Invest in Vietnam: Looking For Low Valuation Stocks

July 06, 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.

Brexit finally came in June; but despite fears that the event would send stocks to a new low, there was no “big retreat” in Vietnam stock market. There was panic at first but the market was soon flooded with enthusiasm as bottom fishers sprang into action. What was good news to those able to hold on to their stocks through the first day of Brexit brought disappointment to those expecting to see another sell-off. In spite of a hike in liquidity, trading was mostly between local investors. Last month, the combined trading volume in the two stock exchanges jumped 17.2% but net foreigner’s purchases dropped by two thirds from May. We estimate that foreign investors accounted for only 7% of the daily trading value in June. This points to a sentimental divergence between the local and foreign investors. While equity market across the global fell into turmoil, VNIndex gained 2.2% and HNIndex 3.4% last month.

After the first six months of 2016, the economy Vietnam is still large stable with three out four key variables, i.e. manufacturing, consumption, investment and trade showing improvements. However, there are risks from the outside now threatening that very stability. Brexit may not bring a direct, sudden shock to Vietnam, is effect is anything but negligible. First, weakened global demand can soon have an impact on exports, which would then spread to the manufacturing sector in the second half of the year. Second and more importantly, the UK-EU divorce can initiate a new round of global monetary easing that would challenge the SBV’s capacity to maintain the stability of the local currency. We maintain our forecast of a 3-percent depreciation of the VND in 2016 but note that there can be an increase in volatility in the currency market as importers demand for the greenback grew strong and fears for the FED rate hike are renewed. As a side effect of Brexit, the Japanese yen is strengthening quickly, implying significant foreign exchange losses for many power companies who borrow in the JPY.

In the stock market, the abundance of liquidity has lifted VNIndex above 640 for the first time in the more than 2 years. We believe the slowdown in new mortgages and manufacturing lending has turn money flows to the stock market. As compared to the same period last year, current cash flows are much less distracted by other investment opportunities, for example, IPOs, real estate and state holding sales, etc.

We believe the market can remain enthusiastic throughout July. However, when liquidity deplete, the market will find it more difficult to move on higher in August. In the first half of 2015, credit growth was reported only 1/3 the SBV’s full-year target (18-20%) and lending tends to be much more robust in the later months of the year. As banks withdraw cash for corporate lending there would less for stock investors. Secondly, the risk of rising inflation will call for more caution from the central bank in managing money supply. Lastly, the need to stabilize the USDVND exchange rates in Q4 would make it hard for SBV to keep pumping money into the system. The P/E ratio of VNIndex is already at a two-year high. On top of the diminishing taste for risky assets following the UK’s latest referendum, this can make Vietnamese stock less attractive to foreign investors.

After the last rally, it is hard to foresee where the stock market will go in July. It may be too soon now to predict a correction since VNIndex used to reach a much higher P/E ratio in the past. Right now, we see no sign that stocks are cooling as Q2 earnings are being revealed. With most of the stocks and sectors under our monitor having strong earnings forecasts in Q2, the market is set to reach higher in July.

VNIndex is expected to move between 633 and 679 and HNIndex 83 and 89 this month.

Since leading stocks are rotating, it is not easy to pick stocks for a trend-following strategy. Smart money will go for stocks that have not gained substantially and those with attractive valuations, as long as there is nothing wrong about their fundamentals. We believe investors can focus in July on stocks of companies with (1) steady revenue and earnings growth, (2) low P/E and P/B and (3) strong earnings forecasts for Q2 and FY2016. Regarding sectors, we are positive about Building materials (steel, plastic, cement, etc.), Construction, Retailing, Automobile & parts, Industrial real estate and Travel & tourism.

WORLD ECONOMY

As mentioned in Strategy Report – June 2016, Brexit is assessed as an important event, receiving the attention from many economists. Since, forecasts about global economic growth has been much more conservative. In addition, monetary policies from central banks of major economies continue to tilt toward easing aspect in the future.

Global economic forecast will be lower than expectation

In the Global Economic Prospects – June, World Bank forecasted that global economic growth for 2016 will achieve 2.4%, decreased by 0.5% compared to previous estimate. In which, developing and developed countries’ prospects were lowered by 0.5 – 0.6%. After Brexit, forecasts about economic growth has been more conservative when majority believes that direct and indirect impacts on commercial flow and market risk could not be quantified easily.

