April 21, 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.
Buy on dip with selection
The stock market went full circle in March as VNIndex and HNIndex climbed strongly during the month but ended down 3% and 2% respectively. Trading activities were much more robust than the previous months, partly thanks to the return of foreign investors as net buyers. Last month, foreign bought a net VND727bn in both exchanges. In the listed markets, the rise of oil & gas and electricity stocks, most notably GAS, VCB, PPC, NT2 and BTP captured the spot light. However, it was the Upcom market that introduced a new taste to the market. Upcom stocks such as MSR, GEX, TOP, VGC, VEF, etc. gained strongly under the support of speculators before a withdrawal of liquidity near the end of the month sent these stock back down. Since stocks moved too fast and there was a strong divergence among sectors and securities, not many investors were to make large profits last month.
There was strong relation between March’s stock market macroeconomic developments of Vietnam in the first quarter. While foreign exchange risk became less concerning, low oil prices caused oil-related revenue in the state budget to fall below expectations; tax revenue from State-run enterprises, especially Dung Quat Refinery was also negatively affected by oil price volatility. On the other hand, Vietnam’s GDP growth only 5.45% in Q1 under the impact of lower oil exports and contraction in the contribution of the agriculture sector as a result of El Nino. On the positive side, three sectors including (1) electricity, (2) construction and (3) building materials exhibited a jump in production value in Q1. Our survey shows that companies in these sectors are generally more optimistic about their business in 2016. Conversely, most oil & gas, natural rubber and automobile companies target lower profits and revenue in 2016. Despite a strong rally in stock prices, electricity companies, including large thermals power and hydropower plants are quite conservative in their 2016 business plans.
Apart from these two factors, we believe that news on FOL expansion would be the topic of much interest in this AGM season. From the AGMs of REE, FPT, PNJ and VSC, we have learnt that developments in the lifting of foreign ownership constraint have been limited and that not every company is excited about this matter. However, we understand there is still a lot of interest from foreign investors for companies with substantial SCIC holdings such as BMP, DHG and especially VNM and expect the developments on the FOL expansion of these companies to have a positive impact on the market.
VNIndex is expected to move between 540 and 574 and HNIndex between 75 and 81 this month.
In the first two week of April, we believe it is necessary to reduce the allocation to stocks as the risk of retracement is still relatively high. Besides, strong fluctuations and unsustainable rebound in the prices of oil and other commodities make stocks in these two groups more suitable for investors with above-average risk tolerance. Similarly, we advise against participation in volatile Upcom stocks, at least until the market regains stability. Nonetheless, a strong decline of the market could become a great opportunity for long-term investors and those who have cash on hand.
For the time being, it is advised that investors pay more attention to sectors with positive Q1 business prospects such as construction, building materials, technology, insurance, etc. In addition, investor should should exert caution with oil & gas and electricity stocks, many of which have grown strongly in the last two weeks. In fact, a decrease in crude output promises a tough year for oil & gas companies despite the recent recovery of crude oil prices. Meanwhile, extreme droughts and water shortage should support thermal power companies in term of prices and output in the short term; however, EVN may tightens its grip and imposes disadvantageous terms in PPA contracts, making it difficult for these companies to achieve strong profit growth.
Vietnam Macro Q1/2016: Unfavourable start
In Q1/2016, economic growth dramatically slowed down, achieved 5.46% compared to 6.12% of Q1/2015. There are two main reasons:
– Manufacturing and processing industry grew slowly, reached 7.9% over the first quarter of 2016.
– Deterioration in agriculture and mining industries are 2.7% yoy and 1.2% respectively.
Overall, we were not too surprised about the decline in mining industry (mainly from the decrease in oil price) and the slowdown in manufacturing and processing industries. However, deterioration in agriculture industry is a rare phenomenon. Despite economic crisis, Vietnam agriculture industry could usually maintain positive growth rates.
Therefore, we can imply that climate change or El nino has negatively affected agricultural production earlier 2016. Specifically, production value decreased by 6% yoy, in which, rice cultivation area declined less than vegetable and short-term crops.
If excluding two negative factors in GDP (agriculture & mining), economic growth rate is estimated at 7%.
– Domestic sector: commercial turnover of two-way trading continues to deteriorate, especially in exports. In Q1, exports declines by 4.7%, imports decreased by 3.6%. Accumulated trade deficit achieved USD 3.8 billion.
