in 2016. Furthermore, the expansion of Thang Loi plant would also be completed in 2016 so PTB could produce over 1,000 container per year (up 10% production capacity).

2016 Outlook

– We assume that revenue growth rate of construction stone segment could increase 16%. Revenue of its household furniture segment should increase 16%.
– As the company opens its new showroom in 2016, we expect revenue from automobile distribution could increase 17%, while maintenance and repair services should increase about 20%.
– Gross profit margin is estimated remain at about 15% in 2016 since PTB will concentrate on growing sales of its more profitable business lines, such as construction stone segment.
– Thus, we expect PTB can record 2016 revenue and NPAT at about VND 3.571 bn (+17.3% yoy) and VND 215 bn (+24.4% y-o-y) respectively.
– EPS in 2016 is estimated at VND 12,100 and P/E forward is 6.5x

Risks to our call

– Intense competition with Chinese products in construction stone industry and possible of adjusting tax policy.
– Demand for automobile market may be lower than expected due to changes in tax policies.
– Wood materials may not meet TPP rules of origin.

SUPERDONG KIEN GIANG JSC

RongViet-Research_Vietnam-Equity-strategy-2016-80
Using tailwind for a boost
Over the last few years, Phu Quoc has become an attractive destination for both foreign and local tourists. In 2015, Phu Quoc welcomed more than 1.66 million tourists growing at an average 58% per annum. High growth in tourism demand opens up many possibilities for enterprises operating in passenger transportation sector between Kien Giang and Phu Quoc. As it expands its fleet, SKG could maintain the absolute leading position in the area. Healthy financials without debt is a plus for SKG. Cash dividend rate in 2015 is expected at 30%.

What to expect

Phu Quoc should continue to attract increased numbers of tourists in 2016. The People Committee of Kien Giang, estimate the number of visitors to Phu Quoc will to grow by 40 – 60% as the island host a National Tourism event in 2016.
Continue to benefit from low oil price. Diesel – the main fuel of SKG is currently at VND10,000/litre, down 31% compared to the average price of 2015. We estimate that for every 10% drop in the price of diesel, SKG’s profit margin increases by 2%.
New ferries and expansion of its operations. In Q1/2016, SKG will start to operations of its Superdong IX and X. In addition, SKG is likely to purchase one car/passenger ferry (400 passengers/200 motorbikes) and put into operation in Q42016.
Corporate Income Tax incentives. SKG benefits from CIT incentives thanks to the location of its headquarter in Phu Quoc. Its CIT rate in 2016 will be 4%.

2016 Outlook

– We estimated SKG’s number of travellers will grow by 39% in 2016 as its fleet capacity increases by 5 – 10%. Growth in the number of its passengers on the Ha Tien – Phu Quoc route should increase 8.7% while the Rach Gia – Phu Quoc route should achieve 23.8% yoy growth.
– Assuming USD37/barrel of crude oil, revenue and profit after tax in 2016 is estimated to surge. 2016 EPS could reach VND10,351/share, up 42% over 2015.

Risks to our call

– SKG may be unable to pass oil price increases down to its customers.
– Increased competition from existing competitors and alternative means of transportation. In 2016, Thanh Thoi ferry and Ngoc Thanh speedboats also plan to expand.

VIET NAM DAIRY PRODUCTS JSC

RongViet-Research_Vietnam-Equity-strategy-2016-82
Maintaining market share is a prerequisite for the growth
In recent years, the combination of new competitors and slowing growth have raised concerns over Vinamilk future. However, VNM has been able to maintain market share and plans to expand herd size and develop international-quality products.

What to expect

Maintaining market share. VNM market share in liquid milk, powder milk, condensed milk and yoghurt has been at 53% (+2% yoy), 26% (+1% yoy), 80%, 85%, respectively. VNM has a distribution network of 224,000 retail stores, 266 distributors and 600 supermarkets nationwide.
Acquiring market share from foreign brands in powdered milk segment. Due to consumers’ preference of foreign brands, the powdered milk segment has currently dominated by international name. As a runner-up (with ~26% of market share), VNM can still elevate its position through adding high-end, imported products. At present, the company has considered acquiring a European powdered milk manufacturer.
Growing significantly in milk-made-products. Besides, yoghurt segment is expected to record positive performance as recent year, ice cream segment can also jump sharply. According to VNM, ice cream market is potential as (1) consumption in Vietnam is lower than the others, (2) weather is hotter and drier due to El Nino. Additionally, VNM focuses on suitable products, therefore, they are easy to reach potential consumers, especially in rural areas.