According to Goldman Sachs’s forecast, under the impacts of Brexit, British economy could fall into recession in mid-2017. Meanwhile, it also drops the forecast for US economic growth during 2H2016 from 2.25% to 2%. Brexit’s negative effects could also spread to EU zone, with the growth forecast of 1.25% for the next two years compared to 1.5% without Brexit.

More stimulus programs in coming months

After Brexit, monetary policies from major central banks may have new developments, mostly leaning toward the conservative aspects. The summary for the upcoming policies from several major central banks will be provided below:

• FED will be more conservative in term of interest rate policy. Latest forecasts pointed out that FED could delay to hike rates in 2016. The next rate hike could take place in mid-2017.
• Bank of England considers to cut rate. In 30/06/2016 meeting, BOE mentioned the possibility to cut operating rates to stabilize the current situation and stimulate economic growth for Q32016.
• Bank of Japan expects to continue easing monetary policy. Official decision will be announced in the upcoming meetings on 28-29/07.
• People’s Bank of China forecasts to cut the reserve requirement ratio.
• European Central Bank forecasts to continue easing monetary policy. After Brexit, economists believe that ECB will expand QE program in 09/2016 meeting.
• Other State Banks from Asia such as Korea, Taiwan, Singapore, Thailand… expect to participate in the wave of easing monetary policies in the future.

Overall, easing monetary policy to stimulate growth is the main orientation to stabilize internal factors and hedge further external shocks. With Brexit, we concern that the race to devaluate domestic currencies could expand without the true end. With less “noise” than the Pound, Yuan has “quietly” depreciated recently. Compared to earlier this year, the Yuan depreciated by 2.7%. The deterioration of China economic growth also received less attention than early-2016. However, the downtrend of the Yuan still exists and it could directly affect the exchange rate policy in Vietnam.

WORLD STOCK MARKET

Highlight event in June was the referendum of England or also known as Brexit. Most shared regained after significantly dropped due to market sale-off on 24/06. In US, the rally in the final week of June erased all Brexit loss. DJI earned monthly gain of 0.95% and had a YTD return of 3%. S&P 500 Index slightly moved up 0.26% to add 0.95% gain for the 1H2016. Nasdaq saw a monthly dropped of 2.13% and ended a disappointing year-half with a loss of 3.84%. Europe markets continued to suffer another negative month. CAC 40 (-5.95%), DAX (-5.68%) etc. were among the strong decliners. Short-term impact of Brexit did not seem to affect Asia markets. Except for Nikkei 225 (-9.63%) and SSE (-1.53%), other markets saw beautiful gain in June.

Uncertainty is stronger on the financial market. It is not surprised when investors chose to invest in gold. SPDR Gold Trust is reported to increase 308 tons of gold for the first half of 2016, which is the largest amount in 7 years. By the of June, gold price has grown 8.7%, marked another quarter of constant growth, and 24.4% since the beginning of this year.

In term of oil price, future contract for WTI improved by 9.9 USD/barrel in Q22016, equivalent to 26% increase to USD 48.33 /barrel. Brent oil price in Q2 also surged by 25% to USD 49.68 /barrel. The decline in supply mainly came from the forest fire in Canada or labor strike in Norway that leading to the strong recover of crude prices. In addition, oil price has been supported by the increase in demand for driving in summer (driving season).

Macroeconomic 1H2016: Growth continued to slowdown

Economy in 1H2016 improved with lower pace

-In 1H2016, Vietnam economy growth rate slowed down, achieved 5.52% yoy. Agriculture and mining remained the only sectors recorded negative growth.

-Negative impacts from weather condition lead to the deterioration of growth for agriculture, dropped by 0.78% yoy. Industrial and construction sectors achieved 6.8% growth rate, lower than 9.66% from last year. Processing and manufacturing industries maintained high growth rates (~10.1%) meanwhile, mining sector declined by 2.2% due to the deterioration in crude exploitation.

Comment:
If excluding two negative factors in GDP (agriculture and mining), economic growth in 1H2016 achieved 7.4%. Overall, agriculture sector recovered at lower pace than our expectation. In 2H2016, negative impacts from El-nino on agriculture will be reduced.

Production and consumption are the firm bases for growth

Vietnam consumption continues the uptrend when consumer confidence index has been optimistic along with the improvement in income and expansion in middle class. According to GSO, the growth rate in retail activities in 1H2016 surpassed 9%.

Meanwhile, domestic production continues the expansion. 6-month average PMI achieved 51.68 points, slightly declined compared to 52.4 point from the previous period. Industrial production index for 1H2016 slowed down compared to the same period, reached 7.5% (was up 9.7% in 2015)

Comment:
Retail activities are expected to be optimistic in 2H2016. Expansion trend in production could be maintained under the scenario of positive disbursement activities from FDI.