– FDI sector: accounting for 70% of total trading turnover, exports from FDI sector showed signs of stagnation, equivalent to the growth rate of 7.9% and -6.3% in exports and imports respectively.
Decrease in import demand made the trade balance slightly enter the surplus situation over the Q1/2016. Specifically, FDI sector recorded doubled surplus volume over the same period.
Commercial activities weakened due to the impacts from global economy, leading to the negative effects on Vietnam commerce over the next quarters. As a result, this indirectly affects domestic industrial activities.
– Deposit and lending rates lightly improved with 0.2 – 0.5% and 0.02 – 0.5% respectively compared to earlier 2016.
– Deposit growth in Q1/2016 is estimated to reach 2.26%, higher than 0.94% of the same period. Credit growth also recorded slight improvement with 1.54%.
According to National Financial Supervisory Commission, interest rate for Q1/2016 slightly fluctuated at the term of 6-12 months, significantly increased at the term of over 12 months. Therefore, interest rate is bottoming up and creating new level.
The movements in interest rate was mentioned at the previous reports. Among the factors affecting interest rates in Q1/2016, there is impact from Draft of Circular 36.
Budget situation overall has not been positive over the first quarter, specifically, with revenue from crude oil and Im-ex due to low oil prices and weak trading activities.
Remarkably, revenue from foreign sectors significantly declined (-42% yoy), leading to the low level of expenses from investment and development compared to estimates (~16%). This figure decreased by 9% yoy.
Under current budget situation, we reserve the perspective about chance of limiting capability of fiscal policies to support growth.
In addition, concentrating in disaster remedial could slowdowns construction projects (transportation infrastructure) compared to the same period.
Industrial production over the first 3 months continued the expansion, however, the pace is slower than last year.
– 3-month PMI average achieved 50.83 points, slightly decreased from 51.3 points over the same period.
– Growth of industrial production index for Q1/2016 was slower than the previous period, recorded 6.3% (2015 recorded +9.3% yoy).
PMI has been relatively stable, however, we believe that this indicator could not surge as Q2/2015.
Growth in imports of FDI sector significantly deteriorated this year and indirectly affected industrial production over the first 3 months and in the future.
In Q1/2016, USDVND averaged VND 22,382, dropped by 0.5% compared to late 2015. The alteration in exchange rate policy helps to closely reflect the demand-supply aspects of the market rather than sentimental factors.
Foreign exchange reserve has the conditions to improve in Q1/2016, increased to USD 34-35 billion and equivalent to 2.6 months of imports.
Stable exchange rate over the first 3 months was resulted from the favorable movements of domestic and foreign markets.
– Domestic factors: trade balance was slightly in surplus situation along with disbursement of FDI created abundant supply of foreign currencies.
– Foreign factors: USD depreciated by 4.1% in Q1/2016 and CNY appreciated comparing with USD eased the pressure on operating policies.
MACRO OUTLOOK: Lacking of growth drivers
El Nino and Vietnam economic growth
Effects on GDP, inflation and export
Late 2015, there are several announced warnings about the impacts of El Nino on agriculture. However, the actual situation has been worse than expectation and it has been demonstrated by negative statistics of Q1/2016. The Central Highlands has 160,000 hectares of crops with water shortage due to severe drought and there are 160,000 hectares of crops in Mekong Delta being damaged by salinization. According to National Centre for Hydro – Meteorological Forecasting (NCHMF), drought and salinization could prolong to the end of 6/2016. However, after El Nino weakens, the probability of La Nina phenomenon to appear late 2016 is relatively high, up to 50 – 60%.
Harsh weather condition has affected Vietnam economy in many aspects. As mentioned above, agriculture sector experienced negative growth rate for the first time in years. Agriculture accounts for 10% of total GDP, 44.3% of national workforce and 8% of export structure. With unfavorable weather condition until the end of 02/2016, RongViet Research estimates national rice output declined by 1.5 million tons, equivalent to 3.3% of total output in 2015. Based on the scenario that agricultural deterioration is 1% in 2016, GDP growth rate could only achieve 5.8 – 6%.
Regarding of rice production, output declined but the increase in prices could compensate for that issue thanks to the higher demand from countries affected by El Nino. Therefore, we believe that El Nino will positively impact on agriculture production value of Vietnam. Over the first 3 months, rice and vegetable exports improved significantly by 26% yoy and 71% yoy respectively. In contrast, export value of agricultural perennial crops such as tea, coffee, pepper, cashew… experienced no growth.