2016 Outlook

– We assume sales in 2016 will increase by 12.6% yoy thanks to improved consumer spending.
– Gross profit margin is estimated to remain at 40% although materials (i.e. skimmed milk and whole milk) may rise in 2016. The reason is VNM concluded a fixed price material contract for the whole of 2016.
– VNM is projected to construct Mega factory phase 2 for the purpose of increasing the capacity from 400 million litres/year to 800 million litres/year
– The Angkor Dairy Company in Cambodia will start to contribute to VNM performance in 2016. The company, which VNM owns 51%, launched its factory at the end of 2015.
– In 2016, net profit is estimated at VND8,609 billion, up to 7% yoy, and EPS is forecasted at VND 6,146 (+5.3%).
– SCIC’s divestment may impact on multiple aspects of VNM’s activities such as sales orientation, management, capital structure, and stock price. Detail of the divestment should be known by late 2016.

Risks to our call

– Growing competition from Vietnamese and Western brands.
– Political risks in exporting markets.

PETROVIETNAM FERTILIZER & CHEMICALS CORPORATION

RongViet-Research_Vietnam-Equity-strategy-2016-83
Gross profit margin improves thanks to low oil price
DPM is one of the few companies under PetroVietnam that benefit from low oil prices. In 2015, despite abundant supply of urea in Vietnam, the company was able to slightly decrease its ASP and maintain revenue levels unchanged relatively. In addition, transparent financial control, appropriate leverage ratio and attractive dividend policy are the key investment points for DPM.

What to expect

Domestic demand for fertilizer will be stable in 2016. In 2016, GDP and export are expected to grow by 6.5% and 11% respectively. In which, we expect agricultural sector might increase marginally by 2.5% due to low commodity prices as well as stable domestic demand. However, this sector still stands on the second most important in GDP structure.
Business prospect comes from product diversification. In 2015, the UFC85 project was successfully tested and put into operation at the end of December. This project at full capacity should add VND 400 bn to DPM’s revenue. Moreover, the disbursement of capital for such an important project as NH3/NPK has been on track and expected to be in operation in 2017. In the upcoming two years, we expect this mega project to become the key growth driver for DPM (contributing VND4,000bn/year to revenue).
High and stable dividend policy. DPM maintains the high level of dividend payment year with favourable business results (VND4-5,000 cash dividend per share).

2016 Outlook

– Dam Phu My plant will operate maintenance-free in 2016, adding 2% to urea output.
– Under oversupply pressure, domestic urea price could decline further this year. We estimate gross profit margin at 34% in 2016 assuming crude oil price at USD37/bbl and urea selling price dropping 8% from 2015.
– With further benefit from low oil prices, revenue and PAT in 2016 are estimated at VND9,174 billion (-6% yoy) and VND1,662 billion (+11.7% yoy). 2016 EPS is expected to achieve VND3,608.

Risks to our call

– A surge of crude oil prices could adversely impact DPM’s profitability.
– China economic slowdown could be worse than expectation and affects negatively to urea price.
– DPM might have to make additional provisions for the guaranteed loans of PVTex if this affiliate company goes default.

HOA PHAT GROUP

RongViet-Research_Vietnam-Equity-strategy-2016-84
Stable in the middle of the avalanche
HPG is one of the few domestic firms able to compete in terms of production costs against Chinese’s cheap steel. Declining iron ore prices have favoured HPG’s gross margin, as the company is in the final phase of building one of the most modern steel plants in Vietnam. The company has room to increase sales as it takes market share from weaker competitors and expands geographically. HPG’s has a strong balance sheet which enables it to investments without raising funds from shareholders.