Surge in FDI disbursement supported production and exports

-FDI disbursement in 1H2016 was positive, improved by 16% yoy, achieved USD 7.3 bn, equivalent to 50% of total disbursement capital in 2015.

-Processing and production sectors continue to be the destiny for FDI capital flow with 70% of total invested FDI, followed by real estate (5%) and Science & technology (5%).

Comment:
Disbursement rate and new invested FDI capital have been relatively positive. In 2H2016, we expect this trend will continue. It will support production and exports in the next 6 – 12 months.

Commercial activities continue to slowdown

Domestic sector: balance of trade showed no sign of improvement. In 1H2016 accumulation, exports dropped by 1.7% with slightly increase of 1.7% in imports. Accumulated trade deficit of state sector in 1H2016 was USD 9 bn, decreased by 6% yoy.

FDI sector: accounts for 70% in total trade turnover of Vietnam. Ex-imports from this sector is likely to level off, equivalent to 9.3% increase and 2.4% decline in exports and imports respectively.

Comment: Deterioration in imports support trade surplus in 1H2016. Specifically, FDI sector doubled the surplus figure compared to the same period.

Global economy slowed down, leading to the deterioration in demand for essential products. As a result, it indirectly affected Vietnam trading activities. Even though current disbursement rate of FDI is still positive, external impacts are the major risks for growth in ex-import trade balance in upcoming months.

Inflation maintains the uptrend

Consumer price index rose by 1.72% in 1H2016 compared with the end of 2015. Drought continues to impact the price levels of agricultural products. Uptrend in prices are mainly depended on food prices, transportation and medical services.

Comment:
National inflation level basically remained stable. In 2H2016, inflation will continue the uptrend when fees of public services and global commodity prices recover. However, we expect core inflation of 2016 will hover around 2%.

Ample liquidity, interbank interest rates fell sharply

Interbank rate plunged to the lowest level in 3 years during mid-May. Despite growth achieved 8.23%, higher than 6.85 of credit segment.

Comment:
System liquidity is abundant, facilitating the decrease in interbank interest rate. Furthermore, the State Bank purchased USD 8 bn in 1H2016, created more supply of VND.

After Brexit, the chance of FED’s rate hike at the end of 2016 gradually decreased. Therefore, we expect interest rates will remain stable in order to stimulate economic growth in 2H2016.

Revenue-expenditure of budget is not optimistic

In 1H2016, State budget income and expenditure was not optimistic. Specifically, income from crude oil and ex-imports have been continuously impacted by low global oil prices and deterioration in commercial activities.

Domestic income maintained positive growth rate, however, revenue from foreign enterprises are still in downtrend. As a consequence, capital expenditure for development was lower than estimates (~30%) and decreased by 8% yoy.

However, the issuance of government bonds was quite favorable with over 80% of success. In term of 1H2016 accumulation, the State Treasury issued VND 187,700 bn worth of bonds, equivalent to 75% of the whole year plan (VND 250,000 bn).

Comment:
State budget is facing difficulties when main income sources from foreign enterprise, crude oil and ex-imports deteriorated compared to the same period.

The favorable issuance of government bonds in 1H2016 provided the additional income to compensate for the budget deficit in short-term. In long-run, the imbalance in income-expenditure could make fiscal policy to be more restrictive, especially for development projects.

Stable exchange rate policy

In 1H2016, average USDVND exchange rate reached 21,881, equivalent to late 2015. Trade surplus and FDI disbursement rate are at high level, helped policy makers to maintain a stable exchange rate. As a result, foreign exchange reserve could improve. SBV is projected to buy the addition of USD 8 bn in 1H2016.

However, according to our observation, the recent depreciation of CNY could put more external pressure on policies.

Comment:
Favorable external and internal factors support exchange rate policy in 1H2016. In 2H2016, the possibility of devaluation will be higher due to (1) Increase in import demand; (2) External uncertainty when there is a wave of domestic currency devaluation to stimulate economic growth around the world.

VIETNAM ECONOMY

In the first half of the year, the economy recorded GDP growth of 5.52% which is lower than expected. The economy is negatively affected by the agriculture and mining industries; meanwhile, the contribution from production and services is stable.