In term of economic consumption, because agricultural sector account for high proportion in work force, deterioration in agricultural sector could affect overall consumption. We believe that increases in food prices will decline the savings, as a result, impacts on the growth rates of non-essential products.
In addition, regarding of recent concerns about the increase in inflation, we believe that with current oil price level (~40USD/barrel), the probability of high inflation will be low. At this moment, core inflation has been relatively stable at 2%. Oil and rice prices increased by 5% and 8% respectively compared to late 2015. Under new CPI calculation method, food proportion was adjusted from 8.2% to 4.5%. In contrast, transportation sector improved from 8.9% to 9.45. Price adjustments in petroleum products and increase trend of several agricultural and fishery products could affect inflation rate in 04/2016. However, observing the trend, we believe inflation is still under control.
Under budget constraint, disasters due to weather condition still need supports from the Government. In 3/2016, the Ministry of Agriculture and Rural Development (MARD) propose the Government to consider supporting measurements based on regions with total cost of ~VND 37,700 billion (~USD 1.7 billion). Furthermore, MARD also initiates agricultural projects to adapt with climate change sponsored by German Government with USD 700,000, done in 4 years and started on 01/03/2016.
Q1/2016 business results from top-down strategy
In Q1/2016, construction recorded a very high growth; increased approximately 10%, much higher than the same period and was the highest increase since 2010. The manufacturing activities of some construction materials were also relatively positive, the steel and cement output grew by 23% and 11% over the same period. In addition, the price of steel increased by the supportive policies from gorvernment. Based on this trend, we believe that the expectations could be optimistic about the business results in Q12016 of some construction and building materials companies such as steel, cement, bricks, stones…
The slight improvement in business results could be seen at milk, electricity, animals feed industries… Meanwhile, the negative outlook should belong to oil and gas industry is due to crude oil output decreased by 1% compared to the same period last year and the low oil prices in the early year made the services of the oil and gas industry significantly affected.
Stable prospects in next quarters
Looking at yearly trend, industrial production has not been as positive as 2 years ago. However, PMI demonstrated the stable signs in orders and improvements over months. Simultanuously, Q1 is off-peak quarter for industrial production. Therefore, we expect stable industrial production to be the backbone of the economy in the future.
FDI sector showed no sign of improvements despite positive disbursement recently and this raise serious concerns. Export growth index for 3-month average decreased by at least 6% while export one improved by 8.6%, lowest level over years. This implied that disbursement flow concentrates on infrastructure construction acvitieis while industrial production of FDI sector showed the stagnation signal. Therefore, growth rates of manufacturing and processing sectors are affected. This factors need to be monitored and warned if there will be no recovery.
Monetary market outlook: stable exchange rate – higher interest rate concern
The dong is expected to remain stable upcoming quarters
We believe that the new exchange rate policy has been operated efficiency as maintaining the USDVND within 3% exchange rate trading band and reducing speculation and daily unexpected surge. As mentioned in previous reports, by changing the exchange rate mechanism the VND move will have a strong correlation with trade deficit and inflow/outflow capitals this year. In Q1/2016, decreasing in export-import growth led to trade surplus. Moreover, implemented FDI capital recorded high, supporting for the SBV’s exchange rate policy. In the first three months of 2016, the SBV also increase foreign exchange reserves through buying foreign currency. This step enables the ability to control the VND’s stability in upcoming quarters. Regarding external factors, the depreciation of US dollar in compline with the conservative FED’s rate hike and less negative Q12016 Chinese economic outlook will help the Vietnamese policy makers more comfortable.
In summary, it seems that fewer negative factors have affected the VND moves in recent times, however, trade activities likely became less positive. In the view of the SBV, balancing between benefits and costs is likely the next step they should consider as fewer supportive factors for growth in upcoming times.
Higher deposit rates will lead to lending rate adjustments
According to Rong Viet Research, the recent adjustments of deposit rates should impact negatively on business confidence in the economy. With the change in deposit rates, the cost of borrowing should be raised, then should create concerns in investment and production expansion. For the banking system, we find the stability in terms of liquidity, but the obligation on safety ratios and provision for bad debt will curb profit growth. In the context of the necessity to support economic growth, the adjustment of lending rates even at low amplitude is also an unfavorable factor for the economy in general and the activities of enterprises in particular.
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