What to expect

Domestic demand for construction steel growing firmly. Supported by growing construction activities, demand for steel should expand by 10% annually over the next five years.
Significant benefits from iron ore price nose-dive. Having the most integrated production process among local producers, HPG can continue to capture more added value while others start to depend on cheap imported billets and slabs from China.
Domestic producers may be protected in 2016, as major local steel makers have proposed the issue to the authority. A large proportion of steel billets are imported as alloyed products to benefit from zero percent duty, while in fact construction steel’s semi-products are levied a 9% tariff.
A punt on animal feed. The investment is small enough that if it fails, it won’t harm HPG’s financial strength. However, if it succeeds, it may open the door for a new agricultural business segment.

2016 Outlook

– We believe sales volumes in 2016 will increase by 37% yoy, owing to steel pipe sales and the final phase of its Hai Duong steel complex.
– Gross profit margin is forecasted at 20.8% in 2016, mildly pessimistic due to fluctuations in steel price movements.
– Our forecast calls for 2015-2016FY revenue and net profit of VND 34,375 bn (+27.1% yoy) and VND 4,835 bn (+24.3% yoy), respectively based on the view that HPG will capture more market share and improve efficiencies.
– EPS in 2016 is estimated at VND 6,597, P/E forward is 4.2x, attractive given its prospect and position as a leading firm in its industry.

Risks to our call

– Cheap Chinese steel may deteriorate HPG’s gross margin due to the pressure on sales prices.
– The hog farming sector if fails can affect the investor sentiment toward HPG, putting downward pressures on the price.

HOA SEN GROUP

RongViet-Research_Vietnam-Equity-strategy-2016-86 Holding on to the crown
Hot-dip galvanized steel (HDG) sector’s leading company has thrived despite contractionary demand in the global market. Input price plummeted while domestic demand grew steadily, favouring HSG’s gross margin in 2015. Carrying out various investments without issuing new shares, HSG has been improving its financial capability and operating efficiency. Directing a suitable strategy that concentrates on the domestic market, HSG is prevailing over its rivals, partly thanks to its marketing strategy and strong brand name. Beside favourable market movements, the attractive dividend policy of 25% on par by cash and 50% by share paid by mid-2016 makes HSG an investment worth considering.

What to expect

Domestic demand for HDG (coated steel) growing firmly. Supported by the growing construction activities, demand for steel, including HDG is expected to expand by at least 8% annually in the next 5-year period.
Further benefits from price movements. Sales prices have been declining at a lower rate than material prices in favour of HSG’s gross margin. Having the most completed production process among local producers, HSG can continue to capture more added value.
Room for domestic dominance. Northern Vietnam is yet to be dominated by HSG products. As it implements its new ERP system into its retail channel, the company should be able to be more efficient.
Attractive dividend payments. 25% on par by cash, paid in May 2016, equivalent to 8.9% dividend yield at the current price, 50% by share paid in July 2016. Share premium and undistributed earnings are sufficient for dividend payments.

2016 Outlook

– We believe sales volumes in 2016 will increase by 11% yoy, while average sales price may fall by as much as 20% and HRC price will decline at a similar rate.
– Newly-established distributors in North Vietnam are expected to boost sales volumes. HSG’s average domestic market share is 38.2% while it only takes 10% market share in the northern region, thus creating large room for growth.
– We estimate gross profit margin at 15.2% in 2016, slightly higher than 2015.
– The completion of the Hoa Sen Nghe An plant and the Hoa Sen Binh Dinh Steel and Plastic Pipe plant are going to enhance HSG’s production and geographical advantages.

Risks to our call

– Vietnamese exports might face countervailing measures, which is a current concern in many of its export markets. As 40% of HSG’s revenue is exports, anti-dumping duties can depress income from exports.
– More than 80% COGS are in USD, thus resulting in exchange rate risk, even though partly mitigated by export revenues. If the Dong depreciates more than 5% in 2016, the exchange rate risk will increase.
– Aggressive dumping from Chinese steel makers may deteriorate HSG’s gross margin due to the pressure on sales prices.

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