In the last half of 2016, we believe that the economy is still depending on the private businesses’ contribution. In fact, manufacturing activities of private businesses are receiving positive support from the domestic demand but it is not enough for those businesses to undergo expansion. Therefore, we believe that economic growth will not be as good due to global economy threat and pressure from government’s debt even though the business environment showed enhancement. The reasonable growth rate for 2016 is estimated at around 6% which is quite high compare to other countries in the region; therefore, Vietnam continues to be the spotlight for consuming and investment.

Domestic demand is supporting private sector

In the weakening trend of the global trade, export of domestic enterprises was fairly tough. According to Customs, in 1H2016, domestic exports decreased by 1.7% while imports increased only 1.4% compared to the same period last year. However, based on trade activities’ data, we recognized a fact that domestic enterprises are actively operating due to domestic demand.

Based on importing trend, it can be seen that even the export is in trouble but demand for input materials for manufacturing is still positive. Among the top of all importing goods, the value of importing goods has fairly increased at segment of producing machinery, equipment, and raw material (plastic, cotton, chemical, metal, steel…). For petroleum products, even the value dropped almost 20% but the volume increased by 28% in the first 5 months of 2016. Those movements along with PMI and consumption in industrial manufacturing, we can conclude that the drive for domestic enterprises comes from internal demand.

Businesses is conservative in investment – capital shift to government bonds

In order to push the economic growth in the last half of this year, credit growth is one of the targets that policy makers aim for. As of 24/06/2016, credit of the economy rose 6,82% compared to end-2015 and was higher than the same period last year. However, capital flow for prioritized industries has not been as good as expected. Data about credit growth at prioritized industries shows that low interest rate does not necessarily trigger the need for credit loan. Meanwhile, credit increased in other segments but it is slowing down due to high growth in the past year.

Capital investment is fairly good but banks continue to buy bonds due to the caution in investing of businesses. In the first half of this year, State Treasury mobilized more than 187,700 billion VND of government bonds, around 2.5 times higher than 2015 with an 80.05% of winning/offering ratio. Due to high demand for government bonds, market has gradually accepted bonds with a longer term. According to MoF, average G-bonds term in the first half 2016 is 6.79 years, in which, demand for 5 years and 15 years G-bonds is extremely popular. Therefore, average G-bonds term is extended to 5 years from 4.44 years at end-2015. With a longer borrowing period, we expect that the pressure on paying government debts will be decreased in the next 2-3 years.

Increasing money supply impacts on interest rate, inflation and exchange rate

The movements of money supply and credit in the first half of 2016 reminds us about the monetary system in 2012-2014 period when M2 growth outperformed credit growth. Two key risks in case of money supply grows faster than credit are banks might provide “easy capital” to non-production sectors (real estates, securities or consumer lending…) and higher inflation risk.

In the previous period, the SBV successfully cut interest rates to boost credit growth. However, at the moment, we believe that it is difficult for policy makers to make further rate cuts. Therefore, with unchanged money supply growth while the orientation to boost credit growth in prioritized sectors have not succeeded as expected plus low demand for government bonds in the second half of 2016 (~VND62,300 billion), capital could move to consumption or real estate, securities. In the latest announcement, the SBV’s governor warn potential risks in credit growth in real estate, securities and consumer lending in HCMC. Credit institutions in HCMC accounted for 40% of total assets, 30% of total deposit and 27% of total loans in banking system. Detailed data is not available for the whole system, but we believe trends in HCMC could represent for whole system. Warnings from the SBV can be seen as a way to orient capital flow, in addition, the monetary market management requires strict control to ensure economic growth and macroeconomic stability.

Regarding inflation risks, we believe there is a strong relationship between inflation and commodity price’s recovery. As global economy is still bleak, commodity price would likely remain at low level, supporting domestic manufacturing and consumption in the near future. Besides, in current situation, oversupply money could lead to higher inflation. However, the caution of domestic manufacturers could delay the effect of oversupply money to inflation.

We believe there are several reasons for the dong exchange rate stability after Brexit. First, foreign capital is relatively interested in Vietnam with more than 7.3 bn USD of FDI while Vietnam recorded a trade surplus of 1 bn USD in the first half of this year. While, new exchange regime showed the efficiency in controlling speculation. Finally, demand for USD-denominated loans has increased since June after SBV lifted ban on foreign currency loans, however, foreign currency loans still decreased 4.6% in the first half of this year. In addition, demand for USD-denominated loans is also limited due to encouraging trade activates. In the second half of this year, we suppose that the pressure on the VND depreciation could be stronger (due to the CNY depreciation), but the SBV, to certain degrees, will have power to reduce the market anxiety.

Disclaimer